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UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


Form 10-K


|  |  |                                                                                             
|- |  | --------------------------------------------------------------------------------------------
|þ |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934    
|  |  | FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005                                                 
|  |  | OR                                                                                          
| 
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934

Commission File Numbers
333-97293;
333-116927


EXTENDICARE HEALTH SERVICES, INC.


(Exact Name of Registrant as Specified in its Charter)


|                                                                   |  |                                                                |  |                                            
|------------------------------------------------------------------ |  | -------------------------------------------------------------- |  | -------------------------------------------
|                                                                   |  | 111 West Michigan Street                                       |  |                                            
|Delaware                                                           |  | Milwaukee, WI 53203                                            |  | 98-0066268                                 
|(State or other Jurisdiction of
    Incorporation or Organization) |  | (Address of principal executive office
    Including zip code) |  | (I.R.S. Employer
    Identification Number)

(414) 908-8000


(Registrants telephone number, including area code)


Securities Registered Pursuant to Section 12(b) of the
Act:


None


Securities Registered Pursuant to Section 12(g) of the
Act:


None


o þ


o þ


þ o


S-K 10-K 10-K. þ


12b-2


o o þ


12b-2 o þ












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TABLE OF CONTENTS


|                                                                        |  |                                                                                                                        |     |                                    |     |  |    | 
|----------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------- | --- | ---------------------------------- | --- |  | -- | 
|                                                                        |  |                                                                                                                        |     | Page                               |    
|                                                                        |  |                                                                                                                        |     |                                    |    
|PART I                                                                 
|Cautionary Notice Regarding Forward Looking
    Statements              |  |                                                                                                                        | 1   |                                   
|ITEM 1.                                                                 |  | BUSINESS                                                                                                               |     |                                    | 2   | 
|                                                                        |  |                                                                                                                        |     | General                            |     |  | 2  | 
|                                                                        |  |                                                                                                                        |     | The Long-term Care Industry        |     |  | 3  | 
|                                                                        |  |                                                                                                                        |     | Competitive Strengths              |     |  | 4  | 
|                                                                        |  |                                                                                                                        |     | Business Strategy                  |     |  | 7  | 
|                                                                        |  |                                                                                                                        |     | Operations                         |     |  | 10 | 
|                                                                        |  |                                                                                                                        |     | Overview of Business               |     |  | 10 | 
|                                                                        |  |                                                                                                                        |     | Nursing Facilities                 |     |  | 13 | 
|                                                                        |  |                                                                                                                        |     | Assisted Living Facilities         |     |  | 18 | 
|                                                                        |  |                                                                                                                        |     | Government Regulation              |     |  | 22 | 
|                                                                        |  |                                                                                                                        |     | Insurance                          |     |  | 29 | 
|                                                                        |  |                                                                                                                        |     | Legal Proceedings                  |     |  | 30 | 
|                                                                        |  |                                                                                                                        |     | Employees                          |     |  | 30 | 
|                                                                        |  |                                                                                                                        |     | Website                            |     |  | 30 | 
|                                                                        |  |                                                                                                                        |     | Terminology, Definitions and Names |     |  | 31 | 
|ITEM 1A.                                                                |  | RISK FACTORS                                                                                                           |     |                                    | 33  | 
|ITEM 1B.                                                                |  | UNRESOLVED STAFF COMMENTS                                                                                              |     |                                    | 43  | 
|ITEM 2.                                                                 |  | PROPERTIES                                                                                                             |     |                                    | 44  | 
|ITEM 3.                                                                 |  | LEGAL PROCEEDINGS                                                                                                      |     |                                    | 45  | 
|ITEM 4.                                                                 |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY
    HOLDERS                                                                |     |                                    | 46  | 
|                                                                       
|PART II                                                                
|ITEM 5.                                                                 |  | MARKET FOR REGISTRANTS COMMON STOCK
    AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
    SECURITIES |     |                                    | 46  | 
|ITEM 6.                                                                 |  | SELECTED FINANCIAL DATA                                                                                                |     |                                    | 47  | 
|ITEM 7.                                                                 |  | MANAGEMENTS DISCUSSION AND ANALYSIS
    OF FINANCIAL CONDITION AND RESULTS OF OPERATION                               |     |                                    | 48  | 
|ITEM 7A.                                                                |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES
    ABOUT MARKET RISK                                                         |     |                                    | 97  | 
|ITEM 8.                                                                 |  | FINANCIAL STATEMENTS AND SUPPLEMENTARY
    DATA                                                                        |     |                                    | 99  | 
|ITEM 9.                                                                 |  | CHANGES IN AND DISAGREEMENTS WITH
    ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                               |     |                                    | 155 | 
|ITEM 9A.                                                                |  | CONTROLS AND PROCEDURES                                                                                                |     |                                    | 155 | 
|ITEM 9B                                                                 |  | OTHER INFORMATION                                                                                                      |     |                                    | 155 | 
|                                                                       
|PART III                                                               
|ITEM 10.                                                                |  | DIRECTORS AND EXECUTIVE OFFICERS OF THE
    REGISTRANT                                                                 |     |                                    | 155 | 
|ITEM 11.                                                                |  | EXECUTIVE COMPENSATION                                                                                                 |     |                                    | 157 | 
|ITEM 12.                                                                |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
    OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS                     |     |                                    | 161 | 
|ITEM 13.                                                                |  | CERTAIN RELATIONSHIPS AND RELATED
    TRANSACTIONS                                                                     |     |                                    | 161 | 
|ITEM 14.                                                                |  | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                                                                 |     |                                    | 163 | 
|                                                                       
|PART IV                                                                
|ITEM 15.                                                                |  | EXHIBITS, FINANCIAL STATEMENT SCHEDULES                                                                                |     |                                    | 164 | 
|SIGNATURES                                                              |  |                                                                                                                        | 166 |                                   
|EXHIBIT INDEX                                                           |  |                                                                                                                        | 167 |                                   
|Subsidiaries                                                           
|Certifications of the Chairman of the Board and CEO                    
|Certifications of the Senior Vice President, CFO and Treasurer         
|Written Statement of Chairman of the Board, CEO, SVP, CFO and Treasurer
|Schedule II-Valuation and Qualifying Accounts                          



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Cautionary Statement Regarding Forward Looking Statements


10-K 10-K




| |   |                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Medicare and Medicaid payment levels and reimbursement
    methodologies and the application of such methodologies and
    policies adopted by the government and its fiscal intermediaries;
|
| |  | liabilities and claims asserted against us, such as resident
    care litigation, including our exposure for punitive damage
    claims and increased insurance costs;                      
|
| |  | national and local economic conditions, including their effect
    on the ability to hire and retain qualified staff and employees
    and the associated costs;                            
|
| |  | federal and state regulation of our business and change in such
    regulations, as well as our compliance with such regulations;                                                           
|
| |  | actions by our competitors; and                                                                                                                                                             
|
| |  | our ability to maintain and increase census levels.                                                                                                                                         

10-K


1



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PART I







|        |         
|------- | --------
|ITEM 1. | BUSINESS




General
















| |   |                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | provide quality, clinically based services;                                                                                                                                                                   
|
| |  | strengthen Medicare census in our nursing facilities, private
    census in our assisted living facilities and total average daily
    census, or ADC, in both our nursing and assisted living
    facilities:
|
| |  | expand non-government based revenue sources, thereby decreasing
    the risk and reliance on government funding;                                                                                              

2



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| |   |                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | expand, and actively manage, our asset portfolio through
    acquisition or internal growth, and where appropriate, divesting
    facilities that fail to meet our performance goals;
|
| |  | diversify within long-term care industry through growth of
    facilities under full management and selected consulting
    services agreements and rehabilitation clinics;          
|
| |  | increase our operating efficiency; and                                                                                                                                               
|
| |  | increase operating cash flow.                                                                                                                                                        




The Long-term Care Industry






Aging Population.


|          |  |             |      |  |       |  |       |       |  |  |         |    |  |       |       |  |  |  |       | 
|--------- |  | ----------- | ---- |  | ----- |  | ----- | ----- |  |  | ------- | -- |  | ----- | ----- |  |  |  | ----- | 
|          |  | Total U.S.  |      |  |       |  |       |       |  |  | Total   |   
|          |  | Population  |      |  |       |  |       |       |  |  | Elderly |   
|          |  | Growth Rate |      |  | 65-74 |  |       | 75-84 |  |  | 85+     |    |  | (65+) |      
|          |  |             |      |  |       |  |       |       |  |  |         |    |  |       |      
|2005-2010 |  |             | 4.5% |  |       |  | 14.2% |       |  |  | (0.8    | )% |  |       | 19.6% |  |  |  | 9.7%  | 
|2010-2015 |  |             | 4.3% |  |       |  | 25.1% |       |  |  | 4.0     | %  |  |       | 11.4% |  |  |  | 16.3% | 
|2015-2020 |  |             | 4.2% |  |       |  | 19.4% |       |  |  | 16.6    | %  |  |       | 6.5%  |  |  |  | 16.8% | 
|2020-2025 |  |             | 4.1% |  |       |  | 12.3% |       |  |  | 27.2    | %  |  |       | 10.2% |  |  |  | 16.3% | 
|2025-2030 |  |             | 4.1% |  |       |  | 6.3%  |       |  |  | 20.6    | %  |  |       | 19.9% |  |  |  | 12.5% | 





Supply/ Demand Imbalance. 24-hour


3



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Cost Containment Pressures. 24-hour


Changing Family Dynamics and Economics.





Competitive Strengths






4



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Leading Provider of Long-term Care Services.


Focus on Core Business.


Significant Facility Ownership.




| |   |                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------
| |  | refurbish facilities to meet changing consumer demands;                                                              
|
| |  | expand the facility, or add assisted living and retirement
    facilities adjacent to our skilled nursing facilities;
|
| |  | adjust licensed capacity to avoid occupancy-based rate penalties;                                                    

5



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| |   |                                                          
| | - | ---------------------------------------------------------
| |  | divest facilities and exit markets at our discretion; and
|
| |  | more directly control our occupancy costs.               

Dual Medicare and Medicaid Certification.


Expansion of non-government based revenues.


Experienced and Proven Management Team.


Geographic Diversity.


Diversify within the Long-term Care Industry.


Management Focus on Key Performance Drivers.




| |   |                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | improving census, particularly increasing our Medicare census in
    our nursing facilities, and private census within our assisted
    living facilities;

6



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| |   |                                                                                    
| | - | -----------------------------------------------------------------------------------
| |  | improving income from operations, through control of labor and
    other costs; and
|
| |  | increasing cash flow from operations.                                              





10-K, 10-K.







Business Strategy








Provide Quality, Clinically Based Services.


7



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on-site


Increase Medicare Census within our Nursing Facilities.


Increase Private Census within our Assisted Living
Facilities.


Expand Non-Government Based Revenue Sources.


8



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Leverage Presence in Small Urban Markets.


Expand Asset Portfolio.


Actively Manage Our Asset Portfolio.


Increase Facilities under Management and Consulting Services
Agreements and Rehabilitation Clinics.


Increase Operating Efficiency.


9



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Operations







| |                     
| | --------------------
| | Overview of Business



| |                                       
| | --------------------------------------
| | Organizational Structure of Operations













| |                   
| | ------------------
| | Nursing Facilities



10



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day-to




| |                           
| | --------------------------
| | Assisted Living Facilities





day-to


11



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| |                                            
| | -------------------------------------------
| | Management and Selected Consulting Services





month-to






| |                          
| | -------------------------
| | Group Purchasing Services





| |                                                               
| | --------------------------------------------------------------
| | Rehabilitative Therapy  Outpatient and Inpatient
    Services





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| |          
| | ---------
| | Expansion





| |   |                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------
| |  | personal contacts that we have in the long-term care industry;                                                                  
|
| |  | information made available to us, and that we make available to
    others, through state and nationally based associations; and
|
| |  | investment and financing firms and brokers.                                                                                     










| |                   
| | ------------------
| | Nursing Facilities



| |                   
| | ------------------
| | Sources of Revenue





| |         
| | --------
| | Medicaid







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Medicare  Part A and Part B






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Part A  Hospital insurance, which provides
    reimbursement for inpatient services for hospitals, skilled
    nursing facilities and certain other healthcare providers and
    patients requiring daily professional skilled nursing and other
    rehabilitative care. Coverage in a skilled nursing facility is
    limited for a period up to 100 days, if medically
    necessary, after a qualifying hospital stay. Medicare pays for
    the first 20 days of stay in a skilled nursing facility in
    full and the next 80 days above a daily coinsurance amount,
    after the individual has qualified for Medicare coverage by a
    three-day hospital stay.
|
| |  | Part B  Supplemental Medicare insurance, which
    requires the beneficiary to pay monthly premiums, will cover
    physician services and other outpatient services, such as
    physical, occupational, and speech therapy services, enteral
    nutrition, certain medical items, and X-ray services received
    outside of a Part A covered inpatient stay.                                                                                                                                                                                                                                                                                                          



Private Pay and Other




Quality of Care and Employee Training


Quality of Care




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Quality of Therapy Services






Quality Improvement Processes






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Guardian Angel Program: At the majority of our nursing
    facilities, we assign a member of our department head team, or
    guardian angel, to be the residents liaison with the
    facility management team. The facility staff member meets with
    the resident and/or family member on a weekly basis to ensure
    that the residents comments and concerns are being address
    and provide a communication process between the resident and the
    facility management team.                                       
|
| |  | Family and Resident Feedback: Within one month of
    admission and on a quarterly basis, we survey residents and
    family members to monitor the quality of services provided to
    residents. Annual written surveys are used to appraise and
    monitor the level of satisfaction of residents and their
    families. We also have a toll-free telephone line that may be
    used at any time by a residents family members to convey
    comments.                                                                     
|
| |  | Regular Inspections: Our regional operations staff on a
    regular basis conduct facility inspections to monitor the
    quality of care, therapy services, dining and housekeeping
    services, professionalism and friendless of staff, physical
    appearance of the facility, and compliance with government
    regulations. All inspections are documented and reports are
    provided to the facility administrator and regional senior
    management. Inspections are also done by members of our
    corporate team.

15



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Employee Training




Marketing and Competition


word-of




Risk Management










16



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Property Management










Employees






17



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Assisted Living Facilities


Sources of Revenues






Private Pay




Medicaid




18



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Quality of Care and Employee Training


Quality of Care








Quality Improvement Processes






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Family and Resident Feedback: Within one month of
    admission and on a quarterly basis, we survey residents and
    family members to monitor the quality of services provided to
    residents. Annual written surveys are used to appraise and
    monitor the level of satisfaction of residents and their
    families. We also have a toll-free telephone line that may be
    used at any time by a residents family members to convey
    comments.

19



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Regular Inspections: Our regional operations staff on a
    regular basis conduct facility inspections to monitor the
    quality of care, dining and housekeeping services,
    professionalism and friendless of staff, physical appearance of
    the facility, and compliance with government regulations. All
    inspections are documented and reports are provided to the
    facility administrator and regional senior management.
    Inspections are also done by members of our corporate team.

Employee Training




Marketing and Competition


word-of






Risk Management






20



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Property Management










21



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Employees











Government Regulation


10-K.


General Regulatory Requirements




Nursing Facility Regulation








| |   |                                                    
| | - | ---------------------------------------------------
| |  | licensure and certification;                       
|
| |  | qualifications of healthcare and support personnel;

22



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| |   |                                                                                      
| | - | -------------------------------------------------------------------------------------
| |  | maintenance of physical plant and equipment;                                         
|
| |  | staffing levels and quality of healthcare services;                                  
|
| |  | maintenance, confidentiality and security issues associated with
    medical records;
|
| |  | relationships with physicians and referral sources;                                  
|
| |  | billing for services;                                                                
|
| |  | operating policies and procedures; and                                               
|
| |  | additions or changes to facilities and services.                                     







| |   |                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | directed plans of correction, directed in-service training and
    state monitoring for minor deficiencies;                                                                                                                          
|
| |  | denial of Medicare or Medicaid reimbursement for existing
    residents or new admissions, and civil money penalties up to
    $3,000 per day for deficiencies that do not immediately
    jeopardize resident health and safety; and
|
| |  | appointment of temporary management, termination from the
    program and civil money penalties of up to $10,000 for one or
    more deficiencies that immediately jeopardize resident health or
    safety.                         







23



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Assisted Living Facility Regulation






| |   |                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | licensure and certification and related community services;                                                                                          
|
| |  | qualifications of healthcare and support personnel;                                                                                                  
|
| |  | staffing levels and the provision of quality of healthcare
    services, including monitoring of resident wellness and
    medication administration;
|
| |  | dining and housekeeping services;                                                                                                                    
|
| |  | admission and discharge criteria, and relationships with
    physicians and referral sources;                                                        
|
| |  | documentation and reporting requirements, and confidentiality
    and security issues associated with medical records;                               
|
| |  | operating policies and procedures, resident rights and
    responsibilities;                                                                         
|
| |  | additions or changes to facilities and services;                                                                                                     
|
| |  | maintenance of physical plant and equipment, safety and
    evacuation plans; and                                                                    
|
| |  | furnishing of general common areas and resident units.                                                                                               





24



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Restrictions on Acquisitions and Construction






Regulation of Fraud and Related Matters




25



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26



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| |   |                                                                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | conviction related to fraud;                                                                                                                                                                                                                                                              
|
| |  | conviction relating to obstruction of an investigation;                                                                                                                                                                                                                                   
|
| |  | conviction relating to a controlled substance;                                                                                                                                                                                                                                            
|
| |  | licensure revocation or suspension;                                                                                                                                                                                                                                                       
|
| |  | exclusion or suspension from state or other federal healthcare
    programs;                                                                                                                                                                                                              
|
| |  | filing claims for excessive charges or unnecessary services or
    failure to furnish medically necessary services;                                                                                                                                                                       
|
| |  | ownership or control of an entity by an individual who has been
    excluded from the Medicaid and/or Medicare programs, against
    whom a civil monetary penalty related to the Medicaid and/or
    Medicare programs has been assessed or who has been convicted of
    the crimes; and
|
| |  | the transfer of ownership or control interest in an entity to an
    immediate family or household member in anticipation of, or
    following, a conviction, assessment or exclusion from the
    Medicare or Medicaid programs.                                                         

Office of the Inspector General






Cross Decertification and De-Licensure




New Initiatives




27



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Environmental Laws and Regulations






Health Insurance Portability and Accountability Act






| |   |                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------
| |  | standardization of electronic patient health, administrative and
    financial data;                                                             
|
| |  | unique health identifiers for individuals, employers, health
    plans and healthcare providers;                                                 
|
| |  | privacy standards protecting the privacy of individually
    identifiable health information; and                                                
|
| |  | security standards protecting the confidentiality, integrity and
    availability of electronic individually identifiable health
    information.











| |   |                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | ensure the confidentiality, integrity and availability of
    protected health information that a covered entity creates,
    receives, maintains or transmits electronically;
|
| |  | protect against any reasonably anticipated hazards that might
    threaten the security or integrity of electronic protected
    health information;                          

28



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| |   |                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------
| |  | protect against any unauthorized use or disclosure of electronic
    protected health information that can be reasonably
    anticipated; and
|
| |  | ensure that the covered entitys workforce complies with
    the full range of security measures.                                            









Corporate Compliance Program







Insurance






29



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Legal Proceedings


10-K.





Employees







Website


www.extendicare.com. 10-K, 10-Q, 10-K 10-Q.


10-K.


30



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Terminology, Definitions and Names




|                                     |  |                                             |  |              |      |  |                |  |                         |      |  |  |    | 
|------------------------------------ |  | ------------------------------------------- |  | ------------ | ---- |  | -------------- |  | ----------------------- | ---- |  |  | -- | 
|                                     |  |                                             |  | Business     |      |  |                |  |                        
|Abbreviation                         |  | Full Name                                   |  | Section Page |      |  | MD&A Reference |  |                         | Page | 
|                                     |  |                                             |  |              |      |  |                |  |                         |      | 
|Accounting Terms                     |  |                                             |  |              |      |  |                |  |                         |      |  |  |    | 
|SFAS                                 |  | Statement of Financial Accounting Standards |  |              | None |  |                |  | Significant Events 2005 |      |  |  | 60 | 
|FASB                                 |  | Financial Accounting Standards Board        |  |              | None |  |                |  | Executive Overview      |      |  |  | 49 | 
|AOCI                                 |  | Accumulated Other Comprehensive Income      |  |              | None |  |                |  | Significant Events 2004 |      |  |  | 62 | 
|FIN                                  |  | FASB Interpretation Bulletin                |  |              | None |  |                |  | Executive Overview      |      |  |  | 50 | 
|EITF                                 |  | Emerging Issues Task Force                  |  |              | None |  |                |  | Accounting Policies     |      |  |  | 94 | 
|APB                                  |  | Accounting Principles Board                 |  |              | None |  |                |  | Significant Events 2005 |      |  |  | 59 | 
|Health Care Terminology              |  |                                             |  |              |      |  |                |  |                         |      |  |  |    | 
|ADC                                  |  | Average Daily Census                        |  |              | 2    |  |                |  | Executive Overview      |      |  |  | 48 | 
|FI                                   |  | Fiscal Intermediary                         |  |              | None |  |                |  | Significant Events 2004 |      |  |  | 54 | 
|HMO                                  |  | Health Maintenance Organizations            |  |              | 9    |  |                |  | Executive Overview      |      |  |  | 51 | 
|PPS                                  |  | The Prospective Payment System              |  |              | 5    |  |                |  | Executive Overview      |      |  |  | 52 | 
|PRRB                                 |  | Provider Reimbursement Review Board         |  |              | None |  |                |  | Significant Events 2004 |      |  |  | 54 | 
|Quality Mix                          |  | Non-Medicaid Census                         |  |              | None |  |                |  | Executive Overview      |      |  |  | 50 | 
|                                    
|Legal Agreements                     |  |                                             |  |              |      |  |                |  |                         |      |  |  |    | 
|Amended and Restated Credit Facility |  | Third Amended and Restated Credit Agreement |  |              | None |  |                |  | Executive Overview      |      |  |  | 49 | 
|DMG Notes                            |  | DMG Mortgage Notes Payable                  |  |              | None |  |                |  | Debt and Liquidity      |      |  |  | 89 | 
|former Revolving Credit              |  |                                             |  |              |      |  |                |  |                         |      |  |  |    | 
|Facility                             |  | Revolving Credit Facility                   |  |              | None |  |                |  | Executive Overview      |      |  |  | 49 | 
|MOU                                  |  | Memorandum of Understanding                 |  |              | None |  |                |  | Significant Events 2005 |      |  |  | 57 | 
|2010 Senior Notes                    |  | 9.5% Senior Notes                           |  |              | 2    |  |                |  | Significant Events 2005 |      |  |  | 56 | 
|2014 Notes                           |  | 6.875% Senior Subordinated Notes            |  |              | 2    |  |                |  | Significant Events 2005 |      |  |  | 56 | 
|2010 Swap                            |  | Swap agreement expiring July 1, 2010        |  |              | None |  |                |  | Debt and Liquidity      |      |  |  | 90 | 
|2014 Swap                            |  | Swap agreement expiring May 1, 2014         |  |              | None |  |                |  | Debt and Liquidity      |      |  |  | 90 | 
|2010 Cap                             |  | Cap agreement expiring July 1, 2010         |  |              | None |  |                |  | Debt and Liquidity      |      |  |  | 90 | 
|2014 Cap                             |  | Cap agreement expiring May 1, 2014          |  |              | None |  |                |  | Debt and Liquidity      |      |  |  | 90 | 

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|                           |  |                                                 |  |              |      |  |                |  |                         |      |  |  |    | 
|-------------------------- |  | ----------------------------------------------- |  | ------------ | ---- |  | -------------- |  | ----------------------- | ---- |  |  | -- | 
|                           |  |                                                 |  | Business     |      |  |                |  |                        
|Abbreviation               |  | Full Name                                       |  | Section Page |      |  | MD&A Reference |  |                         | Page | 
|                           |  |                                                 |  |              |      |  |                |  |                         |      | 
|Legal Entities             |  |                                                 |  |              |      |  |                |  |                         |      |  |  |    | 
|                          
|Extendicare and affiliates |  |                                                 |  |              |      |  |                |  |                         |      |  |  |    | 
|Extendicare                |  | Extendicare Inc.                                |  |              | 2    |  |                |  | Executive Overview      |      |  |  | 48 | 
|ALC                        |  | Assisted Living Concepts, Inc.                  |  |              | 2    |  |                |  | Executive Overview      |      |  |  | 48 | 
|EHI                        |  | Extendicare Holdings, Inc.                      |  |              | None |  |                |  | Executive Overview      |      |  |  | 49 | 
|VCPI                       |  | Virtual Care Provider, Inc.                     |  |              | 5    |  |                |  | Operating Results       |      |  |  | 78 | 
|                          
|External Parties           |  |                                                 |  |              |      |  |                |  |                         |      |  |  |    | 
|Arbor                      |  | Arbor Health Care Company, Inc.                 |  |              | None |  |                |  | Significant Events 2004 |      |  |  | 63 | 
|ALF                        |  | Assisted Living Facilities, Inc.                |  |              | None |  |                |  | Debt and Liquidity      |      |  |  | 83 | 
|Benedictine                |  | Benedictine Health Dimensions, Inc.             |  |              | None |  |                |  | Significant Events 2005 |      |  |  | 58 | 
|Greystone                  |  | Greystone Tribeca Acquisition, L.L.C.           |  |              | None |  |                |  | Significant Events 2004 |      |  |  | 63 | 
|Lakeside Health            |  | Lakeside Health, L.L.C.                         |  |              | None |  |                |  | Executive Overview      |      |  |  | 49 | 
|LTC                        |  | LTC Properties, Inc.                            |  |              | None |  |                |  | Significant Events 2005 |      |  |  | 57 | 
|Omnicare                   |  | Omnicare, Inc.                                  |  |              | 5    |  |                |  | Executive Overview      |      |  |  | 50 | 
|Senior Health  South      |  | Senior Health Properties  South, Inc.          |  |              | None |  |                |  | Executive Overview      |      |  |  | 49 | 
|Senior Health  Texas      |  | Senior Health Properties  Texas, Inc.          |  |              | None |  |                |  | Executive Overview      |      |  |  | 49 | 
|Tandem                     |  | Tandem Health Care, Inc.                        |  |              | None |  |                |  | Significant Events 2004 |      |  |  | 63 | 
|Triple S                   |  | Triple S Investment Company.                    |  |              | None |  |                |  | Debt and Liquidity      |      |  |  | 93 | 
|Governmental Bodies        |  |                                                 |  |              |      |  |                |  |                         |      |  |  |    | 
|CMS                        |  | Centers for Medicare & Medicaid Services        |  |              | 3    |  |                |  | Executive Overview      |      |  |  | 50 | 
|OHCS                       |  | State of Oregon, Housing and Community Services |  |              | None |  |                |  | Debt and Liquidity      |      |  |  | 92 | 
|WSHFC                      |  | Washington State Housing Finance Commission     |  |              | None |  |                |  | Debt and Liquidity      |      |  |  | 92 | 
|OHFC                       |  | Ohio Housing Finance Commission                 |  |              | None |  |                |  | Debt and Liquidity      |      |  |  | 92 | 
|IHCS                       |  | Idaho Housing & Community Services              |  |              | None |  |                |  | Debt and Liquidity      |      |  |  | 92 | 

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



We depend upon reimbursement for our services by third-party
payors, and changes in their reimbursement levels could
adversely affect our revenues, results of operations and
financial position.


Our revenues may be adversely affected by changes or
reductions in Medicare rates through policy changes adopted by
Congress and new rules introduced by CMS.






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Changes or reductions in Medicaid rates may adversely affect
our revenues.








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Legislative and regulatory actions have resulted in
continuing changes to Medicare and Medicaid reimbursement
programs.




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the implementation in January 2006 of nine new high-acuity RUGs
    classifications that required training of all professional
    nursing and therapy staff to ensure the proper classification of
    residents;                                                                                                                                                                                                                                                               
|
| |  | the implementation in January 2006 of Medicare Part D
    benefit from the Medicare Prescription Drug, Improvement and
    Modernization Act of 2003, or MMA, (refer to below for further
    details), that requires us along with Omnicare to provide drugs
    to our residents based upon unique drug formularies that are
    adopted by each residents selected prescription drug plan,
    or PDP, provider, instead of single state formulary prior to
    January 2006;
|
| |  | the repeal of the Boren Amendment federal payment standard for
    Medicaid payments, which required states to provide skilled
    nursing facilities with reasonable and adequate reimbursement
    rates to cover the costs of efficiently and economically
    operated healthcare facilities. As a result, budget constraints
    may cause states to reduce Medicaid reimbursement to skilled
    nursing facilities or delay payments to providers;                        
|
| |  | the limitation of costs being reimbursed under Medicaid
    reimbursement programs when operators use a certain level of
    agency staffing, or incur leasing costs, which have an imputed
    lease interest cost greater than the current market rate;                                                                                                                                                                                                                        
|
| |  | the establishment of a minimum occupancy requirement in certain
    Medicaid programs, which effectively reduces the eligible
    Medicaid reimbursement rate that a skilled nursing facility can
    receive; and                                                                                                                                                                                                                                                               
|
| |  | an increasing number of states have adopted policies to
    discontinue the reimbursement of Part A co-insurance
    payments for dually eligible residents.                                                                                                                                                                                                                                                                                                                     



The cost of general and professional liability claims are
significant and escalating in certain states, resulting in
significant increases in insurance or the availability of
insurance.


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10-K.


The shortage of qualified registered nursing staff,
therapists and other healthcare workers could adversely affect
our ability to attract, train and retain qualified personnel and
could increase operating costs.


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We conduct our skilled nursing business in a heavily
regulated industry and our failure to comply with laws and
government regulation could lead to fines and penalties.






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We conduct our assisted living business in a regulated
industry and our failure to comply with laws and government
regulation could lead to fines and penalties.






Failure to comply with existing environmental laws regarding
the management of infectious medical waste could harm our
business.


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We face periodic reviews, audits and investigations under our
contracts with federal and state government agencies, and these
audits could have adverse findings that may negatively impact
our business.




| |   |                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------
| |  | required refunding of amounts we have been paid pursuant to the
    Medicare or Medicaid programs or from private payors;
|
| |  | state or federal agencies imposing fines, penalties and other
    sanctions on us;                                       
|
| |  | loss of our right to participate in the Medicare or Medicaid
    programs or one or more private payor networks; or      
|
| |  | damages to our reputation in various markets.                                                                            





| |   |                                                   
| | - | --------------------------------------------------
| |  | cost reporting and billing practices;             
|
| |  | quality of care;                                  
|
| |  | financial relationships with referral sources; and
|
| |  | medical necessity of services provided.           



We are required to comply with laws governing the
transmission and privacy of health information.


If we do not comply with the requirements prescribed within
our leases or debt agreements pertaining to Revenue Bonds, we
will be subject to financial penalties.


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If we do not comply with terms contained within leases for
our leased nursing and assisted living facilities, nor maintain
the facilities, we could be faced with financial penalties and
the loss of the facility from our portfolio.


If we do not achieve and maintain competitive quality of care
ratings from CMS in our skilled nursing facilities our business
may be negatively affected. quality-of quality-of


Within our skilled nursing facilities, changes in the case
mix of residents, the mix of residents by payor type and payment
methodologies may significantly affect our profitability.


Within our assisted living facilities, changes in the
percentage of private residents, the level of care services,
and, where applicable, Medicaid rates, may significantly affect
our profitability.


If we fail to cultivate new or maintain existing
relationships with the physicians in the communities in which we
operate, our patient base in our skilled nursing facilities may
decrease.


We self-insure workers compensation, health and dental and
certain other risks.


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We face national, regional and local competition. 10-K.


State efforts to regulate the construction or expansion of
healthcare providers could impair our ability to expand through
construction and redevelopment.






We may make acquisitions and undertake management and
consulting contracts that could subject us to a number of
operating risks.




| |   |                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------
| |  | inaccurate assessment of undisclosed liabilities;                                                                  
|
| |  | entry into markets in which we may have limited or no experience;                                                  
|
| |  | diversion of managements attention from our existing core
    business;                                           
|
| |  | difficulties in assimilating the acquired business or in
    realizing projected efficiencies and cost savings; and
|
| |  | increasing our indebtedness and limiting our ability to access
    additional capital when needed.                 



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We are required to comply with the Sarbanes Oxley Act of
2002, Section 404, or SOX, that involves an in-depth
evaluation of our internal controls and compliance with the
reporting requirements. 10-K,


We have swapped our certain fixed rate debt to variable rate
debt and entered into swap and cap agreements that are subject
to market-based pricing.


The departure of our key officers could negatively impact our
business.


If we are unable to control operating costs and generate
sufficient cash flow to meet operational and financial
requirements, including servicing our indebtedness, our business
operations may be adversely affected.







|         |                          
|-------- | -------------------------
|ITEM 1B. | UNRESOLVED STAFF COMMENTS

None.


