**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549**

**FORM 10-Q**

| (Mark One) |                                                                                     |
|------------|------------------------------------------------------------------------------------------|
|            | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  |
|       |                                                                                     |
|       | For the quarterly period ended March 31, 2004                                            |
|       |                                                                                     |
|       | or                                                                                       |
|       |                                                                                     |
|            | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |

For the transition period from ___________________ to ___________________

Commission File Number: 000-50351

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

| **Pennsylvania**                                              |   |   | **20-0023783**                       |   |
|---------------------------------------------------------------|--------|--------|--------------------------------------|--------|
| (State or other jurisdiction ofincorporation or organization) |   |   | (I.R.S. Employer Identification No.) |   |

| 101 East State StreetKennett Square, Pennsylvania |   |   | 19348      |   |
|---------------------------------------------------|--------|--------|------------|--------|
| (Address of principal executive offices)          |   |   | (Zip code) |   |

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

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

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

YES            NO  

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

YES           NO  

 

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

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

YES           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 May 3, 2004: 19,965,179 shares of the registrant’s common stock were outstanding, including 129,923 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**

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|   |   |   |  CAUTIONARY      STATEMENT REGARDING FORWARD-LOOKING STATEMENTS  1         PART I:     FINANCIAL INFORMATION            ITEM 1:  Financial      Statements  3         ITEM 2:  Management’s Discussion      and Analysis of Financial Condition and Results of Operations  20         ITEM 3:  Quantitative and      Qualitative Disclosures About Market Risk  34         ITEM 4:  Controls and Procedures  34         PART II:     OTHER INFORMATION           ITEM 1:  Legal Proceedings  35         ITEM 2:  Changes in Securities      and Use of Proceeds  35         ITEM 3:  Defaults Upon Senior      Securities  35         ITEM 4:  Submission of Matters      to a Vote of Security Holders  35         ITEM 5:  Other Information  35         ITEM 6:  Exhibits and Reports      on Form 8-K  36         SIGNATURES  37 
 

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**CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS**

**Cautionary Statements Regarding Forward-Looking Statements**

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

     Statements made in this report, and in our other public filings and releases, which are not historical facts, contain “forward-looking” statements (as defined in the Private Securities Litigation Reform Act of 1995) that involve risks and uncertainties and are subject to change at any time.  These forward-looking statements may include, but are not limited to:
•statements contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the notes to our unaudited condensed financial statements, such as the existence of sufficient broad-based support for the services we provide to ensure adequate funding, demographic trends and our ability to take advantage of such demographic trends, the expected impact of recently implemented staffing and retention programs, our ability to meet our working capital requirements, debt service, and future cash needs, capital expenditure and lease requirements, the anticipated receipt of less than significant proceeds from future asset sales in fiscal 2004; our potential extension of credit to our joint venturepartners; the expected changes in and effects of government legislation and regulation on our business; estimates in our pro forma financial data and critical accounting policies, including the adequacy of our allowance for doubtful accounts, any anticipated impact of long-lived asset impairments and our ability to provide for outstanding losses and loss expenses for self-insured programs; the incremental costs of being an independent public company; and legal proceedings; and   •statements contained in “Quantitative and Qualitative Disclosures About Market Risk.”
     The forward-looking statements involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond our control.  You are cautioned that these statements are not guarantees of future performance and that actual results and trends in the future may differ materially.

     Factors that could cause actual results to differ materially include, but are not limited to, the following, which are discussed more fully in our Annual Report on Form 10-K for the fiscal year ended September 30, 2003:
•the difficulty in evaluating certain of our financial information due to the spin-off;   •our limited operating history as an independent entity and our inability to rely on NCI to provide business diversification and capital resources;   •the availability of financial and other resources to us as a separate company;   •the ability to engage successfully in acquisitions and other strategic transactions;   •federal income tax liabilities and indemnification obligations related to the spin-off;   •conflicts of interest as a result of continuing relationships with NCI;   •the ability of NCI, as our single largest supplier of pharmaceutical products and services, to act as a stand-alone entity;   •changes in the reimbursement rates or methods of payment from Medicare and Medicaid, or the implementation of other measures to reduce the reimbursement for our services;
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   •the expiration of enactments providing for additional governmental funding;   •the impact of federal and state regulations;   •changes in case mix, payor mix and payment methodologies;   •further consolidation of managed care organizations and other third-party payors;   •competition in our businesses;   •an increase in insurance costs and potential liability for losses not covered by, or in excess of, our insurance;   •competition for, and availability of, qualified staff in the healthcare industry;   •our ability to control operating costs and generate sufficient cash flow to meet operational and financial requirements;    •our ability, and the ability of our subsidiary guarantors, to fulfill debt obligations;   •an economic downturn or changes in the laws affecting our business in those markets in which we operate; and   •acts of God or public authorities, war, civil unrest, terrorism, fire, floods, earthquakes and other matters beyond our control.
     In addition to these factors and any risks and uncertainties specifically identified in the text surrounding forward-looking statements, any statements in this report or the reports and other documents filed by us with the SEC that warn of risks or uncertainties associated with future results, events or circumstances also identify factors that could cause actual results to differ materially from those expressed in or implied by the forward-looking statements.

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

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****

**PART I:      FINANCIAL INFORMATION**

**ITEM 1:      Financial Statements**

**GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIESUNAUDITED CONDENSED BALANCE SHEETSMARCH 31, 2004 AND SEPTEMBER 30, 2003(IN THOUSANDS)**
  **March 31, 2004**  **September 30, 2003**    Assets:     Current assets:     Cash    and equivalents, primarily restricted at September 30, 2003 $                  125,958  $                      8,791  Restricted    investments in marketable securities                         30,320                 29,320  Accounts    receivable, net                       188,779                        186,570  Prepaid    expenses and other current assets                         24,855                          32,771  Assets    held for sale                           3,952                            7,721      Total    current assets                       373,864                        265,173      Property and equipment, net                       706,189                        673,167  Assets held for sale                           8,717                          10,624  Restricted investments in marketable securities                         60,284                          61,271  Other long-term assets                         86,189                          57,869  Identifiable intangible assets, net                           1,679                            2,242  Goodwill                           6,875                            2,953      Total    assets $               1,243,797  $               1,073,299     Liabilities and Shareholders’ Equity:     Current liabilities:     Current    installments of long-term debt $                      4,664  $                    12,039  Accounts    payable and accrued expenses                       146,814                        126,118  Current    portion of self-insurance liability reserves                         30,320                          29,320      Total    current liabilities                       181,798                        167,477      Long-term debt                       457,097                        254,193  Deferred income taxes                         11,665   – Self-insurance liability reserves                         40,126                          37,093  Other long-term liabilities                         25,240                          33,975  Total shareholders’ equity                       527,871                        580,561      Total    liabilities and shareholders’ equity $               1,243,797  $               1,073,299      
See accompanying notes to unaudited condensed financial statements

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**GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIESUNAUDITED CONDENSED STATEMENTS OF OPERATIONSTHREE MONTHS ENDED MARCH 31, 2004 AND 2003(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)**
   **Three months ended**    **March 31, 2004**  **March 31, 2003**         Net revenues $                  383,308  $                  338,425  Operating expenses:     Salaries,    wages and benefits                       239,046                        213,184  Other    operating expenses                       107,915                          98,011  Loss    on early extinguishment of debt                              655   – Lease expense                           6,888                            6,792  Depreciation and amortization expense                         11,537                            9,636  Interest expense                           7,599                            3,844      Income before income tax expense, equity in net      income    of unconsolidated affiliates and     minority    interests                           9,668                            6,958  Income tax expense                           3,922                            2,714      Income before equity in net income of unconsolidated     affiliates    and minority interests                           5,746                            4,244  Equity in net income of unconsolidated affiliates                              466                               357  Minority interests                              (84) –     Income from continuing operations                           6,128                            4,601  Loss from discontinued operations, net of taxes                            (554)                        (4,593)    Net income $                      5,574  $                             8          Per common share data:     Basic:     Income    from continuing operations $                        0.31  $– Loss    from discontinued operations                           (0.03) – Net    income $                        0.28  $– Weighted    average shares                  19,923,669   –      Diluted:     Income    from continuing operations $                        0.31  $– Loss    from discontinued operations                           (0.03) – Net    income $                        0.28  $– Weighted    average shares                  19,968,492   – 
See accompanying notes to unaudited condensed financial statements

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**GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIESUNAUDITED CONDENSED STATEMENTS OF OPERATIONSSIX MONTHS ENDED MARCH 31, 2004 AND 2003(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)**
  **Six months ended**   **March 31, 2004**  **March 31, 2003**         Net revenues $                 754,520  $                 677,489  Operating expenses:     Salaries,    wages and benefits                      467,233                       421,239  Other    operating expenses                      213,828                       194,642  Loss    (gain) on early extinguishment of debt                             828                         (1,123)Lease expense                        14,299                         13,576  Depreciation and amortization expense                        23,173                         19,203  Interest expense                        13,502                           8,215      Income before income tax expense, equity in net      income    of unconsolidated affiliates and     minority    interests                        21,657                         21,737  Income tax expense                          8,785                           8,477      Income before equity in net income of unconsolidated     affiliates    and minority interests                        12,872                         13,260  Equity in net income of unconsolidated affiliates                          1,024                              428  Minority interests                           (159) –     Income from continuing operations                        13,737                         13,688  Loss from discontinued operations, net of taxes                        (2,157)                       (8,991)    Net income $                   11,580  $                     4,697           Pro forma per common share data:     Basic:     Income    from continuing operations $                       0.70  $– Loss    from discontinued operations                          (0.11) – Net    income $                       0.59  $– Weighted    average shares                 19,754,074   –      Diluted:     Income    from continuing operations $                       0.69  $– Loss    from discontinued operations                          (0.11) – Net    income $                       0.59  $– Weighted    average shares                 19,777,459   – 
See accompanying notes to unaudited condensed financial statements

