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| UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549

**FORM 10-Q** |
|------------------------------------------------------------------------------------|
|                                                                               |
|                                                                               |
| (Mark One)                                                                         |
|                                                                               |   |
|                                                                                    | QUARTERLY REPORT PURSUANT TO SECTION 13 OR        15(d) OF THESECURITIES EXCHANGE ACT OF 1934 |
|                                                                               |   |
|                                                                               | For the quarterly period ended June 30, 2004 |
|                                                                               |   |
|                                                                               | or |
|                                                                               |   |
|                                                                                    | TRANSITION REPORT PURSUANT TO SECTION 13        OR 15(d) OF THESECURITIES 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 |   |   | (I.R.S. Employer Identification No.) |   |
| incorporation or organization)  |   |   |                                 |   |

| **101 East State Street**                |   |   |       |   |
|------------------------------------------|--------|--------|------------|--------|
| **Kennett 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  

 

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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY 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 of1934 subsequent to the distribution of securities under a plan confirmed by a court.

YES       (1)     NO 

| (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. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                 |

APPLICABLE ONLY TO CORPORATE ISSUERS.

     As of August 6, 2004: 19,998,562 shares of the registrant’s common stock were outstanding, including 130,014 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.  

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| TABLE OF CONTENTS                                         |   |
|-----------------------------------------------------------|--------|
|                                                      |   |   | Page |   |
|                                                      |   |   |   |   |
| CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS |   |   | 1 |   |
|                                                      |   |   |   |   |   |   |   |
| PART I:  FINANCIAL INFORMATION                            |   |   |   |   |
|                                                      |   |   |   |   |   |   |   |
| ITEM 1:                                                   |   |   | Financial Statements |   |   | 3 |   |
|                                                      |   |   |   |   |   |   |   |
| ITEM 2:                                                   |   |   | Management’s Discussion and Analysis of Financial Condition and Results of Operations |   |   | 21 |   |
|                                                      |   |   |   |   |   |   |   |
| ITEM 3:                                                   |   |   | Quantitative and Qualitative Disclosures About Market Risk |   |   | 36 |   |
|                                                      |   |   |   |   |   |   |   |
| ITEM 4:                                                   |   |   | Controls and Procedures |   |   | 36 |   |
|                                                      |   |   |   |   |   |   |   |
| PART II:  OTHER INFORMATION                               |   |   |   |   |
|                                                      |   |   |   |   |   |  |   |
| ITEM 1:                                                   |   |   | Legal Proceedings |   |   | 38 |   |
|                                                      |   |   |   |   |   |   |   |
| ITEM 2:                                                   |   |   | Changes in Securities and Use of Proceeds |   |   | 38 |   |
|                                                      |   |   |   |   |   |   |   |
| ITEM 3:                                                   |   |   | Defaults Upon Senior Securities |   |   | 38 |   |
|                                                      |   |   |   |   |   |   |   |
| ITEM 4:                                                   |   |   | Submission of Matters to a Vote of Security Holders |   |   | 38 |   |
|                                                      |   |   |   |   |   |   |   |
| ITEM 5:                                                   |   |   | Other Information |   |   | 38 |   |
|                                                      |   |   |   |   |   |   |   |
| ITEM 6:                                                   |   |   | Exhibits and Reports on Form 8-K |   |   | 39 |   |
|                                                      |   |   |   |   |   |   |   |
| SIGNATURES                                                |   |   | 40 |   |

 

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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 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, debt 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 jointventure 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, certain of which are discussed more fully in our Annual 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 limited 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 engage successfully in acquisitions and other strategic transactions; |

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

|   |   |                                                                              |
|--------|--------|-----------------------------------------------------------------------------------|
|        | • | potential 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; |

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

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|   |   |                                         |
|--------|--------|----------------------------------------------|
|        | • | 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, and availability of, 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 AND SUBSIDIARIES****UNAUDITED CONDENSED BALANCE SHEETS****JUNE 30, 2004 AND SEPTEMBER 30, 2003 (IN THOUSANDS)**

|                                                                                                                                         |   | **June 30, 2004** |      | **September 30,          2003** |      |
|----------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|-----------|---------------------------------|-----------|
|                                                                                                                                         |   |                   |      |                                 |      |
| Assets:                                                                                                                                      |   |              |      |                            |      |   |   |
| Current assets:                                                                                                                              |   |              |      |                            |      |   |   |
|       Cash and equivalents,        primarily restricted at September 30, 2003                                  | $      | 115,144           |      | $                               | 8,791     |   |
|       Restricted        investments in marketable securities                                                   |   | 30,820            |      |                            | 29,320    |   |
|       Accounts receivable,        net of allowances for doubtful accounts of                                   |   |              |      |                            |      |   |
|             $34,615        and $32,170, respectively                             |   | 175,732           |      |                            | 186,570   |   |
|       Prepaid expenses        and other current assets                                                         |   | 31,193            |      |                            | 32,771    |   |
|       Assets held        for sale                                                                              |   | 2,988             |      |                            | 7,721     |   |
|                                                                                                                                         |   |                   |      |                            |           |   |
|                   Total        current assets      |   | 355,877           |      |                            | 265,173   |   |
|                                                                                                                                         |   |              |           |                            |      |  |   |
| Property and equipment, net of accumulated depreciation        of                                                                            |   |              |      |                            |      |   |
|       $102,387 and        $73,109, respectively                                                                |   | 697,943           |      |                            | 673,167   |   |
| Assets held for sale                                                                                                                         |   | 8,724             |      |                            | 10,624    |   |
| Restricted investments in marketable securities                                                                                              |   | 65,345            |      |                            | 61,271    |   |
| Other long-term assets                                                                                                                       |   | 106,316           |      |                            | 78,919    |   |
| Identifiable intangible assets, net of accumulated        amortization of                                                                    |   |              |      |                            |      |   |
|       $880 and $0,        respectively                                                                         |   | 1,928             |      |                            | 2,242     |   |
| Goodwill                                                                                                                                     |   |              | 7,116     |                            |      | 2,953 |   |
|                                                                                                                                         |   |                   |           |                            |           |  |   |
|       Total        assets                                                                                      |   | $                 | 1,243,249 |                            | $         | 1,094,349 |   |
|                                                                                                                                         |   |                   |           |                            |           |  |   |
|                                                                                                                                         |   |              |      |                            |      |   |   |
| Liabilities and Shareholders’ Equity:                                                                                                   |   |              |      |                            |      |   |
| Current liabilities:                                                                                                                         |   |              |      |                            |      |   |
|       Current installments        of long-term debt                                                            | $      | 4,361             |      | $                               | 12,039    |   |
|       Accounts payable        and accrued expenses                                                             |   | 140,135           |      |                            | 126,118   |   |
|       Current portion        of self-insurance liability reserves                                              |   | 30,820            |      |                            | 29,320    |   |
|                                                                                                                                         |        |                   |      |                                 |           |   |
|                                                                                                                                         |   |              |      |                            |      |   |   |
|                   Total        current liabilities |   | 175,316           |      |                            | 167,477   |   |
|                                                                                                                                         |   |                   |           |                            |      |  |   |
|                                                                                                                                         |   |              |      |                            |      |   |   |
| Long-term debt                                                                                                                               |   |              | 425,581   |                            |      | 254,193 |   |
| Deferred income taxes                                                                                                                        |   | 13,496            |      |                            | -         |   |
| Self-insurance liability reserves                                                                                                            |   | 64,800            |      |                            | 58,143    |   |
| Other long-term liabilities                                                                                                                  |   | 28,598            |      |                            | 33,975    |   |
|                                                                                                                                         |   |              |      |                            |      |   |   |
| Total shareholders’ equity                                                                                                              |   | 535,458           |      |                            | 580,561   |   |
|                                                                                                                                         |        |                   |      |                                 |           |   |
|       Total liabilities        and shareholders’ equity                                                   | $      | 1,243,249         |      | $                               | 1,094,349 |   |
|                                                                                                                                         |        |                   |      |                                 |           |   |

See accompanying notes to unaudited condensed financial statements.

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**GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES****UNAUDITED CONDENSED STATEMENTS OF OPERATIONS****THREE MONTHS ENDED JUNE 30, 2004 AND 2003  (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)**

|                                                                    | **Three months          ended** |       |
|-------------------------------------------------------------------------|---------------------------------|------------|
|                                                                    | **June 30, 2004**               |       | **June 30, 2003** |   |
|                                                                    |                                 |       |  |   |
| Net revenues                                                            | $                               | 378,251    |   | $ | 343,254 |   |
| Operating expenses:                                                     |                            |       |   |   |   |   |
|    Salaries, wages and benefits                          |                            | 237,268    |   |   | 211,620 |   |
|    Other operating expenses                              |                            | 103,090    |   |   | 100,482 |   |
|    Loss on early extinguishment of debt                  |                            | 425        |   |   | - |   |
| Lease expense                                                           |                            | 7,010      |   |   | 6,718 |   |
| Depreciation and amortization expense                                   |                            | 11,356     |   |   | 9,787 |   |
| Interest expense                                                        |                            | 6,854      |   |   | 4,422 |   |
|                                                                    |                                 |            |   |  |  |   |
| Income before income tax expense (benefit), equity                      |                            |       |   |   |   |   |
|    in net income of unconsolidated affiliates        and |                            |       |   |   |   |   |
|    minority interests                                    |                            | 12,248     |   |   | 10,225 |   |
| Income tax expense (benefit)                                            |                            | 4,998      |   |   | (455 | ) |
|                                                                    |                                 |            |   |  |  |   |
| Income before equity in net income of unconsolidated                    |                            |       |   |   |   |   |
|    affiliates and minority interests                     |                            | 7,250      |   |   | 10,680 |   |
| Equity in net income of unconsolidated affiliates                       |                            | 746        |   |   | 448 |   |
| Minority interests                                                      |                            | (170       | ) |   | - |   |
|                                                                    |                                 |            |   |  |  |   |
| Income from continuing operations                                       |                            | 7,826      |   |   | 11,128 |   |
| Loss from discontinued operations, net of taxes                         |                            | (1,104     | ) |   | (5,852 | ) |
|                                                                    |                                 |            |   |  |  |   |
| Net income                                                              | $                               | 6,722      |   | $ | 5,276 |   |
|                                                                    |                                 |            |   |  |  |   |
|                                                                    |                            |       |   |   |   |   |
| Per common share data:                                                  |                            |       |   |   |   |   |
| Basic:                                                                  |                            |       |   |   |   |   |
|    Income from continuing operations                     | $                               | 0.39       |   | $ | - |   |
|    Loss from discontinued operations                     |                            | (0.06      | ) |   | - |   |
|    Net income                                            | $                               | 0.34       |   | $ | - |   |
|    Weighted average shares                               |                            | 19,963,778 |   |   | - |   |
|                                                                    |                            |       |   |   |   |   |
| Diluted:                                                                |                            |       |   |   |   |   |
|    Income from continuing operations                     | $                               | 0.39       |   | $ | - |   |
|    Loss from discontinued operations                     |                            | (0.06      | ) |   | - |   |
|    Net income                                            | $                               | 0.34       |   | $ | - |   |
|    Weighted average shares                               |                            | 20,031,427 |   |   | - |   |

 

See accompanying notes to unaudited condensed financial statements.