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|        |           
|------- | ----------
|ITEM 2. | PROPERTIES



|                                  |  |                 |     |          |          |                  |       |                  |          |  |          |  |  |          |        |  |          |  |     |  |  |  |        | 
|--------------------------------- |  | --------------- | --- | -------- | -------- | ---------------- | ----- | ---------------- | -------- |  | -------- |  |  | -------- | ------ |  | -------- |  | --- |  |  |  | ------ | 
|                                  |  |                 |     |          |          | Total Facilities |      
|                                  |  | Assisted Living |     |          | Nursing  |                  |       | Under Management |         
|                                  |  |                 |     |          |          |                  |       |                  |         
|                                  |  |                 |     | Resident |          |                  |       |                  | Resident |  |          |  |  | Resident |       
|                                  |  | Number          |     |          | Capacity |                  |       | Number           |          |  | Capacity |  |  | Number   |        |  | Capacity | 
|                                  |  |                 |     |          |          |                  |       |                  |          |  |          |  |  |          |        |  |          | 
|Pennsylvania                      |  |                 | 12  |          |          |                  | 493   |                  |          |  | 19       |  |  |          | 2,208  |  |          |  | 31  |  |  |  | 2,701  | 
|Pennsylvania  Managed            |  |                 | 5   |          |          |                  | 155   |                  |          |  | 7        |  |  |          | 813    |  |          |  | 12  |  |  |  | 968    | 
|Ohio                              |  |                 | 20  |          |          |                  | 809   |                  |          |  | 29       |  |  |          | 3,020  |  |          |  | 49  |  |  |  | 3,829  | 
|Indiana                           |  |                 | 23  |          |          |                  | 965   |                  |          |  | 19       |  |  |          | 1,866  |  |          |  | 42  |  |  |  | 2,831  | 
|Wisconsin                         |  |                 | 12  |          |          |                  | 631   |                  |          |  | 24       |  |  |          | 2,024  |  |          |  | 36  |  |  |  | 2,655  | 
|Washington                        |  |                 | 23  |          |          |                  | 1,006 |                  |          |  | 15       |  |  |          | 1,588  |  |          |  | 38  |  |  |  | 2,594  | 
|Texas                             |  |                 | 42  |          |          |                  | 1,708 |                  |          |  |         |  |  |          |       |  |          |  | 42  |  |  |  | 1,708  | 
|Kentucky                          |  |                 | 1   |          |          |                  | 55    |                  |          |  | 19       |  |  |          | 1,633  |  |          |  | 20  |  |  |  | 1,688  | 
|Minnesota                         |  |                 | 1   |          |          |                  | 58    |                  |          |  | 7        |  |  |          | 947    |  |          |  | 8   |  |  |  | 1,005  | 
|Oregon                            |  |                 | 20  |          |          |                  | 703   |                  |          |  | 3        |  |  |          | 214    |  |          |  | 23  |  |  |  | 917    | 
|Idaho                             |  |                 | 9   |          |          |                  | 344   |                  |          |  | 2        |  |  |          | 194    |  |          |  | 11  |  |  |  | 538    | 
|Arizona                           |  |                 | 9   |          |          |                  | 400   |                  |          |  |         |  |  |          |       |  |          |  | 9   |  |  |  | 400    | 
|South Carolina                    |  |                 | 9   |          |          |                  | 351   |                  |          |  |         |  |  |          |       |  |          |  | 9   |  |  |  | 351    | 
|Nebraska                          |  |                 | 9   |          |          |                  | 324   |                  |          |  |         |  |  |          |       |  |          |  | 9   |  |  |  | 324    | 
|New Jersey                        |  |                 | 8   |          |          |                  | 312   |                  |          |  |         |  |  |          |       |  |          |  | 8   |  |  |  | 312    | 
|Iowa                              |  |                 | 6   |          |          |                  | 224   |                  |          |  |         |  |  |          |       |  |          |  | 6   |  |  |  | 224    | 
|Louisiana                         |  |                 | 4   |          |          |                  | 173   |                  |          |  |         |  |  |          |       |  |          |  | 4   |  |  |  | 173    | 
|Delaware                          |  |                 |    |          |          |                  |      |                  |          |  | 1        |  |  |          | 120    |  |          |  | 1   |  |  |  | 120    | 
|West Virginia                     |  |                 |    |          |          |                  |      |                  |          |  | 1        |  |  |          | 120    |  |          |  | 1   |  |  |  | 120    | 
|Michigan                          |  |                 | 3   |          |          |                  | 117   |                  |          |  |         |  |  |          |       |  |          |  | 3   |  |  |  | 117    | 
|                                  |  |                 |     |          |          |                  |       |                  |          |  |          |  |  |          |        |  |          | 
|Total                             |  |                 | 216 |          |          |                  | 8,828 |                  |          |  | 146      |  |  |          | 14,747 |  |          |  | 362 |  |  |  | 23,575 | 
|                                  |  |                 |     |          |          |                  |       |                  |          |  |          |  |  |          |        |  |          | 
|Owned                             |  |                 | 155 |          |          |                  | 6,506 |                  |          |  | 130      |  |  |          | 12,915 |  |          |  | 285 |  |  |  | 19,421 | 
|Leased(1)                         |  |                 | 56  |          |          |                  | 2,167 |                  |          |  | 9        |  |  |          | 1,019  |  |          |  | 65  |  |  |  | 3,186  | 
|                                  |  |                 |     |          |          |                  |       |                  |          |  |          |  |  |          |        |  |          | 
|Total Facilities Under Operations |  |                 | 211 |          |          |                  | 8,673 |                  |          |  | 139      |  |  |          | 13,934 |  |          |  | 350 |  |  |  | 22,607 | 
|Managed                           |  |                 | 5   |          |          |                  | 155   |                  |          |  | 7        |  |  |          | 813    |  |          |  | 12  |  |  |  | 968    | 
|                                  |  |                 |     |          |          |                  |       |                  |          |  |          |  |  |          |        |  |          | 
|Total Facilities Under Management |  |                 | 216 |          |          |                  | 8,828 |                  |          |  | 146      |  |  |          | 14,747 |  |          |  | 362 |  |  |  | 23,575 | 
|                                  |  |                 |     |          |          |                  |       |                  |          |  |          |  |  |          |        |  |          | 

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|                                     |                           |                 |  |          |          |                  |  |                  |          |  |          |  |  |          |  |  |          |  |     |     |  |  |        |        | 
|------------------------------------ | ------------------------- | --------------- |  | -------- | -------- | ---------------- |  | ---------------- | -------- |  | -------- |  |  | -------- |  |  | -------- |  | --- | --- |  |  | ------ | ------ | 
|                                     |                           |                 |  |          |          | Total Facilities | 
|                                     |                           | Assisted Living |  |          | Nursing  |                  |  | Under Management |         
|                                     |                           |                 |  |          |          |                  |  |                  |         
|                                     |                           |                 |  | Resident |          |                  |  |                  | Resident |  |          |  |  | Resident | 
|                                     |                           | Number          |  |          | Capacity |                  |  | Number           |          |  | Capacity |  |  | Number   |  |  | Capacity | 
|                                     |                           |                 |  |          |          |                  |  |                  |          |  |          |  |  |          |  |  |          | 
|Consulting services(2):              |                           |                 |  |          |          |                  |  |                  |          |  |          |  |  |          |  |  |          |  |     |     |  |  |        |       
|                                     | Florida                   |                 |  |          |          |                  |  |                  |          |  |          |  |  |          |  |  |          |  |     | 47  |  |  |        | 6,016  | 
|                                     | Texas                     |                 |  |          |          |                  |  |                  |          |  |          |  |  |          |  |  |          |  |     | 22  |  |  |        | 2,276  | 
|                                     | Massachusetts             |                 |  |          |          |                  |  |                  |          |  |          |  |  |          |  |  |          |  |     | 5   |  |  |        | 606    | 
|                                     | Louisiana                 |                 |  |          |          |                  |  |                  |          |  |          |  |  |          |  |  |          |  |     | 3   |  |  |        | 565    | 
|                                     | Pennsylvania              |                 |  |          |          |                  |  |                  |          |  |          |  |  |          |  |  |          |  |     | 4   |  |  |        | 564    | 
|                                     | North Carolina            |                 |  |          |          |                  |  |                  |          |  |          |  |  |          |  |  |          |  |     | 3   |  |  |        | 234    | 
|                                     | Maryland                  |                 |  |          |          |                  |  |                  |          |  |          |  |  |          |  |  |          |  |     | 1   |  |  |        | 135    | 
|                                     | Tennessee                 |                 |  |          |          |                  |  |                  |          |  |          |  |  |          |  |  |          |  |     | 5   |  |  |        | 75     | 
|                                     |                           |                 |  |          |          |                  |  |                  |          |  |          |  |  |          |  |  |          | 
|                                     | Total consulting services |                 |  |          |          |                  |  |                  |          |  |          |  |  |          |  |  |          |  |     | 90  |  |  |        | 10,471 | 
|                                     |                           |                 |  |          |          |                  |  |                  |          |  |          |  |  |          |  |  |          | 
|Total, including consulting services |                           |                 |  |          |          |                  |  |                  |          |  |          |  |  |          |  |  |          |  | 452 |     |  |  | 34,046 |       
|                                     |                           |                 |  |          |          |                  |  |                  |          |  |          |  |  |          |  |  |          | 
|Breakdown by type of facility:       |                           |                 |  |          |          |                  |  |                  |          |  |          |  |  |          |  |  |          |  |     |     |  |  |        |       
|                                     | Assisted living           |                 |  |          |          |                  |  |                  |          |  |          |  |  |          |  |  |          |  |     | 229 |  |  |        | 9,630  | 
|                                     | Nursing                   |                 |  |          |          |                  |  |                  |          |  |          |  |  |          |  |  |          |  |     | 223 |  |  |        | 24,416 | 
|                                     |                           |                 |  |          |          |                  |  |                  |          |  |          |  |  |          |  |  |          | 
|Total, including consulting services |                           |                 |  |          |          |                  |  |                  |          |  |          |  |  |          |  |  |          |  | 452 |     |  |  | 34,046 |       
|                                     |                           |                 |  |          |          |                  |  |                  |          |  |          |  |  |          |  |  |          | 
|OTHER PROPERTIES OWNED:              |                           |                 |  |          |          |                  |  |                  |          |  |          |  |  |          |  |  |          |  |     |     |  |  |        |       
|Nursing facilities under lease(3)    |                           |                 |  |          |          |                  |  |                  |          |  |          |  |  |          |  |  |          |  | 4   |     |  |  | 475    |       
|                                     |                           |                 |  |          |          |                  |  |                  |          |  |          |  |  |          |  |  |          | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The remaining life of the leases, not including renewal options,
    ranges from one to nine years, the average being seven years. We
    have a right of first refusal for four skilled nursing
    properties and have options to purchase one nursing property and
    five assisted living properties. The leases of the five assisted
    living properties are accounted for as capital leases (refer to
    Note 21 to our consolidated financial statements). In
    January 2006, we extended the leases of two Ohio nursing
    facilities for additional
    10-year terms
    commencing February 1, 2006. In February 2006, we executed
    a purchase agreement to acquire a nursing facility (150 beds)
    that we currently lease in Ohio for $9.0 million in cash
    that is anticipated to close in the second quarter of 2006. For
    lease payment information, please see Note 21 to our
    consolidated financial statements.
|   
|(2) | Consulting services provided to the facilities listed include
    billing, accounts receivable tracking, invoice processing,
    payroll, financial reporting and cost reimbursements services.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(3) | We own four nursing properties held under lease arrangements
    with Senior Health Properties  Texas, Inc., an
    unrelated long-term care operator, whose term matures on
    September 30, 2006. Refer to Notes 21 and 17(d) of our
    consolidated financial statements for further information.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

10-K







|        |                  
|------- | -----------------
|ITEM 3. | LEGAL PROCEEDINGS



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10-K,







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






PART II







|        |                                                                                                                       
|------- | ----------------------------------------------------------------------------------------------------------------------
|ITEM 5. | MARKET FOR REGISTRANTS COMMON STOCK AND RELATED
    STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
    SECURITIES

10-K,


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|        |                        
|------- | -----------------------
|ITEM 6. | SELECTED FINANCIAL DATA

10-K.


|                                                                                                    |                                                                                                                 |                                               |           |           |           |   |         |         |         |   |         |         |         |      |         |         |         |   |         |         |         | 
|--------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------- | --------------------------------------------- | --------- | --------- | --------- | - | ------- | ------- | ------- | - | ------- | ------- | ------- | ---- | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                                                                                    |                                                                                                                 | Year Ended December 31,                       |          
|                                                                                                    |                                                                                                                 |                                               |          
|                                                                                                    |                                                                                                                 | 2005                                          |           |           | 2004      |   |         | 2003    |         |   | 2002    |         |         | 2001 |        
|                                                                                                    |                                                                                                                 |                                               |           |           |           |   |         |         |         |   |         |         |         |      |        
|                                                                                                    |                                                                                                                 | (Thousands of dollars unless otherwise noted) |          
|Income Statement Data:                                                                              |                                                                                                                 |                                               |           |           |           |   |         |         |         |   |         |         |         |      |         |         |         |   |         |        
|Revenues:                                                                                           |                                                                                                                 |                                               |           |           |           |   |         |         |         |   |         |         |         |      |         |         |         |   |         |        
|                                                                                                    | Nursing and assisted living facilities                                                                          |                                               | $         | 1,161,126 |           |   | $       | 890,543 |         |   | $       | 805,746 |         |      | $       | 751,475 |         |   | $       | 733,883 |        
|                                                                                                    | Outpatient therapy and medical supplies                                                                         |                                               |           | 11,261    |           |   |         | 10,987  |         |   |         | 11,524  |         |      |         | 10,280  |         |   |         | 9,515   |        
|                                                                                                    | Other                                                                                                           |                                               |           | 17,269    |           |   |         | 16,605  |         |   |         | 15,153  |         |      |         | 16,829  |         |   |         | 17,173  |        
|                                                                                                    |                                                                                                                 |                                               |           |           |           |   |         |         |         |   |         |         |         |      |        
|                                                                                                    |                                                                                                                 | Total revenues                                |           |           | 1,189,656 |   |         |         | 918,135 |   |         |         | 832,423 |      |         |         | 778,584 |   |         |         | 760,571 | 
|Costs and expenses:                                                                                 |                                                                                                                 |                                               |           |           |           |   |         |         |         |   |         |         |         |      |         |         |         |   |         |        
|                                                                                                    | Operating                                                                                                       |                                               |           | 957,163   |           |   |         | 742,938 |         |   |         | 694,538 |         |      |         | 658,318 |         |   |         | 654,441 |        
|                                                                                                    | General and administrative                                                                                      |                                               |           | 37,316    |           |   |         | 29,722  |         |   |         | 30,871  |         |      |         | 32,947  |         |   |         | 32,387  |        
|                                                                                                    | Lease costs                                                                                                     |                                               |           | 21,890    |           |   |         | 9,029   |         |   |         | 9,079   |         |      |         | 10,594  |         |   |         | 14,435  |        
|                                                                                                    | Depreciation and amortization                                                                                   |                                               |           | 45,123    |           |   |         | 33,367  |         |   |         | 35,627  |         |      |         | 35,717  |         |   |         | 38,852  |        
|                                                                                                    | Interest expense, net                                                                                           |                                               |           | 36,840    |           |   |         | 17,321  |         |   |         | 30,070  |         |      |         | 32,428  |         |   |         | 35,560  |        
|                                                                                                    | Valuation adjustment on interest rate caps                                                                      |                                               |           | 1,803     |           |   |         | 7,983   |         |   |         | (131    | )       |      |         |        |         |   |         |        |        
|                                                                                                    | Loss (gain) on disposal of assets, provision for closure
    and exit costs and impairment of long-lived assets |                                               |           | (6,050    | )         |   |         | 1,716   |         |   |         |        |         |      |         | 1,332   |         |   |         | 23,142  |        
|                                                                                                    | Loss on refinancing and retirement of debt                                                                      |                                               |           | 275       |           |   |         | 6,484   |         |   |         |        |         |      |         | 2,849   |         |   |         | 75      |        
|                                                                                                    |                                                                                                                 |                                               |           |           |           |   |         |         |         |   |         |         |         |      |        
|Income (loss) from continuing operations before income taxes and
    change in accounting principle |                                                                                                                 |                                               | 95,296    |           |           |   | 69,575  |         |         |   | 32,369  |         |         |      | 4,399   |         |         |   | (38,321 | )      
|                                                                                                    |                                                                                                                 |                                               |           |           |           |   |         |         |         |   |         |         |         |      |        
|Net income (loss)                                                                                   |                                                                                                                 | $                                             | 45,547    |           |           | $ | 67,738  |         |         | $ | 20,086  |         |         | $    | 3,220   |         |         | $ | (27,495 | )      
|                                                                                                    |                                                                                                                 |                                               |           |           |           |   |         |         |         |   |         |         |         |      |        
|Operating Data:                                                                                     |                                                                                                                 |                                               |           |           |           |   |         |         |         |   |         |         |         |      |         |         |         |   |         |        
|Number of facilities at end of period:                                                              |                                                                                                                 |                                               |           |           |           |   |         |         |         |   |         |         |         |      |         |         |         |   |         |        
|                                                                                                    | Owned and leased:                                                                                               |                                               |           |           |           |   |         |         |         |   |         |         |         |      |         |         |         |   |         |         |        
|                                                                                                    |                                                                                                                 | Nursing                                       |           |           | 139       |   |         |         | 138     |   |         |         | 136     |      |         |         | 135     |   |         |         | 135     | 
|                                                                                                    |                                                                                                                 | Assisted living                               |           |           | 211       |   |         |         | 32      |   |         |         | 34      |      |         |         | 36      |   |         |         | 36      | 
|                                                                                                    |                                                                                                                 |                                               |           |           |           |   |         |         |         |   |         |         |         |      |        
|                                                                                                    |                                                                                                                 | Total owned and leased                        |           |           | 350       |   |         |         | 170     |   |         |         | 170     |      |         |         | 171     |   |         |         | 171     | 
|                                                                                                    |                                                                                                                 |                                               |           |           |           |   |         |         |         |   |         |         |         |      |        
|                                                                                                    | Managed                                                                                                         |                                               |           | 12        |           |   |         | 12      |         |   |         | 19      |         |      |         | 22      |         |   |         | 23      |        
|                                                                                                    | Consulting services                                                                                             |                                               |           | 90        |           |   |         | 77      |         |   |         | 63      |         |      |         | 39      |         |   |         | 35      |        
|Average resident census (continuing operations):                                                    |                                                                                                                 |                                               |           |           |           |   |         |         |         |   |         |         |         |      |         |         |         |   |         |        
|                                                                                                    | Nursing                                                                                                         |                                               |           | 12,787    |           |   |         | 12,562  |         |   |         | 12,253  |         |      |         | 12,081  |         |   |         | 11,381  |        
|                                                                                                    | Assisted living                                                                                                 |                                               |           | 6,940     |           |   |         | 1,434   |         |   |         | 1,496   |         |      |         | 1,472   |         |   |         | 1,463   |        
|Average occupancy rate (continuing operations):                                                     |                                                                                                                 |                                               |           |           |           |   |         |         |         |   |         |         |         |      |         |         |         |   |         |        
|                                                                                                    | Nursing                                                                                                         |                                               |           | 92.8      | %         |   |         | 92.0    | %       |   |         | 91.3    | %       |      |         | 90.0    | %       |   |         | 87.3    | %      
|                                                                                                    | Assisted living                                                                                                 |                                               |           | 87.0      | %         |   |         | 84.4    | %       |   |         | 86.3    | %       |      |         | 83.9    | %       |   |         | 83.1    | %      
|Payor source as a % of total revenue (continuing operations):                                       |                                                                                                                 |                                               |           |           |           |   |         |         |         |   |         |         |         |      |         |         |         |   |         |        
|                                                                                                    | Medicare                                                                                                        |                                               |           | 27        | %         |   |         | 30      | %       |   |         | 28      | %       |      |         | 26      | %       |   |         | 24      | %      
|                                                                                                    | Medicaid                                                                                                        |                                               |           | 45        | %         |   |         | 47      | %       |   |         | 48      | %       |      |         | 49      | %       |   |         | 50      | %      
|                                                                                                    | Private pay                                                                                                     |                                               |           | 28        | %         |   |         | 23      | %       |   |         | 24      | %       |      |         | 25      | %       |   |         | 26      | %      
|Balance Sheet Data (end of period):                                                                 |                                                                                                                 |                                               |           |           |           |   |         |         |         |   |         |         |         |      |         |         |         |   |         |        
|Cash and cash equivalents                                                                           |                                                                                                                 | $                                             | 13,347    |           |           | $ | 29,612  |         |         | $ | 48,855  |         |         | $    | 24,360  |         |         | $ | 407     |        
|Working capital                                                                                     |                                                                                                                 |                                               | 16,091    |           |           |   | 29,570  |         |         |   | 55,795  |         |         |      | 29,897  |         |         |   | (2,554  | )      
|Property and equipment                                                                              |                                                                                                                 |                                               | 750,075   |           |           |   | 446,085 |         |         |   | 448,743 |         |         |      | 453,119 |         |         |   | 477,830 |        
|Total assets                                                                                        |                                                                                                                 |                                               | 1,059,892 |           |           |   | 735,957 |         |         |   | 833,349 |         |         |      | 830,278 |         |         |   | 795,246 |        
|Total debt                                                                                          |                                                                                                                 |                                               | 519,226   |           |           |   | 291,932 |         |         |   | 392,918 |         |         |      | 398,150 |         |         |   | 385,347 |        
|Shareholders equity                                                                                |                                                                                                                 |                                               | 294,511   |           |           |   | 250,189 |         |         |   | 182,660 |         |         |      | 159,201 |         |         |   | 156,002 |        
|Other Financial Data:                                                                               |                                                                                                                 |                                               |           |           |           |   |         |         |         |   |         |         |         |      |         |         |         |   |         |        
|Capital expenditures for property and equipment                                                     |                                                                                                                 |                                               | 32,851    |           |           |   | 25,444  |         |         |   | 21,029  |         |         |      | 18,659  |         |         |   | 16,348  |        
|Capital expenditures for acquisitions                                                               |                                                                                                                 |                                               | 15,809    |           |           |   | 6,454   |         |         |   | 4,124   |         |         |      | 17,930  |         |         |   |        |        
|Capital expenditures for new construction                                                           |                                                                                                                 |                                               | 19,145    |           |           |   | 14,970  |         |         |   | 4,304   |         |         |      |        |         |         |   |        |        
|Net cash flow provided by operating activities                                                      |                                                                                                                 |                                               | 91,536    |           |           |   | 81,400  |         |         |   | 56,033  |         |         |      | 38,832  |         |         |   | 82,626  |        
|Days of revenue outstanding                                                                         |                                                                                                                 |                                               | 37        |           |           |   | 37      |         |         |   | 40      |         |         |      | 43      |         |         |   | 45      |        

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|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
    CONDITION AND RESULTS OF OPERATIONS

Executive Overview






10-K.




| |   |                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | provide quality, clinically-based services;                                                                                                                                                                       
|
| |  | strengthen Medicare census in our nursing facilities, private
    census in our assisted living facilities and total average daily
    census in both nursing and assisted living facilities;                     
|
| |  | expand non-government based revenue sources, thereby decreasing
    the level of risk and reliance on government funding;                                                                                         
|
| |  | expand our asset portfolio through acquisition or internal
    growth, and actively manage our asset portfolio, including where
    appropriate, divesting facilities that fail to meet our
    performance goals;
|
| |  | diversify within the long-term care industry through growth of
    facilities under full management or selected consulting,
    agreements and rehabilitation clinics;                                            
|
| |  | increase our operating efficiency; and                                                                                                                                                                            
|
| |  | improve operating cash flow.                                                                                                                                                                                      





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pre-1980






Revenues




Nursing and Assisted Living Facilities




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|                  |             |                                 |      |       |      |  |      |       |   |  |      |       |  
|----------------- | ----------- | ------------------------------- | ---- | ----- | ---- |  | ---- | ----- | - |  | ---- | ----- | -
|                  |             | Percentage of Total Nursing and |     
|                  |             | Assisted Living Revenues        |     
|                  |             | Year Ended December 31          |     
|                  |             |                                 |     
|                  |             | 2005                            |      |       | 2004 |  |      | 2003  |  
|                  |             |                                 |      |       |      |  |      |       |  
|Medicare          |             |                                 | 28.6 | %     |      |  | 31.3 | %     |   |  | 28.5 | %    
|Private and other |             |                                 | 27.0 | %     |      |  | 20.6 | %     |   |  | 22.1 | %    
|                  |             |                                 |      |       |      |  |      |       |  
|                  | Quality Mix |                                 |      | 55.6  | %    |  |      | 51.9  | % |  |      | 50.6  | %
|Medicaid          |             |                                 | 44.4 | %     |      |  | 48.1 | %     |   |  | 49.4 | %    
|                  |             |                                 |      |       |      |  |      |       |  
|                  | Total       |                                 |      | 100.0 | %    |  |      | 100.0 | % |  |      | 100.0 | %
|                  |             |                                 |      |       |      |  |      |       |  



Nursing Facilities




|                  |             |                        |      |       |      |  |      |       |   |  |      |       |  
|----------------- | ----------- | ---------------------- | ---- | ----- | ---- |  | ---- | ----- | - |  | ---- | ----- | -
|                  |             | Percentage of Total    |     
|                  |             | Nursing Revenues       |     
|                  |             | Year Ended December 31 |     
|                  |             |                        |     
|                  |             | 2005                   |      |       | 2004 |  |      | 2003  |  
|                  |             |                        |      |       |      |  |      |       |  
|Medicare          |             |                        | 35.1 | %     |      |  | 32.7 | %     |   |  | 29.9 | %    
|Private and other |             |                        | 15.4 | %     |      |  | 17.4 | %     |   |  | 18.6 | %    
|                  |             |                        |      |       |      |  |      |       |  
|                  | Quality Mix |                        |      | 50.5  | %    |  |      | 50.1  | % |  |      | 48.5  | %
|Medicaid          |             |                        | 49.5 | %     |      |  | 49.9 | %     |   |  | 51.5 | %    
|                  |             |                        |      |       |      |  |      |       |  
|                  | Total       |                        |      | 100.0 | %    |  |      | 100.0 | % |  |      | 100.0 | %
|                  |             |                        |      |       |      |  |      |       |  

Assisted Living Facilities.




|                                |       |                          |      |       |      |  |      |       |   |  |      |       |  
|------------------------------- | ----- | ------------------------ | ---- | ----- | ---- |  | ---- | ----- | - |  | ---- | ----- | -
|                                |       | Percentage of Total      |     
|                                |       | Assisted Living Revenues |     
|                                |       | Year Ended December 31   |     
|                                |       |                          |     
|                                |       | 2005                     |      |       | 2004 |  |      | 2003  |  
|                                |       |                          |      |       |      |  |      |       |  
|Private and other (Quality Mix) |       |                          | 78.1 | %     |      |  | 91.7 | %     |   |  | 93.6 | %    
|Medicaid                        |       |                          | 21.9 | %     |      |  | 8.3  | %     |   |  | 6.4  | %    
|                                |       |                          |      |       |      |  |      |       |  
|                                | Total |                          |      | 100.0 | %    |  |      | 100.0 | % |  |      | 100.0 | %
|                                |       |                          |      |       |      |  |      |       |  



Other Revenues




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Legislative Actions Affecting Revenues


Legislation Actions Affecting Medicare Revenues






Future Medicare Changes






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Medicaid Rates and State Plan Amendments that affected
Medicaid Revenues








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Future Medicaid Changes








Revenue Adjustments and Provisions (Recovery) for Outstanding
Medicare and Medicaid Receivables








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|                                                                                                           |                                                                                                                                                                |                        |        |        |      |   |       |       |   |   |       |        |  
|---------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------- | ------ | ------ | ---- | - | ----- | ----- | - | - | ----- | ------ | -
|                                                                                                           |                                                                                                                                                                | 2005                   |        |        | 2004 |   |       | 2003  |  
|                                                                                                           |                                                                                                                                                                |                        |        |        |      |   |       |       |  
|                                                                                                           |                                                                                                                                                                | (Dollars in thousands) |       
|Prior year revenue adjustments:                                                                            |                                                                                                                                                                |                        |        |        |      |   |       |       |   |   |       |       
|                                                                                                           | Pennsylvania state plan amendment (Medicaid)                                                                                                                   |                        | $      | 15,800 |      |   | $     |      |   |   | $     |       |  
|                                                                                                           | Indiana state plan amendment (Medicaid)                                                                                                                        |                        |        | 12,754 |      |   |       |      |   |   |       |       |  
|                                                                                                           | Favorable court decision in the State of Ohio relating to the
    recovery of alleged government overpayments for adjudicated
    Medicaid cost report periods |                        |        | 142    |      |   |       | 555   |   |   |       | 4,195  |  
|                                                                                                           | Pennsylvania Medicaid                                                                                                                                          |                        |        | 946    |      |   |       | 3,006 |   |   |       | 949    |  
|                                                                                                           | Other states Medicaid                                                                                                                                          |                        |        | 255    |      |   |       | 156   |   |   |       | 216    |  
|                                                                                                           | Write offs pertaining to individual Medicare claims in dispute
    with Fiscal Intermediary                                                                    |                        |        | (2,200 | )    |   |       | (17   | ) |   |       | (2,657 | )
|                                                                                                           |                                                                                                                                                                |                        |        |        |      |   |       |       |  
|                                                                                                           |                                                                                                                                                                |                        | 27,697 |        |      |   | 3,700 |       |   |   | 2,703 |       
|Prior year provider tax expense associated with revenue
    adjustments above:                             |                                                                                                                                                                |                        |        |        |      |   |       |       |   |   |       |       
|                                                                                                           | Pennsylvania state plan amendment                                                                                                                              |                        | $      | 13,333 |      |   | $     |      |   |   | $     |       |  
|                                                                                                           | Indiana state plan amendment                                                                                                                                   |                        |        | 6,258  |      |   |       |      |   |   |       |       |  
|                                                                                                           |                                                                                                                                                                |                        |        |        |      |   |       |       |  
|                                                                                                           |                                                                                                                                                                |                        | 19,591 |        |      |   |      |       |   |   |      |       
|                                                                                                           |                                                                                                                                                                |                        |        |        |      |   |       |       |  
|Net impact on income from continuing operations before income
    taxes and change in accounting principle |                                                                                                                                                                | $                      | 8,106  |        |      | $ | 3,700 |       |   | $ | 2,703 |       
|                                                                                                           |                                                                                                                                                                |                        |        |        |      |   |       |       |  

Significant Events and Developments


Events of 2005


Acquisition of ALC.


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|                                                  |                                                                           |                |         |         | 
|------------------------------------------------- | ------------------------------------------------------------------------- | -------------- | ------- | ------- | 
|                                                  |                                                                           | (In thousands) |        
|ASSETS:                                           |                                                                           |                |         |        
|Cash, net of cash used to finance the acquisition |                                                                           | $              | (22,652 | )      
|Accounts receivable                               |                                                                           |                | 2,898   |        
|Other current assets                              |                                                                           |                | 8,722   |        
|                                                  |                                                                           |                |        
|Total current assets                              |                                                                           |                | (11,032 | )      
|Property, plant and equipment                     |                                                                           |                | 283,686 |        
|Resident relationships intangible                 |                                                                           |                | 6,357   |        
|Goodwill                                          |                                                                           |                | 5,556   |        
|Other long-term assets                            |                                                                           |                | 1,459   |        
|                                                  |                                                                           |                |        
|Total assets                                      |                                                                           | $              | 286,026 |        
|                                                  |                                                                           |                |        
|                                                 
|LIABILITIES:                                     
|Current maturities of long-term debt              |                                                                           | $              | 3,418   |        
|Unfavorable leases as lessor                      |                                                                           |                | 3,715   |        
|Other current liabilities                         |                                                                           |                | 18,318  |        
|                                                  |                                                                           |                |        
|Total current liabilities                         |                                                                           |                | 25,451  |        
|Long term debt:                                   |                                                                           |                |         |        
|                                                  | Long-term debt of ALC assumed                                             |                |         | 140,212 | 
|                                                  | Proceeds from 6% Term Loan from EHI to finance acquisition                |                |         | 55,000  | 
|                                                  | Proceeds from former Revolving Credit Facility to finance
    acquisition |                |         | 60,000  | 
|                                                  |                                                                           |                |        
|                                                  | Total long-term debt                                                      |                |         | 255,212 | 
|Deferred income taxes                             |                                                                           |                | 608     |        
|Other long-term liabilities                       |                                                                           |                | 4,755   |        
|                                                  |                                                                           |                |        
|Total liabilities                                 |                                                                           | $              | 286,026 |        
|                                                  |                                                                           |                |        





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10-year 10-year




Amended and Restated Credit Facility.


Improvement in Medicare Census.


Acquisitions and New Developments.




Medicaid State Plan Amendments and Waivers.


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Dispositions and Discontinued Operations.






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|                                                               |                                         |                |        |        |      |   |         |        |   |   |        |        |  
|-------------------------------------------------------------- | --------------------------------------- | -------------- | ------ | ------ | ---- | - | ------- | ------ | - | - | ------ | ------ | -
|                                                               |                                         | 2005           |        |        | 2004 |   |         | 2003   |  
|                                                               |                                         |                |        |        |      |   |         |        |  
|                                                               |                                         | (In thousands) |       
|Revenues                                                       |                                         | $              | 18,247 |        |      | $ | 29,718  |        |   | $ | 38,009 |       
|                                                               |                                         |                |        |        |      |   |         |        |  
|Costs and expenses (income):                                   |                                         |                |        |        |      |   |         |        |   |   |        |       
|                                                               | Operating                               |                |        | 23,500 |      |   |         | 33,792 |   |   |        | 36,596 |  
|                                                               | Lease costs                             |                |        | 10     |      |   |         | 20     |   |   |        | 34     |  
|                                                               | Depreciation and amortization           |                |        | 1,045  |      |   |         | 1,832  |   |   |        | 1,821  |  
|                                                               | Interest income                         |                |        | (120   | )    |   |         | (138   | ) |   |        | (124   | )
|                                                               | Loss (gain) on disposal of assets       |                |        | (4,204 | )    |   |         |       |   |   |        |       |  
|                                                               | Loss on impairment of long-lived assets |                |        | 7,761  |      |   |         | 6,825  |   |   |        |       |  
|                                                               |                                         |                |        |        |      |   |         |        |  
|                                                               |                                         |                | 27,992 |        |      |   | 42,331  |        |   |   | 38,327 |       
|                                                               |                                         |                |        |        |      |   |         |        |  
|Income (loss) from discontinued operations before income taxes |                                         |                | (9,745 | )      |      |   | (12,613 | )      |   |   | (318   | )     
|Income tax expense (benefit)                                   |                                         |                | (3,943 | )      |      |   | (3,845  | )      |   |   | (59    | )     
|                                                               |                                         |                |        |        |      |   |         |        |  
|Net income (loss) from discontinued operations                 |                                         | $              | (5,802 | )      |      | $ | (8,768  | )      |   | $ | (259   | )     
|                                                               |                                         |                |        |        |      |   |         |        |  

Non-monetary Exchange of Omnicare Warrant to Omnicare Shares
and Cash.


Impairment Provision against Senior Health -Texas
Advances.


Other Disposal of Assets and Impairments of Long-lived
Assets.


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Loan Repayments.


Adoption of FIN No. 47.


pre-1980




|                                                            |                               |                                   |       |       |        | 
|----------------------------------------------------------- | ----------------------------- | --------------------------------- | ----- | ----- | ------ | 
|                                                            |                               | (In thousands)                    |      
|Cumulative effect of accounting change, net of income taxes |                               | $                                 | 6,414 |      
|Property and equipment                                      |                               |                                   | 1,671 |      
|Deferred state income taxes                                 |                               |                                   | 535   |      
|Due to shareholder and affiliates:                          |                               |                                   |       |      
|                                                            | Deferred federal income taxes |                                   |       | 3,741 |       
|                                                            |                               |                                   |      
|                                                            |                               | Total asset retirement obligation |       | $     | 12,361 | 
|                                                            |                               |                                   |      

Events Subsequent to 2005


Extendicares Strategic Initiative




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Acquisitions




Lease Extensions


10-year


Events prior to 2005


Improvement in Medicare and Total Census.