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**GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIESUNAUDITED CONDENSED STATEMENTS OF CASH FLOWSSIX MONTHS ENDED MARCH 31, 2004 AND 2003(IN THOUSANDS)**
  **Six months ended**   **March 31, 2004**  **March 31, 2003**    Cash flows from operating activities:     Net    income $               11,580  $                    4,697  Net    charges included in operations not requiring funds                    39,701                        32,878  Changes    in assets and liabilities:     Accounts    receivable                    (8,325)                      (9,219)Accounts    payable and accrued expenses                    24,031                        (5,163)Other,    net                      9,376                          2,615      Net    cash provided by operating activities                   76,363                      25,808           Cash flows from investing activities:     Capital    expenditures                 (14,846)                    (19,150)Net    purchases of restricted marketable securities                      (325)                         (909)Acquisition    of rehabilitation services business  –                       (5,436)Purchase    of eldercare centers and lease amendments                 (48,773) – Sale    of eldercare assets                     7,806                        29,556  Other                        311   –     Net    cash (used in) provided by investing activities                 (55,827)                      4,061           Cash flows from financing activities:     Repayment    of long-term debt and payment of sinking      fund    requirements               (248,484)                    (47,426)Proceeds    from issuance of long-term debt                 410,000   – Debt    issuance costs                   (9,337) – Net    transactions with NCI, prior to the spin-off                 (55,548)                    17,498      Net    cash (used in) provided by financing activities                   96,631                     (29,928)         Net increase (decrease) in cash and equivalents $            117,167  $                      (59)     Cash and equivalents:     Beginning of period                     8,791                        7,420      End of period $            125,958  $                  7,361           Supplemental disclosure of cash flow information:     Interest    paid $                5,734  $                    9,407  Taxes    paid (principally state income tax)                     1,798   – 
See accompanying notes to unaudited condensed financial statements

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**Genesis HealthCare Corporation and Subsidiaries  Notes to Unaudited Condensed Financial Statements**

**(1)  **    **Basis of Presentation**

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

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

     The following unaudited pro forma financial information gives effect to the spin-off as if it occurred on October 1, 2003.  The unaudited pro forma data is for informational purposes only and does not purport to represent the results of future periods.  The unaudited pro forma data reflects adjustments based upon available information and certain assumptions that management of GHC considers reasonable.  No changes in operating revenues and expenses have been made to reflect the results of any modifications to operations that might have been made had the spin-off been completed on the aforesaid effective date for purposes of the unaudited pro forma results.  The following unaudited pro forma information is presented in thousands,except per share information:
  **Six months ended March 31, 2004**     **As reported**  **Pro forma**    Net revenues $ 754,520  $ 754,520  Income from continuing operations            13,737                 12,546  Diluted earnings per share – from continuing operations               0.69                    0.63  
     ***General***

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

     Historically, NCI provided certain general and administrative services to GHC, including finance, legal, treasury, information systems and human resources.  The cost for these services for the three and six months ended March 31, 2003 was allocated to GHC based upon various allocation percentages dependent upon the type of service provided.  For instance, certain costs were allocated based upon GHC’s proportionate share of revenue, labor related costs or other operating expenses, as well as other methods which management believes to be reasonable.  These cost allocations were $10.4 million and $21.2 million for the three and six months ended March 31, 2003, respectively.  No such costs were allocated to GHC for the threeand six months ended March 31, 2004 because our general and administrative service functions were established to operate GHC as an independent organization beginning in October 2003.  

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     Prior to the spin-off, certain assets and liabilities related to GHC were managed and controlled by NCI on a centralized basis.  Such assets and liabilities reflected in the accompanying unaudited condensed balance sheet as of September 30, 2003 were allocated to GHC in the manner described in the preceding paragraph for allocating general and administrative service costs.  The accompanying balance sheet as of March 31, 2004 reflects the spin-off of GHC’s net assets from NCI.

     Prior to the spin-off, substantially all of GHC’s cash accounts were linked to NCI’s centralized cash management system.  Accordingly, substantially all cash generated from or used in GHC’s operations had been transferred to and from NCI.  For instance, NCI funded nearly all routine and capital cash disbursements on behalf of GHC.  Likewise, on a daily basis, GHC transferred its cash receipts directly to the concentrated bank account of NCI.  The net effect of these cash transfers has been reflected in the shareholders’ equity section of the condensed balance sheet at September 30, 2003.  The net transactions with NCI as reflected in our unaudited condensed statements of cash flows for the six months endedMarch 31, 2004 represent cash activities between NCI and GHC as previously described.  Prior to the spin-off, the financing activities between NCI and GHC were in the form of equity capital advances and there were no formal repayment or interest arrangements, nor any expectation of any such arrangements in the future.  

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

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

     ***Description of Business***

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

     GHC provides inpatient services through skilled nursing and assisted living centers primarily located in the eastern United States.  As of March 31, 2004, the Company had 216 owned, leased, managed and jointly owned eldercare centers with 26,401 beds, of which three centers having 561 beds have been identified as held for sale.  Revenues of GHC’s owned and leased centers constitute approximately 89% of GHC’s revenues, and are presented in GHC’s segment information as inpatient services revenues.  Management fees earned from eldercare centers that are managed and/or jointly owned by GHC are included in all other revenues presented in GHC’s segment information.  See note 8 – “SegmentInformation.”

     GHC provides an extensive range of rehabilitation therapy services, including speech pathology, physical therapy and occupational therapy.  These services are provided by approximately 4,300 licensed rehabilitation therapists and assistants employed or contracted at substantially all of the eldercare centers operated by GHC, as well as by contract to healthcare facilities operated by others and through any one of our 13 certified outpatient rehabilitation agencies.  After the elimination of intercompany revenues, the rehabilitation therapy services segment constitutes approximately 8% of GHC’s revenues.

     GHC also provides an array of other specialty medical services, including  homecare services, physician services, hospitality services, respiratory health services, staffing services and other healthcare related services.

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**(2)      Certain Significant Risks and Uncertainties**
     ***Spin-off***

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

     GHC and NCI agreed contractually to continue certain transitional arrangements and practices for a limited time after the spin-off.In addition, GHC and NCI agreed to certain mutually beneficial commercial arrangementsintended to reflect terms similar to those that would be agreed to by partiesbargaining at arm’s-length. On May 7, 2004, GHC and NCI amended theMaster Agreement for Pharmacy, Pharmacy Consulting and Related Products andServices to correct a pricing error in the original agreement specifically relatedto intravenous drugs.  The financial impact of the amendment increases GHC’spharmacy costs $1.3 million on an annualized basis, which has been reflected in GHC’s financial results.  The amendment also accelerates by nine months GHC’s ability torenegotiate pricing with NCI.  GHC believes that the amendments offer substantiallyequal value to both organizations.  Beginning December 1, 2003, the agreement, as amended,extends approximately $6.6 million of annual pharmacy cost savings to GHC, which has beenreflected in GHC’s financial results.

     ***Revenue Sources***

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

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

     It is not possible to quantify fully the effect of legislative changes, the interpretation or administration of such legislation or any other governmental initiatives on GHC’s business and the business of the customers served by GHC’s rehabilitation therapy business.  Accordingly, there can be no assurance that the impact of any future healthcare legislation will not further adversely affect GHC’s business.  There can be no assurance that payments under governmental and private third-party payor programs will be timely, will remain at levels equivalent to present levels or will, in the future, be sufficient to cover the costs allocable to patients eligible for reimbursement pursuant to such programs.GHC’s 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.

**(3)      SignificantTransactions and Events**

     ***Purchase of Joint Venture Interests***

     On January 5, 2004, GHC acquired its joint venture partner’s interest in two Massachusetts skilled nursing facilities which it previously managed.  GHC previously owned a 50% interest in one facility and a 20% interest in the other.  Upon completion of the transaction, GHC owns 100% of both facilities and acquired approximately $6 million of working capital along with the property and equipment of the two skilled nursing facilities, having a total of 318 beds.  The aggregate consideration consisted of $6.0 million in cash and the assumption of debt in the amount of approximately $20.0 million, of which $12.5 million was repaid following completion of the transactions.

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     ***ElderTrust Transactions***

     On August 13, 2003, GHC acquired the remaining ownership interest in an unconsolidated joint venture partnership that operates four skilled nursing facilities with 600 skilled nursing and 125 assisted living beds.  Each of the four eldercare centers had been leased to the partnership from ElderTrust, a real estate investment trust from which GHC leased or subleased 18 of its eldercare facilities and eight managed and jointly owned facilities.  GHC purchased its joint venture partner’s interest in the unconsolidated partnership for $3.1 million and  subsequently purchased one of the four eldercare properties from ElderTrust for $2.6 million.  Additionally, GHC paid ElderTrust $2.5 million to reduce the annual cash basis andaccrual basis lease expense of one of the three remaining leased facilities by $0.4 million and $0.2 million, respectively.  The lease terms of the three facilities that will continue to be leased from ElderTrust were extended from 2010 to 2015.  On September 11, 2003, GHC entered into additional agreements with ElderTrust, the principal terms of which are as follows:
•GHC agreed to purchase two skilled nursing facilities having 210 skilled nursing beds and 67 assisted living beds, and three assisted living facilities having 257 beds, for $24.8 million.  GHC previously leased these properties from ElderTrust at an annual cash basis and accrual basis lease cost of $2.4 million and $1.5 million, respectively.  By January 2004, GHC purchased all of the aforementioned eldercare facilities;   •GHC agreed to pay ElderTrust $32.3 million to reduce annual cash basis and accrual basis lease cost associated with nine properties by $6.9 million and $1.2 million, respectively, and acquire options to purchase seven properties previously subleased to GHC by ElderTrust.   On October 29, 2003, GHC paid ElderTrust $2.3 million to reduce the rents of two of the nine eldercare facilities, and on November 7, 2003, GHC paid ElderTrust the remaining $30.0 million to reduce the rents of the other seven aforementioned eldercare facilities; and   •ElderTrust was paid $5.0 million upon consummation of the spin-off in exchange for ElderTrust’s consent to the assignment of all remaining leases and guarantees from NCI to GHC, which was accounted for by NCI as a spin-off related expense in its first fiscal quarter of 2004.  
**(4)     ** **Long-Term Debt**

