UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549





FORM 10-Q/A

(Amendment
No. 1)







|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended December 31, 2008

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 1-12607





SUNLINK HEALTH SYSTEMS, INC.

(Exact name of registrant as specified in its
charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Ohio                                                           |  | 31-0621189                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)

900 Circle 75 Parkway, Suite 1120, Atlanta, Georgia 30339

(Address of principal executive offices)

(Zip Code)

(770) 933-7000

(Registrants telephone number, including area code)





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 filings requirements for the past 90 days.    Yes  x    No   ̈

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post
such files).     Yes   ̈    No   ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definition of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.



|                        |  |                                                  |  |                           |  |  
|----------------------- |  | ------------------------------------------------ |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈                                                |  | Accelerated filer         |  |  ̈
|                        |  |                                                  | 
|Non-accelerated filer   |  |  ̈  (Do not check if a smaller reporting company) |  | Smaller reporting company |  | x

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).    Yes   ̈    No  x

The number of Common Shares, without par value, outstanding as of February 13, 2009 was 7,998,432.









---

Amendment No. 1 Overview

SunLink Health Systems, Inc. (SunLink) is filing this Amendment No. 1 of Form 10-Q/A to our Form 10-Q for the three and six month periods ended December 31, 2008 to reflect the restatement of our
previously issued condensed consolidated financial statements and other information to correct the impact of non-cash accounting errors at its Carmichaels Cashway Pharmacy, Inc. subsidiary (Carmichael). For further discussion of
the restatement, see Note 1. to our condensed consolidated financial statements and Item 4 contained herein.

In May 2009,
Carmichaels then Chief Financial Officer (CFO) resigned. In June 2009, Carmichael hired a new CFO and in July 2009, the new Carmichael CFO and SunLinks CFO began an investigation into unresolved accounting discrepancies
between Carmichaels accounts receivable detail and its general ledger. When the new Carmichael CFO was unable to resolve the discrepancies, SunLink, in July 2009, engaged an outside accountant (the Investigation Accountant)
to investigate the discrepancies. After being informed of the preliminary results of the Investigation Accountants investigation, the Company informed the Audit Committee of SunLinks Board of Directors (the Audit
Committee) of the preliminary findings by such Investigation Accountant. Based on such preliminary findings, on August 28, 2009 SunLink concluded that the impact of the Carmichael level accounting irregularities made it likely that
SunLinks financial statements for the first, second and third fiscal quarters ended September 30, 2008, December 31, 2008 and March 31, 2009, respectively, should not be relied on.

As we previously disclosed in our Form 8-K filed on August 28, 2009, SunLink reached its conclusion on August 28, 2009, based on information
reviewed by SunLinks management and SunLinks Audit Committee and SunLinks independent registered public accounting firm (the Public Accountants), including information provided by the Investigation Accountant.
SunLink concluded that Carmichaels financial statements, among other things, had misstated the Subsidiarys accounts receivable during the referenced periods due to accounting calculation errors and improper period-end cut-off of certain
accounts receivable systems and, as a result thereof, the SunLink financial statements for the quarters ended September 30, 2008, December 31, 2008 and March 31, 2009 contained errors in the amount of accounts receivable, net
income (loss), revenues, provision for bad debts, allowance for doubtful accounts and contractual allowances. The Public Accountants concur with SunLinks conclusion with respect to the restatement of the condensed consolidated financial
statements for the quarter ended September 30, 2008, December 31, 2008 and March 31, 2009.

The information contained in this Amendment,
including the condensed consolidated financial statements and the notes hereto, amends Items 1 and 2 of Part I and Item 4T of Part II of the originally filed Quarterly Report on Form 10-Q for the three and six month periods ended
December 31, 2008 and no other items in our originally filed Form 10-Q are hereby amended. This Form 10-Q/A does not materially modify or update other disclosures in the original Form 10-Q, including the nature and character of such disclosure
to reflect events occurring after February 13, 2009, the filing date of the original Form 10-Q. Accordingly, this Form 10-Q/A should be read in conjunction with our filings made with the Securities and Exchange Commission. In addition,
currently dated certifications from our Chief Executive Officer and Chief Financial Officer have been included as exhibits to this amendment.



2



---

The following table sets forth the effects of the restatement on certain line items within our previously
reported condensed consolidated financial statements (in thousands, except per share data):

(in thousands, except per share amounts)

Condensed Consolidated Statements of Earnings



|                                                                               |  |                           |         |   |                                      |   |         |  
|------------------------------------------------------------------------------ |  | ------------------------- | ------- | - | ------------------------------------ | - | ------- | -
|                                                                               |  | Three Months Ended        |        
|                                                                               |  | December 31, 2008Restated |         |   | December 31, 2008Previously Reported |  
|Net Revenues                                                                   |  | $                         | 49,758  |   |                                      | $ | 50,129  |  
|Provision for bad debts                                                        |  |                           | 5,987   |   |                                      |   | 5,503   |  
|Operating Profit                                                               |  |                           | 837     |   |                                      |   | 1,692   |  
|Earnings (Loss) from continuing operations before income taxes                 |  |                           | (245    | ) |                                      |   | 610     |  
|Earnings (Loss) from continuing operations                                     |  |                           | (161    | ) |                                      |   | 366     |  
|Net Earnings (Loss)                                                            |  |                           | (264    | ) |                                      |   | 263     |  
|Earnings (Loss) per Share                                                      |  |                           |         |   |                                      |   |         |  
|Continuing Operations:                                                         |  |                           |         |   |                                      |   |         |  
|Basic                                                                          |  |                           | (0.02   | ) |                                      |   | 0.05    |  
|Diluted                                                                        |  |                           | (0.02   | ) |                                      |   | 0.05    |  
|Net Earnings (Loss):                                                           |  |                           |         |   |                                      |   |         |  
|Basic                                                                          |  |                           | (0.03   | ) |                                      |   | 0.03    |  
|Diluted                                                                        |  | $                         | (0.03   | ) |                                      | $ | 0.03    |  
|                                                                               | 
|                                                                               |  | Six Months Ended          |        
|                                                                               |  | December 31, 2008Restated |         |   | December 31, 2008Previously Reported |  
|Net Revenues                                                                   |  | $                         | 96,436  |   |                                      | $ | 96,867  |  
|Provision for bad debts                                                        |  |                           | 11,732  |   |                                      |   | 11,122  |  
|Operating Profit                                                               |  |                           | 915     |   |                                      |   | 1,956   |  
|Loss from continuing operations before income taxes                            |  |                           | (1,414  | ) |                                      |   | (373    | )
|Loss from continuing operations                                                |  |                           | (764    | ) |                                      |   | (122    | )
|Net Loss                                                                       |  |                           | (928    | ) |                                      |   | (286    | )
|Loss per Share                                                                 |  |                           |         |   |                                      |   |         |  
|Continuing Operations:                                                         |  |                           |         |   |                                      |   |         |  
|Basic                                                                          |  |                           | (0.10   | ) |                                      |   | (0.02   | )
|Diluted                                                                        |  |                           | (0.10   | ) |                                      |   | (0.02   | )
|Net Loss:                                                                      |  |                           |         |   |                                      |   |         |  
|Basic                                                                          |  |                           | (0.12   | ) |                                      |   | (0.04   | )
|Diluted                                                                        |  | $                         | (0.12   | ) |                                      | $ | (0.04   | )
|                                                                               |  |                          
|(in thousands, except per share amounts) Condensed Consolidated Balance Sheets |  |                           |         |   |                                      |   |         |  
|                                                                               |  |                          
|                                                                               |  | December 31, 2008Restated |         |   | December 31, 2008Previously Reported |  
|Receivables - net                                                              |  | $                         | 20,728  |   |                                      | $ | 21,769  |  
|Prepaid expenses and other                                                     |  |                           | 3,854   |   |                                      |   | 3,455   |  
|Total assets                                                                   |  |                           | 108,557 |   |                                      |   | 109,199 |  
|Retained earnings                                                              |  | $                         | 24,623  |   |                                      |   | 25,265  |  



3



---

PART I. FINANCIAL INFORMATION



|ITEM 1. | FINANCIAL STATEMENTS
|------- | --------------------

SUNLINK HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

(unaudited)



|                                                                                            |  |                  |         |   |              |   |         |  
|------------------------------------------------------------------------------------------- |  | ---------------- | ------- | - | ------------ | - | ------- | -
|                                                                                            |  | December 31,2008 |         |   | June 30,2008 |  
|                                                                                            |  | (Restated)       |         |   |              |  
|ASSETS                                                                                      |  |                  |         |   |              |   |         |  
|Current Assets:                                                                             |  |                  |         |   |              |   |         |  
|Cash and cash equivalents                                                                   |  | $                | 1,122   |   |              | $ | 1,716   |  
|Receivables - net                                                                           |  |                  | 20,728  |   |              |   | 20,052  |  
|Inventory                                                                                   |  |                  | 4,838   |   |              |   | 4,711   |  
|Deferred income tax asset                                                                   |  |                  | 4,800   |   |              |   | 5,449   |  
|Prepaid expenses and other                                                                  |  |                  | 3,854   |   |              |   | 3,244   |  
|                                                                                            |  |                  |         |   |              |   |         |  
|Total Current Assets                                                                        |  |                  | 35,342  |   |              |   | 35,172  |  
|                                                                                            |  |                 
|Property, Plant and Equipment, at cost                                                      |  |                  | 71,149  |   |              |   | 71,205  |  
|Less accumulated depreciation and amortization                                              |  |                  | 22,519  |   |              |   | 19,985  |  
|                                                                                            |  |                  |         |   |              |   |         |  
|Property, Plant and Equipment - net                                                         |  |                  | 48,630  |   |              |   | 51,220  |  
|                                                                                            |  |                 
|Intangible assets - net                                                                     |  |                  | 12,975  |   |              |   | 13,427  |  
|Goodwill                                                                                    |  |                  | 9,453   |   |              |   | 9,453   |  
|Other assets                                                                                |  |                  | 2,157   |   |              |   | 2,352   |  
|                                                                                            |  |                  |         |   |              |   |         |  
|                                                                                            |  |                 
|Total Assets                                                                                |  | $                | 108,557 |   |              | $ | 111,624 |  
|                                                                                            |  |                  |         |   |              |   |         |  
|                                                                                            |  |                 
|LIABILITIES AND SHAREHOLDERS EQUITY                                                        |  |                  |         |   |              |   |         |  
|Current Liabilities:                                                                        |  |                  |         |   |              |   |         |  
|Accounts payable                                                                            |  | $                | 9,385   |   |              | $ | 8,691   |  
|Revolving advances                                                                          |  |                  | 5,500   |   |              |   | 3,900   |  
|Third-party payor settlements                                                               |  |                  | 955     |   |              |   | 1,664   |  
|Current maturities of long-term debt                                                        |  |                  | 1,846   |   |              |   | 1,844   |  
|Current maturities of subordinated long-term debt                                           |  |                  | 300     |   |              |   | 150     |  
|Accrued payroll and related taxes                                                           |  |                  | 4,781   |   |              |   | 6,012   |  
|Income taxes                                                                                |  |                  |        |   |              |   | 555     |  
|Current liabilities of Mountainside Medical Center                                          |  |                  | 594     |   |              |   | 600     |  
|Other accrued expenses                                                                      |  |                  | 3,960   |   |              |   | 3,653   |  
|                                                                                            |  |                  |         |   |              |   |         |  
|Total Current Liabilities                                                                   |  |                  | 27,321  |   |              |   | 27,069  |  
|                                                                                            |  |                 
|Long-Term Liabilities:                                                                      |  |                  |         |   |              |   |         |  
|Long-term debt                                                                              |  |                  | 31,784  |   |              |   | 33,118  |  
|Subordinated long-term debt                                                                 |  |                  | 2,700   |   |              |   | 2,850   |  
|Noncurrent liability for professional liability risks                                       |  |                  | 2,804   |   |              |   | 2,506   |  
|Noncurrent deferred income tax liabilities                                                  |  |                  | 1,971   |   |              |   | 3,132   |  
|Other noncurrent liabilities                                                                |  |                  | 1,458   |   |              |   | 2,090   |  
|                                                                                            |  |                  |         |   |              |   |         |  
|Total Long-term Liabilities                                                                 |  |                  | 40,717  |   |              |   | 43,696  |  
|                                                                                            |  |                 
|Commitments and Contingencies                                                               |  |                  |         |   |              |   |         |  
|Minority interest                                                                           |  |                  | 615     |   |              |   | 615     |  
|                                                                                            |  |                 
|Shareholders Equity:                                                                       |  |                  |         |   |              |   |         |  
|Preferred shares, authorized and unissued, 2,000 shares                                     |  |                  |         |   |              |   |         |  
|Common shares, without par value:                                                           |  |                  |         |   |              |   |         |  
|Issued and outstanding, 7,998 shares at December 31, 2008 and 7,932 shares at June 30, 2008 |  |                  | 3,999   |   |              |   | 3,966   |  
|Additional paid-in capital                                                                  |  |                  | 11,532  |   |              |   | 11,310  |  
|Retained earnings                                                                           |  |                  | 24,623  |   |              |   | 25,551  |  
|Accumulated other comprehensive loss                                                        |  |                  | (250    | ) |              |   | (583    | )
|                                                                                            |  |                  |         |   |              |   |         |  
|Total Shareholders Equity                                                                  |  |                  | 39,904  |   |              |   | 40,244  |  
|                                                                                            |  |                  |         |   |              |   |         |  
|Total Liabilities and Shareholders Equity                                                  |  | $                | 108,557 |   |              | $ | 111,624 |  
|                                                                                            |  |                  |         |   |              |   |         |  

See notes to condensed consolidated financial statements.



4



---

SUNLINK HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(in thousands, except per share amounts)

(unaudited)



