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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, 2005                                                     
|               |                                                                                                      
|               | 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
|--- | --
|    |   

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

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
      of 1934 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
      5, 2005: 19,785,312 shares of the registrants common stock were outstanding,
      including 134,009 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                                        
|---------------------------------------------------------
|                                                         
|                                                         
|CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
|                                                         
|PART
         I:FINANCIAL
         INFORMATION           
|                                                         
|ITEM 1:                                                  
|                                                         
|ITEM 2:                                                  
|                                                         
|ITEM 3:                                                  
|                                                         
|ITEM 4:                                                  
|                                                         
|PART II:OTHER
    INFORMATION                            
|                                                         
|ITEM 1:                                                  
|                                                         
|ITEM 2:                                                  
|                                                         
|ITEM 3:                                                  
|                                                         
|ITEM 4:                                                  
|                                                         
|ITEM 5:                                                  
|                                                         
|ITEM 6:                                                  
|                                                         
|SIGNATURES                                               

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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


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


| | • | statements
        contained in Managements Discussion and Analysis of Financial
        Condition and Results of Operations, and the notes to our unaudited
        condensed consolidated financial statements, such as demographic trends
        and our ability to take advantage of such demographic trends; the expected
        impact of staffing and retention programs; our ability to meet our working
        capital requirements, debt service, and future cash needs; future earnings,
        capital expenditure, asset sales, debt and lease requirements; our potential
        extension of credit to our joint venture partners; the expected changes
        in and effects of government legislation and regulation on our business;
        the nature, timing and amount of provider tax assessments in the state
        of Connecticut; 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 our
        self-insured programs; the estimated impact of new accounting pronouncements
        upon adoption; and the estimated amount of net operating loss carryforwards
    available to us;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | • | statements
        contained in Quantitative and Qualitative Disclosures About Market
    Risk; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | • | statements
        contained in the notes to our unaudited condensed consolidated financial
        statements and in Legal Proceedings regarding the effects
    of litigation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

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, 2004:


| | • | 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;                                                                                                               
| |   |                                                                                                                                                                                               
| | • | the impact
    of federal and state regulations;                                                                                                                                              
| |   |                                                                                                                                                                                               
| | • | changes
    in case mix, payor mix and payment methodologies;                                                                                                                                 
| |   |                                                                                                                                                                                               
| | • | competition
    in our businesses;                                                                                                                                                            
| |   |                                                                                                                                                                                               
| | • | the need
        for extensive capital expenditures in order to modernize and improve
    our physical infrastructure;                                                                        
| |   |                                                                                                                                                                                               
| | • | the capital
    intensive nature of our inpatient services segment;                                                                                                                           
| |   |                                                                                                                                                                                               
| | • | 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,
    and risks of potential labor strikes;                                                           

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| | • | 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;                                                           
| |   |                                                                                                                                                       
| | • | our covenants
        and restrictions contained in financing agreements which limit our discretion
    in the operation of our business;             
| |   |                                                                                                                                                       
| | • | the economic
        condition of, or changes in, the laws affecting our business in those
    markets in which we operate;                           
| |   |                                                                                                                                                       
| | • | the impact
        of acquisitions, and our ability to integrate acquired businesses, on
    our operations and finances;                             
| |   |                                                                                                                                                       
| | • | our ability
        to quantify and realize tax benefits relating to our estimated net operating
    loss carryforwards;                              
| |   |                                                                                                                                                       
| | • | our ability
        to ensure and maintain an effective system of internal control over financial
    reporting;                                      
| |   |                                                                                                                                                       
| | • | the impact
    of implementing new information systems;                                                                                               
| |   |                                                                                                                                                       
| | • | our charter
        documents and the Pennsylvania Business Corporation Law of 1988, as amended,
    which could delay or prevent a change of control;
| |   |                                                                                                                                                       
| | • | the difficulty
    in evaluating certain of our financial information due to the spin-off;                                                            
| |   |                                                                                                                                                       
| | • | 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;
    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 CONSOLIDATED BALANCE SHEETSJUNE
30, 2005 AND SEPTEMBER 30, 2004
(IN THOUSANDS, EXCEPT SHARE DATA)

|                                                                                                                                                                                                                               |  | June 30, 2005 |           | September 30, 2004 |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------- | --------- | ------------------ | -
|                                                                                                                                                                                                                              
|Assets:                                                                                                                                                                                                                        |  |               |           |                    |  
|Current assets:                                                                                                                                                                                                                |  |               |           |                    |  
|Cash and equivalents                                                                                                                                                                                                           |  | $             | 113,253   |                    | $
|Current portion of restricted investments in marketable securities                                                                                                                                                             |  |               | 33,775    |                    |  
|Accounts
       receivable, net of allowances for doubtful accounts of $25,820 and
    $29,382, at June 30, 2005 and September 30, 2004, respectively                                                                          |  |               | 190,855   |                    |  
|Prepaid expenses and other current assets                                                                                                                                                                                      |  |               | 27,826    |                    |  
|Current portion of assets held for sale                                                                                                                                                                                        |  |               | 1,400     |                    |  
|                                                                                                                                                                                                                              
|Total current assets                                                                                                                                                                                                           |  |               | 367,109   |                    |  
|                                                                                                                                                                                                                              
|Property
       and equipment, net of accumulated depreciation of $144,148 and
    $114,162, at June 30, 2005 and September 30, 2004, respectively                                                                             |  |               | 723,990   |                    |  
|Assets held for sale                                                                                                                                                                                                           |  |               | 2,511     |                    |  
|Restricted investments in marketable securities                                                                                                                                                                                |  |               | 66,338    |                    |  
|Other long-term assets                                                                                                                                                                                                         |  |               | 97,694    |                    |  
|                                                                                                                                                                                                                              
|Total
           assets                                                                                                                                                                                                        |  | $             | 1,257,642 |                    | $
|                                                                                                                                                                                                                              
|Liabilities and Shareholders Equity:                                                                                                                                                                                          |  |               |           |                    |  
|Current liabilities:                                                                                                                                                                                                           |  |               |           |                    |  
|Current installments of long-term debt                                                                                                                                                                                         |  | $             | 4,167     |                    | $
|Accounts payable and accrued expenses                                                                                                                                                                                          |  |               | 158,922   |                    |  
|Current portion of self-insurance liability reserves                                                                                                                                                                           |  |               | 33,775    |                    |  
|                                                                                                                                                                                                                              
|Total current liabilities                                                                                                                                                                                                      |  |               | 196,864   |                    |  
|                                                                                                                                                                                                                              
|Long-term debt                                                                                                                                                                                                                 |  |               | 373,499   |                    |  
|Self-insurance liability reserves                                                                                                                                                                                              |  |               | 54,768    |                    |  
|Other long-term liabilities                                                                                                                                                                                                    |  |               | 36,620    |                    |  
|Commitments and contingencies                                                                                                                                                                                                  |  |               |           |                    |  
|Shareholders equity:                                                                                                                                                                                                          |  |               |           |                    |  
|Common
           stock - par $0.01, 45,000,000 shares authorized at June 30, 2005 and
           September
       30, 2004, 20,368,172 and 20,011,795 shares issued at
    June 30, 2005 and September 30, 2004, respectively |  |               | 204       |                    |  
|Additional paid in capital                                                                                                                                                                                                     |  |               | 573,652   |                    |  
|Retained earnings                                                                                                                                                                                                              |  |               | 52,460    |                    |  
|Accumulated other comprehensive (loss) income                                                                                                                                                                                  |  |               | (440      | )                  |  
|Treasury stock at cost, 616,600 shares at June 30, 2005                                                                                                                                                                        |  |               | (25,158   | )                  |  
|Common stock
    held in deferred compensation plan at cost, 156,780 and 158,394 shares at
    June 30, 2005 and September 30, 2004, respectively                                                                              |  |               | (4,827    | )                  |  
|                                                                                                                                                                                                                              
|Total shareholders equity                                                                                                                                                                                                     |  |               | 595,891   |                    |  
|                                                                                                                                                                                                                              
|Total liabilities and shareholders equity                                                                                                                                                                                     |  | $             | 1,257,642 |                    | $
|                                                                                                                                                                                                                              

See accompanying notes to unaudited condensed consolidated financial statements.

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GENESIS
HEALTHCARE CORPORATION AND SUBSIDIARIESUNAUDITED
      CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSTHREE
MONTHS ENDED JUNE 30, 2005 AND 2004
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE
DATA)

|                                                                                                               | Three months ended |           
|-------------------------------------------------------------------------------------------------------------- | ------------------ | ----------
|                                                                                                              
|                                                                                                               | June 30, 2005      |           
|                                                                                                              
|Net revenues                                                                                                   | $                  | 408,971   
|Operating expenses:                                                                                            |                    |           
|Salaries, wages and benefits                                                                                   |                    | 251,945   
|Other operating expenses                                                                                       |                    | 89,031    
|General and administrative costs                                                                               |                    | 23,602    
|Loss on early extinguishment of debt                                                                           |                    | 6,933     
|Lease expense                                                                                                  |                    | 6,538     
|Depreciation and amortization expense                                                                          |                    | 12,723    
|Interest expense                                                                                               |                    | 5,096     
|                                                                                                              
|Income before
    income tax expense, equity in net income of unconsolidated affiliates and minority interests |                    | 13,103    
|Income tax expense                                                                                             |                    | 4,775     
|                                                                                                              
|Income before
    equity in net income of unconsolidated affiliates
    and minority interests                 |                    | 8,328     
|Equity in net income of unconsolidated affiliates                                                              |                    | 591       
|Minority interests                                                                                             |                    | 72        
|                                                                                                              
|Income from continuing operations                                                                              |                    | 8,991     
|Loss from discontinued operations, net of taxes                                                                |                    | (1,350    
|                                                                                                              
|Net income                                                                                                     | $                  | 7,641     
|                                                                                                              
|                                                                                                               |                    |           
|Per common share data:                                                                                         |                    |           
|Basic:                                                                                                         |                    |           
|Income from continuing operations                                                                              | $                  | 0.46      
|Loss from discontinued operations                                                                              |                    | (0.07     
|Net income                                                                                                     | $                  | 0.39      
|Weighted average shares                                                                                        |                    | 19,619,845
|                                                                                                               |                    |           
|Diluted:                                                                                                       |                    |           
|Income from continuing operations                                                                              | $                  | 0.44      
|Loss from discontinued operations                                                                              |                    | (0.07     
|Net income                                                                                                     | $                  | 0.38      
|Weighted average shares                                                                                        |                    | 20,260,790

See accompanying notes to unaudited condensed consolidated financial statements.

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GENESIS
      HEALTHCARE CORPORATION AND SUBSIDIARIES
UNAUDITED
      CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSNINE
  MONTHS ENDED JUNE 30, 2005 AND 2004 
  (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

|                                                                                                           |   | Nine
          months ended |  
|---------------------------------------------------------------------------------------------------------- | - | --------------------------- | -
|                                                                                                          
|                                                                                                           |   | June
          30, 2005     |  
|                                                                                                          
|Net
        revenues                                                                                       | $ | 1,262,564                   |  
|Operating
        expenses:                                                                                |   |                             |  
|Salaries,
    wages and benefits                                                                           |   | 758,300                     |  
|Other
    operating expenses                                                                               |   | 300,771                     |  
|General
    and administrative costs                                                                       |   | 66,300                      |  
|Loss
    on early extinguishment of debt                                                                   |   | 11,765                      |  
|Lease
        expense                                                                                      |   | 20,119                      |  
|Depreciation
        and amortization expense                                                              |   | 37,248                      |  
|Interest
        expense                                                                                   |   | 17,989                      |  
|                                                                                                          
|Income before income tax expense, equity in net income of unconsolidated affiliates and minority interests |   | 50,072                      |  
|Income
        tax expense                                                                                 |   | 19,154                      |  
|                                                                                                          
|Income
        before equity in net income of unconsolidatedaffiliates
        and minority interests      |   | 30,918                      |  
|Equity
        in net income of unconsolidated affiliates                                                  |   | 2,381                       |  
|Minority
        interests                                                                                 |   | (352                        | )
|                                                                                                          
|Income
        from continuing operations                                                                  |   | 32,947                      |  
|Loss from
        discontinued operations, net of taxes                                                    |   | (991                        | )
|                                                                                                          
|Net
        income                                                                                         | $ | 31,956                      |  
|                                                                                                          
|Per common
        share data and pro forma per common share data (note 5):                                |   |                             |  
|Basic:                                                                                                     |   |                             |  
|Income
          from continuing operations                                                                | $ | 1.67                        |  
|Loss
          from discontinued operations                                                                |   | (0.05                       | )
|Net
          income                                                                                       | $ | 1.62                        |  
|Weighted
          average shares                                                                          |   | 19,758,715                  |  
|Diluted:                                                                                                   |   |                             |  
|Income
          from continuing operations                                                                | $ | 1.61                        |  
|Loss
          from discontinued operations                                                                |   | (0.05                       | )
|Net
          income                                                                                       | $ | 1.56                        |  
|Weighted
          average shares                                                                          |   | 20,445,706                  |  

See
    accompanying notes to unaudited condensed consolidated financial statements.

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GENESIS
      HEALTHCARE CORPORATION AND SUBSIDIARIES
UNAUDITED
      CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSNINE
  MONTHS ENDED JUNE 30, 2005 AND 2004
  (IN THOUSANDS)

|                                                                 |   | Nine
          months ended |  
|---------------------------------------------------------------- | - | --------------------------- | -
|                                                                
|                                                                 |   | June
          30, 2005     |  
|                                                                
|Cash flows
        from operating activities:                    |   |                             |  
|Net
    income                                                   | $ | 31,956                      |  
|Net
          charges included in operations not requiring funds |   | 81,116                      |  
|Changes
          in assets and liabilities:                     |   |                             |  
|Accounts
          receivable                                    |   | (22,734                     | )
|Accounts
          payable and accrued expenses                  |   | 12,972                      |  
|Other,
          net                                             |   | 7,277                       |  
|                                                                
|Total
          adjustments                                      |   | 78,631                      |  
|                                                                
|Net
    cash provided by operating activities                    |   | 110,587                     |  
|                                                                
|Cash flows
        from investing activities:                    |   |                             |  
|Capital
    expenditures                                         |   | (40,045                     | )
|Net
    purchases of restricted marketable securities            |   | (5,476                      | )
|Purchase
    of eldercare centers and lease amendments           |   | (7,208                      | )
|Proceeds
    from sales of eldercare assets                      |   | 6,664                       |  
|Other,
    net                                                   |   | 67                          |  
|                                                                
|Net
    cash used in investing activities                        |   | (45,998                     | )
|                                                                
|Cash flows
        from financing activities:                    |   |                             |  
|Proceeds
    from issuance of long-term debt                     |   | 180,000                     |  
|Repayment
    of long-term debt                                  |   | (224,575                    | )
|Debt
    issuance costs and debt prepayment premium              |   | (14,303                     | )
|Purchase
    of common stock for treasury                        |   | (25,158                     | )
|Proceeds
    from exercise of stock options                      |   | 6,629                       |  
|Net
    transactions with NCI, prior to the spin-off             |   | —                           |  
|                                                                
|Net
    cash (used in) provided by financing activities          |   | (77,407                     | )
|                                                                
|Net (decrease)
        increase in cash and equivalents          | $ | (12,818                     | )
|Cash and
        equivalents:                                    |   |                             |  
|Beginning
    of period                                          |   | 126,071                     |  
|                                                                
|End
    of period                                                | $ | 113,253                     |  
|                                                                
|Supplemental
        disclosure of cash flow information:        |   |                             |  
|Interest
    paid                                                | $ | 22,192                      |  
|Taxes
    paid                                                   |   | 4,776                       |  
|Non-cash
        financing activities:                           |   |                             |  
|Capital
    leases                                               | $ | 3,638                       |  
|Assumption
    of debt                                           |   | 15,533                      |  

See
    accompanying notes to unaudited condensed consolidated financial statements.

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Genesis
      HealthCare Corporation and SubsidiariesNotes
    to Unaudited Condensed Consolidated Financial Statements

|(1) | Organization
          and Basis of Presentation
|--- | ------------------------------------------------

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. At June 30, 2005, GHC had
      215 owned, leased, managed and jointly owned eldercare centers with 26,418
      beds. Revenues of GHCs owned and leased centers constitute approximately
      90% of GHCs revenues, and are presented in GHCs segment information
      as inpatient services revenues. Management fees earned from eldercare centers
      that are managed and/or jointly owned by GHC are included in all other
      revenues presented in GHCs segment information. See note 8  Segment
      Information.


GHC provides
      an extensive range of rehabilitation therapy services, including speech
      pathology, physical therapy and occupational therapy. These services are
      provided by approximately 4,600 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 GHCs 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 complementary services, including respiratory health
      services, physician services, hospitality services, staffing services and
      other healthcare related services.


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 effected 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.


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, as amended, a transition
      services agreement, as amended, 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.


The following
      pro forma financial information gives effect to the spin-off as if it occurred
      on October 1, 2003. The pro forma data is for informational purposes only
      and does not purport to represent the results of future periods. The 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 pro
      forma results. The following pro forma information is presented in thousands,
      except per share information:


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|                                                        | Nine months ended June 30, 2004 |          
|------------------------------------------------------- | ------------------------------- | ---------
|                                                       
|                                                        | As reported                     |          
|                                                       
|Net revenues                                            | $                               | 1,120,264
|Income from continuing operations                       |                                 | 21,223   
|Diluted earnings per share  from continuing operations |                                 | 1.06     

Basis of Presentation


The accompanying unaudited condensed consolidated financial statements through November 30, 2003 have been prepared on a basis which reflects the historical financial statements of GHC 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 consolidated financial statements have been prepared on a basis which reflects the net operation of GHC as a stand-alone entity.


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 transactions with NCI as reflected in the unaudited condensed consolidated statements of cash flows for the nine months ended June 30, 2004 represent these cash activities between NCI and GHC. Prior to the spinoff, the financing activities between NCI and GHC were in the form of equity capital advances and there were no formal repayment or interest arrangements.


The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America which requires the use of managements estimates. In the opinion of management, the unaudited condensed consolidated 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.