     Long-term debt at March 31, 2004 and September 30, 2003 consists of the following (in thousands):
  **March 31, 2004**  **  September 30, 2003**        **Total NCI**  **Allocated to GHC**       Allocated debt of NCI $– $     555,213  $        219,945  Senior credit facility – term loan            184,538     – Senior subordinated notes            225,000     – Mortgages and other secured debt              52,223                 46,287                   461,761               266,232  Less:       Current portion of long-term debt               (4,664)           (12,039)            Long-term debt $         457,097    $        254,193        
     *Senior credit facility.* On December 1, 2003, GHC entered into a senior credit facility that provides for a term loan of approximately $185.0 million, which was fully drawn at the consummation of the spin-off, and a revolving credit facility of $75.0 million.  The term loan has a seven year term and amortizes one percent per year through year six.  The revolving credit facility has a five year term.  GHC’s senior credit facility includes an excess cash flow recapture requirement that may increase the required principal payments above contractual minimum amounts each year depending on a defined formula in the senior credit agreement.There can be no assurances of the final excess cash flow recapture requirement until the preparation of GHC’s fiscal year end financial statements.  The term loan portion of GHC’s senior credit facility has a rate of interest of LIBOR plus 2.75% or a base rate plus an applicable margin.  The revolving portion of GHC’s senior credit facility has a rate of interest of LIBOR plus 2.75% or a base rate plus an applicable margin on any borrowings thereunder, and a commitment fee on the revolving portion of 0.50% on any unused commitment.

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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 with a term of ten years.

     *Mortgages and other secured debts.*At March 31, 2004 and September 30, 2003, GHC had $52.2 million and $46.3 million, respectively, of other secured debt consisting principally of revenue bonds and secured bank loans, including loans insured by the Department of Housing and Urban Development.  These loans are secured by the underlying real and personal property of individual eldercare centers and have fixed rates of interest ranging from 3% to 11%, with a weighted average rate of 7.8% and 9.1% at March 31, 2004 and September 30, 2003, respectively.

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

**(5)      EarningsPer Share**

     The computation of basic net income per common share presented for the three and six months ended March 31, 2004 is based upon the number of GHC shares distributed by NCI on December 1, 2003 in connection with the spin-off, assuming such distribution took place on October 1, 2003, and is therefore labeled “pro forma” for the six months ended March 31, 2004.  The computation of diluted net income per common share is calculated by dividing net income by the sum of the weighted average basic common shares and potentially dilutive securities.  Potentially dilutive securities are calculated in accordance with the treasury stock method, which assumes that the proceeds from the exercise of all GHC stock options are used torepurchase GHC common stock at the average market price for the period.  For the three and six months ended March 31, 2004, GHC’s outstanding stock options yielded 44,823 and 23,385 potentially dilutive securities, respectively, under the treasury stock method.  The computation of potentially dilutive securities for the six months ended March 31, 2004 also assumes the spin-off occurred on October 1, 2003, and therefore the presentation of diluted earnings per share data for the six months ended March 31, 2004 is labeled “pro forma.”  Historical earnings per share have not been presented prior to fiscal 2004 as GHC was wholly owned by NCI.

**(6)      ComprehensiveIncome**

     The following table sets forth the computation of comprehensive income for the three and six months ended March 31, 2004 and 2003 (in thousands):
  **Three months ended March 31,**  **Six months ended March 31,**      **2004**  **2003**  **2004**  **2003**               Net income $       5,574  $               8  $     11,580  $       4,697  Unrealized gain (loss) on restricted investments          in    marketable securities              430                98               312               (29)     Total comprehensive income $       6,004  $           106  $     11,892  $       4,668        
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**(7)      AssetsHeld for Sale and Discontinued Operations**

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

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

     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 six months ended March 31, 2004 was $0.1 million and $0.3 million, respectively.  For the three and six months ended March 31, 2003, after-tax interest allocated to discontinued operations was $0.9 million and $1.7 million, respectively.

     GHC has separately  classified $12.7 million and $18.3 million of carrying value associated with  its assets held for sale in its unaudited condensed balance sheets at March  31, 2004 and September 30, 2003, respectively.

     The following table sets forth net revenues and the components of loss from discontinued operations for the three and six months ended March 31, 2004 and 2003 (in thousands):
  **Three Months Ended March 31,**  **Six Months Ended March 31,**      **2004**  **2003**  **2004**  **2003**                   Net revenues $   7,060  $ 50,504 $     16,342  $ 112,028      Net operating loss of discontinued businesses $        (908)$ (5,036)$     (2,953)$     (8,905)Loss on discontinuation of businesses  –    (2,495)          (583)      (5,834)Income tax benefit             354         2,938          1,379          5,748       Loss from discontinued operations, net of taxes $      (554)$     (4,593)$  (2,157)$     (8,991)      
     The loss on discontinuation of businesses includes the write-down of assets to estimated net realizable value.

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**(8)      SegmentInformation**

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

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

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

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

     Summarized financial information concerning the Company’s reportable segments is shown in the following table.  The “All other services and corporate costs” category of revenues and EBITDA represents operating information of business units below the prescribed quantitative thresholds that trigger segment reporting requirements, and our corporate support functions.  The operating business units in this category derive revenues from the following services: management services, consulting services, homecare services, physician services, hospitality services, respiratory health services, staffing services and other healthcare related services.  The “Other adjustments” category consists of certainexpenses and gains that have not been allocated to our reportable segments or the “All other services and corporate costs” category.  This approach to segment reporting is consistent with the Company’s internal financial reporting and the information used by the chief operating decision maker regarding the performance of our reportable and non-reportable segments.
 **Three months      ended March 31,**  **Six months      ended March 31,** **(in thousands)** **2004**  **2003**  **2004**  **2003**   Revenues:                Inpatient services – external$ 340,871  $ 295,882  $ 673,579  $ 596,088          Rehabilitation services:                External  31,080    29,652    59,015    55,908          Intersegment  19,841    21,359    37,515    42,759          All other services:                External  11,357    12,891    21,926    25,493          Intersegment  7,316    15,778    24,368    32,767          Elimination of intersegment revenues  (27,157)  (37,137)  (61,883)  (75,526)          Total net revenues  383,308    338,425    754,520    677,489      EBITDA (1):                Inpatient services  38,916    26,733    81,081    56,922          Rehabilitation services  6,055    8,407    8,648    16,254          All other services and corporate costs  (15,512)  (14,702)  (30,569)  (25,144)        Other adjustments (2)  (655) –   (828)  1,123               Total EBITDA  28,804    20,438    58,332    49,155      Capital and other:        Depreciation        and amortization  (11,537)  (9,636)  (23,173)  (19,203)Interest        expense  (7,599)  (3,844)  (13,502)  (8,215)Income        tax expense  (3,922)  (2,714)  (8,785)  (8,477)Equity        in net income of unconsolidated affiliates  466    357    1,024    428  Minority        interest  (84) –   (159) –             Income from continuing operations  6,128    4,601    13,737    13,688          Loss from discontinued operations, net of taxes  (554)  (4,593)  (2,157)  (8,991)            Net income$ 5,574  $ 8  $ 11,580  $ 4,697          (1)  GHC defines EBITDA as earnings from continuing operations before equity in net income of unconsolidated affiliates, minority interests, interest, taxes, depreciation and amortization.  EBITDA can be calculated through our statements of operations by adding back interest expense, income taxes, depreciation and amortization, equity in net income of unconsolidated affiliates and minority interests costs to GHC’s income from continuing operations.    (2)  Other adjustments in the three and six months ended March 31, 2004 and the six months ended March 31, 2003 represent gains and (losses) recognized in connection with the early extinguishment of debt.  
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     Total assets by segment at March 31, 2004 and September 30, 2003 were as follows (in thousands):
 **March 31, 2004**  **September 30, 2003**   Inpatient services$ 886,527 $ 846,361 Rehabilitation therapy service  38,002   39,584 All other  319,268   187,354   $ 1,243,797 $ 1,073,299   
**(9)      RestrictedInvestments in Marketable Securities**

     At March 31, 2004 and September 30, 2003, the Company reported restricted investments in marketable securities of $90.6 million and $90.6 million, respectively.   The Company’s restricted investments are held by Liberty Health Corporation, LTD. (“LHC”), GHC’s wholly-owned captive insurance subsidiary incorporated under the laws of Bermuda.  The investments held by LHC are restricted by statutory capital requirements in Bermuda.  In addition, certain of these investments are pledged as security for letters of credit issued by LHC.  As a result of such restrictions and encumbrances, GHC and LHC are precluded from freely transferring funds through inter-company loans, advances or cash dividends.

     The Company’s restricted investments in marketable securities are classified in the unaudited condensed balance sheets within both current and non-current assets.  The current portion of restricted investments in marketable securities represents an estimate of the level of outstanding self-insured losses the Company expects to pay in the succeeding 12 months.

**(10)      StockOption 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 requirementsusing 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.  