Acquisitions of Nursing Facilities.


Construction Projects.


Tender Offer/ Redemption of 2007 Notes and Sale and Issuance
of 2014 Notes.




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|                                                             |  |                |        |  
|------------------------------------------------------------ |  | -------------- | ------ | -
|                                                             |  | (In thousands) |       
|Tender premium and call premium                              |  | $              | (6,636 | )
|Write-off of deferred finance charges                        |  |                | (2,359 | )
|Legal expenses                                               |  |                | (285   | )
|                                                             |  |                |       
|                                                             |  |                | (9,280 | )
|Gain on termination of interest rate swap and cap Agreements |  |                | 3,302  |  
|                                                             |  |                |       
|                                                             |  | $              | (5,978 | )
|                                                             |  |                |       

Amendment and Restatement of former Revolving Credit
Facility.




| |   |                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a two-year maturity extension to June 28, 2009;                                                                                                                                                                                                      
|
| |  | an additional $50.0 million of senior secured financing on
    a revolving basis, resulting in total borrowing capacity of
    $155.0 million;                                                                                                       
|
| |  | an interest rate spread which ranges from the Eurodollar rate
    plus 2.50% per annum to 3.25% per annum or the base
    rate plus 1.50% per annum to 2.25% per annum, subject,
    in each case, to adjustments based on our senior leverage ratio;
|
| |  | a commitment fee of 0.50% per annum on the undrawn capacity
    regardless of utilization; and                                                                                                                                                       
|
| |  | changes to the collateral securing the facility to permit us to
    substitute certain assets with other assets.                                                                                                                                     



Interest Rate Swap and Cap Agreements.


Omnicare Shares and Warrants Held for Investment. in-the


62



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Prepayment of Tandem Notes Receivable.


Completion of Greystone Divestiture Agreement.


Settlement of Medicare Receivable Issues.


Consolidation of Two Facilities.


Divestitures.


63



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Transfer of Operations of Nursing Facility in Chippewa Falls,
Wisconsin.


Impairment Provision for Lakeside Property.


Income Tax Benefits.


Key Performance Indicators




Census




Average Daily Census




64



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##### Table of Contents



Occupancy Percentage




Quality Mix




Average Revenue Rate by Payor Source




EBITDA and EBITDA Percentage




Review of Key Performance Indicators




65



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##### Table of Contents



Nursing Facilities  ADC and Quality Mix




All Nursing Facilities  Continuing Operations


|                  |       |                        |       |        |      |  |       |        |  |  |       |        | 
|----------------- | ----- | ---------------------- | ----- | ------ | ---- |  | ----- | ------ |  |  | ----- | ------ | 
|                  |       | Year Ended December 31 |      
|                  |       |                        |      
|                  |       | 2005                   |       |        | 2004 |  |       | 2003   | 
|                  |       |                        |       |        |      |  |       |        | 
|Medicare          |       |                        | 2,347 |        |      |  | 2,115 |        |  |  | 1,916 |       
|Private and other |       |                        | 1,985 |        |      |  | 2,118 |        |  |  | 2,130 |       
|                  |       |                        |       |        |      |  |       |        | 
|Quality Mix       |       |                        | 4,332 |        |      |  | 4,233 |        |  |  | 4,046 |       
|Medicaid          |       |                        | 8,455 |        |      |  | 8,329 |        |  |  | 8,207 |       
|                  |       |                        |       |        |      |  |       |        | 
|                  | Total |                        |       | 12,787 |      |  |       | 12,562 |  |  |       | 12,253 | 
|                  |       |                        |       |        |      |  |       |        | 



Nursing Facilities  Same-Facility


|                  |       |                        |       |        |       |  |      |       |      |  |                |        |  |      |      |       |         |  |       |         |  |  |      |       |   |  |      |     |   |  |      |     |  
|----------------- | ----- | ---------------------- | ----- | ------ | ----- |  | ---- | ----- | ---- |  | -------------- | ------ |  | ---- | ---- | ----- | ------- |  | ----- | ------- |  |  | ---- | ----- | - |  | ---- | --- | - |  | ---- | --- | -
|                  |       | Year Ended December 31 |       |        |       |  |     
|                  |       |                        |       |        |       |  |     
|                  |       | 2005                   |       |        | 2004  |  |      | 2003  |      |  | Percent Change |       
|                  |       |                        |       |        |       |  |      |       |      |  |                |       
|                  |       |                        |       | % of   |       |  |      |       | % of |  |                |        |  | % of |      |       | 2005 to |  |       | 2004 to | 
|                  |       | ADC                    |       |        | Total |  |      | ADC   |      |  | Total          |        |  | ADC  |      |       | Total   |  |       | 2004    |  |  | 2003 |      
|                  |       |                        |       |        |       |  |      |       |      |  |                |        |  |      |      |       |         |  |       |         |  |  |      |      
|Medicare          |       |                        | 2,282 |        |       |  | 18.4 | %     |      |  | 2,073          |        |  |      | 16.9 | %     |         |  | 1,902 |         |  |  | 15.6 | %     |   |  | 10.1 | %   |   |  | 9.0  | %  
|Private and other |       |                        | 1,938 |        |       |  | 15.6 | %     |      |  | 2,065          |        |  |      | 16.8 | %     |         |  | 2,091 |         |  |  | 17.2 | %     |   |  | (6.2 | )%  |   |  | (1.2 | )% 
|                  |       |                        |       |        |       |  |      |       |      |  |                |        |  |      |      |       |         |  |       |         |  |  |      |      
|Quality Mix       |       |                        | 4,220 |        |       |  | 34.0 | %     |      |  | 4,138          |        |  |      | 33.7 | %     |         |  | 3,993 |         |  |  | 32.8 | %     |   |  | 2.0  | %   |   |  | 3.6  | %  
|Medicaid          |       |                        | 8,193 |        |       |  | 66.0 | %     |      |  | 8,154          |        |  |      | 66.3 | %     |         |  | 8,174 |         |  |  | 67.2 | %     |   |  | 0.5  | %   |   |  | (0.2 | )% 
|                  |       |                        |       |        |       |  |      |       |      |  |                |        |  |      |      |       |         |  |       |         |  |  |      |      
|                  | Total |                        |       | 12,413 |       |  |      | 100.0 | %    |  |                | 12,292 |  |      |      | 100.0 | %       |  |       | 12,167  |  |  |      | 100.0 | % |  |      | 1.0 | % |  |      | 1.0 | %
|                  |       |                        |       |        |       |  |      |       |      |  |                |        |  |      |      |       |         |  |       |         |  |  |      |      





|             |  |               |        |  |                |  |        |               |  |  |                |  |  |      |        |  |      |  |        |      |  |  |        |  |  |  |        |  |  |  |        | 
|------------ |  | ------------- | ------ |  | -------------- |  | ------ | ------------- |  |  | -------------- |  |  | ---- | ------ |  | ---- |  | ------ | ---- |  |  | ------ |  |  |  | ------ |  |  |  | ------ | 
|             |  | First Quarter |        |  | Second Quarter |  |        | Third Quarter |  |  | Fourth Quarter | 
|             |  |               |        |  |                |  |        |               |  |  |                | 
|             |  | 2005          |        |  | 2004           |  |        | 2005          |  |  | 2004           |  |  | 2005 |        |  | 2004 |  |        | 2005 |  |  | 2004   | 
|             |  |               |        |  |                |  |        |               |  |  |                |  |  |      |        |  |      |  |        |      |  |  |        | 
|Medicare ADC |  |               | 2,400  |  |                |  | 2,151  |               |  |  | 2,411          |  |  |      | 2,065  |  |      |  | 2,210  |      |  |  | 2,046  |  |  |  | 2,189  |  |  |  | 2,111  | 
|Total ADC    |  |               | 12,628 |  |                |  | 12,281 |               |  |  | 12,487         |  |  |      | 12,324 |  |      |  | 12,467 |      |  |  | 12,450 |  |  |  | 12,458 |  |  |  | 12,500 | 





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Assisted Living Facilities  ADC and Quality Mix




All Assisted Living Facilities


|                                |       |                        |       |       |      |  |       |       |  |  |       |       | 
|------------------------------- | ----- | ---------------------- | ----- | ----- | ---- |  | ----- | ----- |  |  | ----- | ----- | 
|                                |       | Year Ended December 31 |      
|                                |       |                        |      
|                                |       | 2005                   |       |       | 2004 |  |       | 2003  | 
|                                |       |                        |       |       |      |  |       |       | 
|Private and other (Quality Mix) |       |                        | 4,924 |       |      |  | 1,271 |       |  |  | 1,357 |      
|Medicaid                        |       |                        | 2,016 |       |      |  | 163   |       |  |  | 139   |      
|                                |       |                        |       |       |      |  |       |       | 
|                                | Total |                        |       | 6,940 |      |  |       | 1,434 |  |  |       | 1,496 | 
|                                |       |                        |       |       |      |  |       |       | 





Assisted Living Facilities  Same-Facility


|                  |       |                        |       |       |       |  |      |            |      |  |         |       |  |      |      |       |         |  |       |         |  |  |      |       |   |  |      |     |   |  |      |      |   
|----------------- | ----- | ---------------------- | ----- | ----- | ----- |  | ---- | ---------- | ---- |  | ------- | ----- |  | ---- | ---- | ----- | ------- |  | ----- | ------- |  |  | ---- | ----- | - |  | ---- | --- | - |  | ---- | ---- | --
|                  |       | Year Ended December 31 |       |       |       |  |     
|                  |       |                        |       |       |      
|                  |       |                        |       |       |       |  |      | Percentage |     
|                  |       | 2005                   |       |       | 2004  |  |      | 2003       |      |  | Changes |      
|                  |       |                        |       |       |       |  |      |            |      |  |         |      
|                  |       |                        |       | % of  |       |  |      |            | % of |  |         |       |  | % of |      |       | 2005 to |  |       | 2004 to | 
|                  |       | ADC                    |       |       | Total |  |      | ADC        |      |  | Total   |       |  | ADC  |      |       | Total   |  |       | 2004    |  |  | 2003 |      
|                  |       |                        |       |       |       |  |      |            |      |  |         |       |  |      |      |       |         |  |       |         |  |  |      |      
|Private and other |       |                        | 1,156 |       |       |  | 86.3 | %          |      |  | 1,151   |       |  |      | 87.6 | %     |         |  | 1,192 |         |  |  | 89.6 | %     |   |  | 0.4  | %   |   |  | (3.4 | )%  
|Medicaid          |       |                        | 183   |       |       |  | 13.7 | %          |      |  | 163     |       |  |      | 12.4 | %     |         |  | 139   |         |  |  | 10.4 | %     |   |  | 12.3 | %   |   |  | 17.3 | %   
|                  |       |                        |       |       |       |  |      |            |      |  |         |       |  |      |      |       |         |  |       |         |  |  |      |      
|                  | Total |                        |       | 1,339 |       |  |      | 100.0      | %    |  |         | 1,314 |  |      |      | 100.0 | %       |  |       | 1,331   |  |  |      | 100.0 | % |  |      | 1.9 | % |  |      | (1.3 | )%
|                  |       |                        |       |       |       |  |      |            |      |  |         |       |  |      |      |       |         |  |       |         |  |  |      |      



All Nursing and Assisted Living Facilities 
Occupancy and Number of Facilities In Operation




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All Facilities:




All Continuing Facilities


|                            |  |                      |      |   |      |  |      |                               |  |  |      |   |  |      |        |  |      |  |        |      |  |  |        |  |  |      |        |  |  |  |        |  |  |  |        | 
|--------------------------- |  | -------------------- | ---- | - | ---- |  | ---- | ----------------------------- |  |  | ---- | - |  | ---- | ------ |  | ---- |  | ------ | ---- |  |  | ------ |  |  | ---- | ------ |  |  |  | ------ |  |  |  | ------ | 
|                            |  | Occupancy Percentage |      |   | ADC  |  |      | Operational Resident Capacity | 
|                            |  |                      |      |   |      |  |      |                               | 
|                            |  | 2005                 |      |   | 2004 |  |      | 2003                          |  |  | 2005 |   |  | 2004 |        |  | 2003 |  |        | 2005 |  |  | 2004   |  |  | 2003 |       
|                            |  |                      |      |   |      |  |      |                               |  |  |      |   |  |      |        |  |      |  |        |      |  |  |        |  |  |      |       
|Nursing                     |  |                      | 92.8 | % |      |  | 92.0 | %                             |  |  | 91.3 | % |  |      | 12,787 |  |      |  | 12,562 |      |  |  | 12,253 |  |  |      | 13,780 |  |  |  | 13,660 |  |  |  | 13,424 | 
|Assisted Living:            |  |                      |      |   |      |  |      |                               |  |  |      |   |  |      |        |  |      |  |        |      |  |  |        |  |  |      |        |  |  |  |        |  |  |  |        | 
|Mature facilities           |  |                      | 84.8 | % |      |  | 85.4 | %                             |  |  | 84.7 | % |  |      | 1,070  |  |      |  | 1,187  |      |  |  | 1,256  |  |  |      | 1,261  |  |  |  | 1,391  |  |  |  | 1,483  | 
|Developmental facilities    |  |                      | 66.7 | % |      |  | 79.7 | %                             |  |  | 95.9 | % |  |      | 302    |  |      |  | 247    |      |  |  | 240    |  |  |      | 453    |  |  |  | 310    |  |  |  | 250    | 
|ALC acquisition             |  |                      | 88.9 | % |      |  |     |                               |  |  |     |   |  |      | 5,568  |  |      |  |       |      |  |  |       |  |  |      | 6,267  |  |  |  |       |  |  |  |       | 
|                            |  |                      |      |   |      |  |      |                               |  |  |      |   |  |      |        |  |      |  |        |      |  |  |        |  |  |      |       
|Total Assisted Living       |  |                      | 87.0 | % |      |  | 84.3 | %                             |  |  | 86.3 | % |  |      | 6,940  |  |      |  | 1,434  |      |  |  | 1,496  |  |  |      | 7,981  |  |  |  | 1,701  |  |  |  | 1,733  | 
|                            |  |                      |      |   |      |  |      |                               |  |  |      |   |  |      |        |  |      |  |        |      |  |  |        |  |  |      |       
|Nursing and Assisted Living |  |                      | 90.7 | % |      |  | 91.1 | %                             |  |  | 90.7 | % |  |      | 19,727 |  |      |  | 13,996 |      |  |  | 13,749 |  |  |      | 21,761 |  |  |  | 15,361 |  |  |  | 15,157 | 
|                            |  |                      |      |   |      |  |      |                               |  |  |      |   |  |      |        |  |      |  |        |      |  |  |        |  |  |      |       







Same Facility Basis:




Same Facility Basis


|                            |                          |                      |      |      |      |                      |      |          |   |  |      |      |   |      |        |       |      |  |        |       |  |  |        |       |  |      |        |       |  |  |        |       |  |  |        |       | 
|--------------------------- | ------------------------ | -------------------- | ---- | ---- | ---- | -------------------- | ---- | -------- | - |  | ---- | ---- | - | ---- | ------ | ----- | ---- |  | ------ | ----- |  |  | ------ | ----- |  | ---- | ------ | ----- |  |  | ------ | ----- |  |  | ------ | ----- | 
|                            |                          |                      |      |      |      | Operational Resident |     
|                            |                          | Occupancy Percentage |      |      | ADC  |                      |      | Capacity |  
|                            |                          |                      |      |      |      |                      |      |          |  
|                            |                          | 2005                 |      |      | 2004 |                      |      | 2003     |   |  | 2005 |      |   | 2004 |        |       | 2003 |  |        | 2005  |  |  | 2004   |       |  | 2003 |       
|                            |                          |                      |      |      |      |                      |      |          |   |  |      |      |   |      |        |       |      |  |        |       |  |  |        |       |  |      |       
|Nursing                     |                          |                      | 92.9 | %    |      |                      | 92.1 | %        |   |  | 91.3 | %    |   |      | 12,413 |       |      |  | 12,292 |       |  |  | 12,167 |       |  |      | 13,356 |       |  |  | 13,349 |       |  |  | 13,328 |      
|Assisted Living:            |                          |                      |      |      |      |                      |      |          |   |  |      |      |   |      |        |       |      |  |        |       |  |  |        |       |  |      |        |       |  |  |        |       |  |  |        |      
|                            | Mature facilities        |                      |      | 84.8 | %    |                      |      | 84.8     | % |  |      | 83.8 | % |      |        | 1,070 |      |  |        | 1,076 |  |  |        | 1,091 |  |      |        | 1,262 |  |  |        | 1,270 |  |  |        | 1,302 | 
|                            | Developmental facilities |                      |      | 77.4 | %    |                      |      | 83.8     | % |  |      | 95.9 | % |      |        | 269   |      |  |        | 238   |  |  |        | 240   |  |      |        | 347   |  |  |        | 283   |  |  |        | 250   | 
|                            |                          |                      |      |      |      |                      |      |          |   |  |      |      |   |      |        |       |      |  |        |       |  |  |        |       |  |      |       
|                            | Total                    |                      |      | 83.2 | %    |                      |      | 84.6     | % |  |      | 85.8 | % |      |        | 1,339 |      |  |        | 1,314 |  |  |        | 1,331 |  |      |        | 1,609 |  |  |        | 1,553 |  |  |        | 1,552 | 
|                            |                          |                      |      |      |      |                      |      |          |   |  |      |      |   |      |        |       |      |  |        |       |  |  |        |       |  |      |       
|Nursing and Assisted Living |                          |                      | 91.9 | %    |      |                      | 91.3 | %        |   |  | 90.7 | %    |   |      | 13,752 |       |      |  | 13,606 |       |  |  | 13,498 |       |  |      | 14,965 |       |  |  | 14,902 |       |  |  | 14,880 |      
|                            |                          |                      |      |      |      |                      |      |          |   |  |      |      |   |      |        |       |      |  |        |       |  |  |        |       |  |      |       



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|                                           |                        |              |       |      |              |  |       |      |  
|------------------------------------------ | ---------------------- | ------------ | ----- | ---- | ------------ |  | ----- | ---- | -
|                                           |                        | As of        |       |      | As of        | 
|                                           |                        | December 31, |       |      | December 31, | 
|                                           |                        | 2005         |       |      | 2004         | 
|                                           |                        |              |       |      |              | 
|Number of facilities under operation:      |                        |              |       |      |              |  |       |     
|                                           | Nursing                |              |       | 139  |              |  |       | 141  |  
|                                           | Assisted Living        |              |       | 211  |              |  |       | 32   |  
|                                           |                        |              |       |      |              | 
|                                           | Total                  |              |       | 350  |              |  |       | 173  |  
|                                           |                        |              |       |      |              | 
|Number of facilities owned:                |                        |              |       |      |              |  |       |     
|                                           | Nursing                |              |       | 130  |              |  |       | 132  |  
|                                           | Assisted Living        |              |       | 155  |              |  |       | 31   |  
|                                           |                        |              |       |      |              | 
|                                           | Total                  |              |       | 285  |              |  |       | 163  |  
|                                           |                        |              |       |      |              | 
|Number of facilities under capital leases: |                        |              |       |      |              |  |       |     
|                                           | Assisted Living        |              |       | 5    |              |  |       |     |  
|                                           |                        |              |       |      |              | 
|Percent of facilities:                     |                        |              |       |      |              |  |       |     
|                                           | Owned                  |              |       | 81.4 | %            |  |       | 94.2 | %
|                                           | Under capital leases   |              |       | 1.4  | %            |  |       |     |  
|                                           | Under operating leases |              |       | 17.2 | %            |  |       | 5.8  | %
|                                           |                        |              |       |      |              | 
|                                           |                        |              | 100.0 | %    |              |  | 100.0 | %   
|                                           |                        |              |       |      |              | 

Nursing Facilities  Average Revenue per Resident
Day by Payor Source


10-K.


All Continuing Nursing Facilities


|                             |       |                        |        |        |                    |   |        |        |  |   |              |        |  |              |      |      |   |  |      |     |  
|---------------------------- | ----- | ---------------------- | ------ | ------ | ------------------ | - | ------ | ------ |  | - | ------------ | ------ |  | ------------ | ---- | ---- | - |  | ---- | --- | -
|                             |       | Year Ended December 31 |        |        | Percentage Changes |  
|                             |       |                        |        |        |                    |  
|                             |       | 2005                   |        |        | 2004               |   |        | 2003   |  |   | 2005 to 2004 |        |  | 2004 to 2003 |     
|                             |       |                        |        |        |                    |   |        |        |  |   |              |        |  |              |     
|Medicare (Part A and Part B) |       | $                      | 376.39 |        |                    | $ | 358.54 |        |  | $ | 323.96       |        |  |              | 5.0  | %    |   |  | 10.7 | %  
|Private and other            |       | $                      | 197.61 |        |                    | $ | 190.22 |        |  | $ | 183.00       |        |  |              | 3.9  | %    |   |  | 3.9  | %  
|Medicaid                     |       | $                      | 158.03 |        |                    | $ | 140.16 |        |  | $ | 133.31       |        |  |              | 12.7 | %    |   |  | 5.1  | %  
|                             |       |                        |        |        |                    |   |        |        |  |   |              |        |  |              |     
|                             | Total |                        | $      | 204.25 |                    |   | $      | 185.36 |  |   | $            | 171.76 |  |              |      | 10.2 | % |  |      | 7.9 | %
|                             |       |                        |        |        |                    |   |        |        |  |   |              |        |  |              |     



All Continuing Nursing Facilities


|                             |       |                        |        |        |                    |   |        |        |  |   |              |        |  |              |     |     |   |  |     |     |  
|---------------------------- | ----- | ---------------------- | ------ | ------ | ------------------ | - | ------ | ------ |  | - | ------------ | ------ |  | ------------ | --- | --- | - |  | --- | --- | -
|                             |       | Year Ended December 31 |        |        | Percentage Changes |  
|                             |       |                        |        |        |                    |  
|                             |       | 2005                   |        |        | 2004               |   |        | 2003   |  |   | 2005 to 2004 |        |  | 2004 to 2003 |    
|                             |       |                        |        |        |                    |   |        |        |  |   |              |        |  |              |    
|Medicare (Part A and Part B) |       | $                      | 378.96 |        |                    | $ | 358.54 |        |  | $ | 327.78       |        |  |              | 5.7 | %   |   |  | 9.4 | %  
|Private and other            |       | $                      | 197.61 |        |                    | $ | 190.22 |        |  | $ | 183.00       |        |  |              | 3.9 | %   |   |  | 3.9 | %  
|Medicaid                     |       | $                      | 148.35 |        |                    | $ | 138.94 |        |  | $ | 131.53       |        |  |              | 6.8 | %   |   |  | 5.6 | %  
|                             |       |                        |        |        |                    |   |        |        |  |   |              |        |  |              |    
|                             | Total |                        | $      | 198.32 |                    |   | $      | 184.56 |  |   | $            | 171.16 |  |              |     | 7.5 | % |  |     | 7.8 | %
|                             |       |                        |        |        |                    |   |        |        |  |   |              |        |  |              |    
|Medicare Part A only         |       | $                      | 347.14 |        |                    | $ | 326.82 |        |  | $ | 299.89       |        |  |              | 4.9 | %   |   |  | 9.0 | %  

69



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All Continuing Nursing Facilities


|                                      |       |                        |        |        |                    |   |        |        |  |   |              |        |  |              |     |     |   |  |     |     |  
|------------------------------------- | ----- | ---------------------- | ------ | ------ | ------------------ | - | ------ | ------ |  | - | ------------ | ------ |  | ------------ | --- | --- | - |  | --- | --- | -
|                                      |       | Year Ended December 31 |        |        | Percentage Changes |  
|                                      |       |                        |        |        |                    |  
|                                      |       | 2005                   |        |        | 2004               |   |        | 2003   |  |   | 2005 to 2004 |        |  | 2004 to 2003 |    
|                                      |       |                        |        |        |                    |   |        |        |  |   |              |        |  |              |    
|Medicare (Part A and Part B)          |       | $                      | 378.96 |        |                    | $ | 358.54 |        |  | $ | 327.78       |        |  |              | 5.7 | %   |   |  | 9.4 | %  
|Private and other                     |       | $                      | 197.61 |        |                    | $ | 190.22 |        |  | $ | 183.00       |        |  |              | 3.9 | %   |   |  | 3.9 | %  
|Medicaid                              |       | $                      | 148.35 |        |                    | $ | 138.94 |        |  | $ | 131.53       |        |  |              | 6.8 | %   |   |  | 5.6 | %  
|                                      |       |                        |        |        |                    |   |        |        |  |   |              |        |  |              |    
|                                      | Total |                        | $      | 198.32 |                    |   | $      | 184.56 |  |   | $            | 171.16 |  |              |     | 7.5 | % |  |     | 7.8 | %
|                                      |       |                        |        |        |                    |   |        |        |  |   |              |        |  |              |    
|Medicare Part A only                  |       | $                      | 347.14 |        |                    | $ | 326.82 |        |  | $ | 299.89       |        |  |              | 4.9 | %   |   |  | 9.0 | %  
|Medicaid per above                    |       | $                      | 148.35 |        |                    | $ | 138.94 |        |  | $ | 131.53       |        |  |              | 6.8 | %   |   |  | 5.6 | %  
|State provider taxes                  |       | $                      | 10.39  |        |                    | $ | 4.94   |        |  | $ | 3.22         |        |  |              |    |     |   |  |    |    
|                                      |       |                        |        |        |                    |   |        |        |  |   |              |        |  |              |    
|Medicaid, net of state provider taxes |       | $                      | 137.96 |        |                    | $ | 134.00 |        |  | $ | 128.31       |        |  |              | 3.0 | %   |   |  | 4.4 | %  
|                                      |       |                        |        |        |                    |   |        |        |  |   |              |        |  |              |    



Assisted Living Facilities  Average Revenue per
Resident Day by Payor Source




All Assisted Living Facilities


|                  |       |                        |       |       |                    |   |       |       |  |   |              |       |  |              |      |      |   |  |      |     |  
|----------------- | ----- | ---------------------- | ----- | ----- | ------------------ | - | ----- | ----- |  | - | ------------ | ----- |  | ------------ | ---- | ---- | - |  | ---- | --- | -
|                  |       | Year Ended December 31 |       |       | Percentage Changes |  
|                  |       |                        |       |       |                    |  
|                  |       | 2005                   |       |       | 2004               |   |       | 2003  |  |   | 2005 to 2004 |       |  | 2004 to 2003 |     
|                  |       |                        |       |       |                    |   |       |       |  |   |              |       |  |              |     
|Private and other |       | $                      | 90.32 |       |                    | $ | 75.35 |       |  | $ | 71.00        |       |  |              | 19.9 | %    |   |  | 6.1  | %  
|Medicaid          |       | $                      | 61.87 |       |                    | $ | 53.45 |       |  | $ | 46.99        |       |  |              | 15.8 | %    |   |  | 13.7 | %  
|                  |       |                        |       |       |                    |   |       |       |  |   |              |       |  |              |     
|                  | Total |                        | $     | 82.05 |                    |   | $     | 72.86 |  |   | $            | 68.77 |  |              |      | 12.6 | % |  |      | 5.9 | %
|                  |       |                        |       |       |                    |   |       |       |  |   |              |       |  |              |     

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EBITDA and EBITDA Percentage




|                                                                                             |                                                                           |                        |         |        |      |   |         |        |  |   |        |        |  
|-------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------- | ---------------------- | ------- | ------ | ---- | - | ------- | ------ |  | - | ------ | ------ | -
|                                                                                             |                                                                           | Year Ended December 31 |        
|                                                                                             |                                                                           |                        |        
|                                                                                             |                                                                           | 2005                   |         |        | 2004 |   |         | 2003   | 
|                                                                                             |                                                                           |                        |         |        |      |   |         |        | 
|Income from continuing operations before income taxes and change
    in accounting principle |                                                                           | $                      | 95,296  |        |      | $ | 69,575  |        |  | $ | 32,369 |       
|Add (deduct):                                                                                |                                                                           |                        |         |        |      |   |         |        |  |   |        |       
|                                                                                             | Depreciation and amortization                                             |                        |         | 45,123 |      |   |         | 33,367 |  |   |        | 35,627 |  
|                                                                                             | Interest expense, net                                                     |                        |         | 36,840 |      |   |         | 17,321 |  |   |        | 30,070 |  
|                                                                                             | Valuation adjustment on interest rate caps                                |                        |         | 1,803  |      |   |         | 7,983  |  |   |        | (131   | )
|                                                                                             | Loss (gain) on disposal of assets and impairment of
    long-lived assets |                        |         | (6,050 | )    |   |         | 1,716  |  |   |        |       |  
|                                                                                             | Loss on refinancing and retirement of debt                                |                        |         | 275    |      |   |         | 6,484  |  |   |        |       |  
|                                                                                             |                                                                           |                        |         |        |      |   |         |        | 
|EBITDA                                                                                       |                                                                           | $                      | 173,287 |        |      | $ | 136,446 |        |  | $ | 97,935 |       
|                                                                                             |                                                                           |                        |         |        |      |   |         |        | 



|                                   |  |                        |           |   |      |   |         |      |  |   |         |  
|---------------------------------- |  | ---------------------- | --------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                   |  | Year Ended December 31 |          
|                                   |  |                        |          
|                                   |  | 2005                   |           |   | 2004 |   |         | 2003 | 
|                                   |  |                        |           |   |      |   |         |      | 
|EBITDA                             |  | $                      | 173,287   |   |      | $ | 136,446 |      |  | $ | 97,935  |  
|Revenues                           |  | $                      | 1,189,656 |   |      | $ | 918,135 |      |  | $ | 832,423 |  
|EBITDA as percent of total revenue |  |                        | 14.6      | % |      |   | 14.9    | %    |  |   | 11.8    | %



10-K.


71



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Results from Operations:




|                                                                                                         |                                        |                        |       |      |      |  |       |      |   |  |       |      |  
|-------------------------------------------------------------------------------------------------------- | -------------------------------------- | ---------------------- | ----- | ---- | ---- |  | ----- | ---- | - |  | ----- | ---- | -
|                                                                                                         |                                        | Year Ended December 31 |      
|                                                                                                         |                                        |                        |      
|                                                                                                         |                                        | 2005                   |       |      | 2004 |  |       | 2003 |  
|                                                                                                         |                                        |                        |       |      |      |  |       |      |  
|Revenues                                                                                                 |                                        |                        |       |      |      |  |       |      |   |  |       |     
|                                                                                                         | Nursing and assisted living facilities |                        |       | 97.6 | %    |  |       | 97.0 | % |  |       | 96.8 | %
|                                                                                                         | Outpatient therapy                     |                        |       | 1.0  |      |  |       | 1.2  |   |  |       | 1.4  |  
|                                                                                                         | Other                                  |                        |       | 1.4  |      |  |       | 1.8  |   |  |       | 1.8  |  
|                                                                                                         |                                        |                        |       |      |      |  |       |      |  
|                                                                                                         |                                        |                        | 100.0 |      |      |  | 100.0 |      |   |  | 100.0 |     
|Operating and general and administrative costs                                                           |                                        |                        | 83.6  |      |      |  | 84.1  |      |   |  | 87.2  |     
|Lease, depreciation and amortization                                                                     |                                        |                        | 5.6   |      |      |  | 4.6   |      |   |  | 5.4   |     
|Interest expense, net                                                                                    |                                        |                        | 3.1   |      |      |  | 1.9   |      |   |  | 3.6   |     
|Valuation adjustment on interest rate caps                                                               |                                        |                        | 0.2   |      |      |  | 0.9   |      |   |  |      |     
|Loss on disposal of assets, provision for closure and exit costs
    and impairment of long-lived assets |                                        |                        | (0.5  | )    |      |  | 0.2   |      |   |  |      |     
|Loss on refinancing and retirement of debt                                                               |                                        |                        |      |      |      |  | 0.7   |      |   |  |      |     
|                                                                                                         |                                        |                        |       |      |      |  |       |      |  
|Income from continuing operations before income taxes and change
    in accounting principle             |                                        |                        | 8.0   |      |      |  | 7.6   |      |   |  | 3.8   |     
|Income tax (benefit) expense                                                                             |                                        |                        | 3.1   |      |      |  | (0.8  | )    |   |  | 1.4   |     
|                                                                                                         |                                        |                        |       |      |      |  |       |      |  
|Net income from continuing operations before income taxes                                                |                                        |                        | 4.9   |      |      |  | 8.4   |      |   |  | 2.4   |     
|Loss from discontinued operations before income taxes                                                    |                                        |                        | (0.8  | )    |      |  | (1.4  | )    |   |  |      |     
|Income tax benefit on discontinued operations                                                            |                                        |                        | (0.3  | )    |      |  | (0.4  | )    |   |  |      |     
|                                                                                                         |                                        |                        |       |      |      |  |       |      |  
|Net loss from discontinued operations                                                                    |                                        |                        | (0.5  | )    |      |  | (1.0  | )    |   |  |      |     
|                                                                                                         |                                        |                        |       |      |      |  |       |      |  
|Net income before cumulative effect of change in accounting
    principle                                |                                        |                        | 4.4   |      |      |  | 7.4   |      |   |  | 2.4   |     
|Cumulative effect of change in accounting principle, net of
    income taxes                             |                                        |                        | (0.6  | )    |      |  |      |      |   |  |      |     
|                                                                                                         |                                        |                        |       |      |      |  |       |      |  
|Net income                                                                                               |                                        |                        | 3.8   | %    |      |  | 7.4   | %    |   |  | 2.4   | %   
|                                                                                                         |                                        |                        |       |      |      |  |       |      |  

72



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Year Ended December 31, 2005 Compared with Year Ended
December 31, 2004




|                                                            |                       |             |      |        |      |  |      |            |  |  |  |      |  
|----------------------------------------------------------- | --------------------- | ----------- | ---- | ------ | ---- |  | ---- | ---------- |  |  |  | ---- | -
|                                                            |                       | Year Ended  |      |        |     
|                                                            |                       | December 31 |      |        |     
|                                                            |                       |             |      |        |     
|                                                            |                       | 2005        |      |        | 2004 |  |      | Change (%) | 
|Nursing Home Operating Statistics                           |                       |             |      |        |      |  |      |            | 
|Average daily census (same-facility basis):                 |                       |             |      |        |      |  |      |            |  |  |  |     
|                                                            | Medicare              |             |      | 2,302  |      |  |      | 2,093      |  |  |  | 10.0 |  
|                                                            | Private/other         |             |      | 1,951  |      |  |      | 2,081      |  |  |  | (6.2 | )
|                                                            | Medicaid              |             |      | 8,257  |      |  |      | 8,215      |  |  |  | 0.5  |  
|                                                            |                       |             |      |        |      |  |      |            | 
|                                                            | Total                 |             |      | 12,510 |      |  |      | 12,389     |  |  |  | 1.0  |  
|                                                            |                       |             |      |        |      |  |      |            | 
|Medicare as a percent of total census (same-facility basis) |                       |             | 18.4 |        |      |  | 16.9 |            |  |  |  |     
|Average percentage occupancy (same-facility basis)          |                       |             | 93.0 |        |      |  | 92.1 |            |  |  |  |     
|Average revenue rate by payor source:(1)                    |                       |             |      |        |      |  |      |            |  |  |  |     
|                                                            | Medicare Part A and B |             |      | 378.96 |      |  |      | 358.54     |  |  |  | 5.7  |  
|                                                            | Private/other         |             |      | 197.61 |      |  |      | 190.22     |  |  |  | 3.9  |  
|                                                            | Medicaid              |             |      | 148.35 |      |  |      | 138.93     |  |  |  | 6.8  |  
|                                                            | Medicare Part A       |             |      | 347.14 |      |  |      | 326.82     |  |  |  | 6.2  |  



|    |                                              
|--- | ---------------------------------------------
|(1) | Excludes prior period settlement adjustments.