|                                                               |  |                                |        |   |                              |   |        |            |  |   |        |   |  |   |        |  
|-------------------------------------------------------------- |  | ------------------------------ | ------ | - | ---------------------------- | - | ------ | ---------- |  | - | ------ | - |  | - | ------ | -
|                                                               |  | THREE MONTHS ENDEDDECEMBER 31, |        |   | SIX MONTHS ENDEDDECEMBER 31, |  
|                                                               |  | 2008                           |        |   | 2007                         |   |        | 2008       |  |   | 2007   |  
|                                                               |  | (Restated)                     |        |   |                              |   |        | (Restated) |  |   |        |  
|Net Revenues                                                   |  | $                              | 49,758 |   |                              | $ | 36,969 |            |  | $ | 96,436 |   |  | $ | 75,205 |  
|                                                               |  |                                |        |  
|Costs and Expenses:                                            |  |                                |        |   |                              |   |        |            |  |   |        |   |  |   |        |  
|Cost of Goods Sold                                             |  |                                | 9,231  |   |                              |   |       |            |  |   | 15,295 |   |  |   |       |  
|Salaries, wages and benefits                                   |  |                                | 19,511 |   |                              |   | 17,589 |            |  |   | 39,601 |   |  |   | 35,414 |  
|Provision for bad debts                                        |  |                                | 5,987  |   |                              |   | 5,216  |            |  |   | 11,732 |   |  |   | 11,845 |  
|Supplies                                                       |  |                                | 3,387  |   |                              |   | 3,745  |            |  |   | 7,113  |   |  |   | 7,525  |  
|Purchased services                                             |  |                                | 2,870  |   |                              |   | 2,472  |            |  |   | 5,922  |   |  |   | 5,023  |  
|Other operating expenses                                       |  |                                | 5,460  |   |                              |   | 5,425  |            |  |   | 10,894 |   |  |   | 9,856  |  
|Rent and lease expense                                         |  |                                | 776    |   |                              |   | 755    |            |  |   | 1,560  |   |  |   | 1,485  |  
|Depreciation and amortization                                  |  |                                | 1,699  |   |                              |   | 1,278  |            |  |   | 3,404  |   |  |   | 2,502  |  
|                                                               |  |                                |        |   |                              |   |        |            |  |   |        |   |  |   |        |  
|Cost of patient service revenues                               |  |                                | 48,921 |   |                              |   | 36,480 |            |  |   | 95,521 |   |  |   | 73,650 |  
|                                                               |  |                                |        |   |                              |   |        |            |  |   |        |   |  |   |        |  
|                                                               |  |                                |        |  
|Operating Profit                                               |  |                                | 837    |   |                              |   | 489    |            |  |   | 915    |   |  |   | 1,555  |  
|                                                               |  |                                |        |  
|Other Income (Expense):                                        |  |                                |        |   |                              |   |        |            |  |   |        |   |  |   |        |  
|Gain on sale of assets                                         |  |                                | 180    |   |                              |   |       |            |  |   | 180    |   |  |   |       |  
|Interest expense                                               |  |                                | (1,272 | ) |                              |   | (436   | )          |  |   | (2,526 | ) |  |   | (846   | )
|Interest income                                                |  |                                | 10     |   |                              |   | 28     |            |  |   | 17     |   |  |   | 33     |  
|                                                               |  |                                |        |   |                              |   |        |            |  |   |        |   |  |   |        |  
|                                                               |  |                                |        |  
|Earnings (Loss) from Continuing Operations before Income Taxes |  |                                | (245   | ) |                              |   | 81     |            |  |   | (1,414 | ) |  |   | 742    |  
|                                                               |  |                                |        |  
|Income Tax Expense (Benefit)                                   |  |                                | (84    | ) |                              |   | 30     |            |  |   | (650   | ) |  |   | 248    |  
|                                                               |  |                                |        |   |                              |   |        |            |  |   |        |   |  |   |        |  
|                                                               |  |                                |        |  
|Earnings (Loss) from Continuing Operations                     |  |                                | (161   | ) |                              |   | 51     |            |  |   | (764   | ) |  |   | 494    |  
|                                                               |  |                                |        |  
|Loss from Discontinued Operations                              |  |                                | (103   | ) |                              |   | (84    | )          |  |   | (164   | ) |  |   | (134   | )
|                                                               |  |                                |        |   |                              |   |        |            |  |   |        |   |  |   |        |  
|                                                               |  |                                |        |  
|Net Earnings (Loss)                                            |  | $                              | (264   | ) |                              | $ | (33    | )          |  | $ | (928   | ) |  | $ | 360    |  
|                                                               |  |                                |        |   |                              |   |        |            |  |   |        |   |  |   |        |  
|                                                               |  |                                |        |  
|Earnings (Loss) Per Share:                                     |  |                                |        |   |                              |   |        |            |  |   |        |   |  |   |        |  
|Continuing Operations:                                         |  |                                |        |   |                              |   |        |            |  |   |        |   |  |   |        |  
|Basic                                                          |  | $                              | (0.02  | ) |                              | $ | 0.01   |            |  | $ | (0.10  | ) |  | $ | 0.07   |  
|                                                               |  |                                |        |   |                              |   |        |            |  |   |        |   |  |   |        |  
|Diluted                                                        |  | $                              | (0.02  | ) |                              | $ | 0.01   |            |  | $ | (0.10  | ) |  | $ | 0.06   |  
|                                                               |  |                                |        |   |                              |   |        |            |  |   |        |   |  |   |        |  
|                                                               |  |                                |        |  
|Discontinued Operations:                                       |  |                                |        |   |                              |   |        |            |  |   |        |   |  |   |        |  
|Basic                                                          |  | $                              | (0.01  | ) |                              | $ | (0.01  | )          |  | $ | (0.02  | ) |  | $ | (0.02  | )
|                                                               |  |                                |        |   |                              |   |        |            |  |   |        |   |  |   |        |  
|Diluted                                                        |  | $                              | (0.01  | ) |                              | $ | (0.01  | )          |  | $ | (0.02  | ) |  | $ | (0.02  | )
|                                                               |  |                                |        |   |                              |   |        |            |  |   |        |   |  |   |        |  
|                                                               |  |                                |        |  
|Net Earnings (Loss):                                           |  |                                |        |   |                              |   |        |            |  |   |        |   |  |   |        |  
|Basic                                                          |  | $                              | (0.03  | ) |                              | $ | (0.00  | )          |  | $ | (0.12  | ) |  | $ | 0.05   |  
|                                                               |  |                                |        |   |                              |   |        |            |  |   |        |   |  |   |        |  
|Diluted                                                        |  | $                              | (0.03  | ) |                              | $ | (0.00  | )          |  | $ | (0.12  | ) |  | $ | 0.05   |  
|                                                               |  |                                |        |   |                              |   |        |            |  |   |        |   |  |   |        |  
|                                                               |  |                                |        |  
|Weighted-Average Common Shares Outstanding:                    |  |                                |        |   |                              |   |        |            |  |   |        |   |  |   |        |  
|Basic                                                          |  |                                | 7,990  |   |                              |   | 7,515  |            |  |   | 7,963  |   |  |   | 7,514  |  
|                                                               |  |                                |        |   |                              |   |        |            |  |   |        |   |  |   |        |  
|Diluted                                                        |  |                                | 7,990  |   |                              |   | 7,789  |            |  |   | 7,963  |   |  |   | 7,789  |  
|                                                               |  |                                |        |   |                              |   |        |            |  |   |        |   |  |   |        |  

See notes to condensed consolidated financial statements.



5



---

SUNLINK HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



|                                                                 |  |                              |        |   |      |   |        |  
|---------------------------------------------------------------- |  | ---------------------------- | ------ | - | ---- | - | ------ | -
|                                                                 |  | SIX MONTHS ENDEDDECEMBER 31, |       
|                                                                 |  | 2008                         |        |   | 2007 |  
|                                                                 |  | (Restated)                   |        |   |      |  
|Net Cash Provided By (Used In) Operating Activities              |  | $                            | (788   | ) |      | $ | 2,818  |  
|                                                                 |  |                             
|Cash Flows From Investing Activities:                            |  |                              |        |   |      |   |        |  
|                                                                 |  |                             
|Expenditures for property, plant and equipment                   |  |                              | (574   | ) |      |   | (5,329 | )
|Proceeds from sale of assets                                     |  |                              | 522    |   |      |   |       |  
|                                                                 |  |                              |        |   |      |   |        |  
|                                                                 |  |                             
|Net Cash Used in Investing Activities                            |  |                              | (52    | ) |      |   | (5,329 | )
|                                                                 |  |                             
|Cash Flows From Financing Activities:                            |  |                              |        |   |      |   |        |  
|Proceeds from issuance of common shares under stock option plans |  |                              | 108    |   |      |   | 13     |  
|Revolving advances, net                                          |  |                              | 1,600  |   |      |   | 3,299  |  
|Payments on long-term debt                                       |  |                              | (1,462 | ) |      |   | (453   | )
|                                                                 |  |                              |        |   |      |   |        |  
|                                                                 |  |                             
|Net Cash Provided by Financing Activities                        |  |                              | 246    |   |      |   | 2,859  |  
|                                                                 |  |                              |        |   |      |   |        |  
|                                                                 |  |                             
|Net Increase (Decrease) in Cash and Cash Equivalents             |  |                              | (594   | ) |      |   | 348    |  
|                                                                 |  |                             
|Cash and Cash Equivalents at Beginning of Period                 |  |                              | 1,716  |   |      |   | 814    |  
|                                                                 |  |                              |        |   |      |   |        |  
|                                                                 |  |                             
|Cash and Cash Equivalents at End of Period                       |  | $                            | 1,122  |   |      | $ | 1,162  |  
|                                                                 |  |                              |        |   |      |   |        |  
|                                                                 |  |                             
|Supplemental Disclosure of Cash Flow Information:                |  |                              |        |   |      |   |        |  
|                                                                 |  |                             
|Cash Paid For:                                                   |  |                              |        |   |      |   |        |  
|Interest                                                         |  | $                            | 1,734  |   |      | $ | 839    |  
|                                                                 |  |                              |        |   |      |   |        |  
|Income taxes                                                     |  | $                            | 820    |   |      | $ | 597    |  
|                                                                 |  |                              |        |   |      |   |        |  
|                                                                 |  |                             
|Non-cash investing and financing activities :                    |  |                              |        |   |      |   |        |  
|                                                                 |  |                             
|Property, plant and equipment acquired but not paid              |  | $                            |       |   |      | $ | 1,028  |  
|                                                                 |  |                              |        |   |      |   |        |  
|Asset acquired under capital lease obligation                    |  | $                            | 131    |   |      | $ |       |  
|                                                                 |  |                              |        |   |      |   |        |  

See notes to condensed consolidated financial statements.



6



---

SUNLINK HEALTH SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND SIX MONTHS
ENDED DECEMBER 31, 2008 AND 2007

(all dollar amounts in thousands, except per share amounts)

(unaudited)

Note 1.  Restatement and Basis
of Presentation

Restatement

We
have restated our Condensed Consolidated Financial Statements and other financial information in our Quarterly Report on Form 10-Q for the three and six months periods ended December 31, 2008 to correct the impact of non-cash accounting errors
at our Carmichaels Cashway Pharmacy, Inc. subsidiary (Carmichael). The accompanying Condensed Consolidated Financial Statements were restated only to reflect the adjustments described below and do not reflect events occurring after
February 13, 2009, the date of the filing of our original Form 10-Q, nor modify or update those disclosures that have been affected by subsequent events. Accordingly, this Form 10-Q/A should be read in conjunction with our filings made with the
Securities and Exchange Commission.

In May 2009, Carmichaels then Chief Financial Officer (CFO) resigned. In June 2009,
Carmichael hired a new CFO and in July 2009, the new Carmichael CFO and SunLink CFO began an investigation into unresolved accounting discrepancies between Carmichaels accounts receivable detail and its general ledger. When the new Carmichael
CFO was unable to resolve the discrepancies, SunLink, in July 2009, engaged an outside accountant (the Investigation Accountant) to investigate the discrepancies. After being informed of the preliminary results of the
Investigation Accountants investigation, the Company informed the Audit Committee of SunLinks Board of Directors (the Audit Committee) of the preliminary findings by such Investigation Accountant. Based on such
preliminary findings, on August 28, 2009 SunLink concluded that the impact of the Carmichael level accounting irregularities made it likely that SunLinks financial statements for the first, second and third fiscal quarters ended
September 30, 2008, December 31, 2008 and March 31, 2009, respectively, should not be relied on.

As we previously
disclosed in our Form 8-K filed on August 28, 2009, SunLink reached its conclusion on August 28, 2009, based on information reviewed by SunLinks management and SunLinks Audit Committee and SunLinks independent registered
public accounting firm (the Public Accountants), including information provided by the Investigation Accountant. SunLink concluded that Carmichaels financial statements, among other things, had misstated the
Subsidiarys accounts receivable during the referenced periods due to accounting calculation errors and improper period-end cut-off of certain accounts receivable systems and, as a result thereof, the SunLink financial statements for the
quarters ended September 30, 2008, December 31, 2008 and March 31, 2009 contained errors in the amount of accounts receivable, net income (loss), revenues, provision for bad debts, allowance for doubtful accounts and contractual
allowances. The Public Accountants concur with SunLinks conclusion with respect to the restatement of the condensed consolidated financial statements for the quarter ended September 30, 2008, December 31, 2008 and March 31, 2009.



7



---

The following table sets forth the effects of the restatement on certain line items within our previously
reported condensed consolidated financial statements (in thousands, except per share data):

(in thousands, except per share amounts)

Condensed Consolidated Statements of Earnings



|                                                                               |  |                           |         |   |                                      |   |         |  
|------------------------------------------------------------------------------ |  | ------------------------- | ------- | - | ------------------------------------ | - | ------- | -
|                                                                               |  | Three Months Ended        |        
|                                                                               |  | December 31, 2008Restated |         |   | December 31, 2008Previously Reported |  
|Net Revenues                                                                   |  | $                         | 49,758  |   |                                      | $ | 50,129  |  
|Provision for bad debts                                                        |  |                           | 5,987   |   |                                      |   | 5,503   |  
|Operating Profit                                                               |  |                           | 837     |   |                                      |   | 1,692   |  
|Earnings (Loss) from continuing operations before income taxes                 |  |                           | (245    | ) |                                      |   | 610     |  
|Earnings (Loss) from continuing operations                                     |  |                           | (161    | ) |                                      |   | 366     |  
|Net Earnings (Loss)                                                            |  |                           | (264    | ) |                                      |   | 263     |  
|Earnings (Loss) per Share                                                      |  |                           |         |   |                                      |   |         |  
|Continuing Operations:                                                         |  |                           |         |   |                                      |   |         |  
|Basic                                                                          |  |                           | (0.02   | ) |                                      |   | 0.05    |  
|Diluted                                                                        |  |                           | (0.02   | ) |                                      |   | 0.05    |  
|Net Earnings (Loss):                                                           |  |                           |         |   |                                      |   |         |  
|Basic                                                                          |  |                           | (0.03   | ) |                                      |   | 0.03    |  
|Diluted                                                                        |  | $                         | (0.03   | ) |                                      | $ | 0.03    |  
|                                                                               | 
|                                                                               |  | Six Months Ended          |        
|                                                                               |  | December 31, 2008Restated |         |   | December 31, 2008Previously Reported |  
|Net Revenues                                                                   |  | $                         | 96,436  |   |                                      | $ | 96,867  |  
|Provision for bad debts                                                        |  |                           | 11,732  |   |                                      |   | 11,122  |  
|Operating Profit                                                               |  |                           | 915     |   |                                      |   | 1,956   |  
|Loss from continuing operations before income taxes                            |  |                           | (1,414  | ) |                                      |   | (373    | )
|Loss from continuing operations                                                |  |                           | (764    | ) |                                      |   | (122    | )
|Net Loss                                                                       |  |                           | (928    | ) |                                      |   | (286    | )
|Loss per Share                                                                 |  |                           |         |   |                                      |   |         |  
|Continuing Operations:                                                         |  |                           |         |   |                                      |   |         |  
|Basic                                                                          |  |                           | (0.10   | ) |                                      |   | (0.02   | )
|Diluted                                                                        |  |                           | (0.10   | ) |                                      |   | (0.02   | )
|Net Loss:                                                                      |  |                           |         |   |                                      |   |         |  
|Basic                                                                          |  |                           | (0.12   | ) |                                      |   | (0.04   | )
|Diluted                                                                        |  | $                         | (0.12   | ) |                                      | $ | (0.04   | )
|                                                                               |  |                          
|(in thousands, except per share amounts) Condensed Consolidated Balance Sheets |  |                           |         |   |                                      |   |         |  
|                                                                               |  |                          
|                                                                               |  | December 31, 2008Restated |         |   | December 31, 2008Previously Reported |  
|Receivables - net                                                              |  | $                         | 20,728  |   |                                      | $ | 21,769  |  
|Prepaid expenses and other                                                     |  |                           | 3,854   |   |                                      |   | 3,455   |  
|Total assets                                                                   |  |                           | 108,557 |   |                                      |   | 109,199 |  
|Retained earnings                                                              |  | $                         | 24,623  |   |                                      |   | 25,265  |  



8



---

The accompanying unaudited Condensed Consolidated Financial Statements as of and for the
three and six month periods ended December 31, 2008 and 2007 have been prepared in accordance with Rule 10-01 of Regulation S-X of the Securities and Exchange Commission (SEC) and, as such, do not include all information required by
accounting principles generally accepted in the United States of America. These Condensed Consolidated Financial Statements should be read in conjunction with the audited consolidated financial statements included in the SunLink Health Systems, Inc.
(SunLink, we, our, ours, us or the Company) Annual Report on Form 10-K for the fiscal year ended June 30, 2008, filed with the SEC on September 26, 2008. In the
opinion of management, the Condensed Consolidated Financial Statements, which are unaudited, include all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position and results of operations for
the periods indicated. The results of operations for the three and six month periods ended December 31, 2008 are not necessarily indicative of the results that may be expected for the entire fiscal year or any other interim period.

Note 2.  Business Operations and Corporate Strategy

Business Operations

SunLink Health Systems, Inc. is a provider of
healthcare services in certain rural and exurban markets in the United States. SunLinks business is composed of two business segments:



| |  |  | Healthcare Facilities, which consist of
| | - |  | ---------------------------------------



| |  |  | Our seven community hospitals which have a total of 402 licensed beds;
| | - |  | ----------------------------------------------------------------------



| |  |  | Our three nursing homes, which have a total of 261 licensed beds, each of which is located adjacent to a corresponding SunLink community hospital;
and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our four home health agencies, each of which operates in connection with a corresponding SunLink community hospital.
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | Specialty Pharmacy, which consists of
| | - |  | -------------------------------------



| |  |  | Specialty pharmacy services;
| | - |  | ----------------------------



| |  |  | Durable medical equipment;
| | - |  | --------------------------



| |  |  | Institutional pharmacy services; and
| | - |  | ------------------------------------



| |  |  | Retail pharmacy products and services.
| | - |  | --------------------------------------

SunLink has conducted its healthcare facilities business since 2001 and its specialty pharmacy business since April 2008. Our Specialty Pharmacy Segment is operated through SunLink ScriptsRx LLC and
consists of a specialty pharmacy business acquired in April 2008 with four service lines.

Strategy

SunLinks business strategy for our healthcare facilities is to focus our efforts on internal growth of our seven hospitals, three
nursing homes and four home health agencies, supplemented by growth from selected rural and exurban healthcare facility acquisitions, including, but not limited to hospitals, nursing homes and home health agencies. During the quarter and six months
ended December 31, 2008, we concentrated our healthcare facilities efforts on the operations of our existing hospitals. During the current and prior fiscal years, we have evaluated certain rural and exurban hospitals and healthcare facilities
which were for sale and monitored other selected rural and exurban healthcare acquisition targets we believed might become available for sale. We continue to engage in similar evaluation and monitoring activities with respect to rural and exurban
hospitals and healthcare facilities, which are or may become available for acquisition.



9



---

Our acquisition strategy for our pharmacy business is to acquire such businesses in rural or
exurban markets where the acquisition is complementary to our existing pharmacy services and in new rural and exurban markets where the scale of the acquisition is sufficient to provide a foundation to grow Specialty Pharmacy in that area.

Note 3.  Carmichaels Cashway Pharmacy Acquisition

On April 22, 2008, SunLink acquired Carmichaels Cashway Pharmacy, Inc. (Carmichael). The Carmichael acquisition purchase price was $24,000, consisting of
$19,000 cash, seller subordinated debt of $3,000 and $2,000 in SunLink shares (334,448 shares). Carmichael had annual revenues of approximately $42,200 for its year ended December 31, 2007 and at the time of acquisition had been in business for
over 35 years. Carmichael provides services to patients in rural communities in southwest Louisiana and eastern Texas.