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

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 **Three months      ended March 31,**  **Six months ended      March 31,**  **2004**  **2003**  **2004**  **2003**  Net income – as reported$ 5,574  $ 8  $ 11,580  $ 4,697  Deduct: Total stock-based employee        compensation        determined under fair        value        based method for all stock option        awards,        net of related tax effects  (668)  (794)  (1,882)  (1,552) Net income (loss) – pro      forma$ 4,906  $ (786)$ 9,698  $ 3,145   Earnings per share:        Basic        – as reported$ 0.28    $ 0.59    Basic        – pro forma 0.25    0.49   Diluted        – as reported 0.28    0.59   Diluted        – pro forma$ 0.25    $ 0.49     
     The fair value of stock options granted in 2004 is estimated at the grant date using the Black-Scholes option-pricing model with the following assumptions for the 2004 periods.  The fair value of stock options granted by NCI in 2003 and 2002 and allocated to the Company as described above is estimated at the grant date using the Black-Scholes option-pricing model with the following assumptions for the 2003 periods: 
**Three months      ended March 31,   ** ** Six months      ended March 31,    ****2004**  **2003**  **2004**  **2003** Volatility41.90% 47.57% 40.13% 41.15%Expected life      (in years)9.7  7.1  9.7  7.1 Rate of return4.66% 3.80% 3.57% 3.80%Dividend yield0.00% 0.00% 0.00% 0.00%
**(11)      PreferredShare Purchase Plan**

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

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

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

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

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

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     These unaudited condensed consolidating financial statements have been prepared on the same basis of accounting as the consolidated financial statements.  GHC is the borrower under the senior credit facility and the senior subordinated notes described in note 4 – “Long-Term Debt” and incurs interest expense thereunder.  In April 2004, GHC filed a registration statement on Form S-4 with the Securities and Exchange Commission in connection with the exchange offer relating to the senior subordinating notes.  The senior subordinated notes are fully and unconditionally guaranteed on a joint and several basis by certain 100% owned subsidiaries of GHC (Guarantors).  Non-guarantor subsidiaries do not guarantee the seniorsubordinated notes and principally consist of LHC, GHC’s wholly owned insurance captive, and certain separately mortgaged eldercare centers (Non-Guarantors).  The following tables present the unaudited condensed consolidating financial statements of GHC (Parent), the Guarantors and the Non-Guarantors.

**GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATING BALANCE SHEETSMARCH 31, 2004(IN THOUSANDS)**
 **Parent**  **Guarantors**  **Non-guarantors**  **Eliminations**  **Consolidated**  Assets:               Current        assets $ 125,945   $ 210,982   $ 36,990   $ (53) $ 373,864  Property        and equipment, net  20,667    668,303    17,219   –   706,189  Other        long-term assets  63,657    38,334    69,944    (8,191)  163,744  Investments        in subsidiaries  178,182   –  –   (178,182) – Intercompany        receivables  663,832   –  –   (663,832) –   Total assets $ 1,052,283   $ 917,619   $ 124,153   $ (850,258) $ 1,243,797    Liabilities and shareholders’      equity:               Current        liabilities $ 70,654   $ 73,130   $ 38,958   $ (944) $ 181,798  Intercompany        payables –   633,684    30,148    (663,832) – Long-term        debt  416,467    32,850    12,223    (4,443)  457,097  Other        long-term liabilities  37,291    (444)  40,184   –   77,031  Shareholders’        equity  527,871    178,399    2,640    (181,039)  527,871    Total liabilities and shareholders’      equity $ 1,052,283   $ 917,619   $ 124,153   $ (850,258) $ 1,243,797    
**GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATING BALANCE SHEETSSEPTEMBER 30, 2003(IN THOUSANDS)**
 **Parent**  **Guarantors**  **Non-guarantors**  **Eliminations**  **Consolidated**  Assets:               Current        assets$ 10,156  $ 216,523  $ 41,009  $ (2,515)$ 265,173  Property        and equipment, net            16,718              649,783              6,666        –             673,167  Other        long-term assets            46,667              25,343              71,161              (8,212)            134,959  Investments        in subsidiaries            100,011        –      –             (100,011)      – Intercompany        receivables            696,661        –      –             (696,661)      –                Total assets$ 870,213  $ 891,649  $ 118,836  $ (807,399)$ 1,073,299                 Liabilities and shareholders’      equity:               Current        liabilities$ 58,500  $ 67,843  $ 43,649  $ (2,515)$ 167,477  Intercompany        payables    –             674,221              22,440              (696,661)      – Long-term        debt            209,928              36,450              7,815       –             254,193  Other        long-term liabilities            21,224              12,299              37,198              347              71,068  Shareholders’        equity            580,561              100,836              7,734              (108,570)            580,561                 Total liabilities and shareholders’      equity$ 870,213  $ 891,649  $ 118,836  $ (807,399)$ 1,073,299    
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**GENESIS HEALTHCARE CORPORATION  AND SUBSIDIARIES  CONDENSED CONSOLIDATING STATEMENTS OF INCOMETHREE MONTHS ENDED MARCH 31, 2004(IN THOUSANDS)**
 **Parent**  **Guarantors**  **Non-guarantors**  **Eliminations**  **Consolidated**   Net revenues$ 3,394  $ 398,218  $ 8,855  $ (27,159)$ 383,308  Equity in net income (loss) of      subsidiaries            23,263        –       –             (23,263)      – Operating expenses            24,247              344,079              6,449              (27,159)            347,616  Lease expense            480              6,408        –       –             6,888  Depreciation and amortization            1,845              9,015              677        –             11,537  Interest expense            6,483              875              241        –             7,599    Income (loss) before income tax      (benefit) expense,                     equity      in net income (loss) of unconsolidated                     affiliates      and minority interests            (6,398)            37,841              1,488              (23,263)            9,668  Income tax (benefit) expense            (11,310)            14,836              580              (184)            3,922    Income (loss) before equity in      net income (loss) of                    unconsolidated      affiliates and minority interests            4,912              23,005              908              (23,079)            5,746  Equity in net income (loss) of      unconsolidated affiliates            662              135        –             (331)            466  Minority interests      –             58        –             (142)            (84)  Income (loss) from continuing      operations            5,574              23,198              908              (23,552)            6,128  Loss from discontinued operations      –             (545)            (9)      –             (554)  Net income (loss) $ 5,574  $ 22,653  $ 899  $ (23,552)$ 5,574    
**GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATING STATEMENTS OF INCOMETHREE MONTHS ENDED MARCH 31, 2003(IN THOUSANDS)**
 **Parent**  **Guarantors**  **Non-guarantors**  **Eliminations**  **Consolidated**   Net revenues$ 4,125  $ 368,811  $ 2,936  $ (37,447)$ 338,425  Equity in net income (loss) of      subsidiaries            12,906        –       –             (12,906)      – Operating expenses            21,557              324,330              2,755              (37,447)            311,195  Lease expense            733              6,059        –       –             6,792  Depreciation and amortization            (97)            9,201              532        –             9,636  Interest expense            2,813              863              168        –             3,844    Income (loss) before income tax      (benefit) expense,                     equity      in net (loss) income of unconsolidated                     affiliates      and minority interests            (7,975)            28,358              (519)            (12,906)            6,958  Income tax (benefit) expense            (8,247)            11,163              (202)      –             2,714    Income (loss) before equity in      net (loss) income of                    unconsolidated      affiliates and minority interests            272              17,195              (317)            (12,906)            4,244  Equity in net (loss) income of      unconsolidated affiliates            (264)            621        –       –             357  Minority interests      –       –       –       –       –   Income (loss) from continuing      operations            8              17,816              (317)            (12,906)            4,601  Loss from discontinued operations      –             (4,433)            (160)      –             (4,593)  Net income (loss) $ 8  $ 13,383  $ (477)$ (12,906)$ 8    
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**GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATING STATEMENTS OF INCOMESIX MONTHS ENDED MARCH 31, 2004(IN THOUSANDS)**
 **Parent**  **Guarantors**  **Non-guarantors**  **Eliminations**  **Consolidated**   Net revenues $ 6,831   $ 796,368   $ 13,206   $ (61,885) $ 754,520  Equity in net income (loss) of      subsidiaries  45,126   –  –   (45,126) – Operating expenses  47,086    684,753    11,935    (61,885)  681,889  Lease expense  1,073    13,226   –  –   14,299  Depreciation and amortization  3,741    18,189    1,243   –   23,173  Interest expense  11,427    1,602    473   –   13,502    Income (loss) before income tax      (benefit) expense,                     equity      in net income (loss) of unconsolidated                     affiliates      and minority interests  (11,370)  78,598    (445)  (45,126)  21,657  Income tax (benefit) expense  (21,448)  30,655    (174)  (248)  8,785    Income (loss) before equity in      net income (loss) of                     unconsolidated      affiliates and minority interests  10,078    47,943    (271)  (44,878)  12,872  Equity in net income (loss) of      unconsolidated affiliates  1,502   –  –   (478)  1,024  Minority interests –  –  –   (159)  (159)  Income (loss) from continuing      operations  11,580    47,943    (271)  (45,515)  13,737  Loss from discontinued operations –   (2,089)  (68) –   (2,157)  Net income (loss)  $ 11,580   $ 45,854   $ (339) $ (45,515) $ 11,580    
**GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATING STATEMENTS OF INCOMESIX MONTHS ENDED MARCH 31, 2003(IN THOUSANDS)**
 **Parent**  **Guarantors**  **Non-guarantors**  **Eliminations**  **Consolidated**   Net revenues$ 7,974  $ 739,891  $ 5,742  $ (76,118)$ 677,489  Equity in net income (loss) of      subsidiaries            29,762        –       –             (29,762)      – Operating expenses            41,384              645,441              4,051              (76,118)            614,758  Lease expense            1,524              12,052        –       –             13,576  Depreciation and amortization            39              18,094              1,070        –             19,203  Interest expense            5,925              1,953              337        –             8,215    Income (loss) before income tax      (benefit) expense,                     equity      in net (loss) income of unconsolidated                     affiliates      and minority interests            (11,136)            62,351              284              (29,762)            21,737  Income tax (benefit) expense            (16,026)            24,392              111        –             8,477    Income (loss) before equity in      net (loss) income of                     unconsolidated      affiliates and minority interests            4,890              37,959              173              (29,762)            13,260  Equity in net (loss) income of      unconsolidated affiliates            (193)            621        –       –             428  Minority interests      –       –       –       –       –   Income (loss) from continuing      operations            4,697              38,580              173              (29,762)            13,688  Loss from discontinued operations      –             (7,262)            (1,729)      –             (8,991)  Net income (loss) $ 4,697  $ 31,318  $ (1,556)$ (29,762)$ 4,697    
****