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**GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES****UNAUDITED CONDENSED STATEMENTS OF OPERATIONS****NINE MONTHS ENDED JUNE 30, 2004 AND 2003  (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)**

|                                                                 | **Nine months          ended** |       |
|----------------------------------------------------------------------|--------------------------------|------------|
|                                                                 | **June 30, 2004**              |       | **June 30, 2003** |   |
|                                                                 |                                |       |  |   |
| Net revenues                                                         | $                              | 1,129,434  |   | $ | 1,017,341 |   |
| Operating expenses:                                                  |                           |       |   |   |   |   |
|    Salaries, wages and benefits                       |                           | 701,842    |   |   | 630,181 |   |
|    Other operating expenses                           |                           | 316,125    |   |   | 294,282 |   |
|    Loss (gain) on early extinguishment of        debt |                           | 1,253      |   |   | (1,123 | ) |
| Lease expense                                                        |                           | 21,309     |   |   | 20,294 |   |
| Depreciation and amortization expense                                |                           | 34,433     |   |   | 28,893 |   |
| Interest expense                                                     |                           | 20,203     |   |   | 12,487 |   |
|                                                                 |                                |            |   |  |  |   |
| Income before income tax expense, equity in net                      |                           |       |   |   |   |   |
|    income of unconsolidated affiliates and            |                           |       |   |   |   |   |
|    minority interests                                 |                           | 34,269     |   |   | 32,327 |   |
| Income tax expense                                                   |                           | 13,925     |   |   | 8,164 |   |
|                                                                 |                                |            |   |  |  |   |
| Income before equity in net income of unconsolidated                 |                           |       |   |   |   |   |
|    affiliates and minority interests                  |                           | 20,344     |   |   | 24,163 |   |
| Equity in net income of unconsolidated affiliates                    |                           | 1,770      |   |   | 875 |   |
| Minority interests                                                   |                           | (329       | ) |   | - |   |
|                                                                 |                                |            |   |  |  |   |
|                                                                 |                           |       |   |   |   |   |
| Income from continuing operations                                    |                           | 21,785     |   |   | 25,038 |   |
| Loss from discontinued operations, net of taxes                      |                           | (3,483     | ) |   | (15,065 | ) |
|                                                                 |                                |            |   |  |  |   |
| Net income                                                           | $                              | 18,302     |   | $ | 9,973 |   |
|                                                                 |                                |            |   |  |  |   |
|                                                                 |                           |       |   |   |   |   |
| Pro forma per common share data:                                     |                           |       |   |   |   |   |
| Basic:                                                               |                           |       |   |   |   |   |
|    Income from continuing operations                  | $                              | 1.09       |   | $ | - |   |
|    Loss from discontinued operations                  |                           | (0.17      | ) |   | - |   |
|    Net income                                         | $                              | 0.92       |   | $ | - |   |
|    Weighted average shares                            |                           | 19,928,517 |   |   | - |   |
|                                                                 |                           |       |   |   |   |   |
| Diluted:                                                             |                           |       |   |   |   |   |
|    Income from continuing operations                  | $                              | 1.09       |   | $ | - |   |
|    Loss from discontinued operations                  |                           | (0.17      | ) |   | - |   |
|    Net income                                         | $                              | 0.92       |   | $ | - |   |
|    Weighted average shares                            |                           | 19,966,961 |   |   | - |   |

 

See accompanying notes to unaudited condensed financial statements.

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**GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES  UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS****NINE MONTHS ENDED JUNE 30, 2004 AND 2003  (IN THOUSANDS)**

|                                                                                               | **Nine months          ended** |     |
|----------------------------------------------------------------------------------------------------|--------------------------------|----------|
|                                                                                               | **June 30, 2004**              |     | **June 30, 2003** |   |
|                                                                                               |                                |     |  |   |
| Cash flows from operating activities:                                                              |                           |     |   |   |   |   |
|    Net income                                                                       | $                              | 18,302   |   | $ | 9,973 |   |
|    Net charges included in operations not        requiring funds                    |                           | 58,229   |   |   | 54,426 |   |
|    Changes in assets and liabilities:                                               |                           |     |   |   |   |   |
|          Accounts        receivable                   |                           | (1,362   | ) |   | (1,146 | ) |
|          Accounts        payable and accrued expenses |                           | 21,971   |   |   | (13,915 | ) |
|          Other,        net                            |                           | 3,024    |   |   | 398 |   |
|                                                                                               |                                |          |   |  |  |   |
|                                                                                               |                           |     |   |   |   |   |
|    Net cash provided by operating activities                                        |                           | 100,164  |   |   | 49,736 |   |
|                                                                                               |                                |          |   |  |  |   |
|                                                                                               |                           |     |   |   |   |   |
| Cash flows from investing activities:                                                              |                           |     |   |   |   |   |
|    Capital expenditures                                                             |                           | (21,030  | ) |   | (25,015 | ) |
|    Net purchases of restricted marketable        securities                         |                           | (6,261   | ) |   | (7,373 | ) |
|    Acquisition of rehabilitation services        business                           |                           | -        |   |   | (5,918 | ) |
|    Purchase of eldercare centers and lease        amendments                        |                           | (48,976  | ) |   | - |   |
|    Sale of eldercare assets                                                         |                           | 15,074   |   |   | 55,977 |   |
|    Other                                                                            |                           | 2,571    |   |   | 10,605 |   |
|                                                                                               |                                |          |   |  |  |   |
|    Net cash (used in) provided by investing        activities                       |                           | (58,622  | ) |   | 28,276 |   |
|                                                                                               |                                |          |   |  |  |   |
|                                                                                               |                           |     |   |   |   |   |
| Cash flows from financing activities:                                                              |                           |     |   |   |   |   |
|    Repayment of long-term debt and payment        of sinking                        |                           |     |   |   |   |   |
|       fund requirements                                              |                           | (280,304 | ) |   | (51,268 | ) |
|    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  | ) |   | (29,290 | ) |
|                                                                                               |                                |          |   |  |  |   |
|                                                                                               |                           |     |   |   |   |   |
|    Net cash provided by (used in) financing        activities                       |                           | 64,811   |   |   | (80,558 | ) |
|                                                                                               |                                |          |   |  |  |   |
|                                                                                               |                           |     |   |   |   |   |
| Net increase (decrease) in cash and equivalents                                                    | $                              | 106,353  |   | $ | (2,546 | ) |
|                                                                                               |                           |     |   |   |   |   |
| Cash and equivalents:                                                                              |                           |     |   |   |   |   |
| Beginning of period                                                                                |                           | 8,791    |   |   | 7,420 |   |
|                                                                                               |                                |          |   |  |  |   |
| End of period                                                                                      | $                              | 115,144  |   | $ | 4,874 |   |
|                                                                                               |                                |          |   |  |  |   |
|                                                                                               |                           |     |   |   |   |   |
| Supplemental disclosure of cash flow information:                                                  |                           |     |   |   |   |   |
|    Interest paid                                                                    | $                              | 18,475   |   | $ | 13,506 |   |
|    Taxes paid (principally state income tax)                                        |                           | 2,872    |   |   | - |   |

 

See accompanying notes to unaudited condensed financial statements.

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**Genesis HealthCare Corporation and SubsidiariesNotes to Unaudited Condensed Financial Statements**

| **(1)** | **Organization and Basis of Presentation** |
|---------|--------------------------------------------|
|    |                                       |
|    | ***Spin-off***                             |

       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 commonstock 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, as amended, a pharmacy benefit management agreement, as amended, and a durable medical equipment agreement.  In connection with the spin-off, GHC entered into new financing arrangements.  See Note 4 to the Financial Statements — “Long-TermDebt.”

       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 shareinformation:

|                                                         | **Nine months ended June 30, 2004** |      |
|--------------------------------------------------------------|-------------------------------------|-----------|
|                                                         |                                     |      |
|                                                         | **As reported**                     |      | **Pro forma** |   |
|                                                         |                                     |      |  |   |
| Net revenues                                                 | $                                   | 1,129,434 |   | $ | 1,129,434 |   |
| Income from continuing operations                            |                                | 21,785    |   |   | 20,594 |   |
| Diluted earnings per share — from continuing operations |                                | 1.09      |   |   | 1.03 |   |

|   | ***Basis of Presentation*** |
|--------|-----------------------------|

       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 and nine months ended June 30, 2003 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 $10.9 million and $32.0 million for the three and nine months ended June 30, 2003, respectively.  No such costs were allocated to GHC for the three and nine monthsended June 30, 2004 because the 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 balance sheet as of June 30, 2004 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 condensed balance sheet at September 30, 2003.  The net transactions with NCI as reflected in our unaudited condensed statements of cash flows for the nine months ended June 30, 2004represent 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 and all such adjustments are of a normal recurring nature.  Certain prior period balances have been reclassified to conform to the current period classification.

       ***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.  GHC currently has 214 owned, leased, managed and jointly owned eldercare centers with 26,149 beds, of which two centers having 404 beds have been identified as held for sale.  Included in the managed total are 15 transitional care units with 389 beds.  Revenues of GHC’s owned and leased centers constitute approximately 89% 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 revenues presented in GHC’s segment information.  See Note8 to the Financial Statements — “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 13 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 management services, respiratory health services, physician services, hospitality services, staffing services and other healthcare related services.

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| **(2)** | **Certain Significant    Risks and Uncertainties** |
|---------|----------------------------------------------------|
|    |                                               |
|    | ***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 the customers served by GHC’s rehabilitation therapy business.  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 financialcondition and results of operations will 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**   |
|---------|----------------------------------------------|
|    |                                         |
|    | ***Purchase of Joint Venture    Interests*** |

       On    January 5, 2004, GHC acquired its joint venture partner’s interest    in two Massachusetts skilled nursing facilities which it previously managed.    GHC previously owned a 50% interest in one facility and a 20% interest in    the other. Upon completion of the transaction, GHC owns 100% of both facilities    and acquired approximately $6.0 million of working capital along with the    property and equipment of the two skilled nursing facilities, having a total    of 318 beds. The aggregate consideration consisted of $6.0 million in cash    and the assumption of debt in the amount of approximately $20.0 million,    of which $12.5 million was repaid following completion of the transactions.

       ***ElderTrust/Ventas 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 basislease 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.                                                                                                                                                                                                                                                                                        |

       In February    2004, ElderTrust shareholders approved the merger of ElderTrust with Ventas    Sub, LLC (Ventas), a Delaware limited liability company and a wholly owned    subsidiary of Ventas, Inc., a publicly traded Delaware corporation. Thismerger did not have a material impact on GHC.

       In June 2004, Ventas exercised its option to purchase an assisted living facility from GHC for cash consideration of $4.9 million.  GHC leased the property back from Ventas under a 10-year operating lease agreement.  GHC recognized a $1.6 million gain on the sale of the property, which has been deferred and will be amortized on a straight line basis to lease expense over the 10-year lease term.

| **(4)** |  **Long-Term    Debt** |
|---------|-----------------------------|

           Long-term    debt at June 30, 2004 and September 30, 2003 consists of the following (inthousands):

|                                    | **June 30, 2004** |    | **September 30,          2003** |   |
|-----------------------------------------|-------------------|---------|---------------------------------|--------|
|                                    |              |    |                       |   |
|                                    |              |    | **Total NCI**                   |   |   | **Allocated to GHC** |   |
|                                    |              |    |                                 |   |  |  |   |
| Allocated debt of NCI                   | $                 | -       |                            | $      | 555,213 |   | $ | 219,945 |   |
| Senior credit facility – term loan |              | 159,538 |                            |   |   |   |   | - |   |
| Senior subordinated notes               |              | 225,000 |                            |   |   |   |   | - |   |
| Mortgages and other secured debt        |              | 45,404  |                            |   |   |   |   | 46,287 |   |
|                                    |                   |         |                            |   |   |   |  |  |   |
|                                    |              | 429,942 |                            |   |   |   |   | 266,232 |   |
| Less:                                   |              |    |                            |   |   |   |   |   |   |
| Current portion of long-term debt       |              | (4,361  | )                               |   |   |   |   | (12,039 | ) |
|                                    |                   |         |                            |   |   |   |  |  |   |
| Long-term debt                          | $                 | 425,581 |                            |   |   |   | $ | 254,193 |   |
|                                    |                   |         |                            |   |   |   |  |  |   |

       *Senior credit facility.* On December 1, 2003, GHC entered into a senior credit facility that provides for a $185.0 million term loan, which was fully drawn at the consummation of the spin-off, and a revolving credit facility of $75.0 million.  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 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.  There can be no assurances of the final excess cash flow recapture requirement until the preparation of GHC’sfiscal year end financial statements.  On May 14, 2004, GHC made a $25.0 million voluntary prepayment of the term loan portion of its senior credit facility.  The interest rate terms under the senior credit facility were amended as of June 25, 2004, such that the interest rate on the term loan portion of GHC’s senior credit facility was reduced to LIBOR plus 2.25% (2.75% prior to the amendment) or a base rate plus an applicable margin.  The revolving portion of GHC’s senior credit facility has a rate of interest of LIBOR plus 2.50% 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.  In April 2004, GHC filed a registration statement on Form S-4 with the Securities and Exchange Commission in connection with its offer to exchange the unregistered senior subordinated notes issued in October 2003 for registered notes.  In July 2004, upon the expiration of the exchange offer, $224.0 million aggregate principal amount of senior subordinated notes registered under the Securities Act of 1933, as amended, were exchanged for the unregistered notes issued in October 2003.  The aggregate principal amount of $1.0 million of unregistered notes was not exchanged and remainsoutstanding.

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       *Mortgages and other secured debts.*At June 30, 2004 and September 30, 2003, GHC had $45.4 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 or variable rates of interest ranging from 1.2% to 11.0%, with a weighted average interest rate of 7.3% and 9.1% at June 30, 2004 and September 30, 2003, respectively.