The
following table presents selected unaudited consolidated financial information of our company, for the three and six months ended December 31, 2007, as if the acquisition of Carmichael had occurred on July 1, 2007. The pro forma results
are derived from the historical financial results of Carmichael for all periods presented and are not necessarily indicative of the results that would have occurred had the acquisition been consummated on July 1, 2007.



|                                                              |  |                                            |        |                                              |   |        |  
|------------------------------------------------------------- |  | ------------------------------------------ | ------ | -------------------------------------------- | - | ------ | -
|                                                              |  | UnauditedSix Months EndedDecember 31, 2007 |        | UnauditedThree Months EndedDecember 31, 2007 |  
|Revenues                                                      |  | $                                          | 97,462 |                                              | $ | 48,097 |  
|Earnings (Loss) from Continuing Operations                    |  |                                            | 123    |                                              |   | (352   | )
|Earnings (loss) per share from Continuing Operations, diluted |  | $                                          | 0.02   |                                              | $ | (0.04  | )

Note 4.  Discontinued Operations

All of the businesses discussed below are reported as discontinued operations and the condensed consolidated financial statements for all prior periods have been adjusted to reflect
this presentation.



10



---

Results for all of the businesses included in discontinued operations are presented in the
following table:



|                                                                   |  |                                |      |   |                              |   |      |      |  |   |      |   |  |   |      |  
|------------------------------------------------------------------ |  | ------------------------------ | ---- | - | ---------------------------- | - | ---- | ---- |  | - | ---- | - |  | - | ---- | -
|                                                                   |  | Three Months EndedDecember 31, |      |   | Six Months EndedDecember 31, |  
|                                                                   |  | 2008                           |      |   | 2007                         |   |      | 2008 |  |   | 2007 |  
|                                                                   |  |                                |      |  
|Loss from discontinued operations:                                 |  |                                |      |   |                              |   |      |      |  |   |      |   |  |   |      |  
|                                                                   |  |                                |      |  
|Housewares Segment:                                                |  |                                |      |   |                              |   |      |      |  |   |      |   |  |   |      |  
|Loss from operations                                               |  | $                              | (122 | ) |                              | $ | (109 | )    |  | $ | (140 | ) |  | $ | (137 | )
|Income tax benefit                                                 |  |                                | (48  | ) |                              |   | (43  | )    |  |   | (55  | ) |  |   | (54  | )
|                                                                   |  |                                |      |   |                              |   |      |      |  |   |      |   |  |   |      |  
|Loss from Housewares Segment after taxes                           |  |                                | (74  | ) |                              |   | (66  | )    |  |   | (85  | ) |  |   | (83  | )
|                                                                   |  |                                |      |   |                              |   |      |      |  |   |      |   |  |   |      |  
|                                                                   |  |                                |      |  
|Mountainside Medical                                               |  |                                |      |   |                              |   |      |      |  |   |      |   |  |   |      |  
|Loss from operations                                               |  |                                | (33  | ) |                              |   | (19  | )    |  |   | (98  | ) |  |   | (59  | )
|Income tax benefit                                                 |  |                                | (13  | ) |                              |   | (8   | )    |  |   | (37  | ) |  |   | (23  | )
|                                                                   |  |                                |      |   |                              |   |      |      |  |   |      |   |  |   |      |  
|Loss from Mountainside Medical Center after taxes                  |  |                                | (20  | ) |                              |   | (11  | )    |  |   | (61  | ) |  |   | (36  | )
|                                                                   |  |                                |      |   |                              |   |      |      |  |   |      |   |  |   |      |  
|                                                                   |  |                                |      |  
|Life sciences and engineering segment:                             |  |                                |      |   |                              |   |      |      |  |   |      |   |  |   |      |  
|Loss from operations                                               |  |                                | (14  | ) |                              |   | (12  | )    |  |   | (29  | ) |  |   | (25  | )
|Income tax benefit                                                 |  |                                | (5   | ) |                              |   | (5   | )    |  |   | (11  | ) |  |   | (10  | )
|                                                                   |  |                                |      |   |                              |   |      |      |  |   |      |   |  |   |      |  
|                                                                   |  |                                |      |  
|Loss from life sciences and engineering segment after income taxes |  |                                | (9   | ) |                              |   | (7   | )    |  |   | (18  | ) |  |   | (15  | )
|                                                                   |  |                                |      |   |                              |   |      |      |  |   |      |   |  |   |      |  
|                                                                   |  |                                |      |  
|Loss from discontinued operations                                  |  | $                              | (103 | ) |                              | $ | (84  | )    |  | $ | (164 | ) |  | $ | (134 | )
|                                                                   |  |                                |      |   |                              |   |      |      |  |   |      |   |  |   |      |  

Housewares Segment - Beldray Limited (Beldray), a U.K.
housewares manufacturing subsidiary, was sold on October 5, 2001 to two of its managers for nominal consideration. KRUG International U.K. Ltd. (KRUG UK), an inactive U.K. subsidiary of SunLink, entered into a guarantee (the
Beldray Guarantee), at a time when it owned Beldray. The Beldray Guarantee covers Beldrays obligations under a lease of a portion of Beldrays former manufacturing location. KRUG UK was placed into involuntary liquidation by the
High Court in February 2005. SunLinks non-current liability reserves for discontinued operations at December 31, 2008, included a reserve for a portion of the Beldray Guarantee, which would include certain amounts sought pursuant to the
application made by the liquidator of KRUG UK. See the Legal Proceedings subsection in Note 14 Commitments and Contingencies which follows for additional disclosure of the application.

Mountainside Medical Center - On June 1, 2004, SunLink completed the sale of its Mountainside Medical Center
(Mountainside) hospital in Jasper, Georgia, for approximately $40,000 pursuant to the terms of an asset sale agreement. Under the terms of the agreement, SunLink sold the operations of Mountainside, which included substantially all the
property, plant and equipment and the supplies inventory. SunLink retained Mountainsides working capital except for supplies inventory. The retained liabilities of Mountainside are shown in current liabilities of Mountainside Medical Center on
the consolidated balance sheet. The pre-tax losses in the quarter ended December 31, 2008 with respect to the former Mountainside operations resulted primarily from legal expenses related to a claim made by the buyer of Mountainside and a
counterclaim made by SunLink. See the Legal Proceedings subsection in Note 14 Commitments and Contingencies which follows for additional disclosure of the claims.



11



---

Life Sciences and Engineering Segment - SunLink retained a defined benefit
retirement plan which covered substantially all of the employees of this segment when it was sold in fiscal 1998. Effective February 28, 1997, the plan was amended to freeze participant benefits and close the plan to new participants. Included
in discontinued operations for the three and six months ended December 31, 2008 and 2007, respectively, were the following:



|                                   |  |                               |     |   |                             |   |     |      |  |   |      |   |  |   |     |  
|---------------------------------- |  | ----------------------------- | --- | - | --------------------------- | - | --- | ---- |  | - | ---- | - |  | - | --- | -
|                                   |  | Three Months EndedDecember 31 |     |   | Six Months EndedDecember 31 |  
|                                   |  | 2008                          |     |   | 2007                        |   |     | 2008 |  |   | 2007 |  
|Interest cost                      |  | $                             | 18  |   |                             | $ | 18  |      |  | $ | 36   |   |  | $ | 36  |  
|Expected return on assets          |  |                               | (13 | ) |                             |   | (14 | )    |  |   | (25  | ) |  |   | (27 | )
|Amortization of prior service cost |  |                               | 9   |   |                             |   | 8   |      |  |   | 18   |   |  |   | 16  |  
|                                   |  |                               |     |   |                             |   |     |      |  |   |      |   |  |   |     |  
|Net pension expense                |  | $                             | 14  |   |                             | $ | 12  |      |  | $ | 29   |   |  | $ | 25  |  
|                                   |  |                               |     |   |                             |   |     |      |  |   |      |   |  |   |     |  

SunLink did not contribute to the plan in the six months ended December 31,
2008. We expect to make no contribution to the plan through the end of the fiscal year ending June 30, 2009.

Industrial Segment - In fiscal 1989, SunLink discontinued the operations of its industrial segment and subsequently disposed of substantially all related net assets. However, obligations may remain relating to product
liability claims for products sold prior to the disposal.

Discontinued Operations Reserves - Over the past 19
years, SunLink has discontinued operations carried on by its former Mountainside Medical Center and its former industrial, U.K. leisure marine, life sciences and engineering, and European child safety segments, as well as the U.K. housewares
segment. SunLinks reserves relating to discontinued operations of these segments represent managements best estimate of SunLinks possible liability for property, product liability and other claims for which SunLink may incur
liability. These estimates are based on managements judgments, using currently available information, as well as, in certain instances, consultation with its insurance carriers, third party advisors and legal counsel. While estimates have been
based on the evaluation of available information, it is not possible to predict with certainty the ultimate outcome of many contingencies relating to discontinued operations. SunLink intends to continue to adjust its estimates of the reserves as
additional information is developed and evaluated. However, management believes that the final resolution of these contingencies will not have a material adverse impact on the financial position, cash flows or results of operations of SunLink.

Note 5.  Stock-Based Compensation

For the three months ended December 31, 2008 and 2007, SunLink recognized $26 and $103, respectively, in salaries, wages and benefit expense for share options issued to employees and directors of the
Company and for the six months ended December 31, 2008 and 2007, SunLink recognized $147 and $206 respectively, in salaries, wages and benefit expense for share options issued to employees and directors of the Company. The fair value of the
share options granted was estimated using the Black-Scholes option pricing model. There were zero share options granted during the three months ended December 31, 2008 and 28,000 share options granted during the six months ended
December 31, 2008.

In November 2008, SunLink approved an Executive Bonus Plan for 2009 (the Plan),
which is a variable cash incentive program designed to reward Executives of SunLink and its affiliates for successful achievement of certain short-term corporate goals and objectives. The Plan is being



12



---

offered to all of the Companys executive officers and certain other employees, and requires that each participant, in order to participate in the Plan, agree to relinquish any and all stock
options, such executive officer holds, that have an exercise price equal to or greater than $6.00 per share. During the quarter ended December 31, 2008, stock options totaling 601,106 shares were relinquished under the Plan.

Note 6  Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements which defines fair value, establishes a framework for measuring fair value, and expands disclosures about
fair value measurements. SFAS No. 157 applies to other accounting pronouncements that require or permit fair value measurements and does not require any new fair value measurements.

Effective July 1, 2008, the Company adopted the provisions of SFAS No. 157 for financial assets and liabilities, as well as for any other assets and liabilities that are
carried at fair value on a recurring basis. The adoption of the provisions of SFAS No. 157 related to financial assets and liabilities and other assets and liabilities that are carried at fair value on a recurring basis did not materially
impact the Companys consolidated financial position and results of operations.

In February 2008, the FASB issued FASB
Staff Position (FSP) 157-2, Effective Date of FASB Statement No. 157which provides for a one-year deferral of the provisions of SFAS No. 157 for non-financial assets and liabilities that are recognized or
disclosed at fair value in the consolidated financial statements on a non-recurring basis. The Company is currently evaluating the impact of adopting the provisions of Statement No. 157 for non-financial assets and liabilities that are
recognized or disclosed on a non-recurring basis (adoption is required on July 1, 2009).

In October 2008, the FASB
issued FSP No. 157-3, Determining the Fair Value of a Financial Asset When the Market for that Asset is not Active, which provides guidance for determining the fair value of a financial asset in an inactive market. The
adoption of FSP 157-3 did not have a material impact on the Companys consolidated financial statements.

SFAS
No. 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. SFAS No. 157 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. SFAS
No. 157 describes three levels of inputs that may be used to measure fair value:

Level 1 - quoted prices in active markets for
identical assets or liabilities;

Level 2 - quoted prices for similar assets and liabilities in active markets or inputs that are
observable;

Level 3 - inputs that are unobservable (for example cash flow modeling inputs based on assumptions).



13



---

The following table summarizes liabilities measured at fair value on a recurring basis at
December 31, 2008, as required by SFAS No. 157. These liabilities were recorded in other accrued expenses in the consolidated balance sheet.



|                       |  |                                |   |         |   |         |  |       |   |  |   |    
|---------------------- |  | ------------------------------ | - | ------- | - | ------- |  | ----- | - |  | - | ---
|                       |  | Fair Value Measurements Using:
|                       |  | Level 1                        |   | Level 2 |   | Level 3 |  | Total
|Liabilities:           |  |                                |   |         |   |         |  |       |   |  |   |    
|Derivative liabilities |  | $                              |  |         | $ | 659     |  | $     |  |  | $ | 659
|                       |  |                                |   |         |   |         |  |       |   |  |   |    

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities, which provides companies with an option to report selected financial assets and liabilities at fair value. It also establishes presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. There has been no effect on the consolidated statement of earnings from the adoption of this statement.

In March 2007, the FASB issued SFAS No. 141R, Business Combinations, which is intended to improve, simplify, and converge internationally the accounting for business combinations
and the reporting of noncontrolling interests in consolidated financial statements. Under SFAS No. 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date
fair value with limited exceptions. SFAS No. 141R includes a substantial number of new disclosure requirements. SFAS No. 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company will comply with the new SFAS No. 141R requirements for any business combination transactions concluded after June 30,
2009.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statements  An Amendment of ARB No. 51, which establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 is intended to
improve the relevance, comparability, and transparency of financial information provided to investors by requiring all entities to report noncontrolling (minority) interests in subsidiaries in the same way as equity in the consolidated financial
statements. SFAS No. 160 includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning
on or after December 15, 2008. Earlier adoption is prohibited. The Company is currently evaluating the effect of adopting SFAS No. 160 on the Companys consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161 Disclosures about Derivative Instruments and Hedging Activities  an
amendment of FASB Statement No. 133, which requires enhanced disclosures about an entitys derivative and hedging activities and thereby improves the transparency of financial reporting. SFAS No 161 is effective for fiscal years
and interim periods beginning after November 15, 2008, with early application encouraged. This Statement encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The Company is currently evaluating the
effect of adopting SFAS No. 161 on the Companys consolidated financial statements.

In April 2008, the FASB issued
FSP No. FAS 142-3, Determination of the Useful Life of Intangible Assets. This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized
intangible asset under



14



---

SFAS No. 142,Goodwill and Other Intangible Assets.The Company is required to adopt FSP 142-3 on September 1, 2009; earlier adoption is prohibited. The
guidance in FSP 142-3 for determining the useful life of a recognized intangible asset shall be applied prospectively to intangible assets acquired after adoption, and the disclosure requirements shall be applied prospectively to all intangible
assets recognized as of, and subsequent to, adoption. The Company is currently evaluating the effect of FSP 142-3 on its consolidated financial statements

In May 2008, the FASB issued SFAS No. 162, Hierarchy of Generally Accepted Accounting Principles (SFAS 162). This statement is intended to improve financial reporting
by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements of nongovernmental entities that are presented in conformity with GAAP. This statement will be effective 60 days
following the U.S. Securities and Exchange Commissions approval of the Public Company Accounting Oversight Board amendment to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting
Principles. The adoption of this Statement is not expected to have a material impact on the Companys consolidated financial statements.

In September 2008, the FASB issued FSP No. FSP FAS 133-1 and FIN 45-4, Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB
Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161. This FSP amends FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, to require
disclosures by sellers of credit derivatives, including credit derivatives embedded in a hybrid instrument. This FSP also amends FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, to require an additional disclosure about the current status of the payment/performance risk of a guarantee. Further, this FSP clarifies the Boards intent about the effective
date of FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities. This FSP is effective for fiscal years and interim periods ending after November 15, 2008. The adoption of this Statement
did not have a material impact on the Companys consolidated financial statements.

Note 7.  Receivables - net



|                                                    |  |                  |         |   |              |   |         |  
|--------------------------------------------------- |  | ---------------- | ------- | - | ------------ | - | ------- | -
|                                                    |  | December 31,2008 |         |   | June 30,2008 |  
|                                                    |  | (Restated)       |         |   |              |  
|Accounts receivable (net of contractual allowances) |  | $                | 35,165  |   |              | $ | 34,190  |  
|Less allowance for doubtful accounts                |  |                  | (14,437 | ) |              |   | (14,138 | )
|                                                    |  |                  |         |   |              |   |         |  
|Receivables - net                                   |  | $                | 20,728  |   |              | $ | 20,052  |  
|                                                    |  |                  |         |   |              |   |         |  

Net revenues included $24 and $249 for the three months ended December 31, 2008
and 2007, respectively, for the settlements and filings of prior year Medicare and Medicaid cost reports. Net revenues included $272 and $324 for the six months ended December 31, 2008 and 2007, respectively, for the settlements and filings of
prior year Medicare and Medicaid cost reports.



15



---

Note 8.  Goodwill and Intangible Assets

SunLink has goodwill and intangible assets resulting from acquisitions of its Healthcare Facilities and Specialty Pharmacy segments.