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**GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWSIX MONTHS ENDED MARCH 31, 2004(IN THOUSANDS)**
 **Parent**  **Guarantors**  **Non-guarantors**  **Consolidated**  Net cash (used in) provided by      operating activities$ (29,749)$ 105,314  $ 798  $ 76,363  Net cash (used in) provided by      investing activities  (11,843)  (43,873)  (111)  (55,827)Net cash provided by (used in)      financing activities  167,637    (69,495)  (1,511)  96,631   Net increase (decrease) in cash      and equivalents$ 126,045  $ (8,054)$ (824)$ 117,167    
**GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWSIX MONTHS ENDED MARCH 31, 2003(IN THOUSANDS)**
 **Parent**  **Guarantors**  **Non-guarantors**  **Consolidated**  Net cash (used in) provided by      operating activities$ (49,006)$ 73,441  $ 1,373  $ 25,808  Net cash (used in) provided by      investing activities  (2,610)  8,851    (2,180)  4,061  Net cash provided by (used in)      financing activities  54,961    (85,040)  150    (29,928) Net increase (decrease) in cash      and equivalents$ 3,346  $ (2,748)$ (657)$ (59)  
****

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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 enhancedquality payor mix.  For the six months ended March 31, 2004, the average occupancy level in our inpatient facilities was approximately 91%.

     Approximately 89% of our net revenues are generated through inpatient services.  Our inpatient services business is offered through a network of skilled nursing and assisted living centers primarily located in the eastern United States.  Our eldercare centers are concentrated in the states of Pennsylvania, New Jersey, Maryland and Massachusetts.  We currently own, lease, manage or jointly own 216 eldercare facilities, consisting of 193 skilled nursing facilities and 23 assisted living facilities with 26,401 beds, including three skilled nursing facilities with 561 beds that have been identified as held for sale.

     Our rehabilitation therapy business, which represents approximately 8% of our net revenues, provides an extensive range of rehabilitation therapy services to the elderly, including speech pathology, physical therapy and occupational therapy in our eldercare regional market concentrations.  These services are provided by approximately 4,300 licensed rehabilitation therapists and assistants employed or contracted by us at substantially all of the eldercare facilities we operate, as well as by contract to third-party healthcare facilities operated by other providers and through our 13 outpatient rehabilitation agencies.  We also provide other complimentary healthcare services, the revenues for which are included in all otherservices revenues in our segment financial information.

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

     Government funded programs, principally Medicaid and Medicare, provide approximately 80% of our revenue.  Over the past five years, changes in funding from these government sources 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 74% of our total operating expenses.  We compete with other healthcare providers and with non-healthcare providers for both professional and non-professional employees.  In recent years, we and our industry have experienced shortages in qualified professional clinical staff.  While we have been able to retain the services of an adequate number of qualified personnel to staff our facilities and sites of services, we have used expensive temporary nursing agency services to supplement staffing, particularly in fiscal 2001 and 2002.  In fiscal 2003, we implemented programs to improve staff scheduling and retention, and to reduce reliance on overtimecompensation and temporary nursing agency services.  Our efforts resulted in a 36% reduction in the cost of temporary nursing agencies in fiscal 2003 with an additional 45% reduction in year to date fiscal 2004, without experiencing a significant change in overall nursing hours per patient day.  However, if a shortage of nurses or other health care workers occurred in the geographic areas in which we operate, it could adversely affect our ability to attract and retain qualified personnel and could further increase our operating costs, without a corresponding increase in the level of government funded reimbursement.

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

**Revenue Sources**

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

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

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

     The Centers for    Medicare and Medicaid Services, or “CMS”, has indicated that    fiscal year 2005 prospective payment system rates will be announced by mid-summer    2004, and such rates will be promulgated under existing rules providing for    a continuation of the current payment system with provision for a full market    basket inflation increase and certain payment add-ons that were authorized    to compensate for non-therapy ancillaries. While no changes are anticipated    in the fiscal year 2005 rules, CMS affirms that its contractor, the Urban    Institute, is expected to complete its study of the skilled nursing payment    system and that the study recommendations will be incorporated into proposed    fiscal year 2006 rules.

     The recently enacted Medicare Modernization Act suspended application of the therapy caps, as of December 8, 2003 through December 31, 2005.   The therapy caps in place effective September 1, 2003 imposed payment limits to services provided by independent therapists as well as to those provided by outpatient rehabilitation facilities and other forms of rehabilitation agencies.  The suspension does not have retroactive impact upon Medicare beneficiaries who exceeded their caps between September 1, 2003 and December 8, 2003.   Extension of the moratorium removes a significant financial threat to our therapy business for the short term.  Previously, we estimated that the therapy caps would reduce our annual net revenues byapproximately $18.9 million and EBITDA by approximately $4.9 million.  The new law also assures at least a positive 1.5% increase in the therapy fee schedule for each of the next two years through calendar year 2005.  No assurances can be made or given that Congress will extend the moratorium on application of the therapy caps beyond 2005.  As mandated by the law, the General Accounting Office is conducting a study of alternatives to the therapy caps. This report and a related study previously required from CMS will be released in the coming months. 

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

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     The plight of state governments has helped to elevate issues related to Medicaid onto the national agenda.  Last year, Congress passed temporary relief to states providing a 2.9% temporary increase in the Federal Medicaid Assistance Percentage for five quarters estimated to provide states $10 billion in Medicaid relief.  Under current law, this assistance terminates June 30, 2004.  Prospects for Congress to extend the temporary assistance are not encouraging.  Actions to date on state Medicaid budgets affirm that many states are reducing state spending to reflect the loss of the temporary Federal assistance. 

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

     Among the alternative Medicaid funding approaches that states have explored are nursing home provider assessments as tools for leveraging increased Medicaid matching funds. Such initiatives are authorized under the law. Nursing home provider assessments have been implemented in three states where we operate (MA, WV and RI) and two additional states have recently received CMS approvals to implement plans (NC and NH).  Responding to the number of state variations of provider assessment plans, CMS has slowed the processing of such plan amendments and increased review requirements. Two pending state plan amendments (NJ and PA) have been delayed in the CMS slow down.  In both states further delays in the Federal processing of theprovider assessment plan amendments could adversely impact future nursing home funding.

     It is not possible to quantify fully the effect of legislative changes, the interpretation or administration of such legislation or any other governmental initiatives on our business and the business of the customers served by our rehabilitation services business.  Accordingly, there can be no assurance that the impact of any future healthcare legislation will not further adversely affect our business.  There can be no assurance that payments under governmental and private third-party payor programs will be timely, will remain at levels comparable to present levels or will, in the future, be sufficient to cover the costs allocable to patients eligible for reimbursement pursuant to such programs.  Our financial condition andresults 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.

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

**Certain Transactions and Events**

     ***Purchase of Joint Venture Interests***

     On January 5, 2004, we acquired our joint venture partner’s interest in two Massachusetts skilled nursing facilities which we previously managed.  We previously owned a 50% interest in one facility and a 20% interest in the other.  Upon completion of the transaction, we own 100% of both facilities and acquired approximately $6 million of working capital along with the property and equipment of the two skilled nursing facilities, having a total of 318 beds.  The aggregate consideration consisted of $6.0 million in cash and the assumption of debt in the amount of approximately $20.0 million, $12.5 million of which was repaid following completion of the transactions.

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     ***Spin-off***

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

     We and NCI have agreed contractually to continue certain transitional arrangements and practices for a limited time after the spin-off.  In addition, we and NCI have agreed to certain mutually beneficial commercial arrangements intended to reflect terms similar to those that would be agreed to by parties bargaining at arm’s-length.  On May 7, 2004, we and NCI amended the Master Agreement for Pharmacy, Pharmacy Consulting and Related Products and Services to correct a pricing error in the original agreement specifically related to intravenous drugs.  The financial impact of the amendment increases our pharmacy costs $1.3 million on an annualized basis, which hasbeen reflected in our financial results.  The amendment also accelerates by nine months our ability to renegotiate pricing with NCI.  We believe that the amendments offer substantially equal value to both organizations.  Beginning December 1, 2003, the agreement, as amended, extends approximately $6.6 million of annual pharmacy cost savings to GHC, which hasbeen reflected in our financial results.