Correction of Errors


During the nine months ended June 30, 2005, the Company identified and corrected certain errors in previously issued consolidated financial statements. Management evaluated the quantitative and qualitative impact of the corrections, individually and in the aggregate, on previously reported periods, on the current fiscal year and on earnings trends. Based upon this evaluation, management concluded the errors are not material to the Companys consolidated financial statements taken as a whole and has recognized the errors in the period such errors were identified.


During the three months ended June 30, 2005, the Company identified that it was not properly accounting for its deferred compensation plan in accordance with Emerging Issues Task Force (EITF) Issue No. 97-14, Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested (EITF No. 97-14). GHC employee compensation deferrals are invested in a rabbi trust, which is a funding vehicle used to protect deferred compensation benefits from various events, excluding bankruptcy or insolvency. The accounting treatment for assets invested in a rabbi trust under EITF No. 97-14 differs depending upon the level of restrictions placed on a participants ability to diversify deferred compensation that is invested in Company stock. In its application of EITF 97-14, the Company recognized that GHC common stock held in its rabbi trust was not properly classified as a component of shareholders equity at cost; and GHC common stock held in its rabbi trust was improperly marked to market each reporting period, resulting in an inappropriate recognition of unrealized gains and losses from fluctuations in the market value of GHCs common stock. The correction to previously issued financial statements resulted in a decrease to revenues of $3.0 million, a decrease to other long-term assets of $8.2 million and a decrease to shareholders equity of $7.0 million. To conform to the current period presentation, GHC decreased other long-term assets and shareholders equity $3.8 million, respectively, at September 30, 2004.


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During the three months ended March 31, 2005, the Company recorded a $1.3 million increase to depreciation expense and accumulated depreciation resulting from corrections to the useful lives assigned to certain fixed assets. The cumulative error principally relates to the period beginning after the Companys adoption of fresh start reporting, or October 1, 2001 through March 31, 2005.


During the three months ended December 31, 2004, the Company recorded an increase to accounts payable and other operating expenses of $2.8 million to reflect an estimate of previously unaccrued costs resulting from a weakness in the Companys purchasing cut-off procedures. The Company has remediated the internal control weakness.


Other


During
      the nine months ended June 30, 2005, GHC recognized a tax refund and tax
      credits of $0.7 million and $0.8 million, respectively, which reduced the
      Companys effective tax rate of 39.6% to 36.8%.


|(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.


On
      July 28, 2005, the Centers for Medicare and Medicaid Services (CMS) released
      the final fiscal 2006 skilled nursing facility prospective payment rules,
  including refinement to the resource utilization group classification system
  (RUGs refinement).
      Effective October 1, 2005, the current skilled nursing facility prospective
    payment rates will be increased by a 3.1% annual inflation update factor. Effective
    January
      1, 2006, the rules establish nine new payment classifications, alter the
  case-mix weights for the remaining 44 RUG payment categories and adjust upward
  the nursing
      component of each reimbursement schedule. Efforts are underway to quantify
    the impact of the final rules. GHCs initial assessment is that while the final rules are an improvement over the proposed rules, the new 53 RUG payment categories will have a negative impact on the Companys financial condition and results of operations once fully implemented. Specifically, effective October 1, 2005, GHC estimates its Medicare rates will increase by $10 per patient day. Starting January 1, 2006, GHC estimates that its Medicare rates could be reduced as much as $20 per patient day as a result of RUGs refinement. Thus, it is estimated that GHCs
      Medicare rates could decline by $10 per patient day from its current Medicare
      per diems effective January 1, 2006.


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 or regulation 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 similar to present levels or will,
      in the future, be sufficient to cover the costs allocable to patients eligible
      for reimbursement pursuant to such programs. GHCs
        financial condition and results of operations 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. GHCs bad debt expense for the three
      and nine months ended June 30, 2005 and 2004 was $2.5 million, $8.4 million,
      $4.5 million and $15.8 million, respectively.


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Use
  of Estimates


The Company has made a number of estimates relating to the reporting of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities to prepare these condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Some of the more significant estimates impact accounts receivable, long-lived assets and loss reserves for self-insured programs. It is at least reasonably possible that GHC will revise its estimates significantly in the near term. Any subsequent differences arising are recorded in the period in which they are determined.


|(3) | Significant
      Transactions and Events
|--- | -----------------------------------------

Amendments to NCI Agreements


On
  June 9, 2005, GHC and NCI entered into Amendment No. 1 to the Tax Sharing Agreement,
  dated as of December 1, 2003 (the tax sharing amendment), and Amendment No. 1
  to the Transition Services Agreement, dated as of December 1, 2003 (the transition
  services amendment). On June 9, 2005, the Company and NeighborCare Pharmacy Services,
  Inc., NCIs subsidiary (NCPS), entered into Amendment No. 2 (the 2005 pharmacy
  services amendment) to the Master Agreement for Pharmacy, Pharmacy Consulting
  and Related Products and Services, dated as of December 1, 2003 (the pharmacy
services agreement), as amended on May 7, 2004 (the 2004 pharmacy services amendment).


A
  summary of the amendments is provided below. The agreements are described in
  more detail in the Companys annual report on Form 10-K for the fiscal year
ended September 30, 2004.


Tax
          Sharing Amendment.The
  tax sharing amendment prohibits NCI or its successors from changing or amending
  any combined tax returns for periods ending on or before September 30, 2001
          without the Companys consent. In addition, the Company was granted
          a joint right, in the event of a change in control of NCI, to represent
          members of combined tax returns in any tax proceeding directly relating
          to the net operating loss (NOL) carryforward available to the Company
          and, pursuant to this joint right, the Company and NCI agreed that
          neither will file any amended tax returns, enter into any settlement
          agreement with the Internal Revenue Service or take any other action
          that could be reasonably expected to have an adverse impact on the
          other party without the other partys consent. Consent shall not
          be unreasonably withheld or delayed. As defined in the tax sharing
          amendment, a change in control occurs, generally, at any
          time when individuals serving on NCIs
  board of directors as of June 9,
  2005 no longer constitute at least a majority of the NCI board. The tax sharing
  amendment also increases the percentage of the NOL carryforward limitation
that NCI must allocate to the Company.


Transition Services Amendment.Pursuant
  to the transition services amendment, the Company and NCI adjusted the pricing
  of transition services provided by the Company to NCI for the period prior to
  January 1, 2005 and during the three month period ended March 31, 2005. In addition,
  the Company agreed to discount the cost to NCI of transition services provided
  during the five month period ending September 1, 2005; provided that such discount
  shall not exceed actual cost. The amount of the discount reduces in the event
  of NCIs continued use of the transition services of the Company, including but not limited to, NCIs failure to vacate the data center owned by the Company by certain specified dates. The Company also agreed to bear any severance costs associated with NCIs
  termination of transition services. Both the Company and NCI further agreed to
  release one another from any claims relating to adjustments for cash amounts
due one another as of December 1, 2003.


Pharmacy Services Amendment.
  The 2005 pharmacy services amendment reinstates the provision in the pharmacy
  services agreement pursuant to which the Company and NCPS agreed to negotiate
  any adjustments in pricing at least 180 days prior to December 1, 2008. The 2004
  pharmacy services amendment had accelerated by nine months the Companys
ability to renegotiate pricing.


Issuance and Registration of Convertible Senior Subordinated Debentures


In March
        2005, GHC completed a private placement of $180.0 million aggregate principal
        amount of its 2.5% convertible senior subordinated debentures due 2025
        to qualified institutional buyers under Rule 144A of the Securities Act
        of 1933, as amended. After paying financing fees of approximately $5.5
        million, GHC used (i) approximately $20.1 million of the net proceeds
        of the offering to repurchase shares of its common stock from the      initial purchasers
      of the debentures in negotiated transactions concurrently with the offering,
      (ii) approximately $119.7 million of the net proceeds to repay the remaining
      outstanding borrowings under the term loan portion of its senior credit
      facility, and (iii) the balance for general corporate purposes, including
      debt repurchases described below. In June 2005, the Company filed a registration
      statement on Form S-3 with the Securities and Exchange Commission to register
      the resale of the convertible senior subordinated debentures and the relating
      guarantees and underlying common stock.


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Senior Credit Facility Amendment


In March 2005, in connection with the offering of the convertible senior subordinated debentures, GHC entered into an amended and restated senior credit agreement pursuant to which the Company refinanced the indebtedness under its existing senior credit agreement. The Company repaid all outstanding borrowings under the term loan portion of the senior credit facility and expanded the borrowing capacity of the revolving credit portion.


Prior to the amendment, the existing senior credit agreement provided for a revolving credit facility of $75.0 million, with sub limits for swing line loans, letters of credit and term loans. The amended and restated senior credit agreement provides for a $125.0 million revolving credit facility, with sub limits for the issuance of letters of credit and for swing line loans.


Share Repurchase


In February 2005, GHCs Board of Directors authorized an increase to the size of its previously established share repurchase program from $25.0 million to $50.0 million of the Companys common stock. Share repurchases may take place at managements discretion and/or under pre-established, nondiscretionary programs from time to time, depending on market conditions, in the open market, and in privately negotiated transactions. Under this program, there were 616,600 shares of common stock repurchased at a cost of $25.2 million through June 30, 2005.


Debt Repurchase


In February 2005, GHCs Board of Directors authorized the repurchase of a portion of GHC's 8% senior subordinated notes due 2013 from time to time commencing in March 2005. There were $70.9 million of 8% senior subordinated notes repurchased through June 30, 2005. The debt repurchases resulted in a year to date prepayment premium of $7.4 million, which is included in loss on early extinguishment of debt.


Amendment to 2003 Stock Incentive Plan


At the 2005 Annual Meeting of Shareholders of GHC held in February 2005, the shareholders of GHC approved an amendment to the 2003 Stock Incentive Plan to increase the number of shares of common stock available for issuance under the 2003 Stock Incentive Plan from 750,000 to 1,000,000.


Recognition of Pennsylvania and New Jersey Provider Assessments


Provider assessments generate additional federal matching funds to the states for Medicaid reimbursement purposes, and implementation of a provider assessment plan requires approval by CMS in order to qualify for federal matching funds. These plans usually take the form of a bed tax or a quality assessment fee, which is imposed uniformly across classes of providers within the state. In turn, the state utilizes the additional federal matching funds generated by the tax to pay increased reimbursement rates to the providers, which often include a repayment of a portion of the provider tax based on the providers percentage of Medicaid patients.


In January 2005, CMS approved the Pennsylvania provider assessment. The Pennsylvania provider assessment, which is retroactive to July 1, 2003 and will expire on June 30, 2007, was recognized cumulatively in the quarter ended March 31, 2005. Recognition of the Pennsylvania provider assessment resulted in increased revenue and net income of $42.0 million and $3.7 million, respectively in the quarter ended March 31, 2005, of which, $30.9 million of revenue and $3.3 million of net income relates to periods prior to the current fiscal year.


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In February 2005, CMS approved the New Jersey provider assessment. The New Jersey provider assessment, which is retroactive to July 1, 2004 and will expire on June 30, 2006, was recognized cumulatively in the quarter ended March 31, 2005. Recognition of the New Jersey provider assessment resulted in increased revenue and net income of $12.8 million and $1.8 million, respectively in the quarter ended March 31, 2005, of which, $4.3 million of revenue and $0.6 million of net income relates to periods prior to the current fiscal year.


Purchase of Joint Venture Interests


Effective January 1, 2005, GHC acquired its joint venture partners interest in a Commonwealth of Massachusetts skilled nursing facility having 123 beds. Prior to that acquisition, the Company owned a 50% interest in the facility and managed its operations. Upon completion of the transaction, GHC owned 100% of the facility and began consolidating the revenues, expenses, assets and liabilities of the facility on January 1, 2005. The aggregate consideration consisted of cash of $0.5 million to acquire the remaining partnership interests and the assumption of approximately $6.0 million of debt, all of which was repaid at the closing of the transaction. The facilitys annual revenues and pretax income are expected to approximate $10.1 million and $1.1 million, respectively. The facility had total assets of approximately $10.4 million at the date of acquisition.


Acquisition of Previously Leased ElderCare Center and Lease Termination


On January 31, 2005, GHC acquired the land and building of a State of New Jersey skilled nursing facility having 136 beds that it previously leased. The purchase price of approximately $15.8 million includes the assumption of a $9.5 million, 6% fixed rate mortgage that matures in October 2007. The revenues, operating expenses and working capital of the purchased center are consolidated in GHCs historical results. The transaction results in an annual reduction to lease expense of approximately $1.5 million and an increase to depreciation expense and interest expense of approximately $0.5 million and $0.6 million, respectively.


On January 31, 2005, GHC terminated the lease of a State of New Jersey skilled nursing facility having 186 beds. Upon termination, the center was classified as a discontinued operation; consequently, its results of operations in the current and prior year periods have been classified as discontinued operations in the unaudited condensed consolidated statements of operations. The annual revenues and pretax income of this center approximate $12.3 million and $1.4 million, respectively.


Sale of Assets


On December 1, 2004, GHC sold its two remaining eldercare centers based in the State of Wisconsin for net cash proceeds of $4.6 million. These centers are classified as assets held for sale in the condensed consolidated balance sheet at September 30, 2004.


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

Long-term debt at June 30, 2005 and September 30, 2004 consists of the following (in thousands):


|                                          |   | June 30, 2005 |   |   | September 30, 2004 |  
|----------------------------------------- | - | ------------- | - | - | ------------------ | -
|                                         
|Senior credit facility  term loan        | $ | —             |   | $ | 134,075            |  
|Senior subordinated notes                 |   | 154,150       |   |   | 225,000            |  
|Convertible senior subordinted debentures |   | 180,000       |   |   | —                  |  
|Mortgages and other secured debt          |   | 43,516        |   |   | 43,996             |  
|                                         
|                                          |   | 377,666       |   |   | 403,071            |  
|Less:                                     |   |               |   |   |                    |  
|Current portion of long-term debt         |   | (4,167        | ) |   | (27,230            | )
|                                         
|Long-term debt                            | $ | 373,499       |   | $ | 375,841            |  
|                                         

Senior credit facility.On December 1, 2003, GHC entered into a senior credit facility that provided for a fully drawn $185.0 million term loan and a revolving credit facility of $75.0 million. In March 2005, in connection with the offering of the convertible senior subordinated debentures, GHC entered into an amended and restated senior credit agreement pursuant to which the Company refinanced the indebtedness under its existing senior credit agreement. The Company repaid all outstanding borrowings under the term loan portion of the senior credit facility and expanded the borrowing capacity of the $75.0 million revolving credit portion of the senior credit facility.


The amended
    and restated senior credit agreement provides for a $125.0 million revolving
    credit facility, with sub limits for the issuance of letters of credit and
    for swing line loans. However, so long as GHC is not in default and if it
    finds lenders that are willing to commit, the amended and restated senior
    credit agreement allows GHC to add up to $50.0 million of additional available
    credit under the revolver, subject to the approval of GHCs Board of Directors. Each of GHCs material U.S. subsidiaries provided guarantees of the indebtedness under the amended and restated senior credit agreement. GHC and the guarantors pledged substantially all of their personal property to secure the obligations under the amended and restated senior credit agreement, subject to certain exceptions agreed upon with the lenders. In addition, the mortgages that GHC and its subsidiaries provided under the prior credit agreement continue to secure the amended and restated senior credit agreement, but GHC is not required to provide additional mortgages except under certain limited circumstances. The amended and restated senior credit agreement has a five year term.


GHC pays interest
monthly on the outstanding loans under the amended and restated senior credit
agreement at either a base rate plus a margin or at the London Interbank Offered
Rate (LIBOR) plus a margin. Initially, that margin will be 0.50% for base rate
loans and 1.50% for LIBOR loans. The margin will be adjusted, from time to time,
depending on GHCs
leverage ratio. For base rate loans, the margin range is from 0.00% to 1.00%.
For LIBOR loans, the margin range is from 1.00% to 2.00%. GHC pays a commitment
fee
to the lenders on the unused portion of the revolving credit
facility equal to 0.50% of the unused amount; that percentage will drop to 0.375%
if GHCs total leverage ratio drops below 2.25:1.00, as defined.


The agreements and instruments governing the amended and restated senior credit agreement contain various restrictive covenants that, among other things, restrict the ability of GHC and its subsidiaries that guarantee the indebtedness under the amended and restated senior credit agreement to: incur more debt; pay dividends; purchase GHC common stock or make other distributions; make payments in respect of subordinated debt; make certain investments; create liens; enter into transactions with affiliates; make acquisitions, merge or consolidate; and transfer or sell assets.


The amended and restated senior credit agreement requires that GHC maintain compliance with certain financial covenants as defined in the agreement, including a senior leverage ratio, a total leverage ratio and a fixed charge coverage ratio. There is also a limitation on the amount of capital expenditures that GHC may make.


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Senior subordinated
notes. In October 2003, GHC issued 8%
senior subordinated notes in an aggregate principal amount of $225.0 million due in 2013. Interest is payable
semi-annually in April and October. In July 2004, upon the expiration of an 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. Each of GHCs subsidiaries that guarantees
the indebtedness under the amended and restated senior credit agreement also guarantees the senior subordinated notes.
The guarantees will be released at such time that such subsidiary ceases to be a guarantor under the amended and restated
senior credit agreement or all of the senior subordinated notes are no longer outstanding.


The indenture governing the senior subordinated notes
contains various restrictive covenants that, among other things, restrict the ability of GHC and its subsidiaries that guarantee the
senior subordinated notes to: incur more debt; pay dividends; purchase GHC common stock or make other distributions; make payments in
respect of subordinated debt; make certain investments; create liens; enter into transactions with affiliates; make acquisitions, merge
or consolidate; and transfer or sell assets.


In February 2005, GHCs Board of Directors authorized the repurchase of a portion of GHC's 8% senior subordinated notes due 2013 from time to time commencing in March 2005. There were $70.9 million of senior subordinated notes repurchased through June 30, 2005. The debt repurchases resulted in a prepayment premium of $7.4 million, which is included in loss on early extinguishment of debt.


