##### Table of Contents





UNITED STATES SECURITIES AND
    EXCHANGE COMMISSIONWashington, D.C.
    20549
  Form 10-K
  (Mark One)þ


ANNUAL REPORT PURSUANT TO
    SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
    1934For the Fiscal Year Ended December 31, 2007ORo


TRANSITION REPORT PURSUANT TO
    SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
    1934   Commission
    File Number
    001-33459Skilled Healthcare Group, Inc. (Exact
    Name of Registrant as Specified in its Charter)
  Delaware

20-3934755(State of
    Incorporation)

(I.R.S. Employer Identification
    Number)27442 Portola Parkway, Suite 200
    Foothill Ranch, CA(Address of Principal
    Executive Offices)

92610(Zip Code)   Registrants telephone number:
    (949) 282-5800
 Securities registered pursuant to Section 12(b) of the
    Act:
  Common Stock, $0.001 par value per share

New York Stock Exchange(Title of each class)

(Name of each exchange on which
    registered)   Securities registered pursuant to Section 12(g) of the
    Act: None
  o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. þ
  Rule 12b-2
  Large accelerated
    filer o

Accelerated filer
    o

Non-accelerated
    filer þ
    (Do not check if a smaller reporting company)

Smaller reporting
    company o   Rule 12b-2 o þ
    þ o
  Documents
    Incorporated by Reference:




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##### Table of Contents





TABLE OF
    ADDITIONAL REGISTRANTS
  (State or Other


(Primary StandardJurisdiction of


IndustrialIncorporation or


Classification Code


(I.R.S. Employer(Exact Names of Registrants as Specified in Their
    Charters)

Organization)


Number)


Identification No.)Albuquerque Heights Healthcare and Rehabilitation Center, LLC


Delaware



8051



26-0675040Alexandria Care Center, LLC


Delaware



8051



95-4395382Alta Care Center, LLC


Delaware



8051



20-0081141Anaheim Terrace Care Center, LLC


Delaware



8051



20-0081125Baldwin Healthcare and Rehabilitation Center, LLC


Delaware



8051



20-1854609Bay Crest Care Center, LLC


Delaware



8051



20-0081158Belen Meadows Healthcare and Rehabilitation Center, LLC


Delaware



8051



26-0675094Blue River Rehabilitation Center, LLC


Delaware



8051



20-8386525Briarcliff Nursing and Rehabilitation Center GP, LLC


Delaware



6700



20-0080490Briarcliff Nursing and Rehabilitation Center, LP


Delaware



8051



20-0081646Brier Oak on Sunset, LLC


Delaware



8051



95-4212165Cameron Nursing and Rehabilitation Center, LLC


Delaware



8051



20-8571379Canyon Transitional Rehabilitation Center, LLC


Delaware



8051



26-0675157Carehouse Healthcare Center, LLC


Delaware



8051



20-0080962Carmel Hills Healthcare and Rehabilitation Center, LLC


Delaware



8051



20-4214320Chestnut Property, LLC


Delaware



6500



20-8386994Clairmont Beaumont GP, LLC


Delaware



6700



20-0080531Clairmont Beaumont, LP


Delaware



8051



20-0081662Clairmont Longview GP, LLC


Delaware



6700



20-0080552Clairmont Longview, LP


Delaware



8051



20-0081682Clovis Healthcare and Rehabilitation Center, LLC


Delaware



8051



26-0675210Colonial New Braunfels Care Center, LP


Delaware



8051



20-0081694Colonial New Braunfels GP, LLC


Delaware



6700



20-0080585Colonial Tyler Care Center, LP


Delaware



8051



20-0081705Colonial Tyler GP, LLC


Delaware



6700



20-0080596Comanche Nursing Center, LP


Delaware



8051



20-0081764Coronado Nursing Center GP, LLC


Delaware



6700



20-0080630Coronado Nursing Center, LP


Delaware



8051



20-0081776Devonshire Care Center, LLC


Delaware



8051



20-0080978East Sunrise Property, LLC


Delaware



6500



20-8387041East Walnut Property, LLC


Delaware



6500



20-4214556Elmcrest Care Center, LLC


Delaware



8051



95-4274740Euclid Property, LLC


Delaware



6500



20-8387105Eureka Healthcare and Rehabilitation Center, LLC


Delaware



8051



20-0146285Flatonia Oak Manor GP, LLC


Delaware



6700



20-0080645Flatonia Oak Manor, LP


Delaware



8051



20-0081788Fountain Care Center, LLC


Delaware



8051



20-0081005Fountain Senior Assisted Living, LLC


Delaware



8360



20-0081024 ii




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##### Table of Contents



(State or Other


(Primary StandardJurisdiction of


IndustrialIncorporation or


Classification Code


(I.R.S. Employer(Exact Names of Registrants as Specified in Their
    Charters)