     ***ElderTrust Transactions***

     On August 13, 2003, we acquired the remaining ownership interest in an unconsolidated joint venture partnership that operates four skilled nursing facilities with 600 skilled nursing and 125 assisted living beds.  Each of the four eldercare centers had been leased to the partnership from ElderTrust, a real estate investment trust from which we leased or subleased 18 of our eldercare facilities and eight managed and jointly owned facilities.  We purchased our joint venture partner’s interest in the unconsolidated partnership for $3.1 million and subsequently purchased one of the four eldercare properties from ElderTrust for $2.6 million.  Additionally, we paid ElderTrust $2.5 million to reduce the annual cash basis andaccrual basis lease expense of one of the three remaining leased facilities by $0.4 million and $0.2 million, respectively.  The lease terms of the three facilities that will continue to be leased from ElderTrust were extended from 2010 to 2015.  On September 11, 2003, we entered into additional agreements with ElderTrust, the principal terms of which are as follows:
•We agreed to purchase two skilled nursing facilities having 210 skilled nursing beds and 67 assisted living beds, and three assisted living facilities having 257 beds, for $24.8 million.  We previously leased these properties from ElderTrust at an annual cash basis and accrual basis lease cost of $2.4 million and $1.5 million, respectively.   By January 2004, we purchased all of the aforementioned eldercare facilities;   •We agreed to pay ElderTrust $32.3 million to reduce annual cash basis and accrual basis lease cost associated with nine properties by $6.9 million and $1.2 million, respectively, and acquire options to purchase seven properties previously subleased to us by ElderTrust.   On October 29, 2003, we paid ElderTrust $2.3 million to reduce the rents of two of the nine eldercare facilities, and on November 7, 2003, we paid ElderTrust the remaining $30.0 million to reduce the rents of the other seven aforementioned eldercare facilities; and   •ElderTrust was paid $5.0 million upon consummation of the spin-off in exchange for ElderTrust’s consent to the assignment of all remaining leases and guarantees from NCI to us, which was accounted for by NCI as a spin-off related expense in its first fiscal quarter of 2004.  
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**Results of Operations**

**Factors Affecting Comparability of Financial Information**

     Our unaudited condensed statements of operations for the three and six months ended March 31, 2003 and for the first two months (through November 30, 2003) of the six months ended March 31, 2004 have been prepared on a basis which reflects the historical financial statements of Genesis HealthCare Corporation assuming that the operations of NCI contributed in the spin-off were organized as a separate legal entity which owned certain net assets of NCI.  

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

     Management believes that the unaudited condensed statement of operations for the three and six months ended March 31, 2004 is generally comparable to the unaudited condensed statement of operations for the three and six months ended March 31, 2003, with the exception of interest expense, income tax expense and depreciation and amortization expense.  This lack of comparability is due to the restructuring of our capital structure following the spin-off and the related incremental interest costs and amortization of deferred financing fees in connection with our new financing arrangements.

**Reasons for Non-GAAP Financial Disclosure**

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

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

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

     Adjusted EBITDA is presented to exclude certain expenses and gains related to one-time transactional events or settlements.  Specifically, in the six months ended March 31, 2003 we excluded a net gain recognized in connection with the early extinguishment of a mortgage debt.

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

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

     The following table reconciles net income to EBITDA and Adjusted EBITDA (in thousands).
 **Three months      ended March 31,**  **Six months ended      March 31,**  **2004**  **2003**  **2004**  **2003**     Net income$ 5,574  $ 8  $ 11,580  $ 4,697  Add back:             Loss      from discontinued operations, net of taxes 554   4,593   2,157   8,991       Equity      in net income of unconsolidated affiliates (466) (357) (1,024) (428)     Minority      interests 84   –  159   –      Income      tax expense  3,922    2,714    8,785    8,477       Interest      expense  7,599    3,844    13,502    8,215       Depreciation      and amortization expense  11,537    9,636    23,173    19,203      EBITDA $ 28,804  $ 20,438  $ 58,332  $ 49,155       Gain      on early extinguishment of debt (1) –  –  –   (1,123)    Adjusted EBITDA$ 28,804  $ 20,438  $ 58,332  $ 48,032      (1) The gain on early      extinguishment of debt is the result of a negotiated discount on a mortgage      loan liquidated by us at the request of the mortgage lender. We excluded      this gain on early extinguishment of debt from the calculation of Adjusted      EBITDA because management does not view such a gain as likely to occur in      the foreseeable future, nor have we encountered a similar transaction in      recent years. While we often may be interested in extinguishing certain      of our mortgage loans by refinancing such loans with senior credit facility      borrowings at more favorable rates of interest, because most of these mortgage      loans require expensive prepayment penalties, it often is not economically      feasible for us to do so. To have a mortgage lender approach GHC to extinguish      mortgage debt so that we are able to negotiate favorable extinguishment      terms is deemed by management to be an unusual event that is reasonably      unlikely to occur within the next two years. We did not exclude from the      calculation of Adjusted EBITDA certain losses on the early extinguishment      of debt recognized in the 2004 periods because GHC has recognized similar      losses in recent years and believes it is likely that similar losses will      be recognized within the next two years. We incurred losses on the early      extinguishment of debt of $0.7 million and $0.8 million for the three and      six months ended March 31, 2004, respectively.     
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**Results of Operations**

***Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003***

     In the current quarter revenues were $383.3 million, an increase of $44.9 million, or 13.3%, over the same period in the prior year.  Of this growth, inpatient services revenue increased by $45.0 million, external rehabilitation therapy services revenue grew $1.4 million and other businesses revenue declined $1.5 million.  

     The $45.0 million of revenue growth in our inpatient services segment is primarily attributed to increased payor rates, acquisitions and the impact of an additional calendar day in the current quarter.  Our average rate per patient day in the current fiscal year was $200 compared to $187 for the comparable period in the prior year.  This increase in the average rate per patient day generated $23.2 million of additional revenues and is principally driven by increased average Medicaid rates ($157 in 2004 versus $145 in 2003) and Medicare rates per patient day ($347 in 2004 versus $313 in 2003).  The 10.8% increase in our Medicare rate per patient day is attributed to the October 1, 2003 upward Medicare rate adjustments of 6.3% andhigher Medicare patient acuity.  Total patient days increased 115,754 to 1,701,186 in the current quarter compared to 1,585,432 in the same period of the prior year.  Of this increase, 97,283 patient days are attributed to the step acquisition of eight eldercare centers, 17,616 are attributed to the current year quarter having one additional calendar day due to a leap year, with the remaining 855 patient days attributed to increased occupancy on a same store basis.  The aforementioned step acquisitions increased revenues by approximately $18.2 million while the impact of the additional calendar day increased revenues by approximately $2.9 million.  Our overall occupancy improved to 91.0% in 2004 from 90.6% in 2003. 

     Approximately $0.6 million of the $1.4 million increase in our external rehabilitation therapy services revenue is the net result of revenues from new customers, with the remaining $0.8 million of revenue growth attributed to net increased sales volume of existing customers. 

      Management’s decision to curtail the operations of our hospitality business led to a $1.2 million decline in other business revenue, with the balance of the decline in other business revenue primarily resulting from reduced management fee revenue due to the step acquisitions of previously managed properties.

     For the current quarter, net income increased to $5.6 million from $8,000 in the same period in the prior year.  Revenue increases of $44.9 million, as discussed in the preceding paragraph, were partially offset by $25.9 million of increased salaries, wages and benefits and $9.9 million of higher other operating costs both as a result of increased revenue levels.  Salaries, wages and benefits as a percentage of revenue improved to 62.4% of revenues in the current fiscal year versus 63.0% in the prior fiscal year.  Such improvement resulted from the inpatient segment, which is the least labor intensive of our segments, representing a larger portion of our overall revenues in 2004 versus 2003 following the step acquisition of eighteldercare centers.  Other operating expenses as a percentage of revenue improved to 28.2% of revenues in 2004 from 29.0% of revenues in 2003.  The improvement in other operating costs as a percentage of revenues was primarily due to a reduction in utilization of higher cost nursing agencies used to supplement our employed labor, partially offset by increased insurance, ancillary and corporate costs as well as increased bad debt expense.   Net income was reduced from increases in interest expense, depreciation and amortization expense and loss on early extinguishment of debt of $3.8 million, $1.9 million and $0.7 million, respectively, as further discussed below.  Net income increased by $4.0 million due to lower after-tax losses of discontinued operations and decreased by $1.2 million dueto increased income tax expense, both of which are further discussed below.

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     For the current quarter, Adjusted EBITDA was $28.8 million compared with $20.4 million in same period of the prior year.  Increased Adjusted EBITDA in the current fiscal year reflects a $12.2 million increase in the Adjusted EBITDA of our inpatient services segment due to $2.0 million of reduced utilization of higher cost nursing agencies, $1.9 million of price reductions extended by our rehabilitation therapy services segment to our inpatient services segment and $1.2 million due to the step acquisition of eight eldercare centers.  The remaining $7.1 million Adjusted EBITDA increase in the inpatient services segment is primarily the result of same store revenue growth net of increased expense levels in support of such increasedrevenues.  The inpatient services increase was offset by a decrease of $2.3 million in the Adjusted EBITDA of our rehabilitation therapy services segment primarily due to certain contract pricing reductions, including the $1.9 million of price reductions extended to our inpatient services segment.  The remaining decrease in Adjusted EBITDA of $1.5 million is principally attributed to increased general and administrative expenses.

     *Capital Costs and Other*

     Depreciation and amortization expense increased $1.9 million to $11.5 million in the current quarter compared to $9.6 million for the same period in the prior year.  The increase is principally attributed to incremental amortization of deferred financing fees following the completion of our new financing arrangements and incremental depreciation expense on information systems in the current year quarter following the spin-off due to higher levels of such equipment attributed to GHC from NCI in excess of estimated allocations made in the prior year quarter carve-out financial statements.

     Interest expense increased $3.8 million in the current quarter to $7.6 million, compared to $3.8 million for the same period in the prior year.  This is principally due to increased debt levels above those allocated in the prior year carve-out financial statements resulting from the issuance of senior subordinated notes in an aggregate principal amount of $225.0 million in October 2003 and our entering into a senior credit facility consisting of a fully drawn $185.0 million term loan in December 2003.

     The loss on early extinguishment of debt of $0.7 million recognized in the current quarter is the result of the early extinguishment of mortgage loans and principally consists of the write-off of unamortized deferred financing fees.

     Income tax expense in current and prior year quarters is estimated using an effective tax rate of approximately 39%.  Income tax expense includes the provision of taxes on both equity in net income of unconsolidated affiliates and minority interests.