Convertible senior subordinated debentures.In March 2005, GHC completed a private placement of $180.0 million aggregate principal amount of its 2.5% convertible senior subordinated debentures due 2025 to qualified institutional buyers under Rule 144A of the Securities Act of 1933, as amended. Interest is payable semi-annually in March and September. Each of GHCs subsidiaries that guarantees the indebtedness under the senior subordinated notes also guarantees the convertible senior subordinated debentures. The guarantees will be released at such time that such subsidiary ceases to be a guarantor under the senior subordinated notes, all of the senior subordinated notes are no longer outstanding, or on March 20, 2012. In June 2005, the Company filed a registration statement on Form S-3 with the Securities and Exchange Commission to register the resale of the convertible senior subordinated debentures and the relating guarantees and underlying common stock.


The debentures may be converted into cash and, depending on the circumstances at the time of conversion, shares of GHC common stock. The initial conversion rate for the debentures will be equivalent to 18.4493 shares of common stock per $1,000 principal amount of the debentures (which is based upon an initial conversion price equivalent to approximately $54.20 per share), subject to adjustment under certain circumstances. The holders of the convertible senior subordinated debentures may convert their debentures into shares of GHC common stock prior to the stated maturity at their option only under the following circumstances:
(1) if, after June 30, 2005, the closing price of GHC common stock exceeds 130% of the conversion price then in effect for at least 20 trading days in the 30 consecutive trading day period ending on the last trading day of the immediately preceding fiscal quarter;
(2) during the five business days immediately following any five consecutive trading day period in which the trading price per $1,000 principal amount of debentures for each day of such period was less than 95% of the product of the closing price of GHC common stock and the applicable conversion rate then in effect, subject to certain exceptions;
(3) the debentures have been called for redemption; (4) upon the occurrence of specified corporate transactions; or (5) upon the occurrence of certain designated events.


Subject to certain exceptions, once debentures are tendered for conversion, the value, or conversion value, of the cash and shares of GHC common stock, if any, to be received by a holder converting $1,000 principal amount of the debentures will be determined by multiplying the applicable conversion rate by the ten trading day average closing price of GHC common stock. GHC will deliver the conversion value to holders as follows: (i) an amount in cash, referred to as the principal return, equal to the lesser of (x) the aggregate conversion value of the debentures to be converted and (y) the aggregate principal amount of the debentures to be converted, (ii) if the aggregate conversion value of the debentures to be converted is greater than the principal return, an amount in whole shares, referred to as the net shares, equal to such aggregate conversion value less the principal return, referred to as the net share amount, and (iii) an amount in cash in lieu of any fractional shares of GHC common stock. The number of net shares to be paid will be determined by dividing the net share amount by the ten trading day average closing price of GHC common stock.


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GHC may not redeem the convertible senior subordinated debentures before March 20, 2010. The holders of the convertible senior subordinated debentures may require GHC to purchase all or a portion of their debentures at any of three specified dates during the life of the debentures, with the first such date being March 15, 2012, or upon the occurrence of certain designated events for cash at a repurchase price equal to the principal amount plus accrued and unpaid interest plus, in the case of certain designated events that occur on or prior to March 20, 2010, a make whole premium, if any, payable solely in shares of GHC common stock.


GHC used (i) approximately $20.1 million of the proceeds of the offering to repurchase shares of its common stock from the initial purchasers of the debentures in negotiated transactions concurrently with the offering, (ii) approximately $119.7 million of the proceeds to repay the remaining outstanding borrowings under the term loan portion of its senior credit facility, and (iii) the balance for general corporate purposes, including repurchases of the Companys senior subordinated notes.


The following pro forma financial information is presented as if the above noted financing transactions occurred on October 1, 2004. The pro forma adjustments assume proceeds of the $180.0 million offering of the 2.5% convertible senior subordinated debentures were used to (i) pay $5.6 million of related financing costs, (ii) repay $119.7 million of outstanding borrowings under the term loan portion of the senior credit facility, (iii) purchase $20.1 million of our common stock and (iv) purchase $34.6 million of our 8% senior subordinated notes. The pro forma data is for informational purposes only and does not purport to represent the results of future periods. The pro forma data reflects adjustments based upon available information and certain assumptions that management of GHC considers reasonable. No changes in operating revenues or expenses have been made to reflect the results of any modifications to operations that might have been made had the financing transactions been completed on the aforesaid effective dates for purposes of the pro forma results. The following pro forma information is presented in thousands, except per share information:


|                                                        |   | Nine months ended June 30, 2005 | 
|------------------------------------------------------- | - | ------------------------------- | 
|                                                       
|                                                        |   | As reported                     | 
|                                                       
|Net revenues                                            | $ | 1,262,564                       | 
|Income from continuing operations                       |   | 32,947                          | 
|Diluted earnings per share  from continuing operations |   | 1.61                            | 

Mortgages
      and other secured debts.At
      June 30, 2005 and September 30, 2004, GHC had $43.5 million and $44.0 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, as well as capital lease obligations. 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 3.0% to 11.0%, with a weighted average interest rate of 6.4% and 7.4%
      at June 30, 2005 and September 30, 2004, respectively. On November 30,
      2004, GHC prepaid an $11.0 million, 11% fixed rate mortgage. GHC paid the
      lenders a $0.3 million penalty in connection with the prepayment. On January
      31, 2005, GHC acquired the land and building of a State of New Jersey skilled
      nursing facility assuming a $9.5 million, 6% fixed rate mortgage that matures
      in October 2007. On June 30, 2005, GHC amended the lease of one of its
      facilities located in the State of New Hampshire to include a purchase
      agreement of the facility to be exercised at the end of the lease term
      on April 30, 2007. The amdended lease is being accounted for as a capital
      lease, resulting in a $2.1 million capital lease obligation at June 30,
      2005.


|(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 for the 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. Therefore, the basic weighted average common
    shares presented for the nine months ended June 30, 2004 are labeled pro
    forma.
    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. GHC applies the treasury stock method in calculating
    potentially dilutive securities 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, 2005, GHCs
    outstanding stock options yielded 273,472 and 281,784, respectively, potentially
    dilutive
    securities, in comparison to the three and nine months ended June 30, 2004,
    in which GHCs outstanding stock options yielded 67,649 and 38,444,
    respectively, potentially dilutive securities. For the three and nine months
    ended June 30, 2005, GHCs unvested restricted stock yielded an additional
    367,473 and 405,207, respectively, potentially dilutive securities under
    the modified treasury stock method in comparison to the three and nine months
    ended June 30, 2004, in which GHCs unvested restricted stock yielded
    96,312 and 76,492, respectively, potentially dilutive securities. Basic and
    diluted weighted average common shares outstanding were reduced by GHC common
    stock held in its deferred compensation plan. For the three and nine months
    ended June 30, 2005, total weighted average common shares were reduced by
    208,501 and 186,877, respectively, for GHC common stock held in this plan. 15


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

The following table sets forth the computation of comprehensive income for the three and nine months ended June 30, 2005 and 2004 (in thousands):


|                                                                                          |   | Three months ended June 30, |  |   | Nine months ended June 30, |  
|----------------------------------------------------------------------------------------- | - | --------------------------- |  | - | -------------------------- | -
|                                                                                         
|                                                                                          |   | 2005                        |  |   | 2004                       |  
|                                                                                         
|Net income                                                                                | $ | 7,641                       |  | $ | 6,722                      |  
|Net
         unrealized gain (loss) on restricted investmentsin
    marketable securities |   | 1,065                       |  |   | (375                       | )
|Minimum pension liability                                                                 |   | —                           |  |   | —                          |  
|                                                                                         
|Total comprehensive income                                                                | $ | 8,706                       |  | $ | 6,347                      |  
|                                                                                         

|    |                                                     
|--- | ----------------------------------------------------
|(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,
  are classified as discontinued operations in the consolidated statements of
  operations.


The Company
    has classified several businesses as held for sale or closed. In 2002, GHC
    identified, and has since sold, all of its eldercare centers located in the
    states of Florida, Wisconsin and Illinois. In addition to these assets, since
    fiscal 2002 GHC has identified other eldercare centers in various 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, 2005
  was $0.1 million and $0.3 million, respectively. For the three and nine months
  ended June 30, 2004 after-tax interest expense allocated to discontinued operations
  was $0.2 million and $0.5 million, respectively.


GHC has separately
  classified an aggregate of $3.9 million and $8.8 million of carrying value
  associated with its assets held for sale in its unaudited condensed consolidated
  balance sheets at June 30, 2005 and September 30, 2004, respectively. GHCs
  assets held for sale are classified in the unaudited condensed consolidated
  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.


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The following table sets forth net revenues and the components of loss from discontinued operations for the three and nine months ended June 30, 2005 and 2004 (in thousands):


|                                                |   | Three Months Ended June 30, |   |   | Nine Months Ended June 30, |  
|----------------------------------------------- | - | --------------------------- | - | - | -------------------------- | -
|                                               
|                                                |   | 2005                        |   |   | 2004                       |  
|                                               
|Net revenues                                    | $ | 1,038                       |   | $ | 9,384                      |  
|                                               
|Net operating loss of discontinued businesses   | $ | (1,520                      | ) | $ | (1,539                     | )
|Loss on discontinuation or sale of businesses   |   | (754                        | ) |   | —                          |  
|Income tax benefit                              |   | 924                         |   |   | 620                        |  
|                                               
|Loss from discontinued operations, net of taxes | $ | (1,350                      | ) | $ | (919                       | )
|                                               

The loss on discontinuation of businesses represents 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.


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 the Companys 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 Loss on early extinguishment of debt category has not been allocated to the Companys reportable segments or the All other services and corporate costs category. This approach to segment reporting is consistent with the Companys internal financial reporting and the information used by the chief operating decision maker regarding the performance of the Companys
reportable and non-reportable segments.


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|                                                  |   | Three months ended June 30, |   |   | Nine months ended June 30, |  
|------------------------------------------------- | - | --------------------------- | - | - | -------------------------- | -
|                                                 
|**(in
    thousands)**                            |   | 2005                        |   |   | 2004                       |  
|                                                 
|Revenues:                                         |   |                             |   |   |                            |  
|Inpatient services - external                     | $ | 366,974                     |   | $ | 333,499                    |  
|Rehabilitation services:                          |   |                             |   |   |                            |  
|External                                          |   | 32,511                      |   |   | 30,957                     |  
|Intersegment                                      |   | 20,312                      |   |   | 19,422                     |  
|All other services:                               |   |                             |   |   |                            |  
|External                                          |   | 9,486                       |   |   | 10,817                     |  
|Intersegment                                      |   | 14,852                      |   |   | 15,443                     |  
|Elimination of intersegment revenues              |   | (35,164                     | ) |   | (34,865                    | )
|                                                 
|Total net revenues                                |   | 408,971                     |   |   | 375,273                    |  
|                                                 
|EBITDA (1):                                       |   |                             |   |   |                            |  
|Inpatient services                                |   | 52,638                      |   |   | 40,872                     |  
|Rehabilitation services                           |   | 2,306                       |   |   | 4,637                      |  
|All other services and corporate costs            |   | (17,089                     | ) |   | (14,954                    | )
|Loss on early extinguishment of debt              |   | (6,933                      | ) |   | (425                       | )
|                                                 
|Total EBITDA                                      |   | 30,922                      |   |   | 30,130                     |  
|                                                 
|Capital and other:                                |   |                             |   |   |                            |  
|Depreciation and amortization expense             |   | (12,723                     | ) |   | (11,337                    | )
|Interest expense                                  |   | (5,096                      | ) |   | (6,854                     | )
|Income tax expense                                |   | (4,775                      | ) |   | (4,874                     | )
|Equity in net income of unconsolidated affiliates |   | 591                         |   |   | 746                        |  
|Minority interests                                |   | 72                          |   |   | (170                       | )
|                                                 
|Income from continuing operations                 |   | 8,991                       |   |   | 7,641                      |  
|Loss from discontinued operations, net of taxes   |   | (1,350                      | ) |   | (919                       | )
|                                                 
|Net income                                        | $ | 7,641                       |   | $ | 6,722                      |  
|                                                 
|                                                  |   |                             |   |   |                            |  

|(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
        GHCs unaudited condensed consolidated 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.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Total assets by segment at June 30, 2005 and September 30, 2004 were as follows (in thousands):


|                                | June 30, 2005 |           | September 30, 2004 |  
|------------------------------- | ------------- | --------- | ------------------ | -
|                               
|Inpatient services              | $             | 895,949   |                    | $
|Rehabilitation therapy services |               | 38,057    |                    |  
|All other                       |               | 323,636   |                    |  
|                               
|Total assets                    | $             | 1,257,642 |                    | $
|                               

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

At June 30,
    2005 and September 30, 2004, the Company reported restricted investments
    in marketable securities of $100.1 million and $95.0 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 consolidated 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 a fair-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. See note 12  New Accounting Pronouncements regarding
the issuance of SFAS No. 123R.


The following
    table illustrates the effect on net income (in thousands, except per share
    data) if the fair-value-based method had been applied to all outstanding
and unvested awards in each period.


|                                        | Three months ended June 30, |       | Nine months ended June 30, |  
|--------------------------------------- | --------------------------- | ----- | -------------------------- | -
|                                       
|                                        | 2005                        |       | 2004                       |  
|                                       
|Net income - as reported                | $                           | 7,641 |                            | $
|Deduct: Total stock-based employee      |                             |       |                            |  
|compensation determined under fair      |                             |       |                            |  
|value based method for all stock option |                             |       |                            |  
|awards, net of related tax effects      |                             | (367  | )                          |  
|                                       
|Net income - pro forma                  | $                           | 7,274 |                            | $
|                                       
|Earnings per share:                     |                             |       |                            |  
|Basic  as
    reported                 | $                           | 0.39  |                            | $
|Basic  pro
    forma                   |                             | 0.37  |                            |  
|Diluted  as
    reported               | $                           | 0.38  |                            | $
|Diluted  pro
    forma                 |                             | 0.36  |                            |  
|                                       

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The fair value of stock options granted is estimated at the grant date using the Black-Scholes option-pricing model, which requires the use of highly subjective assumptions, including expected stock price volatility. The assumptions used in preparing the estimates were as follows:


|                         | Three months ended June 30, |   | Nine months ended June 30, |  
|------------------------ | --------------------------- | - | -------------------------- | -
|                        
|                         | 2005                        |   | 2004                       |  
|                        
|Volatility               | 39.43                       | % | 41.32                      | %
|Expected life (in years) | 5.0                         |   | 5.0                        |  
|Risk free rate of return | 3.36                        | % | 3.36                       | %
|Dividend yield           | 0.00                        | % | 0.00                       | %
|                        
|                         |                             |   |                            |  

|(11) | IncomeTaxes
|---- | -----------

Based on NCIs consolidated federal tax
return for the period ended September 30, 2004 that was filed in June 2005, GHC estimates its net operating
loss (NOL) carryforward at June 30, 2005 to be approximately $128.0 million with a total annual utilization
limitation of $33.0 million. Such NOL carryforward may need to be adjusted based on any return amendments
or settlement of any federal tax audit of NCIs tax years ending on or before that date. This could
materially reduce GHCs estimated NOL carryforward. The amount and timing of any realized tax benefit
resulting from the utilization of the NOL carryforward is also a function of future taxable income, multiple
change of ownership limitations imposed by Section 382 of the Internal Revenue Code of 1986, as amended,
contractual limitations imposed by the tax sharing agreement with NCI, as amended, and the term of the
carryforward period. As a consequence, the NOL carryforward is subject to a 100% valuation allowance.
GHC will continue to monitor the realizability of its NOL carryforward and make appropriate adjustments
as and when necessary.


|(12) | New
          Accounting
Pronouncements
|---- | ---------------------------------------

| |                                             
| | --------------------------------------------
| | Accounting
    Changes and Error Corrections

In
May 2005, the  FASB issued Statement of Financial Accounting Standards (SFAS)
No. 154, Accounting
Changes and Error Correctionsa replacement of APB Opinion No. 20 and FASB
Statement No. 3.
This statement changes the requirements for the accounting for and reporting
of a change in accounting principle. This statement applies to all voluntary
changes in accounting principle. It also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include
specific transition provisions. When a pronouncement includes specific transition
provisions, those provisions should be followed. APB No. 20 previously required
that most voluntary changes in accounting principle be recognized by including
in net income of the period of the change the cumulative effect of changing to
the new accounting principle. SFAS 154 requires retrospective application
to prior period financial statements of changes in accounting principle, unless
it is impracticable to determine either the period-specific effects or the cumulative
effect of the change.  This statement does not change the guidance for reporting
the
correction of an error in previously issued financial statements or the change
in an accounting estimate. SFAS No. 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005,
or October 1, 2006 for GHC. The Company does not expect this statement to have
a material impact on its consolidated financial statements.


| | Share
    Based Payments
| | ------------------------

In December 2004, the FASB issued
Statement No. 123R,Share-Based Payment(SFAS 123R), which requires companies to measure and recognize compensation expense for all stock-based payments at fair value.
On April 14, 2005, the Securities and Exchange Commission issued rules to allow companies to adopt the standard at the beginning
of the fiscal year that begins after June 15, 2005, and, thus, will be effective for GHC beginning October 1, 2005. GHC is currently
evaluating the option valuation methodologies, transition alternatives and assumptions
in light of SFAS 123R, and therefore cannot estimate the impact of its adoption at this time. Adoption of the expensing requirements of SFAS
123R will increase GHCs operating expenses. The ultimate amount of increased operating expenses will be dependent on the number of option
shares granted during the year, their timing and vesting period, and the method used to calculate the fair value of the awards, among other factors.
The Company has begun, but has not completed, evaluating the impact of adopting SFAS 123R on its results of operations. The Company currently
determines the fair value of stock-based compensation using a Black-Scholes option-pricing model. In connection with evaluating the impact of
adopting SFAS 123R, the Company is also considering the potential implementation of different valuation models to determine the fair market value of
stock-based compensation, although no decision has been yet made. The new methodologies and assumptions may be different than those currently
employed by GHC in disclosing the impact of applying the fair value-based method under SFAS 123 to outstanding and unvested awards.
See note 10  Stock Option Plan for information related to the pro forma effects of stock-based employee compensation
on GHCs reported results assuming application of the fair value recognition provisions of SFAS 123.