       *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)** | **Earnings Per    Share** |
|---------|---------------------------|

       The computation of basic net income per common share is calculated by dividing net income by the weighted average number of common shares outstanding during the reporting period.  The computation of basic weighted average common shares presented for the three and nine months ended June 30, 2004 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, and is therefore labeled “pro forma” for the nine months ended June 30, 2004.  The computation of diluted net income per common share is calculated by dividing net income by the sum of the weighted average basic common shares and potentially dilutive securities.  Potentiallydilutive 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 and nine months ended June 30, 2004, GHC’s outstanding stock options yielded 67,649 and 38,444 potentially dilutive securities, respectively, under the treasury stock method.  The computation of potentially dilutive securities for the nine months ended June 30, 2004 also assumes the spin-off occurred on October 1, 2003, and therefore the presentation of diluted earnings per share data for the nine months ended June 30, 2004 is labeled “pro forma.”  Historical earnings per share have not been presented prior to fiscal 2004as GHC was wholly owned by NCI.

| **(6)** | **Comprehensive    Income** |
|---------|-----------------------------|

       The following table sets forth the computation of comprehensive income for the three and nine months ended June 30, 2004 and 2003 (in thousands):

|                                                   | **Three months          ended June 30,** |   | **Nine months          ended June 30,** |
|--------------------------------------------------------|------------------------------------------|--------|-----------------------------------------|
|                                                   |                                          |   |                                         |
|                                                   | **2004**                                 |   | **2003**                                |   | **2004** |   | **2003** |
|                                                   |                                          |   |                                         |   |  |   |  |
| Net income                                             | $                                        | 6,722  |                                    | $ | 5,276 |   | $ | 18,302 |   | $ | 9,973 |
| Unrealized gain on restricted investments              |                                     |   |                                    |   |   |   |   |   |   |   |   |
|      in marketable securities |                                     | 375    |                                    |   | 241 |   |   | 687 |   |   | 211 |
|                                                   |                                          |        |                                    |  |  |   |  |  |   |  |  |
| Total comprehensive income                             | $                                        | 7,097  |                                    | $ | 5,517 |   | $ | 18,989 |   | $ | 10,184 |
|                                                   |                                          |        |                                    |  |  |   |  |  |   |  |  |

| **(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 discontinuedoperations in the consolidated statements of operations.  

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       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 hascontinued to develop its capabilities 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, since fiscal 2002 GHC has identified 15 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.

       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 and nine months ended June 30, 2004 was $0.2 million and $0.5 million, respectively.  For the three and nine months ended June 30, 2003, after-tax interest allocated to discontinued operations was $0.5 million and $2.4 million, respectively.

       GHC has separately classified an aggregate of $11.7 million and $18.3 million of carrying value associated with its assets held for sale in its unaudited condensed balance sheets at June 30, 2004 and September 30, 2003, respectively.  GHC’s assets held for sale are classified in the unaudited condensed balance sheets within both current and non-current assets.  The current portion of assets held for sale represents those assets for which the Company has binding agreements of sale.

       The following table sets forth net revenues and the components of loss from discontinued operations for the three and nine months ended June 30, 2004 and 2003 (in thousands):

|                                            | **Three Months          Ended June 30,** |   | **Nine Months          Ended June 30,** |   |
|-------------------------------------------------|------------------------------------------|--------|-----------------------------------------|--------|
|                                            |                                          |   |                                         |   |
|                                            | **2004**                                 |   | **2003**                                |   | **2004** |   | **2003** |   |
|                                            |                                          |   |                                         |   |  |   |  |   |
| Net revenues                                    | $                                        | 6,405  |                                    | $      | 27,169 |   | $ | 26,084 |   | $ | 142,599 |   |
|                                            |                                          |        |                                    |        |  |   |  |  |   |  |  |   |
|                                            |                                     |   |                                    |   |   |   |   |   |   |   |   |   |
| Net operating loss of discontinued businesses   | $                                        | (1,809 | )                                       | $      | (4,529 | ) | $ | (5,127 | ) | $ | (13,799 | ) |
| Loss on discontinuation of businesses           |                                     | -      |                                    |   | (5,064 | ) |   | (583 | ) |   | (10,898 | ) |
| Income tax benefit                              |                                     | 705    |                                    |   | 3,741 |   |   | 2,227 |   |   | 9,632 |   |
|                                            |                                          |        |                                    |        |  |   |  |  |   |  |  |   |
| Loss from discontinued operations, net of taxes | $                                        | (1,104 | )                                       | $      | (5,852 | ) | $ | (3,483 | ) | $ | (15,065 | ) |
|                                            |                                          |        |                                    |        |  |   |  |  |   |  |  |   |

       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 revenues earned from the provisions of speech pathology, physical therapy and occupational therapy.

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       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, respiratory health services, physician services, hospitality services, staffing services and other healthcare related services.  The “Other adjustments” category consists of certain expenses and gains that have not been allocated to ourreportable 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.

|                                                                                           | **Three months ended June 30,** |    | **Nine months ended June 30,** |   |
|------------------------------------------------------------------------------------------------|---------------------------------|---------|--------------------------------|--------|
| (in thousands)                                                                                 | **2004**                        |    | **2003**                       |   | **2004** |   | **2003** |   |
|                                                                                           |                                 |         |                           |        |  |   |  |  |   |  |  |   |
| Revenues:                                                                                      |                            |    |                           |   |   |   |   |   |   |   |   |   |
|    Inpatient services - external                                                | $                               | 336,477 |                           | $      | 299,030 |   | $ | 1,006,719 |   | $ | 891,716 |   |
|    Rehabilitation services:                                                     |                            |    |                           |   |   |   |   |   |   |   |   |   |
|       External                                                   |                            | 30,957  |                           |   | 32,615 |   |   | 89,972 |   |   | 88,523 |   |
|       Intersegment                                               |                            | 19,422  |                           |   | 19,931 |   |   | 56,937 |   |   | 62,690 |   |
|    All other services:                                                          |                            |    |                           |   |   |   |   |   |   |   |   |   |
|       External                                                   |                            | 10,817  |                           |   | 11,609 |   |   | 32,743 |   |   | 37,102 |   |
|       Intersegment                                               |                            | 7,320   |                           |   | 15,192 |   |   | 31,688 |   |   | 47,959 |   |
|    Elimination of intersegment revenues                                         |                            | (26,742 | )                              |   | (35,123 | ) |   | (88,625 | ) |   | (110,649 | ) |
|                                                                                           |                                 |         |                           |        |  |   |  |  |   |  |  |   |
|          Total          net revenues              |                            | 378,251 |                           |   | 343,254 |   |   | 1,129,434 |   |   | 1,017,341 |   |
|                                                                                           |                                 |         |                           |        |  |   |  |  |   |  |  |   |
| EBITDA (1):                                                                                    |                            |    |                           |   |   |   |   |   |   |   |   |   |
|    Inpatient services                                                           |                            | 41,763  |                           |   | 28,867 |   |   | 122,959 |   |   | 85,907 |   |
|    Rehabilitation services                                                      |                            | 4,637   |                           |   | 8,900 |   |   | 13,285 |   |   | 25,154 |   |
|    All other services and corporate costs                                       |                            | (15,517 | )                              |   | (13,333 | ) |   | (46,086 | ) |   | (38,477 | ) |
|    Other adjustments (2)                                                        |                            | (425    | )                              |   | - |   |   | (1,253 | ) |   | 1,123 |   |
|                                                                                           |                                 |         |                           |        |  |   |  |  |   |  |  |   |
|                                                                                           |                            |    |                           |   |   |   |   |   |   |   |   |   |
|          Total          EBITDA                    |                            | 30,458  |                           |   | 24,434 |   |   | 88,905 |   |   | 73,707 |   |
|                                                                                           |                                 |         |                           |        |  |   |  |  |   |  |  |   |
|                                                                                           |                            |    |                           |   |   |   |   |   |   |   |   |   |
| Capital and other:                                                                             |                            |    |                           |   |   |   |   |   |   |   |   |   |
|       Depreciation and          amortization expense             |                            | (11,356 | )                              |   | (9,787 | ) |   | (34,433 | ) |   | (28,893 | ) |
|       Interest expense                                           |                            | (6,854  | )                              |   | (4,422 | ) |   | (20,203 | ) |   | (12,487 | ) |
|       Income tax (expense)          benefit                      |                            | (4,998  | )                              |   | 455 |   |   | (13,925 | ) |   | (8,164 | ) |
|       Equity in net income          of unconsolidated affiliates |                            | 746     |                           |   | 448 |   |   | 1,770 |   |   | 875 |   |
|       Minority interests                                         |                            | (170    | )                              |   | - |   |   | (329 | ) |   | - |   |
|                                                                                           |                                 |         |                           |        |  |   |  |  |   |  |  |   |
|                                                                                           |                            |    |                           |   |   |   |   |   |   |   |   |   |
|       Income from continuing          operations                 |                            | 7,826   |                           |   | 11,128 |   |   | 21,785 |   |   | 25,038 |   |
|       Loss from discontinued          operations, net of taxes   |                            | (1,104  | )                              |   | (5,852 | ) |   | (3,483 | ) |   | (15,065 | ) |
|                                                                                           |                                 |         |                           |        |  |   |  |  |   |  |  |   |
|       Net income                                                 | $                               | 6,722   |                           | $      | 5,276 |   | $ | 18,302 |   | $ | 9,973 |   |
|                                                                                           |                                 |         |                           |        |  |   |  |  |   |  |  |   |

| (1) |   |   | GHC defines EBITDA as earnings from continuing operations before equity in net income of unconsolidated affiliates, minority interests, interest expense, income 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 and nine months ended June 30, 2004 and the nine months ended June 30, 2003 represent gains and (losses) recognized in connection with the early extinguishment of debt. |   |

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       Total assets by segment at June 30, 2004 and September 30, 2003 were as follows (in thousands):

|                           | **June 30, 2004** |      | **September 30, 2003** |   |
|--------------------------------|-------------------|-----------|------------------------|--------|
|                           |                   |      |                        |   |
| Inpatient services             | $                 | 872,327   |                   | $      | 846,361 |   |
| Rehabilitation therapy service |              | 35,845    |                   |   | 39,584 |   |
| All other                      |              | 335,077   |                   |   | 208,404 |   |
|                           |                   |           |                   |        |  |   |
|                           | $                 | 1,243,249 |                   | $      | 1,094,349 |   |
|                           |                   |           |                   |        |  |   |

| **(9)** | **Restricted Investments    in Marketable Securities** |
|---------|--------------------------------------------------------|

       At June 30, 2004 and September 30, 2003, the Company reported restricted investments in marketable securities of $96.2 million and $90.6 million, respectively.   The Company’s restricted investments 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 12 months.

| **(10)** | ** Stock Option    Plan** |
|----------|--------------------------------|

       GHC applies the intrinsic-value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, “*Accounting for Stock Issued to Employees*,” and related interpretations including FASB Interpretation No. 44, “*Accounting for Certain Transactions Involving Stock Compensation, an interpretation of APB Opinion No. 25*,” issued in March 2000, to account for its fixed-plan stock options.  Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price.  SFAS No. 123, “*Accounting for Stock-Based Compensation*,” established accounting and disclosure requirements using afair-value-based method of accounting for stock-based employee compensation plans.  As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of SFAS No. 123.  

       The following table illustrates the effect on net income (in thousands) if the fair-value-based method had been applied to all outstanding and unvested awards in each period.  Pro forma compensation expense for the prior year periods has been allocated to GHC using management’s estimate of the portion of stock option grants made to employees that provide services to GHC.  No earnings per share data is presented for the prior year periods as no shares of GHC were distributed prior to the December 1, 2003 spin-off date.