     Loss from discontinued operations, net of taxes, was $0.6 million in the current quarter and $4.6 million in the prior year quarter.   The change is due in part to a $1.5 million (after-tax) write-down of assets classified as discontinued in the prior year quarter combined with the relative results of operations of those businesses identified as discontinued operations.   The improvement in the operating results of our discontinued businesses is primarily due to our disposition of certain discontinued operations since the prior year quarter, including the sale of our discontinued Florida properties in the third quarter of the prior fiscal year. 

***Six Months Ended March 31, 2004 Compared to Six Months Ended March 31, 2003***

     In the current year-to-date period revenues were $754.5 million, an increase of $77.0 million, or 11.4%, over the same period in the prior year.  Of this growth, inpatient services revenue increased by $77.5 million, external rehabilitation therapy services revenue grew $3.1 million and other businesses revenue declined $3.6 million. 

      The $77.5 million of revenue growth in our inpatient services segment is primarily attributed to increased payor rates and acquisitions.  $30.4 million of the increase in inpatient services revenue is due to step acquisitions of eight eldercare centers.   The balance of the increase in inpatient services revenue is primarily due to increased average rates per patient day.  Our average rate per patient day in the current fiscal year was $198 compared to $186 for the comparable period in the prior year.  This increase in the average rate per patient day is principally driven by increased average Medicaid rates ($156 in 2004 versus $145 in 2003) and Medicare rates ($347 in 2004 versus $312 in 2003).  The 11.2% increase in ourMedicare rate per patient day is attributed to the October 1, 2003 upward Medicare rate adjustments of 6.3% and higher Medicare patient acuity.  Total patient days increased 185,882 to 3,397,861 in the current year-to-date period compared to 3,211,979 in the same period of the prior year.  Of this increase, 168,023 patient days are attributed to the step acquisition of eight eldercare centers, 17,616 are attributed to the current year-to-date period having one additional calendar day due to a leap year, with the remaining 243 patient days attributed to increased occupancy on a same store basis.  Our overall occupancy improved to 91.1% in 2004 from 90.9% in 2003.  

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     Approximately $0.3 million of the $3.1 million increase in our external rehabilitation therapy services revenue is the net result of revenues from new customers, with the remaining $2.8 million of revenue growth attributed to net increased sales volume of existing customers.  

     Management’s decision to curtail the operations of our hospitality business led to a $2.1 million decline in other business revenue, with the balance of the decline in other business revenue primarily resulting from reduced management fee revenue due to the step acquisitions of previously managed properties.

     For the current year-to-date period, net income increased to $11.6 million from $4.7 million in the same period in the prior year.  Revenue increases of $77.0 million, as discussed in the preceding paragraph, were partially offset by $46.0 million of increased salaries, wages and benefits and $19.2 million of other operating expenses both as a result of increased revenue levels.  Salaries, wages and benefits as a percentage of revenue improved to 61.9% of revenues in the current year-to-date period versus 62.2% in the prior year.  Such improvement resulted from the inpatient segment, which is the least labor intensive of our segments, representing a larger portion of our overall revenues in 2004 versus 2003 following the stepacquisition of eight eldercare centers.  Other operating expenses as a percentage of revenue improved to 28.3% of revenues in 2004 from 28.7% of revenues in 2003.  The improvement in other operating costs as a percentage of revenues was primarily due to a reduction in utilization of higher cost nursing agencies used to supplement our employed labor, partially offset by increased insurance, ancillary and corporate costs as well as increased bad debt expense.   Net income was reduced from increases in lease expense, interest expense, depreciation and amortization expense and loss (gain) on early extinguishment of debt of $0.7 million, $5.3 million, $4.0 million and $2.0 million, respectively, as further discussed below.  Net income increased by $6.8 million due to lower after-tax losses ofdiscontinued operations, increased $0.4 million due to higher earnings of less than 100% owned subsidiaries and decreased by $0.3 million due to increased income tax expense, each of which is further discussed below.

     For the current year-to-date period, Adjusted EBITDA was $58.3 million compared with $48.0 million in same period of the prior year.  Increased Adjusted EBITDA in the current fiscal year reflects a $24.2 million increase in the Adjusted EBITDA of our inpatient services segment due to $4.3 million of reduced utilization of higher cost nursing agencies, $3.8 million of price reductions extended by our rehabilitation therapy services segment to our inpatient services segment and $7.6 million due to the step acquisition of eight eldercare centers.  The remaining $8.5 million Adjusted EBITDA increase in the inpatient services segment is primarily the result of same store revenue growth net of increased expense levels in support ofsuch increased revenues.  The inpatient services increase was offset by a decrease of $7.6 million in the Adjusted EBITDA of our rehabilitation therapy services segment primarily due to certain contract pricing reductions, including the $3.8 million of price reductions extended to our inpatient services segment and an unfavorable shift in patient mix in the preceding quarter resulting from the September 1, 2003 implementation of the therapy caps (which was subsequently rescinded in December 2003).  The remaining decrease in Adjusted EBITDA of $6.3 million is principally attributed to increased general and administrative costs.

     *Capital Costs and Other*

     Lease expense increased by $0.7 million to $14.3 million in the current year-to-date period from $13.6 million in the prior year-to-date period primarily due to the step acquisitions of eldercare centers.

     Depreciation and amortization expense increased $4.0 million to $23.2 million in the current year-to-date period compared to $19.2 million for the same period in the prior year.  The increase is principally attributed to incremental amortization of deferred financing fees following the completion of our new financing arrangements and incremental depreciation expense on information systems in the current year quarter following the spin-off due to higher levels of such equipment attributed to GHC from NCI in excess of estimated allocations made in the prior year year-to-date carve-out financial statements.

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     Interest expense increased $5.3 million in the current year-to-date period to $13.5 million, compared to $8.2 million for the same period in the prior year, principally due to increased debt levels above those allocated in the prior year carve-out financial statements resulting from the issuance of senior subordinated notes in an aggregate principal amount of $225.0 million in October 2003 and our entering into a senior credit facility consisting of a fully drawn $185.0 million term loan in December 2003.

     The loss on early extinguishment of debt of $0.8 million recognized in the current year-to-date period is the result of the early extinguishment of mortgage loans and principally consists of the write-off of unamortized deferred financing fees, while the gain on early extinguishment of debt of $1.1 million recognized in the same period in the prior year is the result of a negotiated discount on a mortgage loan liquidated by us at the request of the mortgage lender.  

     Loss from discontinued operations, net of taxes, was $2.2 million in the current year-to-date period and $9.0 million in the prior year.   The change is due in part to an $0.4 million (after-tax) write-down of assets classified as discontinued in the current year-to-date period compared to $3.6 million (after-tax) recorded in the prior year period, combined with the relative results of operations of those businesses identified as discontinued operations.   The improvement in the operating results of our discontinued businesses is primarily due to our disposition of certain discontinued operations since the prior year year-to-date period, including the sale of our discontinued Florida properties in the third quarter of the priorfiscal year. 

     Income tax expense in both the current and prior year-to-date periods is estimated using an effective tax rate of approximately 39%.  Income tax expense includes the provision of taxes on both equity in net income of unconsolidated affiliates and minority interests.

     Equity in net income of unconsolidated affiliates improved by $0.6 million in the current year-to-date period versus the same period in the prior year due to improved operating results of certain unconsolidated eldercare centers.

**Liquidity and Capital Resources**

***Working Capital and Cash Flows***

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

     Our operating cash flow is used to finance trade accounts receivable, fund capital expenditures, service our indebtedness and make selective acquisitions.  Financing trade accounts receivable is necessary because, on average, the customers and payors for our services do not pay us as quickly as we pay our vendors and employees for their services.  Capital expenditures consist primarily of betterments and expansion of eldercare centers and investments in computer hardware and software.  In order to maintain our physical properties in a suitable condition to conduct our business and meet regulatory requirements, we expect for the foreseeable future to incur capital expenditure costs at levels approximating $35 million annually.Following the spin-off, we are highly leveraged and, consequently, a significant portion of our operating cash flow will be used to meet our debt service requirements including payments that may be required under the excess cash flow recapture requirements of our senior credit facility.  See “–New Financing Arrangements” below. At the end of each fiscal year, we are required to prepare an excess cash flow calculation as defined in the senior credit agreement.  Of the amount determined as excess cash flow, a percentage is to be paid to our senior lenders in the form of a mandatory payment on December 31 of each year. There can be no assurances of the final excess cash flow recapturerequirement until the preparation of our fiscal year end financial statements.  Our cash flow from operations for the six months ended March 31, 2004 was $76.4 million, including $24.0 million of cash generated from the timing of payments to vendors and employees, which is subject to fluctuations.

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

     At March 31, 2004, we had restricted investments in marketable securities of $90.6 million, which are held by Liberty Health Corp., LTD., our wholly-owned captive insurance subsidiary incorporated under the laws of Bermuda.  The investments held by Liberty Health Corp. are restricted by statutory capital requirements in Bermuda.  As a result of such restrictions and encumbrances, we and Liberty Health Corp. are precluded from freely transferring funds through intercompany loans, advances or cash dividends.

     Cash from net investing transactions for the six months ended March 31, 2004 was a net use of cash of $55.8 million, attributed to $14.8 million of capital expenditures and a use of cash of $48.8 million primarily related to the ElderTrust transactions.  Also in the six months ended March 31, 2004, we received cash proceeds of $7.8 million from the sale of three eldercare centers located in the state of Wisconsin.   We do not expect to receive significant cash proceeds in fiscal 2004 from asset sales.

     Cash from net financing activities for the six months ended March 31, 2004 was a net source of cash of $96.6 million, attributed to $400.7 million of net proceeds from our new financing arrangements, offset by the use of $218.5 million to repay indebtedness of NCI, $27.2 million to repay mortgage debt of five eldercare centers, $2.9 million of scheduled principal payments and $55.5 million of cash transferred to NCI in connection with the spin-off.

     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. On May 14, 2004, we made a $25 million prepayment of the term loan portion of our senior credit facility.