Revenues




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|                                                                                                                                                                                                                                                                                                                  |  |               |      |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ---- | -
|                                                                                                                                                                                                                                                                                                                  |  | (In millions) |     
| Indiana and Pennsylvania Medicaid revenues
    attributable to the approval of the state plan amendments and
    waivers (the related increase in state assessment expense of
    $10.2 million is reflected in operating expenses below)                                                                       |  | $             | 18.7 |  
| Medicare census increasing from 16.9% of total in
    2004 to 18.4% in 2005                                                                                                                                                                                                                                     |  |               | 13.0 |  
| average daily nursing Medicaid rates, in states
    other than Indiana and Pennsylvania                                                                                                                                                                                                                         |  |               | 8.9  |  
| Medicare revenues due to the improvement in RUGs mix
    and other factors                                                                                                                                                                                                                                      |  |               | 9.3  |  
| total nursing census increasing from 12,389 in 2004
    to 12,510 in 2005                                                                                                                                                                                                                                       |  |               | 5.7  |  
| Medicare revenues due to increases in Medicare
    Part A rates effective October 1, 2004 and 2005                                                                                                                                                                                                              |  |               | 7.9  |  
| an increase in private and other nursing rates                                                                                                                                                                                                                                                                  |  |               | 5.2  |  
| nursing ancillary revenues                                                                                                                                                                                                                                                                                      |  |               | 1.9  |  
| nursing revenues due to one less day in 2005 as
    compared to 2004                                                                                                                                                                                                                                            |  |               | (2.3 | )
| an increase in assisted living revenues                                                                                                                                                                                                                                                                         |  |               | 1.8  |  
|                                                                                                                                                                                                                                                                                                                  |  |               |     
|                                                                                                                                                                                                                                                                                                                  |  |               | 70.1 |  
|Adjustments relating to prior years:                                                                                                                                                                                                                                                                              |  |               |      |  
| Indiana and Pennsylvania Medicaid revenues in 2005
    attributable to the approval of the state plan amendments and
    waivers for the period July 1, 2003 through
    December 31, 2004 (the related increase in state assessment
    expense of $19.6 million is reflected in operating expenses
    below) |  |               | 28.5 |  
| Contractual allowance recorded in 2005 relating to
    the recovery of non-reimbursable Part A co-insurance, based
    upon audit results up to 2003                                                                                                                                                            |  |               | (2.2 | )
| Other prior year settlement adjustments in 2005 as
    compared to 2004                                                                                                                                                                                                                                         |  |               | (3.1 | )
|                                                                                                                                                                                                                                                                                                                  |  |               |     
|Total increase in revenues from same facility nursing and
    assisted living facilities                                                                                                                                                                                                                          |  | $             | 93.3 |  
|                                                                                                                                                                                                                                                                                                                  |  |               |     

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Operating and General and Administrative Costs




|                                                                                                                                                                                  |  |               |      | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ---- | 
|                                                                                                                                                                                  |  | (In millions) |     
| wages, benefits and contracted staffing, which
    included an average wage rate increase of 3.9% in nursing home
    operations                                                |  | $             | 38.0 | 
| state assessment taxes in Indiana and Pennsylvania
    for 2005 attributable to the approval of the state plan
    amendments and waivers                                       |  |               | 13.6 | 
| other state assessments and bed taxes                                                                                                                                           |  |               | 2.3  | 
| drug expense due to higher resident census, resident
    acuity and drug prices                                                                                                 |  |               | 6.9  | 
| medical equipment lease, food and supplies expense                                                                                                                              |  |               | 4.4  | 
| repairs and maintenance, utilities and telephone                                                                                                                                |  |               | 3.3  | 
| professional fees, fines and penalties                                                                                                                                          |  |               | 3.6  | 
| bad debt expense                                                                                                                                                                |  |               | 2.7  | 
| other operating and administrative expenses                                                                                                                                     |  |               | 3.5  | 
|                                                                                                                                                                                  |  |               |     
|                                                                                                                                                                                  |  |               | 78.3 | 
|Adjustment relating to prior year:                                                                                                                                                |  |               |      | 
| state assessment taxes in Indiana and Pennsylvania
    for the period July 1, 2003 through December 31, 2004
    due to final approval of the state plan amendments and waivers |  |               | 19.6 | 
|                                                                                                                                                                                  |  |               |     
|Total increase in same facility operating and general and
    administrative costs                                                                                                |  | $             | 97.9 | 
|                                                                                                                                                                                  |  |               |     

Lease Costs, Depreciation and Amortization




Interest Expense, Net






75



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Valuation Adjustment on Interest Rate Caps




Loss (Gain) on Disposal of Assets and Impairment of
Long-Lived Assets






Loss on Refinancing and Retirement of Debt






Income Taxes




76



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Net Income from Continuing Operations




Loss from Discontinued Operations








Net Income before Cumulative Effect of Change in Accounting
Principle




Cumulative Effect of Change in Accounting Principle




Net Income




Related Party Transactions




77



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|                                |                             |                                 |          |                      |        |        |      |   |         |        |  
|------------------------------- | --------------------------- | ------------------------------- | -------- | -------------------- | ------ | ------ | ---- | - | ------- | ------ | -
|Affiliate                       |                             | Purpose                         |          | 2005                 |        |        | 2004 |  
|                                |                             |                                 |          |                      |        |        |      |  
|                                |                             |                                 |          | (In thousands)       |       
|                                |                             |                                 |          | Receivable (payable) |       
|Current assets:                 |                             |                                 |          |                      |        |        |      |   |         |       
|Extendicare Holdings, Inc.      |                             | Federal income taxes receivable |          | $                    | 10,450 |        |      | $ | 5,231   |       
|Extendicare Holdings, Inc.      |                             | Deferred federal income taxes   |          |                      | 15,787 |        |      |   | 13,258  |       
|Extendicare Inc.                |                             | Working capital advances        |          |                      |       |        |      |   | 7,690   |       
|                                |                             |                                 |          |                      |        |        |      |  
|                                |                             |                                 |          |                      | 26,237 |        |      |   | 26,179  |       
|                                |                             |                                 |          |                      |        |        |      |  
|Current liabilities:            |                             |                                 |          |                      |        |        |      |   |         |       
|Virtual Care Provider, Inc.     |                             | Working capital advances        |          |                      | (3,000 | )      |      |   | (3,000  | )     
|The Northern Group, Inc.        |                             | Intercompany operating expenses |          |                      | 16     |        |      |   | 19      |       
|Laurier Indemnity Company, Ltd. |                             | Intercompany insurance premium  |          |                      | 6      |        |      |   | 3       |       
|Extendicare Holdings, Inc.      |                             | Working capital advances        |          |                      | 3      |        |      |   | 3       |       
|                                |                             |                                 |          |                      |        |        |      |  
|                                |                             |                                 |          |                      | (2,975 | )      |      |   | (2,975  | )     
|                                |                             |                                 |          |                      |        |        |      |  
|Long-term liabilities:          |                             |                                 |          |                      |        |        |      |   |         |       
|Extendicare Holdings, Inc.      |                             | Deferred federal income taxes   |          |                      | (9,815 | )      |      |   | (1,853  | )     
|                                |                             |                                 |          |                      |        |        |      |  
|Other:                          |                             |                                 |          |                      |        |        |      |   |         |       
|                                | Extendicare Inc.            |                                 | Advances |                      |        |       |      |   |         | (8,900 | )
|                                | Extendicare Inc.            |                                 | Advances |                      |        | 281    |      |   |         | 1,218  |  
|                                | Extendicare Holdings, Inc.  |                                 | Advances |                      |        | (3,483 | )    |   |         | (3,483 | )
|                                | Virtual Care Provider, Inc. |                                 | Advances |                      |        | (2,738 | )    |   |         | (3,620 | )
|                                |                             |                                 |          |                      |        |        |      |  
|                                |                             |                                 |          |                      | (5,940 | )      |      |   | (14,785 | )     
|                                |                             |                                 |          |                      |        |        |      |  
|                                |                             |                                 |          | $                    | 7,507  |        |      | $ | 6,566   |       
|                                |                             |                                 |          |                      |        |        |      |  



78



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Year Ended December 31, 2004 Compared with Year Ended
December 31, 2003




|                                                            |                       |             |      |        |      |  |      |            |  |  |  |      |  
|----------------------------------------------------------- | --------------------- | ----------- | ---- | ------ | ---- |  | ---- | ---------- |  |  |  | ---- | -
|                                                            |                       | Year Ended  |      |        |     
|                                                            |                       | December 31 |      |        |     
|                                                            |                       |             |      |        |     
|                                                            |                       | 2004        |      |        | 2003 |  |      | Change (%) | 
|Nursing Home Operating Statistics                           |                       |             |      |        |      |  |      |            | 
|Average daily census (same-facility basis):                 |                       |             |      |        |      |  |      |            |  |  |  |     
|                                                            | Medicare              |             |      | 2,073  |      |  |      | 1,902      |  |  |  | 9.0  |  
|                                                            | Private/other         |             |      | 2,065  |      |  |      | 2,091      |  |  |  | (1.2 | )
|                                                            | Medicaid              |             |      | 8,154  |      |  |      | 8,175      |  |  |  | (0.2 | )
|                                                            |                       |             |      |        |      |  |      |            | 
|                                                            | Total                 |             |      | 12,292 |      |  |      | 12,168     |  |  |  | 1.0  |  
|                                                            |                       |             |      |        |      |  |      |            | 
|Medicare as a percent of total census (same-facility basis) |                       |             | 16.9 |        |      |  | 15.6 |            |  |  |  |     
|Average percentage occupancy (same-facility basis)          |                       |             | 92.1 |        |      |  | 91.3 |            |  |  |  |     
|Average revenue rate by payor source:(1)                    |                       |             |      |        |      |  |      |            |  |  |  |     
|                                                            | Medicare Part A and B |             |      | 358.54 |      |  |      | 327.78     |  |  |  | 9.4  |  
|                                                            | Private/other         |             |      | 190.22 |      |  |      | 183.00     |  |  |  | 3.9  |  
|                                                            | Medicaid              |             |      | 138.93 |      |  |      | 131.53     |  |  |  | 5.6  |  
|                                                            | Medicare Part A       |             |      | 326.82 |      |  |      | 299.89     |  |  |  | 9.0  |  



|    |                                              
|--- | ---------------------------------------------
|(1) | Excludes prior period settlement adjustments.

Revenues




79



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|                                                                                                                                                                                                                          |  |               |      | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ---- | 
|                                                                                                                                                                                                                          |  | (In millions) |     
| a 5.7% increase (excluding prior year adjustments)
    in the average daily nursing Medicaid rate (which included
    cost-offset funding as a result of increased state assessments
    and bed taxes of $5.4 million) |  | $             | 22.9 | 
| an increase in Medicare revenues due to Medicare
    Part A rate increases of 2.8% and 6.26% effective
    October 1, 2004 and 2003, respectively                                                                       |  |               | 12.7 | 
| an increase in Medicare residents from 15.5% of
    total in 2003 to 16.6% in 2004                                                                                                                                      |  |               | 10.2 | 
| an increase in Medicare revenues due to the
    improvement in RUGs mix and other factors                                                                                                                               |  |               | 7.6  | 
| an increase in nursing ancillary revenues                                                                                                                                                                               |  |               | 6.0  | 
| a increase in nursing resident ADC census                                                                                                                                                                               |  |               | 6.0  | 
| increases in other average daily nursing rates                                                                                                                                                                          |  |               | 4.5  | 
| increase due to one extra day in 2004                                                                                                                                                                                   |  |               | 2.0  | 
| an increase in assisted living revenues due to
    increased occupancy and higher rates                                                                                                                                 |  |               | 1.1  | 
|                                                                                                                                                                                                                          |  |               |     
|                                                                                                                                                                                                                          |  |               | 73.0 | 
|These increases were adjusted by:                                                                                                                                                                                         |  |               |      | 
| favorable prior year revenue adjustments recorded in
    2004 of $3.7 million compared to favorable prior year
    revenue adjustments of $2.7 million recorded in 2003                                                 |  |               | 1.0  | 
|                                                                                                                                                                                                                          |  |               |     
|Total increase in revenues from same facility nursing and
    assisted living centers                                                                                                                                     |  | $             | 74.0 | 
|                                                                                                                                                                                                                          |  |               |     

Operating and General and Administrative Costs




|                                                                                                    |  |               |      |  
|--------------------------------------------------------------------------------------------------- |  | ------------- | ---- | -
|                                                                                                    |  | (In millions) |     
| wages, benefits and contracted staffing, which
    included an average wage rate increase of 3.0% |  | $             | 28.8 |  
| state assessments and bed taxes                                                                   |  |               | 5.4  |  
| drug expense due to higher resident census, Medicare
    mix and drug prices                      |  |               | 3.1  |  
| equipment expenses                                                                                |  |               | 1.6  |  
| other operating and administrative expenses                                                       |  |               | (0.3 | )
|                                                                                                    |  |               |     
|Total increase in same facility operating and general and
    administrative costs                  |  | $             | 38.6 |  
|                                                                                                    |  |               |     

Lease Costs, Depreciation and Amortization




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Interest Expense, Net




Valuation Adjustment on Interest Rate Caps




Loss (Gain) on Disposal of Assets and Impairment of
Long-Lived Assets








Loss on Refinancing and Retirement of Debt




Income Taxes




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Net Income from Continuing Operations




Loss from Discontinued Operations






Net Income




Related Party Transactions






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Liquidity and Capital Resources


Sources and Uses of Cash




|                                                 |  |                        |          |   |      |   |         |      |  |   |         |  
|------------------------------------------------ |  | ---------------------- | -------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                 |  | Year Ended December 31 |         
|                                                 |  |                        |         
|                                                 |  | 2005                   |          |   | 2004 |   |         | 2003 | 
|                                                 |  |                        |          |   |      |   |         |      | 
|                                                 |  | (In thousands)         |         
|Cash provided by operating activities            |  | $                      | 91,536   |   |      | $ | 81,400  |      |  | $ | 56,033  |  
|Cash provided by (used in) investing activities  |  |                        | (182,320 | ) |      |   | (9,669  | )    |  |   | (26,772 | )
|Cash provided by (used in) financing activities  |  |                        | 74,519   |   |      |   | (90,974 | )    |  |   | (4,766  | )
|Increase (decrease) in cash and cash equivalents |  |                        | (16,265  | ) |      |   | (19,243 | )    |  |   | 24,495  |  











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Debt Instruments


Summary of Long-term Debt




|                                                                                                          |  |          |      |   |      |   |         |      |  |   |         | 
|--------------------------------------------------------------------------------------------------------- |  | -------- | ---- | - | ---- | - | ------- | ---- |  | - | ------- | 
|                                                                                                          |  | Interest |      |   |      |   |        
|                                                                                                          |  | Rate(1)  |      |   | 2005 |   |         | 2004 | 
|                                                                                                          |  |          |      |   |      |   |         |      | 
|9.50% Senior Notes due 2010                                                                               |  |          | 9.54 | % |      | $ | 149,756 |      |  | $ | 149,714 | 
|6.875% Senior Subordinated Notes due 2014                                                                 |  |          | 7.23 | % |      |   | 122,255 |      |  |   | 122,022 | 
|Term Loan due 2010, at variable interest rates                                                            |  |          | 6.02 | % |      |   | 85,570  |      |  |   |        | 
|6.00% EHI Term Note due 2010                                                                              |  |          | 6.00 | % |      |   | 55,000  |      |  |   |        | 
|6.00% EI Term Note due 2010                                                                               |  |          | 6.00 | % |      |   | 8,900   |      |  |   |        | 
|Other mortgage notes payable, interest rates ranging from 3.0%
    to 7.25%, maturing through 2009        |  |          | 6.67 | % |      |   | 3,836   |      |  |   | 9,730   | 
|Industrial Development Revenue Bond due 2014                                                              |  |          |     |   |      |   |        |      |  |   | 9,500   | 
|6.25% Industrial Development Revenue Bond, maturing 2008                                                  |  |          | 6.25 | % |      |   | 735     |      |  |   | 955     | 
|Capital lease obligations                                                                                 |  |          |     |   |      |   |        |      |  |   | 11      | 
|ALC Debt:                                                                                                 |  |          |      |   |      |   |         |      |  |   |         | 
|6.24% Red Mortgage Capital Note due 2014                                                                  |  |          | 6.51 | % |      |   | 36,533  |      |  |   |        | 
|DMG Mortgage notes payable, interest rates ranging from 7.58% to
    8.65%, due 2008                      |  |          | 6.01 | % |      |   | 27,263  |      |  |   |        | 
|Capital lease obligations, interest rates ranging from 2.84% to
    13.54%, maturing through 2009         |  |          | 6.36 | % |      |   | 12,222  |      |  |   |        | 
|Oregon Trust Deed Notes, interest rates ranging from 0.25%
    to 10.90%, maturing from 2020 through 2026 |  |          | 6.75 | % |      |   | 9,483   |      |  |   |        | 
|HUD Insured Mortgages, interest rates ranging from 7.40% to
    7.55%, due 2036                           |  |          | 6.89 | % |      |   | 7,673   |      |  |   |        | 
|                                                                                                          |  |          |      |   |      |   |         |      | 
|Long-term debt before current maturities                                                                  |  |          |      |   |      |   | 519,226 |      |  |   | 291,932 | 
|Less current maturities                                                                                   |  |          |      |   |      |   | 4,142   |      |  |   | 1,071   | 
|                                                                                                          |  |          |      |   |      |   |         |      | 
|Total long-term debt                                                                                      |  |          |      |   |      | $ | 515,084 |      |  | $ | 290,861 | 
|                                                                                                          |  |          |      |   |      |   |         |      | 



|    |                                                                      
|--- | ---------------------------------------------------------------------
|(1) | Interest rate is effective interest rate as of December 31,
    2005.





9.50% Senior Notes due 2010




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12-month


|                    |  |                  |         |  
|------------------- |  | ---------------- | ------- | -
|Year                |  | Redemption Price |        
|                    |  |                  |        
|2006                |  |                  | 104.750 | %
|2007                |  |                  | 102.375 | %
|2008 and thereafter |  |                  | 100.000 | %



6.875% Senior Subordinated Notes due 2014








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|                    |  |                  |          | 
|------------------- |  | ---------------- | -------- | 
|Year                |  | Redemption Price |         
|                    |  |                  |         
|2009                |  |                  | 103.438% | 
|2010                |  |                  | 102.292% | 
|2011                |  |                  | 101.146% | 
|2012 and thereafter |  |                  | 100.000% | 

Amended and Restated Credit Facility






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the credit extended to us under the Amended and Restated Credit
    Facility includes a term loan for $86.0 million. The
    principal balance of the term loan is payable in equal quarterly
    installments of $215,000 over the first four years of the
    Amended and Restated Credit Facility, equal quarterly
    installments of $20.6 million over the first three quarters
    of the last year of the Amended and Restated Credit Facility,
    and a final principal installment of $20.6 million due on
    the maturity date.                                                                                       
|
| |  | the revolving credit limit under the Amended and Restated Credit
    Facility reflects a reduction by $41.0 million from the
    $155.0 million limit under the former Revolving Credit
    Facility to $114.0 million under the Amended and Restated
    Credit Facility. We may request an increase in the credit
    extended or available under the Amended and Restated Credit
    Facility by up to $15.0 million, but such increase must be
    approved by one or more participating lenders. The increase may
    be in the form of additional term loans or in the form of an
    increase in the revolving credit limit.
|
| |  | the maturity date of the Amended and Restated Credit Facility is
    July 31, 2010, reflecting an extension of more than one
    year from the maturity date of the former Revolving Credit
    Facility.                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | the interest rate margins over the Eurodollar rate or the base
    rate, as applicable, have been reduced and fixed at
    1.75% per annum for Eurodollar rate loans and
    0.75% per annum for base rate loans. Under the former
    Revolving Credit Facility the interest rate margin ranged from
    2.50% per annum to 3.25% per annum for Eurodollar rate
    loans and from 1.50% per annum to 2.25% per annum for
    base rate loans, subject, in each case, to adjustments based on
    our senior leverage ratio.                                                                                                      
|
| |  | the Amended and Restated Credit Facility includes a
    $10.0 million swing line commitment within the
    $114 million revolving credit limit.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | the financial covenants under the Amended and Restated Credit
    Facility include ALCs debt and earnings, whereas the
    financial covenants under the former Revolving Credit Facility
    did not. The financial covenants are otherwise substantially the
    same as under the former Revolving Credit Facility.                                                                                                                                                                                                                                                                                                            
|
| |  | the Amended and Restated Credit Facility includes procedures for
    ALC and its subsidiaries to be designated as restricted
    subsidiaries and guarantors of the Amended and Restated Credit
    Facility over time. As this occurs, these subsidiaries will
    become subject to the covenants of the Amended and                                                                                                                                                                                                                                                                                                             

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | Restated Credit Facility that apply to our restricted
    subsidiaries. Also, we are be permitted to make investments in
    these subsidiaries to the same extent that we are permitted to
    make investments in our other restricted subsidiaries that have
    guaranteed the Amended and Restated Credit Facility.                                                                                                                                                                                                        
|
| |  | the Amended and Restated Credit Facility increases the our
    ability to make investments in unrestricted subsidiaries (the
    unrestricted subsidiaries being ALC and its subsidiaries unless
    and until they have been designated as restricted subsidiaries)
    such that we and our restricted subsidiaries may have
    investments in unrestricted subsidiaries outstanding from time
    to time up to the sum of the amount of investments in
    unrestricted subsidiaries at June 30, 2005 plus
    $40 million.
|
| |  | the Amended and Restated Credit Facility required that
    ALCs debt in connection with the $22.0 million of
    Revenue Bonds secured by ALC facilities located in the States of
    Washington, Idaho and Ohio be repaid in full within
    180 days after the closing of the Amended and Restated
    Credit Facility. The Revenue Bonds were prepaid in full in
    December 2005, and as a result, ALC became a restricted
    subsidiary under the Amended and Restated Credit Facility.                                 
|
| |  | the Amended and Restated Credit Facility increases our ability
    to make restricted payments to permit annual dividends up to the
    lesser of (i) 50% of net income, or
    (ii) $25 million plus the unused restricted payment
    amount for the previous fiscal year, or
    (iii) $50 million.                                                                                                                                                                                                                          









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6.0% EHI Term Note due 2010




6.0% Extendicare Term Note due 2010




Mortgage Notes Payable




6.24% Red Mortgage Capital Note due 2014


25-year


DMG Mortgage Notes Payable due 2008




Capital Lease Obligations




Oregon Trust Deed Notes




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HUD Insured Mortgages due 2036




Credit Ratings




|                                        |  |     |    |  |         |  |     | 
|--------------------------------------- |  | --- | -- |  | ------- |  | --- | 
|                                        |  | S&P |    |  | Moodys | 
|                                        |  |     |    |  |         | 
|2010 Senior Notes                       |  |     | B+ |  |         |  | B1  | 
|2014 Notes                              |  |     | B  |  |         |  | B2  | 
|Revolving Credit Facility and Term Loan |  |     | BB |  |         |  | Ba2 | 

Interest Rate Swap and Cap Agreements










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Letters of Credit




Off Balance Sheet Arrangements




Cash Management




Future Liquidity and Capital Resources




Capital Commitments




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Accrual for Self-Insured Liabilities




Revenue Bonds Commitments










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Contractual Obligations




|                            |  |                        |         |  |      |   |        |      |  |   |        |  |  |      |        |  |      |   |        |            |  |   |         |  |  |   |         | 
|--------------------------- |  | ---------------------- | ------- |  | ---- | - | ------ | ---- |  | - | ------ |  |  | ---- | ------ |  | ---- | - | ------ | ---------- |  | - | ------- |  |  | - | ------- | 
|                            |  | Payments Due by Year   |        
|                            |  |                        |        
|                            |  | Total                  |         |  | 2006 |   |        | 2007 |  |   | 2008   |  |  | 2009 |        |  | 2010 |   |        | After 2010 | 
|                            |  |                        |         |  |      |   |        |      |  |   |        |  |  |      |        |  |      |   |        |            | 
|                            |  | (Dollars in thousands) |        
|Long-term debt              |  | $                      | 519,226 |  |      | $ | 4,142  |      |  | $ | 7,111  |  |  | $    | 27,682 |  |      | $ | 53,800 |            |  | $ | 256,226 |  |  | $ | 170,265 | 
|Operating lease commitments |  |                        | 164,072 |  |      |   | 20,971 |      |  |   | 19,454 |  |  |      | 19,544 |  |      |   | 19,331 |            |  |   | 19,435  |  |  |   | 65,337  | 
|                            |  |                        |         |  |      |   |        |      |  |   |        |  |  |      |        |  |      |   |        |            | 
|Total                       |  | $                      | 683,298 |  |      | $ | 25,113 |      |  | $ | 26,565 |  |  | $    | 47,226 |  |      | $ | 73,131 |            |  | $ | 275,661 |  |  | $ | 235,602 | 
|                            |  |                        |         |  |      |   |        |      |  |   |        |  |  |      |        |  |      |   |        |            | 







Critical Accounting Policies


10-K.


Revenue Recognition and Accounts Receivable




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Measurement of Acquired Assets and Liabilities in Business
Combinations




lease-up lease-up lease-up




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Medicare and Medicaid Settlement Receivables










Valuation of Assets and Asset Impairment






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Self-insured Liabilities








Conditional Asset Retirement Obligation




pre-1980




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Deferred Tax Assets









|         |                                                               
|-------- | --------------------------------------------------------------
|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
    RISK

Qualitative Disclosures








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Quantitative Disclosures




|                                         |                 |      |       |   |      |   |       |      |  |   |        |   |  |      |        |            |            |   |         |       |  |   |         |         |  |   |         |         |  |   |         |       |  
|---------------------------------------- | --------------- | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ------ | - |  | ---- | ------ | ---------- | ---------- | - | ------- | ----- |  | - | ------- | ------- |  | - | ------- | ------- |  | - | ------- | ----- | -
|                                         |                 |      |       |   |      |   |       |      |  |   |        |   |  |      |        | Fair Value |           
|                                         |                 |      |       |   |      |   |       |      |  |   |        |   |  |      |        | Liability  |           
|                                         |                 | 2006 |       |   | 2007 |   |       | 2008 |  |   | 2009   |   |  | 2010 |        |            | After 2010 |   |         | Total |  |   | (Asset) |        
|                                         |                 |      |       |   |      |   |       |      |  |   |        |   |  |      |        |            |            |   |         |       |  |   |         |        
|LONG-TERM DEBT:                          |                 |      |       |   |      |   |       |      |  |   |        |   |  |      |        |            |            |   |         |       |  |   |         |         |  |   |         |         |  |   |         |      
|Fixed Rate                               |                 | $    | 3,282 |   |      | $ | 6,252 |      |  | $ | 26,822 |   |  | $    | 12,090 |            |            | $ | 214,946 |       |  | $ | 170,265 |         |  | $ | 433,656 |         |  | $ | 444,455 |      
|Average Interest Rate                    |                 |      | 6.26% |   |      |   | 6.72  | %    |  |   | 6.07   | % |  |      | 6.38   | %          |            |   | 8.48    | %     |  |   | 7.06    | %       |  |   | 7.66    | %       |  |   |         |      
|Variable Rate                            |                 | $    | 860   |   |      | $ | 860   |      |  | $ | 860    |   |  | $    | 41,710 |            |            | $ | 41,280  |       |  |   |        |         |  | $ | 85,570  |         |  | $ | 85,570  |      
|Average Interest Rate                    |                 |      | 6.02% |   |      |   | 6.02  | %    |  |   | 6.02   | % |  |      | 6.02   | %          |            |   | 6.02    | %     |  |   |        |         |  |   | 6.02    | %       |  |   |         |      
|INTEREST RATE SWAPS: (fixed to variable) |                 |      |       |   |      |   |       |      |  |   |        |   |  |      |        |            |            |   |         |       |  |   |         |         |  |   |         |         |  |   |         |      
|Notional Amount                          |                 |      |      |   |      |   |      |      |  |   |       |   |  |      |       |            |            |   |        |       |  | $ | 275,000 |         |  | $ | 275,000 |         |  | $ | 5,389   |      
|Average Pay Rate (variable rate)         |                 |      |      |   |      |   |      |      |  |   |       |   |  |      |       |            |            |   |        |       |  |   | 8.15    | %       |  |   | 8.15    | %       |  |   |         |      
|Average Receive Rate (fixed rate)        |                 |      |      |   |      |   |      |      |  |   |       |   |  |      |       |            |            |   |        |       |  |   | 8.31    | %       |  |   | 8.31    | %       |  |   |         |      
|INTEREST RATE CAPS:                      |                 |      |       |   |      |   |       |      |  |   |        |   |  |      |        |            |            |   |         |       |  |   |         |         |  |   |         |         |  |   |         |      
|                                         | Notional Amount |      |       |  |      |   |       |     |  |   |        |  |  |      |        |           |            |   |         |      |  |   | $       | 150,000 |  |   | $       | 150,000 |  |   | $       | (387  | )
|                                         | Notional Amount |      |       |  |      |   |       |     |  |   |        |  |  |      |        |           |            |   |         |      |  |   | $       | 125,000 |  |   | $       | 125,000 |  |   | $       | 5,496 |  



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|        |                                            
|------- | -------------------------------------------
|ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM














| |                
| | ---------------
| | [KPMG LLP LOGO]





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EXTENDICARE HEALTH SERVICES, INC.


CONSOLIDATED BALANCE SHEETS


December 31, 2005 and 2004


|                                                     |                                                                                            |                                            |         |         |           |  |         |         |         | 
|---------------------------------------------------- | ------------------------------------------------------------------------------------------ | ------------------------------------------ | ------- | ------- | --------- |  | ------- | ------- | ------- | 
|                                                     |                                                                                            | 2005                                       |         |         | 2004      | 
|                                                     |                                                                                            |                                            |         |         |           | 
|                                                     |                                                                                            | (In thousands except                       |        
|                                                     |                                                                                            | share data)                                |        
|ASSETS                                              
|Current Assets:                                      |                                                                                            |                                            |         |         |           |  |         |        
|                                                     | Cash and cash equivalents                                                                  |                                            | $       | 13,347  |           |  | $       | 29,612  |        
|                                                     | Short-term investments (Note 3)                                                            |                                            |         | 5,722   |           |  |         |        |        
|                                                     | Accounts receivable, less allowances of $13,813 and $10,594,
    respectively              |                                            |         | 120,982 |           |  |         | 95,973  |        
|                                                     | Supplies, prepaid expenses and other current assets (Note 4)                               |                                            |         | 23,173  |           |  |         | 17,751  |        
|                                                     | Income taxes receivable (Note 24)                                                          |                                            |         | 557     |           |  |         | 1,654   |        
|                                                     | Deferred state income taxes (Note 24)                                                      |                                            |         | 4,660   |           |  |         | 2,664   |        
|                                                     | Due from shareholder and affiliates (Notes 23 and 24):                                     |                                            |         |         |           |  |         |         |        
|                                                     |                                                                                            | Federal income taxes receivable            |         |         | 10,450    |  |         |         | 5,231   | 
|                                                     |                                                                                            | Deferred federal income taxes              |         |         | 15,787    |  |         |         | 13,258  | 
|                                                     |                                                                                            | Other                                      |         |         |          |  |         |         | 7,690   | 
|                                                     |                                                                                            |                                            |         |         |           | 
|                                                     |                                                                                            | Total current assets                       |         |         | 194,678   |  |         |         | 173,833 | 
|Property and equipment (Note 7)                      |                                                                                            |                                            | 750,075 |         |           |  | 446,085 |        
|Goodwill and other intangible assets (Note 8)        |                                                                                            |                                            | 85,476  |         |           |  | 74,554  |        
|Other assets (Note 9)                                |                                                                                            |                                            | 28,563  |         |           |  | 41,485  |        
|                                                     |                                                                                            |                                            |         |         |           | 
|                                                     |                                                                                            | Total Assets                               |         | $       | 1,058,792 |  |         | $       | 735,957 | 
|                                                     |                                                                                            |                                            |         |         |           | 
|                                                    
|LIABILITIES AND SHAREHOLDERS EQUITY                
|Current Liabilities:                                 |                                                                                            |                                            |         |         |           |  |         |        
|                                                     | Outstanding checks in excess of bank balance                                               |                                            | $       | 13,453  |           |  | $       |        |        
|                                                     | Current maturities of long-term debt (Note 10)                                             |                                            |         | 4,142   |           |  |         | 1,071   |        
|                                                     | Accounts payable                                                                           |                                            |         | 29,169  |           |  |         | 22,297  |        
|                                                     | Accrued liabilities (Note 12)                                                              |                                            |         | 117,448 |           |  |         | 99,920  |        
|                                                     | Current portion of accrual for self-insured liabilities
    (Note 13)                      |                                            |         | 12,500  |           |  |         | 18,000  |        
|                                                     | Current portion of amounts due from shareholder and affiliates
    (Note 23)               |                                            |         | 2,975   |           |  |         | 2,975   |        
|                                                     |                                                                                            |                                            |         |         |           | 
|                                                     |                                                                                            | Total current liabilities                  |         |         | 179,687   |  |         |         | 144,263 | 
|Accrual for self-insured liabilities (Note 13)       |                                                                                            |                                            | 21,691  |         |           |  | 19,725  |        
|Long-term debt (Notes 10 and 23)                     |                                                                                            |                                            | 515,084 |         |           |  | 290,861 |        
|Deferred state income taxes (Note 24)                |                                                                                            |                                            | 479     |         |           |  | 1,833   |        
|Other long-term liabilities (Note 14)                |                                                                                            |                                            | 32,652  |         |           |  | 12,448  |        
|Due to shareholder and affiliates (Notes 23 and 24): |                                                                                            |                                            |         |         |           |  |         |        
|                                                     | Deferred federal income taxes                                                              |                                            |         | 9,815   |           |  |         | 1,853   |        
|                                                     | Other                                                                                      |                                            |         | 5,940   |           |  |         | 14,785  |        
|                                                     |                                                                                            |                                            |         |         |           | 
|                                                     |                                                                                            | Total Liabilities                          |         |         | 765,348   |  |         |         | 485,768 | 
|                                                     |                                                                                            |                                            |         |         |           | 
|Shareholders Equity:                                |                                                                                            |                                            |         |         |           |  |         |        
|                                                     | Common stock, $1 par value, 1,000 shares authorized,
    947 shares issued and outstanding |                                            |         | 1       |           |  |         | 1       |        
|                                                     | Additional paid-in capital                                                                 |                                            |         | 209,771 |           |  |         | 209,221 |        
|                                                     | Accumulated other comprehensive income                                                     |                                            |         |        |           |  |         | 342     |        
|                                                     | Retained earnings                                                                          |                                            |         | 83,672  |           |  |         | 40,625  |        
|                                                     |                                                                                            |                                            |         |         |           | 
|                                                     |                                                                                            | Total Shareholders Equity                 |         |         | 293,444   |  |         |         | 250,189 | 
|                                                     |                                                                                            |                                            |         |         |           | 
|                                                     |                                                                                            | Total Liabilities and Shareholders Equity |         | $       | 1,058,792 |  |         | $       | 735,957 | 
|                                                     |                                                                                            |                                            |         |         |           | 



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EXTENDICARE HEALTH SERVICES, INC.