Intangibles consist of the following, net of amortization:



|                              |  |                  |        |              |   |       
|----------------------------- |  | ---------------- | ------ | ------------ | - | ------
|                              |  | December 31,2008 |        | June 30,2008
|Specialty Pharmacy Segment    |  | $                | 12,356 |              | $ | 12,721
|Healthcare Facilities Segment |  |                  | 619    |              |   | 706   
|                              |  |                  |        |              |   |       
|                              |  | $                | 12,975 |              | $ | 13,427
|                              |  |                  |        |              |   |       

Amortization expense was $226 and $42, for the quarters ended December 31, 2008
and 2007, respectively. Amortization expense was $452 and $85, for the six months ended December 31, 2008 and 2007, respectively.

Goodwill consists of the following:



|                              |  |                  |       |              |   |      
|----------------------------- |  | ---------------- | ----- | ------------ | - | -----
|                              |  | December 31,2008 |       | June 30,2008
|Healthcare Facilities Segment |  | $                | 2,944 |              | $ | 2,944
|Specialty Pharmacy Segment    |  |                  | 6,509 |              |   | 6,509
|                              |  |                  |       |              |   |      
|                              |  | $                | 9,453 |              | $ | 9,453
|                              |  |                  |       |              |   |      

Note 9.  Long-Term Debt

Long-term debt consisted of the following:



|                          |  |                  |        |   |              |   |        |  
|------------------------- |  | ---------------- | ------ | - | ------------ | - | ------ | -
|                          |  | December 31,2008 |        |   | June 30,2008 |  
|Term Loan                 |  | $                | 33,461 |   |              | $ | 34,854 |  
|Capital lease obligations |  |                  | 169    |   |              |   | 108    |  
|                          |  |                  |        |   |              |   |        |  
|Total                     |  |                  | 33,630 |   |              |   | 34,962 |  
|Less current maturities   |  |                  | (1,846 | ) |              |   | (1,844 | )
|                          |  |                  |        |   |              |   |        |  
|                          |  | $                | 31,784 |   |              | $ | 33,118 |  
|                          |  |                  |        |   |              |   |        |  

SunLink Credit Facilities - On April 23, 2008, SunLink entered
into a $47,000 seven-year senior secured credit facility (2008 Credit Facility) comprised of a revolving line of credit of up to $12,000 with an interest rate at LIBOR plus 3.50% (6.25% at December 31, 2008) (the Revolving
Loan) and a $35,000 term loan with an interest rate at LIBOR plus 5.07% (7.82% at December 31, 2008) (the Term Loan). In the 2008 Credit Facility, LIBOR is defined as the Thirty-Day published rate, not to be less than 2.75%,
however it may not exceed 5.50%. The total availability of credit under all components of the credit facility is keyed to the level of SunLinks earnings, which, based upon the Companys estimates, provided for current borrowing capacity,
before any draws, of approximately $44,500 at December 31, 2008. At closing, the entire $35,000 term loan and $5,500 of the revolving loan were drawn. The Company used the initial proceeds of the loans in the amount of $40,500 to repay
outstanding debt, including its 2004 Credit Agreement, to pay the cash portion of the purchase price for the Carmichael



16



---

acquisition, to pay fees and expenses thereunder and for general corporate purposes. Costs and fees related to execution of the credit facility were $2,174. The fees will be amortized over seven
years at approximately $370 a year and are recorded in other assets and other non-current assets. Amortization expense was $95 and $187, respectively, for the quarter and six months ended December 31, 2008. Accumulated amortization was $248 at
December 31, 2008. The Credit Facility is secured by a first priority security interest in substantially all real and personal property of the Company and its consolidated domestic subsidiaries, including a pledge of all of the equity interests
in such subsidiaries.

Note 10.  Subordinated Long-Term Debt

Subordinated long-term debt consisted of the following:



|                        |  |                  |       |   |              |   |       |  
|----------------------- |  | ---------------- | ----- | - | ------------ | - | ----- | -
|                        |  | December 31,2008 |       |   | June 30,2008 |  
|Carmichael              |  | $                | 3,000 |   |              | $ | 3,000 |  
|Less current maturities |  |                  | (300  | ) |              |   | (150  | )
|                        |  |                  |       |   |              |   |       |  
|                        |  | $                | 2,700 |   |              | $ | 2,850 |  
|                        |  |                  |       |   |              |   |       |  

Carmichaels Loan - On April 22, 2008, SunLink Scripts Rx,
LLC (formerly known as SunLink Homecare Services LLC) entered into a $3,000 promissory note agreement with an interest rate of 8% with the former owners of Carmichael as part of the acquisition purchase price. The note is payable in semi-annual
installments of $150 beginning on April 22, 2009 with the remaining balance of $1,200 due April 22, 2015. Interest is payable in arrears semi-annually on the six-month anniversary of the issuance of the note. The note is guaranteed by
SunLink Health Systems, Inc. for the payment of the note and accrued interest. The note is subordinate to the 2008 Credit Facility.

Note
11.  Income Taxes

Income tax benefit of $84 ($58 federal tax benefit and $26 state tax benefit) and income tax
expense of $30 ($27 federal tax expense and $3 state tax expense) was recorded for the three months ended December 31, 2008 and 2007, respectively. Income tax benefit of $650 ($577 federal tax benefit and $73 state tax benefit) and income tax
expense of $248 ($222 federal tax expense and $26 state tax expense) was recorded for the six months ended December 31, 2008 and 2007, respectively. We had an estimated net operating loss carry-forward for federal income tax purposes of
approximately $6,500 at December 31, 2008. Use of this net operating loss carry-forward is subject to the limitations of the provisions of Internal Revenue Code Section 382. As a result, not all of the net operating loss carry-forward is
available to offset federal taxable income in the current year. At December 31, 2008, we have provided a partial valuation allowance against the domestic deferred tax asset so that the net domestic tax asset was $2,829. Based upon
managements assessment that it was more likely than not that a portion of its domestic deferred tax asset (primarily its domestic net operating losses subject to limitation) would not be recovered, the Company established a valuation allowance
for the portion of the domestic tax asset which may not be utilized. The Company has provided a valuation allowance for the entire amount of the foreign tax asset as it is more likely than not that none of the foreign deferred tax assets will be
realized through future taxable income or implementation of tax planning strategies.

The Company adopted the provisions of
FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109 on July 1, 2007. It requires that a change in judgment related to
prior years tax positions be recognized in the quarter of such change. As a result of the implementation of FIN 48, the Company recognized a liability for unrecognized tax benefits in the amount of $58 which was accounted for as the



17



---

creation of a deferred tax asset as of July 1, 2007. A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:



|                                                         |  |   |     |  
|-------------------------------------------------------- |  | - | --- | -
|Balance at July 1, 2008                                  |  | $ | 58  |  
|Additions based on tax positions related to current year |  |   | 7   |  
|Additions for tax positions of prior years               |  |   |    |  
|Reductions for tax positions of current year             |  |   |    |  
|Reductions for tax positions of prior years              |  |   | (11 | )
|Settlements                                              |  |   |    |  
|                                                         |  |   |     |  
|Balance at December 31, 2008                             |  | $ | 54  |  
|                                                         |  |   |     |  

The Company and its subsidiaries files income tax returns in the U.S. federal
jurisdiction, and various states and foreign jurisdictions. The Company is not currently subject to U.S. federal, state or local, or non-U.S. income tax examinations by tax authorities for any tax years. We therefore believe that there is no tax
jurisdiction in which the outcome of unresolved issues or claims is likely to be material to our financial position, cash flows or results of operations. We further believe that we have made adequate provision for all income tax uncertainties.

At July 1, 2008, our unrecognized tax benefits, the aggregate tax effect of differences between tax return positions and
the benefits recognized in our financial statements as shown above, amounted to $58. This amount decreased during the current period to $54. If recognized, all of our unrecognized tax benefits would not reduce our income tax expense or effective tax
rate except as such recognition related to the removal of the liability associated with interest classified as income tax expense. No portion of any such reduction might be reported as discontinued operations. During 2008, certain factors could
potentially reduce our unrecognized tax benefits, either because of the expiration of open statutes of limitation or modifications to our intercompany accounting policies and procedures. Of these tax positions, none relate to positions that would
affect our total tax provision or effective tax rate (except as such recognition related to the removal of the liability associated with interest classified as income tax expense).

We classify interest on tax deficiencies and income tax penalties as tax expense. At July 1, 2008, before any tax benefits, our accrued interest on unrecognized tax benefits
amounted to $10 and we had recorded no related accrued penalties. The amount of accrued interest increased by $2 during the six months ended December 31, 2008 to $12.

Note 12.  Minority Interest

On February 1, 2008, SunLink sold
17% of the Chilton Medical Center in Clanton, Alabama, to individual physicians practicing at that facility. The minority interest reported reflects these physicians ownership interest at December 31, 2008. The results of operations for the
period from February 1, 2008 to June 30, 2008 and from July 1, 2008 to December 31, 2008 were a loss and did not result in any change in the physicians ownership interest.

Note 13.  Comprehensive Earnings

Comprehensive earnings for SunLink include foreign currency translation adjustments and change in minimum pension liability. The foreign currency translation adjustment results primarily from the effect
of changes in the exchange rates of the UK pound on the Companys reserve for the Beldray Guarantee (See Note 4. Discontinued Operations).



18



---

Total comprehensive earnings for the following periods were as follows:



|                                         |  |                                |      |   |                              |   |     |            |  |   |      |   |  |   |    
|---------------------------------------- |  | ------------------------------ | ---- | - | ---------------------------- | - | --- | ---------- |  | - | ---- | - |  | - | ---
|                                         |  | Three Months EndedDecember 31, |      |   | Six Months EndedDecember 31,
|                                         |  | 2008                           |      |   | 2007                         |   |     | 2008       |  |   | 2007
|                                         |  | (Restated)                     |      |   |                              |   |     | (Restated) |  |   |     
|Net earnings (loss)                      |  | $                              | (264 | ) |                              | $ | (33 | )          |  | $ | (928 | ) |  | $ | 360
|Other comprehensive income net of tax:   |  |                                |      |   |                              |   |     |            |  |   |      |   |  |   |    
|Change in equity due to:                 |  |                                |      |   |                              |   |     |            |  |   |      |   |  |   |    
|Foreign currency translation adjustments |  |                                | 165  |   |                              |   | 42  |            |  |   | 333  |   |  |   | 14 
|                                         |  |                                |      |   |                              |   |     |            |  |   |      |   |  |   |    
|Comprehensive earnings (loss)            |  | $                              | (99  | ) |                              | $ | 9   |            |  | $ | (595 | ) |  | $ | 374
|                                         |  |                                |      |   |                              |   |     |            |  |   |      |   |  |   |    

Note 14.  Commitments and Contingencies

On July 13, 2006, Piedmont Healthcare, Inc. (PHI) and Piedmont Mountainside Hospital, Inc. (PMH) (collectively
the Plaintiffs or Piedmont) filed a Complaint in the Superior Court of Cobb County, Georgia, alleging breach of the Asset Purchase Agreement (the Agreement) dated as of April 9, 2004 by and among PMH,
Piedmont Medical Center, Inc. (n/k/a PMI), Southern Health Corporation of Jasper, Inc. (SHCJ), SunLink Healthcare LLC (formerly SunLink Healthcare Corp.) and SunLink (collectively Defendants or SunLink) pursuant
to which the Mountainside Medical Center was sold to PMH in June 2004. Specifically, Piedmont seeks to have SunLink reimburse Piedmont for certain costs associated with an alleged indigent and charity care shortfall of Piedmont Mountainside Hospital
(formerly Mountainside Medical Center) for the fiscal year ended June 30, 2004 demanded by the Georgia Department of Community Health (DCH). In addition, Piedmont seeks reimbursement for funds allegedly recouped from PMH by DCH in
respect of Medicaid Cost Report settlements and adjustments for the reporting periods ended June 30, 2002, June 30, 2003 and May 31, 2004. Piedmont also seeks a declaratory judgment to the effect that PMH may retain certain
payments it has received or likely will receive from the DCHs Indigent Care Trust Fund for Disproportionate Share Hospitals. Piedmont also seeks recovery of costs and attorneys fees pursuant to the Agreement and under Georgia Law.

On August 11, 2006, SunLink filed an Answer to the complaint asserting factual and legal defenses, along with a
Counterclaim. In the Counterclaim, SHCJ alleges that PMH breached the Agreement by failing to reimburse SHCJ for certain Medicaid Cost Report adjustments for the reporting periods ended June 30, 1999, and June 30, 2000, as well as funds
paid or expected to be paid to PMH from the DCHs Indigent Care Trust Fund for Disproportionate Share Hospitals, which payments Defendants contend qualify as excluded assets not sold to PMH under the Agreement. SHCJ also alleged
that PMH breached the Agreement by failing to cooperate with SHCJ in an appeal of certain Medicaid Cost Reports settlements for the reporting period ended June 30, 2002, June 30, 2003 and May 31, 2004. SHCJ further alleged that
Piedmont breached its obligations to guarantee PMHs payment and performance of its obligations under the Agreement. SunLink sought a declaratory judgment regarding the parties rights in respect of the Medicaid Cost Report settlements and
adjustments, as well as the payment made and expected to be made under the Indigent Care Trust Fund. Also, SunLink sought to recover their costs and attorneys fees pursuant to the Agreement and under Georgia law.



19



---

On October 13, 2008, the Superior Court of Cobb County, Georgia, ruled in
SunLinks favor and determined that the May and August 2006 DSH payments constitute excluded assets not sold to PMH under the Agreement and, therefore, the right to receive the payments belonged to SunLink. By PMH retaining the
payments for itself and failing to pay an equivalent amount of money to SunLink, PMH was in breach of the agreement. PMH is liable to SunLink for damages in the amount of $1,056 plus prejudgment interest from August 11, 2006 to October 13,
2008 at the legal rate of 7%. Since PMH appealed the above ruling, SunLink has not recorded a receivable for the judgment amount.

As discussed in Note 4.  Discontinued Operations, SunLink sold its former U.K. housewares manufacturing subsidiary, Beldray Limited (Beldray), to two of its managers in October 2001. Beldray has since
entered into administrative receivership and is under the administration of its primary lender. SunLink believes Beldray ceased to operate in October 2004.

KRUG International U.K. Ltd. (KRUG UK), an inactive U.K. subsidiary of SunLink, entered into a guarantee (the Beldray Guarantee), at a time when it owned Beldray. The Beldray
Guarantee covers Beldrays obligations under a lease of a portion of Beldrays former manufacturing location. KRUG UK was placed into involuntary liquidation by the High Court in February 2005.

On August 6, 2007, the liquidator of KRUG UK made an application in the Birmingham County Court in Birmingham, England, in which the
liquidator is seeking a declaration by the court that a transfer of certain funds in 2001 from KRUG UK to SunLink in connection with the purchase of certain preferred stock of another subsidiary of SunLink and the making of a loan to SunLink, and
certain forgiveness of debt to SunLink by KRUG UK was improper, among other things, as KRUG UK was then effectively insolvent and that the approval of such transfers by the then directors of KRUG UK resulted in a breach of their fiduciary duties.
The liquidator seeks to have the court order the former directors or, in the alternative, the Company, to account for, repay or restore such funds plus interest to the liquidator of KRUG UK. On December 4, 2007, the case went to mediation but
no settlement was reached. In connection with the allegations in the application of breach of fiduciary duty by the directors of KRUG UK in approving such transfer of funds, SunLink has indemnification obligations to the former directors of KRUG UK.
SunLink denies any liability to KRUG UK other than to it in KRUG UKs status as a preferred stockholder (the unpaid balance on the promissory note was paid by SunLink at maturity in August 2008). SunLink, through its United Kingdom
counsel, intends to vigorously defend against the liquidators claims.

SunLinks non-current liability
reserves for discontinued operations at December 31, 2008, included a reserve for a portion of the Beldray Guarantee. Such reserve was based upon managements estimate, after consultation with its property consultants and legal counsel, of
the cost to satisfy the Beldray Guarantee in light of KRUG UKs limited assets and before taking into account any other claims against KRUG UK. The maximum potential obligation of KRUG UK for rent under the Beldray Guarantee is estimated to be
approximately $8,400. SunLink expensed $122 in the three months ended December 31, 2008 and $140 in the six months ended December 31, 2008 on legal costs to defend against the claim. As a result of this claim and the U.K. liquidation
proceedings against KRUG UK, SunLink expects KRUG UK to be wound-up in liquidation in the UK and has fully reserved for any assets of KRUG UK.



20



---

Additional contingent obligations, other than with respect to our existing operations,
include potential product liability claims for products manufactured and sold before the disposal of our discontinued industrial segment in fiscal year 1989 and for guarantees of certain obligations of former subsidiaries. We have provided an
accrual at December 31, 2008 related to the Beldray Lease Guarantee, as discussed above. Based upon an evaluation of information currently available and consultation with legal counsel, management has not reserved any amounts for contingencies
related to these liquidations.

SunLink is a party to claims and litigation incidental to its business, for which it is not
currently possible to determine the ultimate liability, if any. Based on an evaluation of information currently available and consultation with legal counsel, management believes that resolution of such claims and litigation is not likely to have a
material effect on the financial position, cash flows, or results of operations of the Company. The Company expenses legal costs as they are incurred.

Other

The former owners of Carmichaels Cashway Pharmacy, Inc. received 334,448 common shares of
SunLink as partial consideration for the business and SunLink is obligated to pay the difference between the market value at business sale date and the price per share received for any shares sold less $1 per share if these shares are sold within
one year from the acquisition date. The put option derivative liability as of December 31, 2008 was $659 and was recorded in other accrued expenses in the consolidated balance sheet. See Notes 3 and 6.