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|                                                      | **Three months ended June 30,** |   | **Nine months ended June 30,** |     |
|-----------------------------------------------------------|---------------------------------|--------|--------------------------------|----------|
|                                                      | **2004**                        |   |                           | **2003** |   |   | **2004** |   |   | **2003** |   |
|                                                           |
|                                                      |                            |   |                           |     |   |   |   |   |   |   |   |   |
| Net income - as reported                                  | $                               | 6,722  |                           | $        | 5,276 |   | $ | 18,302 |   | $ | 9,973 |   |
| Deduct: Total stock-based employee                        |                            |   |                           |     |   |   |   |   |   |   |   |   |
|    compensation determined under fair      |                            |   |                           |     |   |   |   |   |   |   |   |   |
|    value based method for all stock option |                            |   |                           |     |   |   |   |   |   |   |   |   |
|    awards, net of related tax effects      |                            | (910   | )                              |     | (151 | ) |   | (2,369 | ) |   | (213 | ) |
|                                                           |
| Net income - pro forma                                    | $                               | 5,812  |                           | $        | 5,125 |   | $ | 15,933 |   | $ | 9,760 |   |
|                                                           |
|                                                      |                            |   |                           |     |   |   |   |   |   |   |   |   |
| Earnings per share:                                       |                            |   |                           |     |   |   |   |   |   |   |   |   |
|    Basic – as reported                | $                               | 0.34   |                           |     |   |   | $ | 0.92 |   |   |   |   |
|    Basic – pro forma                  |                            | 0.29   |                           |     |   |   |   | 0.80 |   |   |   |   |
|    Diluted – as reported              |                            | 0.34   |                           |     |   |   |   | 0.92 |   |   |   |   |
|    Diluted – pro forma                | $                               | 0.29   |                           |     |   |   | $ | 0.80 |   |   |   |   |
|                                                           |

       The fair value of stock options granted in 2004 and 2003 is estimated at the grant date using the Black-Scholes option-pricing model based upon the following assumptions:

|                     | **Three months ended June 30,** | ** ** | **Nine months ended June 30,** |       |
|--------------------------|---------------------------------|------------|--------------------------------|------------|
|                     | **2004**                        | ** ** | **2003**                       | ** ** | **2004** | ** ** | **2003** |   |
|                          |
|                     |                            |       |                           |       |   |   |   |   |
| Volatility               | 41.32                           | %          | 25.61                          | %          | 40.39 | % | 41.83 | % |
| Expected life (in years) | 9.6                             |       | 3.3                            |       | 9.6 |   | 3.3 |   |
| Rate of return           | 4.63                            | %          | 2.54                           | %          | 4.63 | % | 2.54 | % |
| Dividend yield           | 0.00                            | %          | 0.00                           | %          | 0.00 | % | 0.00 | % |
|                          |

| **(11)** | **New/Proposed    Accounting Pronouncements:** |
|----------|------------------------------------------------|

       In December 2002, the FASB issued SFAS No. 148, “*Accounting for Stock-Based Compensation — Transition and Disclosure, an amendment of FASB Statement No. 123*,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation.  The Company has adopted the disclosure provisions of this statement (see Note 10 to the Financial Statements — “Stock Option Plan”).  In March 2004, the FASB issued a Proposed SFAS — “*Share-Based Payment:  an amendment of FASB Statements No. 123 and 95*.”  The proposed standard would require companies to expense share-based payments to employees, including stock options,based on the fair value of the award at grant date.  The proposed statement would eliminate the intrinsic value method of accounting for stock options permitted by APB No. 25 “*Accounting for Stock Issued to Employees*,” currently followed by the Company (see Note 5 to the Financial Statements — “Earnings Per Share”).

       In    January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), “*Consolidation    of Variable Interest Entities — an interpretation of ARB No. 51.*”  The    primary objectives of FIN 46 are to provide guidance on the identification    of entities for which control is achieved through means other than through    voting rights (variable interest entities or “VIEs”) and how    to determine when and which business enterprise should consolidate the VIE    (the primary beneficiary). In December 2003, the FASB issued FIN 46-R, “*Consolidation    of Variable Interest Entities — an interpretation of ARB No. 51*(revised    December 2003),” which    replaces FIN 46. FIN 46-R incorporates certain modifications to FIN 46 adopted    by the FASB subsequent to the issuance of FIN 46, including modifications    to the scope of FIN 46. Additionally, FIN 46-R also incorporates much of    the guidance previously issued in the form of FASB Staff Positions. The Company    has adopted all of the provisions of FIN 46-R in the second quarter of 2004.    The adoption of FIN 46-R did not have an impact on the presentation of the    Company’s financial position, result of operations or liquidity.

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**(12)      Condensed Consolidating Financial Statements of Genesis HealthCare Corporation and Subsidiaries**

       The following condensed consolidating financial statements of GHC and its subsidiaries have been prepared pursuant to Rule 3-10 of Regulation S-X.

       These unaudited condensed consolidating financial statements have been prepared on the same basis of accounting as the consolidated financial statements.  GHC is the borrower under the senior credit facility and the senior subordinated notes described in Note 4 to the Financial Statements — “Long-Term Debt” and incurs interest expense thereunder.  In April 2004, GHC filed a registration statement on Form S-4 with the Securities and Exchange Commission in connection with the exchange offer relating to the senior subordinating notes.  In July 2004, upon the expiration of the exchange offer, $224.0 million aggregate principal amount of senior subordinated notes registered under the Securities Act of 1933, as amended, were exchangedfor the unregistered notes issued in October 2003.  The aggregate principal amount of $1.0 million of unregistered notes was not exchanged and remains outstanding.  The senior subordinated notes are fully and unconditionally guaranteed on a joint and several basis by certain 100% owned subsidiaries of GHC (Guarantors).  Non-guarantor subsidiaries do not guarantee the senior subordinated notes and principally consist of LHC, GHC’s wholly owned insurance captive, and certain separately mortgaged eldercare centers (Non-guarantors).  The following tables present the unaudited condensed consolidating financial statements of GHC (Parent), the Guarantors and the Non-guarantors.

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**GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES  UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEETS  JUNE 30, 2004  (IN THOUSANDS)**

|                                            | **Parent** |      | **Guarantors** |   | **Non-guarantors** |   | **Eliminations** |    | **Consolidated** |   |
|-------------------------------------------------|------------|-----------|----------------|--------|--------------------|--------|------------------|---------|------------------|--------|
|                                            |            |
| Assets:                                         |       |      |           |   |               |   |             |    |             |   |   |   |   |   |   |
|    Current assets                | $          | 119,574   |           | $      | 196,763            |   | $                | 42,225  |             | $      | (2,685 | ) | $ | 355,877 |   |
|    Property and equipment, net   |       | 20,924    |           |   | 660,316            |   |             | 16,703  |             |   | - |   |   | 697,943 |   |
|    Other long-term assets        |       | 81,766    |           |   | 40,718             |   |             | 75,173  |             |   | (8,228 | ) |   | 189,429 |   |
|    Investments in subsidiaries   |       | 215,618   |           |   | -                  |   |             | -       |             |   | (215,618 | ) |   | - |   |
|    Intercompany receivables      |       | 609,356   |           |   | -                  |   |             | -       |             |   | (609,356 | ) |   | - |   |
|                                            |            |
| Total assets                                    | $          | 1,047,238 |           | $      | 897,797            |   | $                | 134,101 |             | $      | (835,887 | ) | $ | 1,243,249 |   |
|                                            |            |
| Liabilities and shareholders’ equity:      |       |      |           |   |               |   |             |    |             |   |   |   |   |   |   |
|    Current liabilities           | $          | 57,991    |           | $      | 73,913             |   | $                | 47,048  |             | $      | (3,636 | ) | $ | 175,316 |   |
|    Intercompany payables         |       | -         |           |   | 579,592            |   |             | 29,764  |             |   | (609,356 | ) |   | - |   |
|    Long-term debt                |       | 390,987   |           |   | 26,831             |   |             | 12,206  |             |   | (4,443 | ) |   | 425,581 |   |
|    Other long-term liabilities   |       | 62,802    |           |   | 784                |   |             | 43,308  |             |   | - |   |   | 106,894 |   |
|    Shareholders’ equity     |       | 535,458   |           |   | 216,677            |   |             | 1,775   |             |   | (218,452 | ) |   | 535,458 |   |
|                                            |            |
| Total liabilities and shareholders’ equity | $          | 1,047,238 |           | $      | 897,797            |   | $                | 134,101 |             | $      | (835,887 | ) | $ | 1,243,249 |   |
|                                            |            |

**GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES  UNAUDITED CONDENSED COMBINING BALANCE SHEETS****SEPTEMBER 30, 2003  (IN THOUSANDS)**

|                                            | **Parent** |    | **Guarantors** |   | **Non-guarantors** |   | **Eliminations** |    | **Consolidated** |   |
|-------------------------------------------------|------------|---------|----------------|--------|--------------------|--------|------------------|---------|------------------|--------|
|                                            |            |
| Assets:                                         |       |    |           |   |               |   |             |    |             |   |   |   |   |   |   |
|    Current assets                | $          | 10,156  |           | $      | 216,523            |   | $                | 41,009  |             | $      | (2,515 | ) | $ | 265,173 |   |
|    Property and equipment, net   |       | 16,718  |           |   | 649,783            |   |             | 6,666   |             |   | - |   |   | 673,167 |   |
|    Other long-term assets        |       | 67,717  |           |   | 25,343             |   |             | 71,161  |             |   | (8,212 | ) |   | 156,009 |   |
|    Investments in subsidiaries   |       | 100,011 |           |   | -                  |   |             | -       |             |   | (100,011 | ) |   | - |   |
|    Intercompany receivables      |       | 696,661 |           |   | -                  |   |             | -       |             |   | (696,661 | ) |   | - |   |
|                                            |            |
| Total assets                                    | $          | 891,263 |           | $      | 891,649            |   | $                | 118,836 |             | $      | (807,399 | ) | $ | 1,094,349 |   |
|                                            |            |
| Liabilities and shareholders’ equity:      |       |    |           |   |               |   |             |    |             |   |   |   |   |   |   |
|    Current liabilities           | $          | 58,500  |           | $      | 67,843             |   | $                | 43,649  |             | $      | (2,515 | ) | $ | 167,477 |   |
|    Intercompany payables         |       | -       |           |   | 674,221            |   |             | 22,440  |             |   | (696,661 | ) |   | - |   |
|    Long-term debt                |       | 209,928 |           |   | 36,450             |   |             | 7,815   |             |   | - |   |   | 254,193 |   |
|    Other long-term liabilities   |       | 42,274  |           |   | 12,299             |   |             | 37,198  |             |   | 347 |   |   | 92,118 |   |
|    Shareholders’ equity     |       | 580,561 |           |   | 100,836            |   |             | 7,734   |             |   | (108,570 | ) |   | 580,561 |   |
|                                            |            |
| Total liabilities and shareholders’ equity | $          | 891,263 |           | $      | 891,649            |   | $                | 118,836 |             | $      | (807,399 | ) | $ | 1,094,349 |   |
|                                            |            |

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**GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES  UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS  THREE MONTHS ENDED JUNE 30, 2004  (IN THOUSANDS)**

|                                                                      | **Parent** |    | **Guarantors** |   | **Non-guarantors** |   | **Eliminations** |   | **Consolidated** |   |
|---------------------------------------------------------------------------|------------|---------|----------------|--------|--------------------|--------|------------------|--------|------------------|--------|
|                                                                      |            |
| Net revenues                                                              | $          | 3,356   |           | $      | 393,598            |   | $                | 8,078  |             | $      | (26,781 | ) | $ | 378,251 |   |
|                                                                      |       |    |           |   |               |   |             |   |             |   |   |   |   |   |   |
| Equity in net income (loss) of subsidiaries                               |       | 23,319  |           |   | -                  |   |             | -      |             |   | (23,319 | ) |   | - |   |
|                                                                      |       |    |           |   |               |   |             |   |             |   |   |   |   |   |   |
| Operating expenses                                                        |       | 22,856  |           |   | 336,351            |   |             | 8,293  |             |   | (26,717 | ) |   | 340,783 |   |
| Lease expense                                                             |       | 463     |           |   | 6,547              |   |             | -      |             |   | - |   |   | 7,010 |   |
| Depreciation and amortization expense                                     |       | 2,006   |           |   | 8,713              |   |             | 637    |             |   | - |   |   | 11,356 |   |
| Interest expense                                                          |       | 6,051   |           |   | 636                |   |             | 231    |             |   | (64 | ) |   | 6,854 |   |
|                                                                      |            |
| Income (loss) before income tax (benefit) expense,                        |       |    |           |   |               |   |             |   |             |   |   |   |   |   |   |
|    equity in net income (loss) of unconsolidated           |       |    |           |   |               |   |             |   |             |   |   |   |   |   |   |
|    affiliates and minority interests                       |       | (4,701  | )              |   | 41,351             |   |             | (1,083 | )                |   | (23,319 | ) |   | 12,248 |   |
| Income tax (benefit) expense                                              |       | (10,610 | )              |   | 16,123             |   |             | (422   | )                |   | (93 | ) |   | 4,998 |   |
|                                                                      |            |
| Income (loss) before equity in net income (loss) of                       |       |    |           |   |               |   |             |   |             |   |   |   |   |   |   |
|    unconsolidated affiliates and minority        interests |       | 5,909   |           |   | 25,228             |   |             | (661   | )                |   | (23,226 | ) |   | 7,250 |   |
|                                                                      |       |    |           |   |               |   |             |   |             |   |   |   |   |   |   |
| Equity in net income (loss) of unconsolidated affiliates                  |       | 813     |           |   | -                  |   |             | -      |             |   | (67 | ) |   | 746 |   |
| Minority interests                                                        |       | -       |           |   | -                  |   |             | -      |             |   | (170 | ) |   | (170 | ) |
|                                                                      |            |
| Income (loss) from continuing operations                                  |       | 6,722   |           |   | 25,228             |   |             | (661   | )                |   | (23,463 | ) |   | 7,826 |   |
|                                                                      |       |    |           |   |               |   |             |   |             |   |   |   |   |   |   |
| Income (loss) from discontinued operations                                |       | -       |           |   | (1,191             | )      |             | 87     |             |   | - |   |   | (1,104 | ) |
|                                                                      |            |
| Net income (loss)                                                         | $          | 6,722   |           | $      | 24,037             |   | $                | (574   | )                | $      | (23,463 | ) | $ | 6,722 |   |
|                                                                      |            |