CONSOLIDATED STATEMENTS OF INCOME


For the Years Ended December 31, 2005, 2004 and 2003


|                                                                                                    |                                                                                          |                |           |           |      |   |         |         |   |   |         |         |  
|--------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------- | -------------- | --------- | --------- | ---- | - | ------- | ------- | - | - | ------- | ------- | -
|                                                                                                    |                                                                                          | 2005           |           |           | 2004 |   |         | 2003    |  
|                                                                                                    |                                                                                          |                |           |           |      |   |         |         |  
|                                                                                                    |                                                                                          | (In thousands) |          
|REVENUES:                                                                                           |                                                                                          |                |           |           |      |   |         |         |   |   |         |        
|                                                                                                    | Nursing and assisted living facilities (Note 15)                                         |                | $         | 1,161,126 |      |   | $       | 890,543 |   |   | $       | 805,746 |  
|                                                                                                    | Outpatient therapy                                                                       |                |           | 11,261    |      |   |         | 10,987  |   |   |         | 11,524  |  
|                                                                                                    | Other                                                                                    |                |           | 17,269    |      |   |         | 16,604  |   |   |         | 15,153  |  
|                                                                                                    |                                                                                          |                |           |           |      |   |         |         |  
|                                                                                                    |                                                                                          |                | 1,189,656 |           |      |   | 918,134 |         |   |   | 832,423 |        
|                                                                                                    |                                                                                          |                |           |           |      |   |         |         |  
|COSTS AND EXPENSES (INCOME):                                                                        |                                                                                          |                |           |           |      |   |         |         |   |   |         |        
|                                                                                                    | Operating                                                                                |                |           | 957,163   |      |   |         | 742,938 |   |   |         | 694,538 |  
|                                                                                                    | General and administrative                                                               |                |           | 37,316    |      |   |         | 29,722  |   |   |         | 30,871  |  
|                                                                                                    | Lease costs                                                                              |                |           | 21,890    |      |   |         | 9,029   |   |   |         | 9,079   |  
|                                                                                                    | Depreciation and amortization                                                            |                |           | 45,123    |      |   |         | 33,368  |   |   |         | 35,627  |  
|                                                                                                    | Interest expense, net (Note 16)                                                          |                |           | 36,840    |      |   |         | 17,321  |   |   |         | 30,070  |  
|                                                                                                    | Valuation adjustment on interest rate caps (Note 11)                                     |                |           | 1,803     |      |   |         | 7,983   |   |   |         | (131    | )
|                                                                                                    | Loss (gain) on disposal of assets and impairment of
    long-lived assets (Note 17)      |                |           | (6,050    | )    |   |         | 1,716   |   |   |         |        |  
|                                                                                                    | Loss on refinancing and retirement of debt (Note 18)                                     |                |           | 275       |      |   |         | 6,484   |   |   |         |        |  
|                                                                                                    |                                                                                          |                |           |           |      |   |         |         |  
|                                                                                                    |                                                                                          |                | 1,094,360 |           |      |   | 848,561 |         |   |   | 800,054 |        
|                                                                                                    |                                                                                          |                |           |           |      |   |         |         |  
|INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND CHANGE
    IN ACCOUNTING PRINCIPLE        |                                                                                          |                | 95,296    |           |      |   | 69,573  |         |   |   | 32,369  |        
|                                                                                                    | Income tax (benefit) expense (Note 24)                                                   |                |           | 37,533    |      |   |         | (6,933  | ) |   |         | 12,024  |  
|                                                                                                    |                                                                                          |                |           |           |      |   |         |         |  
|NET INCOME FROM CONTINUING OPERATIONS BEFORE CUMULATIVE EFFECT
    OF CHANGE IN ACCOUNTING PRINCPLE |                                                                                          |                | 57,763    |           |      |   | 76,506  |         |   |   | 20,345  |        
|                                                                                                    | Loss from discontinued operations before income taxes
    (Note 19)                      |                |           | 9,745     |      |   |         | 12,613  |   |   |         | 318     |  
|                                                                                                    | Income tax benefit on discontinued operations (Note 19)                                  |                |           | (3,943    | )    |   |         | (3,845  | ) |   |         | (59     | )
|                                                                                                    |                                                                                          |                |           |           |      |   |         |         |  
|NET LOSS FROM DISCONTINUED OPERATIONS                                                               |                                                                                          |                | (5,802    | )         |      |   | (8,768  | )       |   |   | (259    | )      
|                                                                                                    |                                                                                          |                |           |           |      |   |         |         |  
|NET INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
    PRINCIPLE                           |                                                                                          |                | 51,961    |           |      |   | 67,738  |         |   |   | 20,086  |        
|                                                                                                    | Cumulative effect of change in accounting principle, net of
    income taxes (Note 2(j)) |                |           | 6,414     |      |   |         |        |   |   |         |        |  
|                                                                                                    |                                                                                          |                |           |           |      |   |         |         |  
|NET INCOME                                                                                          |                                                                                          | $              | 45,547    |           |      | $ | 67,738  |         |   | $ | 20,086  |        
|                                                                                                    |                                                                                          |                |           |           |      |   |         |         |  



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EXTENDICARE HEALTH SERVICES, INC.


CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND


COMPREHENSIVE INCOME


|                              |                                                        |                                                          |     |   |            |             |   |               |          |   |               |     |   |               |        |      |        |   |         |        |        |   |         |        |        |  
|----------------------------- | ------------------------------------------------------ | -------------------------------------------------------- | --- | - | ---------- | ----------- | - | ------------- | -------- | - | ------------- | --- | - | ------------- | ------ | ---- | ------ | - | ------- | ------ | ------ | - | ------- | ------ | ------ | -
|                              |                                                        |                                                          |     |   |            | Accumulated |   |               | Retained |   |               |    
|                              |                                                        | Common Stock                                             |     |   | Additional |             |   | Other         |          |   | Earnings      |     |   | Total         |       
|                              |                                                        |                                                          |     |   | Paid-In    |             |   | Comprehensive |          |   | (Accumulated  |     |   | Shareholders |       
|                              |                                                        | Shares                                                   |     |   | Amount     |             |   | Capital       |          |   | Income (Loss) |     |   | Deficit)      |        |      | Equity |  
|                              |                                                        |                                                          |     |   |            |             |   |               |          |   |               |     |   |               |        |      |        |  
|                              |                                                        | (In thousands except share data)                         |    
|BALANCES at DECEMBER 31, 2002 |                                                        |                                                          | 947 |   |            |             | 1 |               |          |   | 208,787       |     |   |               | (2,388 | )    |        |   | (47,199 | )      |        |   | 159,201 |       
|                              | Comprehensive income (loss) (Note 25):                 |                                                          |     |   |            |             |   |               |          |   |               |     |   |               |        |      |        |   |         |        |        |   |         |        |       
|                              |                                                        | Unrealized gain on investments, net of income taxes      |     |   |           |             |   |               |         |   |               |     |  |               |        |      | 3,341  |   |         |        |       |   |         |        | 3,341  |  
|                              |                                                        | Unrealized gain on cash flow hedges, net of income taxes |     |   |           |             |   |               |         |   |               |     |  |               |        |      | 32     |   |         |        |       |   |         |        | 32     |  
|                              |                                                        | Net income                                               |     |   |           |             |   |               |         |   |               |     |  |               |        |      |       |   |         |        | 20,086 |   |         |        | 20,086 |  
|                              |                                                        |                                                          |     |   |            |             |   |               |          |   |               |     |   |               |        |      |        |  
|                              | Total comprehensive income (loss)                      |                                                          |     |   |            |             |   |               |          |   |               |     |   |               |        |      |        |   |         |        |        |   |         | 23,459 |       
|                              |                                                        |                                                          |     |   |            |             |   |               |          |   |               |     |   |               |        |      |        |  
|BALANCES at DECEMBER 31, 2003 |                                                        |                                                          | 947 |   |            |             | 1 |               |          |   | 208,787       |     |   |               | 985    |      |        |   | (27,113 | )      |        |   | 182,660 |       
|                              | Comprehensive income (Note 25):                        |                                                          |     |   |            |             |   |               |          |   |               |     |   |               |        |      |        |   |         |        |        |   |         |        |       
|                              |                                                        | Unrealized loss on investments, net of income taxes      |     |   |           |             |   |               |         |   |               |     |  |               |        |      | (742   | ) |         |        |       |   |         |        | (742   | )
|                              |                                                        | Unrealized gain on cash flow hedges, net of income taxes |     |   |           |             |   |               |         |   |               |     |  |               |        |      | 99     |   |         |        |       |   |         |        | 99     |  
|                              |                                                        | Net income                                               |     |   |           |             |   |               |         |   |               |     |  |               |        |      |       |   |         |        | 67,738 |   |         |        | 67,738 |  
|                              |                                                        |                                                          |     |   |            |             |   |               |          |   |               |     |   |               |        |      |        |  
|                              | Total comprehensive income                             |                                                          |     |   |            |             |   |               |          |   |               |     |   |               |        |      |        |   |         |        |        |   |         | 67,095 |       
|                              | Income tax benefit from parent stock options exercised |                                                          |     |  |            |             |   |              |          |   |               | 434 |   |               |        |     |        |   |         |       |        |   |         | 434    |       
|                              |                                                        |                                                          |     |   |            |             |   |               |          |   |               |     |   |               |        |      |        |  
|BALANCES at DECEMBER 31, 2004 |                                                        |                                                          | 947 |   |            |             | 1 |               |          |   | 209,221       |     |   |               | 342    |      |        |   | 40,625  |        |        |   | 250,189 |       
|                              | Comprehensive income (loss) (Note 25):                 |                                                          |     |   |            |             |   |               |          |   |               |     |   |               |        |      |        |   |         |        |        |   |         |        |       
|                              |                                                        | Unrealized loss on investments, net of income taxes      |     |   |           |             |   |               |         |   |               |     |  |               |        |      | (342   | ) |         |        |       |   |         |        | (342   | )
|                              |                                                        | Net income                                               |     |   |           |             |   |               |         |   |               |     |  |               |        |      |       |   |         |        | 45,547 |   |         |        | 45,547 |  
|                              |                                                        |                                                          |     |   |            |             |   |               |          |   |               |     |   |               |        |      |        |  
|                              | Total comprehensive income                             |                                                          |     |  |            |             |   |              |          |   |               |    |   |               |        | (342 | )      |   |         | 45,547 |        |   |         | 45,205 |       
|                              | Cash dividend paid                                     |                                                          |     |  |            |             |   |              |          |   |               |    |   |               |        |     |        |   |         | (2,500 | )      |   |         | (2,500 | )     
|                              | Income tax benefit from parent stock options exercised |                                                          |     |  |            |             |   |              |          |   |               | 550 |   |               |        |     |        |   |         |       |        |   |         | 550    |       
|                              |                                                        |                                                          |     |   |            |             |   |               |          |   |               |     |   |               |        |      |        |  
|BALANCES at DECEMBER 31, 2005 |                                                        |                                                          | 947 |   |            | $           | 1 |               |          | $ | 209,771       |     |   | $             |       |      |        | $ | 83,672  |        |        | $ | 293,444 |       
|                              |                                                        |                                                          |     |   |            |             |   |               |          |   |               |     |   |               |        |      |        |  



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EXTENDICARE HEALTH SERVICES, INC.


CONSOLIDATED STATEMENTS OF CASH FLOWS


For the Years Ended December 31, 2005, 2004 and 2003


|                                                                                      |                                                                                      |                                                     |        |          |          |   |        |         |         |   |        |         |         |  
|------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------ | --------------------------------------------------- | ------ | -------- | -------- | - | ------ | ------- | ------- | - | ------ | ------- | ------- | -
|                                                                                      |                                                                                      | 2005                                                |        |          | 2004     |   |        | 2003    |        
|                                                                                      |                                                                                      |                                                     |        |          |          |   |        |         |        
|                                                                                      |                                                                                      | (In thousands)                                      |       
|OPERATING ACTIVITIES:                                                                 |                                                                                      |                                                     |        |          |          |   |        |         |         |   |        |        
|Net income                                                                            |                                                                                      | $                                                   | 45,547 |          |          | $ | 67,738 |         |         | $ | 20,086 |        
|Adjustments to reconcile net income to net cash provided by
    operating activities: |                                                                                      |                                                     |        |          |          |   |        |         |         |   |        |        
|                                                                                      | Depreciation and amortization                                                        |                                                     |        | 46,169   |          |   |        | 35,200  |         |   |        | 37,448  |        
|                                                                                      | Amortization of deferred financing costs                                             |                                                     |        | 1,906    |          |   |        | 1,672   |         |   |        | 1,496   |        
|                                                                                      | Amortization of purchase accounting adjustments for leases and
    debt              |                                                     |        | (663     | )        |   |        |        |         |   |        |        |        
|                                                                                      | Amortization of purchase accounting adjustments for below market
    resident leases |                                                     |        | (2,488   | )        |   |        |        |         |   |        |        |        
|                                                                                      | Provision for self-insured liabilities (Note 13)                                     |                                                     |        | 8,045    |          |   |        | 6,600   |         |   |        | 6,000   |        
|                                                                                      | Payments of self-insured liabilities (Note 13)                                       |                                                     |        | (12,481  | )        |   |        | (13,938 | )       |   |        | (16,026 | )      
|                                                                                      | Deferred income taxes                                                                |                                                     |        | 7,442    |          |   |        | (30,794 | )       |   |        | 1,820   |        
|                                                                                      | Valuation adjustment on interest rate caps (Note 11)                                 |                                                     |        | 1,803    |          |   |        | 7,983   |         |   |        | (131    | )      
|                                                                                      | Change in accounting principle, net of income tax
    (Note 2(j))                    |                                                     |        | 6,414    |          |   |        |        |         |   |        |        |        
|                                                                                      | Loss (gain) on disposal of assets and impairment of
    long-lived assets (Note 17)  |                                                     |        | (2,492   | )        |   |        | 8,541   |         |   |        |        |        
|                                                                                      | Loss on refinancing and retirement of debt (Note 18)                                 |                                                     |        | 275      |          |   |        | 6,484   |         |   |        |        |        
|                                                                                      | Changes in assets and liabilities:                                                   |                                                     |        |          |          |   |        |         |         |   |        |         |        
|                                                                                      |                                                                                      | Accounts receivable                                 |        |          | (21,103  | ) |        |         | (7,487  | ) |        |         | 487     |  
|                                                                                      |                                                                                      | Other assets                                        |        |          | 4,597    |   |        |         | 15,723  |   |        |         | 3,793   |  
|                                                                                      |                                                                                      | Supplies, prepaid expenses and other current assets |        |          | 1,192    |   |        |         | (10,673 | ) |        |         | (211    | )
|                                                                                      |                                                                                      | Accounts payable                                    |        |          | 4,042    |   |        |         | 1,625   |   |        |         | (178    | )
|                                                                                      |                                                                                      | Accrued liabilities                                 |        |          | 1,560    |   |        |         | 381     |   |        |         | 735     |  
|                                                                                      |                                                                                      | Income taxes payable/receivable                     |        |          | (932     | ) |        |         | (1,622  | ) |        |         | 526     |  
|                                                                                      |                                                                                      | Current due to shareholder and affiliates           |        |          | 2,703    |   |        |         | (6,033  | ) |        |         | 188     |  
|                                                                                      |                                                                                      |                                                     |        |          |          |   |        |         |        
|                                                                                      |                                                                                      | Cash provided by operating activities               |        |          | 91,536   |   |        |         | 81,400  |   |        |         | 56,033  |  
|                                                                                      |                                                                                      |                                                     |        |          |          |   |        |         |        
|INVESTING ACTIVITIES:                                                                 |                                                                                      |                                                     |        |          |          |   |        |         |         |   |        |        
|                                                                                      | Payment for acquisition of Assisted Living Concepts, Inc.
    (Note 5)               |                                                     |        | (144,578 | )        |   |        |        |         |   |        |        |        
|                                                                                      | Cash balances in ALC as of acquisition                                               |                                                     |        | 6,522    |          |   |        |        |         |   |        |        |        
|                                                                                      | Payments for other acquisitions (Note 6)                                             |                                                     |        | (15,809  | )        |   |        | (6,454  | )       |   |        | (4,124  | )      
|                                                                                      | Payments for new construction projects                                               |                                                     |        | (19,145  | )        |   |        | (14,970 | )       |   |        | (4,304  | )      
|                                                                                      | Payments for purchases of property and equipment                                     |                                                     |        | (32,851  | )        |   |        | (25,444 | )       |   |        | (21,029 | )      
|                                                                                      | Proceeds from repayment of notes receivable                                          |                                                     |        |         |          |   |        | 20,552  |         |   |        |        |        
|                                                                                      | Proceeds from completion of divestiture agreement                                    |                                                     |        |         |          |   |        | 10,000  |         |   |        |        |        
|                                                                                      | Proceeds from sale of assets held for sale                                           |                                                     |        | 10,574   |          |   |        |        |         |   |        |        |        
|                                                                                      | Proceeds from sale of investments                                                    |                                                     |        | 4,937    |          |   |        | 4,894   |         |   |        |        |        
|                                                                                      | Proceeds from sale of property and equipment (Note 16)                               |                                                     |        | 1,877    |          |   |        | 4,850   |         |   |        |        |        
|                                                                                      | Changes in other non-current assets                                                  |                                                     |        | 6,153    |          |   |        | (3,097  | )       |   |        | 2,685   |        
|                                                                                      |                                                                                      |                                                     |        |          |          |   |        |         |        
|                                                                                      |                                                                                      | Cash used in investing activities                   |        |          | (182,320 | ) |        |         | (9,669  | ) |        |         | (26,772 | )
|                                                                                      |                                                                                      |                                                     |        |          |          |   |        |         |        

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EXTENDICARE HEALTH SERVICES, INC.


CONSOLIDATED STATEMENTS OF CASH FLOWS 
(Continued)


|                                                                          |                                                                        |                                                                                                                                                                  |                                     |                               |        |        |          |          |         |        |        |        |        |        |   | 
|------------------------------------------------------------------------- | ---------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------- | ----------------------------- | ------ | ------ | -------- | -------- | ------- | ------ | ------ | ------ | ------ | ------ | - | 
|                                                                          |                                                                        | 2005                                                                                                                                                             |                                     |                               | 2004   |        |          | 2003     |        
|                                                                          |                                                                        |                                                                                                                                                                  |                                     |                               |        |        |          |          |        
|                                                                          |                                                                        | (In thousands)                                                                                                                                                   |                                    
|FINANCING ACTIVITIES:                                                     |                                                                        |                                                                                                                                                                  |                                     |                               |        |        |          |          |         |        |        |       
|                                                                          | Proceeds from Revolving Credit Facility to finance ALC
    acquisition |                                                                                                                                                                  |                                     | 60,000                        |        |        |          |         |         |        |        |       |       
|                                                                          | Proceeds from 6% EHI Term Note to finance ALC acquisition              |                                                                                                                                                                  |                                     | 55,000                        |        |        |          |         |         |        |        |       |       
|                                                                          | Proceeds from issuance of long-term debt (Note 10)                     |                                                                                                                                                                  |                                     | 96,000                        |        |        |          | 128,082  |         |        |        |       |       
|                                                                          | Payments of long-term debt (Note 10)                                   |                                                                                                                                                                  |                                     | (78,769                       | )      |        |          | (229,253 | )       |        |        | (5,267 | )     
|                                                                          | Payments on line of credit                                             |                                                                                                                                                                  |                                     | (70,000                       | )      |        |          |         |         |        |        |       |       
|                                                                          | Payments of deferred financing costs (Note 9)                          |                                                                                                                                                                  |                                     | (1,144                        | )      |        |          | (5,506   | )       |        |        |       |       
|                                                                          | Payments of interest rate cap fee (Note 21)                            |                                                                                                                                                                  |                                     |                              |        |        |          | (3,495   | )       |        |        |       |       
|                                                                          | Payments of tender and call premium and legal expenses                 |                                                                                                                                                                  |                                     |                              |        |        |          | (6,921   | )       |        |        |       |       
|                                                                          | Proceeds from termination of interest rate swap and cap                |                                                                                                                                                                  |                                     |                              |        |        |          | 2,615    |         |        |        |       |       
|                                                                          | Advances from shareholder and an affiliate                             |                                                                                                                                                                  |                                     |                              |        |        |          | 22,900   |         |        |        |       |       
|                                                                          | Dividend paid                                                          |                                                                                                                                                                  |                                     | (2,500                        | )      |        |          |         |         |        |        |       |       
|                                                                          | Outstanding checks in excess of bank balance                           |                                                                                                                                                                  |                                     | 13,453                        |        |        |          |         |         |        |        |       |       
|                                                                          | Other long-term liabilities                                            |                                                                                                                                                                  |                                     | 2,479                         |        |        |          | 604      |         |        |        | 501    |       
|                                                                          |                                                                        |                                                                                                                                                                  |                                     |                               |        |        |          |          |        
|                                                                          |                                                                        | Cash provided by (used in) financing activities                                                                                                                  |                                     |                               | 74,519 |        |          |          | (90,974 | )      |        |        | (4,766 | )     
|                                                                          |                                                                        |                                                                                                                                                                  |                                     |                               |        |        |          |          |        
|Increase (decrease) in cash and cash equivalents                          |                                                                        |                                                                                                                                                                  | (16,265                             | )                             |        |        | (19,243  | )        |         |        | 24,495 |       
|Cash and cash equivalents, beginning of year                              |                                                                        |                                                                                                                                                                  | 29,612                              |                               |        |        | 48,855   |          |         |        | 24,360 |       
|                                                                          |                                                                        |                                                                                                                                                                  |                                     |                               |        |        |          |          |        
|Cash and cash equivalents, end of year                                    |                                                                        | $                                                                                                                                                                | 13,347                              |                               |        | $      | 29,612   |          |         | $      | 48,855 |       
|                                                                          |                                                                        |                                                                                                                                                                  |                                     |                               |        |        |          |          |        
|Supplemental schedule of cash flow information:                           |                                                                        |                                                                                                                                                                  |                                     |                               |        |        |          |          |         |        |        |       
|                                                                          |                                                                        | Cash paid during the period for:                                                                                                                                 |                                     |                               |        |        |          |          |         |        |        |        |        |       
|                                                                          |                                                                        |                                                                                                                                                                  | Interest                            |                               | $      | 35,317 |          |          | $       | 24,644 |        |        | $      | 32,662 |  
|                                                                          |                                                                        |                                                                                                                                                                  | Income tax payments, net of refunds |                               |        | 32,238 |          |          |         | 12,500 |        |        |        | 7,000  |  
|Supplemental schedule of non-cash investing and financing
    activities: |                                                                        |                                                                                                                                                                  |                                     |                               |        |        |          |          |         |        |        |       
|                                                                          |                                                                        | The Company acquired all of the capital stock of Assisted Living
    Concepts, Inc. In connection with the acquisition, liabilities
    were assumed as follows: |                                     |                               |        |        |          |          |         |        |        |        |        |       
|                                                                          |                                                                        |                                                                                                                                                                  |                                     | Fair value of assets acquired |        | $      | 315,200  |          |         | $      |       |        |        | $      |  | 
|                                                                          |                                                                        |                                                                                                                                                                  |                                     | Cash paid                     |        |        | (144,578 | )        |         |        |       |        |        |        |  | 
|                                                                          |                                                                        |                                                                                                                                                                  |                                     |                               |        |        |          |          |        
|                                                                          |                                                                        |                                                                                                                                                                  |                                     | Liabilities assumed           |        | $      | 170,622  |          |         | $      |       |        |        | $      |  | 
|                                                                          |                                                                        |                                                                                                                                                                  |                                     |                               |        |        |          |          |        
|                                                                          |                                                                        | Capital lease obligations incurred to purchase properties
    (Notes 10 and 21)                                                                                  |                                     | $                             | 12,848 |        |          | $        |        |        |        | $      |       |       
|                                                                          |                                                                        |                                                                                                                                                                  |                                     |                               |        |        |          |          |        



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EXTENDICARE HEALTH SERVICES, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




|   |         
|-- | --------
|1. | BUSINESS









|   |                                           
|-- | ------------------------------------------
|2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a)     Principles of
Consolidation








| |                                           
| | ------------------------------------------
| | b)     Cash and Short-term
    Investments





c)     Accounts Receivable




105



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EXTENDICARE HEALTH SERVICES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








| |                              
| | -----------------------------
| | d)     Property and Equipment



|                                                                                 |  |                                                                                                                                                                                                                   
|-------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Land improvements                                                                |  | 10 to 25 years                                                                                                                                                                                                    
|Buildings                                                                        |  | 30 to 40 years                                                                                                                                                                                                    
|Building improvements                                                            |  | 5 to 30 years                                                                                                                                                                                                     
|Building expenditures pertaining to conditional asset retirement
    obligations |  | The shorter of the useful life of the asset or 35 years                                                                                                                                                           
|Furniture and equipment                                                          |  | Varying periods not exceeding 15 years                                                                                                                                                                            
|Leasehold improvements                                                           |  | The shorter of the useful life of the assets or a term that
    includes required lease periods and renewals that are deemed to
    be reasonably assured at the date the leasehold improvements are
    purchased



five-to




106



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##### Table of Contents



EXTENDICARE HEALTH SERVICES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |              
| | -------------
| | e)     Leases





f)     Goodwill and Other Intangible
Assets






36-month 18-month


g)     Long-lived Assets




h)     Other Assets




107



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##### Table of Contents



EXTENDICARE HEALTH SERVICES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










i)     Revenue Recognition




108



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##### Table of Contents



EXTENDICARE HEALTH SERVICES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






j)     Asset Retirement
Obligations




pre-1980


109



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##### Table of Contents



EXTENDICARE HEALTH SERVICES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                            |                               |                                   |       |       |        | 
|----------------------------------------------------------- | ----------------------------- | --------------------------------- | ----- | ----- | ------ | 
|                                                            |                               | (In thousands)                    |      
|Cumulative effect of accounting change, net of income taxes |                               | $                                 | 6,414 |      
|Property and equipment, net                                 |                               |                                   | 1,671 |      
|Deferred state income taxes                                 |                               |                                   | 535   |      
|Due to shareholder and affiliates:                          |                               |                                   |       |      
|                                                            | Deferred federal income taxes |                                   |       | 3,741 |       
|                                                            |                               |                                   |      
|                                                            |                               | Total asset retirement obligation |       | $     | 12,361 | 
|                                                            |                               |                                   |      







|                                                                                       |                              |                |        |      |      |   |        |      |   |   |        |      |  
|-------------------------------------------------------------------------------------- | ---------------------------- | -------------- | ------ | ---- | ---- | - | ------ | ---- | - | - | ------ | ---- | -
|                                                                                       |                              | 2005           |        |      | 2004 |   |        | 2003 |  
|                                                                                       |                              |                |        |      |      |   |        |      |  
|                                                                                       |                              | (In thousands) |       
|Net income before cumulative effect of change in accounting
    principle, as reported |                              | $              | 53,028 |      |      | $ | 67,738 |      |   | $ | 20,086 |     
|Effect of adoption of FIN No. 47 on:                                                   |                              |                |        |      |      |   |        |      |   |   |        |     
|                                                                                       | Income before income taxes   |                |        | (917 | )    |   |        | (856 | ) |   |        | (803 | )
|                                                                                       | Income tax expense (benefit) |                |        | (367 | )    |   |        | (334 | ) |   |        | (313 | )
|                                                                                       |                              |                |        |      |      |   |        |      |  
|                                                                                       | Net income                   |                |        | (550 | )    |   |        | (522 | ) |   |        | (490 | )
|                                                                                       |                              |                |        |      |      |   |        |      |  
|Adjusted net income after effect of adoption of
    FIN No. 47                         |                              | $              | 52,478 |      |      | $ | 67,216 |      |   | $ | 19,596 |     
|                                                                                       |                              |                |        |      |      |   |        |      |  

k)     Provision for Divested
Operations and Facility Closures




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##### Table of Contents



EXTENDICARE HEALTH SERVICES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


l)     Derivative Instruments and
Hedging Activities








m)     Income Taxes




n)     Accounting for
Acquisitions


02-17, 02-17.




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##### Table of Contents



EXTENDICARE HEALTH SERVICES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




lease-up lease-up lease-up




o)     Exchanges of Non-monetary
Assets




p)     Reclassifications




q)     New Accounting
Pronouncements




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##### Table of Contents



EXTENDICARE HEALTH SERVICES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


r)     Terminology, Definitions and
Names




|                                     |  |                                             |  |                     |    |    
|------------------------------------ |  | ------------------------------------------- |  | ------------------- | -- | ---
|                                     |  |                                             |  | Financial Statement |   
|Abbreviation                         |  | Full Name                                   |  | Note Number         |   
|                                     |  |                                             |  |                     |   
|Accounting Terms                     |  |                                             |  |                     |    |    
|SFAS                                 |  | Statement of Financial Accounting Standards |  |                     | 2  | (f)
|FASB                                 |  | Financial Accounting Standards Board        |  |                     | 2  | (e)
|AOCI                                 |  | Accumulated Other Comprehensive Income      |  |                     | 2  | (h)
|FIN                                  |  | FASB Interpretation Bulletin                |  |                     | 2  | (j)
|EITF                                 |  | Emerging Issues Task Force                  |  |                     | 2  | (n)
|APB                                  |  | Accounting Principles Board                 |  |                     | 2  | (o)
|Health Care Terminology              |  |                                             |  |                     |    |    
|FI                                   |  | Fiscal Intermediary                         |  |                     | 2  | (h)
|HMO                                  |  | Health Maintenance Organizations            |  |                     | 2  | (i)
|PPA                                  |  | The Prospective Payment System              |  |                     | 2  | (h)
|PRRB                                 |  | Provider Reimbursement Review Board         |  |                     | 2  | (h)
|Legal Agreements                     |  |                                             |  |                     |    |    
|Amended and Restated Credit Facility |  | Third Amended and Restated Credit Agreement |  |                     | 10 |    
|DMG Notes                            |  | DMG Mortgage Notes Payable                  |  |                     | 10 |    
|former Revolving Credit Facility     |  | Revolving Credit Facility                   |  |                     | 5  |    
|MOU                                  |  | Memorandum of Understanding                 |  |                     | 21 |    
|2010 Senior Notes                    |  | 9.5% Senior Notes                           |  |                     | 10 |    
|2014 Notes                           |  | 6.875% Senior Subordinated Notes            |  |                     | 10 |    
|2010 Swap                            |  | Swap agreement expiring July 1, 2010        |  |                     | 11 |    
|2014 Swap                            |  | Swap agreement expiring May 1, 2014         |  |                     | 11 |    
|2010 Cap                             |  | Cap agreement expiring July 1, 2010         |  |                     | 11 |    
|2014 Cap                             |  | Cap agreement expiring May 1, 2014          |  |                     | 11 |    

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EXTENDICARE HEALTH SERVICES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                           |  |                                             |  |                     |    |    
|-------------------------- |  | ------------------------------------------- |  | ------------------- | -- | ---
|                           |  |                                             |  | Financial Statement |   
|Abbreviation               |  | Full Name                                   |  | Note Number         |   
|                           |  |                                             |  |                     |   
|Legal Entities             |  |                                             |  |                     |    |    
|                          
|Extendicare and affiliates |  |                                             |  |                     |    |    
|Extendicare                |  | Extendicare Inc.                            |  |                     | 1  |    
|ALC                        |  | Assisted Living Concepts, Inc.              |  |                     | 2  | (i)
|EHI                        |  | Extendicare Holdings, Inc.                  |  |                     | 5  |    
|VCPI                       |  | Virtual Care Provider, Inc.                 |  |                     | 23 |    
|                          
|External Parties           |  |                                             |  |                     |    |    
|Arbor                      |  | Arbor Health Care Company, Inc.             |  |                     | 9  |    
|ALF                        |  | Assisted Living Facilities, Inc.            |  |                     | 10 |    
|Benedictine                |  | Benedictine Health Dimensions, Inc.         |  |                     | 19 |    
|Greystone                  |  | Greystone Tribeca Acquisition, L.L.C.       |  |                     | 17 |    
|Lakeside Health            |  | Lakeside Health, L.L.C.                     |  |                     | 19 |    
|LTC                        |  | LTC Properties, Inc.                        |  |                     | 21 |    
|Omnicare                   |  | Omnicare, Inc.                              |  |                     | 3  |    
|Senior Health  South      |  | Senior Health Properties  South, Inc.      |  |                     | 9  |    
|Senior Health  Texas      |  | Senior Health Properties  Texas, Inc.      |  |                     | 9  |    
|Tandem                     |  | Tandem Health Care, Inc.                    |  |                     | 9  |    
|Triple S                   |  | Triple S Investment Company.                |  |                     | 21 |    
|                          
|Governmental Bodies        |  |                                             |  |                     |    |    
|CMS                        |  | Centers for Medicare & Medicaid Services    |  |                     | 2  | (h)
|OHCS                       |  | State of Oregon, Housing and Community      |  |                     | 22 |    
|                           |  | Services                                    |  |                     |    |    
|WSHFC                      |  | Washington State Housing Finance Commission |  |                     | 22 |    
|OHFC                       |  | Ohio Housing Finance Commission             |  |                     | 22 |    
|IHCS                       |  | Idaho Housing & Community Services          |  |                     | 22 |    

114



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EXTENDICARE HEALTH SERVICES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |                       
|-- | ----------------------
|3. | SHORT-TERM INVESTMENTS





|   |                                                    
|-- | ---------------------------------------------------
|4. | SUPPLIES, PREPAID EXPENSES AND OTHER CURRENT ASSETS

|                                     |  |                |        |  |      |   |        | 
|------------------------------------ |  | -------------- | ------ |  | ---- | - | ------ | 
|                                     |  | 2005           |        |  | 2004 |  
|                                     |  |                |        |  |      |  
|                                     |  | (In thousands) |       
|Prepaid expenses                     |  | $              | 9,886  |  |      | $ | 11,477 | 
|Supplies                             |  |                | 4,573  |  |      |   | 4,278  | 
|Restricted cash workers compensation |  |                | 2,935  |  |      |   |       | 
|Deposits                             |  |                | 2,823  |  |      |   | 534    | 
|Other current assets                 |  |                | 2,956  |  |      |   | 1,462  | 
|                                     |  |                |        |  |      |  
|                                     |  | $              | 23,173 |  |      | $ | 17,751 | 
|                                     |  |                |        |  |      |  





|   |                                              
|-- | ---------------------------------------------
|5. | ACQUISITION OF ASSISTED LIVING CONCEPTS, INC.