In August 2007, the Company received final approval of a Certificate of Need application with the State of Georgia to build a replacement
hospital in Ellijay, Georgia. SunLink exercised its option to purchase land in Ellijay, however the seller failed to close, and SunLink and the seller of the land are currently in litigation and the outcome is uncertain. Cost for such property is
approximately $3,300. Except for the Ellijay, Georgia land purchase, there are no other material future commitments for capital expenditures.

Contractual Obligations, Commitments and Contingencies

Contractual obligations, commitments and
contingencies related to long-term debt, non-cancelable operating leases, physician guarantees and interest on outstanding debt from continuing operations at December 31, 2008 were as follows:



|                 |  |               |        |                           |   |                 |  |                     |       |                           |   |                                       |  |   |        |  |   |      
|---------------- |  | ------------- | ------ | ------------------------- | - | --------------- |  | ------------------- | ----- | ------------------------- | - | ------------------------------------- |  | - | ------ |  | - | -----
|Payments due in: |  | Long-TermDebt |        | SubordinatedLong-TermDebt |   | OperatingLeases |  | PhysicianGuarantees |       | InterestOnOutstandingDebt |   | InterestOnSubordinatedOutstandingDebt
|                 |  |               |        |                           |   |                
|1 year           |  | $             | 1,750  |                           | $ | 300             |  | $                   | 2,669 |                           | $ |                                      |  | $ | 2,573  |  | $ | 228  
|                 |  |               |        |                           |   |                
|2 years          |  |               | 1,750  |                           |   | 300             |  |                     | 1,751 |                           |   |                                      |  |   | 2,425  |  |   | 204  
|3 years          |  |               | 1,750  |                           |   | 300             |  |                     | 870   |                           |   |                                      |  |   | 2,289  |  |   | 180  
|4 years          |  |               | 1,750  |                           |   | 300             |  |                     | 463   |                           |   |                                      |  |   | 2,137  |  |   | 156  
|5 years          |  |               | 1,750  |                           |   | 300             |  |                     | 282   |                           |   |                                      |  |   | 2,001  |  |   | 132  
|5 years +        |  |               | 24,711 |                           |   | 1,500           |  |                     | 1,280 |                           |   |                                      |  |   | 1,932  |  |   | 120  
|                 |  |               |        |                           |   |                
|                 |  |               |        |                           |   |                 |  |                     |       |                           |   |                                       |  |   |        |  |   |      
|                 |  | $             | 33,461 |                           | $ | 3,000           |  | $                   | 7,315 |                           | $ |                                      |  | $ | 13,357 |  | $ | 1,020
|                 |  |               |        |                           |   |                 |  |                     |       |                           |   |                                       |  |   |        |  |   |      

At December 31, 2008 SunLink had no outstanding contracts with physicians that
contained guaranteed minimum gross receipts. A physician with whom a guarantee agreement is made generally agrees to maintain his/her practice within the hospital geographic area for a specific



21



---

period (normally three years) or be liable to repay all or a portion of the guarantee received. The physicians liability for any guarantee repayment due to non-compliance with guarantee
provisions generally is collateralized by the physicians patient accounts receivable and/or a promissory note from the physician. SunLink expensed $195 and $169 on physician guarantees and recruiting for the three months ended
December 31, 2008 and 2007, respectively, and expensed $384 and $316 on physician guarantees and recruiting for the six months ended December 31, 2008 and 2007, respectively. The table above shows noncancelable commitments under physician
guarantee contracts as of December 31, 2008.

Note 15. Related Party Transactions

A director of the Company and our company secretary (who was a director of SunLink until November 2003 and is now a director emeritus) are
members of two different law firms, each of which provides services to SunLink. The Company has paid to these firms an aggregate of $114 and $242 for the three months ended December 31, 2008 and 2007, respectively, and $315 and $439 for the six
months ended December 31, 2008 and 2007, respectively for such services.

Note 16.  Financial Information By Segments

Prior to the acquisition of Carmichael in April 2008, we operated as a single business segment. Under SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief
operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision-making group is composed of the chief executive officer and members of senior management. Our two
reportable operating segments are Healthcare Facilities and Specialty Pharmacy.

We evaluate performance of our operating
segments based on revenue and operating profit (loss). Segment information for the quarter and six months ended December 31, 2008 is as follows:



|                                               |  |                      |        |                   |   |                    |  |   |        |   |  |   |        
|---------------------------------------------- |  | -------------------- | ------ | ----------------- | - | ------------------ |  | - | ------ | - |  | - | -------
|                                               |  | HealthcareFacilities |        | SpecialtyPharmacy |   | CorporateAnd Other |  |   | Total 
|Three months ended December 31, 2008:          |  |                      |        |                   |   |                    |  |   |        |   |  |   |        
|(Restated)                                     |  |                      |        |                   |   |                    |  |   |        |   |  |   |        
|                                               |  |                      |        |                  
|Net Revenues from external customers           |  | $                    | 36,430 |                   | $ | 13,328             |  | $ |       |   |  | $ | 49,758 
|Operating profit (loss)                        |  |                      | 1,236  |                   |   | 745                |  |   | (1,144 | ) |  |   | 837    
|Depreciation and amortization                  |  |                      | 1,209  |                   |   | 379                |  |   | 111    |   |  |   | 1,699  
|Assets                                         |  |                      | 71,517 |                   |   | 28,803             |  |   | 8,237  |   |  |   | 108,557
|Expenditures for property, plant and equipment |  | $                    | 209    |                   | $ | 80                 |  | $ | 34     |   |  | $ | 323    
|                                               |  |                      |        |                  
|Six months ended December 31, 2008:            |  |                      |        |                   |   |                    |  |   |        |   |  |   |        
|(Restated)                                     |  |                      |        |                   |   |                    |  |   |        |   |  |   |        
|                                               |  |                      |        |                  
|Net Revenues from external customers           |  | $                    | 73,497 |                   | $ | 22,939             |  | $ |       |   |  | $ | 96,436 
|Operating profit (loss)                        |  |                      | 2,598  |                   |   | 991                |  |   | (2,674 | ) |  |   | 915    
|Depreciation and amortization                  |  |                      | 2,421  |                   |   | 754                |  |   | 229    |   |  |   | 3,404  
|Assets                                         |  |                      | 71,517 |                   |   | 28,803             |  |   | 8,237  |   |  |   | 108,557
|Expenditures for property, plant and equipment |  | $                    | 342    |                   | $ | 187                |  | $ | 176    |   |  | $ | 705    



22



---

|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

(dollars in thousands, except per share and admissions data)

Forward-Looking Statements

This Quarterly Report and the documents that are
incorporated by reference in this Quarterly Report contain certain forward-looking statements within the meaning of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Forward-looking
statements include all statements that do not relate solely to historical or current facts and may be identified by the use of words such as may, believe, will, expect, project,
estimate, anticipate, plan or continue. These forward-looking statements are based on current plans and expectations and are subject to a number of risks, uncertainties and other factors which could
significantly affect current plans and expectations and our future financial condition and results. These factors, which could cause actual results, performance and achievements to differ materially from those anticipated, include, but are not
limited to:

General Business Conditions



| |  |  | general economic and business conditions in the U.S., both nationwide and in the states in which we operate;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | the competitive nature of the U.S. community hospital, nursing home, homecare and specialty pharmacy businesses;
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | demographic changes in areas where we operate;
| | - |  | ----------------------------------------------



| |  |  | the availability of cash or borrowings to fund working capital, renovations, replacements, expansions and capital improvements at existing
healthcare facilities and for acquisitions and replacement healthcare facilities;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in accounting principles generally accepted in the U.S.; and,
| | - |  | ---------------------------------------------------------------------



| |  |  | fluctuations in the market value of equity securities including SunLink common shares;
| | - |  | --------------------------------------------------------------------------------------

Operational Factors



| |  |  | inability to operate profitability in one or more segments of the healthcare business;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | the availability of, and our ability to attract and retain, sufficient qualified staff physicians, management, nurses, pharmacists and staff
personnel for our operations;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | timeliness and amount of reimbursement payments received under government programs;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | restrictions imposed by debt agreements;
| | - |  | ----------------------------------------



| |  |  | the cost and availability of insurance coverage including professional liability (e.g., medical malpractice) and general liability insurance;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the efforts of insurers, healthcare providers, and others to contain healthcare costs;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | the impact on hospital services of the treatment of patients in lower acuity healthcare settings, whether with drug therapy or via alternative
healthcare services, such as surgery centers or urgent care centers;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in medical and other technology;
| | - |  | ----------------------------------------



| |  |  | risks of changes in estimates of self insurance claims and reserves;
| | - |  | --------------------------------------------------------------------



| |  |  | increases in prices of materials and services utilized in our hospital and pharmacy operations;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | increases in wages as a result of inflation or competition for management, physician, nursing, pharmacy and staff positions;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | increases in the amount and risk of collectibility of accounts receivable, including deductibles and co-pay amounts; and,
| | - |  | -------------------------------------------------------------------------------------------------------------------------



23



---

| |  |  | the functionality or costs with respect to our management information system for our hospitals, including both software and hardware;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------

Liabilities, Claims, Obligations and Other Matters



| |  |  | claims under leases, guarantees and other obligations relating to discontinued operations, including sold facilities, retained or acquired
subsidiaries and former subsidiaries;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | potential adverse consequences of known and unknown government investigations;
| | - |  | ------------------------------------------------------------------------------



| |  |  | claims for product and environmental liabilities from continuing and discontinued operations;
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | professional, general and other claims which may be asserted against us; and
| | - |  | ----------------------------------------------------------------------------



| |  |  | weather-related events such as flooding, wind damage and population evacuations affecting areas in which we operate, including Louisiana and South
Georgia.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------

Regulation and Governmental Activity



| |  |  | existing and proposed governmental budgetary constraints;
| | - |  | ---------------------------------------------------------



| |  |  | the regulatory environment for our businesses, including state certificate of need laws and regulations, rules and judicial cases relating thereto;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | anticipated adverse changes in the levels and terms of government (including Medicare, Medicaid and other programs) and private reimbursement for
SunLinks healthcare services including the payment arrangements and terms of managed care agreements;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in or failure to comply with Federal, state or local laws and regulations affecting the healthcare industry; and,
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | the possible enactment of Federal healthcare reform laws or reform laws in states where we operate hospital and pharmacy facilities (including
Medicaid waivers and other reforms);
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Acquisition Related Matters



| |  |  | the availability and terms of capital to fund additional acquisitions or replacement facilities;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | impairment or uncollectibility of certain acquired assets;
| | - |  | ----------------------------------------------------------



| |  |  | assumed liabilities discovered subsequent to an acquisition;
| | - |  | ------------------------------------------------------------



| |  |  | our ability to integrate acquired healthcare businesses and implement our business strategy; and
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | competition in the market for acquisitions of hospitals and healthcare businesses.
| | - |  | ----------------------------------------------------------------------------------

As a consequence, current plans, anticipated actions and future financial condition and results may differ from those
expressed in any forward-looking statements made by or on behalf of SunLink. You are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in this Form 10-Q. We have not undertaken any obligation
to publicly update or revise any forward-looking statements.

Corporate Business Strategy

SunLinks business strategy for our healthcare facilities is to focus our efforts on internal growth of our seven
hospitals, three nursing homes and four home health agencies, supplemented by growth from selected rural and exurban healthcare facility acquisitions, including but not limited to hospitals, nursing homes and home health agencies. During the quarter
and six months ended December 31, 2008, we concentrated our healthcare facilities efforts on the operations and improvement of our existing hospitals. During the current fiscal year, we have evaluated certain rural and exurban hospitals and
healthcare facilities, which were for sale and monitored other selected rural and exurban healthcare acquisition targets we believed might become available for



24



---

sale. We continue to engage in similar evaluation and monitoring activities with respect to rural and exurban hospitals and healthcare facilities, which are or may become available for
acquisition.

Our hospital facilities operations efforts are focused on internal growth, with our primary
operational strategy being to improve the profitability of our hospitals by reducing out-migration of patients, recruiting physicians, expanding services and implementing and maintaining effective cost controls.

Our acquisition strategy for our pharmacy business is to acquire such businesses in rural or exurban markets where the
acquisition is complementary to our existing pharmacy services and in new rural and exurban markets where the scale of the acquisition is sufficient to provide a foundation to grow Specialty Pharmacy in that area.

Critical Accounting Estimates

The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect reported amounts and related disclosures.
We consider an accounting estimate to be critical if:



| |  |  | it requires assumptions to be made that were uncertain at the time the estimate was made; and
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | changes in the estimate or different estimates that could have been made could have a material impact on our consolidated results of operations or
financial condition.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our critical accounting estimates are more fully described in our 2008
Annual Report on Form 10-K and continue to include the following areas:



| |  |  | Receivables  net and provision for doubtful accounts;
| | - |  | ------------------------------------------------------



| |  |  | Revenue recognition / Net Patient Service Revenues;
| | - |  | ---------------------------------------------------



| |  |  | Goodwill and accounting for business combinations;
| | - |  | --------------------------------------------------



| |  |  | Professional and general liability claims; and
| | - |  | ----------------------------------------------



| |  |  | Accounting for income taxes.
| | - |  | ----------------------------



25



---

Financial Summary

The results of continuing operations shown in the financial summary below are for our two business segments, Healthcare Facilities and Specialty Pharmacy.



|                                                               |  |                                |         |   |                              |   |         |          |  |        |            |  |   |         |   |  |          |         |   |  |        |  
|-------------------------------------------------------------- |  | ------------------------------ | ------- | - | ---------------------------- | - | ------- | -------- |  | ------ | ---------- |  | - | ------- | - |  | -------- | ------- | - |  | ------ | -
|                                                               |  | THREE MONTHS ENDEDDecember 31, |         |   | SIX MONTHS ENDEDDecember 31, |  
|                                                               |  | 2008                           |         |   | 2007                         |   |         | % Change |  |        | 2008       |  |   | 2007    |   |  | % Change |        
|                                                               |  | (Restated)                     |         |   |                              |   |         |          |  |        | (Restated) |  |   |         |   |  |          |        
|Net Revenues - Healthcare Facilities                           |  | $                              | 36,430  |   |                              | $ | 36,969  |          |  | -1.46  | %          |  | $ | 73,497  |   |  | $        | 75,205  |   |  | -2.27  | %
|Net Revenues - Specialty Pharmacy                              |  |                                | 13,328  |   |                              |   |        |          |  | N/A    |            |  |   | 22,939  |   |  |          |        |   |  | N/A    |  
|                                                               |  |                                |         |   |                              |   |         |          |  |        |            |  |   |         |   |  |          |         |   |  |        |  
|Total Net Revenues                                             |  |                                | 49,758  |   |                              |   | 36,969  |          |  | 34.59  | %          |  |   | 96,436  |   |  |          | 75,205  |   |  | 28.23  | %
|Costs and expenses                                             |  |                                | (48,921 | ) |                              |   | (36,480 | )        |  | 34.10  | %          |  |   | (95,521 | ) |  |          | (73,650 | ) |  | 29.70  | %
|                                                               |  |                                |         |   |                              |   |         |          |  |        |            |  |   |         |   |  |          |         |   |  |        |  
|Operating profit                                               |  |                                | 837     |   |                              |   | 489     |          |  | 71.17  | %          |  |   | 915     |   |  |          | 1,555   |   |  | -69.95 | %
|Gain on sale of assets                                         |  |                                | 180     |   |                              |   |        |          |  | N/A    |            |  |   | 180     |   |  |          |        |   |  | N/A    |  
|Interest expense                                               |  |                                | (1,272  | ) |                              |   | (436    | )        |  | 191.74 | %          |  |   | (2,526  | ) |  |          | (846    | ) |  | 198.58 | %
|Interest income                                                |  |                                | 10      |   |                              |   | 28      |          |  | -64.29 | %          |  |   | 17      |   |  |          | 33      |   |  | -48.48 | %
|                                                               |  |                                |         |   |                              |   |         |          |  |        |            |  |   |         |   |  |          |         |   |  |        |  
|Earnings (Loss) from continuing operations before income taxes |  | $                              | (245    | ) |                              | $ | 81      |          |  | N/A    |            |  | $ | (1,414  | ) |  | $        | 742     |   |  | N/A    |  
|                                                               |  |                                |         |   |                              |   |         |          |  |        |            |  |   |         |   |  |          |         |   |  |        |  
|Healthcare Facilities Segment:                                 |  |                                |         |   |                              |   |         |          |  |        |            |  |   |         |   |  |          |         |   |  |        |  
|Admissions                                                     |  |                                | 2,081   |   |                              |   | 2,142   |          |  | -2.85  | %          |  |   | 4,176   |   |  |          | 4,314   |   |  | -3.20  | %
|Equivalent admissions                                          |  |                                | 6,180   |   |                              |   | 6,114   |          |  | 1.08   | %          |  |   | 12,303  |   |  |          | 12,782  |   |  | -3.75  | %
|Surgeries                                                      |  |                                | 881     |   |                              |   | 1,131   |          |  | -22.10 | %          |  |   | 1,864   |   |  |          | 2,276   |   |  | -18.10 | %
|Revenue per equivalent admissions                              |  | $                              | 5,895   |   |                              | $ | 6,047   |          |  | -2.51  | %          |  | $ | 5,974   |   |  | $        | 5,884   |   |  | 1.53   | %

Equivalent admissions Equivalent admissions is used by
management (and certain investors) as a general measure of combined inpatient and outpatient volume. Equivalent admissions are computed by multiplying admissions (inpatient volume) by the sum of gross inpatient revenues and gross outpatient revenues
and dividing the result by gross inpatient revenues. The equivalent admissions computation is intended to relate outpatient revenues to the volume measure (admissions) used to measure inpatient volume to result in a general approximation of combined
inpatient and outpatient volume (equivalent admissions).