     **GENESIS HEALTHCARE      CORPORATION AND SUBSIDIARIES  UNAUDITED CONDENSED COMBINIG STATEMENTS OF OPERATIONS****THREE MONTHS ENDED JUNE 30, 2003 (IN THOUSANDS)**

|                                                                      | **Parent** |   | **Guarantors** |   | **Non-guarantors** |   | **Eliminations** |   | **Consolidated** |   |
|---------------------------------------------------------------------------|------------|--------|----------------|--------|--------------------|--------|------------------|--------|------------------|--------|
|                                                                      |            |
| Net revenues                                                              | $          | 3,445  |           | $      | 372,180            |   | $                | 2,992  |             | $      | (35,363 | ) | $ | 343,254 |   |
|                                                                      |       |   |           |   |               |   |             |   |             |   |   |   |   |   |   |
| Equity in net income (loss) of subsidiaries                               |       | 20,003 |           |   | -                  |   |             | -      |             |   | (20,003 | ) |   | - |   |
|                                                                      |       |   |           |   |               |   |             |   |             |   |   |   |   |   |   |
| Operating expenses                                                        |       | 21,141 |           |   | 322,393            |   |             | 3,931  |             |   | (35,363 | ) |   | 312,102 |   |
| Lease expense                                                             |       | 624    |           |   | 6,094              |   |             | -      |             |   | - |   |   | 6,718 |   |
| Depreciation and amortization expense                                     |       | 2,494  |           |   | 6,756              |   |             | 537    |             |   | - |   |   | 9,787 |   |
| Interest expense                                                          |       | 3,487  |           |   | 767                |   |             | 168    |             |   | - |   |   | 4,422 |   |
|                                                                      |            |
| Income (loss) before income tax (benefit) expense,                        |       |   |           |   |               |   |             |   |             |   |   |   |   |   |   |
|    equity in net income of unconsolidated                  |       |   |           |   |               |   |             |   |             |   |   |   |   |   |   |
|    affiliates and minority interests                       |       | (4,298 | )              |   | 36,170             |   |             | (1,644 | )                |   | (20,003 | ) |   | 10,225 |   |
| Income tax (benefit) expense                                              |       | (9,416 | )              |   | 9,602              |   |             | (641   | )                |   | - |   |   | (455 | ) |
|                                                                      |            |
| Income (loss) before equity in net income of                              |       |   |           |   |               |   |             |   |             |   |   |   |   |   |   |
|    unconsolidated affiliates and minority        interests |       | 5,118  |           |   | 26,568             |   |             | (1,003 | )                |   | (20,003 | ) |   | 10,680 |   |
|                                                                      |       |   |           |   |               |   |             |   |             |   |   |   |   |   |   |
| Equity in net income of unconsolidated affiliates                         |       | 158    |           |   | 290                |   |             | -      |             |   | - |   |   | 448 |   |
|                                                                      |            |
|                                                                      |       |   |           |   |               |   |             |   |             |   |   |   |   |   |   |
| Income (loss) from continuing operations                                  |       | 5,276  |           |   | 26,858             |   |             | (1,003 | )                |   | (20,003 | ) |   | 11,128 |   |
|                                                                      |       |   |           |   |               |   |             |   |             |   |   |   |   |   |   |
| Loss from discontinued operations                                         |       | -      |           |   | (4,585             | )      |             | (1,267 | )                |   | - |   |   | (5,852 | ) |
|                                                                      |            |
| Net income (loss)                                                         | $          | 5,276  |           | $      | 22,273             |   | $                | (2,270 | )                | $      | (20,003 | ) | $ | 5,276 |   |
|                                                                      |            |

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**GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES****UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS****NINE MONTHS ENDED JUNE 30, 2004  (IN THOUSANDS)**

|                                                                      | **Parent** |    | **Guarantors** |   | **Non-guarantors** |   | **Eliminations** |   | **Consolidated** |   |
|---------------------------------------------------------------------------|------------|---------|----------------|--------|--------------------|--------|------------------|--------|------------------|--------|
|                                                                      |            |
| Net revenues                                                              | $          | 10,187  |           | $      | 1,186,629          |   | $                | 21,284 |             | $      | (88,666 | ) | $ | 1,129,434 |   |
|                                                                      |       |    |           |   |               |   |             |   |             |   |   |   |   |   |   |
| Equity in net income (loss) of subsidiaries                               |       | 68,445  |           |   | -                  |   |             | -      |             |   | (68,445 | ) |   | - |   |
|                                                                      |       |    |           |   |               |   |             |   |             |   |   |   |   |   |   |
| Operating expenses                                                        |       | 69,942  |           |   | 1,017,652          |   |             | 20,228 |             |   | (88,602 | ) |   | 1,019,220 |   |
| Lease expense                                                             |       | 1,536   |           |   | 19,773             |   |             | -      |             |   | - |   |   | 21,309 |   |
| Depreciation and amortization expense                                     |       | 5,747   |           |   | 26,806             |   |             | 1,880  |             |   | - |   |   | 34,433 |   |
| Interest expense                                                          |       | 17,478  |           |   | 2,085              |   |             | 704    |             |   | (64 | ) |   | 20,203 |   |
|                                                                      |            |
| Income (loss) before income tax (benefit) expense,                        |       |    |           |   |               |   |             |   |             |   |   |   |   |   |   |
|    equity in net income (loss) of unconsolidated           |       |    |           |   |               |   |             |   |             |   |   |   |   |   |   |
|    affiliates and minority interests                       |       | (16,071 | )              |   | 120,313            |   |             | (1,528 | )                |   | (68,445 | ) |   | 34,269 |   |
| Income tax (benefit) expense                                              |       | (32,058 | )              |   | 46,920             |   |             | (596   | )                |   | (341 | ) |   | 13,925 |   |
|                                                                      |            |
| Income (loss) before equity in net income (loss) of                       |       |    |           |   |               |   |             |   |             |   |   |   |   |   |   |
|    unconsolidated affiliates and minority        interests |       | 15,987  |           |   | 73,393             |   |             | (932   | )                |   | (68,104 | ) |   | 20,344 |   |
|                                                                      |       |    |           |   |               |   |             |   |             |   |   |   |   |   |   |
| Equity in net income (loss) of unconsolidated affiliates                  |       | 2,315   |           |   | -                  |   |             | -      |             |   | (545 | ) |   | 1,770 |   |
| Minority interests                                                        |       | -       |           |   | -                  |   |             | -      |             |   | (329 | ) |   | (329 | ) |
|                                                                      |            |
|                                                                      |       |    |           |   |               |   |             |   |             |   |   |   |   |   |   |
| Income (loss) from continuing operations                                  |       | 18,302  |           |   | 73,393             |   |             | (932   | )                |   | (68,978 | ) |   | 21,785 |   |
|                                                                      |       |    |           |   |               |   |             |   |             |   |   |   |   |   |   |
| Income (loss) from discontinued operations                                |       | -       |           |   | (3,502             | )      |             | 19     |             |   | - |   |   | (3,483 | ) |
|                                                                      |            |
| Net income (loss)                                                         | $          | 18,302  |           | $      | 69,891             |   | $                | (913   | )                | $      | (68,978 | ) | $ | 18,302 |   |
|                                                                      |            |

      **GENESIS HEALTHCARE      CORPORATION AND SUBSIDIARIES  UNAUDITED CONDENSED COMBINING STATEMENTS OF OPERATIONS****NINE MONTHS ENDED JUNE 30, 2003  (IN THOUSANDS)**

|                                                                      | **Parent** |    | **Guarantors** |   | **Non-guarantors** |   | **Eliminations** |   | **Consolidated** |   |
|---------------------------------------------------------------------------|------------|---------|----------------|--------|--------------------|--------|------------------|--------|------------------|--------|
|                                                                      |            |
| Net revenues                                                              | $          | 11,419  |           | $      | 1,108,668          |   | $                | 8,734  |             | $      | (111,480 | ) | $ | 1,017,341 |   |
|                                                                      |       |    |           |   |               |   |             |   |             |   |   |   |   |   |   |
| Equity in net income (loss) of subsidiaries                               |       | 49,766  |           |   | -                  |   |             | -      |             |   | (49,766 | ) |   | - |   |
|                                                                      |       |    |           |   |               |   |             |   |             |   |   |   |   |   |   |
| Operating expenses                                                        |       | 62,526  |           |   | 964,312            |   |             | 7,982  |             |   | (111,480 | ) |   | 923,340 |   |
| Lease expense                                                             |       | 2,148   |           |   | 18,146             |   |             | -      |             |   | - |   |   | 20,294 |   |
| Depreciation and amortization expense                                     |       | 2,533   |           |   | 24,753             |   |             | 1,607  |             |   | - |   |   | 28,893 |   |
| Interest expense                                                          |       | 9,412   |           |   | 2,570              |   |             | 505    |             |   | - |   |   | 12,487 |   |
|                                                                      |            |
| Income (loss) before income tax (benefit) expense,                        |       |    |           |   |               |   |             |   |             |   |   |   |   |   |   |
|    equity in net (loss) income of unconsolidated           |       |    |           |   |               |   |             |   |             |   |   |   |   |   |   |
|    affiliates and minority interests                       |       | (15,434 | )              |   | 98,887             |   |             | (1,360 | )                |   | (49,766 | ) |   | 32,327 |   |
| Income tax (benefit) expense                                              |       | (25,443 | )              |   | 34,137             |   |             | (530   | )                |   | - |   |   | 8,164 |   |
|                                                                      |            |
| Income (loss) before equity in net (loss) income of                       |       |    |           |   |               |   |             |   |             |   |   |   |   |   |   |
|    unconsolidated affiliates and minority        interests |       | 10,009  |           |   | 64,750             |   |             | (830   | )                |   | (49,766 | ) |   | 24,163 |   |
|                                                                      |       |    |           |   |               |   |             |   |             |   |   |   |   |   |   |
| Equity in net (loss) income of unconsolidated affiliates                  |       | (36     | )              |   | 911                |   |             | -      |             |   | - |   |   | 875 |   |
| Minority interests                                                        |       | -       |           |   | -                  |   |             | -      |             |   | - |   |   | - |   |
|                                                                      |            |
| Income (loss) from continuing operations                                  |       | 9,973   |           |   | 65,661             |   |             | (830   | )                |   | (49,766 | ) |   | 25,038 |   |
|                                                                      |       |    |           |   |               |   |             |   |             |   |   |   |   |   |   |
| Loss from discontinued operations                                         |       | -       |           |   | (12,077            | )      |             | (2,988 | )                |   | - |   |   | (15,065 | ) |
|                                                                      |            |
| Net income (loss)                                                         | $          | 9,973   |           | $      | 53,584             |   | $                | (3,818 | )                | $      | (49,766 | ) | $ | 9,973 |   |
|                                                                      |            |

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**GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES  UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS  NINE MONTHS ENDED JUNE 30, 2004  (IN THOUSANDS)**

|                                                | **Parent** |    | **Guarantors** |   | **Non-guarantors** |   | **Consolidated** |   |
|-----------------------------------------------------|------------|---------|----------------|--------|--------------------|--------|------------------|--------|
|                                                |            |
| Net cash (used in) provided by operating activities | $          | (75,176 | )              | $      | 168,564            |   | $                | 6,776  |   | $ | 100,164 |   |
| Net cash used in investing activities               |       | (8,314  | )              |   | (44,152            | )      |             | (6,156 | ) |   | (58,622 | ) |
| Net cash provided by (used in) financing activities |       | 196,667 |           |   | (129,945           | )      |             | (1,911 | ) |   | 64,811 |   |
|                                                |            |
| Net increase (decrease) in cash and equivalents     | $          | 113,177 |           | $      | (5,533             | )      | $                | (1,291 | ) | $ | 106,353 |   |
|                                                |            |

      **GENESIS HEALTHCARE      CORPORATION AND SUBSIDIARIES  UNAUDITED CONDENSED COMBINING STATEMENTS OF CASH FLOWS****NINE MONTHS ENDED JUNE 30, 2003  (IN THOUSANDS)**

|                                                | **Parent** |    | **Guarantors** |   | **Non-guarantors** |   | **Consolidated** |   |
|-----------------------------------------------------|------------|---------|----------------|--------|--------------------|--------|------------------|--------|
|                                                |            |
| Net cash (used in) provided by operating activities | $          | (80,368 | )              | $      | 117,907            |   | $                | 12,197 |   | $ | 49,736 |   |
| Net cash provided by (used in) investing activities |       | 1,148   |           |   | 32,749             |   |             | (5,621 | ) |   | 28,276 |   |
| Net cash provided by (used in) financing activities |       | 71,508  |           |   | (147,863           | )      |             | (4,203 | ) |   | (80,558 | ) |
|                                                |            |
| Net (decrease) increase in cash and equivalents     | $          | (7,712  | )              | $      | 2,793              |   | $                | 2,373  |   | $ | (2,546 | ) |
|                                                |            |

 

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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 improve continuously 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 nine months ended June 30, 2004, the average occupancy level in our inpatient facilities was approximately 91%.