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In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (SAB 107), Share-Based Payment, which provides interpretive guidance related to the interaction between SFAS 123R and certain
SEC rules and regulations, as well as provides the SEC staffs views regarding the valuation of share-based payment arrangements.
In particular, SAB 107 provides guidance related to share-based payment transactions with non employees, the
transition from non-public to public entity status, valuation methods (including assumptions such as expected
volatility and expected term), the accounting for certain redeemable financial instruments issued under share-based
payment arrangements, the classification of compensation expense, non-GAAP financial measures, first-time adoption
of SFAS No. 123R in an interim period, capitalization of compensation cost related to share-based payment arrangements,
the accounting for income tax effects of share-based payment arrangements upon adoption of SFAS No. 123R, the modification
of employee share options prior to adoption of SFAS No. 123R, and disclosures in Managements Discussion and Analysis of
Financial Condition and Results of Operations subsequent to adoption of SFAS No. 123R. The Company is currently assessing the
impact of SAB 107 on its implementation and adoption of SFAS 123R.


| | General Partner Control of Limited Partnerships
| | -----------------------------------------------

In June 2005, the Emerging Issues Task Force reached a consensus on EITF Issue No. 04-5, Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights (EITF 04-5). This consensus applies to voting right entities not within the scope of FIN 46(R) in which the investor is the general partner(s) in a limited partnership or functional equivalent. The EITF consensus is that the general partner(s) in a limited partnership is presumed to control that limited partnership and therefore should include the limited partnership in its consolidated financial statements. The general partner(s) may overcome this presumption of control and not consolidate the entity if the limited partners have: (a) the substantive ability to dissolve (liquidate) the limited partnership or otherwise remove the general partner through substantive kick-out rights that can be exercised without having to show cause; or (b) substantive participating rights in managing the partnership. This guidance became immediately effective upon ratification by the FASB on June 29, 2005 for all newly formed limited partnerships and for existing limited partnerships for which the partnership agreements have been modified. For general partners in all other limited partnerships, the guidance is effective no later than the beginning of the first reporting period in fiscal years beginning after December 15, 2005, or October 1, 2006 for the Company. The Company has begun, but has not completed, evaluating the impact of applying the provisions of EITF No. 04-5 to its existing unconsolidated joint venture partnerships, but does not expect the adoption will have a material impact on its consolidated financial statements.


|(13) | Commitments
    and Contingencies
|---- | ---------------------------------

GHC is a party to litigation and regulatory investigations arising in the ordinary course of business. Management does not believe the results of such litigation or regulatory investigations, even if the outcome is unfavorable, would have a material adverse effect on the financial position of GHC.


At June 30, 2005 GHC has:


| | • | extended
        $4.1 million in working capital lines of credit to certain jointly owned
    and managed companies, of which $2.2 million was unused;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------

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| | • | posted
        $3.0 million of outstanding letters of credit to guarantee the performance
    to third parties of various trade activities;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                            
| | • | provided
        $0.3 million of financial guarantees related to loan commitments of one
    jointly owned and managed company; and        
| |   |                                                                                                                                            
| | • | contractual
        commitments of approximately $2.5 million related to its internal construction
    program.                            
| |   |                                                                                                                                            

|(14) | Condensed
          Consolidating Financial Statements of Genesis HealthCare Corporation
    and Subsidiaries
|---- | -------------------------------------------------------------------------------------------------------------

The following condensed consolidating financial statements of GHC and 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, the senior subordinated notes and the convertible senior subordinated
debentures described in note 4  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 subordinated 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. In March 2005, GHC completed the private placement
of its 2.5% convertible senior subordinated debentures due 2025 to qualified institutional buyers under Rule 144A
of the Securities Act of 1933, as amended. In June 2005, the Company filed a registration statement on Form S-3
with the Securities and Exchange Commission to register the resale of the convertible senior subordinated debentures
and the relating guarantees and underlying common stock. The senior subordinated notes and the convertible senior
subordinated debentures 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 or the
convertible senior subordinated debentures 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.


GENESIS
HEALTHCARE CORPORATION AND SUBSIDIARIESUNAUDITED CONDENSED CONSOLIDATING BALANCE SHEETSJUNE
    30, 2005
(IN THOUSANDS)

|                                                   |   | Parent    |  |   | Guarantors |   |   | Non-guarantors |  |   | Eliminations |   |   | Consolidated | 
|-------------------------------------------------- | - | --------- |  | - | ---------- | - | - | -------------- |  | - | ------------ | - | - | ------------ | 
|                                                  
|Assets:                                            |   |           |  |   |            |   |   |                |  |   |              |   |   |              | 
|Current
        assets                             | $ | 117,082   |  | $ | 215,603    |   | $ | 38,882         |  | $ | (4,458       | ) | $ | 367,109      | 
|Property
        and equipment, net                |   | 23,600    |  |   | 693,053    |   |   | 7,337          |  |   |             |   |   | 723,990      | 
|Other
        long-term assets                     |   | 88,687    |  |   | 30,050     |   |   | 70,265         |  |   | (22,459      | ) |   | 166,543      | 
|Investments
        in subsidiaries                |   | 359,827   |  |   |           |   |   |               |  |   | (359,827     | ) |   |             | 
|Intercompany
        receivables                   |   | 462,415   |  |   |           |   |   |               |  |   | (462,415     | ) |   |             | 
|                                                  
|Total assets                                       | $ | 1,051,611 |  | $ | 938,706    |   | $ | 116,484        |  | $ | (849,159     | ) | $ | 1,257,642    | 
|                                                  
|Liabilities and shareholders'
        equity:      |   |           |  |   |            |   |   |                |  |   |              |   |   |              | 
|Current
        liabilities                        | $ | 66,123    |  | $ | 90,104     |   | $ | 49,167         |  | $ | (8,530       | ) | $ | 196,864      | 
|Intercompany
        payables                      |   |          |  |   | 452,888    |   |   | 9,527          |  |   | (462,415     | ) |   |             | 
|Long-term
        debt                             |   | 339,247   |  |   | 26,564     |   |   | 12,131         |  |   | (4,443       | ) |   | 373,499      | 
|Other
        long-term liabilities                |   | 50,350    |  |   | (743       | ) |   | 41,781         |  |   |             |   |   | 91,388       | 
|Shareholders'
        equity                       |   | 595,891   |  |   | 369,893    |   |   | 3,878          |  |   | (373,771     | ) |   | 595,891      | 
|                                                  
|Total liabilities and shareholders'
        equity | $ | 1,051,611 |  | $ | 938,706    |   | $ | 116,484        |  | $ | (849,159     | ) | $ | 1,257,642    | 
|                                                  

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GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIESUNAUDITED
        CONDENSED CONSOLIDATING BALANCE SHEETS
  SEPTEMBER 30, 2004
  (IN THOUSANDS)

|                                                   |   | **Parent** | **** | **** | **Guarantors** | **** | **** | **Non-guarantors** | **** | **** | **Eliminations** | **** | **** | **Consolidated** | ****
|-------------------------------------------------- | - | ---------- | ---- | ---- | -------------- | ---- | ---- | ------------------ | ---- | ---- | ---------------- | ---- | ---- | ---------------- | ----
|                                                  
|Assets:                                            |   |            |      |      |                |      |      |                    |      |      |                  |      |      |                  |     
|Current
        assets                             | $ | 127,796    |      | $    | 199,598        |      | $    | 45,139             |      | $    | (1,490           | )    | $    | 371,043          |     
|Property
        and equipment, net                |   | 21,489     |      |      | 657,866        |      |      | 16,156             |      |      |                 |      |      | 695,511          |     
|Other
        long-term assets                     |   | 89,526     |      |      | 34,376         |      |      | 72,334             |      |      | (16,075          | )    |      | 180,161          |     
|Investments
        in subsidiaries                |   | 255,978    |      |      |               |      |      |                   |      |      | (255,978         | )    |      |                 |     
|Intercompany
        receivables                   |   | 547,964    |      |      |               |      |      |                   |      |      | (547,964         | )    |      |                 |     
|                                                  
|Total assets                                       | $ | 1,042,753  |      | $    | 891,840        |      | $    | 133,629            |      | $    | (821,507         | )    | $    | 1,246,715        |     
|                                                  
|Liabilities and shareholders'
        equity:      |   |            |      |      |                |      |      |                    |      |      |                  |      |      |                  |     
|Current
        liabilities                        | $ | 90,174     |      | $    | 83,069         |      | $    | 46,152             |      | $    | (5,272           | )    | $    | 214,123          |     
|Intercompany
        payables                      |   |           |      |      | 520,640        |      |      | 27,324             |      |      | (547,964         | )    |      |                 |     
|Long-term
        debt                             |   | 341,596    |      |      | 26,500         |      |      | 12,188             |      |      | (4,443           | )    |      | 375,841          |     
|Other
        long-term liabilities                |   | 46,010     |      |      | 422            |      |      | 45,346             |      |      |                 |      |      | 91,778           |     
|Shareholders'
        equity                       |   | 564,973    |      |      | 261,209        |      |      | 2,619              |      |      | (263,828         | )    |      | 564,973          |     
|                                                  
|Total liabilities and shareholders'
        equity | $ | 1,042,753  |      | $    | 891,840        |      | $    | 133,629            |      | $    | (821,507         | )    | $    | 1,246,715        |     
|                                                  

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GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIESUNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
  THREE MONTHS ENDED JUNE 30, 2005
(IN THOUSANDS)

|                                                           |   | Parent  |   |   | Guarantors |   |   | Non-guarantors |   |   | Eliminations |   |   | Consolidated |  
|---------------------------------------------------------- | - | ------- | - | - | ---------- | - | - | -------------- | - | - | ------------ | - | - | ------------ | -
|                                                          
|Net revenues                                               | $ | 1,134   |   | $ | 430,423    |   | $ | 12,578         |   | $ | (35,164      | ) | $ | 408,971      |  
|Equity in net income of subsidiaries                       |   | 30,791  |   |   |           |   |   |               |   |   | (30,791      | ) |   |             |  
|Operating expenses                                         |   | 32,677  |   |   | 357,706    |   |   | 16,194         |   |   | (35,066      | ) |   | 371,511      |  
|Lease expense                                              |   | 347     |   |   | 6,191      |   |   |               |   |   |             |   |   | 6,538        |  
|Depreciation and amortization
        expense              |   | 2,479   |   |   | 10,145     |   |   | 99             |   |   |             |   |   | 12,723       |  
|Interest expense                                           |   | 4,554   |   |   | 376        |   |   | 250            |   |   | (84          | ) |   | 5,096        |  
|                                                          
|Income (loss) before income
        tax (benefit) expense, |   |         |   |   |            |   |   |                |   |   |              |   |   |              |  
|equity in net income of unconsolidated                     |   |         |   |   |            |   |   |                |   |   |              |   |   |              |  
|affiliates
        and minority
        interests          |   | (8,132  | ) |   | 56,005     |   |   | (3,695         | ) |   | (30,805      | ) |   | 13,103       |  
|Income tax (benefit) expense                               |   | (15,016 | ) |   | 21,404     |   |   | (1,572         | ) |   | (41          | ) |   | 4,775        |  
|                                                          
|Income (loss) before equity
        in net income of       |   |         |   |   |            |   |   |                |   |   |              |   |   |              |  
|unconsolidated
    affiliates and minority interests       |   | 6,884   |   |   | 34,601     |   |   | (2,393         | ) |   | (30,764      | ) |   | 8,328        |  
|Equity in net income of unconsolidated
        affiliates  |   | 757     |   |   |           |   |   |               |   |   | (166         | ) |   | 591          |  
|Minority interests                                         |   |        |   |   |           |   |   |               |   |   | 72           |   |   | 72           |  
|                                                          
|Income (loss) from continuing
        operations           |   | 7,641   |   |   | 34,601     |   |   | (2,393         | ) |   | (30,858      | ) |   | 8,991        |  
|Loss from discontinued operations,
        net of taxes    |   |        |   |   | (1,348     | ) |   | (2             | ) |   |             |   |   | (1,350       | )
|                                                          
|Net income (loss)                                          | $ | 7,641   |   | $ | 33,253     |   | $ | (2,395         | ) | $ | (30,858      | ) | $ | 7,641        |  
|                                                          

GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIESUNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONSTHREE MONTHS ENDED JUNE 30, 2004
  (IN THOUSANDS)

|                                                                             |   | Parent  |   |   | Guarantors |   |   | Non-guarantors |   |   | Eliminations |   |   | Consolidated |  
|---------------------------------------------------------------------------- | - | ------- | - | - | ---------- | - | - | -------------- | - | - | ------------ | - | - | ------------ | -
|                                                                            
|Net revenues                                                                 | $ | 3,319   |   | $ | 390,618    |   | $ | 16,201         |   | $ | (34,865      | ) | $ | 375,273      |  
|Equity in net income of subsidiaries                                         |   | 23,356  |   |   |           |   |   |               |   |   | (23,356      | ) |   |             |  
|Operating expenses                                                           |   | 22,856  |   |   | 333,792    |   |   | 16,416         |   |   | (34,840      | ) |   | 338,224      |  
|Lease expense                                                                |   | 463     |   |   | 6,456      |   |   |               |   |   |             |   |   | 6,919        |  
|Depreciation and amortization
        expense                                |   | 2,006   |   |   | 8,694      |   |   | 637            |   |   |             |   |   | 11,337       |  
|Interest expense                                                             |   | 6,051   |   |   | 636        |   |   | 231            |   |   | (64          | ) |   | 6,854        |  
|                                                                            
|Income (loss) before income
        tax (benefit) expense,                   |   |         |   |   |            |   |   |                |   |   |              |   |   |              |  
|equity
        in net income of
        unconsolidated                       |   |         |   |   |            |   |   |                |   |   |              |   |   |              |  
|affiliates
        and minority interests                                    |   | (4,701  | ) |   | 41,040     |   |   | (1,083         | ) |   | (23,317      | ) |   | 11,939       |  
|Income tax (benefit) expense                                                 |   | (10,610 | ) |   | 15,999     |   |   | (422           | ) |   | (93          | ) |   | 4,874        |  
|                                                                            
|Income (loss) before equity
        in net income of                         |   |         |   |   |            |   |   |                |   |   |              |   |   |              |  
|unconsolidated
        affiliates and
        minority interests             |   | 5,909   |   |   | 25,041     |   |   | (661           | ) |   | (23,224      | ) |   | 7,065        |  
|Equity in net income of unconsolidated affiliates                            |   | 813     |   |   |           |   |   |               |   |   | (67          | ) |   | 746          |  
|Minority interests                                                           |   |        |   |   |           |   |   |               |   |   | (170         | ) |   | (170         | )
|                                                                            
|Income (loss) from continuing
        operations                             |   | 6,722   |   |   | 25,041     |   |   | (661           | ) |   | (23,461      | ) |   | 7,641        |  
|Income (loss) from discontinued
        operations, 
           net of taxes |   |        |   |   | (1,006     | ) |   | 87             |   |   |             |   |   | (919         | )
|                                                                            
|Net income (loss)                                                            | $ | 6,722   |   | $ | 24,035     |   | $ | (574           | ) | $ | (23,461      | ) | $ | 6,722        |  
|                                                                            

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GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIESUNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
  NINE MONTHS ENDED JUNE 30, 2005
  (IN THOUSANDS)

|                                                           |   | Parent  |   |   | Guarantors |   |   | Non-guarantors |   |   | Eliminations |   |   | Consolidated |  
|---------------------------------------------------------- | - | ------- | - | - | ---------- | - | - | -------------- | - | - | ------------ | - | - | ------------ | -
|                                                          
|Net revenues                                               | $ | 4,060   |   | $ | 1,323,376  |   | $ | 39,291         |   | $ | (104,163     | ) | $ | 1,262,564    |  
|Equity in net income of subsidiaries                       |   | 95,144  |   |   |           |   |   |               |   |   | (95,144      | ) |   |             |  
|Operating expenses                                         |   | 87,406  |   |   | 1,112,354  |   |   | 41,212         |   |   | (103,836     | ) |   | 1,137,136    |  
|Lease expense                                              |   | 1,184   |   |   | 18,935     |   |   |               |   |   |             |   |   | 20,119       |  
|Depreciation and amortization
        expense              |   | 6,849   |   |   | 30,115     |   |   | 284            |   |   |             |   |   | 37,248       |  
|Interest expense                                           |   | 16,314  |   |   | 1,122      |   |   | 789            |   |   | (236         | ) |   | 17,989       |  
|                                                          
|Income (loss) before income
        tax (benefit) expense, |   |         |   |   |            |   |   |                |   |   |              |   |   |              |  
|equity
    in net income of unconsolidated                 |   |         |   |   |            |   |   |                |   |   |              |   |   |              |  
|affiliates
        and minority interests                  |   | (12,549 | ) |   | 160,850    |   |   | (2,994         | ) |   | (95,235      | ) |   | 50,072       |  
|Income tax (benefit) expense                               |   | (41,445 | ) |   | 62,229     |   |   | (1,186         | ) |   | (444         | ) |   | 19,154       |  
|                                                          
|Income (loss) before equity
        in net income of       |   |         |   |   |            |   |   |                |   |   |              |   |   |              |  
|unconsolidated
        affiliates and minority interests   |   | 28,896  |   |   | 98,621     |   |   | (1,808         | ) |   | (94,791      | ) |   | 30,918       |  
|Equity in net income of unconsolidated
        affiliates  |   | 3,060   |   |   |           |   |   |               |   |   | (679         | ) |   | 2,381        |  
|Minority interests                                         |   |        |   |   | (1         | ) |   |               |   |   | (351         | ) |   | (352         | )
|                                                          
|Income (loss) from continuing
        operations           |   | 31,956  |   |   | 98,620     |   |   | (1,808         | ) |   | (95,821      | ) |   | 32,947       |  
|Loss from discontinued operations,
        net of taxes    |   |        |   |   | (727       | ) |   | (264           | ) |   |             |   |   | (991         | )
|                                                          
|Net income (loss)                                          | $ | 31,956  |   | $ | 97,893     |   | $ | (2,072         | ) | $ | (95,821      | ) | $ | 31,956       |  
|                                                          

GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIESUNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONSNINE MONTHS ENDED JUNE 30, 2004
  (IN THOUSANDS)

|                                                                      |   | Parent  |   |   | Guarantors |   |   | Non-guarantors |   |   | Eliminations |   |   | Consolidated |  
|--------------------------------------------------------------------- | - | ------- | - | - | ---------- | - | - | -------------- | - | - | ------------ | - | - | ------------ | -
|                                                                     
|Net revenues                                                          | $ | 10,150  |   | $ | 1,177,456  |   | $ | 45,593         |   | $ | (112,935     | ) | $ | 1,120,264    |  
|Equity in net income of subsidiaries                                  |   | 68,482  |   |   |           |   |   |               |   |   | (68,482      | ) |   |             |  
|Operating expenses                                                    |   | 69,942  |   |   | 1,009,764  |   |   | 44,537         |   |   | (112,911     | ) |   | 1,011,332    |  
|Lease expense                                                         |   | 1,536   |   |   | 19,500     |   |   |               |   |   |             |   |   | 21,036       |  
|Depreciation
        and amortization expense                         |   | 5,747   |   |   | 26,738     |   |   | 1,880          |   |   |             |   |   | 34,365       |  
|Interest expense                                                      |   | 17,478  |   |   | 2,085      |   |   | 704            |   |   | (64          | ) |   | 20,203       |  
|                                                                     
|Income (loss) before income
        tax (benefit) expense,            |   |         |   |   |            |   |   |                |   |   |              |   |   |              |  
|equity
    in net income of unconsolidated                            |   |         |   |   |            |   |   |                |   |   |              |   |   |              |  
|affiliates
        and minority interests                             |   | (16,071 | ) |   | 119,369    |   |   | (1,528         | ) |   | (68,442      | ) |   | 33,328       |  
|Income tax (benefit) expense                                          |   | (32,058 | ) |   | 46,541     |   |   | (596           | ) |   | (341         | ) |   | 13,546       |  
|                                                                     
|Income (loss) before equity
        in net income of                  |   |         |   |   |            |   |   |                |   |   |              |   |   |              |  
|unconsolidated
        affiliates and minority interests              |   | 15,987  |   |   | 72,828     |   |   | (932           | ) |   | (68,101      | ) |   | 19,782       |  
|Equity in net income of unconsolidated affiliates                     |   | 2,315   |   |   |           |   |   |               |   |   | (545         | ) |   | 1,770        |  
|Minority interests                                                    |   |        |   |   |           |   |   |               |   |   | (329         | ) |   | (329         | )
|                                                                     
|Income (loss) from continuing
        operations                      |   | 18,302  |   |   | 72,828     |   |   | (932           | ) |   | (68,975      | ) |   | 21,223       |  
|Income (loss) from discontinued
        operations, 
    net of taxes |   |        |   |   | (2,940     | ) |   | 19             |   |   |             |   |   | (2,921       | )
|                                                                     
|Net income (loss)                                                     | $ | 18,302  |   | $ | 69,888     |   | $ | (913           | ) | $ | (68,975      | ) | $ | 18,302       |  
|                                                                     

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GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIESUNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWSNINE MONTHS ENDED JUNE 30, 2005
  (IN THOUSANDS)

|                                                    |   | Parent  |   |   | Guarantors |   |   | Non-guarantors |   |   | Consolidated |  
|--------------------------------------------------- | - | ------- | - | - | ---------- | - | - | -------------- | - | - | ------------ | -
|                                                   
|Net cash (used in) provided by operating activities | $ | (84,651 | ) | $ | 189,521    |   | $ | 5,717          |   | $ | 110,587      |  
|Net cash used in investing activities               |   | (3,490  | ) |   | (41,927    | ) |   | (581           | ) |   | (45,998      | )
|Net cash provided by (used in) financing activities |   | 25,733  |   |   | (96,391    | ) |   | (6,749         | ) |   | (77,407      | )
|                                                   
|Net (decrease) increase in cash and equivalents     | $ | (62,408 | ) | $ | 51,203     |   | $ | (1,613         | ) | $ | (12,818      | )
|                                                   

GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIESUNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWSNINE 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      |  
|                                                   

|(15) | Subsequent
    Events
|---- | ---------------------

In
    August 2005, GHC repurchased an additional 21,773 shares of its common stock
    at a cost of $0.9 million.

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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 level of Medicare and private paying patients. We receive higher rates of reimbursement from Medicare and private paying patients. For the nine months ended June 30, 2005, the average occupancy level in our inpatient facilities was approximately 90%, and approximately 47% of our net revenues were from Medicare, private pay and other non-Medicaid patients.


Approximately 90% of our net revenues are generated through inpatient services. Our inpatient services business is offered through a network of skilled nursing and assisted living centers primarily located in the eastern United States. Our eldercare centers are concentrated in the states of Pennsylvania, New Jersey, Maryland and Massachusetts. We currently own, lease, manage or jointly own 215 eldercare facilities, consisting of 179 skilled nursing facilities, 23 assisted living facilities and 13 transitional care units together totaling 26,412 beds.


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 4,600 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 our segment financial information.


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


Government funded programs, principally Medicaid and
Medicare, provide approximately 75% 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 71% 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 reliance on overtime compensation and temporary nursing agency services. Our efforts
resulted in a significant reduction in our reliance on temporary nursing agency services,
without 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. Beginning in fiscal 2004 and continuing into fiscal 2005, we and our industry are experiencing a shortage of qualified
      rehabilitation therapists. As the demand 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 incremental 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, 2004.


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.


On July 30, 2004, the Centers for Medicare and Medicaid Services (CMS) published notice of the fiscal year 2005 prospective payment system rates that became effective October 1, 2004 and which are in effect through September 30, 2005. The fiscal year 2005 rules provide for a 2.8% increase in the annual inflation update factor and continue the current payment system with certain payment add-ons that were authorized to compensate for non-therapy ancillaries.


On July 28, 2005, CMS released the
final fiscal 2006 skilled nursing facility prospective payment rules, including refinement to the resource utilization group
classification system (RUGs refinement). Effective October 1, 2005, the current skilled nursing facility prospective payment
rates will be increased by a 3.1% annual inflation update factor. Effective January 1, 2006, the rules establish nine new
payment classifications, alter the case-mix weights for the remaining 44 RUG payment categories and adjust upward the
nursing component of each reimbursement schedule. Efforts are underway to quantify the impact of the final rules.
Our initial assessment is that while the final rules are an improvement over the proposed rules, the new 53 RUG
payment categories will have a negative impact on our financial condition and results of operations once fully implemented.
Specifically, effective October 1, 2005, we estimate our Medicare rates will increase by $10 per patient day. Starting
January 1, 2006, we estimate that our Medicare rates could be reduced as much as $20 per patient day as a result of RUGs refinement.
Thus, it is estimated that our Medicare rates could decline by $10 per patient day from our current Medicare per diems effective
January 1, 2006.


The proposed Federal Budget for 2006 also
proposes to reduce by 30% the amount that Medicare reimburses skilled nursing facilities and other non-hospital providers for bad debts
arising from uncollectible Medicare coinsurance and deductibles. As proposed by CMS, the reduction would be phased-in over a three-year
period at 10% per year. Based on our current volume of Medicare bad debts, this proposed rule would reduce our EBITDA and net income
by $1.7 million and $1.0 million in the first year, respectively. We cannot currently determine if, or when, this proposal will be implemented.


The Medicare Prescription Drug, Improvement and Modernization Act of 2003, referred to as the Medicare Modernization Act (MMA), may have an impact on institutional pharmacy services provided in the long-term setting. The law constitutes a significant overhaul of the Medicare system, including provisions to provide subsidies to insurers and managed care organizations, and establishes mechanisms to allow private healthcare coverage plans to compete with Medicare initially on a pilot basis.


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The MMA suspended
application of the $1,500 payment caps (therapy caps) on Medicare Part B rehabilitation
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. Extension
of the moratorium removes a significant financial threat to our therapy business
for the short term. No assurances can be made or given that Congress will extend
the moratorium on application of the therapy caps beyond calendar year 2005.
As mandated by the law, the General Accounting Office is conducting a study of
alternatives to the therapy caps. We are unable to predict the impact an implementation
of therapy caps would have on our financial condition and operating results,
but believe it has the potential to reduce our revenue, EBITDA and net income.


Effective January
    1, 2006, under the MMA, Medicaid coverage of prescription drugs for Medicare
    beneficiaries who are also eligible for Medicaid will be shifted to the Medicare
    program (Medicare Part D). These residents are referred to as dual
    eligibles. This
    change could affect a significant percentage of residents in our nursing
    facilities.


As a result of shifting prescription drug coverage from Medicaid to Medicare
through such private plans, the MMA could affect the ability of long-term care pharmacies to provide pharmacy service to our residents.
CMS announced final regulations relating to the MMA on January 21, 2005, and provided specific sub-regulatory guidance for long-term care
on March 16, 2005. The final regulations specifically require the new prescription drug plans and Medicare Advantage Plans that offer
prescription drug coverage to provide convenient access to long-term care pharmacies and to offer standard contracts to all long-term
care pharmacies within the plans service areas that meet performance standards to be specified by CMS. Currently, under contract,
NCI provides services required by federal law for residents of our facilities and are reimbursed primarily through the Medicaid program.
We do not yet know whether payment rates for the prescription drugs provided by these plans will be sufficient to cover the costs of the
pharmacy needs of nursing home residents. Thus, there is a risk that the implementation of the MMA may disrupt pharmacy services to our
facilities. Any such change or reduction in long-term care pharmacy services could create additional cost for us, reduce our ability to
meet quality standards and disrupt service delivery to our residents.


Moreover, the MMA covers most prescription drugs, insulin and certain insulin supplies, and approved vaccines. However, certain drugs are excluded from coverage under the new Medicare benefit in Part D, including several drugs that are commonly prescribed for nursing home and other long-term care residents. As a result, there is a risk that if these prescription drug costs are not reimbursed under Medicaid or through Medicare, we will need to bear the cost of these drugs.


We have described only certain provisions of the MMA applicable to our business. There may be other provisions of the legislation that may impact our business by decreasing revenues or increasing operational expenses. The impact of this legislation depends upon a variety of factors, including patient mix and the implementing regulations. CMS continues to issue new regulations to implement the MMA, which we are in the process of reviewing. However, because of the broad scope and phased-implementation of key provisions in the MMA, we are not in a position to assess fully its impact on our business.


States have
    just completed legislative actions on their fiscal year 2006 state budgets.
    The initial budget plans called for reducing the growth of Medicaid nursing
    home expenditures in a number of states where we provide services. In certain
    instances, the budget plans proposed significant cuts in current nursing
    home funding. Advocacy efforts have been successful in modifying the final
    actions. In four states (New Hampshire, Massachusetts, Delaware and Virginia)
    full nursing home funding was restored; in four others (Connecticut, Maryland,
    New Jersey and Pennsylvania) substantial funding was restored. In a number
    of these states, the details for implementing fiscal year 2006 state Medicaid
    budgets are still in development. Absent these specifics, it is premature
    to predict the final outcome of these state budget considerations.


Among
      the alternative Medicaid funding approaches that states have explored,
      and in many states implemented, are nursing home provider assessments as
      tools for leveraging increased Medicaid matching funds. Such initiatives
      are authorized under the law. Provider assessment plans generate additional
      federal matching funds to the states for Medicaid reimbursement purposes,
      and implementation of a provider assessment plan requires approval by CMS
      in order to qualify for federal matching funds. These plans usually take
      the form of a bed tax or a quality assessment fee, which is imposed uniformly
      across classes of providers within the state. In turn, the state utilizes
      the additional federal matching funds generated by the tax to pay increased
      reimbursement rates to the providers, which often include a repayment of
      a portion of the provider tax based on the providers percentage of
      Medicaid patients.


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Nursing home provider assessments have been
implemented in seven states where we operate (Massachusetts, West Virginia, Rhode Island, North Carolina, New Hampshire, Pennsylvania and New Jersey).
Legislation was recently enacted and signed into law in Connecticut to implement a provider assessment. As with other states, Connecticut must
submit a Medicaid plan amendment and secure CMS approval before implementing its program. If enacted, the Connecticut provider assessment is
expected to have a positive impact on our revenues and net income. In January 2005, CMS approved the Pennsylvania provider assessment. The
Pennsylvania provider assessment, which is retroactive to July 1, 2003 and will expire on June 30, 2007, was recognized cumulatively in
the quarter ended March 31, 2005. Recognition of the Pennsylvania provider assessment resulted in increased revenue, EBITDA and net
income of $42.0 million, $6.1 million and $3.7 million, respectively in the quarter ended March 31, 2005, of which, $30.9 million of
revenue, $5.4 million of EBITDA and $3.3 million of net income relates to periods prior to the current fiscal year. In February 2005,
CMS approved the New Jersey provider assessment. The New Jersey provider assessment, which is retroactive to July 1, 2004 and will
expire on June 30, 2006, was recognized cumulatively in the quarter ended March 31, 2005. Recognition of the New Jersey provider
assessment resulted in increased revenue, EBITDA and net income of $12.8 million, $3.0 million and $1.8 million, respectively in
the quarter ended March 31, 2005, of which $4.3 million of revenue, $1.0 million of EBITDA and $0.6 million of net income relates
to periods prior to the current fiscal year.


The proposed Federal Budget for 2006 included proposed reform of the Medicaid program to cut a total of $60.0
billion in projected Medicaid expenditure growth over 10 years, including a provision that would reduce the maximum amount of provider taxes that a
state may impose on providers for purposes of qualifying for federal matching funds from 6% of a states Medicaid outlay to 3%. Congress,
during consideration of its first fiscal year 2006 congressional budget resolution, scaled back the proposed Medicaid reductions. The final
enactment is a compromise establishing a Medicaid Commission authorized to make specific policy recommendations, while agreeing to defer
Medicaid cuts during fiscal year 2006, and providing reconciliation instructions to Congress to make $10.0 billion in Medicaid reductions
during fiscal years 2007 to 2011. The final resolution directed legislative committees to complete legislation, while finalizing the proposed
changes by mid-September 2005. No predictions can be made as to the ultimate outcome of this budget proposal or the future of provider tax
plan provisions. We cannot predict the impact that such decrease, if any, in spending by the federal government will have on our financial
condition and results of operations.


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 or regulation 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 similar to present levels or will, in the future, be sufficient to cover the costs allocable to patients eligible for reimbursement pursuant to such programs.
Our financial condition and results of operations 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. Our bad debt
expense for the three and nine months ended June 30, 2005 and 2004 was $2.5 million, $8.4 million,
$4.5 million and $15.8 million, respectively.


The federal government and state governments continue to focus on efforts to curb spending on healthcare programs such as Medicare and Medicaid. It is impossible to predict the outcome of the legislative process. 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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Significant Transactions and Events

Amendments to NCI Agreements


On June 9, 2005, we and NCI entered into the tax sharing amendment and the transition services amendment. On June 9, 2005, we and NeighborCare Pharmacy Services, Inc., NCIs subsidiary (NCPS), entered into the 2005 pharmacy services amendment.


A summary of the amendments is provided below. The agreements are described in more detail in our annual report on Form 10-K for the fiscal year ended September 30, 2004.


Tax Sharing Amendment.The tax sharing amendment prohibits NCI or its successors from changing or amending any combined tax returns for periods ending on or before September 30, 2001 without our consent. In addition, we were granted a joint right, in the event of a change in control of NCI, to represent members of combined tax returns in any tax proceeding directly relating to the net operating loss (NOL) carryforward available to us and, pursuant to this joint right, we and NCI agreed that neither will file any amended tax returns, enter into any settlement agreement with the Internal Revenue Service or take any other action that could be reasonably expected to have an adverse impact on the other party without the other partys consent. Consent shall not be unreasonably withheld or delayed. As defined in the tax sharing amendment, a change in control occurs, generally, at any time when individuals serving on NCIs board of directors as of June 9, 2005 no longer constitute at least a majority of the NCI board. The tax sharing amendment also increases the percentage of the NOL carryforward limitation that NCI must allocate to us.


Transition Services Amendment.Pursuant to the transition services amendment, we and NCI adjusted the pricing of transition services provided by us to NCI for the period prior to January 1, 2005 and during the three month period ended March 31, 2005. In addition, we agreed to discount the cost to NCI of transition services provided during the five month period ending September 1, 2005; provided that such discount shall not exceed actual cost. The amount of the discount reduces in the event of NCIs continued use of the transition services of us, including but not limited to, NCIs failure to vacate the data center owned by us by certain specified dates. We also agreed to bear any severance costs associated with NCIs termination of transition services. Both we and NCI further agreed to release one another from any claims relating to adjustments for cash amounts due one another as of December 1, 2003.


Pharmacy Services Amendment. The 2005 pharmacy services amendment reinstates the provision in the pharmacy services agreement pursuant to which we and NCPS agreed to negotiate any adjustments in pricing at least 180 days prior to December 1, 2008. The 2004 pharmacy services amendment had accelerated by nine months our ability to renegotiate pricing.


Issuance and Registration of Convertible Senior Subordinated Debentures


In March 2005, we completed a private placement of $180.0 million aggregate principal amount of our 2.5% convertible senior subordinated debentures due 2025 to qualified institutional buyers under Rule 144A of the Securities Act of 1933, as amended. We used (i) approximately $20.1 million of the proceeds of the offering to repurchase shares of our common stock from the initial purchasers of the debentures in negotiated transactions concurrently with the offering, (ii) approximately $119.7 million of the proceeds to repay the remaining outstanding borrowings under the term loan portion of our senior credit facility, and (iii) the balance for general corporate purposes, including debt repurchases described below. In June 2005, we filed a registration statement on Form S-3 with the Securities and Exchange Commission to register the resale of the convertible senior subordinated debentures and the relating guarantees and underlying common stock.