Results of Operations

Healthcare Facilities Segment

Net revenues for the quarter ended December 31, 2008 were $36,430 with a total of 6,180 equivalent admissions and revenue per equivalent admission of $5,895 compared to net revenues $36,969 with a
total of 6,114 equivalent admissions and revenue per equivalent admission of $6,047 for the quarter ended December 31, 2007.

The following table sets forth the percentage of net patient revenues from major payor sources for the Companys Healthcare Facilities during the periods indicated:



|                             |  |                                |   |  |                              |   |  |       |   |  |       |  
|---------------------------- |  | ------------------------------ | - |  | ---------------------------- | - |  | ----- | - |  | ----- | -
|                             |  | Three Months EndedDecember 31, |   |  | Six Months EndedDecember 31, |  
|                             |  | 2008                           |   |  | 2007                         |   |  | 2008  |   |  | 2007  |  
|Source                       |  |                                |   |  |                              |   |  |       |   |  |       |  
|Medicare                     |  | 42.0                           | % |  | 40.4                         | % |  | 41.4  | % |  | 39.8  | %
|Medicaid                     |  | 14.2                           | % |  | 14.9                         | % |  | 14.1  | % |  | 14.4  | %
|Self pay                     |  | 12.9                           | % |  | 12.4                         | % |  | 12.7  | % |  | 14.1  | %
|Commercial Insurance & Other |  | 30.9                           | % |  | 32.3                         | % |  | 31.8  | % |  | 31.7  | %
|                             |  |                                |   |  |                              |   |  |       |   |  |       |  
|                             |  | 100.0                          | % |  | 100.0                        | % |  | 100.0 | % |  | 100.0 | %
|                             |  |                                |   |  |                              |   |  |       |   |  |       |  



26



---

The 1.46% decrease in net revenues for the quarter ended December 31,
2008 was primarily due to increases in outpatient revenue and self pay offset by decreases in Medicaid and commercial insurance and other. Outpatient revenue increased $370, a 2.0% increase from last year, to $18,559 for the three months ended
December 31, 2008. Self pay revenue increased $138, a 0.6% increase from last year, to $18,559 for the three months ended December 31, 2008. Medicaid revenues decreased $324, a 0.7% decrease from last year, to $5,171 for the three months
ended December 31, 2008. Commercial Insurance & other revenues decreased $710, a 1.5% decrease from last year to $11,252 for the three months ended December 31, 2008.

Net revenue for the three months ended December 31, 2008 and 2007, included net revenues of $210 and $363,
respectively, from state indigent care programs. Net revenues included an increase of $23 and an increase of $249 for the three months ended December 31, 2008 and 2007, respectively, for the settlements and filings of prior year Medicare and
Medicaid cost reports.

Net revenues for the six months ended December 31, 2008 were $73,497 with a total
of 12,303 equivalent admissions and revenue per equivalent admission of $5,974 compared to net revenues of $75,205 with a total of 12,782 equivalent admissions and revenue per equivalent admission of $5,884 for the six months ended December 31,
2007.

The 2.27% decrease in net revenues for the six months ended December 31, 2008 was primarily due to
net outpatient service revenue decreases and decreases in Medicaid and self pay revenues. Net outpatient service revenues decreased $1,070, a 2.8% decrease from last year to $37,040 for the six months ended December 31, 2008 and decreased to
50.4% of net revenues from 50.7% last year. Medicaid revenues decreased $484, a 0.3% decrease from last year to $10,358 for the six months ended December 31, 2008. Self pay revenues decreased $1,196, a 1.3% decrease from last year to $9,369 for
the six months ended December 31, 2008.

Net revenue for the six months ended December 31, 2008 and
2007, included net revenues of $640 and $624, respectively, from state indigent care programs. Net revenues included an increase of $271 and $324 for the six months ended December 31, 2008 and 2007, respectively, for the settlements and filings
of prior year Medicare and Medicaid cost reports.

Medicare increased during the quarter by $358 and by $501
in the six months ended December 31, 2008 compared to the comparable quarter last year. Medicare net revenues have increased due to the increased number of Medicare eligible patients in our service areas. Medicaid net revenues decreased during
the quarter and six months ended December 31, 2008 compared to the comparable quarter last year. Medicaid revenue decreased due to fewer Medicaid eligible patients as a result of more stringent State eligibility standards.

Self-pay revenues decreased for the six months ended December 31, 2008. The decrease in self-pay net revenues resulted
from lower self-pay patient hospital admissions which is thought to have resulted from more uninsured patients either delaying health care treatment due to the economic recession, accessing free or lower cost healthcare available from local
governmental agencies or other sources or both. The lower self-pay net revenue also results partially from hospital managements improvements in identifying the patients insurance carrier or assisting the patient in becoming eligible for
Medicaid. The decrease in inpatient volume contributed to the decreased commercial insurance net revenues in the quarter ended December 31, 2008.

We added nine net new doctors during the year ended June 30, 2008 and no net new doctors during the six months ended December 31, 2008. During the six months ended December 31, 2008,
SunLink expensed $384 on physician guarantees and recruiting expenses compared to $316 for the same period last year. We also have expended approximately $8,911 for capital expenditures to upgrade services and facilities since July 1, 2007.



27



---

We believe the economic recession is negatively affecting our hospital
patient census and our Healthcare Facilities revenue growth. However, we continue to seek increased patient volume by implementing cost controls where needed in our facilities and corporate offices, selectively attracting additional physicians to
our hospitals, selectively upgrading the services offered by the hospitals and improving the hospitals physical facilities.

Specialty Pharmacy Segment

On April 22, 2008 SunLink acquired Carmichael. Net revenue for
the quarter and six months ended December 31, 2008 was significantly affected by the acquisition and was $13,328 and $22,939, respectively.

Healthcare Facilities Segment Costs and Expenses

Cost and expenses for our Healthcare
Facilities including depreciation and amortization, was $35,054 and $35,217 for the three months ended December 31, 2008 and 2007, respectively, and $70,761 and $71,115 for the six months ended December 31, 2008 and 2007, respectively.



|                              |  |                                      |   |  |                              |   |  |      |   |  |      |  
|----------------------------- |  | ------------------------------------ | - |  | ---------------------------- | - |  | ---- | - |  | ---- | -
|                              |  | Cost of RevenuesAs % of Net
Revenues |  
|                              |  | Three Months EndedDecember 31,       |   |  | Six Months EndedDecember 31, |  
|                              |  | 2008                                 |   |  | 2007                         |   |  | 2008 |   |  | 2007 |  
|Salaries, wages and benefits  |  | 46.9                                 | % |  | 45.5                         | % |  | 47.2 | % |  | 45.0 | %
|Provision for bad debts       |  | 14.6                                 | % |  | 14.1                         | % |  | 14.5 | % |  | 15.7 | %
|Supplies                      |  | 9.2                                  | % |  | 10.1                         | % |  | 9.6  | % |  | 10.0 | %
|Purchased services            |  | 7.1                                  | % |  | 6.7                          | % |  | 7.1  | % |  | 6.7  | %
|Other operating expenses      |  | 12.7                                 | % |  | 13.2                         | % |  | 12.2 | % |  | 11.8 | %
|Rent and lease expense        |  | 1.9                                  | % |  | 2.0                          | % |  | 1.9  | % |  | 1.9  | %
|Depreciation and amortization |  | 3.3                                  | % |  | 3.1                          | % |  | 3.3  | % |  | 3.0  | %

Salaries, wages and benefits expense increased as a percentage of net
revenues for the three and six months ended December 31, 2008 due to having more employed physicians and higher employee health claim costs in the quarter and six months ended December 31, 2008 compared to the quarter and six months ended
December 31, 2007.

Provision for bad debts increased as a percentage of net revenue in the three months
ended December 31, 2008 due to increase in self-pay revenue of 0.5%. Provision for bad debts decreased as a percentage of net revenue in the six months ended December 31, 200 due to improved upfront collection procedures, collecting on old
accounts receivable balances and decrease in self-pay revenue of 1.4%.

Supplies expense decreased as a
percentage of net revenue in the current year due to the decreases in admissions and surgeries. Admissions decreased 2.8% and 3.2% and surgeries decreased 22.1% and 18.1% for the three and six months, respectively, ended December 31, 2008.
Purchased services, increased as a percentage of net revenues for the three and six months ended December 31, 2008 due to the cost of a geriatric psychiatry program at one of the facilities that started in June 2008. Other operating expenses
decreased as a percentage of net revenue in the three months ended December 31, 2008 due to decreases in radiology and anesthesia fees and



28



---

repair and maintenance costs. Other operating expenses increased in the six months ended December 31, 2008 due to an increase in general and
professional liability insurance.

Depreciation and amortization expense increased for the three and six months ended
December 31, 2008 compared to the comparable prior year period. The increase was due primarily to the approximately $8,911 of capital expenditures made in the past 18 months.

Specialty Pharmacy Segment Costs and Expenses

Cost and expenses for our Specialty
Pharmacy Segment which was acquired April 22, 2008 including depreciation and amortization, was $12,583 and $0 for the three months ended December 31, 2008 and 2007, respectively, and $21,948 and $0 for the six months ended
December 31, 2008 and 2007, respectively.



|                              |  |                                      |   |  |                              |  
|----------------------------- |  | ------------------------------------ | - |  | ---------------------------- | -
|                              |  | Cost of RevenuesAs % of Net Revenues |  
|                              |  | Three Months EndedDecember 31,       |   |  | Six Months EndedDecember 31, |  
|                              |  | 2008                                 |   |  | 2008                         |  
|                              |  | (Restated)                           |   |  | (Restated)                   |  
|Cost of goods sold            |  | 69.3                                 | % |  | 66.7                         | %
|Salaries, wages and benefits  |  | 12.4                                 | % |  | 14.6                         | %
|Provision for bad debts       |  | 4.9                                  | % |  | 4.6                          | %
|Supplies                      |  | 0.3                                  | % |  | 0.4                          | %
|Purchased services            |  | 2.2                                  | % |  | 3.0                          | %
|Other operating expenses      |  | 2.0                                  | % |  | 2.5                          | %
|Rent and lease expense        |  | 0.5                                  | % |  | 0.6                          | %
|Depreciation and amortization |  | 2.8                                  | % |  | 3.3                          | %

The Specialty Pharmacy Segments business is seasonal. Sales for the three
months ended December 31, 2008 were 58% of sales for the six months ended December 31, 2008. As a result, all cost and expense categories except for cost of goods sold and bad debt expense had a lower percentage of net revenue in the three
months ended December 31, 2008 when compared to the six months ended December 31, 2008 due to the increased sales. Costs of goods sold increased as a percent of net revenue for the three months ended December 31, 2008 compared to the
six months ended December 31, 2008 as a result of significantly increased sales of one infusion therapy product in the three months ended December 31, 2008. This product has a higher cost than the average cost of the products sold by the
Segment. The provision for bad debts increased in the quarter ended December 31, 2008 compared to the six months ended December 31, 2008 due to increased write-offs of uncollectible accounts receivables and an increase in the allowance for
doubtful accounts for durable medical equipment and specialty pharmacy customer accounts receivable during the quarter ended December 31, 2008.

Corporate Overhead Costs and Expenses

Cost and expenses for Corporate Overhead including depreciation and
amortization, was $1,283 and $1,263 for the three months ended December 31, 2008 and 2007, respectively, and $2,811 and $2,535 for the six months ended December 31, 2008 and 2007, respectively. The increase in corporate overhead for the
three and six months ended December 31, 2008 was due to corporate overhead costs related to Carmichael and increased legal and consulting costs.



29



---

Operating Profit

Operating profit for the three months ended December 31, 2008 was $837 compared to an operating profit of $489 for the three months ended December 31, 2007. Operating
profit for the six months ended December 31, 2008 was $915 compared to operating profit of $1,555 last year. The increase in operating profit in the current year was primarily attributable to the operating profit provided by the Specialty
Pharmacy Segment.

Gain on Sale of Assets

Gain on sale of assets for the three and six months ended December 31, 2008 was $180. The gain on sale of assets was due to the sale of a medical office building in Jasper, Georgia that SunLink was
not currently using in its operations.

Interest Expense

Interest expense was $1,272 and $436 for the three months ended December 31, 2008 and 2007, respectively, and was $2,526 and $846 for the six months ended December 31, 2008
and 2007, respectively. The increase in interest expense resulted from higher outstanding debt amounts due to capital expenditures, the $19,000 paid in cash in April 2008 for Carmichael and the $601 in derivative interest related to the Carmichael
acquisition. The former owners of Carmichaels Cashway Pharmacy, Inc. received 334,448 common shares of SunLink as partial consideration for the business and SunLink is obligated to pay the difference between the market value at business sale
date and the price per share received for any shares sold less $1 per share if these shares are sold within a year. In April 2008, we entered into a $47,000 seven-year senior secured credit facility agreement. As of December 31, 2008, our
outstanding balance on our current credit agreement was $38,961. As of December 31, 2007, our outstanding balance on our prior credit agreement was $15,888.

Income Tax Expense

Income tax benefit of $84 ($58 federal
tax benefit and $26 state tax benefit) and income tax expense of $30 ($27 federal tax expense and $3 state tax expense) was recorded for the three months ended December 31, 2008 and 2007, respectively. Income tax benefit of $650 ($577 federal
tax benefit and $73 state tax benefit) and income tax expense of $248 ($222 federal tax expense and $26 state tax expense) was recorded for the six months ended December 31, 2008 and 2007, respectively. We had an estimated net operating loss
carry-forward for federal income tax purposes of approximately $6,500 at December 31, 2008. Use of this net operating loss carry-forward is subject to the limitations of the provisions of Internal Revenue Code Section 382. As a result, not
all of the net operating loss carry-forward is available to offset federal taxable income in the current year. At December 31, 2008, we have provided a partial valuation allowance against the domestic deferred tax asset so that the net domestic
tax asset was $2,829. Based upon managements assessment that it was more likely than not that a portion of its domestic deferred tax asset (primarily its domestic net operating losses subject to limitation) would not be recovered, the Company
established a valuation allowance for the portion of the domestic tax asset which may not be utilized. The Company has provided a valuation allowance for the entire amount of the foreign tax asset as it is more likely than not that none of the
foreign deferred tax assets will be realized through future taxable income or implementation of tax planning strategies.

Earnings

Loss from continuing operations was $161 ($0.02 loss per fully diluted share) for the quarter ended
December 31, 2008 compared to earnings from continuing operations of $51 ($0.01 per fully diluted share) for the comparable quarter last year due to increased interest expense this



30



---

year. Loss from continuing operations was $764 ($0.10 per fully diluted share) for the six months ended December 31, 2008 compared to earnings from continuing operations was $494 ($0.07 per
fully diluted share) for the comparable period last year due to the decrease in the Healthcare Facilities operating profit and increased interest expense.

The loss from discontinued operations after taxes of $164 ($0.02 per fully diluted share) in the six months ended December 31, 2008 primarily resulted from legal costs related to our discontinued
operations. Loss from discontinued operations after taxes were $103 ($0.01 per fully diluted share) for the quarter ended December 31, 2008.

Net loss was $264 (0.03 per fully diluted share) in the quarter ended December 31, 2008 compared to net loss of $33 (0.00 per share) in the quarter ended December 31, 2007. Net loss for the six
months ended December 31, 2008 was $928 ($0.12 per share) compared to net earnings of $360 ($0.05 per fully diluted share) for the six months ended December 31, 2007.

Adjusted earnings before income taxes, interest, depreciation and amortization

Earnings before income taxes, interest, depreciation and amortization (EBITDA) represent the sum of income before income taxes, interest, depreciation and amortization. We understand that
certain industry analysts and investors generally consider EBITDA to be one measure of the liquidity of a company, and it is presented to assist analysts and investors in analyzing the ability of a company to generate cash, service debt and meet
capital requirements. We believe increased EBITDA is an indicator of improved ability to service existing debt and to satisfy capital requirements. EBITDA, however, is not a measure of financial performance under accounting principles generally
accepted in the United States of America and should not be considered an alternative to net income as a measure of operating performance or to cash liquidity. Because EBITDA is not a measure determined in accordance with accounting principles
generally accepted in the United States of America and is thus susceptible to varying calculations, EBITDA, as presented, may not be comparable to other similarly titled measures of other corporations. Where we adjust EBITDA for non-cash charges we
refer to such measurement as Adjusted EBITDA, which we report on a company wide basis. Non-cash adjustments in Adjusted EBITDA are not intended to be identified or characterized in any respect as non-recurring, infrequent or
unusual, if we believe such charge is reasonably likely to recur within two years, or if there was a similar charge (or gain) within the prior two years. Where we report Adjusted EBITDA, we typically also report Hospital Facilities Segment
Adjusted EBITDA and Specialty Pharmacy Segment Adjusted EBITDA which is the EBITDA for the applicable segments without any allocation of corporate overhead, which we report as a separate line item, and without any allocation of the non-cash
adjustments, which we also report as a separate line item in Adjusted EBITDA. Net cash provided by (used in) operations for the three and six months ended December 31, 2008 and 2007, respectively, is shown below.