     Approximately 89% 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 214 eldercare facilities, consisting of 176 skilled nursing facilities, 23 assisted living facilities and 15 transitional care units with 26,149 beds, including two skilled nursing facilities with 404 beds that have been identified as held for sale.

     Our rehabilitation therapy business, which represents approximately 8% of our net revenues, 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 13 outpatient rehabilitation agencies.  We also provide other complementary healthcare services, the revenues for which are included in all other services revenues in oursegment 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 variousareas 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 73% of our revenue.  Over the past five years, changes in funding from these government sources has 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 operate our business profitably is our greatest financial risk.  

     Labor costs, including salaries, wages and benefits, account for approximately 75% 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 in our inpatient services segment 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 relianceon overtime compensation and temporary nursing agency services.  Our efforts resulted in a 36% reduction in the cost of temporary nursing agencies in fiscal 2003 as compared to fiscal 2002, and a 46% reduction in year-to-date fiscal 2004 compared to year-to-date fiscal 2003, without experiencing a significant change in overall nursing hours per patient day.  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.  In fiscal 2004, we and our industry are experiencing a shortage of qualified rehabilitation therapists.  As thedemand for these services continues to exceed the supply of available therapists, we and our competitors have been forced to offer more attractive wage and benefit packages to these professionals while utilizing outside contractors for these services at premium rates.  Although we have been able to retain adequate levels of qualified therapists to maintain our standards of quality care in the services we provide, the shortage of qualified therapists has impacted negatively our ability to generate new therapy business.

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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 have increased our 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.

     On July 30, 2004, the Centers for Medicare and Medicaid Services, or “CMS,” published notice of the fiscal year 2005 prospective payment system rates that will be effective October 1, 2004.  The fiscal year 2005 rules provide for a 2.8% market basket increase and continue the current payment system with certain payment add-ons that were authorized to compensate for non-therapy ancillaries.  While no changes are made to the fiscal year 2005 rules, CMS affirms that its contractor, the Urban Institute, is expected to complete its study of the skilled nursing payment system and that the study recommendations will be considered as part of the proposed fiscal year 2006 rules.

     The Medicare Modernization Act, enacted and effective on December 8, 2003, suspended application of the therapy caps through December 31, 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 $18.9million 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.  As mandated by the law, the General Accounting Office is conducting a study of alternatives to the therapy caps. This report and a related study previously required from CMS are expected to be released before the end of calendar year 2004.

     State    budget pressures in recent years have translated into reductions in the rate    of state spending growth in certain jurisdictions. 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 address    responsibly the particular funding issues.

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     The plight of state governments has helped to elevate issues related to Medicaid onto the national agenda.  Last year, Congress passed temporary relief to states providing a 2.9% temporary increase in the federal Medicaid Assistance Percentage for five quarters estimated to provide states $10 billion in Medicaid relief.  That assistance terminated on June 30, 2004.  While legislation has been introduced in both the U.S. Senate and U.S. House of Representatives, prospects for Congress extending the temporary assistance are not encouraging.  Actions to date on state Medicaid budgets affirm that many states are adjusting state Medicaid spending to reflect the loss of the temporary federal assistance.  Medicaid funding is set annually.  While moststates have completed formulating their fiscal year 2005 budgets, it is premature to calculate what the impact of these state budget decisions will be on skilled nursing facility services as detailed rate notices are still in process.

     Certain important studies on Medicaid nursing home reimbursement have been released during the fiscal year.  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.  Similar conclusions were reached by an academic study published in June 2004 in *Health Affairs*.  While the data in both studies 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.  The reports are consistent with observed behavior in the states where we operate.

     Among the alternative Medicaid funding approaches that states have explored are nursing home provider assessments as tools for leveraging increased Medicaid matching funds.  Such initiatives are authorized under the law.  Nursing home provider assessments have been implemented in three states where we operate (MA, WV and RI) and two additional states have recently received CMS approvals to implement plans (NC and NH).  During June 2004, new state laws were enacted in both New Hampshire and New Jersey amending previously enacted provider assessment laws to address federal approval concerns.  Given successful negotiations with CMS, New Hampshire has approved and is in the process of implementing its provider assessment program.  New Jersey isrevising its proposed state plan amendments and is expected to resubmit its proposal in the near future.  While new legislation was not required in Pennsylvania, the Commonwealth continues to negotiate with the federal government to resolve items in dispute in their provider assessment submission.  We have not completed our evaluation of the financial impact of these provider assessment proposals, but we expect their implementation to have a positive impact on our financial and operating performance.  Further delays in the federal processing of the pending provider assessment plans in New Jersey and Pennsylvania could adversely impact future nursing home funding in both jurisdictions.

     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 the customers served by our rehabilitation services business.  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 operationswill 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.  

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**Certain Transactions and Events**

     ***Purchase of Joint Venture Interests***

     On January 5, 2004, we acquired our joint venture partner’s interest in two Massachusetts skilled nursing facilities which we previously managed.  We previously owned a 50% interest in one facility and a 20% interest in the other.  Upon completion of the transaction, we own 100% of both facilities and acquired approximately $6.0 million of working capital along with the property and equipment of the two skilled nursing facilities, having a total of 318 beds.  The aggregate consideration consisted of $6.0 million in cash and the assumption of debt in the amount of approximately $20.0 million, $12.5 million of which was repaid following completion of the transactions.

     ***Spin-off***

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

     We and NCI have agreed contractually to continue certain transitional arrangements and practices for a limited time after the spin-off.  In addition, we and NCI have 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.  On May 7, 2004, we and NCI amended the Master Agreement for Pharmacy, Pharmacy Consulting and Related Products and Services to correct a pricing error in the original agreement specifically related to intravenous drugs.  The financial impact of the amendment increases our pharmacy costs $1.3 million on an annualized basis, which has been reflected in our financial results.  The amendment also accelerates by ninemonths our ability to renegotiate pricing with NCI.  We believe that the amendments offer substantially equal value to both organizations.  Beginning December 1, 2003, the agreements with NCI, as amended, along with a revised pricing agreement with our primary supplier of medical supplies, extends approximately $6.6 million of annual cost savings to GHC, as compared to our pricing prior to the spin-off.

     ***ElderTrust/Ventas 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 leaseexpense 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 |

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|  | • | 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. |
|--|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

     In February 2004, ElderTrust shareholders approved the merger of ElderTrust with Ventas Sub, LLC (Ventas), a Delaware limited liability company and a wholly owned subsidiary of Ventas, Inc., a publicly traded Delaware corporation.  This merger did not have a material impact on us.

     In June 2004, Ventas exercised its option to purchase an assisted living facility from us for cash consideration of $4.9 million.  We leased the property back from Ventas under a 10-year operating lease agreement.  We recognized a $1.6 million gain on the sale of the property, which has been deferred and will be amortized on a straight line basis to lease expense over the 10-year lease term.

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**Results of Operations**

**Factors Affecting Comparability of Financial Information**

     Our unaudited condensed statements of operations for the three and nine months ended June 30, 2003 and for the first two months (through November 30, 2003) of the nine months ended June 30, 2004 have been prepared on a basis which reflects our historical financial statements 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 us in the future, or what the results of operations, cash flows or financial position would have been had we been a separate stand-alone public entity for all periods presented.

     Management believes that the unaudited condensed statement of operations for the three and nine months ended June 30, 2004 is generally comparable to the unaudited condensed statement of operations for the three and nine months ended June 30, 2003, with the exception of interest 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 directlycomparable financial measure so calculated and presented.  In this regard, GAAP refers to accounting principles generally accepted 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 asinterest 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 compensationawards.  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 discontinuedbusinesses.  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 expense, income 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 nine months ended June 30, 2003 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 June 30,** |     |   | **Nine months          ended June 30,** |     |
|----------------------------------------------------------------------------|------------------------------------------|----------|--------|-----------------------------------------|----------|
|                                                                       |                                     | **2004** |   |                                    | **2003** |   |   | **2004** |   |   | **2003** |   |
|                                                                       |                                          |          |   |                                         |          |   |  |  |   |  |  |   |
| Net income                                                                 | $                                        | 6,722    |   | $                                       | 5,276    |   | $ | 18,302 |   | $ | 9,973 |   |
| Add back:                                                                  |                                     |     |   |                                    |     |   |   |   |   |   |   |   |
|    Loss from discontinued operations, net        of taxes   |                                     | 1,104    |   |                                    | 5,852    |   |   | 3,483 |   |   | 15,065 |   |
|    Equity in net income of unconsolidated        affiliates |                                     | (746     | )      |                                    | (448     | ) |   | (1,770 | ) |   | (875 | ) |
|    Minority interests                                       |                                     | 170      |   |                                    | -        |   |   | 329 |   |   | - |   |
|    Income tax expense (benefit)                             |                                     | 4,998    |   |                                    | (455     | ) |   | 13,925 |   |   | 8,164 |   |
|    Interest expense                                         |                                     | 6,854    |   |                                    | 4,422    |   |   | 20,203 |   |   | 12,487 |   |
|    Depreciation and amortization expense                    |                                     | 11,356   |   |                                    | 9,787    |   |   | 34,433 |   |   | 28,893 |   |
|                                                                       |                                          |          |   |                                         |          |   |  |  |   |  |  |   |
| EBITDA                                                                     | $                                        | 30,458   |   | $                                       | 24,434   |   | $ | 88,905 |   | $ | 73,707 |   |
|    Gain on early extinguishment of debt        (1)          |                                     | -        |   |                                    | -        |   |   | - |   |   | (1,123 | ) |
|                                                                       |                                          |          |   |                                         |          |   |  |  |   |  |  |   |
| Adjusted EBITDA                                                            | $                                        | 30,458   |   | $                                       | 24,434   |   | $ | 88,905 |   | $ | 72,584 |   |
|                                                                       |                                          |          |   |                                         |          |   |  |  |   |  |  |   |

| (1)    |   |   | The gain on early extinguishment of debt is the result of a negotiated discount on a mortgage loan prepaid 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 lenderapproach us 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.  We did not exclude from the calculation of Adjusted EBITDA certain losses on the early extinguishment of debt recognized in the 2004 periods because we have recognized similar losses in recent years and believe it is likely that similar losses will be recognized within the next two years.  We incurred losses on the early extinguishment of debt of $0.4 million and $1.3 million for the three and nine months ended June 30, 2004, respectively. |   |
|--------|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |

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***Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003***

     *References herein to “same facility” results exclude the impact of the eight eldercare centers acquired through step acquisitions.*

     In the current quarter, revenues were $378.3 million, an increase of $35.0 million, or 10.2%, over the same period in the prior year.  Of this growth, inpatient services revenue increased by $37.4 million, external rehabilitation therapy services revenue declined by $1.7 million and other businesses revenue declined $0.7 million.  

     The    $37.4 million of revenue growth in our inpatient services segment is primarily    attributed to increased payor rates and acquisitions. Of the increase, $18.1    million is due to step acquisitions of eight eldercare centers. The balance    of the increase in inpatient services revenue is primarily due to increased    average rates per patient day resulting in $22.0 million of revenue growth,    increased Medicare Part B volume of $1.0 million, partially offset by a $1.9    million decline in non-Medicaid patient revenue and a same facility occupancy    decline of $1.6 million. Our average rate per patient day in the current    quarter was $201 compared to $188 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 ($158 in 2004 versus $147 in 2003) and    Medicare rates per patient day ($352 in 2004 versus $314 in 2003). The 12.1%    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. Total patient days increased 88,946 to 1,676,326 in the current quarter    compared to 1,587,380 in the same period of the prior year. Of this increase,    96,665 patient days are attributed to the step acquisition of eight eldercare    centers, offset by a decline of 7,719 patient days in our same facility eldercare    centers. Overall occupancy declined to 90.3% in the current year quarter    from 90.5% in the same period in the prior year. A 0.5% shift in patient    daysfrom Private to Medicaid payor sources resulted in the aforementioned declinein non-Medicaid patient revenue.

     A net loss of 42 contracts was the primary reason for the decline in external rehabilitation therapy services revenues, offset by increased revenue volume generated by ongoing customer contracts.

     Management’s decision to curtail the operations of our hospitality business and reduced management fee revenue due to the step acquisitions of previously managed properties were the primary reasons for the $0.7 million decline in other businesses revenue.