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EXTENDICARE HEALTH SERVICES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                  |                                                                           |                |         |         | 
|------------------------------------------------- | ------------------------------------------------------------------------- | -------------- | ------- | ------- | 
|                                                  |                                                                           | (In thousands) |        
|ASSETS:                                           |                                                                           |                |         |        
|Cash, net of cash used to finance the acquisition |                                                                           | $              | (22,652 | )      
|Accounts receivable                               |                                                                           |                | 2,898   |        
|Other current assets                              |                                                                           |                | 8,722   |        
|                                                  |                                                                           |                |        
|Total current assets                              |                                                                           |                | (11,032 | )      
|Property, plant and equipment                     |                                                                           |                | 283,686 |        
|Resident relationships intangible                 |                                                                           |                | 6,357   |        
|Goodwill                                          |                                                                           |                | 5,556   |        
|Other long-term assets                            |                                                                           |                | 1,459   |        
|                                                  |                                                                           |                |        
|Total assets                                      |                                                                           | $              | 286,026 |        
|                                                  |                                                                           |                |        
|                                                 
|LIABILITIES:                                      |                                                                           |                |         |        
|Current maturities of long-term debt              |                                                                           | $              | 3,418   |        
|Unfavorable leases as lessor                      |                                                                           |                | 3,715   |        
|Other current liabilities                         |                                                                           |                | 18,318  |        
|                                                  |                                                                           |                |        
|Total current liabilities                         |                                                                           |                | 25,451  |        
|Long term debt:                                   |                                                                           |                |         |        
|                                                  | Long-term debt of ALC assumed                                             |                |         | 140,212 | 
|                                                  | Proceeds from 6% Term Loan from EHI to finance acquisition                |                |         | 55,000  | 
|                                                  | Proceeds from former Revolving Credit Facility to finance
    acquisition |                |         | 60,000  | 
|                                                  |                                                                           |                |        
|                                                  | Total long-term debt                                                      |                |         | 255,212 | 
|Deferred income taxes                             |                                                                           |                | 608     |        
|Other long-term liabilities                       |                                                                           |                | 4,755   |        
|                                                  |                                                                           |                |        
|Total liabilities                                 |                                                                           | $              | 286,026 |        
|                                                  |                                                                           |                |        





|                                      |  |                          |           |  |      |   |           | 
|------------------------------------- |  | ------------------------ | --------- |  | ---- | - | --------- | 
|                                      |  | Years Ended December 31, |          
|                                      |  |                          |          
|                                      |  | 2005                     |           |  | 2004 |  
|                                      |  |                          |           |  |      |  
|                                      |  | (In thousands)           |          
|Total revenues                        |  | $                        | 1,204,758 |  |      | $ | 1,096,799 | 
|Income before income taxes            |  |                          | 94,486    |  |      |   | 72,196    | 
|Net income from continuing operations |  |                          | 57,270    |  |      |   | 78,515    | 

116



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EXTENDICARE HEALTH SERVICES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|   |                                        
|-- | ---------------------------------------
|6. | OTHER ACQUISITIONS AND NEW CONSTRUCTION



| |                                                     
| | ----------------------------------------------------
| | a)     Acquisitions in Pennsylvania
    and Kentucky



|                                     |  |                |        |   |          |   |        |       |  |   |         |  
|------------------------------------ |  | -------------- | ------ | - | -------- | - | ------ | ----- |  | - | ------- | -
|                                     |  | Pennsylvania   |        |   | Kentucky |   |        | Total | 
|                                     |  |                |        |   |          |   |        |       | 
|                                     |  | (In thousands) |       
|Cash used to finance the acquisition |  | $              | (7,590 | ) |          | $ | (8,219 | )     |  | $ | (15,809 | )
|Other current assets                 |  |                | 32     |   |          |   | (4     | )     |  |   | 28      |  
|                                     |  |                |        |   |          |   |        |       | 
|Total current assets                 |  |                | (7,558 | ) |          |   | (8,223 | )     |  |   | (15,781 | )
|Property, plant and equipment        |  |                | 6,600  |   |          |   | 7,360  |       |  |   | 13,960  |  
|Resident relationships intangible    |  |                | 47     |   |          |   | 48     |       |  |   | 95      |  
|Goodwill                             |  |                | 1,203  |   |          |   | 815    |       |  |   | 2,018   |  
|                                     |  |                |        |   |          |   |        |       | 
|Total assets                         |  | $              | 292    |   |          | $ |       |       |  | $ | 292     |  
|                                     |  |                |        |   |          |   |        |       | 
|Current liabilities                  |  | $              | 292    |   |          | $ |       |       |  | $ | 292     |  
|                                     |  |                |        |   |          |   |        |       | 



| |                        
| | -----------------------
| | b)     New Construction







| |                                              
| | ---------------------------------------------
| | c)     2004 Acquisitions and
    Developments





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##### Table of Contents



EXTENDICARE HEALTH SERVICES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |                       
|-- | ----------------------
|7. | PROPERTY AND EQUIPMENT



|                                                           |  |                |           |  |      |   |         | 
|---------------------------------------------------------- |  | -------------- | --------- |  | ---- | - | ------- | 
|                                                           |  | 2005           |           |  | 2004 |  
|                                                           |  |                |           |  |      |  
|                                                           |  | (In thousands) |          
|Land and land improvements                                 |  | $              | 59,730    |  |      | $ | 40,220  | 
|Buildings and improvements                                 |  |                | 875,169   |  |      |   | 585,757 | 
|Furniture and equipment                                    |  |                | 74,079    |  |      |   | 70,927  | 
|Leasehold improvements                                     |  |                | 12,922    |  |      |   | 12,209  | 
|Construction in progress (Note 22)                         |  |                | 5,885     |  |      |   | 11,485  | 
|                                                           |  |                |           |  |      |  
|                                                           |  |                | 1,027,785 |  |      |   | 720,598 | 
|Less accumulated depreciation and amortization (Note 2(d)) |  |                | 277,710   |  |      |   | 274,513 | 
|                                                           |  |                |           |  |      |  
|                                                           |  | $              | 750,075   |  |      | $ | 446,085 | 
|                                                           |  |                |           |  |      |  





|   |                                     
|-- | ------------------------------------
|8. | GOODWILL AND OTHER INTANGIBLE ASSETS



|                                          |  |                |         |  |      |   |        | 
|----------------------------------------- |  | -------------- | ------- |  | ---- | - | ------ | 
|                                          |  | 2005           |         |  | 2004 |  
|                                          |  |                |         |  |      |  
|                                          |  | (In thousands) |        
|Goodwill                                  |  | $              | 89,988  |  |      | $ | 82,414 | 
|Leasehold rights                          |  |                | 10,016  |  |      |   | 10,016 | 
|Resident relationships intangible         |  |                | 6,452   |  |      |   |       | 
|                                          |  |                |         |  |      |  
|                                          |  |                | 106,456 |  |      |   | 92,430 | 
|Less accumulated amortization (Note 2(f)) |  |                | 20,978  |  |      |   | 17,876 | 
|                                          |  |                |         |  |      |  
|                                          |  | $              | 85,476  |  |      | $ | 74,554 | 
|                                          |  |                |         |  |      |  





118



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EXTENDICARE HEALTH SERVICES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |             
|-- | ------------
|9. | OTHER ASSETS



|                                                                                                                                   |  |                |        |  |      |   |        | 
|---------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------ |  | ---- | - | ------ | 
|                                                                                                                                   |  | 2005           |        |  | 2004 |  
|                                                                                                                                   |  |                |        |  |      |  
|                                                                                                                                   |  | (In thousands) |       
|Deferred financing costs, net of accumulated amortization of
    $3.9 million and $2.7 million for 2005 and 2004,
    respectively |  | $              | 11,073 |  |      | $ | 11,828 | 
|Medicare and Medicaid settlement receivables, less contractual
    allowance of $0 in 2005 and $2,994 in 2004, respectively        |  |                | 5,617  |  |      |   | 10,214 | 
|Indemnification escrow                                                                                                             |  |                | 3,700  |  |      |   | 3,700  | 
|Funds held under deferred compensation plan (Note 14)                                                                              |  |                | 2,340  |  |      |   | 2,001  | 
|Assets held for sale (Note 19)                                                                                                     |  |                | 1,331  |  |      |   |       | 
|Debt service and capital expenditure trust funds                                                                                   |  |                | 1,269  |  |      |   | 309    | 
|Cash held as collateral for ALC letters of credit                                                                                  |  |                | 1,041  |  |      |   |       | 
|Notes receivable                                                                                                                   |  |                | 880    |  |      |   | 1,000  | 
|Security deposits                                                                                                                  |  |                | 825    |  |      |   | 361    | 
|Prepaid interest rate cap fee                                                                                                      |  |                | 387    |  |      |   | 984    | 
|Advances to Lakeside Health, LLC (note 19)                                                                                         |  |                |       |  |      |   | 2,445  | 
|Other investments                                                                                                                  |  |                |       |  |      |   | 916    | 
|Advances to non-affiliated long-term care operators                                                                                |  |                |       |  |      |   | 7,024  | 
|Other                                                                                                                              |  |                | 100    |  |      |   | 703    | 
|                                                                                                                                   |  |                |        |  |      |  
|                                                                                                                                   |  | $              | 28,563 |  |      | $ | 41,485 | 
|                                                                                                                                   |  |                |        |  |      |  



| |                                             
| | --------------------------------------------
| | Medicare and Medicaid Settlement Receivables



|                                                                                                                                            |  |                |        |  |      |   |        | 
|------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------ |  | ---- | - | ------ | 
|                                                                                                                                            |  | 2005           |        |  | 2004 |  
|                                                                                                                                            |  |                |        |  |      |  
|                                                                                                                                            |  | (In thousands) |       
|Total Settlement Receivables from Medicare and Medicaid
    programs, less total contractual allowance of $0 in 2005 and
    $4,370 in 2004 |  | $              | 12,011 |  |      | $ | 16,954 | 
|Less: Current portion of Medicare and Medicaid settlement
    receivables (included in accounts receivable)                                 |  |                | 6,394  |  |      |   | 6,740  | 
|                                                                                                                                            |  |                |        |  |      |  
|Non-current portion of Settlement Accounts Receivable                                                                                       |  | $              | 5,617  |  |      | $ | 10,214 | 
|                                                                                                                                            |  |                |        |  |      |  





119



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EXTENDICARE HEALTH SERVICES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                       
| | ----------------------
| | Indemnification Escrow





| |                                                      
| | -----------------------------------------------------
| | Advances from Non-affiliated Long-term Care Operators







120



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EXTENDICARE HEALTH SERVICES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                                  
|--- | ---------------------------------
|10. | LINE OF CREDIT AND LONG-TERM DEBT



|                                                                                                          |  |          |      |                |      |   |         |      |  |   |         | 
|--------------------------------------------------------------------------------------------------------- |  | -------- | ---- | -------------- | ---- | - | ------- | ---- |  | - | ------- | 
|                                                                                                          |  | Interest |      |                |      |   |        
|                                                                                                          |  | Rate(1)  |      |                | 2005 |   |         | 2004 | 
|                                                                                                          |  |          |      |                |      |   |         |      | 
|                                                                                                          |  |          |      | (In thousands) |     
|9.50% Senior Notes due 2010                                                                               |  |          | 9.54 | %              |      | $ | 149,756 |      |  | $ | 149,714 | 
|6.875% Senior Subordinated Notes due 2014                                                                 |  |          | 7.23 | %              |      |   | 122,255 |      |  |   | 122,022 | 
|Term Loan due 2010, at variable interest rates                                                            |  |          | 6.02 | %              |      |   | 85,570  |      |  |   |        | 
|6.00% EHI Term Note due 2010                                                                              |  |          | 6.00 | %              |      |   | 55,000  |      |  |   |        | 
|6.00% EI Term Note due 2010                                                                               |  |          | 6.00 | %              |      |   | 8,900   |      |  |   |        | 
|Other mortgage notes payable, interest rates ranging from 3.0%
    to 7.25%, maturing through 2009        |  |          | 6.67 | %              |      |   | 3,836   |      |  |   | 9,730   | 
|Industrial Development Revenue Bond due 2014                                                              |  |          |     |                |      |   |        |      |  |   | 9,500   | 
|6.25% Industrial Development Revenue Bond, maturing 2008                                                  |  |          | 6.25 | %              |      |   | 735     |      |  |   | 955     | 
|Capital lease obligations                                                                                 |  |          |     |                |      |   |        |      |  |   | 11      | 
|                                                                                                         
|ALC Debt:                                                                                                 |  |          |      |                |      |   |         |      |  |   |         | 
|6.24% Red Mortgage Capital Note due 2014                                                                  |  |          | 6.51 | %              |      |   | 36,533  |      |  |   |        | 
|DMG Mortgage notes payable, interest rates ranging from 7.58% to
    8.65%, due 2008                      |  |          | 6.01 | %              |      |   | 27,263  |      |  |   |        | 
|Capital lease obligations, interest rates ranging from 2.84% to
    13.54%, maturing through 2009         |  |          | 6.36 | %              |      |   | 12,222  |      |  |   |        | 
|Oregon Trust Deed Notes, interest rates ranging from 0.25%
    to 10.90%, maturing from 2020 through 2026 |  |          | 6.75 | %              |      |   | 9,483   |      |  |   |        | 
|HUD Insured Mortgages, interest rates ranging from 7.40% to
    7.55%, due 2036                           |  |          | 6.89 | %              |      |   | 7,673   |      |  |   |        | 
|                                                                                                          |  |          |      |                |      |   |         |      | 
|Long-term debt before current maturities                                                                  |  |          |      |                |      |   | 519,226 |      |  |   | 291,932 | 
|Less current maturities                                                                                   |  |          |      |                |      |   | 4,142   |      |  |   | 1,071   | 
|                                                                                                          |  |          |      |                |      |   |         |      | 
|Total long-term debt                                                                                      |  |          |      |                |      | $ | 515,084 |      |  | $ | 290,861 | 
|                                                                                                          |  |          |      |                |      |   |         |      | 



|    |                                                                      
|--- | ---------------------------------------------------------------------
|(1) | Interest rate is effective interest rate as of December 31,
    2005.





| |                  
| | -----------------
| | 2010 Senior Notes



121



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EXTENDICARE HEALTH SERVICES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






12-month


|                    |  |                  |          | 
|------------------- |  | ---------------- | -------- | 
|Year                |  | Redemption Price |         
|                    |  |                  |         
|2006                |  |                  | 104.750% | 
|2007                |  |                  | 102.375% | 
|2008 and thereafter |  |                  | 100.000% | 





| |           
| | ----------
| | 2014 Notes







122



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EXTENDICARE HEALTH SERVICES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                    |  |                  |          | 
|------------------- |  | ---------------- | -------- | 
|Year                |  | Redemption Price |         
|                    |  |                  |         
|2009                |  |                  | 103.438% | 
|2010                |  |                  | 102.292% | 
|2011                |  |                  | 101.146% | 
|2012 and thereafter |  |                  | 100.000% | 



| |                                     
| | ------------------------------------
| | Amended and Restated Credit Facility







| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the credit extended to the Company under the Amended and
    Restated Credit Facility includes a Term Loan for
    $86.0 million. The principal balance of the Term Loan is
    payable in equal quarterly installments of $215,000 over the
    first four years of the Amended and Restated Credit Facility,
    equal quarterly installments of $20.6 million over the
    first three quarters of the last year of the Amended and
    Restated Credit Facility, and a final principal installment of
    $20.6 million due on the maturity date.                                                                                      
|
| |  | the revolving credit limit under the Amended and Restated Credit
    Facility reflects a reduction by $41.0 million from the
    $155.0 million limit under the former Revolving Credit
    Facility to $114.0 million under the Amended and Restated
    Credit Facility. The Company may request an increase in the
    credit extended or available under the Amended and Restated
    Credit Facility by up to $15.0 million, but such request
    must be approved by one or more participating lenders. The
    increase may be in the form of additional term loans or in the
    form of an increase in the revolving credit limit.
|
| |  | the maturity date of the Amended and Restated Credit Facility is
    July 31, 2010, reflecting an extension of more than one
    year from the maturity date of the former Revolving Credit
    Facility.                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | the interest rate margins over the Eurodollar rate or the base
    rate, as applicable, have been reduced and fixed at
    1.75% per annum for Eurodollar rate loans and
    0.75% per annum for base rate loans. Under the former
    Revolving Credit Facility the interest rate margin ranged from
    2.50% per annum to 3.25% per annum for Eurodollar rate
    loans and from 1.50% per annum to 2.25% per annum for
    base rate loans, subject, in each case, to adjustments based on
    the Companys senior leverage ratio.                                                                                                    
|
| |  | the Amended and Restated Credit Facility includes a
    $10.0 million swing line commitment within the
    $114 million revolving credit limit.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

123



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EXTENDICARE HEALTH SERVICES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the financial covenants under the Amended and Restated Credit
    Facility include ALCs debt and earnings, whereas the
    financial covenants under the former Revolving Credit Facility
    did not. The financial covenants are otherwise substantially the
    same as under the former Revolving Credit Facility.                                                                                                                                                                                                                                                                                                                                          
|
| |  | the Amended and Restated Credit Facility includes procedures for
    ALC and its subsidiaries to be designated as restricted
    subsidiaries and guarantors of the Amended and Restated Credit
    Facility over time. As this occurs, these subsidiaries will
    become subject to the covenants of the Amended and Restated
    Credit Facility that apply to the Companys restricted
    subsidiaries. Also, the Company is permitted to make investments
    in these subsidiaries to the same extent that it is permitted to
    make investments in its other restricted subsidiaries that have
    guaranteed the Amended and Restated Credit Facility.
|
| |  | the Amended and Restated Credit Facility increases the
    Companys ability to make investments in unrestricted
    subsidiaries (the unrestricted subsidiaries being ALC and its
    subsidiaries unless and until they have been designated as
    restricted subsidiaries) such that the Company and its
    restricted subsidiaries may have investments in unrestricted
    subsidiaries outstanding from time to time up to the sum of the
    amount of investments in unrestricted subsidiaries at
    June 30, 2005 plus $40 million.                                                                                                                  
|
| |  | the Amended and Restated Credit Facility required that
    ALCs debt in connection with the $22.0 million of
    Revenue Bonds secured by ALC facilities located in the States of
    Washington, Idaho and Ohio be repaid in full within
    180 days after the closing of the Amended and Restated
    Credit Facility. The Revenue Bonds were prepaid in December
    2005, and as a result, ALC became a restricted subsidiary under
    the Amended and Restated Credit Facility.                                                                                                                                                                          
|
| |  | the Amended and Restated Credit Facility increases the
    Companys ability to make restricted payments to permit
    annual dividends up to the lesser of (i) 50% of net income,
    or (ii) $25 million plus the unused restricted payment
    amount for the previous fiscal year, or
    (iii) $50 million.                                                                                                                                                                                                                                                                                                                                                 





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EXTENDICARE HEALTH SERVICES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










6.0% EHI Term Note due 2010




6.0% Extendicare Term Note due 2010




Mortgage Notes Payable




Industrial Development Revenue Bond due 2014




6.24% Red Mortgage Capital Note due 2014


25-year


125



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##### Table of Contents



EXTENDICARE HEALTH SERVICES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


DMG Mortgage Notes Payable due 2008




Capital Lease Obligations




Oregon Trust Deed Notes






HUD Insured Mortgages due 2036




Principal Repayment Schedule




|           |  |                |         | 
|---------- |  | -------------- | ------- | 
|           |  | (In Thousands) |        
|2006       |  | $              | 4,142   | 
|2007       |  |                | 7,111   | 
|2008       |  |                | 27,682  | 
|2009       |  |                | 53,800  | 
|2010       |  |                | 256,226 | 
|After 2010 |  |                | 170,265 | 
|           |  |                |        
|           |  | $              | 519,226 | 
|           |  |                |        

126



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##### Table of Contents



EXTENDICARE HEALTH SERVICES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|    |                                              
|--- | ---------------------------------------------
|11. | DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Objectives and Strategies




Interest Rate Swap and Cap Agreements








127



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EXTENDICARE HEALTH SERVICES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Risk Management Policies




Quantitative Disclosures








Valuation Adjustment on Interest Rate Caps




128



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##### Table of Contents



EXTENDICARE HEALTH SERVICES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                    
|--- | -------------------
|12. | ACCRUED LIABILITIES



|                                                       |  |                |         |  |      |   |        | 
|------------------------------------------------------ |  | -------------- | ------- |  | ---- | - | ------ | 
|                                                       |  | 2005           |         |  | 2004 |  
|                                                       |  |                |         |  |      |  
|                                                       |  | (In thousands) |        
|Salaries and wages, fringe benefits and payroll taxes  |  | $              | 46,370  |  |      | $ | 45,325 | 
|Workers compensation                                  |  |                | 23,578  |  |      |   | 16,155 | 
|Property taxes, utilities and other taxes              |  |                | 11,942  |  |      |   | 5,825  | 
|Other claims                                           |  |                | 9,399   |  |      |   | 12,614 | 
|Interest and financing                                 |  |                | 9,937   |  |      |   | 7,174  | 
|State bed fees and other assessments                   |  |                | 6,915   |  |      |   | 4,277  | 
|Other operating expense                                |  |                | 6,073   |  |      |   | 4,145  | 
|Above (or below) market resident contracts             |  |                | 1,227   |  |      |   |       | 
|Reserves for divested operations and facility closures |  |                | 1,013   |  |      |   | 2,523  | 
|Medicaid accrued liabilities                           |  |                | 994     |  |      |   | 1,882  | 
|                                                       |  |                |         |  |      |  
|                                                       |  | $              | 117,448 |  |      | $ | 99,920 | 
|                                                       |  |                |         |  |      |  



|                          |                  |                |       |        |              |   |     |       |   |   |       |        |  
|------------------------- | ---------------- | -------------- | ----- | ------ | ------------ | - | --- | ----- | - | - | ----- | ------ | -
|                          |                  | Medicare,      |       |        |              |   |    
|                          |                  | Medicaid       |       |        | Resident and |   |     |      
|                          |                  | and Supplier   |       |        | Other        |   |     |      
|                          |                  | Claims         |       |        | Claims       |   |     | Total |  
|                          |                  |                |       |        |              |   |     |       |  
|                          |                  | (In thousands) |      
|Balance December 31, 2003 |                  |                | 6,637 |        |              |   | 654 |       |   |   | 7,291 |       
|                          | Cash payments    |                |       | (1,410 | )            |   |     | (160  | ) |   |       | (1,570 | )
|                          | Provisions       |                |       | (3,198 | )            |   |     |      |   |   |       | (3,198 | )
|                          |                  |                |       |        |              |   |     |       |  
|Balance December 31, 2004 |                  |                | 2,029 |        |              |   | 494 |       |   |   | 2,523 |       
|                          | Reclassification |                |       | 494    |              |   |     | (494  | ) |   |       |       |  
|                          | Cash payments    |                |       | (1,510 | )            |   |     |      |   |   |       | (1,510 | )
|                          |                  |                |       |        |              |   |     |       |  
|Balance December 31, 2005 |                  | $              | 1,013 |        |              | $ |    |       |   | $ | 1,013 |       
|                          |                  |                |       |        |              |   |     |       |  



|    |                                     
|--- | ------------------------------------
|13. | ACCRUAL FOR SELF-INSURED LIABILITIES



129



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##### Table of Contents



EXTENDICARE HEALTH SERVICES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|                              |  |                |         |   |      |   |         |  
|----------------------------- |  | -------------- | ------- | - | ---- | - | ------- | -
|                              |  | 2005           |         |   | 2004 |  
|                              |  |                |         |   |      |  
|                              |  | (In thousands) |        
|Balances at beginning of year |  | $              | 37,725  |   |      | $ | 45,063  |  
|Increase due to acquisition   |  |                | 902     |   |      |   |        |  
|Cash payments                 |  |                | (12,481 | ) |      |   | (13,938 | )
|Provisions                    |  |                | 8,045   |   |      |   | 6,600   |  
|                              |  |                |         |   |      |  
|Balances at end of year       |  | $              | 34,191  |   |      | $ | 37,725  |  
|                              |  |                |         |   |      |  
|Current portion               |  | $              | 12,500  |   |      | $ | 18,000  |  
|Long-term portion             |  |                | 21,691  |   |      |   | 19,725  |  
|                              |  |                |         |   |      |  
|Balances at end of year       |  | $              | 34,191  |   |      | $ | 37,725  |  
|                              |  |                |         |   |      |  



|    |                            
|--- | ---------------------------
|14. | OTHER LONG-TERM LIABILITIES



|                                             |  |                |        |  |      |   |        | 
|-------------------------------------------- |  | -------------- | ------ |  | ---- | - | ------ | 
|                                             |  | 2005           |        |  | 2004 |  
|                                             |  |                |        |  |      |  
|                                             |  | (In thousands) |       
|Asset retirement obligation                  |  | $              | 12,361 |  |      | $ |       | 
|Deferred compensation                        |  |                | 8,373  |  |      |   | 7,207  | 
|Market value of interest rate caps (note 11) |  |                | 5,496  |  |      |   | 5,241  | 
|Unfavorable lease adjustment as lessee       |  |                | 3,832  |  |      |   |       | 
|Future lease commitments                     |  |                | 2,137  |  |      |   |       | 
|Other                                        |  |                | 453    |  |      |   |       | 
|                                             |  |                |        |  |      |  
|                                             |  | $              | 32,652 |  |      | $ | 12,448 | 
|                                             |  |                |        |  |      |  

130



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##### Table of Contents



EXTENDICARE HEALTH SERVICES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Asset Retirement Obligation




pre-1980


Deferred Compensation








Unfavorable Lease Adjustment as Lessee




131



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##### Table of Contents



EXTENDICARE HEALTH SERVICES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Future Lease Commitments






|    |         
|--- | --------
|15. | REVENUES



Legislation Actions Affecting Medicare Revenues










132



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##### Table of Contents



EXTENDICARE HEALTH SERVICES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




State Plan Amendments affecting Medicaid Revenues








Revenue Adjustments and Provisions (Recovery) for
Outstanding Medicare and Medicaid Receivables






133



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EXTENDICARE HEALTH SERVICES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)












|                                                                                                           |                                                                                                                                                                |                |        |        |      |   |       |       |   |   |       |        |  
|---------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------- | ------ | ------ | ---- | - | ----- | ----- | - | - | ----- | ------ | -
|                                                                                                           |                                                                                                                                                                | 2005           |        |        | 2004 |   |       | 2003  |  
|                                                                                                           |                                                                                                                                                                |                |        |        |      |   |       |       |  
|                                                                                                           |                                                                                                                                                                | (In thousands) |       
|Prior year revenue adjustments:                                                                            |                                                                                                                                                                |                |        |        |      |   |       |       |   |   |       |       
|                                                                                                           | Pennsylvania state plan amendment (Medicaid)                                                                                                                   |                | $      | 15,800 |      |   | $     |      |   |   | $     |       |  
|                                                                                                           | Indiana state plan amendment (Medicaid)                                                                                                                        |                |        | 12,754 |      |   |       |      |   |   |       |       |  
|                                                                                                           | Favorable court decision in the State of Ohio relating to the
    recovery of alleged government overpayments for adjudicated
    Medicaid cost report periods |                |        | 142    |      |   |       | 555   |   |   |       | 4,195  |  
|                                                                                                           | Pennsylvania Medicaid                                                                                                                                          |                |        | 946    |      |   |       | 3,006 |   |   |       | 949    |  
|                                                                                                           | Other states Medicaid                                                                                                                                          |                |        | 255    |      |   |       | 156   |   |   |       | 216    |  
|                                                                                                           | Write offs pertaining to individual Medicare claims in dispute
    with Fiscal Intermediary                                                                    |                |        | (2,200 | )    |   |       | (17   | ) |   |       | (2,657 | )
|                                                                                                           |                                                                                                                                                                |                |        |        |      |   |       |       |  
|                                                                                                           |                                                                                                                                                                |                | 27,697 |        |      |   | 3,700 |       |   |   | 2,703 |       
|Prior year provider tax expense associated with revenue above:                                             |                                                                                                                                                                |                |        |        |      |   |       |       |   |   |       |       
|                                                                                                           | Pennsylvania state plan amendment                                                                                                                              |                | $      | 13,333 |      |   | $     |      |   |   | $     |       |  
|                                                                                                           | Indiana state plan amendment                                                                                                                                   |                |        | 6,258  |      |   |       |      |   |   |       |       |  
|                                                                                                           |                                                                                                                                                                |                |        |        |      |   |       |       |  
|                                                                                                           |                                                                                                                                                                |                | 19,591 |        |      |   |      |       |   |   |      |       
|                                                                                                           |                                                                                                                                                                |                |        |        |      |   |       |       |  
|Net impact on income from continuing operations before income
    taxes and change in accounting principle |                                                                                                                                                                | $              | 8,106  |        |      | $ | 3,700 |       |   | $ | 2,703 |       
|                                                                                                           |                                                                                                                                                                |                |        |        |      |   |       |       |  