Senior Credit Facility Amendment


In March 2005, in connection with the offering of the convertible senior subordinated debentures, we entered into an amended and restated senior credit agreement pursuant to which we refinanced the indebtedness under our
existing senior
credit agreement. We repaid all outstanding borrowings under the term loan portion
of the senior credit facility and expanded the borrowing capacity of the revolving
credit portion.


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The senior credit agreement previously provided for a revolving credit facility of $75.0 million, with sub limits for swing line loans, letters of credit and term loans. The amended and restated senior credit agreement provides for a $125.0 million revolving credit facility, with sub limits for the issuance of letters of credit and for swing line loans.


Share Repurchase


In February 2005, our Board of Directors authorized an increase to the size of our previously established share repurchase program from $25.0 million to $50.0 million of our common stock. Share repurchases may take place at managements discretion and/or under pre-established, nondiscretionary programs from time to time, depending on market conditions, in the open market, and in privately negotiated transactions. Under this program, there were 616,600 shares of common stock repurchased at a cost of $25.2 million through June 30, 2005.


Debt Repurchase


In February 2005, our Board of Directors authorized the repurchase of a portion of our 8% senior subordinated notes due 2013 from time to time commencing in March 2005. There were $70.9 million of 8% senior subordinated notes repurchased through June 30, 2005. The debt repurchases resulted in a year to date prepayment premium of $7.4 million, which is included in loss on early extinguishment of debt.


Amendment to 2003 Stock Incentive Plan


At our 2005 Annual Meeting of Shareholders held in February 2005, our shareholders approved an amendment to the 2003 Stock Incentive Plan to increase the number of shares of common stock available for issuance under the 2003 Stock Incentive Plan from 750,000 to 1,000,000.


Recognition of Pennsylvania and New Jersey Provider Assessments


Provider assessments generate additional federal matching funds to the states for Medicaid reimbursement purposes, and implementation of a provider assessment plan requires approval by CMS in order to qualify for federal matching funds. These plans usually take the form of a bed tax or a quality assessment fee, which is imposed uniformly across classes of providers within the state. In turn, the state utilizes the additional federal matching funds generated by the tax to pay increased reimbursement rates to the providers, which often include a repayment of a portion of the provider tax based on the providers percentage of Medicaid patients.


In January 2005, CMS approved the Pennsylvania provider assessment. The Pennsylvania provider assessment, which is retroactive to July 1, 2003 and will expire on June 30, 2007, was recognized cumulatively in the quarter ended March 31, 2005. Recognition of the Pennsylvania provider assessment resulted in increased revenue and net income of $42.0 million and $3.7 million, respectively in the quarter ended March 31, 2005, of which, $30.9 million of revenue and $3.3 million of net income relates to periods prior to the current fiscal year.


In February 2005, CMS approved the New Jersey provider assessment. The New Jersey provider assessment, which is retroactive to July 1, 2004 and will expire on June 30, 2006, was recognized cumulatively in the quarter ended March 31, 2005. Recognition of the New Jersey provider assessment resulted in increased revenue and net income of $12.8 million and $1.8 million, respectively in the quarter ended March 31, 2005, of which, $4.3 million of revenue and $0.6 million of net income relates to periods prior to the current fiscal year.


Purchase of Joint Venture Interests


Effective January
1, 2005, we acquired our joint venture partners interest in a Commonwealth
ofMassachusetts
skilled nursing facility having 123 beds. Prior to that acquisition, we owned
a 50% interest in the facility and managed its operations. Upon completion of
the transaction, we owned 100% of the facility and began consolidating the revenues,
expenses, assets and liabilities of the facility on January 1, 2005. The aggregate consideration consisted
of cash of $0.5 million to acquire the remaining partnership interests and the
assumption of approximately $6.0 million of debt, all of which was repaid at
the closing of the transaction. The facilitys annual revenues and pretax
income are expected to approximate $10.1 million and $1.1 million, respectively.
The facility had total assets of approximately $10.4 million at the date of acquisition.


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Acquisition of Previously Leased ElderCare Center and Lease Termination


In January 2005, we acquired the land and building of a State of New Jersey skilled nursing facility having 136 beds that we previously leased. The purchase price of approximately $15.8 million includes the assumption of a 6%, $9.5 million fixed rate mortgage that matures in October 2007. The revenues, operating expenses and working capital of the purchased center are consolidated in our historical results. The transaction results in an annual reduction to lease expense of approximately $1.5 million and an increase to depreciation expense and interest expense of approximately $0.5 million and $0.6 million, respectively.


In January 2005, we terminated the lease of a State of New Jersey skilled nursing facility having 186 beds. Upon termination, the center was classified as a discontinued operation; consequently, its results of operations in the current and prior year periods have been classified as discontinued operations in the unaudited condensed consolidated statements of operations. The annual revenues and pretax income of this center approximate $12.3 million and $1.4 million, respectively.


Sale of Assets


On December 1, 2004, we sold our two remaining eldercare centers based in the State of Wisconsin for net cash proceeds of $4.6 million. These centers are classified as assets held for sale in the condensed consolidated financial statements at and for the year ended September 30, 2004.


Spin-off


On December 1, 2003, NeighborCare, Inc. (NCI) completed the distribution (the spin-off) of our common stock. The spin-off was effected by way of a pro-rata tax free distribution of our common stock to holders of NCIs common stock on December 1, 2003 at a rate of 0.5 shares of our stock for each share of NCI stock owned as of October 15, 2003.


In connection with the spin-off, 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 entered into certain mutually beneficial commercial arrangements. Specifically, we and NCI entered into a separation and distribution agreement, a tax sharing agreement, as amended, a transition services agreement, as amended, 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.


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Results of Operations

Factors Affecting Comparability of Financial Information

Our unaudited condensed consolidated statements of operations 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 consolidated 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 consolidated statement of operations for the nine months ended June 30, 2005 is generally comparable to the unaudited condensed consolidated statement of operations for the nine months ended June 30, 2004, 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 post spin-off financing arrangements.


Reasons for Non-GAAP Financial Disclosure

The following discussion includes EBITDA which is
a non-GAAP financial measure. For purposes of SEC Regulation G, a non-GAAP financial measure is a numerical measure of a registrants historical
or future financial performance, financial position or cash flows that excludes amounts, or is subject to adjustments that have the effect of
excluding amounts, that are included in the most directly comparable financial measure calculated and presented in accordance with GAAP in the
statement of operations, balance sheet or statement of cash flows (or equivalent statements) of the registrant; or includes amounts, or is
subject to adjustments that have the effect of including amounts, that are excluded from the most directly comparable financial measure so
calculated and presented. In this regard, GAAP refers to 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 provides useful information to investors regarding our results of operations because it is useful for trending, analyzing and benchmarking the performance and value of our business. We use EBITDA primarily as a performance measure and believe that the GAAP financial measure most directly comparable to EBITDA is net income. We use 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 is useful in this regard because it does not include such costs as interest expense, income taxes and depreciation and amortization expense which may vary from business unit to business unit depending upon such factors as the method used to finance the original purchase of the business unit or the tax law in the state that a business unit operates in. By excluding such factors when measuring financial performance, many of which are outside of the control of the employees responsible for operating our business units, management is better able to evaluate operating performance of the business unit and the employees responsible for business unit performance. Consequently, management uses EBITDA to determine the extent to which our employees have met performance goals, and therefore may or may not be eligible for incentive compensation awards. We also use EBITDA in our annual budget process. We believe EBITDA facilitates internal comparisons to historical operating performance of prior periods and external comparisons to competitors historical operating performance. Although we useEBITDA
      as a financial measure to assess the performance of our business, the use
      of EBITDA is limited because it does not consider certain material costs
      necessary to operate our business. These costs include the cost to service
      our debt, the non-cash depreciation and amortization associated with our
      long-lived assets, the cost of our federal and state tax obligations, our
      share of the earnings or losses of our less than 100% owned operations
      and the operating results of our discontinued businesses. Because EBITDA
      does not consider these important elements of our cost structure, a user
      of our financial information who relies on EBITDA as the only measure of
      our performance could draw an incomplete or misleading conclusion regarding
      our financial performance. Consequently,
      a user of our financial information should consider net income an important
      measure of our financial performance because it provides the most complete
      measure of our performance.


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We define EBITDA as earnings from continuing operations before equity in net income of unconsolidated affiliates, minority interests, interest 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.


EBITDA should be considered in addition to, not a substitute for, or superior to, GAAP financial measures.


The
      following table reconciles net income to EBITDA.


|                                                    |   | Three
    months ended June 30, |   |   | Nine months ended June 30, |  
|--------------------------------------------------- | - | ------------------------------- | - | - | -------------------------- | -
|                                                   
|(in
    thousands)                                  |   | 2005                            |   |   | 2004                       |  
|                                                   
|Net income                                          | $ | 7,641                           |   | $ | 6,722                      |  
|Add back:                                           |   |                                 |   |   |                            |  
|Loss
    from discontinued operations, net of taxes |   | 1,350                           |   |   | 919                        |  
|Equity in net income of unconsolidated affiliates   |   | (591                            | ) |   | (746                       | )
|Minority interests                                  |   | (72                             | ) |   | 170                        |  
|Income tax expense                                  |   | 4,775                           |   |   | 4,874                      |  
|Interest expense                                    |   | 5,096                           |   |   | 6,854                      |  
|Depreciation and amortization expense               |   | 12,723                          |   |   | 11,337                     |  
|                                                   
|EBITDA                                              | $ | 30,922                          |   | $ | 30,130                     |  
|                                                   

Three Months Ended June 30, 2005 Compared to Three Months Ended June 30, 2004

In the current quarter, revenues were $409.0 million, an increase of $33.7 million, or 9.0%, over the same period in the prior year. Of this growth, inpatient services revenue increased by $33.5 million, external rehabilitation therapy services revenue increased by $1.5 million and other businesses revenue decreased by $1.3 million.


The $33.5 million of revenue growth in our inpatient services segment is primarily attributed to increased payor rates. In aggregate, payor rates increased by $32.8 million versus the prior year quarter with $25.8 million of such increase occurring in the Medicaid payor category. The 2005 quarter reflects $9.0 million of provider tax assessments for the states of Pennsylvania, New Jersey and New Hampshire, whereas the 2004 quarter has no provider tax assessments for these states. In the current year quarter $4.3 million of revenues were recorded as a result of positive settlements of prior fiscal year Maryland Medicaid cost reports. The $12.5 million balance of Medicaid rate increases, which equate to a 7.5% increase, resulted from both increased acuity levels and legislative increases. A 5.1% increase in our average Medicare rate, attributed to the October 1, 2004 upward Medicare rate adjustments of 2.8% and higher Medicare patient acuity, was the primary reason for the remainder of the overall rate increase. Approximately $2.5 million of the overall revenue increase is due to the step acquisition of an eldercare center which we previously jointly owned and managed. We purchased our joint venture partners ownership interests in the center and, beginning in January 2005, we own and consolidate 100% of the operation. Remaining net revenue increases of $1.4 million were primarily due to increased quality mix resulting from combined insurance and Medicare census comprising 0.8% more of our skilled nursing facility census in the 2005 quarter versus the 2004 quarter. The preceding were partially offset by a $3.2 million revenue decline resulting from a decline in overall occupancy. Overall occupancy declined to 89.4% in the current quarter from 90.4% in the same period in the prior year. Total patient days decreased 4,499 to 1,657,401 in the current quarter compared to 1,661,900 in the same period of the prior year. A 10,389 patient day increase attributed to the step acquisition of an eldercare center was offset by a 14,888 patient day decline in our centers which were included in both reporting periods.


Increased revenue volume generated by ongoing customer contracts was the primary reason for the $1.5 million increase in external rehabilitation therapy services revenue. Due to a very competitive rehabilitation therapy market, we have had only limited opportunities to increase prices charged for rehabilitation services.


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The $1.3 million
    decrease in other business revenue primarily resulted from $2.2 million of
    reduced  revenues in the current year quarter recognized within our deferred
    compensation plan's rabbi trust principally due to a correction in the way
    in which we account for GHC common stock held by the deferred compensation
    plan's rabbi trust and $0.5 million of decreased external business volume
    in our non-core hospitality, physicians services and staffing services businesses.
    The preceding were partially offset by $0.9 million of increased volume in
    our respiratory business, with the remaining $0.5 million increase primarily
    due to increased management fee revenues and increased investment income
    resulting from increased cash levels.


For
      the current quarter, net income increased to $7.6 million from $6.7 million
      in the same period in the prior year. Revenue increases of $33.7 million,
      as previously discussed, were partially offset by $9.7 million of increased
      salaries, wages and benefits and $14.1 million of higher other operating
      expenses. Of the $9.7 million of increased salaries, wages and benefits,
      $1.2 million is attributed to the step acquisition of an eldercare center,
      approximately $1.1 million is attributed to the replacement of higher cost
      temporary agency nurses with internally employed nurses, with the balance
      of the increase due to normal inflationary growth in wage and benefits
      in both our inpatient services segment and rehabilitation therapy services
      segment, increased inpatient nursing hours per patient day resulting from
      servicing higher acuity patients and increased rehabilitation therapy services
      business volume. Of the $14.1 million of increased other operating expenses,
      $7.6 million is attributed to the recognition of provider assessments,
      $1.0 million is attributed to increased utilization of temporary agencies
      with our rehabilitation services business as a result of an industry-wide
      shortage of therapists, $1.0 million is attributed to an increase in pharmacy
      and medical supply costs incurred to treat a higher acuity patient population,
      $0.7 million is attributed to the step acquisition of an eldercare center,
      $2.9 million is attributed to a change in the estimate in the prior year
    quarter for incurred but not reported general and professional liability claims and $0.5 million is attributed
    to increased training costs associated with employee
    injury
    reduction
    programs.
    These
      increases in other operating expenses were offset by approximately $1.2
      million of reduced costs attributed to the replacement of higher cost temporary
      agency nurses with internally employed nurses and $2.0 million of reduced
      bad debt expense due to improvement in the collection of older accounts
      receivable. The balance of the increase in other operating expenses of
      approximately $3.6 million is largely attributed to normal inflationary
      increases in cost. General and administrative costs increased by $2.9 million
      with $0.5 million of the increase attributed to higher adverse claims development
      associated with our self-insured programs, $1.5 million attributed to increased
      strategic consulting costs, $0.6 million attributed to consulting costs
      incurred relative to matters associated with the Sarbanes-Oxley Act with
      the balance of the increase primarily resulting from inflationary increases
      in payroll costs. Net income was further reduced from increases in early
      extinguishment of debt costs, depreciation and amortization expense and
      higher after-tax losses of discontinued operations as further discussed
      below. Net income increased due to lower interest expense, lease expense,
      income tax expense and higher earnings of less than 100% owned subsidiaries,
      each of which is further discussed below.


For the current quarter, EBITDA increased $0.8 million to $30.9 million compared with $30.1 million in the
same period of the prior year. Inpatient services EBITDA increased $11.8 million, of which $1.4 million was due to the recognition of provider
tax assessments for New Jersey, Pennsylvania and New Hampshire and $4.3 million was due to positive settlements of prior fiscal year Maryland
Medicaid cost reports. Approximately $5.5 million of the increase resulted from the previously discussed other increases in payor rates, increased
quality mix, reduced utilization of external nursing agencies and reduced bad debt expense offset by the impact of increased nursing hours per
patient day, decreased occupancy, increased pharmacy and medical supply costs and inflationary increases in cost. An additional $0.6 million of
the increase was due to the step acquisition of an eldercare center. EBITDA of our rehabilitation therapy services segment declined $2.3 million
with $2.4 million of combined external and intersegment revenue increases and $0.1 million of decreased other costs being offset by $3.8 million
of higher labor related costs and $1.0 million of increased utilization of temporary agencies. The increase in rehabilitation therapy labor and
temporary agency costs is primarily being driven by high market demand for a limited pool of qualified therapists. Increased loss on early
extinguishment of debt in the current quarter decreased EBITDA by $6.5 million. Of the $6.9 million loss on early extinguishment of debt
recognized in the current quarter, $1.5 million is due to the write-off of unamortized financing fees on the repayment of 8% subordinated
debt and $0.4 million of commissions paid relative to such debt retirement. In addition, prepayment premiums on the repaid 8% subordinated
debt resulted in $5.0 million of debt extinguishment charges. The remaining decrease in EBITDA of $2.2 million in the current quarter is
principally attributed to a correction in the way in which we account for investments in GHC common stock held in our sponsored benefit plan.


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Capital Costs and Other


Lease expense decreased by $0.4 million to $6.5 million in the current quarter, compared to $6.9 million for the same period in the prior year, primarily due to the purchase of two previously leased facilities, offset by increases in lease costs.


Depreciation and amortization expense increased by $1.4 million to $12.7 million in the current quarter compared to $11.3 million for the same period in the prior year. The increase is principally attributed to additional depreciation expense on incremental capital additions.


Interest expense decreased $1.8 million in the current quarter to $5.1 million, compared to $6.9 million for the same period in the prior year, principally due to the restructuring of our debt portfolio in the March 2005 quarter and resulting decline in overall debt and the weighted average interest rate.


Income tax expense in the current year quarter was offset by tax credits of $0.3 million for an adjustment to our income tax liability following the filing of our fiscal 2004 tax return and $0.3 million from the recognition of an empowerment zone/urban renewal tax credit. In addition, income tax expense in the current year quarter includes a cumulative adjustment to bring the year to date effective tax rate to an estimated 39.6%. Income tax in the prior year was estimated using an effective tax rate of 39.0%. 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 $1.4 million in the current year quarter and $0.9 million in the prior year quarter. The change is due to a $0.4 million (after-tax) write-down of assets classified as discontinued in the current year opposed to no such write-downs in the prior year.


Operating
      results of our less than 100% owned subsidiaries in the current year quarter
      improved compared to the same period in the prior year, resulting in a
      combined increase of $0.1 million in equity in net income of unconsolidated
      affiliates and minority interests.


Nine months ended June 30, 2005 Compared to Nine months ended June 30, 2004

In the current year to date period, revenues were $1,262.6 million, an increase of $142.3 million, or 12.7%, over the same period in the prior year. Of this growth, inpatient services revenue increased by $133.3 million, external rehabilitation therapy services revenue increased by $7.6 million and other businesses revenue increased by $1.4 million.