31



---

|                                                                            |  |                                |        |   |                              |   |        |            |  |   |        |   |  |   |        |  
|--------------------------------------------------------------------------- |  | ------------------------------ | ------ | - | ---------------------------- | - | ------ | ---------- |  | - | ------ | - |  | - | ------ | -
|                                                                            |  | Three Months EndedDecember 31, |        |   | Six Months EndedDecember 31, |  
|                                                                            |  | 2008                           |        |   | 2007                         |   |        | 2008       |  |   | 2007   |  
|                                                                            |  | (Restated)                     |        |   |                              |   |        | (Restated) |  |   |        |  
|Healthcare Facilities Adjusted EBITDA                                       |  | $                              | 2,590  |   |                              | $ | 2,914  |            |  | $ | 5,156  |   |  | $ | 6,359  |  
|Specialty Pharmacy Adjusted EBITDA                                          |  |                                | 1,124  |   |                              |   |       |            |  |   | 1,745  |   |  |   |       |  
|Corporate overhead costs                                                    |  |                                | (1,176 | ) |                              |   | (1,147 | )          |  |   | (2,582 | ) |  |   | (2,302 | )
|Taxes and interest expense                                                  |  |                                | (1,442 | ) |                              |   | (380   | )          |  |   | (2,156 | ) |  |   | (973   | )
|Other non-cash expenses and net changes in operating assets and liabilities |  |                                | (954   | ) |                              |   | 85     |            |  |   | (2,951 | ) |  |   | (266   | )
|                                                                            |  |                                |        |   |                              |   |        |            |  |   |        |   |  |   |        |  
|Net cash provided by (used in) operations                                   |  | $                              | 142    |   |                              | $ | 1,472  |            |  | $ | (788   | ) |  | $ | 2,818  |  
|                                                                            |  |                                |        |   |                              |   |        |            |  |   |        |   |  |   |        |  

Liquidity and Capital Resources

We used $788 of cash from operating activities during the six months ended December 31, 2008 compared to $2,818 of cash
generated during the comparable period last year. The cash used from operations in the current year resulted mainly from decreases in third party payables resulting from cash paid for cost report settlements, increased interest expense due to the
higher debt levels, and cash paid for income tax and debt payments.

On April 23, 2008, SunLink entered
into a $47,000 seven-year senior secured credit facility (2008 Credit Facility) comprised of a revolving line of credit of up to $12,000 with an interest rate at LIBOR plus 3.50% (6.25% at December 31, 2008) (the Revolving
Loan) and a $35,000 term loan with an interest rate at LIBOR plus 5.07% (7.82% at December 31, 2008) (the Term Loan). In the 2008 Credit Facility, LIBOR is defined as the Thirty-Day published rate, not to be less than 2.75%,
however it may not exceed 5.50%. The total availability of credit under all components of the credit facility is keyed to the level of SunLinks earnings, which, based upon the Companys estimates, provided for current borrowing capacity,
before any draws, of approximately $44,500 at December 31, 2008. At closing, the entire $35,000 term loan and $5,500 of the revolving loan were drawn. The Company used the initial proceeds of the loans in the amount of $40,500 to repay
outstanding debt, including its 2004 Credit Agreement, to pay the cash portion of the purchase price for the Carmichael acquisition, to pay fees and expenses thereunder and for general corporate purposes. Costs and fees related to execution of the
credit facility were $2,174. The fees will be amortized over seven years at approximately $370 a year and are recorded in other assets and other non-current assets. Amortization expense was $95 and $187, respectively, for the quarter and six months
ended December 31, 2008. Accumulated amortization was $248 at December 31, 2008. The Credit Facility is secured by a first priority security interest in substantially all real and personal property of the Company and its consolidated
domestic subsidiaries, including a pledge of all of the equity interests in such subsidiaries.

If SunLink or
its applicable subsidiaries experience a material adverse change in their business, assets, financial condition, management or operations, or if the value of the collateral securing the SunLink 2008 Credit Facility decreases, we may be unable to
draw on such credit facility.

We expended $574 for capital improvements during the six months ended
December 31, 2008 and expect to spend approximately $1,500 during the remainder of this fiscal year. We believe attractive and up-to-date physical facilities assist in recruiting quality staff and physicians, as well as attracting patients.



32



---

We believe we have adequate financing and liquidity to support our current
level of operations through the next twelve months. Our primary sources of liquidity are cash generated from continuing operations and availability under the SunLink 2008 Credit Facility. The total availability of credit under all components of the
SunLink 2008 Credit Facility is keyed to the level of SunLinks earnings, which, based upon the Companys estimates, would provide for current borrowing capacity of approximately $44,500 at December 31, 2008, of which $33,461 was
outstanding under a term loan and $5,500 was outstanding on a revolver loan. The current remaining availability of approximately $5,539 could be adversely affected by, among other things, the risk, uncertainties and other factors listed at the
beginning of the Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A), as well as lower earnings due to lower demand for our services by patients, changes in patient mix and changes in terms and
levels of government and private reimbursement for services. Cash generated from operations could be adversely affected by, among other things, the risks, uncertainties and other factors listed at the beginning of the MD&A, as well as lower
patient demand for our services, higher operating costs (including, but not limited to, salaries, wages and benefits, provisions for bad debts, general liability and other insurance costs, cost of pharmaceutical drugs and other operating expenses)
or by changes in terms and levels of government and private reimbursement for services, and the regulatory environment of the community hospital segment.

Contractual obligations, commitments and contingencies related to long-term debt, non-cancelable operating leases, physician guarantees and interest on outstanding debt from continuing operations at
December 31, 2008 were as follows:



|                 |  |               |        |                           |   |                 |  |                     |       |                           |   |                                       |  |   |        |  |   |      
|---------------- |  | ------------- | ------ | ------------------------- | - | --------------- |  | ------------------- | ----- | ------------------------- | - | ------------------------------------- |  | - | ------ |  | - | -----
|Payments due in: |  | Long-TermDebt |        | SubordinatedLong-TermDebt |   | OperatingLeases |  | PhysicianGuarantees |       | InterestOnOutstandingDebt |   | InterestOnSubordinatedOutstandingDebt
|1 year           |  | $             | 1,750  |                           | $ | 300             |  | $                   | 2,669 |                           | $ |                                      |  | $ | 2,573  |  | $ | 228  
|                 |  |               |        |                           |   |                
|2 years          |  |               | 1,750  |                           |   | 300             |  |                     | 1,751 |                           |   |                                      |  |   | 2,425  |  |   | 204  
|3 years          |  |               | 1,750  |                           |   | 300             |  |                     | 870   |                           |   |                                      |  |   | 2,289  |  |   | 180  
|4 years          |  |               | 1,750  |                           |   | 300             |  |                     | 463   |                           |   |                                      |  |   | 2,137  |  |   | 156  
|5 years          |  |               | 1,750  |                           |   | 300             |  |                     | 282   |                           |   |                                      |  |   | 2,001  |  |   | 132  
|5 years +        |  |               | 24,711 |                           |   | 1,500           |  |                     | 1,280 |                           |   |                                      |  |   | 1,932  |  |   | 120  
|                 |  |               |        |                           |   |                
|                 |  |               |        |                           |   |                 |  |                     |       |                           |   |                                       |  |   |        |  |   |      
|                 |  | $             | 33,461 |                           | $ | 3,000           |  | $                   | 7,315 |                           | $ |                                      |  | $ | 13,357 |  | $ | 1,020
|                 |  |               |        |                           |   |                 |  |                     |       |                           |   |                                       |  |   |        |  |   |      

At December 31, 2008 SunLink had no outstanding contracts with
physicians that contained guaranteed minimum gross receipts. A physician with whom a guarantee agreement is made generally agrees to maintain his/her practice within the hospital geographic area for a specific period (normally three years) or be
liable to repay all or a portion of the guarantee received. The physicians liability for any guarantee repayment due to non-compliance with guarantee provisions generally is collateralized by the physicians patient accounts receivable
and/or a promissory note from the physician. SunLink expensed $195 and $169 on physician guarantees and recruiting for the three months ended December 31, 2008 and 2007, respectively, and expensed $384 and $316 on physician guarantees and
recruiting for the six months ended December 31, 2008 and 2007, respectively. The table above shows noncancelable commitments under physician guarantee contracts as of December 31, 2008.



33



---

The former owners of Carmichaels Cashway Pharmacy, Inc. received
334,448 common shares of SunLink as partial consideration for the business and SunLink is obligated to pay the difference between the market value at business sale date and the price per share received for any shares sold less $1 per share if these
shares are sold within a year. The put option derivative liability as of December 31, 2008 was $659.

At
December 31, 2008, we had outstanding long-term debt and subordinated debt of $36,630 of which $33,461 was incurred under the SunLink 2008 Credit Facility, $3,000 was incurred under the subordinated loan, and $169 was related to capital leases.
Also outstanding at December 31, 2008 was a revolving line of credit loan of $5,500.

Legal Proceedings

On July 13, 2006, Piedmont Healthcare, Inc. (PHI) and Piedmont Mountainside Hospital, Inc. (PMH)
(collectively the Plaintiffs or Piedmont) filed a Complaint in the Superior Court of Cobb County, Georgia, alleging breach of the Asset Purchase Agreement (the Agreement) dated as of April 9, 2004 by and
among PMH, Piedmont Medical Center, Inc. (n/k/a PMI), Southern Health Corporation of Jasper, Inc. (SHCJ), SunLink Healthcare LLC (formerly SunLink Healthcare Corp.) and SunLink (collectively Defendants or SunLink)
pursuant to which the Mountainside Medical Center was sold to PMH in June 2004. Specifically, Piedmont seeks to have SunLink reimburse Piedmont for certain costs associated with an alleged indigent and charity care shortfall of Piedmont
Mountainside Hospital (formerly Mountainside Medical Center) for the fiscal year ended June 30, 2004 demanded by the Georgia Department of Community Health (DCH). In addition, Piedmont seeks reimbursement for funds allegedly
recouped from PMH by DCH in respect of Medicaid Cost Report settlements and adjustments for the reporting periods ended June 30, 2002, June 30, 2003 and May 31, 2004. Piedmont also seeks a declaratory judgment to the effect
that PMH may retain certain payments it has received or likely will receive from the DCHs Indigent Care Trust Fund for Disproportionate Share Hospitals. Piedmont also seeks recovery of costs and attorneys fees pursuant to the
Agreement and under Georgia Law.

On August 11, 2006, SunLink filed an Answer to the complaint asserting
factual and legal defenses, along with a Counterclaim. In the Counterclaim, SHCJ alleges that PMH breached the Agreement by failing to reimburse SHCJ for certain Medicaid Cost Report adjustments for the reporting periods ended June 30, 1999,
and June 30, 2000, as well as funds paid or expected to be paid to PMH from the DCHs Indigent Care Trust Fund for Disproportionate Share Hospitals, which payments Defendants contend qualify as excluded assets not sold to PMH
under the Agreement. SHCJ also alleged that PMH breached the Agreement by failing to cooperate with SHCJ in an appeal of certain Medicaid Cost Reports settlements for the reporting period ended June 30, 2002, June 30, 2003 and
May 31, 2004. SHCJ further alleged that Piedmont breached its obligations to guarantee PMHs payment and performance of its obligations under the Agreement. SunLink sought a declaratory judgment regarding the parties rights in
respect of the Medicaid Cost Report settlements and adjustments, as well as the payment made and expected to be made under the Indigent Care Trust Fund. Also, SunLink sought to recover their costs and attorneys fees pursuant to the Agreement
and under Georgia law.

On October 13, 2008, the Superior Court of Cobb County, Georgia, ruled in
SunLinks favor and determined that the May and August 2006 DSH payments constitute excluded assets not sold to PMH under the Agreement and, therefore, the right to receive the payments belonged to SunLink. By PMH retaining the
payments for itself and failing to pay an equivalent amount of money to SunLink, PMH was in breach of the agreement. PMH is liable to SunLink for damages



34



---

in the amount of $1,056 plus prejudgment interest from August 11, 2006 to October 13, 2008 at the legal rate of 7%. Since PMH appealed the above ruling, SunLink has not recorded a
receivable for the judgment amount.

KRUG International U.K. Ltd. (KRUG UK), an inactive U.K.
subsidiary of SunLink, entered into a guarantee (the Beldray Guarantee), at a time when it owned Beldray. The Beldray Guarantee covers Beldrays obligations under a lease of a portion of Beldrays former manufacturing location.
KRUG UK was placed into involuntary liquidation by the High Court in February 2005.

On August 6, 2007,
the liquidator of KRUG UK made an application in the Birmingham County Court in Birmingham, England, in which the liquidator is seeking a declaration by the court that a transfer of certain funds in 2001 from KRUG UK to SunLink in connection with
the purchase of certain preferred stock of another subsidiary of SunLink and the making of a loan to SunLink, and certain forgiveness of debt to SunLink by KRUG UK was improper, among other things, as KRUG UK was then effectively insolvent and that
the approval of such transfers by the then directors of KRUG UK resulted in a breach of their fiduciary duties. The liquidator seeks to have the court order the former directors or, in the alternative, the Company, to account for, repay or restore
such funds plus interest to the liquidator of KRUG UK. On December 4, 2007, the case went to mediation but no settlement was reached. In connection with the allegations in the application of breach of fiduciary duty by the directors of KRUG UK
in approving such transfer of funds, SunLink has indemnification obligations to the former directors of KRUG UK. SunLink denies any liability to KRUG UK other than to it in KRUG UKs status as a preferred stockholder (the unpaid balance on
the promissory note was paid by SunLink at maturity in September 2008). SunLink, through its United Kingdom counsel, intends to vigorously defend against the liquidators claims.

Sarbanes-Oxley Section 404

We have completed the planning, documentation and testing phase of our efforts to comply with the provisions of Section 404 of the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley) in order to
permit our management to report on, as of June 30, 2008, and our independent auditors to attest to, as of June 30, 2010, our internal controls over financial reporting as required by Sarbanes-Oxley. See Item 4T Controls and
Procedures of this Quarterly Report for our assessment. We are in the second year of compliance with Sarbanes-Oxley.

Recent
Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS No. 157 applies to other accounting pronouncements that require or permit fair value
measurements and does not require any new fair value measurements.

Effective July 1, 2008, the Company
adopted the provisions of SFAS No. 157 for financial assets and liabilities, as well as for any other assets and liabilities that are carried at fair value on a recurring basis. The adoption of the provisions of SFAS No. 157 related to
financial assets and liabilities and other assets and liabilities that are carried at fair value on a recurring basis did not materially impact the Companys consolidated financial position and results of operations.



35



---

In February 2008, the FASB issued FASB Staff Position (FSP)
157-2, Effective Date of FASB Statement No. 157which provides for a one-year deferral of the provisions of SFAS No. 157 for non-financial assets and liabilities that are recognized or disclosed at fair value in the
consolidated financial statements on a non-recurring basis. The Company is currently evaluating the impact of adopting the provisions of Statement No. 157 for non-financial assets and liabilities that are recognized or disclosed on a
non-recurring basis (adoption is required on July 1, 2009).

In October 2008, the FASB issued FSP
No. 157-3, Determining the Fair Value of a Financial Asset When the Market for that Asset is not Active, which provides guidance for determining the fair value of a financial asset in an inactive market. The adoption of
FSP 157-3 did not have a material impact on the Companys consolidated financial statements.

SFAS
No. 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. SFAS No. 157 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. SFAS
No. 157 describes three levels of inputs that may be used to measure fair value:

Level 1 - quoted
prices in active markets for identical assets or liabilities;

Level 2 - quoted prices for similar
assets and liabilities in active markets or inputs that are observable;

Level 3 - inputs that are
unobservable (for example cash flow modeling inputs based on assumptions).

The following table summarizes
liabilities measured at fair value on a recurring basis at December 31, 2008, as required by SFAS No. 157. These liabilities were recorded in other accrued expenses in the consolidated balance sheet.



|                       |  |                                |   |         |   |         |  |       |   |  |   |    
|---------------------- |  | ------------------------------ | - | ------- | - | ------- |  | ----- | - |  | - | ---
|                       |  | Fair Value Measurements Using:
|                       |  | Level 1                        |   | Level 2 |   | Level 3 |  | Total
|Liabilities:           |  |                                |   |         |   |         |  |       |   |  |   |    
|Derivative liabilities |  | $                              |  |         | $ | 659     |  | $     |  |  | $ | 659
|                       |  |                                |   |         |   |         |  |       |   |  |   |    

In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities, which provides companies with an option to report selected financial assets and liabilities at fair value. It also establishes presentation and disclosure requirements
designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. There has been no effect on the consolidated statement of earnings from the adoption of this statement.