134



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##### Table of Contents



EXTENDICARE HEALTH SERVICES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                      
|--- | ---------------------
|16. | INTEREST EXPENSE, NET



|                 |  |                |        |   |      |   |        |      |  |   |        |  
|---------------- |  | -------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                 |  | 2005           |        |   | 2004 |   |        | 2003 | 
|                 |  |                |        |   |      |   |        |      | 
|                 |  | (In thousands) |       
|Interest expense |  | $              | 39,975 |   |      | $ | 25,390 |      |  | $ | 33,981 |  
|Interest income  |  |                | (3,135 | ) |      |   | (8,069 | )    |  |   | (3,911 | )
|                 |  |                |        |   |      |   |        |      | 
|                 |  | $              | 36,840 |   |      | $ | 17,321 |      |  | $ | 30,070 |  
|                 |  |                |        |   |      |   |        |      | 



|    |                                                                   
|--- | ------------------------------------------------------------------
|17. | LOSS ON DISPOSAL OF ASSETS AND IMPAIRMENT OF LONG-LIVED
    ASSETS

|                                         |                                                      |                |         |        |      |   |       |        |   |   |   |   | 
|---------------------------------------- | ---------------------------------------------------- | -------------- | ------- | ------ | ---- | - | ----- | ------ | - | - | - | - | 
|                                         |                                                      | 2005           |         |        | 2004 |   |       | 2003  
|                                         |                                                      |                |         |        |      |   |       |       
|                                         |                                                      | (In thousands)
|Loss (gain) on disposal of assets:       |                                                      |                |         |        |      |   |       |        |   |   |   |  
|                                         | Exercise of Omnicare warrant and sale of shares:     |                |         |        |      |   |       |        |   |   |   |   | 
|                                         | Exercise of Omnicare stock warrant                   |                | $       | (9,158 | )    |   | $     |       |   |   | $ |  | 
|                                         | Sale of Omnicare common stock                        |                |         | (405   | )    |   |       | (863   | ) |   |   |  | 
|                                         | Unrealized gain on Omnicare common stock             |                |         | (167   | )    |   |       |       |   |   |   |  | 
|                                         | Write-off of Omnicare warrant                        |                |         |       |      |   |       | 4,000  |   |   |   |  | 
|                                         |                                                      |                |         |        |      |   |       |        |  
|                                         |                                                      |                | (9,730  | )      |      |   | 3,137 |        |   |   |  |  
|                                         | Sale of MetLife common shares                        |                |         | (630   | )    |   |       |       |   |   |   |  | 
|                                         | Sale of Maryland property                            |                |         | (448   | )    |   |       |       |   |   |   |  | 
|                                         | Sale of Arkansas facilities                          |                |         |       |      |   |       | 574    |   |   |   |  | 
|                                         | Completion of Divestiture Agreement with Greystone   |                |         |       |      |   |       | (4,873 | ) |   |   |  | 
|                                         | Payoff of notes receivable from Tandem at a discount |                |         |       |      |   |       | 1,266  |   |   |   |  | 
|                                         |                                                      |                |         |        |      |   |       |        |  
|                                         |                                                      |                | (10,808 | )      |      |   | 104   |        |   |   |  |  
|Loss on impairment of long-lived assets: |                                                      |                |         |        |      |   |       |        |   |   |   |  
|                                         | Impairment on advances to Senior Health  Texas      |                |         | 4,500  |      |   |       |       |   |   |   |  | 
|                                         | Impairment on nursing facility in Oregon             |                |         | 258    |      |   |       |       |   |   |   |  | 
|                                         | Impairment on nursing facility in Indiana            |                |         |       |      |   |       | 1,612  |   |   |   |  | 
|                                         |                                                      |                |         |        |      |   |       |        |  
|                                         |                                                      | $              | (6,050  | )      |      | $ | 1,716 |        |   | $ |  |  
|                                         |                                                      |                |         |        |      |   |       |        |  



a)     Omnicare Warrant and
Shares






135



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##### Table of Contents



EXTENDICARE HEALTH SERVICES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




b)     MetLife shares




c)     Disposal of Maryland
property






|   |                                                         
|-- | --------------------------------------------------------
|d) | Impairment on advances made to Senior Health 
    Texas





|   |                           
|-- | --------------------------
|e) | Oregon property impairment



f)     2004 Disposals and
Impairments


in-the






136



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##### Table of Contents



EXTENDICARE HEALTH SERVICES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|    |                                           
|--- | ------------------------------------------
|18. | LOSS ON REFINANCING AND RETIREMENT OF DEBT



|                                                                               |  |                |     |  |      |   |        |      |  |   |   | 
|------------------------------------------------------------------------------ |  | -------------- | --- |  | ---- | - | ------ | ---- |  | - | - | 
|                                                                               |  | 2005           |     |  | 2004 |   |        | 2003
|                                                                               |  |                |     |  |      |   |        |     
|                                                                               |  | (In thousands)
|Loss on early retirement of Mortgage Note (Note 10)                            |  | $              | 140 |  |      | $ |       |      |  | $ |  | 
|Loss on early retirement of 2007 Notes (Note 10)                               |  |                |    |  |      |   | 9,280  |      |  |   |  | 
|Loss on early retirement of Industrial Development Revenue Bonds
    (Note 10) |  |                | 135 |  |      |   | 506    |      |  |   |  | 
|                                                                               |  |                |     |  |      |   |        |      | 
|                                                                               |  |                | 275 |  |      |   | 9,786  |      |  |   |  | 
|Gain on termination of interest rate swap and cap (Note 11)                    |  |                |    |  |      |   | (3,302 | )    |  |   |  | 
|                                                                               |  |                |     |  |      |   |        |      | 
|                                                                               |  | $              | 275 |  |      | $ | 6,484  |      |  | $ |  | 
|                                                                               |  |                |     |  |      |   |        |      | 



|    |                        
|--- | -----------------------
|19. | DISCONTINUED OPERATIONS



137



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EXTENDICARE HEALTH SERVICES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                               |                                         |                |        |        |      |   |         |        |   |   |        |        |  
|-------------------------------------------------------------- | --------------------------------------- | -------------- | ------ | ------ | ---- | - | ------- | ------ | - | - | ------ | ------ | -
|                                                               |                                         | 2005           |        |        | 2004 |   |         | 2003   |  
|                                                               |                                         |                |        |        |      |   |         |        |  
|                                                               |                                         | (In thousands) |       
|Revenues                                                       |                                         | $              | 18,247 |        |      | $ | 29,718  |        |   | $ | 38,009 |       
|                                                               |                                         |                |        |        |      |   |         |        |  
|Costs and expenses (income):                                   |                                         |                |        |        |      |   |         |        |   |   |        |       
|                                                               | Operating                               |                |        | 23,500 |      |   |         | 33,792 |   |   |        | 36,596 |  
|                                                               | Lease costs                             |                |        | 10     |      |   |         | 20     |   |   |        | 34     |  
|                                                               | Depreciation and amortization           |                |        | 1,045  |      |   |         | 1,832  |   |   |        | 1,821  |  
|                                                               | Interest income                         |                |        | (120   | )    |   |         | (138   | ) |   |        | (124   | )
|                                                               | Loss (gain) on disposal of assets       |                |        | (4,204 | )    |   |         |       |   |   |        |       |  
|                                                               | Loss on impairment of long-lived assets |                |        | 7,761  |      |   |         | 6,825  |   |   |        |       |  
|                                                               |                                         |                |        |        |      |   |         |        |  
|                                                               |                                         |                | 27,992 |        |      |   | 42,331  |        |   |   | 38,327 |       
|                                                               |                                         |                |        |        |      |   |         |        |  
|Income (loss) from discontinued operations before income taxes |                                         |                | (9,745 | )      |      |   | (12,613 | )      |   |   | (318   | )     
|Income tax expense (benefit)                                   |                                         |                | (3,943 | )      |      |   | (3,845  | )      |   |   | (59    | )     
|                                                               |                                         |                |        |        |      |   |         |        |  
|Net income (loss) from discontinued operations                 |                                         | $              | (5,802 | )      |      | $ | (8,768  | )      |   | $ | (259   | )     
|                                                               |                                         |                |        |        |      |   |         |        |  



a)     Sale of Senior
Health  South Florida Properties






|   |                                             
|-- | --------------------------------------------
|b) | Sale of Lakeside Nursing Facility, Wisconsin





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EXTENDICARE HEALTH SERVICES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)












c)     Closure and Disposition of
Three Nursing Facilities in Minnesota






|    |                  
|--- | -----------------
|20. | SUBSEQUENT EVENTS

Extendicares Strategic Initiative




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EXTENDICARE HEALTH SERVICES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Acquisitions (unaudited)




Lease Extensions


10-year




|    |                  
|--- | -----------------
|21. | LEASE COMMITMENTS



|                                                                 |  |                |        |  |           |   |         |       |  |   |         | 
|---------------------------------------------------------------- |  | -------------- | ------ |  | --------- | - | ------- | ----- |  | - | ------- | 
|                                                                 |  | Capital        |        |  | Operating |   |         |      
|                                                                 |  | Leases         |        |  | Leases    |   |         | Total | 
|                                                                 |  |                |        |  |           |   |         |       | 
|                                                                 |  | (In thousands) |       
|2006                                                             |  | $              | 1,156  |  |           | $ | 20,971  |       |  | $ | 22,127  | 
|2007                                                             |  |                | 1,185  |  |           |   | 19,454  |       |  |   | 20,639  | 
|2008                                                             |  |                | 1,215  |  |           |   | 19,544  |       |  |   | 20,759  | 
|2009                                                             |  |                | 11,558 |  |           |   | 19,331  |       |  |   | 30,889  | 
|2010                                                             |  |                |       |  |           |   | 19,435  |       |  |   | 19,435  | 
|After 2010                                                       |  |                |       |  |           |   | 65,337  |       |  |   | 65,337  | 
|                                                                 |  |                |        |  |           |   |         |       | 
|Total minimum lease payments                                     |  | $              | 15,114 |  |           | $ | 164,072 |       |  | $ | 179,186 | 
|                                                                 |  |                |        |  |           |   |         |       | 
|Less amounts representing interest (at rates from 2.8% to 13.5%) |  |                | 2,892  |  |           |   |         |       |  |   |         | 
|                                                                 |  |                |        |  |           |   |         |       | 
|Present value of net minimum capital lease payments              |  |                | 12,222 |  |           |   |         |       |  |   |         | 
|Less current maturities of capital lease obligations             |  |                | 390    |  |           |   |         |       |  |   |         | 
|                                                                 |  |                |        |  |           |   |         |       | 
|Capital lease obligations, excluding current maturities          |  | $              | 11,832 |  |           |   |         |       |  |   |         | 
|                                                                 |  |                |        |  |           |   |         |       | 



a)     Lease agreement with LTC
Properties, Inc.


10-year


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EXTENDICARE HEALTH SERVICES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






b)     Lease agreement with Assisted
Living Facilities, Inc.




c)     Triple S Lease Agreement






d)     Letters of credit




e)     Properties leased to
unrelated long-term care providers




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EXTENDICARE HEALTH SERVICES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                                               |  |                |        |  |      |   |        | 
|---------------------------------------------- |  | -------------- | ------ |  | ---- | - | ------ | 
|                                               |  | 2005           |        |  | 2004 |  
|                                               |  |                |        |  |      |  
|                                               |  | (In thousands) |       
|Land and land improvements                     |  | $              | 736    |  |      | $ | 3,496  | 
|Buildings and improvements                     |  |                | 16,432 |  |      |   | 42,108 | 
|Furniture and equipment                        |  |                | 4,106  |  |      |   | 8,131  | 
|                                               |  |                |        |  |      |  
|                                               |  |                | 21,274 |  |      |   | 53,735 | 
|Less accumulated depreciation and amortization |  |                | 14,314 |  |      |   | 33,473 | 
|                                               |  |                |        |  |      |  
|Property and equipment                         |  | $              | 6,960  |  |      | $ | 20,262 | 
|                                               |  |                |        |  |      |  



|    |                              
|--- | -----------------------------
|22. | COMMITMENTS AND CONTINGENCIES

Revenue Bonds










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EXTENDICARE HEALTH SERVICES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Capital Expenditures






Insurance and Self-insured Liabilities




Litigation






Regulatory Risks




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EXTENDICARE HEALTH SERVICES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






Omnicare Preferred Provider Agreement








|    |                                                                     
|--- | --------------------------------------------------------------------
|23. | BALANCES DUE TO AND TRANSACTIONS WITH SHAREHOLDER AND
    AFFILIATES

Balances Due to Shareholder and Affiliates










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EXTENDICARE HEALTH SERVICES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                |                             |                                 |          |                      |        |        |      |   |         |        |  
|------------------------------- | --------------------------- | ------------------------------- | -------- | -------------------- | ------ | ------ | ---- | - | ------- | ------ | -
|Affiliate                       |                             | Purpose                         |          | 2005                 |        |        | 2004 |  
|                                |                             |                                 |          |                      |        |        |      |  
|                                |                             |                                 |          | (In thousands)       |       
|                                |                             |                                 |          | Receivable (payable) |       
|Current assets:                 |                             |                                 |          |                      |        |        |      |   |         |       
|Extendicare Holdings, Inc.      |                             | Federal income taxes receivable |          | $                    | 10,450 |        |      | $ | 5,231   |       
|Extendicare Holdings, Inc.      |                             | Deferred federal income taxes   |          |                      | 15,787 |        |      |   | 13,258  |       
|Extendicare Inc.                |                             | Working capital advances        |          |                      |       |        |      |   | 7,690   |       
|                                |                             |                                 |          |                      |        |        |      |  
|                                |                             |                                 |          |                      | 26,237 |        |      |   | 26,179  |       
|                                |                             |                                 |          |                      |        |        |      |  
|Current liabilities:            |                             |                                 |          |                      |        |        |      |   |         |       
|Virtual Care Provider, Inc.     |                             | Working capital advances        |          |                      | (3,000 | )      |      |   | (3,000  | )     
|The Northern Group, Inc.        |                             | Intercompany operating expenses |          |                      | 16     |        |      |   | 19      |       
|Laurier Indemnity Company, Ltd. |                             | Intercompany insurance premium  |          |                      | 6      |        |      |   | 3       |       
|Extendicare Holdings, Inc.      |                             | Working capital advances        |          |                      | 3      |        |      |   | 3       |       
|                                |                             |                                 |          |                      |        |        |      |  
|                                |                             |                                 |          |                      | (2,975 | )      |      |   | (2,975  | )     
|                                |                             |                                 |          |                      |        |        |      |  
|Long-term liabilities:          |                             |                                 |          |                      |        |        |      |   |         |       
|Extendicare Holdings, Inc.      |                             | Deferred federal income taxes   |          |                      | (9,815 | )      |      |   | (1,853  | )     
|                                |                             |                                 |          |                      |        |        |      |  
|Other:                          |                             |                                 |          |                      |        |        |      |   |         |       
|                                | Extendicare Inc.            |                                 | Advances |                      |        |       |      |   |         | (8,900 | )
|                                | Extendicare Inc.            |                                 | Advances |                      |        | 281    |      |   |         | 1,218  |  
|                                | Extendicare Holdings, Inc.  |                                 | Advances |                      |        | (3,483 | )    |   |         | (3,483 | )
|                                | Virtual Care Provider, Inc. |                                 | Advances |                      |        | (2,738 | )    |   |         | (3,620 | )
|                                |                             |                                 |          |                      |        |        |      |  
|                                |                             |                                 |          |                      | (5,940 | )      |      |   | (14,785 | )     
|                                |                             |                                 |          |                      |        |        |      |  
|                                |                             |                                 |          | $                    | 7,507  |        |      | $ | 6,566   |       
|                                |                             |                                 |          |                      |        |        |      |  

Transactions with Shareholders and Affiliates




Insurance






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EXTENDICARE HEALTH SERVICES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Computer Services




Transactions pertaining to Refinancing of 2007 Notes in May
2004






|    |             
|--- | ------------
|24. | INCOME TAXES





|                                                                        |  |                |        |   |      |   |        |      |  |   |        | 
|----------------------------------------------------------------------- |  | -------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | 
|                                                                        |  | 2005           |        |   | 2004 |   |        | 2003 | 
|                                                                        |  |                |        |   |      |   |        |      | 
|                                                                        |  | (In thousands) |       
|Income tax expense (benefit)                                            |  | $              | 37,533 |   |      | $ | (6,933 | )    |  | $ | 12,024 | 
|Shareholders equity for unrealized gain or (loss) on
    investments   |  |                | (228   | ) |      |   | (496   | )    |  |   | 2,227  | 
|Shareholders equity for unrealized gain (loss) on cash
    flow hedges |  |                | 0      |   |      |   | 67     |      |  |   | 4      | 
|Shareholders equity for disqualifying stock option
    dispositions    |  |                | (550   | ) |      |   | (434   | )    |  |   |       | 
|                                                                        |  |                |        |   |      |   |        |      | 
|                                                                        |  | $              | 36,755 |   |      | $ | (7,796 | )    |  | $ | 14,255 | 
|                                                                        |  |                |        |   |      |   |        |      | 



|                                   |          |                |        |        |      |   |        |         |   |   |        |       | 
|---------------------------------- | -------- | -------------- | ------ | ------ | ---- | - | ------ | ------- | - | - | ------ | ----- | 
|                                   |          | 2005           |        |        | 2004 |   |        | 2003    |  
|                                   |          |                |        |        |      |   |        |         |  
|                                   |          | (In thousands) |       
|Federal:                           |          |                |        |        |      |   |        |         |   |   |        |      
|                                   | Current  |                | $      | 22,953 |      |   | $      | 16,813  |   |   | $      | 9,138 | 
|                                   | Deferred |                |        | 10,566 |      |   |        | (24,940 | ) |   |        | 1,666 | 
|                                   |          |                |        |        |      |   |        |         |  
|Total Federal                      |          |                | 33,519 |        |      |   | (8,127 | )       |   |   | 10,804 |      
|State:                             |          |                |        |        |      |   |        |         |   |   |        |      
|                                   | Current  |                |        | 6,646  |      |   |        | 4,517   |   |   |        | 1,066 | 
|                                   | Deferred |                |        | (2,632 | )    |   |        | (3,323  | ) |   |        | 154   | 
|                                   |          |                |        |        |      |   |        |         |  
|Total State                        |          |                | 4,014  |        |      |   | 1,194  |         |   |   | 1,220  |      
|                                   |          |                |        |        |      |   |        |         |  
|Total income tax expense (benefit) |          | $              | 37,533 |        |      | $ | (6,933 | )       |   | $ | 12,024 |      
|                                   |          |                |        |        |      |   |        |         |  

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EXTENDICARE HEALTH SERVICES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                                                 |                                                                          |      |      |      |      |  |       |       |   |  |      |      |  
|------------------------------------------------ | ------------------------------------------------------------------------ | ---- | ---- | ---- | ---- |  | ----- | ----- | - |  | ---- | ---- | -
|                                                 |                                                                          | 2005 |      |      | 2004 |  |       | 2003  |  
|                                                 |                                                                          |      |      |      |      |  |       |       |  
|Statutory federal income tax rate                |                                                                          |      | 35.0 | %    |      |  | 35.0  | %     |   |  | 35.0 | %   
|Increase (reduction) in tax rate resulting from: |                                                                          |      |      |      |      |  |       |       |   |  |      |     
|                                                 | State income taxes, net of Federal income tax benefit                    |      |      | 7.2  |      |  |       | 6.6   |   |  |      | 8.5  |  
|                                                 | Recovery of prior year taxes due to loss on sale of subsidiary
    stock |      |      |     |      |  |       | (45.8 | ) |  |      |     |  
|                                                 | Other permanent items                                                    |      |      | 0.6  |      |  |       | 0.7   |   |  |      | 1.8  |  
|                                                 | IRS audit settlement and other items                                     |      |      |     |      |  |       | (2.5  | ) |  |      |     |  
|                                                 | Change in valuation allowance                                            |      |      | (2.9 | )    |  |       | (2.7  | ) |  |      | (6.0 | )
|                                                 | Work opportunity credit                                                  |      |      | (0.7 | )    |  |       | (0.8  | ) |  |      | (2.0 | )
|                                                 | Other, net                                                               |      |      | 0.2  |      |  |       | (0.5  | ) |  |      | (0.2 | )
|                                                 |                                                                          |      |      |      |      |  |       |       |  
|Effective tax rate (benefit)                     |                                                                          |      | 39.4 | %    |      |  | (10.0 | )%    |   |  | 37.1 | %   
|                                                 |                                                                          |      |      |      |      |  |       |       |  



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EXTENDICARE HEALTH SERVICES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                            |                              |                                      |       |        |        |   |     |        |       | 
|------------------------------------------- | ---------------------------- | ------------------------------------ | ----- | ------ | ------ | - | --- | ------ | ----- | 
|                                            |                              | 2005                                 |       |        | 2004   |  
|                                            |                              |                                      |       |        |        |  
|                                            |                              | (In thousands)                       |      
|State Deferred tax assets:                  |                              |                                      |       |        |        |   |     |       
|                                            | Employee benefit accruals    |                                      | $     | 4,068  |        |   | $   | 2,891  |      
|                                            | Accrued liabilities          |                                      |       | 2,503  |        |   |     | 2,906  |      
|                                            | Accounts receivable reserves |                                      |       | 1,532  |        |   |     | 567    |      
|                                            | Capital loss carryforwards   |                                      |       | 19     |        |   |     |       |      
|                                            | Operating loss carryforwards |                                      |       | 3,203  |        |   |     | 4,473  |      
|                                            | Goodwill                     |                                      |       | 25     |        |   |     | 110    |      
|                                            | Asset retirement obligation  |                                      |       | 534    |        |   |     |       |      
|                                            | Other assets                 |                                      |       | 2,935  |        |   |     | 1,329  |      
|                                            |                              |                                      |       |        |        |  
|                                            | Subtotal                     |                                      |       | 14,819 |        |   |     | 12,276 |      
|                                            | Valuation allowance          |                                      |       | 929    |        |   |     | 3,690  |      
|                                            |                              |                                      |       |        |        |  
|                                            |                              | Total state deferred tax assets      |       |        | 13,890 |   |     |        | 8,586 | 
|State Deferred tax liabilities:             |                              |                                      |       |        |        |   |     |       
|                                            | Depreciation                 |                                      |       | 8,294  |        |   |     | 6,279  |      
|                                            | Goodwill                     |                                      |       |       |        |   |     |       |      
|                                            | Leasehold rights             |                                      |       | 57     |        |   |     | 119    |      
|                                            | Miscellaneous                |                                      |       | 1,358  |        |   |     | 1,357  |      
|                                            |                              |                                      |       |        |        |  
|                                            |                              | Total state deferred tax liabilities |       |        | 9,709  |   |     |        | 7,755 | 
|                                            |                              |                                      |       |        |        |  
|Net state deferred tax assets (liabilities) |                              | $                                    | 4,181 |        |        | $ | 831 |       
|                                            |                              |                                      |       |        |        |  









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EXTENDICARE HEALTH SERVICES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|    |                     
|--- | --------------------
|25. | COMPREHENSIVE INCOME



|                             |  |                |        |            |             |   |      |               |  |   |        |  
|---------------------------- |  | -------------- | ------ | ---------- | ----------- | - | ---- | ------------- |  | - | ------ | -
|                             |  |                |        | Unrealized |             |   |     
|                             |  | Unrealized     |        |            | Gains       |   |      | Accumulated   | 
|                             |  | Gains          |        |            | (Losses) on |   |      | Other         | 
|                             |  | (Losses) on    |        |            | Cash Flow   |   |      | Comprehensive | 
|                             |  | Investments    |        |            | Hedges      |   |      | Income        | 
|                             |  |                |        |            |             |   |      |               | 
|                             |  | (In thousands) |       
|Balance at December 31, 2002 |  | $              | (2,257 | )          |             | $ | (131 | )             |  | $ | (2,388 | )
|Net current period change    |  |                | 3,341  |            |             |   | 32   |               |  |   | 3,373  |  
|                             |  |                |        |            |             |   |      |               | 
|Balance at December 31, 2003 |  |                | 1,084  |            |             |   | (99  | )             |  |   | 985    |  
|Net current period change    |  |                | (742   | )          |             |   | 99   |               |  |   | (643   | )
|                             |  |                |        |            |             |   |      |               | 
|Balance at December 31, 2004 |  |                | 342    |            |             |   |     |               |  |   | 342    |  
|Net current period change    |  |                | (342   | )          |             |   |     |               |  |   | (342   | )
|                             |  |                |        |            |             |   |      |               | 
|Balance at December 31, 2005 |  | $              |       |            |             | $ |     |               |  | $ |       |  
|                             |  |                |        |            |             |   |      |               | 

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EXTENDICARE HEALTH SERVICES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                         |                                                             |                |        |        |            |   |        |            |   |   |       |       |  
|---------------------------------------- | ----------------------------------------------------------- | -------------- | ------ | ------ | ---------- | - | ------ | ---------- | - | - | ----- | ----- | -
|                                         |                                                             |                |        | Tax    |            |   |       
|                                         |                                                             | Before-Tax     |        |        | (Expense)  |   |        | Net-of-Tax |  
|                                         |                                                             | Amount         |        |        | or Benefit |   |        | Amount     |  
|                                         |                                                             |                |        |        |            |   |        |            |  
|                                         |                                                             | (In thousands) |       
|Year Ended December 31, 2005:            |                                                             |                |        |        |            |   |        |            |   |   |       |      
|Unrealized gains (losses) on securities: |                                                             |                |        |        |            |   |        |            |   |   |       |      
|                                         | Unrealized holding gains (losses) arising during the period |                | $      | (570   | )          |   | $      | 228        |   |   | $     | (342  | )
|                                         |                                                             |                |        |        |            |   |        |            |  
|Year Ended December 31, 2004:            |                                                             |                |        |        |            |   |        |            |   |   |       |      
|Unrealized gains (losses) on securities: |                                                             |                |        |        |            |   |        |            |   |   |       |      
|                                         | Unrealized holding gains (losses) arising during the period |                | $      | (1,238 | )          |   | $      | 496        |   |   | $     | (742  | )
|Cash flow hedges:                        |                                                             |                |        |        |            |   |        |            |   |   |       |      
|                                         | Net derivative gains arising during the period              |                |        | 166    |            |   |        | (67        | ) |   |       | 99    |  
|                                         |                                                             |                |        |        |            |   |        |            |  
|Other comprehensive income (loss)        |                                                             | $              | (1,072 | )      |            | $ | 429    |            |   | $ | (643  | )    
|                                         |                                                             |                |        |        |            |   |        |            |  
|Year Ended December 31, 2003:            |                                                             |                |        |        |            |   |        |            |   |   |       |      
|Unrealized gains on securities:          |                                                             |                |        |        |            |   |        |            |   |   |       |      
|                                         | Unrealized holding gains arising during the period          |                | $      | 5,568  |            |   | $      | (2,227     | ) |   | $     | 3,341 |  
|Cash flow hedges:                        |                                                             |                |        |        |            |   |        |            |   |   |       |      
|                                         | Net derivative gains arising during the period              |                |        | 36     |            |   |        | (4         | ) |   |       | 32    |  
|                                         |                                                             |                |        |        |            |   |        |            |  
|Other comprehensive income               |                                                             | $              | 5,604  |        |            | $ | (2,231 | )          |   | $ | 3,373 |      
|                                         |                                                             |                |        |        |            |   |        |            |  



|    |                                            
|--- | -------------------------------------------
|26. | UNCERTAINTIES AND CERTAIN SIGNIFICANT RISKS

Revenues








Interests in Unrelated Long-Term Care Providers




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EXTENDICARE HEALTH SERVICES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Accrual for Self-Insured Liabilities




Claims and Contingencies






151



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EXTENDICARE HEALTH SERVICES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Debt Obligations






| |   |                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a substantial portion of the Companys cash flow from
    operations would be dedicated to the payment of principal and
    interest on the Companys indebtedness, thereby reducing
    the funds available for other purposes;
|
| |  | the Companys ability to obtain additional financing within
    its current Amended and Restated Credit Facility for working
    capital, capital expenditures, acquisitions or other purposes
    may be limited; and          
|
| |  | certain of the Companys borrowings are at variable rates
    of interest, which exposes the Company to the risk of higher
    interest rates.                                                                                  





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EXTENDICARE HEALTH SERVICES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                                                       
|--- | ------------------------------------------------------
|27. | DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS



|                                                     |                                                     |                |         |       |            |   |         |          |  |   |            |        |  |   |         |       | 
|---------------------------------------------------- | --------------------------------------------------- | -------------- | ------- | ----- | ---------- | - | ------- | -------- |  | - | ---------- | ------ |  | - | ------- | ----- | 
|                                                     |                                                     | 2005           |         |       | 2004       |  
|                                                     |                                                     |                |         |       |            |  
|                                                     |                                                     | Carrying       |         |       | Estimated  |   |         | Carrying |  |   | Estimated  |       
|                                                     |                                                     | Value          |         |       | Fair Value |   |         | Value    |  |   | Fair Value |       
|                                                     |                                                     |                |         |       |            |   |         |          |  |   |            |       
|                                                     |                                                     | (In thousands) |        
|ASSETS:                                              |                                                     |                |         |       |            |   |         |          |  |   |            |        |  |   |         |      
|Cash and cash equivalents                            |                                                     | $              | 13,347  |       |            | $ | 13,347  |          |  | $ | 29,612     |        |  | $ | 29,612  |      
|Short-term investments                               |                                                     |                | 5,722   |       |            |   | 5,722   |          |  |   |           |        |  |   |        |      
|Supplies, prepaid expenses and other current assets: |                                                     |                |         |       |            |   |         |          |  |   |            |        |  |   |         |      
|                                                     | Restricted cash workers compensation                |                |         | 2,935 |            |   |         | 2,935    |  |   |            |       |  |   |         |      | 
|                                                     | Deposits                                            |                |         | 2,823 |            |   |         | 2,823    |  |   |            |       |  |   |         |      | 
|Other assets (long-term):                            |                                                     |                |         |       |            |   |         |          |  |   |            |        |  |   |         |      
|                                                     | Medicare and Medicaid settlement receivables        |                |         | 5,617 |            |   |         | 5,014    |  |   |            | 10,214 |  |   |         | 9,540 | 
|                                                     | Indemnification escrow                              |                |         | 3,700 |            |   |         | 3,700    |  |   |            | 3,700  |  |   |         | 3,700 | 
|                                                     | Funds held under deferred compensation plan         |                |         | 2,340 |            |   |         | 2,340    |  |   |            | 2,001  |  |   |         | 2,001 | 
|                                                     | Debt service and capital expenditure trust funds    |                |         | 1,269 |            |   |         | 1,269    |  |   |            | 309    |  |   |         | 309   | 
|                                                     | Cash held as collateral for ALC letters of credit   |                |         | 1,041 |            |   |         | 1,041    |  |   |            |       |  |   |         |      | 
|                                                     | Notes receivable                                    |                |         | 880   |            |   |         | 880      |  |   |            | 1,000  |  |   |         | 1,000 | 
|                                                     | Security deposits                                   |                |         | 825   |            |   |         | 825      |  |   |            | 361    |  |   |         | 361   | 
|                                                     | Prepaid interest rate cap fee                       |                |         | 387   |            |   |         | 387      |  |   |            | 984    |  |   |         | 984   | 
|                                                     | Advances to Lakeside Health, LLC                    |                |         |      |            |   |         |         |  |   |            | 2,445  |  |   |         | 2,239 | 
|                                                     | Other investments                                   |                |         |      |            |   |         |         |  |   |            | 916    |  |   |         | 916   | 
|                                                     | Advances to non-affiliated long-term care operators |                |         |      |            |   |         |         |  |   |            | 7,024  |  |   |         | 7,024 | 
|                                                     | Other                                               |                |         | 87    |            |   |         | 87       |  |   |            | 99     |  |   |         | 99    | 
|                                                     |                                                     |                |         |       |            |   |         |          |  |   |            |       
|                                                     |                                                     | $              | 40,973  |       |            | $ | 40,370  |          |  | $ | 58,665     |        |  | $ | 57,785  |      
|                                                     |                                                     |                |         |       |            |   |         |          |  |   |            |       
|LIABILITIES:                                         |                                                     |                |         |       |            |   |         |          |  |   |            |        |  |   |         |      
|Outstanding checks in excess of bank balance         |                                                     | $              | 13,453  |       |            | $ | 13,453  |          |  | $ |           |        |  | $ |        |      
|Long-term debt, including current maturities         |                                                     |                | 519,226 |       |            |   | 530,240 |          |  |   | 291,932    |        |  |   | 317,655 |      
|Interest rate swaps                                  |                                                     |                | 5,389   |       |            |   | 5,.389  |          |  |   | (308       | )      |  |   | (308    | )    
|Other long-term liabilities:                         |                                                     |                |         |       |            |   |         |          |  |   |            |        |  |   |         |      
|                                                     | Deferred compensation                               |                |         | 8,373 |            |   |         | 8,373    |  |   |            | 7,207  |  |   |         | 7,207 | 
|                                                     | Market value of interest rate caps                  |                |         | 5,496 |            |   |         | 5,496    |  |   |            | 5,241  |  |   |         | 5,241 | 
|Due to shareholder and affiliates (long-term)        |                                                     |                | 5,940   |       |            |   | 5,940   |          |  |   | 14,785     |        |  |   | 14,785  |      
|                                                     |                                                     |                |         |       |            |   |         |          |  |   |            |       
|                                                     |                                                     | $              | 557,877 |       |            | $ | 568,891 |          |  | $ | 318,857    |        |  | $ | 344,580 |      
|                                                     |                                                     |                |         |       |            |   |         |          |  |   |            |       







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EXTENDICARE HEALTH SERVICES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|    |                                                   
|--- | --------------------------------------------------
|28. | SUPPLEMENTARY QUARTERLY FINANCIAL DATA (UNAUDITED)



|                                                                                             |  |                |         |   |     |   |         |     |  |   |         |   |  |       |         |   |  |   |           |  
|-------------------------------------------------------------------------------------------- |  | -------------- | ------- | - | --- | - | ------- | --- |  | - | ------- | - |  | ----- | ------- | - |  | - | --------- | -
|                                                                                             |  | 2005           |        
|                                                                                             |  |                |        
|                                                                                             |  | 1st            |         |   | 2nd |   |         | 3rd |  |   | 4th     |   |  | Total |        
|                                                                                             |  |                |         |   |     |   |         |     |  |   |         |   |  |       |        
|                                                                                             |  | (In thousands) |        
|Total revenues                                                                               |  | $              | 288,801 |   |     | $ | 306,780 |     |  | $ | 295,404 |   |  | $     | 298,671 |   |  | $ | 1,189,656 |  
|                                                                                             |  |                |         |   |     |   |         |     |  |   |         |   |  |       |        
|Valuation adjustment on interest rate caps                                                   |  |                | (1,298  | ) |     |   | (939    | )   |  |   | 129     |   |  |       | 305     |   |  |   | (1,803    | )
|Loss (gain) on disposal of assets and impairment of
    long-lived assets                    |  |                | (448    | ) |     |   | (630    | )   |  |   | (9,270  | ) |  |       | 4,298   |   |  |   | (6,050    | )
|Loss on refinancing and retirement of debt                                                   |  |                | 275     |   |     |   |        |     |  |   |        |   |  |       |        |   |  |   | 275       |  
|Income from continuing operations before income taxes and change
    in accounting principle |  |                | 21,230  |   |     |   | 31,201  |     |  |   | 31,766  |   |  |       | 11,099  |   |  |   | 95,296    |  
|Income tax expense                                                                           |  |                | 8,367   |   |     |   | 12,134  |     |  |   | 12,808  |   |  |       | 4,224   |   |  |   | 37,533    |  
|                                                                                             |  |                |         |   |     |   |         |     |  |   |         |   |  |       |        
|Net income from continuing operations                                                        |  |                | 12,863  |   |     |   | 19,067  |     |  |   | 18,958  |   |  |       | 6,875   |   |  |   | 57,763    |  
|Net loss from discontinued operations                                                        |  |                | (809    | ) |     |   | (3,768  | )   |  |   | (754    | ) |  |       | (471    | ) |  |   | (5,802    | )
|                                                                                             |  |                |         |   |     |   |         |     |  |   |         |   |  |       |        
|Net income before cumulative effect of change in account
    principle                       |  |                | 12,054  |   |     |   | 15,299  |     |  |   | 18,204  |   |  |       | 6,404   |   |  |   | 51,961    |  
|Cumulative effect of change in account principle, net of income
    taxes                    |  |                |        |   |     |   |        |     |  |   |        |   |  |       | (6,414  | ) |  |   | (6,414    | )
|                                                                                             |  |                |         |   |     |   |         |     |  |   |         |   |  |       |        
|Net income (loss)                                                                            |  | $              | 12,054  |   |     | $ | 15,299  |     |  | $ | 18,204  |   |  | $     | (10     | ) |  | $ | 45,547    |  
|                                                                                             |  |                |         |   |     |   |         |     |  |   |         |   |  |       |        

|                                                                                             |  |                |         |   |     |   |         |     |  |   |         |   |  |       |         |   |  |   |         |  
|-------------------------------------------------------------------------------------------- |  | -------------- | ------- | - | --- | - | ------- | --- |  | - | ------- | - |  | ----- | ------- | - |  | - | ------- | -
|                                                                                             |  | 2004           |        
|                                                                                             |  |                |        
|                                                                                             |  | 1st            |         |   | 2nd |   |         | 3rd |  |   | 4th     |   |  | Total |        
|                                                                                             |  |                |         |   |     |   |         |     |  |   |         |   |  |       |        
|                                                                                             |  | (In thousands) |        
|Total revenues                                                                               |  | $              | 222,615 |   |     | $ | 224,112 |     |  | $ | 236,090 |   |  | $     | 235,317 |   |  | $ | 918,134 |  
|                                                                                             |  |                |         |   |     |   |         |     |  |   |         |   |  |       |        
|Valuation adjustment on interest rate caps                                                   |  |                | 73      |   |     |   | 4,320   |     |  |   | 2,030   |   |  |       | 1,560   |   |  |   | 7,983   |  
|Loss (gain) on disposal of assets and Impairment of
    long-lived assets                    |  |                | 1,612   |   |     |   | (4,469  | )   |  |   | 4,573   |   |  |       |        |   |  |   | 1,716   |  
|Loss on refinancing and retirement of debt                                                   |  |                | 354     |   |     |   | 5,978   |     |  |   | 152     |   |  |       |        |   |  |   | 6,484   |  
|Income from continuing operations before income taxes and change
    in accounting principle |  |                | 15,213  |   |     |   | 14,412  |     |  |   | 18,477  |   |  |       | 21,471  |   |  |   | 69,573  |  
|Income tax (benefit) expense                                                                 |  |                | 5,725   |   |     |   | 5,405   |     |  |   | 6,938   |   |  |       | (25,001 | ) |  |   | (6,933  | )
|                                                                                             |  |                |         |   |     |   |         |     |  |   |         |   |  |       |        
|Net income from continuing operations                                                        |  |                | 9,488   |   |     |   | 9,007   |     |  |   | 11,539  |   |  |       | 46,472  |   |  |   | 76,506  |  
|Net loss from discontinued operations                                                        |  |                | (141    | ) |     |   | (181    | )   |  |   | (1,079  | ) |  |       | (7,367  | ) |  |   | (8,768  | )
|                                                                                             |  |                |         |   |     |   |         |     |  |   |         |   |  |       |        
|Net income                                                                                   |  | $              | 9,347   |   |     | $ | 8,826   |     |  | $ | 10,460  |   |  | $     | 39,105  |   |  | $ | 67,738  |  
|                                                                                             |  |                |         |   |     |   |         |     |  |   |         |   |  |       |        