The $133.3 million
    of revenue growth in our inpatient services segment is primarily attributed
    to increased payor rates and acquisitions. In aggregate, payor rates increased
    by $129.2 million versus the prior year to date period with $109.4 million
    of such increase occurring in the Medicaid payor category. Approximately
    $68.0 million of the Medicaid rate increase was due to provider tax assessments
    for New Jersey, Pennsylvania and New Hampshire recorded in the current year
    to date period, with $37.1 million of such provider tax assessments pertaining
    to periods prior to fiscal 2005. The prior year to date period contains no
    provider tax assessments for these states. In the current year to date period
    $4.3 million of revenues were recorded as a result of positive settlements
    of prior fiscal year Maryland Medicaid cost reports. The $37.1 million balance
    of Medicaid rate increases, which equate to a 7.4% increase, resulted from
    both increased acuity levels and legislative increases. A 5.6% increase in
    our average Medicare rate, attributed to the October 1, 2004 upward Medicare
    rate adjustments of 2.8% and higher Medicare patient acuity, was the primary
    reason for the remainder of the overall rate increase. Approximately $12.1
    million of the overall revenue increase is due to the step acquisition of
    three eldercare centers, which we previously jointly owned and managed. We
    purchased our joint venture partners ownership interests in the centers
    and currently we own and consolidate 100% of the operations. Increased Medicare
    Part B volume resulted in $2.4 million of increased revenues. Remaining net
    revenue increases of $1.7 million were primarily due to increased quality
    mix resulting from combined insurance and Medicare census comprising 0.4%
    more of our skilled nursing facility census in the current year to date period
    versus the prior year to date period. The preceding were partially offset
    by a $3.7 million revenue decline as the result of the current year to date
    period having one less day than the same period in the prior "leap" year
      and an $8.4 million revenue decline resulting from a decline in overall
      occupancy. Overall occupancy declined to 90.0% in the current year to date
      period from 90.9% in the same period in the prior year. Total patient days
      decreased 5,869 to 4,996,814 in the current year to date period compared
      to 5,002,683 in the same period of the prior year. A 48,953 patient day
      increase attributed to the step acquisitions of three eldercare centers
      was offset by a decline of 18,392 patient days as the result of the current
      year quarter having one less day than the prior year quarter and a 36,430
      patient day decline in our centers which were included in both reporting
      periods.


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Increased revenue volume generated by ongoing customer contracts was the primary reason for the $7.6 million increase in external rehabilitation therapy services revenue.


The $1.4 million increase in other business revenue primarily resulted from $2.0 million of increased volume in our respiratory business and $2.3 million of increases primarily due to increased management fee revenues and increased investment income resulting from higher cash levels. The preceding were partially offset by $0.6 million of reduced investment income of our deferred compensation plans rabbi trust primarily due to a correction in the way in which we account for GHC common stock held by the deferred compensation plans rabbi trust and $2.3 million of decreased external business volume in our non-core hospitality, physicians services and staffing services businesses.


For the year
    to date period, net income increased to $32.0 million from $18.3 million
    in the same period in the prior year. Revenue increases of $142.3 million,
    as previously discussed, were partially offset by $40.9 million of increased
    salaries, wages and benefits and $67.6 million of higher other operating
    expenses. Of the $40.9 million of increased salaries, wages and benefits,
    $6.3 million is attributed to the step acquisitions of three eldercare centers,
    approximately $5.2 million is attributed to the replacement of higher cost
    temporary agency nurses with internally employed nurses, with the balance
    of the increase due to normal inflationary growth in wage and benefits in
    both our inpatient services segment and rehabilitation therapy services segment,
    increased inpatient nursing hours per patient day resulting from servicing
    higher acuity patients and increased rehabilitation therapy services business
    volume. Of the $67.6 million of increased other operating expenses, $56.1
    million is attributed to increased provider assessments primarily for New
    Jersey, Pennsylvania and New Hampshire, with $28.8 million of such provider
    assessments pertaining to periods prior to fiscal 2005, $4.5 million is attributed
    to increased utilization of temporary agencies within our rehabilitation
    services business as a result of an industry-wide shortage of therapists,
    $1.7 million is attributed to an increase in pharmacy and medical supply
    costs incurred to treat a higher acuity patient population, $2.5 million
    is attributed to step acquisitions of three eldercare centers, $3.0 million
    is attributed to a change in the estimate in the prior year to date period
    for incurred but not reported general and professional liability claims and $1.3 million is attributed
    to increased training costs associated with employee
    injury
    reduction
    programs.
    An additional
    $2.8
    million
    of increased operating expenses is due to an adjustment to reflect an estimate
    of previously unaccrued costs resulting from a weakness in our purchasing
    cut-off procedures. We have remediated the internal control weakness and
    believe that the correction is not material to any previously reported financial
    statements and is not material to earnings trends. These increases in other
    operating expenses were offset by approximately $6.0 million of reduced costs
    attributed to the replacement of higher cost temporary agency nurses with
    internally employed nurses and $7.4 million of reduced bad debt expense due
    to improvement in the collection of older accounts receivable. The balance
    of the increase in other operating expenses of approximately $9.1 million
    is largely attributed to normal inflationary increases in cost. General and
    administrative costs increased by $6.8 million with $3.6 million of the increase
    attributed to higher adverse claims development associated with our self-insured
     programs,
    $1.7 million attributed to increased strategic consulting costs, $0.9 million
    attributed to consulting costs incurred relative to matters associated with
    the Sarbanes-Oxley Act with the balance of the increase primarily resulting
    from inflationary increases in payroll costs. Net income was further reduced
    from increases in early extinguishment of debt costs, depreciation and amortization
    expense and income tax expense as further discussed below. Net income increased
    due to lower lease expense, lower interest expense, lower after-tax losses
    of discontinued operations and higher earnings of less than 100% owned subsidiaries,
    each
    of which is further discussed below.


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For the year
    to date period, EBITDA increased $17.4 million to $105.3 million compared
    with $87.9 million in the same period of the prior year. Inpatient services
    EBITDA increased $38.1 million, of which $11.9 million was due to provider
    tax assessments for New Jersey, Pennsylvania and New Hampshire, with $8.3
    million of such provider tax assessments pertaining to periods prior to fiscal
    2005. The positive settlement of prior year Maryland Medicaid
    cost reports was responsible for $4.3 million of the increase. Approximately
    $2.8
    million of the increase was due to step acquisitions of three eldercare centers
    with the remaining $19.1 million increase resulting from the previously discussed
    other increases in payor rates, increased quality mix, reduced utilization
    of external nursing agencies and reduced bad debt expense offset by the impact
    of increased nursing hours per patient day, decreased occupancy, increased
    pharmacy and medical supply costs and inflationary increases in cost. EBITDA
    of our rehabilitation therapy services segment declined $4.8 million with
    $10.9 million of combined external and intersegment revenue increases being
    offset by $10.7 million of higher labor related costs, $4.5 million of increased
    utilization of temporary agencies and $0.5 million of increased other costs.
    The increase in rehabilitation therapy labor and temporary agency costs is
    primarily being driven by high market demand for a limited pool of qualified
    therapists. Increased loss on early extinguishment of debt in the current
    year to date period decreased EBITDA by $10.5 million. Of the $11.8 million
    loss on early extinguishment of debt recognized in the current year to date
    period, $0.4 million is due to the write-off of unamortized financing fees
    for several repaid mortgages, $1.3 million is due to the full write-off of
    unamortized financing fees for the term loan component of our senior credit
    facility, $2.3 million is due to the write-off of unamortized financing fees
    from the repayment of 8% subordinated debt and $0.4 million is due to commissions
    paid relative to the 8% subordinated debt. In addition, prepayment premiums
    on the repaid 8% subordinated debt resulted in $7.4 million of debt extinguishment
    charges. The remaining decrease in EBITDA of $5.4 million in the current
    year to date period is principally attributed to a correction in the way in which we
    account for investments in GHC common stock held in our sponsored benefit
    plan and changes in EBITDA of our other services businesses and corporate
    costs.


Capital Costs and Other


Lease expense decreased by $0.9 million to $20.1 million in the current year to date period, compared to $21.0 million for the same period in the prior year, primarily due to the purchase of six previously leased facilities, offset by increases in lease costs.


Depreciation and amortization expense increased by $2.9 million to $37.2 million in the current year to date period compared to $34.4 million for the same period in the prior year. The increase is principally attributed to $1.3 million of corrections to depreciation expense recorded in the current year following modifications to the useful lives assigned to certain fixed assets as well as additional depreciation expense on incremental capital additions.


Interest expense decreased $2.2 million in the current year to date period to $18.0 million, compared to $20.2 million for the same period in the prior year, principally due to the restructuring of our debt portfolio in the March 2005 quarter and resulting decline in overall debt and the weighted average interest rate.


Income tax expense in the current year period is estimated using an effective tax rate of approximately 39.6%, offset by the recognition of $0.5 million of tax credits, a $0.7 million tax refund and a $0.3 million adjustment to our income tax liability following the filing of our fiscal 2004 tax return. Income tax in the prior year was estimated using an effective tax rate of 39.0%. 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 $1.0 million in the current year to date period and $2.9 million in the prior year to date period. The change is due in part to a $0.7 million (after-tax) write-down of assets classified as discontinued in the current year to date period opposed to $0.3 million of such write-downs in the prior year to date period combined with the relative results of operations of those businesses identified as discontinued operations.


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 consolidated balance sheets and statements of cash flows will facilitate understanding of the discussion that follows.


Our operating cash flow has been used to fund trade accounts receivable, fund capital expenditures, service our indebtedness and make selective acquisitions. Funding 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. Our cash flow from operations for the nine months ended June 30, 2005 and 2004 were $110.6 million and $100.2 million, respectively. The $10.4 million increase in cash flow from operations primarily resulted from a $39.5 million improvement in operating cash flow primarily resulting from growth in operations and the net benefits of the Pennsylvania and New Jersey provider assessments offset by $29.1 million in reduced cash flow resulting from growth in accounts receivable and the timing of payments to vendors and employees.


Our investing
    activities principally consist of capital expenditures and asset acquisitions
    and dispositions. Capital expenditures consist primarily of betterments and
    expansion of eldercare centers and investments in computer hardware and software.
    For the foreseeable future, we expect to incur capital expenditure costs
    at levels significantly above the levels incurred in prior years as we intend
    to increase our investment in both physical plant and information systems.
    For fiscal 2005, capital expenditures are anticipated to be within the range
    of $50.0 million to $60.0 million. Capital expenditures were $40.0 million
    and $21.0 million for the nine months ended June 30, 2005 and 2004, respectively.
    Investing activities for the nine months ended June 30, 2005 and 2004 also
    include proceeds received from the sale of eldercare centers of $6.7 million
    and $15.1 million, respectively, principally from the sale of eldercare centers
    located in the state of Wisconsin. We do not expect to receive significant
    cash proceeds from asset sales for the remainder of fiscal 2005. In the nine
    months ended June 30, 2005, approximately $7.2 million of net cash was used
    principally to purchase two previously leased skilled nursing facilities,
    and in the nine months ended June 30, 2004, $49.0 million of cash was used
    to purchase two centers in which we previously held a 50% joint venture interest,
    to purchase five previously leased eldercare centers and to restructure nine
    lease agreements in an effort to reduce future lease payments. Investing
    activities for the nine months ended June 30, 2005 and 2004 also include
    $5.5 million and $6.3 million, respectively, of net purchases of restricted
    marketable securities held by our wholly owned insurance captive.


Cash flows from financing activities for the nine months ended June 30, 2005 are reflective of a significant number of financing transactions that occurred in the second quarter of fiscal 2005. In March 2005, we issued $180.0 million of 2.5% convertible senior subordinated debentures due 2025. After paying financing fees of approximately $5.5 million, we used (i) approximately $20.1 million of the net proceeds of the offering to repurchase shares of our common stock from the initial purchasers of the debentures in negotiated transactions concurrently with the offering, (ii) approximately $119.7 million of the net proceeds to repay the remaining outstanding borrowings under the term loan portion of our senior credit facility, and (iii) the balance for general corporate purposes, including repurchases of our 8% senior subordinated notes due 2013. Through June 30, 2005, we repurchased $70.9 million of our 8% senior subordinated notes due 2013. The debt repurchases resulted in a prepayment premium of $7.4 million, which is included in loss on early extinguishment of debt. Also impacting cash from net financing activities, in November 2004, we repaid approximately $14.0 million under the mandatory payment provisions of our then existing term loan under the senior credit facility. In November 2004, we prepaid an $11.0 million, 11% fixed rate mortgage and paid the lender a $0.3 million prepayment penalty. In January 2005, we repaid a $6.0 million mortgage that was assumed in the same period upon the step acquisition of a skilled nursing facility joint venture partnership.


Cash from 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 post
    spin-off 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 of voluntary prepayment of the term loan
    portion of our senior credit facility, $3.4 million of scheduled principal
    payments and $55.5 million of cash transferred to NCI prior to and in connection
    with the spin-off.




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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. As part
of such ongoing evaluation, our Board of Directors has authorized the repurchase
of up to $50.0 million of our common stock and principal amounts of our 8% senior
subordinated notes in accordance with the restrictions of our amended and restated
senior credit agreement. Share and debt repurchases may take place at managements
discretion and/or under pre-established, nondiscretionary programs from time
to time, depending on market conditions, in the open market, and in privately
negotiated transactions. Through June 30, 2005, there were 616,600 shares of
common stock repurchased at a cost of $25.2 million and $70.9 million of 8% senior
subordinated note repurchases. In August 2005, we repurchased an additional 21,773 shares of our common stock at a cost of $0.9 million.


We believe that the net cash provided by our operating activities, supplemented as necessary with cash reserves and borrowings available under our revolving credit facility described below will provide sufficient resources to meet our working capital requirements, debt service and other short-term and long-term liquidity needs.


At June 30, 2005, we had restricted investments in marketable securities of $100.1 million, which are held by Liberty Health Corporation, LTD. (LHC), our wholly owned captive insurance subsidiary incorporated under the laws of Bermuda. The investments held by LHC are restricted by statutory capital requirements in Bermuda. As a result of such restrictions and encumbrances, we and LHC are precluded from freely transferring funds through intercompany loans, advances or cash dividends.


Recent Financing Transactions


Convertible senior subordinated debentures. In March 2005, we completed a private placement of $180.0 million aggregate principal amount of our 2.5% convertible senior subordinated debentures due 2025 to qualified institutional buyers under Rule 144A of the Securities Act of 1933, as amended. Interest is payable semi-annually in March and September. Each of our subsidiaries that guarantees the indebtedness under the senior subordinated notes also guarantees the convertible senior subordinated debentures. The guarantees will be released at such time that such subsidiary ceases to be a guarantor under the senior subordinated notes, all of the senior subordinated notes are no longer outstanding, or on March 20, 2012.In June 2005, we filed a registration statement on Form S-3 with the Securities and Exchange Commission to register the resale of the convertible senior subordinated debentures and the relating guarantees and underlying common stock.


The debentures may be converted into cash and, depending on the
circumstances at the time of conversion, shares of our common stock. The initial conversion rate for the debentures will be equivalent to
18.4493 shares of common stock per $1,000 principal amount of the debentures (which is based upon an initial conversion price equivalent
to approximately $54.20 per share), subject to adjustment under certain circumstances. The holders of the convertible senior subordinated
debentures may convert their debentures into shares of our common stock prior to the stated maturity at their option only under the
following circumstances: (1) if, after June 30, 2005, the closing price of our common stock exceeds 130% of the conversion price
then in effect for at least 20 trading days in the 30 consecutive trading day period ending on the last trading day of the
immediately preceding fiscal quarter; (2) during the five business days immediately following any five consecutive trading
day period in which the trading price per $1,000 principal amount of debentures for each day of such period was less than 95%
of the product of the closing price of our common stock and the applicable conversion rate then in effect, subject to certain
exceptions; (3) the debentures have been called for redemption; (4) upon the occurrence of specified corporate transactions;
or (5) upon the occurrence of certain designated events.


Subject to certain exceptions, once debentures are tendered for conversion, the value, or conversion value, of the cash and shares of our common stock, if any, to be received by a holder converting $1,000 principal amount of the debentures will be determined by multiplying the applicable conversion rate by the ten trading day average closing price of our common stock. We will deliver the conversion value to holders as follows: (i) an amount in cash, referred to as the principal return, equal to the lesser of (x) the aggregate conversion value of the debentures to be converted and (y) the aggregate principal amount of the debentures to be converted, (ii) if the aggregate conversion value of the debentures to be converted is greater than the principal return, an amount in whole shares, referred to as the net shares, equal to such aggregate conversion value less the principal return, referred to as the net share amount, and (iii) an amount in cash in lieu of any fractional shares of our common stock. The number of net shares to be paid will be determined by dividing the net share amount by the ten trading day average closing price of our common stock.


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We may not redeem the convertible senior subordinated debentures before March 20, 2010. The holders of the convertible senior subordinated debentures may require us to purchase all or a portion of their debentures at any of three specified dates during the life of the debentures, with the first such date being March 15, 2012, or upon the occurrence of certain designated events for cash at a repurchase price equal to the principal amount plus accrued and unpaid interest plus, in the case of certain designated events that occur on or prior to March 20, 2010, a make whole premium, if any, payable solely in shares of our common stock.


In connection with the issuance of the convertible senior subordinated debentures, we have agreed with The Nasdaq Stock Market, Inc. not to take certain actions without prior shareholder approval if, as a result of such actions, greater than 19.99% of our common stock outstanding immediately prior to the issuance of the debentures would be issued.


Amendment to Senior Credit Facility.In connection with the offering of the convertible senior subordinated debentures, we entered into an amended and restated senior credit agreement pursuant to which we refinanced the indebtedness under our existing senior credit agreement. We repaid all outstanding borrowings under the term loan portion of the senior credit facility and expanded the borrowing capacity of the revolving credit portion.