In March 2007, the FASB issued SFAS No. 141R, Business Combinations, which is intended to improve, simplify, and converge internationally the accounting for
business combinations and the reporting of noncontrolling interests in consolidated financial statements. Under SFAS No. 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at
the acquisition-date fair value with limited exceptions. SFAS No. 141R includes a substantial number of new disclosure requirements. SFAS No. 141R applies prospectively to business combinations for which the acquisition date is on or after
the



36



---

beginning of the first annual reporting period beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company will comply with the new SFAS No. 141R requirements
for any business combination transactions concluded after June 30, 2009.

In December 2007, the FASB
issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements  An Amendment of ARB No. 51, which establishes new accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 is intended to improve the relevance, comparability, and transparency of financial information provided to investors by requiring all entities to report noncontrolling
(minority) interests in subsidiaries in the same way as equity in the consolidated financial statements. SFAS No. 160 includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. SFAS
No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company is currently evaluating the effect of adopting SFAS No. 160 on
the Companys consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161
Disclosures about Derivative Instruments and Hedging Activities  an amendment of FASB Statement No. 133, which requires enhanced disclosures about an entitys derivative and hedging activities and thereby improves
the transparency of financial reporting. SFAS No 161 is effective for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. This Statement encourages, but does not require, comparative
disclosures for earlier periods at initial adoption. The Company is currently evaluating the effect of adopting SFAS No. 161 on the Companys consolidated financial statements.

In April 2008, the FASB issued FSP No. FAS 142-3, Determination of the Useful Life of Intangible Assets.
This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible
Assets. The Company is required to adopt FSP 142-3 on September 1, 2009; earlier adoption is prohibited. The guidance in FSP 142-3 for determining the useful life of a recognized intangible asset shall be applied
prospectively to intangible assets acquired after adoption, and the disclosure requirements shall be applied prospectively to all intangible assets recognized as of, and subsequent to, adoption. The Company is currently evaluating the effect of
FSP 142-3 on its consolidated financial statements

In May 2008, the FASB issued SFAS No. 162,
Hierarchy of Generally Accepted Accounting Principles (SFAS 162). This statement is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be
used in preparing financial statements of nongovernmental entities that are presented in conformity with GAAP. This statement will be effective 60 days following the U.S. Securities and Exchange Commissions approval of the Public Company
Accounting Oversight Board amendment to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. The adoption of this Statement is not expected to have a material impact on
the Companys consolidated financial statements.

In September 2008, the FASB issued FSP No. FSP FAS
133-1 and FIN 45-4, Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement
No. 161. This FSP amends FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, to require disclosures by sellers of credit derivatives, including credit derivatives embedded in a
hybrid instrument. This FSP also amends



37



---

FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, to require an additional disclosure about the current status of the payment/performance risk of a guarantee. Further, this FSP clarifies the Boards intent about the effective date of FASB Statement
No. 161, Disclosures about Derivative Instruments and Hedging Activities. This FSP is effective for fiscal years and interim periods ending after November 15, 2008. The adoption of this Statement did not have a material
impact on the Companys consolidated financial statements.

Related Party Transactions

A director of the Company and our company secretary (who was a director of SunLink until November 2003 and is now a director emeritus) are
members of two different law firms, each of which provides services to SunLink. The Company has paid to these firms an aggregate of $114 and $242 for the three months ended December 31, 2008 and 2007, respectively, and $315 and $439 for the six
months ended December 31, 2008 and 2007, respectively for such services.



|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

We are exposed to interest rate changes, primarily as a result of borrowing under our 2008 credit facility. At December 31, 2008, borrowings under the facility of $38,961 have been drawn at an interest rate based
upon LIBOR. A one percent change in the LIBOR rate would result in a change in interest expense of $390 on an annual basis. No action has been taken to mitigate our exposure to interest rate market risk and we are not a party to any interest rate
market risk management activities.



|ITEM 4T. | CONTROLS AND PROCEDURES
|-------- | -----------------------

RestatementIn July 2009, we identified potential errors in our accounting for accounts receivable, contractual allowances and provision for bad debts, at our Carmichael subsidiary. Upon completion of our investigation and
analysis of Carmichaels accounts receivable, on August 28, 2009, SunLinks management concluded that we would amend our previously filed Quarterly Report on Form 10Q for the quarters ended September 30,
2008, December 31, 2008 and March 31, 2009, respectively, to correct our previously reported net revenues, provision for bad debts and receivables  net. The Audit Committee of the Board of Directors concurred with
managements decision to amend our previously filed reports on August 28, 2009. Additionally, management concluded that our failure to identify the errors in our accounting for Carmichaels accounts receivable, revenues, provision for
bad debts, and contractual allowances constituted a material weakness in our internal control over financial reporting. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Solely as a result of this material weakness, our management has revised its earlier assessment and concluded that our internal
control over financial reporting was not effective as of December 31, 2008, due to a failure of internal controls at our Carmichaels subsidiary for which we were not yet required to have made an internal controls evaluation. This material
weakness caused us to amend our Form 10-Qs for the quarters ended September 30, 2008, December 31, 2008 and March 31, 2009, respectively.

Disclosure Controls and ProceduresWe seek to maintain controls and procedures designed to ensure that we are able to collect the information we are required to disclose in the
reports we file with the SEC, and to process, summarize and disclose this information within the time periods specified in the rules of the SEC.



38



---

In connection with the restatement, our management, with the participation of our Chief
Executive Officer and Chief Financial Officer, reevaluated our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934 as amended (the Exchange Act).
Based on this reevaluation our Chief Executive Officer and Chief Financial Officer have concluded that, as a result of the material weakness in the internal control over financial reporting at our Carmichael subsidiary described above for which we
were not yet required to perform an internal controls analysis, our disclosure controls and procedures were not effective as of the end of the period covered by this report on Form 10-Q/A.

Since our April 2008 acquisition of Carmichael, (see Note 3 to the consolidated financial statements included in this report), we have
focused upon integrating the operations acquired into our disclosure controls and procedures and internal controls. However, in accordance with the rules of the SEC, we did not assess the internal control over financial reporting of our Carmichael
subsidiary.

As previously disclosed, because of the need to integrate Carmichael into our system of disclosure and
internal controls, there is a risk that we are not able to calculate meaningful changes in bad debts or revenue until after we are able to fully assess the internal controls at Carmichael and address the material weaknesses we have identified.
Furthermore, the pre-existing deficiencies in the Carmichael financial systems, processes and related internal controls increase the risk that the historical or current financial statements of the Carmichael operations and cash flows provided to
SunLink both before or after the acquisition might not be accurate in additional ways or to an extent beyond the ways previously identified by us in Current Reports on Form 8-K, including reports filed on September 19, 2008, May 22,
2009 and August 28, 2009 or amendments thereto. There is a risk due to material deficiencies in Carmichael internal controls that additional undetected errors may exist in the financial statements provided by Carmichael and in the
Companys consolidated financial statements.

As previously disclosed, on September 17, 2008, we announced that
the financial statements of Carmichael for the periods June 1, 2006 through December 31, 2006, January 1, 2007 through December 31, 2007, and January 1, 2008 through April 22, 2008, should not be relied upon and
that we expected the audited financial statements of Carmichael would be restated to adjust the pre-acquisition periods previously reported in our Current Report on Form 8-K filed on July 9, 2008. Such financial statements were restated and
were included in our current reports on Form 8-K/A filed on May 22, 2009.

We reached our conclusion with respect to
such pre-acquisition periods based on information reviewed by SunLinks Management, SunLinks Audit Committee and SunLinks independent registered public accounting firm that the Carmichael pre-acquisition financial statements
contained errors that include the amount of customer receivables and which related primary to pre-acquisition collections, bad debts policies and Carmichael collection activities.

As previously discussed, on August 28, 2009, we announced that the unaudited financial statements contained in our quarterly reports
on Form 10-Q for the quarters ended September 30, 2008, December 31, 2008 and March 31, 2009, should not be relied upon and that we expected



39



---

such financial statements to be restated due to the impact of non-cash accounting errors at Carmichael. We filed this and other amendments to our Form 10-Qs
for such periods on September 25, 2009. In connection with these restatements, our Chief Executive Officer and Chief Financial Officer concluded that, as a result of the material weakness in internal control over financial reporting at
Carmichael described above, SunLink had a corresponding weakness in our disclosure controls and procedures such that our internal controls and procedures were not effective as of the end of the period covered by this report on Form 10-Q/A.

We reached our conclusion with respect to such periods based on information reviewed by SunLinks management,
SunLinks Audit Committee, the Investigation Accountant we retained, and SunLinks independent registered public accounting firm that the Carmichael financial statements contained errors that include accounting for accounts receivable,
revenues, contractual allowances and provision for bad debts.

In our Report on Form 10-K for the year ended June 30,
2009, our assessment of our internal controls and procedures will be required to take into account our assessment of internal controls at Carmichael as part of our overall assessment of our internal controls and procedures. We anticipate that such
report will identify material weaknesses as of June 30, 2009.

Remediation of Material Weakness in Internal
ControlWe have performed an extensive review of the matters impacted by the material weakness described above in an effort to ensure that this amendment reflects all necessary adjustments. We believe that this review, the investigation and
analysis of the errors described above, and the changes in the related accounting processes which are being or have been implemented as a result of this restatement will remediate the material weakness and are designed so that we may conclude that
the internal control over financial reporting at our Carmichael subsidiary are effective and accordingly that no material weakness in our consolidated controls and procedures will remain as a result thereof. However, as of the date of the filing of
this report, not all of the remedial actions have been implemented. Accordingly, until all of our remedial actions with respect to Carmichael have been completed and tested, material weakness in our internal controls may exist.

Changes in Internal ControlThere were no changes to our internal control over financial reporting during the quarter ended
December 31, 2008 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Accounting Firm AttestationThis quarterly report does not include an attestation report of the Companys registered public accounting firm regarding internal control over financial reporting.
Managements report was not subject to attestation by the Companys registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only managements report in
this quarterly report.



40



---

PART II. OTHER INFORMATION

Items required under Part II not specifically shown below are not applicable.



|ITEM 1. | LEGAL PROCEEDINGS
|------- | -----------------

On July 13, 2006, Piedmont Healthcare, Inc. (PHI) and Piedmont Mountainside Hospital, Inc. (PMH) (collectively the Plaintiffs or Piedmont) filed a Complaint in the Superior Court of Cobb
County, Georgia, alleging breach of the Asset Purchase Agreement (the Agreement) dated as of April 9, 2004 by and among PMH, Piedmont Medical Center, Inc. (n/k/a PMI), Southern Health Corporation of Jasper, Inc. (SHCJ),
SunLink Healthcare LLC (formerly SunLink Healthcare Corp.) and SunLink (collectively Defendants or SunLink) pursuant to which the Mountainside Medical Center was sold to PMH in June 2004. Specifically, Piedmont seeks to
have SunLink reimburse Piedmont for certain costs associated with an alleged indigent and charity care shortfall of Piedmont Mountainside Hospital (formerly Mountainside Medical Center) for the fiscal year ended June 30, 2004 demanded by the
Georgia Department of Community Health (DCH). In addition, Piedmont seeks reimbursement for funds allegedly recouped from PMH by DCH in respect of Medicaid Cost Report settlements and adjustments for the reporting periods ended
June 30, 2002, June 30, 2003 and May 31, 2004. Piedmont also seeks a declaratory judgment to the effect that PMH may retain certain payments it has received or likely will receive from the DCHs Indigent Care Trust Fund
for Disproportionate Share Hospitals. Piedmont also seeks recovery of costs and attorneys fees pursuant to the Agreement and under Georgia Law.

On August 11, 2006, SunLink filed an Answer to the complaint asserting factual and legal defenses, along with a Counterclaim. In the Counterclaim, SHCJ alleges that PMH breached the Agreement by
failing to reimburse SHCJ for certain Medicaid Cost Report adjustments for the reporting periods ended June 30, 1999, and June 30, 2000, as well as funds paid or expected to be paid to PMH from the DCHs Indigent Care Trust Fund for
Disproportionate Share Hospitals, which payments Defendants contend qualify as excluded assets not sold to PMH under the Agreement. SHCJ also alleged that PMH breached the Agreement by failing to cooperate with SHCJ in an appeal of
certain Medicaid Cost Reports settlements for the reporting period ended June 30, 2002, June 30, 2003 and May 31, 2004. SHCJ further alleged that Piedmont breached its obligations to guarantee PMHs payment and performance
of its obligations under the Agreement. SunLink sought a declaratory judgment regarding the parties rights in respect of the Medicaid Cost Report settlements and adjustments, as well as the payment made and expected to be made under the
Indigent Care Trust Fund. Also, SunLink sought to recover their costs and attorneys fees pursuant to the Agreement and under Georgia law.

On October 13, 2008, the Superior Court of Cobb County, Georgia, ruled in SunLinks favor and determined that the May and August 2006 DSH payments constitute excluded assets not sold
to PMH under the Agreement and, therefore, the right to receive the payments belonged to SunLink. By PMH retaining the payments for itself and failing to pay an equivalent amount of money to SunLink, PMH was in breach of the agreement. PMH is liable
to SunLink for damages in the amount of $1,056 plus prejudgment interest from August 11, 2006 to October 13, 2008 at the legal rate of 7%. Since PMH appealed the above ruling, SunLink has not recorded a receivable for the judgment amount.

KRUG International U.K. Ltd. (KRUG UK), an inactive U.K. subsidiary of SunLink, entered into a
guarantee (the Beldray Guarantee), at a time when it owned Beldray. The Beldray Guarantee covers Beldrays obligations under a lease of a portion of Beldrays former manufacturing location. KRUG UK was placed into involuntary
liquidation by the High Court in February 2005.



41



---

On August 6, 2007, the liquidator of KRUG UK made an application in the
Birmingham County Court in Birmingham, England, in which the liquidator is seeking a declaration by the court that a transfer of certain funds in 2001 from KRUG UK to SunLink in connection with the purchase of certain preferred stock of another
subsidiary of SunLink and the making of a loan to SunLink, and certain forgiveness of debt to SunLink by KRUG UK was improper, among other things, as KRUG UK was then effectively insolvent and that the approval of such transfers by the then
directors of KRUG UK resulted in a breach of their fiduciary duties. The liquidator seeks to have the court order the former directors or, in the alternative, the Company, to account for, repay or restore such funds plus interest to the liquidator
of KRUG UK. On December 4, 2007, the case went to mediation but no settlement was reached. In connection with the allegations in the application of breach of fiduciary duty by the directors of KRUG UK in approving such transfer of funds,
SunLink has indemnification obligations to the former directors of KRUG UK. SunLink denies any liability to KRUG UK other than to it in KRUG UKs status as a preferred stockholder (the unpaid balance on the promissory note was paid by
SunLink at maturity in September 2008). SunLink, through its United Kingdom counsel, intends to vigorously defend against the liquidators claims.



|ITEM 1A. | RISK FACTORS
|-------- | ------------

Risk Factors Relating to
an Investment in SunLink

Information regarding risk factors appears in MD&A 
Forward-Looking Statements, in Part I  Item 2 of this Form 10-Q and in MD&A  Risks Factors Relating to an Investment in SunLink in Part I  Item 1A of the Companys Annual Report on Form 10-K for
the year ended June 30, 2008. While we believe there have been no material changes from the risk factors previously disclosed in such Annual Report, except as discussed in MD&A  Corporate Business Strategy and
MD&A  Discontinued Operations in Item 2 of this Form 10-Q, you should carefully consider, in addition to the other information set forth in this report, the risk factors discussed in our Annual Report which could
materially affect our business, financial condition or future results. Such risk factors are expressly incorporated herein by reference. The risks described in our Annual Report are not the only risks facing our Company. In addition to
risks and uncertainties inherent in forward looking statements contained in this Report on Form 10-Q, additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our
business, financial condition and/or operating results. Whenever we refer to SunLink, Company, we, our, or us in this Item 1A, we mean SunLink Health Systems, Inc. and its
subsidiaries, unless the context suggests otherwise.



|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS -
|------- | -----------------------------------------------------

On November 10, 2008, the Company held its Annual Meeting of Shareholders. At the meeting, four directors, Karen B. Brenner, C. Michael Ford, Howard E. Turner, and Christopher H. B. Mills were
elected to two year terms expiring at the Annual Meeting of Shareholders in 2010. 5,540,633 votes were voted in favor of electing Ms. Brenner and 616,410 votes were withheld. 5,601,147 votes were voted in favor of electing Mr. Ford and
555,896 votes were withheld. 5,206,328 votes were voted in favor of electing Mr. Turner and 950,715 votes were withheld. 5,654,820 votes were voted in favor of electing Mr. Mills and 502,223 votes were withheld. Robert M. Thornton, Jr.,
Dr. Steven J. Baileys, Michael W. Hall, and Gene E. Burleson remained in office. Their terms expire at the Annual Meeting of Shareholders in 2009.



42



---

|ITEM 6. | EXHIBITS
|------- | --------

Exhibits:



|     |  |                                                                                                                                                  
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------
|31.1 |  | Chief Executive Officers Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.                                       
|     | 
|31.2 |  | Chief Financial Officers Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.                                       
|     | 
|32.1 |  | Chief Executive Officers Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|     | 
|32.2 |  | Chief Financial Officers Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



43



---

SIGNATURES

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



SunLink Health Systems, Inc.By:

/s/ Mark J. StockslagerMark J. StockslagerChief Financial Officer


Dated: September 25, 2009



44