     For the current quarter, net income increased to $6.7 million from $5.3 million in the same period in the prior year.  Revenue increases of $35.0 million, as previously discussed, were partially offset by $25.6 million of increased salaries, wages and benefits and $2.6 million of higher other operating expenses.  Of these increases, $15.2 million is attributed to the step acquisitions of eight eldercare centers, with the balance of the increase attributed to inflationary increases in cost and other individually insignificant expense fluctuations.  Salaries, wages and benefits as a percentage of revenue increased to 62.7% of revenues in the current quarter versus 61.7% in the prior year quarter.  Such increase primarily resulted from continuedsuccess in replacing higher cost nursing agencies with internal labor in the inpatient segment.  Other operating expenses as a percentage of revenue improved to 27.3% of revenues in the current quarter from 29.3% of revenues in the prior year quarter.  The improvement in other operating costs as a percentage of revenues was primarily due to the aforementioned reduction in utilization of higher cost nursing agencies used to supplement our employed labor and decreased pharmacy costs primarily resulting from pricing reductions from our pharmacy provider, partially offset by increased ancillary costs necessary to treat a higher acuity patient population and increased general and administrative costs as a result of our operating independently of NCI.  Income before taxes was reduced $0.3million due to higher lease expense principally driven by the step acquisition of three properties subject to leases.  Income before taxes was further reduced from increases in interest expense, depreciation and amortization expense and loss on early extinguishment of debt of $2.4 million, $1.6 million and $0.4 million, respectively, as further discussed below.  Net income increased by $4.8 million due to lower after-tax losses of discontinued operations and decreased by $5.5 million due to increased income tax expense, both of which are further discussed below.

     For the current quarter, Adjusted EBITDA was $30.5 million compared with $24.4 million in same period of the prior year.  Increased Adjusted EBITDA in the current fiscal year reflects a $12.9 million increase in the Adjusted EBITDA of our inpatient services segment due to $2.9 million of reduced utilization of higher cost nursing agencies, $2.0 million of price reductions extended by our rehabilitation therapy services segment to our inpatient services segment, $1.7 million in decreased pharmacy costs primarily resulting from pricing reductions from our pharmacy provider and $1.3 million due to the step acquisition of eight eldercare centers.  The remaining $5.0 million Adjusted EBITDA increase in the inpatient services segment is primarily theresult of the previously discussed increase in payor rates offset by inflationary increases in cost.  The inpatient services increase in Adjusted EBITDA was offset by a decrease of $4.3 million in the Adjusted EBITDA of our rehabilitation therapy services segment primarily due to $2.0 million of contract pricing reductions extended to our inpatient services segment, $3.5 million of net lost business volume and $1.2 million of higher labor related costs, partially offset by $2.9 million of increased sales volume generated by ongoing customer contracts. The increase in rehabilitation therapy labor costs is being driven by high market demand for a limited pool of qualified therapists.  A loss on early extinguishment of debt in the current year quarter decreased Adjusted EBITDA by $0.4 million.  The remainingdecrease in Adjusted EBITDA of $2.1 million in the current year quarter is principally attributed to increased general and administrative expenses driven by inflationary increases in cost and the incremental cost of operating independently of NCI.

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*Capital Costs and Other*

     Lease expense increased by $0.3 million to $7.0 million in the current quarter, compared to $6.7 million for the same period in the prior year, primarily due to the step acquisitions of 3 eldercare centers subject to leases.

     Depreciation and amortization expense increased $1.6 million to $11.4 million in the current quarter compared to $9.8 million for the same period in the prior year.  The increase is principally 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 us from NCI in excess of initial estimated allocations made in the prior year quarter carve-out financial statements.

     Interest expense increased $2.4 million in the current quarter to $6.9 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 October 2003 issuance of senior subordinated notes in an aggregate principal amount of $225.0 million and, in December of 2003, our entering into a senior credit facility consisting of a fully drawn $185.0 million term loan (of which $25.0 million was repaid in the current quarter, see loss on early extinguishment of debt discussion below).

     The    loss on early extinguishment of debt of $0.4 million recognized in the current    quarter is the result of a voluntary prepayment of $25.0 million of our senior    term loan and consistsof the write-off of unamortized deferred financing fees.

     Income tax expense for the prior year quarter was offset by tax credits of $4.4 million pursuant to the Job Creation and Worker Assistance Act of 2002.  Income tax expense in the current and prior year quarters is otherwise estimated using an effective tax rate of approximately 39%.  Income tax expense includes the provision of taxes on both equity in net income of unconsolidated affiliates and minority interests.

     Loss from discontinued operations, net of taxes, was $1.1 million in the current quarter and $5.9 million in the prior year quarter.   The change is due in part to a $3.1 million (after-tax) write-down of assets classified as discontinued 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.

***Nine Months Ended June 30, 2004 Compared to Nine Months Ended June 30, 2003***

     *References herein to “same facility” results exclude the impact of the eight eldercare centers acquired through step acquisitions.*

     In the current year-to-date period revenues were $1,129.4 million, an increase of $112.1 million, or 11.0%, over the same period in the prior year.  Of this growth, inpatient services revenue increased by $115.0 million, external rehabilitation therapy services revenue grew $1.4 million and other businesses revenue declined $4.3 million.

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     The    $115.0 million of revenue growth in our inpatient services segment is primarily    attributed to increased payor rates and acquisitions. Of the increase, $48.5    million is due to step acquisitions of eight 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    year-to-date period was $199 compared to $187 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 ($157 in 2004 versus $146 in 2003)    and Medicare rates per patient day ($349 in 2004 versus $313 in 2003). The    11.5% 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. Total patient days increased 275,583 to 5,046,687 in the    current year-to-date period compared to 4,771,104 in the same period of the    prior year. Of this increase, 264,688 patient days are attributed to the    step acquisition of eight eldercare centers and 17,477 patient days are attributed    to the current year-to-date period having one additional calendar day due    to a leap year, offset by a decline of 6,582 patient days in our same facility    centers. Our overall occupancy improved to 90.9% in the current year-to-date    periodfrom 90.8% in the same period in the prior year.

     External    rehabilitation therapy services revenue increased by $1.4 million, or 1.6%,    due to $9.3 million of net increased sales volume to ongoing customers partially    offset by certain contract pricing reductions and the net negative impactof lost contracts versus new contracts.

     Management’s decision to curtail the operations of our hospitality business led to a $3.3 million decline in other business revenue, with the balance of the decline in other business revenue primarily resulting from reduced management fee revenue due to the step acquisitions of previously managed properties.

     For the current year-to-date period, net income increased to $18.3 million from $10.0 million in the same period in the prior year.  Revenue increases of $112.1 million, as discussed above, were partially offset by $71.7 million of increased salaries, wages and benefits and $21.8 million of other operating expenses.  Of these increases, $40.8 million is attributed to the step acquisitions of eight eldercare centers, with the balance of the increase attributed to inflationary increases in cost and other individually insignificant expense fluctuations.  Salaries, wages and benefits as a percentage of revenue increased to 62.1% of revenues in the current year-to-date period versus 61.9% in the same period in the prior year.  Such increase primarilyresulted from continued success in replacing higher cost nursing agencies with internal labor in the inpatient segment.  Other operating expenses as a percentage of revenue improved to 28.0% of revenues in the current year-to-date period from 28.9% of revenues in the same period in the prior year.  The improvement in other operating costs as a percentage of revenues was primarily due to the aforementioned reduction in utilization of higher cost nursing agencies used to supplement our employed labor and decreased pharmacy costs primarily resulting from pricing reductions from our pharmacy provider, partially offset by increased insurance costs, increased bad debt expenses, ancillary costs necessary to treat a higher acuity patient population and increased general and administrative costs asa result of our operating independently of NCI.  Income before taxes was further reduced from increases in lease expense, interest expense, depreciation and amortization expense and loss (gain) on early extinguishment of debt of $1.0 million, $7.7 million, $5.5 million and $2.4 million, respectively, as further discussed below.  Income before taxes increased by $11.6 million due to lower after-tax losses of discontinued operations, increased $0.6 million due to higher earnings of less than 100% owned subsidiaries and decreased by $5.8 million due to increased income tax expense, each of which is further discussed below.

     For the current year-to-date period, Adjusted EBITDA was $88.9 million compared with $72.6 million in same period of the prior year.  Increased Adjusted EBITDA in the current fiscal year reflects a $37.1 million increase in the Adjusted EBITDA of our inpatient services segment due to $9.0 million of reduced utilization of external nursing agencies, $5.9 million of price reductions extended by our rehabilitation therapy services segment to our inpatient services segment, $2.7 million in decreased pharmacy costs primarily resulting from pricing reductions from our pharmacy provider and $3.1 million due to the step acquisition of eight eldercare centers.  The remaining $16.4 million Adjusted EBITDA increase in the inpatient services segment isprimarily the result of the previously discussed increase in payor rates offset by inflationary increases in cost.  The inpatient services increase in Adjusted EBITDA was offset by a decrease of $11.9 million in the Adjusted EBITDA of our rehabilitation therapy services segment primarily due to certain contract pricing reductions, including the $5.9 million of price reductions extended to our inpatient services segment, a $1.9 million unfavorable shift in patient mix in the December 2003 quarter resulting from the September 1, 2003 implementation of the therapy caps (which was subsequently rescinded in December 2003) and $6.4 million of higher labor related costs.  The increase in rehabilitation therapy labor costs is being driven by high market demand for a limited pool of qualifiedtherapists.  Increased loss (gain) on early extinguishment of debt in the current year decreased Adjusted EBITDA by $1.3 million.  The remaining decrease in Adjusted EBITDA of $7.6 million in the current year-to-date period is principally attributed to increased general and administrative costs driven by inflationary increases in cost and the incremental cost of operating independently of NCI.

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     *Capital Costs and Other*

     Lease expense increased by $1.0 million to $21.3 million in the current year-to-date period from $20.3 million in the prior year-to-date period primarily due to the step acquisitions of 3 eldercare centers subject to leases.

     Depreciation and amortization expense increased $5.5 million to $34.4 million in the current year-to-date period compared to $28.9 million for the same period in the prior year.  The increase is principally attributed to incremental amortization of deferred financing fees following the completion of our new financing arrangements and incremental depreciation expense on information systems following the spin-off.  Incremental depreciation expense on information systems is due to higher levels of such systems attributed to us from NCI in excess of estimated allocations made in the prior year year-to-date carve-out financial statements.

     Interest expense increased $7.7 million in the current year-to-date period to $20.2 million, compared to $12.5 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 October 2003 issuance of senior subordinated notes in an aggregate principal amount of $225.0 million and, in December of 2003, our entering into a senior credit facility consisting of a fully drawn $185.0 million term loan (of which $25.0 million was repaid in the current quarter, see loss on early extinguishment of debt discussion below).

     The    loss on early extinguishment of debt of $1.3 million recognized in the current    year-to-date period is the result of the early extinguishment of mortgage    loans as well as a voluntary prepayment of $25.0 million of our senior term    loan and principally consists of the write-off of unamortized deferred financing    fees,    while the    gain on early extinguishment of debt of $1.1 million recognized in the same    period in the prior year is the result of a negotiated discount on a mortgageloan liquidated by us at the request of the mortgage lender.

     Loss from discontinued operations, net of taxes, was $3.5 million in the current year-to-date period and $15.1 million in the prior year.   The change is due in part to an $0.4 million (after-tax) write-down of assets classified as discontinued in the current year-to-date period compared to $6.6 million (after-tax) recorded in the prior year period, 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-to-date period, including the sale of our discontinued Florida properties in the third quarter of the prior fiscal year.

     Income tax expense for the prior year-to-date period was offset by tax credits of $4.4 million pursuant to the Job Creation and Worker Assistance Act of 2002.  Income tax expense in both the current and prior year-to-date periods is otherwise estimated using an effective tax rate of approximately 39%.  Income tax expense includes the provision of taxes on both equity in net income of unconsolidated affiliates and minority interests.

     Operating results of our less than 100% owned subsidiaries in the current year-to-date period improved compared to the same period in the prior year, resulting in a combined increase of $0.6 million in equity in net income of unconsolidated affiliates and minority interests. 

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**Liquidity and Capital Resources**

***Working Capital and Cash Flows***

     Reference to our unaudited 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, in fiscal 2004 we expect to incur capital expenditure costs at levels approximating between $30.0 million and $35.0 million.  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 including payments that may be required under the excess cash flow recapture requirements of our senior credit facility.  See “—New Financing Arrangements” below. At the end of each fiscal year, we are required to prepare an excess cash flow calculation as defined in the senior credit agreement.  Of the amount determined as excess cash flow, a percentage is to be paid to our senior lenders in the form of a mandatory payment no later than January 15 of each year.  There can be no final determination of the final excess cash flow recapture requirement until the preparation of our fiscal year endfinancial statements; however, after considering the impact of our $25.0 million voluntary prepayment of the senior term loan we believe the range of the final excess cash flow recapture payment is between $10.0 million and $30.0 million.  Our cash flow from operations for the nine months ended June 30, 2004 was $100.2 million, including $22.0 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 short-term and long-term liquidity needs, including any mandatory debt repayment under the excess cash flow recapture requirement.