Prior to the amendment, the senior credit agreement provided for a revolving credit facility of $75.0 million,
with sub limits for swing line loans, letters of credit and term loans. The amended and restated senior credit
agreement provides for a $125.0 million revolving credit facility, with sub limits for the issuance of letters
of credit and for swing line loans. However, so long as we are not in default and if we find lenders that are
willing to commit, the amended and restated senior credit agreement allows us to add up to $50.0 million of
additional available credit under the revolver, subject to the approval of our Board of Directors. Each of our material
U.S. subsidiaries provided guarantees of the indebtedness under the amended and restated senior credit agreement.
We and the guarantors pledged substantially all of our personal property to secure the obligations under the amended
and restated senior credit agreement, subject to certain exceptions agreed upon with the lenders. In addition, the
mortgages that we and our subsidiaries provided under the prior credit agreement continue to secure the amended and
restated senior credit agreement, but we are not required to provide additional mortgages except under certain limited
circumstances. The amended and restated senior credit agreement has a five year term.


We
      pay interest on the outstanding loans under the amended and restated senior
      credit agreement at either a base rate plus a margin or at the London Interbank
      Offered Rate (LIBOR) plus a margin. Initially, that margin will be 0.50%
      for base rate loans and 1.50% for LIBOR loans. The margin will be adjusted,
      from time to time, depending on our leverage ratio, as defined. For base
    rate loans, the margin range is from 0.00% to 1.00%. For LIBOR loans, the
    margin range is from 1.00% to 2.00%. We pay a commitment fee
      to the lenders on the unused portion of the revolving credit facility equal
      to 0.50% of the unused amount; that percentage will drop to 0.375% if our
      total leverage ratio drops below 2.25:1.00, as defined.


The agreements and instruments governing the amended and restated senior credit agreement contain various restrictive covenants that, among other things, restrict our ability to: incur more debt; pay dividends; purchase our common stock or make other distributions; make payments in respect of subordinated debt; make certain investments; create liens; enter into transactions with affiliates; make acquisitions, merge or consolidate; and transfer or sell assets.


The amended and restated senior credit agreement requires that we maintain compliance with certain financial covenants as defined in the agreement, including a senior leverage ratio, a total leverage ratio and a fixed charge coverage ratio. There is also a limitation on the amount of capital expenditures that we may make.


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Contractual Obligations and Commitments


We have future obligations for debt repayments and future minimum rentals under operating and capital leases. The obligations as of June 30, 2005 are summarized as follows (in thousands):


|                                    |  |       |         |                      |   |           |  | Payments Due by Period |        |            |   |       
|----------------------------------- |  | ----- | ------- | -------------------- | - | --------- |  | ---------------------- | ------ | ---------- | - | ------
|                                   
|Contractual Obligations             |  | Total |         | Less
    than 1 year |   | 1-3 years |  | 4-5 years              |        | Thereafter |  
|                                   
|Long-term debt (including interest) |  | $     | 589,660 |                      | $ | 22,358    |  | $                      | 53,161 |            | $ | 41,923
|Operating leases                    |  |       | 135,635 |                      |   | 21,985    |  |                        | 38,944 |            |   | 28,686
|Capital leases                      |  |       | 3,334   |                      |   | 1,249     |  |                        | 2,085  |            |   | —     
|                                   
|                                    |  | $     | 728,629 |                      | $ | 45,592    |  | $                      | 94,190 |            | $ | 70,609
|                                   

In addition, we have entered into contractual commitments of approximately $2.5 million related to our internal construction program.


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 $4.1 million in working capital lines of credit to certain jointly owned and managed companies, of which $2.2 million were unused at June 30, 2005. 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 $3.0 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 consolidated 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 have provided $0.3 million of financial guarantees related to loan commitments of one jointly owned and managed company. The guarantees are not recorded as liabilities on our consolidated balance sheet unless we are required to perform under the guarantee. Credit risk represents the accounting loss that would be recognized at the reporting date if counter-parties failed to perform completely as contracted. The credit risk amounts are equal to the contractual amounts, assuming that the amounts are fully advanced and that no amounts could be recovered from other parties.


Income Taxes

Net Operating Loss Carryforwards


Based on NCIs consolidated federal tax return for the period ended September 30, 2004 that was filed in June 2005, we estimate our net operating loss (NOL) carryforward at June 30, 2005 to be approximately $128.0 million with a total annual utilization limitation of $33.0 million. Such NOL carryforward may need to be adjusted based on any return amendments or settlement of any federal tax audit of NCIs tax years ending on or before that date. This could materially reduce our estimated NOL carryforward. The amount and timing of any realized tax benefit resulting from the utilization of the NOL carryforward is also a function of future taxable income, multiple change of ownership limitations imposed by Section 382 of the Internal Revenue Code of 1986, as amended, contractual
limitations imposed
by the tax sharing agreement with NCI, as amended, and the term of the carryforward
period. As a consequence, the NOL carryforward is subject to a 100% valuation
allowance. We will continue to monitor the realizability of our NOL carryforward
and make appropriate adjustments as and when necessary.


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Other


During the nine months ended June 30, 2005, we recognized a tax refund and tax credits of $0.7 million and $0.8 million, respectively, which reduced our effective tax rate of 39.6% to 36.8%.


Critical Accounting Policies

We consider an accounting policy to be critical if it is important to our financial condition and results of operations, and requires significant judgment and estimates on the part of management in its application. Our critical accounting estimates and the related assumptions are evaluated periodically as conditions warrant, and changes to such estimates are recorded as new information or changed conditions require revision. Application of the critical accounting policies requires managements significant judgments, often as the result of the need to make estimates of matters that are inherently uncertain. If actual results were to differ materially from the estimates made, the reported results could be materially affected. We believe that the following represents our critical accounting policies, which are described in our Annual Report on Form 10-K for the fiscal year ended September 30, 2004:


| | • | Allowance
    for Doubtful Accounts;                 
| | - | -----------------------------------------------------
| |   |                                                      
| | • | Loss Reserves
    for Certain Self-Insured Programs; 
| |   |                                                      
| | • | Revenue
    Recognition / Contractual Allowances; and
| |   |                                                      
| | • | Long-Lived
    Asset Impairments.                    

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


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New Accounting Pronouncements

Accounting Changes and Error Corrections


In
May 2005, FASB issued Statement of Financial Accounting Standards (SFAS) No.
154, Accounting
Changes and Error Correctionsa replacement of APB Opinion No. 20 and FASB
Statement No. 3.
This statement changes the requirements for the accounting for and reporting
of a change in accounting principle. This statement applies to all voluntary
changes in accounting principle. It also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include
specific transition provisions. When a pronouncement includes specific transition
provisions, those provisions should be followed. APB No. 20 previously required
that most voluntary changes in accounting principle be recognized by including
in net income of the period of the change the cumulative effect of changing to
the new accounting principle. SFAS 154 requires retrospective application to
prior period financial statements of changes in accounting principle, unless
it is
impracticable
to determine either the period-specific effects or the cumulative effect of the
change. This statement does not change the guidance for reporting the
correction of an error in previously issued financial statements or the change
in an accounting
estimate. SFAS No. 154 is effective for accounting changes and corrections of
errors made in fiscal years beginning after December 15, 2005, or October 1,
2006 for us. We do not expect this statement to have a material impact on our
consolidated financial statements.


Share Based Payments


In December 2004, the FASB issued Statement No. 123R,Share-Based Payment(SFAS 123R), which
requires companies to measure and recognize compensation expense for all stock-based payments at fair value. On April 14, 2005, the Securities and
Exchange Commission issued rules to allow companies to adopt the standard at the beginning of the fiscal year that begins after June 15, 2005, and,
thus, will be effective for us beginning October 1, 2005. We are currently evaluating the option valuation methodologies, transition alternatives
and assumptions in light of SFAS 123R, and therefore cannot estimate the impact of its adoption at this time. Adoption of the expensing requirements
of SFAS 123R will increase our operating expenses. The ultimate amount of increased operating expenses will be dependent on the number of option
shares granted during the year, their timing and vesting period, and the method used to calculate the fair value of the awards, among other factors.
We have begun, but have not completed, evaluating the impact of adopting SFAS 123R on our results of operations. We currently determine the fair
value of stock-based compensation using a Black-Scholes option-pricing model. In connection with evaluating the impact of adopting SFAS 123R, we
are also considering the potential implementation of different valuation models to determine the fair market value of stock-base compensation,
although no decision has been yet made. The new methodologies and assumptions may be different than those currently employed by us in disclosing
the impact of applying the fair value-based method under SFAS 123 to outstanding and unvested awards. See note 10  Stock Option Plan
for information related to the pro forma effects of stock-based employee compensation on our reported results assuming application of the fair value
recognition provisions of SFAS 123.


In March 2005, the SEC issued Staff Accounting
Bulletin No. 107 (SAB 107), Share-Based
Payment, which provides interpretive guidance
related to the interaction between SFAS 123R and certain SEC rules and regulations, as well as provides the SEC staffs
views regarding the valuation of share-based payment arrangements. In particular, SAB 107 provides guidance related to share-based
payment transactions with non employees, the transition from non-public to public entity status, valuation methods (including
assumptions such as expected volatility and expected term), the accounting for certain redeemable financial instruments issued
under share-based payment arrangements, the classification of compensation expense, non-GAAP financial measures, first-time
adoption of SFAS No. 123R in an interim period, capitalization of compensation cost related to share-based payment arrangements,
the accounting for income tax effects of share-based payment arrangements upon adoption of SFAS No. 123R, the modification of
employee share options prior to adoption of SFAS No. 123R, and disclosures in Managements Discussion and Analysis of Financial
Condition and Results of Operations subsequent to adoption of SFAS No. 123R. We are currently assessing the impact of SAB 107
on our implementation and adoption of SFAS 123R.


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General Partner Control of Limited Partnerships


In June 2005, the Emerging Issues Task Force (EITF) reached a consensus on
EITF Issue No. 04-5, Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited
Partnership or Similar Entity When the Limited Partners Have Certain Rights (EITF 04-5). This consensus applies to
voting right entities not within the scope of FIN 46(R) in which the investor is the general partner(s) in a limited
partnership or functional equivalent. The EITF consensus is that the general partner(s) in a limited partnership is
presumed to control that limited partnership and therefore should include the limited partnership in its consolidated
financial statements. The general partner(s) may overcome this presumption of control and not consolidate the entity if
the limited partners have: (a) the substantive ability to dissolve (liquidate) the limited partnership or otherwise remove
the general partner through substantive kick-out rights that can be exercised without having to show cause; or (b)
substantive participating rights in managing the partnership. This guidance became immediately effective upon ratification
by the FASB on June 29, 2005 for all newly formed limited partnerships and for existing limited partnerships for which the
partnership agreements have been modified. For general partners in all other limited partnerships, the guidance is effective
no later than the beginning of the first reporting period in fiscal years beginning after December 15, 2005, or October 1, 2006
for us. We have begun, but have not completed, evaluating the impact of applying the provisions of EITF No. 04-5 to our
existing unconsolidated joint venture partnerships, but do not expect the adoption will have a material impact on our
consolidated financial statements.


Other

We manage the operations of 44 eldercare centers and 13 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, 2005, we billed our managed clients $85.3 million for such labor related costs compared to $82.5 million for the comparable period in the prior year.


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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, 2005, we have $8.0 million of debt subject to variable rates of interest. A one percent change in the rate of interest would result in a change to our interest expense of $0.1 million annually.


At June 30, 2005, we have $113.3 million of cash and equivalents that are affected by market rates of interest. A one percent change in the rate of interest would result in a change in interest income of $1.1 million annually.


At June 30, 2005, we held $12.0 million of restricted investments in marketable securities that are affected by market rates of interest. A one percent change in the rate of interest would result in a change in interest income of $0.1 million annually.


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|ITEM 4: | Controls
    and Procedures
|------- | ---------------------------

(a)   Evaluation
of
disclosure controls and procedures.


As required by Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended, (the Exchange Act), 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)). Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act, such as this Form 10-Q, is properly recorded, processed, summarized and reported within the time periods required by the Securities and Exchange Commissions rules and forms. Management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures that, by their nature, can provide only reasonable assurance regarding managements control objectives. Management does not expect that its disclosure controls and procedures will prevent all errors and fraud. A control system, irrespective of how well it is designed and operated, can only provide reasonable assurance, and cannot guarantee that it will succeed in its stated objectives.


We are currently documenting, evaluating the design effectiveness of and testing the internal controls of our significant processes over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, in order to allow our management to report on, and our Registered Independent Public Accounting Firm to attest to, our internal controls over financial reporting. The evaluation and testing requires significant costs and management time. In the course of our ongoing evaluation and testing, management has identified certain deficiencies and implemented remediation plans or is in the process of planning remediation for the deficiencies.


Based on an evaluation of the effectiveness of disclosure controls and procedures, 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 Exchange Act is recorded, processed, summarized and reported within the time period specified in the Securities and Exchange Commissions rules and forms.


(b)   Changes in
internal controls.


There was no change in our internal controls over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to affect materially, our internal control over financial reporting.


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|PART
    II: | OTHER
    INFORMATION
|------------ | ---------------------
|             |                      
|ITEM
    1:  | Legal
    Proceedings

Haskell et al. v. Goldman Sachs & Co. et al


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 $205.0 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 $200.0
  million plus interest costs and fees. The action was removed to the United
  States 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. In addition, Mellon Bank,
  N.A. has asserted a claim against NeighborCare, Inc. for indemnification for
  expenses and damages related to the former investors claim. On March 28, 2005,
  the Bankruptcy Court ruled that NeighborCare, Inc. would be obligated to reimburse
  Mellon Bank, N.A. for expenses and damages relating to the claim, other than
  any expenses or damages determined by the Bankruptcy Court to have resulted
  from Mellon Banks gross negligence or willful misconduct. On April 27,
  2005 the Bankruptcy Court dismissed the plaintiffs complaint against
  all named defendants. Defendants have appealed the Bankruptcy Courts
  decision. While we have advanced NeighborCare, Inc. 50% of the deductible under
  the insurance policy related to the former investors claim, we have not made
  a determination with respect to our ultimate liability, if any, relative to
  this case.


|ITEM
    2: | Unregistered
    Sales of Equity Securities and Use of Proceeds
|----------- | ---------------------------------------------------------------

The following table provides information with respect to common stock repurchased by us during the three months ended June 30, 2005:


|Issuer Purchases of Equity Securities | 
|------------------------------------- | 
|                                      | 
|Period                                | 
|                                      | 
|4/1/05 — 4/30/05                      | 
|5/1/05 — 5/31/05                      | 
|6/1/05 — 6/30/05                      | 
|                                      | 
|Total                                 | 
|                                      | 

|   
|---
|(1)

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|ITEM
    3: | Defaults
    Upon Senior Securities None                    
|----------- | -------------------------------------------------------------
|            |                                                              
|ITEM
    4: | Submission
    of Matters to a Vote of Security Holders -None
|            |                                                              
|ITEM
    5: | Other
          Information-
    None                        
|            |                                                              
|ITEM
    6: | Exhibits                                                     

| |     |                 |                                                                                                                                                                                                                                                                                                                            
| | --- | --------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | Exhibits        |                                                                                                                                                                                                                                                                                                                            
| |     |                 |                                                                                                                                                                                                                                                                                                                            
| |     | 10.1
       (1) | Amendment
       No. 1, dated as of June 9, 2005, to the Tax Sharing Agreement, dated as
       of December 1, 2003, by and between NeighborCare, Inc. (formerly Genesis
    Health Ventures, Inc.) and Genesis HealthCare Corporation.                                                                                    
| |     |                 |                                                                                                                                                                                                                                                                                                                            
| |     | 10.2
       (1) | Amendment
       No. 1, dated as of June 9, 2005, to the Transition Services Agreement,
       dated as of December 1, 2003, by and between NeighborCare, Inc. (formerly
    Genesis Health Ventures, Inc.) and Genesis HealthCare Corporation.                                                                            
| |     |                 |                                                                                                                                                                                                                                                                                                                            
| |     | 10.3
       (1) | Amendment
       No. 2, dated as of June 9, 2005, to the Master Agreement for Pharmacy,
       Pharmacy Consulting and Related Products and Services, dated as of December
       1,
    2003 and as amended on May 7, 2004, by and between NeighborCare Pharmacy
       Services, Inc. and Genesis HealthCare Corporation.
| |     |                 |                                                                                                                                                                                                                                                                                                                            
| |     | 31.1            | Certification
       of George V. Hager, Jr., Chief Executive Officer, of the Company dated
       August 9, 2005 pursuant to Rule 13a  14(a) of the Securities Exchange
       Act of 1934, as amended.                                                                                                                  
| |     |                 |                                                                                                                                                                                                                                                                                                                            
| |     | 31.2            | Certification
       of James V. McKeon, Chief Financial Officer, of the Company dated August
       9, 2005 pursuant to Rule 13a  14(a) of the Securities Exchange Act
    of 1934, as amended.                                                                                                                          
| |     |                 |                                                                                                                                                                                                                                                                                                                            
| |     | 32.1            | Certification
       of George V. Hager, Jr., Chief Executive Officer, of the Company dated
       August 9, 2005 pursuant to 18 U.S.C. Section 1350.                                                                                                                                                                      
| |     |                 |                                                                                                                                                                                                                                                                                                                            
| |     | 32.2            | Certification
       of James V. McKeon, Chief Financial Officer, of the Company dated August
    9, 2005 pursuant to 18 U.S.C. Section 1350.                                                                                                                                                                              
| |     |                 |                                                                                                                                                                                                                                                                                                                            
| |     | (1)             | Incorporated
       by reference to Genesis HealthCare Corporations Form 8-K filed with the
       Securities and Exchange Commission on June 14, 2005.                                                                                                                                                                   
| |     |                 |                                                                                                                                                                                                                                                                                                                            

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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 9, 2005 | /s/ James V. McKeon                               | 
|                    |                                                   | 
|                    | James V. McKeon,                                  | 
|                    | Chief Financial Officer                           | 
|                    |                                                   | 
|Date:August 9, 2005 | /s/ George V. Hager, Jr.                          | 
|                    |                                                   | 
|                    | George V. Hager, Jr.,                             | 
|                    | Chief Executive Officer and Chairman of the Board | 

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