***New Financing Arrangements***

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

     In October 2003, we issued 8% senior subordinated notes in an aggregate principal amount of $225.0 million with a term of ten years.  On December 1, 2003, we entered into a senior credit facility that provides for a term loan of approximately $185.0 million, which was fully drawn at the consummation of the spin-off, and a revolving credit facility of $75.0 million.  As of May 12, 2004, there was $72.9 million of available credit under the revolving credit facility after giving effect to $2.1 million in outstanding letters of credit issued under the revolving credit facility.  The term loan has a seven year term and amortizes one percent per year through year six.  The revolving credit facility has a five year term.  Our seniorcredit facility includes an excess cash flow recapture requirement that may increase the required principal payments above contractual minimum amounts each year depending on a defined formula in the senior credit agreement.  The term loan portion of our senior credit facility has a rate of interest of LIBOR plus 2.75% or a base rate plus an applicable margin.  The revolving portion of our senior credit facility has a rate of interest of LIBOR plus 2.75% or a base rate plus an applicable margin on any borrowings thereunder, and a commitment fee on the revolving portion of 0.50% on any unused commitment.

     The agreements and instruments governing our new financing arrangements contain various restrictive covenants that, among other things, require us to comply with or maintain certain financial tests and ratios and restrict our ability to:
•incur more debt;   •pay dividends, purchase company stock or make other distributions;    •make certain investments;
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•create liens;   •enter into transactions with affiliates;    •make acquisitions;    •merge or consolidate; and   •transfer or sell assets.
     Our new financing arrangements require us to maintain compliance with certain financial and non-financial covenants, including minimum EBITDAR (earnings before interest, tax, depreciation, amortization and rents), limitations on capital expenditures, maximum leverage ratios, minimum fixed charge coverage ratios and minimum net worth.

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

***Contractual Obligations and Commitments***

     We have future obligations for debt repayments and future minimum rentals under operating leases.  The obligations as of March 31, 2004 are summarized as follows (in thousands):
  **Payments Due      by Period**  **Contractual Obligation** **Total**  **Less than 1 year**  **1-3 years**  **4-5 years**  **Thereafter**  Long-term debt$ 461,761 $ 4,664 $ 10,005 $ 10,091 $ 437,001 Operating leases      73,056       15,935       27,717       20,985       8,419   $ 534,817 $ 20,599 $ 37,722 $ 31,076 $ 445,420  
***Off-Balance Sheet Commitments***

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

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

     We have extended $3.9 million in working capital lines of credit to certain jointly owned and managed companies, of which $1.6 million were unused at March 31, 2004.  Credit risk represents the accounting loss that would be recognized at the reporting date if the affiliate companies were unable to repay any amounts utilized under the working capital lines of credit.  Commitments to extend credit to third parties are conditional agreements generally having fixed expiration or termination dates and specific interest rates and purposes.

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     We have posted $2.1 million of outstanding letters of credit.  The letters of credit guarantee performance to third parties of various trade activities.  The letters of credit are not recorded as liabilities on our balance sheet unless they are probable of being utilized by the third party.  The financial risk approximates the amount of outstanding letters of credit.  

     We are a party to joint venture partnerships whereby our ownership interests are 50% or less of the total capital of the partnerships.  We account for these partnerships using the equity method of accounting and, therefore, the assets, liabilities and operating results of these partnerships are not consolidated with ours.  The carrying value of our investment in joint venture partnerships is $8.1 million at March 31, 2004.  Although we are not contractually obligated to fund operating losses of these partnerships, in certain cases, we have extended credit to such joint venture partnerships in the past and may decide to do so in the future in order to realize economic benefits from our joint venture relationship.  Managementassesses the creditworthiness of such partnerships in the same manner it does other third-parties.  We have provided $8.7 million of financial guarantees related to loan commitments of four jointly owned and managed companies.  The guarantees are not recorded as liabilities on our balance sheet unless we are required to perform under the guarantee.  Credit risk represents the accounting loss that would be recognized at the reporting date if counter-parties failed to perform completely as contracted.  The credit risk amounts are equal to the contractual amounts, assuming that the amounts are fully advanced and that no amounts could be recovered from other parties.

***Income Taxes***

     At March 31, 2004, we had net deferred tax liabilities, inclusive of tax benefits related to net operating loss carry-forwards.  Because management believes it is more likely than not that the tax benefits related to pre-emergence net operating loss carry-forwards will not be realized, the related deferred tax asset remains subject to a 100% valuation allowance. The ultimate net operating loss carry-forwards available to us will not be determinable until the preparation of NCI’s federal tax return for its fiscal year ended September 30, 2004 is completed.  Pursuant to SOP 90-7, future utilization of deferred tax assets existing at the October 2, 2001 bankruptcy emergence date will be applied first as a reduction ofidentifiable intangible assets and, then, as an increase to shareholders’ equity.

**Critical Accounting Policies**

     We consider an accounting policy to be critical if it is important to our financial condition and results, and requires significant judgment and estimates on the part of management in its application. Our critical accounting estimates and the related assumptions are evaluated periodically as conditions warrant, and changes to such estimates are recorded as new information or changed conditions require revision. Application of the critical accounting policies requires management’s significant judgments, often as the result of the need to make estimates of matters that are inherently uncertain. If actual results were to differ materially from the estimates made, the reported results could be materially affected. We believe that thefollowing represents our critical accounting policies, which are described in our Annual Report on Form 10-K for the fiscal year ended September 30, 2003:
 •Allowance for Doubtful Accounts; •Loss Reserves for Certain Self-Insured Programs; •Revenue Recognition / Contractual Allowances;      and •Long-lived Asset Impairments.
     During the current quarter, we did not make any material changes to our estimates or methods by which estimates are derived with regard to our critical accounting policies.  

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**Other**

     We manage the operations of 54 eldercare centers. 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 six months ended March 31, 2004, we billed our managed clients $54.9million for such labor related costs compared to $64.6 million for the comparable period in the prior year.

**Seasonality**

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

**Impact of Inflation**

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

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

     We are exposed to the impact of interest rate changes. 

     At March 31, 2004, we have $184.5 million of debt subject to variable rates of interest.  A 1% increase in LIBOR would result in an increase to our interest expense of $1.8 million annually.

     At March 31, 2004, we have $126.0 million of cash and equivalents that are affected by market rates of interest.  A 1% change in the rate of interest would result in a change in interest income on cash and equivalents of $1.3 million annually.

     At March 31, 2004, we held $15.4 million of restricted investments in marketable securities that are affected by market rates of interest.  A 1% change in the rate of interest would result in a change in interest income on those investments of $0.2 million annually.

**ITEM 4:      Controls  and Procedures**

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

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

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****
**PART II:****OTHER INFORMATION**  **ITEM 1:****Legal Proceedings –**        Haskell et al. v. Goldman Sachs & Co. et al        We understand that NeighborCare, Inc., our former parent, is the defendant in an action brought by former investors in NeighborCare, Inc. on January 27, 2004 in the Supreme Court of New York, County of New York.  The plaintiffs collectively held over $205 million in subordinated debentures prior to the filing by NeighborCare, Inc. and substantially all of our subsidiaries of a Chapter 11 bankruptcy petition in 2000.  The claim alleges fraud and grossly negligent misrepresentation by defendants NeighborCare, Inc., Goldman Sachs & Co., Mellon Bank, N.A., Highland Capital Management, LP, and George V. Hager, Jr., our Chief Executive Officer (and former Chief Financial Officer of NeighborCare, Inc. prior to the spin-off), in connection withthe Bankruptcy Court’s approval of the plan of reorganization confirmed by the Bankruptcy Court in 2001 which canceled the subordinated debentures.  The plaintiffs seek to recover $200 million plus interest costs and fees.  The action has been removed to the Bankruptcy Court for the District of Delaware. Although NeighborCare Inc. has advised us that they believe we may be responsible for a portion of any liability relating to this case, no claim has been made against us by any of the parties to the action to date; accordingly, we have not made any determination with respect to any liability relative to this case, if any at all.  **ITEM 2:****Changes in Securities and      Use of Proceeds –**None  **ITEM 3:****Defaults Upon Senior Securities      –**None  **ITEM 4:****Submission of Matters to a      Vote of Security Holders –**None   **ITEM 5:****Other Information –**None
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**ITEM 6:** **Exhibits and Reports      on Form 8-K**                    (a)      Exhibits         10.1 Amendment No. 1 dated      May 7, 2004 to the Master Pharmacy, Pharmacy Consulting and Related Products      and Services.         31.1  Certification of      George V. Hager, Jr., Chief Executive Officer, of the Company dated May      14, 2004 pursuant to Rule 13a – 14(a)/15d – 14(a) of the Securities      Exchange Act of 1934, as amended, as adopted pursuant to Sections 302 and      404 of the Sarbanes-Oxley Act of 2002.         31.2  Certification of      James V. McKeon, Chief Financial Officer, of the Company dated May 14, 2004      pursuant to Rule 13a – 14(a)/15d – 14(a) of the Securities Exchange      Act of 1934, as amended, as adopted pursuant to Sections 302 and 404 of      the Sarbanes-Oxley Act of 2002.         32.1  Certification of      George V. Hager, Jr., Chief Executive Officer, of the Company dated May      14, 2004 pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section      906 of the Sarbanes-Oxley Act of 2002.         32.2  Certification of      James V. McKeon, Chief Financial Officer, of the Company dated May 14, 2004      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of      the Sarbanes-Oxley Act of 2002.         (b)      Reports on Form 8-K           •     Current      Report on the Form 8-K filed on February 11, 2004 announcing financial results      for the          quarter      ended December, 31 2003
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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: May 14, 2004 James V. McKeon                            James V. McKeon,      Chief Financial Officer  Date: May 14, 2004 George V. Hager, Jr.                         George V. Hager, Jr.,      Chief Executive Officer and Chairman of the Board
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