     At June 30, 2004, we had restricted investments in marketable securities of $96.2 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.

     Cash from net investing transactions for the nine months ended June 30, 2004 was a net use of cash of $58.6 million, attributed to $21.0 million of capital expenditures and a use of cash of $49.0 million primarily related to the ElderTrust/Ventas transactions.  Also in the nine months ended June 30, 2004, we received cash proceeds of $15.1 million from the sale of three eldercare centers located in the state of Wisconsin, the sale of one eldercare center located in the Commonwealth of Pennsylvania, and the sale of our diagnostics business.  We do not expect to receive significant cash proceeds in the fourth fiscal quarter of 2004 from asset sales.

     Cash    from net financing activities for the nine months ended June 30, 2004 was    a net source of cash of $64.8 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, $33.4 million to repay mortgage and    bond debt of eight eldercare centers, $25.0 million voluntary prepayment    of term loan portion of our senior credit facility, $3.5 million of scheduled    principal    payments and $55.5 million of cash transferred to NCI in connection with    the spin-off.

     During the quarter ended June 30, 2004, we renewed our general and professional liability and workers’ compensation insurance programs.  Our general and professional liability risks through May 31, 2005 are insured through our wholly owned Liberty Health Corp.  Specifically, we are responsible for the first dollar of each claim (on a claims made basis), up to $1.0 million per incident with an aggregate retention limit of $19.0 million.  Any costs above the retention limit are covered by third-party insurance carriers up to an aggregate limit of $100.0 million.  Our workers’ compensation liability risks through April 30, 2005 are insured through Liberty Health Corp. under a large deductible program.  Specifically, we are insuredthrough Liberty Health Corp. up to the first $0.5 million per incident.  All claims above $0.5 million per incident are insured through a third-party insurer.

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     We continually evaluate the most efficient use of our capital, including investments in our property and equipment, information systems, potential asset acquisitions or dispositions, purchasing, refinancing, exchanging or retiring certain of our outstanding debt securities to the extent permitted by our existing covenant restrictions. 

***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 provide adequate capital to both organizations separately.

     In October 2003, we issued 8% senior subordinated notes in an aggregate principal amount of $225.0 million with a term of ten years.  In April 2004, we filed a registration statement on Form S-4 with the Securities and Exchange Commission in connection with our offer to exchange the unregistered senior subordinated notes issued in October 2003 for registered notes.  In July 2004, upon the expiration of the exchange offer, $224.0 million aggregate principal amount of senior subordinated notes registered under the Securities Act of 1933, as amended, were exchanged for the unregistered notes issued in October 2003.  The aggregate principal amount of $1.0 million of unregistered notes was not exchanged and remains outstanding.  On December 1, 2003,we entered into a senior credit facility that provides for a term loan of approximately $185.0 million, which was fully drawn at the consummation of the spin-off, and a revolving credit facility of $75.0 million.  As of August 6, 2004, there was $72.9 million of available credit under the revolving credit facility after giving effect to $2.1million in outstanding letters of credit issued under the revolving credit facility.  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 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 creditagreement.  The terms under the senior credit facility were amended as of June 25, 2004 such that the interest rate on the term loan portion of our senior credit facility was reduced to LIBOR plus 2.25% (2.75% prior to the amendment) or a base rate plus an applicable margin.  In addition to this reduction in applicable margin, the amendment provides for further reduction to LIBOR plus 2.00% if the term loan achieves a rating at or above BB by S&P or at or above Ba2 by Moody’s.  The revolving portion of our senior credit facility has a rate of interest of LIBOR plus 2.50% 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 expense, income taxes, 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.

***Contractual Obligations and Commitments***

     We have future obligations for debt repayments and future minimum rentals under operating leases.  The obligations as of June 30, 2004 are summarized as follows (in thousands):

|                       |           |         |                               | **Payments          Due by Period** |          |
|----------------------------|-----------|---------|-------------------------------|-------------------------------------|---------------|
|                            |
| **Contractual Obligation** | **Total** |    | **Less than          1 year** |                                | **1-3 years** |   | **4-5 years** |   | **Thereafter** |   |
|                            |
| Long-term debt             | $         | 429,942 |                          | $                                   | 4,361         |   | $ | 9,308 |   | $ | 11,307 |   | $ | 404,966 |   |
| Operating leases           |      | 172,124 |                          |                                | 25,593        |   |   | 43,197 |   |   | 35,856 |   |   | 67,478 |   |
|                            |
|                       | $         | 602,066 |                          | $                                   | 29,954        |   | $ | 52,505 |   | $ | 47,163 |   | $ | 472,444 |   |
|                       |      |    |                          |                                |          |   |   |   |   |   |   |   |   |   |   |
|                            |

***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 and the board of directors in accordance with obligational authority policies.  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 $2.1 million were unused at June 30, 2004.  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 $2.1 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 $8.6 million at June 30, 2004.  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 thecreditworthiness of such partnerships in the same manner it does other third-parties.  We have provided $1.7 million of financial guarantees related to loan commitments of two 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.

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**Income Taxes**

     At June 30, 2004, 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. The ultimate net operating loss carry-forwards available to us will not be determinable until the preparation of NCI’s federal tax return for the fiscal year ended September 30, 2004.  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.

**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 followingrepresents 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;     •      LossReserves for Certain Self-Insured Programs;     •      RevenueRecognition / Contractual Allowances; and     •      Long-livedAsset 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.  

**New/Proposed Accounting Pronouncements**

     In December 2002, the FASB issued SFAS No. 148, “*Accounting for Stock-Based Compensation — Transition and Disclosure, an amendment of FASB Statement No. 123*,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation.  We have adopted the disclosure provisions of this statement (see Note 10 to the Financial Statements — “Stock Option Plan”).  In March 2004, the FASB issued a Proposed SFAS — “*Share-Based Payment:  an amendment of FASB Statements No. 123 and 95*.”  The proposed standard would require companies to expense share-based payments to employees, including stock options, basedon the fair value of the award at grant date.  The proposed statement would eliminate the intrinsic value method of accounting for stock options permitted by APB No. 25 “*Accounting for Stock Issued to Employees*,” currently followed by us (see Note 5 to the Financial Statements — “Earnings Per Share”).

     In    January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), “*Consolidation    of Variable Interest Entities — an interpretation of ARB No. 51.*”  The    primary objectives of FIN 46 are to provide guidance on the identification    of entities for which control is achieved through means other than through    voting rights (variable interest entities or “VIEs”) and how    to determine when and which business enterprise should consolidate the VIE    (the primary beneficiary). In December 2003, the FASB issued FIN 46-R, “*Consolidation    of Variable Interest Entities — an interpretation of ARB No. 51*(revised    December 2003),” which    replaces FIN 46. FIN 46-R incorporates certain modifications to FIN 46 adopted    by the FASB subsequent to the issuance of FIN 46, including modifications    to the scope of FIN 46. Additionally, FIN 46-R also incorporates much of    the guidance previously issued in the form of FASB Staff Positions. We have    adopted all of the provisions of FIN 46-R in the second quarter of 2004.    The adoption of FIN 46-R did not have an impact on the presentation of our    financial    position,result of operations or liquidity.

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**Other**

     We manage the operations of 39 eldercare centers and 15 transitional care units. Under a majority of these arrangements, we employ the operational staff of the managed business for ease of benefit administration and bill the related wage and benefit costs on a dollar-for-dollar basis to the owner of the managed property. In this capacity, we operate as an agent on behalf of the managed property owner and are not the primary obligor in the context of a traditional employee / employer relationship.  Historically, we have treated these transactions on a “net basis”, thereby not reflecting the billed labor and benefit costs as a component of our net revenue or expenses. For the nine months ended June 30, 2004, we billed our managedclients $82.5 million for such labor related costs compared to $97.2 million for the comparable period in the prior year.

**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 sought to 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.”

**ITEM 3:**      **Quantitative and Qualitative Disclosures about Market Risk**

     We are exposed to the impact of interest rate changes. 

     At June 30, 2004, we have $167.8 million of debt subject to variable rates of interest.  A 1% increase in LIBOR would result in an increase to our interest expense of $1.7 million annually.

     At June 30, 2004, we have $115.1 million of cash and equivalents 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 cash and equivalents of $1.2 million annually.

     At June 30, 2004, we held $18.0 million of restricted 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)). 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 ExchangeCommission’s rules and forms. 

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     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 affect materially, our Internal Control. Based on that evaluation, therehas been no such change during the quarter covered by this report.

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| **PART II:      ** | **OTHER INFORMATION**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |
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| **ITEM 1:      **  | **Legal Proceedings —**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |
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|                                        |       Haskell et    al. v. Goldman Sachs & Co. et al                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |
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|                                        |       We          understand that NeighborCare, Inc., our former parent, is the defendant          in an action brought by former investors in NeighborCare, Inc. on January          27, 2004 in the Supreme Court of New York, County of New York. The          plaintiffs collectively held over $205 million in subordinated debentures          prior to the filing by NeighborCare, Inc. and substantially all of          our subsidiaries of a Chapter 11 bankruptcy petition in 2000. The claim          alleges fraud and grossly negligent misrepresentation by defendants          NeighborCare, Inc., Goldman Sachs & Co., Mellon Bank, N.A., Highland          Capital Management, LP, and George V. Hager, Jr., our Chief Executive          Officer (and former Chief Financial Officer of NeighborCare, Inc. prior          to the spin-off), in connection with the Bankruptcy Court’s approval          of the plan of reorganization confirmed by the Bankruptcy Court in          2001 which canceled the subordinated debentures. The plaintiffs seek          to recover $200 million plus interest costs and fees. The action has          been removed to the Bankruptcy Court for the District of Delaware. In July 2004, we received notice from NeighborCare, Inc. indicating that it believes we are responsible for 50% of the legal fees related to this matter. We have not made a determination with respect    to our liability, if any, relative to this case. |   |
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| **ITEM 2:      **  | **Changes in Securities and Use of Proceeds —**None                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |
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| **ITEM 3:      **  | **Defaults Upon Senior Securities —**None                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |
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| **ITEM 4:      **  | **Submission of Matters to a Vote of Security    Holders —**None****                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |
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| **ITEM 5:      **  | **Other Information —**None                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |

 

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| **ITEM 6:      ** | **Exhibits and Reports on Form 8-K**                                                                                                                                                                                                          |
|--------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                       |                                                                                                                                                                                                                                          |   |   |   |
|                                       | (a)                                                                                                                                                                                                                                           |   |   | Exhibits |
|                                       |                                                                                                                                                                                                                                          |   |   |
|                                       | 10.1                                                                                                                                                                                                                                          | + |   | Amendment No. 1 dated May 7, 2004 to the        Master Pharmacy, Pharmacy Consulting and Related Products and Services. |
|                                       |                                                                                                                                                                                                                                          |   |
|                                       | 10.2                                                                                                                                                                                                                                          |   |   | Amendment No. 1 dated June          25, 2004 to the Credit, Security, Guaranty and Pledge Agreement dated          December 1, 2003. |
|                                       |                                                                                                                                                                                                                                          |   |   |
|                                       | 31.1                                                                                                                                                                                                                                          |   |   | Certification of George V. Hager,        Jr., Chief Executive Officer, of the Company dated August 11, 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 August 11, 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 August 11, 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 August 11, 2004 pursuant        to 18 U.S.C. Section        1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of    2002. |
|                                       |                                                                                                                                                                                                                                          |   |
|                                       | + Incorporated by reference to Genesis          HealthCare Corporation’s Quarterly Report on Form 10-Q for the          quarterly period ended March 31, 2004, as filed with the Securities    and Exchange Commission on May 14, 2004. |
|                                       |                                                                                                                                                                                                                                          |   |
|                                       | (b)                                                                                                                                                                                                                                           |   |   | Reports on Form 8-K |
|                                       |                                                                                                                                                                                                                                          |   |
|                                       |                                                                                                                                                                                                                                          |   |   | The following reports on Form 8-K were filed        or furnished, as applicable, by Genesis HealthCare Corporation during    the quarterly period ended June 30, 2004: |
|                                       |                                                                                                                                                                                                                                          |   |
|                                       |                                                                                                                                                                                                                                          |   |   | •      Current        Report on Form 8-K filed on May 4, 2004 announcing financial results            for        the quarter ended March 31, 2004 |
|                                       |                                                                                                                                                                                                                                          |   |
|                                       |                                                                                                                                                                                                                                          |   |   | •      Current        Report on Form 8-K filed on June 30, 2004 announcing the adoption of                  a combined *Code of Business Conduct and Ethics.* |

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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:  August 11, 2004 | James V. McKeon                                          James V. McKeon,Chief Financial Officer                   |
| Date:  August 11, 2004 | George V. Hager, Jr.                                       George V. Hager, Jr.,Chief Executive Officer and Chairman of the Board |

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