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|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
    ACCOUNTING AND FINANCIAL DISCLOSURE








|         |                        
|-------- | -----------------------
|ITEM 9A. | CONTROLS AND PROCEDURES

Evaluation of Disclosure Control and Procedures


10-K


Changes in Internal Controls Over Financial Reporting









|         |                  
|-------- | -----------------
|ITEM 9B. | OTHER INFORMATION



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PART III







|         |                                                   
|-------- | --------------------------------------------------
|ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Directors and Executive Officers


The following table sets forth information with respect to
our directors and executive officers:


|                    |  |     |    |  |          |                                                                           
|------------------- |  | --- | -- |  | -------- | --------------------------------------------------------------------------
|Name                |  | Age |    |  | Position
|                    |  |     |    |  |         
|Mel Rhinelander     |  |     | 55 |  |          | Chairman of the Board and Chief Executive Officer and Director            
|Philip W. Small     |  |     | 49 |  |          | President and Chief Operating Officer and Director                        
|Richard L. Bertrand |  |     | 57 |  |          | Senior Vice President, Chief Financial Officer, Treasurer and
    Director
|Roch Carter         |  |     | 66 |  |          | Vice President, General Counsel and Assistant Secretary                   
|Douglas J. Harris   |  |     | 50 |  |          | Vice President and Controller                                             
|L. William Wagner   |  |     | 57 |  |          | Vice President, Human Resources                                           

Mel Rhinelander


Philip W. Small


Richard L. Bertrand


Roch Carter


Douglas J. Harris


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L. William Wagner


Corporate Governance Matters




www.extendicare.com


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|         |                       
|-------- | ----------------------
|ITEM 11. | EXECUTIVE COMPENSATION

Compensation of Named Executive Officers




Summary Compensation Table


|                            |                                                                                   |      |      |                     |     |              |              |         |            |                 |           |           |            |                  |        |                 |     |  |         |         |  |  |        |        | 
|--------------------------- | --------------------------------------------------------------------------------- | ---- | ---- | ------------------- | --- | ------------ | ------------ | ------- | ---------- | --------------- | --------- | --------- | ---------- | ---------------- | ------ | --------------- | --- |  | ------- | ------- |  |  | ------ | ------ | 
|                            |                                                                                   |      |      |                     |     | Long-Term    |              |         |           
|                            |                                                                                   |      |      | Annual Compensation |     |              | Compensation |         |            |                
|                            |                                                                                   |      |      |                     |     |              |              |         |            |                
|                            |                                                                                   |      |      |                     |     | Other Annual |              |         | Securities |                 |           | All Other |           
|Name and Principal Position |                                                                                   |      |      | Salary              |     |              | Bonus        |         |            | Compensation(1) |           |           | Underlying |                  |        | Compensation(2) |    
|with the Corporation        |                                                                                   | Year |      |                     | ($) |              |              | ($)     |            |                 | ($)       |           |            | Options/SARs (#) |        |                 | ($) | 
|                            |                                                                                   |      |      |                     |     |              |              |         |            |                 |           |           |            |                  |        |                 |     | 
|M.A. Rhinelander            |                                                                                   |      | 2005 |                     |     |              | 800,000      |         |            |                 | 1,000,000 |           |            |                  | 55,936 |                 |     |  | 100,000 |         |  |  | 11,206 |       
|                            | President and Chief Executive                                                     |      |      | 2004                |     |              |              | 800,000 |            |                 |           | 950,000   |            |                  |        | 85,512          |     |  |         | 100,000 |  |  |        | 10,834 | 
|                            | Officer of Extendicare Inc.;                                                      |      |      | 2003                |     |              |              | 650,000 |            |                 |           | 950,000   |            |                  |        | 44,512          |     |  |         | 100,000 |  |  |        | 11,632 | 
|                            | Chairman and Chief Executive
    Officer of Extendicare Health
    Services, Inc. |      |      |                     |     |              |              |         |            |                 |           |           |            |                  |        |                 |     |  |         |         |  |  |        |        | 
|R.L. Bertrand(3)            |                                                                                   |      | 2005 |                     |     |              | 300,000      |         |            |                 | 135,000   |           |            |                  |       |                 |     |  | 40,000  |         |  |  | 40,768 |       
|                            | Senior Vice President, Chief                                                      |      |      | 2004                |     |              |              | 258,667 |            |                 |           | 140,000   |            |                  |        |                |     |  |         | 30,000  |  |  |        | 30,303 | 
|                            | Financial Officer, and Treasurer                                                  |      |      | 2003                |     |              |              | 240,000 |            |                 |           | 120,000   |            |                  |        |                |     |  |         | 30,000  |  |  |        | 36,768 | 
|                            | of Extendicare Inc. and
    Extendicare Health
    Services, Inc                  |      |      |                     |     |              |              |         |            |                 |           |           |            |                  |        |                 |     |  |         |         |  |  |        |        | 
|P.W. Small                  |                                                                                   |      | 2005 |                     |     |              | 390,000      |         |            |                 | 156,000   |           |            |                  |       |                 |     |  | 40,000  |         |  |  | 64,669 |       
|                            | President and Chief Operating                                                     |      |      | 2004                |     |              |              | 375,000 |            |                 |           | 210,000   |            |                  |        |                |     |  |         | 40,000  |  |  |        | 40,711 | 
|                            | Officer of Extendicare Health                                                     |      |      | 2003                |     |              |              | 310,000 |            |                 |           | 174,500   |            |                  |        |                |     |  |         | 30,000  |  |  |        | 40,381 | 
|                            | Services, Inc                                                                     |      |      |                     |     |              |              |         |            |                 |           |           |            |                  |        |                 |     |  |         |         |  |  |        |        | 
|L.A. Bebo                   |                                                                                   |      | 2005 |                     |     |              | 275,000      |         |            |                 | 123,750   |           |            |                  |       |                 |     |  | 30,000  |         |  |  | 31,979 |       
|                            | President and Chief Operating                                                     |      |      | 2004                |     |              |              | 235,000 |            |                 |           | 82,250    |            |                  |        |                |     |  |         | 25,000  |  |  |        | 24,764 | 
|                            | Officer of Assisted Living                                                        |      |      | 2003                |     |              |              | 225,000 |            |                 |           | 100,000   |            |                  |        |                |     |  |         | 15,000  |  |  |        | 23,764 | 
|                            | Concepts, Inc.                                                                    |      |      |                     |     |              |              |         |            |                 |           |           |            |                  |        |                 |     |  |         |         |  |  |        |        | 
|D.K. Howe                   |                                                                                   |      | 2005 |                     |     |              | 300,000      |         |            |                 | 50,000    |           |            |                  |       |                 |     |  | 25,000  |         |  |  | 45,460 |       
|                            | Senior Area Vice President of                                                     |      |      | 2004                |     |              |              | 237,000 |            |                 |           | 82,950    |            |                  |        |                |     |  |         | 25,000  |  |  |        | 39,798 | 
|                            | Extendicare Health                                                                |      |      | 2003                |     |              |              | 227,000 |            |                 |           | 100,000   |            |                  |        |                |     |  |         | 15,000  |  |  |        | 38,824 | 
|                            | Services, Inc.                                                                    |      |      |                     |     |              |              |         |            |                 |           |           |            |                  |        |                 |     |  |         |         |  |  |        |        | 

Notes:




|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The aggregate amount of perquisites and other benefits for each
    named executive officer is less than the lesser of $50,000 or
    10% of total annual salary and bonus. In the case of M.A.
    Rhinelander, the amount is comprised of car allowance and
    flexible account.                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(2) | For M.A. Rhinelander these amounts reflect premiums paid by the
    Company for term life insurance and long-term disability. All
    other compensation, in the case of R.L. Bertrand, P.W. Small,
    L.A. Bebo and D.K. Howe includes payments for life insurance and
    long-term disability premiums and contributions to a deferred
    compensation plan and a defined contribution retirement plan.
    The amount of salary and/or bonus deferred by the named
    executive officer is included within the figures set forth in
    the Salary and/or Bonus columns in the
    above table. EHSIs contribution is included within the
    All Other

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| |                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| | Compensation column. The amounts contributed by the
    officer and our matching portion contributed to the deferred
    compensation plan are as follows:

|                        |  |      |        |  |      |   |        |      |  |   |       | 
|----------------------- |  | ---- | ------ |  | ---- | - | ------ | ---- |  | - | ----- | 
|Named Executive Officer |  | 2005 |        |  | 2004 |   |        | 2003 | 
|                        |  |      |        |  |      |   |        |      | 
|R.L. Bertrand           |  |      |        |  |      |   |        |      |  |   |       | 
|Officer contribution    |  |      |       |  |      |   |       |      |  |   |      | 
|Officer interest        |  | $    | 13,014 |  |      | $ | 10,029 |      |  | $ | 7,922 | 
|EHSI contribution       |  |      |       |  |      |   |       |      |  |   |      | 
|EHSI interest           |  |      | 6,507  |  |      |   | 5,014  |      |  |   | 3,961 | 
|P.W. Small              |  |      |        |  |      |   |        |      |  |   |       | 
|Officer contribution    |  |      | 39,000 |  |      |   | 30,000 |      |  |   |      | 
|Officer interest        |  |      | 3,763  |  |      |   | 127    |      |  |   |      | 
|EHSI contribution       |  |      | 19,618 |  |      |   |       |      |  |   |      | 
|EHSI interest           |  |      | 57     |  |      |   |       |      |  |   |      | 
|L.A. Bebo               |  |      |        |  |      |   |        |      |  |   |       | 
|Officer contribution    |  |      | 26,833 |  |      |   | 23,500 |      |  |   |      | 
|Officer interest        |  |      | 2,383  |  |      |   | 834    |      |  |   |      | 
|EHSI contribution       |  |      |       |  |      |   |       |      |  |   |      | 
|EHSI interest           |  |      |       |  |      |   |       |      |  |   |      | 



|    |                                                                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3) | R.L. Bertrand, formerly the Senior Vice-President, Development,
    was appointed to the position of Senior Vice President, Chief
    Financial Officer and Treasurer effective September 1, 2004.

Stock Option Plan












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90-day 270-day


















Option/ SAR Grants in Fiscal Year 2005


|                 |  |              |         |            |              |  |       |             |                            |                            |                              |  |  |     |           |  |                 |   |           |  |  |  |                   | 
|---------------- |  | ------------ | ------- | ---------- | ------------ |  | ----- | ----------- | -------------------------- | -------------------------- | ---------------------------- |  |  | --- | --------- |  | --------------- | - | --------- |  |  |  | ----------------- | 
|                 |  |              |         | Percent of |              |  |       |             | Potential Realizable Value |                            |                              | 
|                 |  | Number of    |         |            | Total        |  |       |             |                            | at Assumed Annual Rates of |                              |  | 
|                 |  | Securities   |         |            | Options/SARs |  |       | Exercise or |                            |                            | Stock Price Appreciation for |  |  |    
|                 |  | Underlying   |         |            | Granted to   |  |       | Base Price  |                            |                            | Option Term (C$)             |  |  |    
|                 |  | Options/SARs |         |            | Employees in |  |       | (C$) per    |                            |                            |                              |  |  |    
|Name             |  | Granted      |         |            | Fiscal Year  |  |       | Share)      |                            |                            | 5%                           |  |  | 10% |           |  | Expiration Date |  
|                 |  |              |         |            |              |  |       |             |                            |                            |                              |  |  |     |           |  |                 |  
|M.A. Rhinelander |  |              | 100,000 |            |              |  | 17.83 | %           |                            |                            | 18.00                        |  |  | $   | 1,132,010 |  |                 | $ | 2,868,736 |  |  |  | February 22, 2015 | 
|R.L. Bertrand    |  |              | 40,000  |            |              |  | 7.13  |             |                            |                            | 18.00                        |  |  |     | 452,804   |  |                 |   | 1,147,495 |  |  |  | February 22, 2015 | 
|P.W. Small       |  |              | 40,000  |            |              |  | 7.13  |             |                            |                            | 18.00                        |  |  |     | 452,804   |  |                 |   | 1,147,495 |  |  |  | February 22, 2015 | 
|L.A. Bebo        |  |              | 30,000  |            |              |  | 5.35  |             |                            |                            | 18.00                        |  |  |     | 339,603   |  |                 |   | 860,621   |  |  |  | February 22, 2015 | 
|D.K. Howe        |  |              | 25,000  |            |              |  | 4.46  |             |                            |                            | 18.00                        |  |  |     | 283,003   |  |                 |   | 717,184   |  |  |  | February 22, 2015 | 

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Aggregated Option/ SAR Exercised in Fiscal Year 2004


and Fiscal Year-End Option/ SAR Values


|                 |  |             |         |  |          |                        |                 |                     |                              |                       |                      |  |  |             |         |  |               |  |           |  |  |  |           | 
|---------------- |  | ----------- | ------- |  | -------- | ---------------------- | --------------- | ------------------- | ---------------------------- | --------------------- | -------------------- |  |  | ----------- | ------- |  | ------------- |  | --------- |  |  |  | --------- | 
|                 |  |             |         |  |          | Number of Securities   |                 |                     |                             
|                 |  |             |         |  |          | Underlying Unexercised |                 |                     | Value of Unexercised in-the- |                      
|                 |  | Shares      |         |  |          |                        | Options/SARs at |                     |                              | Money Options/SARs at |                     
|                 |  | Acquired    |         |  | Value    |                        |                 | Fiscal Year-End (#) |                              |                       | Fiscal Year-End (C$) | 
|                 |  | on Exercise |         |  | Realized |                        |                 |                     |                              |                       |                      | 
|Name             |  | (#)         |         |  | (C$)     |                        |                 | Exercisable         |                              |                       | Unexercisable        |  |  | Exercisable |         |  | Unexercisable | 
|                 |  |             |         |  |          |                        |                 |                     |                              |                       |                      |  |  |             |         |  |               | 
|M.A. Rhinelander |  |             | 175,000 |  |          |                        | 2,762,333       |                     |                              |                       | 150,000              |  |  |             | 250,000 |  |               |  | 1,883,500 |  |  |  | 1,406,000 | 
|R.L. Bertrand    |  |             | 12,500  |  |          |                        | 185,138         |                     |                              |                       | 40,000               |  |  |             | 85,000  |  |               |  | 495,200   |  |  |  | 424,800   | 
|P.W. Small       |  |             | 55,000  |  |          |                        | 675,850         |                     |                              |                       | 10,000               |  |  |             | 92,500  |  |               |  | 38,000    |  |  |  | 453,300   | 
|L.A. Bebo        |  |             | 21,250  |  |          |                        | 298,775         |                     |                              |                       | 10,000               |  |  |             | 58,750  |  |               |  | 79,438    |  |  |  | 226,475   | 
|D.K. Howe        |  |             | 18,750  |  |          |                        | 234,288         |                     |                              |                       |                     |  |  |             | 53,750  |  |               |  |          |  |  |  | 224,975   | 



|      |                                                                                                                                                                                                                            
|----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note: | The value of the unexercised options is based on C$18.30, the
    closing price of the Extendicare Inc. subordinate voting shares
    on the TSX on December 31, 2005. All amounts are stated in
    Canadian dollars (C$).



Retirement Arrangements








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Deferred Compensation Plan




Executive Retirement Plan




Termination of Employment Arrangements




Compensation Committee Interlocks and Insider
Participation









|         |                                                                                                   
|-------- | --------------------------------------------------------------------------------------------------
|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
    MANAGEMENT AND RELATED SHAREHOLDER MATTERS










|         |                                               
|-------- | ----------------------------------------------
|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



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|                                |                             |                                 |          |                      |        |        |      |   |         |        |  
|------------------------------- | --------------------------- | ------------------------------- | -------- | -------------------- | ------ | ------ | ---- | - | ------- | ------ | -
|Affiliate                       |                             | Purpose                         |          | 2005                 |        |        | 2004 |  
|                                |                             |                                 |          |                      |        |        |      |  
|                                |                             |                                 |          | (In thousands)       |       
|                                |                             |                                 |          | Receivable (payable) |       
|Current assets:                 |                             |                                 |          |                      |        |        |      |   |         |       
|Extendicare Holdings, Inc.      |                             | Federal income taxes receivable |          | $                    | 10,450 |        |      | $ | 5,231   |       
|Extendicare Holdings, Inc.      |                             | Deferred federal income taxes   |          |                      | 15,787 |        |      |   | 13,258  |       
|Extendicare Inc.                |                             | Working capital advances        |          |                      |       |        |      |   | 7,690   |       
|                                |                             |                                 |          |                      |        |        |      |  
|                                |                             |                                 |          |                      | 26,237 |        |      |   | 26,179  |       
|                                |                             |                                 |          |                      |        |        |      |  
|Current liabilities:            |                             |                                 |          |                      |        |        |      |   |         |       
|Virtual Care Provider, Inc.     |                             | Working capital advances        |          |                      | (3,000 | )      |      |   | (3,000  | )     
|The Northern Group, Inc.        |                             | Intercompany operating expenses |          |                      | 16     |        |      |   | 19      |       
|Laurier Indemnity Company, Ltd. |                             | Intercompany insurance premium  |          |                      | 6      |        |      |   | 3       |       
|Extendicare Holdings, Inc.      |                             | Working capital advances        |          |                      | 3      |        |      |   | 3       |       
|                                |                             |                                 |          |                      |        |        |      |  
|                                |                             |                                 |          |                      | (2,975 | )      |      |   | (2,975  | )     
|                                |                             |                                 |          |                      |        |        |      |  
|Long-term liabilities:          |                             |                                 |          |                      |        |        |      |   |         |       
|Extendicare Holdings, Inc.      |                             | Deferred federal income taxes   |          |                      | (9,815 | )      |      |   | (1,853  | )     
|                                |                             |                                 |          |                      |        |        |      |  
|Other:                          |                             |                                 |          |                      |        |        |      |   |         |       
|                                | Extendicare Inc.            |                                 | Advances |                      |        |       |      |   |         | (8,900 | )
|                                | Extendicare Inc.            |                                 | Advances |                      |        | 281    |      |   |         | 1,218  |  
|                                | Extendicare Holdings, Inc.  |                                 | Advances |                      |        | (3,483 | )    |   |         | (3,483 | )
|                                | Virtual Care Provider, Inc. |                                 | Advances |                      |        | (2,738 | )    |   |         | (3,620 | )
|                                |                             |                                 |          |                      |        |        |      |  
|                                |                             |                                 |          |                      | (5,940 | )      |      |   | (14,785 | )     
|                                |                             |                                 |          |                      |        |        |      |  
|                                |                             |                                 |          | $                    | 7,507  |        |      | $ | 6,566   |       
|                                |                             |                                 |          |                      |        |        |      |  






|         |                                       
|-------- | --------------------------------------
|ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES



|                       |                            |                |       |     |      |   |     |   | 
|---------------------- | -------------------------- | -------------- | ----- | --- | ---- | - | --- | - | 
|                       |                            | 2005           |       |     | 2004 |  
|                       |                            |                |       |     |      |  
|                       |                            | (In thousands) |      
|Audit fees(1)          |                            | $              | 650   |     |      | $ | 453 |  
|Audit-related fees(2): |                            |                |       |     |      |   |     |  
|                       | Acquisition of ALC         |                |       | 185 |      |   |     |  | 
|                       | Review of internal control |                |       | 84  |      |   |     |  | 
|Tax fees(3)            |                            |                | 64    |     |      |   | 43  |  
|All other fees(4)      |                            |                | 21    |     |      |   | 48  |  
|                       |                            |                |       |     |      |  
|                       |                            | $              | 1,004 |     |      | $ | 544 |  
|                       |                            |                |       |     |      |  



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Audit Fees. This consists of aggregate fees billed to us
    by KPMG LLP for professional services rendered for the audit of
    our annual financial statements, reviews of our interim
    financial statements, and services that are normally provided in
    connection with statutory or regulatory filings or engagements,
    including consents and other services related to Securities and
    Exchange Commission matters.
|   
|(2) | Audit-Related Fees. This consists of fees billed to us by
    KPMG LLP for assurance and related services that are reasonably
    related to the performance of the audit or review of our
    financial statements and are                                                                                                                                                                                                           

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|    |                                                                                                                                                                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | not reported under Audit Fees. These services
    include consultations in connection with potential transactions,
    and consultations concerning financial accounting and reporting
    standards.                                                                                        
|   
|(3) | Tax Fees. This consists of fees billed to us by KPMG LLP
    for professional services for tax compliance, tax advice and tax
    planning. These services include assistance regarding federal
    and state tax compliance, tax audit issues, mergers and
    acquisitions, and tax planning.
|   
|(4) | All Other Fees. This consists of other fees billed to us
    by KPMG LLP for products and services other than the services
    reported above. All other fees are for support and learning
    services, which have been deemed to be permissible non-attest
    services.                     

Pre-Approval Policies and Procedures








contribution-in






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PART IV







|         |                                        
|-------- | ---------------------------------------
|ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES



|    |                                        
|--- | ---------------------------------------
|(a) | Documents filed as part of this report:

Financial Statements


10-K


|                                                                                  |  |       |     | 
|--------------------------------------------------------------------------------- |  | ----- | --- | 
|                                                                                  |  | Pages |    
|                                                                                  |  |       |    
|Report of the Independent Registered Public Accounting Firm                       |  |       | 99  | 
|Consolidated Balance Sheets at December 31, 2005 and 2004                         |  |       | 100 | 
|Consolidated Statements of Income for Years 2005, 2004, and 2003                  |  |       | 101 | 
|Consolidated Statements of Shareholders Equity for Years
    2005, 2004 and 2003 |  |       | 102 | 
|Consolidated Statements of Cash Flows for Years 2005, 2004 and
    2003           |  |       | 103 | 
|Notes to Consolidated Financial Statements                                        |  |       | 105 | 

Financial Statement Schedule


10-K.


Exhibits


10-K.




|    |         
|--- | --------
|(b) | Exhibits

10-K.




|    |                                                                      
|--- | ---------------------------------------------------------------------
|(c) | Financial Statements Excluded from Annual Report to
    Shareholders:



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SIGNATURES






| |                                  
| | ---------------------------------
| | EXTENDICARE HEALTH SERVICES, INC.



| |     |                        
| | --- | -----------------------
| | By: | /s/ RICHARD L. BERTRAND

| |                                                   
| | --------------------------------------------------
| |                                                   
| | Richard L. Bertrand                               
| | Senior Vice President, Chief Financial Officer and
| | Treasurer and Director (Principal Financial       
| | and Accounting Officer)                           





|                                           |  |                                                                                                                             |  |                |  | 
|------------------------------------------ |  | --------------------------------------------------------------------------------------------------------------------------- |  | -------------- |  | 
|Name                                       |  | Title                                                                                                                       |  | Date          
|                                           |  |                                                                                                                             |  |               
|                                          
|/s/ Mel RhinelanderMel Rhinelander         |  | Chairman of the Board and
    Chief Executive Officer
    (Principal Executive Officer)                                     |  | March 30, 2006
|                                          
|/s/ Richard L. BertrandRichard L. Bertrand |  | Senior Vice President, Chief Financial Officer, Treasurer and
    Director (Principal Financial and
    Accounting Officer) |  | March 30, 2006
|                                          
|/s/ Philip W. SmallPhilip W. Small         |  | President and Chief Operating Officer and Director                                                                          |  | March 30, 2006
|                                          
|/s/ Laurie A. BeboLaurie A. Bebo           |  | President and Chief Operating Officer, Assisted Living Concepts,
    Inc.                                                   |  | March 30, 2006

SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED
PURSUANT TO SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH
HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF
THE ACT.




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EXHIBIT INDEX


|       |   |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|------ | - | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |   | Description
|       |   |            
|       | 2 | .1          |  | Form of Operations Transfer Agreement, dated as of
    October 1, 2001, by and among Extendicare Homes, Inc.,
    Extendicare Health Facilities, Inc., Senior Health
    Properties  Texas, Inc. and certain affiliates of
    Senior Health Properties  Texas, Inc. (Certain
    exhibits of the Operations Transfer Agreement and certain
    exhibits of the exhibits have been omitted based on
    Item 601(b)(2) of Regulation S-K. Such exhibits are
    described in the Operations Transfer Agreement and the exhibits
    thereto. The Company agrees to furnish to the Commission, upon
    its request, any or all of such omitted exhibits. (Incorporated
    by reference to the Companys Form 8-K filed on
    January 4, 2002).
|      
|       | 2 | .2          |  | Plan of Merger and Acquisition Agreement, dated as of
    November 4, 2004, By and Among Extendicare Health Services,
    Inc., Alpha Acquisition, Inc., and Assisted Living Concepts,
    Inc. (Incorporated by reference to Exhibit 2.1 to the
    Companys Current Report on Form 8-K filed on
    November 9, 2004).                                                                                                                                                                                                                                                                                                                                                                                                                         
|      
|       | 3 | .1          |  | Restated Certificate of Incorporation of Extendicare Health
    Services, Inc. (Incorporated by reference to the Companys
    Registration Statement on Form S-4 (Registration
    No. 333-43549)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|      
|       | 3 | .2          |  | By-Laws of Extendicare Health Services, Inc. (Incorporated by
    reference to the Companys Registration Statement on
    Form S-4 (Registration No. 333-43549)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|      
|       | 4 | .1          |  | Purchase Agreement, dated as of June 20, 2002, among
    Extendicare Health Services, Inc., the Guarantors named therein,
    Lehman Brothers, Inc., ABN AMRO Incorporated and
    U.S. Bancorp Piper Jaffrey Inc. (Incorporated by reference
    to Exhibit 4.2 to the Companys Registration Statement
    on Form S-4 (Registration No. 333-97293)).                                                                                                                                                                                                                                                                                                                                                                                           
|      
|       | 4 | .2          |  | Indenture, dated as of June 28, 2002, among Extendicare
    Health Services, Inc., the Guarantors named therein, as
    Guarantors, and U.S. Bank, N.A., as Trustee. (Incorporated
    by reference to the Companys Registration Statement on
    Form S-4 (Registration No. 333-97293)).                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|      
|       | 4 | .3          |  | Exchange and Registration Rights Agreement, dated as of
    June 28, 2002, among Extendicare Health Services, Inc., the
    Guarantors named therein, Lehman Brothers Inc., ABN AMRO
    Incorporated and U.S. Bancorp Piper Jaffrey Inc.
    (Incorporated by reference to Exhibit 4.4 to the
    Companys Registration Statement on Form S-4
    (Registration No. 333-97293)).                                                                                                                                                                                                                                                                                                                                                                
|      
|       | 4 | .4          |  | Third Amended And Restated Credit Agreement, dated as of
    August 4, 2005, among Extendicare Holdings, Inc.,
    Extendicare Health Services, Inc., as Borrower, the several
    lenders from time to time parties thereto, Lehman Brothers Inc.,
    as Arranger, U.S. Bank, National Association, as
    Syndication Agent, General Electric Capital Corporation and
    LaSalle Bank National Association, as Co-Documentation Agents
    and Lehman Commercial Paper Inc., as Administrative Agent
    (Incorporated by reference to Exhibit 4.1 to the
    Companys Current Report on Form 8-K dated
    August 4, 2005).                                                                                                                 
|      
|       | 4 | .5          |  | Purchase Agreement, dated as of April 15, 2004, among
    Extendicare Health Services, Inc., the Guarantors named therein,
    Lehman Brothers, Inc., ABN AMRO Incorporated and
    U.S. Bancorp Piper Jaffrey Inc. (Incorporated by reference
    to Exhibit 4.5 to the Companys Registration Statement
    on Form S-4 (Registration No. 333-116927).                                                                                                                                                                                                                                                                                                                                                                                          
|      
|       | 4 | .6          |  | Indenture, dated as of April 22, 2004, among Extendicare
    Health Services, Inc., the Guarantors named therein, as
    Guarantors, and U.S. Bank, N.A., as Trustee. (Incorporated
    by reference to Exhibit 4.6 to the Companys
    Registration Statement on Form S-4 (Registration
    No. 333-116927)).                                                                                                                                                                                                                                                                                                                                                                                                                                   
|      
|       | 4 | .7          |  | Exchange and Registration Rights Agreement, dated as of
    April 22, 2004, among Extendicare Health Services, Inc.,
    the Guarantors named therein, Lehman Brothers, Inc., ABN AMRO
    Incorporated and U.S. Bancorp Piper Jaffrey Inc.
    (Incorporated by reference to Exhibit 4.7 to the
    Companys Registration Statement on Form S-4
    (Registration No. 333-116927). Pursuant to Item 601(b)
    (4) (iii) of Regulation S-K, the Registrants agree to
    furnish to the Securities and Exchange Commission, upon request,
    any instrument defining the rights of holders of long-term debt
    not being registered that is not filed as an exhibit to this
    Annual Report on Form 10-K                                   
|      
|       | 4 | .8          |  | Senior Unsubordinated and Unsecured $55 Million Note
    between Extendicare Health Services, Inc. and Extendicare
    Holdings, Inc. dated January 27, 2005 (Incorporated by
    referenced to Exhibit 4.3 to the Companys Current
    Report on Form 8-K filed on January 31, 2005).                                                                                                                                                                                                                                                                                                                                                                                                                                                           

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|       |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|------ | -- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |    | Description
|       |    |            
|      
|       | 10 | .1          |  | Asset Purchase Agreement, dated as of July 29, 1998,
    between Extendicare Health Service, Inc. and certain affiliate
    and Omnicare, Inc. and its affiliates (Incorporated by reference
    to the Companys Form 10-K for the year ended
    December 31, 1998).                                                                                                                                                                                                                                  
|      
|       | 10 | .2          |  | Preferred Provider Agreement dated as of July 29, 1998
    between the Company and Omnicare, Inc. (Incorporated by
    reference to the Companys Form 10-K for the year
    ended December 31, 2001).                                                                                                                                                                                                                                                                                                  
|      
|       | 10 | .3          |  | Amended and Restated Subordinate Voting Share Option Plan
    (Incorporated by reference to the Companys Registration
    Statement on Form S-4 (Registration No. 333-97293)).*                                                                                                                                                                                                                                                                                                                        
|      
|       | 10 | .4          |  | Executive Retirement Program (Incorporated by reference to the
    Companys Registration Statement on Form S-4
    (Registration No. 333-97293)).*                                                                                                                                                                                                                                                                                                                                                     
|      
|       | 10 | .5          |  | Form of Deferred Compensation Agreement (which collectively
    constitutes the deferred compensation plan) available to all
    highly compensated employees of the Company as prescribed by the
    Internal Revenue Service, which form of agreement has been
    executed by Mark W. Durishan, Douglas J. Harris, L. William
    Wagner, Roch Carter and Richard L. Bertrand. (Incorporated by
    reference to the Companys Registration Statement on
    Form S-4 (Registration No. 333-97293)).*
|      
|       | 10 | .6          |  | Termination of Employment Arrangement for Mel Rhinelander
    (Incorporated by reference to the Companys Registration
    Statement on Form S-4 (Registration No. 333-97293)).*                                                                                                                                                                                                                                                                                                                        
|      
|       | 10 | .7          |  | Form of Executive Retiring Allowance Agreement entered into by
    Mel Rhinelander and Richard L. Bertrand (Incorporated by
    reference to the Companys Registration Statement on
    Form S-4 (Registration No. 333-97293)).*                                                                                                                                                                                                                                                                       
|      
|       | 10 | .8          |  | Form of Addendum to Executive Retiring Allowance Agreement
    entered into by Mel Rhinelander (Incorporated by reference to
    the Companys Registration Statement on Form S-4
    (Registration No. 333-97293)).*                                                                                                                                                                                                                                                                                   
|      
|       | 10 | .9          |  | ISDA Master Agreement, dated as of April 16, 2004, between
    U.S. Bank National Association and Extendicare Health
    Services, Inc. (Incorporated by reference to Exhibit 10.8
    to the Companys Registration Statement on Form S-4
    (Registration No. 333-116927).                                                                                                                                                                                                                           
|      
|       | 10 | .10         |  | Memorandum of Understanding dated January 31, 2005, by and
    among LTC Properties, Inc. and Texas-LTC Limited Partnership;
    and Extendicare Health Services, Inc., Alpha Acquisition, Inc.,
    Assisted Living Concepts, Inc., and Carriage House Assisted
    Living, Inc. (Incorporated by referenced to Exhibit 10.1 to
    the Companys Current Report on Form 8-K filed on
    January 31, 2005).                                                                                           
|      
|       | 21 |             |  | Subsidiaries of the Registrant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|      
|       | 31 | .1          |  | Certifications of Chairman of the Board and Chief Executive
    Officer .                                                                                                                                                                                                                                                                                                                                                                                                                               
|      
|       | 31 | .2          |  | Certifications of Senior Vice President, Chief Financial Officer
    and Treasurer.                                                                                                                                                                                                                                                                                                                                                                                                                     
|      
|       | 32 |             |  | Written Statement of Chairman of the Board and Chief Executive
    Officer and Senior Vice President, Chief Financial Officer and
    Treasurer pursuant to 18 U.S.C. Section 1350.                                                                                                                                                                                                                                                                                                                     
|      
|       | 99 | .1          |  | Schedule II  Valuation and Qualifying Accounts
    and related Report of Independent Registered Public Accounting
    Firm.                                                                                                                                                                                                                                                                                                                                                                            






|  |                                                                          
|- | -------------------------------------------------------------------------
|* | Represents a management contract or compensatory plan or
    arrangement.

169