Organization)


Number)


Identification No.)Fountain View Subacute and Nursing Center, LLC


Delaware



8051



95-2506832Glen Hendren Property, LLC


Delaware



6500



20-4214585Granada Healthcare and Rehabilitation Center, LLC


Delaware



8051



20-0146353Guadalupe Valley Nursing Center GP, LLC


Delaware



6700



20-0080693Guadalupe Valley Nursing Center, LP


Delaware



8051



20-0081801Hallettsville Rehabilitation and Nursing Center, LP


Delaware



8051



20-0081807Hallettsville Rehabilitation GP, LLC


Delaware



6700



20-0080721Hallmark Investment Group, Inc.


Delaware



6700



95-4644786Hallmark Rehabilitation GP, LLC


Delaware



8051



20-0083989Hallmark Rehabilitation, LP


Delaware



8051



20-0084046Hancock Park Rehabilitation Center, LLC


Delaware



8051



95-3918421Hancock Park Senior Assisted Living, LLC


Delaware



8051



95-3918420Hemet Senior Assisted Living, LLC


Delaware



8051



20-0081183Highland Healthcare and Rehabilitation Center, LLC


Delaware



8051



20-1854718Holmesdale Healthcare and Rehabilitation Center, LLC


Delaware



8051



20-4214404Holmesdale Property, LLC


Delaware



6500



20-4214625Hospice Care Investments, LLC


Delaware



6700



20-0674503Hospice Care of the West, LLC


Delaware



8080



20-0662232Hospice of the West, LP


Delaware



8080



20-1138347Hospitality Nursing and Rehabilitation Center, LP


Delaware



8051



20-0081818Hospitality Nursing GP, LLC


Delaware



6700



20-0080750Leasehold Resource Group, LLC


Delaware



6500



20-0083961Liberty Terrace Healthcare and Rehabilitation Center, LLC


Delaware



8051



20-4214454Live Oak Nursing Center GP, LLC


Delaware



6700



20-0080766Live Oak Nursing Center, LP


Delaware



8051



20-0081828Louisburg Healthcare and Rehabilitation Center, LLC


Delaware



8051



20-1854747Montebello Care Center, LLC


Delaware



8051



20-0081194Monument Rehabilitation and Nursing Center, LP


Delaware



8051



20-0081831Monument Rehabilitation GP, LLC


Delaware



6700



20-0080781Oak Crest Nursing Center GP, LLC


Delaware



6700



20-0080801Oak Crest Nursing Center, LP


Delaware



8051



20-0081841Oakland Manor GP, LLC


Delaware



6700



20-0080814Oakland Manor Nursing Center, LP


Delaware



8051



20-0081854Pacific Healthcare and Rehabilitation Center, LLC


Delaware



8051



20-0146398Preferred Design, LLC


Delaware



7300



20-4645757Richmond Healthcare and Rehabilitation Center, LLC


Delaware



8051



20-1854787Rio Hondo Subacute and Nursing Center, LLC


Delaware



8051



95-4274737Rossville Healthcare and Rehabilitation Center, LLC


Delaware



8051



20-1854816Royalwood Care Center, LLC


Delaware



8051



20-0081209Seaview Healthcare and Rehabilitation Center, LLC


Delaware



8051



20-0146473 iii




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##### Table of Contents



(State or Other


(Primary StandardJurisdiction of


IndustrialIncorporation or


Classification Code


(I.R.S. Employer(Exact Names of Registrants as Specified in Their
    Charters)

Organization)


Number)


Identification No.)Sharon Care Center, LLC


Delaware



8051



20-0081226Shawnee Gardens Healthcare and Rehabilitation Center, LLC


Delaware



8051



20-1854845SHG Resources, LP


Delaware



6500



20-0084078Skies Healthcare and Rehabilitation Center, LLC


Delaware



8051



26-0675263Skilled Healthcare, LLC


Delaware



7300



20-0084014South Swope Property, LLC


Delaware



6500



20-5855449Southwest Payroll Services, LLC


Delaware



7300



41-2115227Southwood Care Center GP, LLC


Delaware



6700



20-0080824Southwood Care Center, LP


Delaware



8051



20-0081861Spring Senior Assisted Living, LLC


Delaware



8360



20-0081045St. Anthony Healthcare and Rehabilitation Center, LLC


Delaware



8051



26-0675327St. Catherine Healthcare and Rehabilitation Center, LLC


Delaware



8051



20-8386337St. Elizabeth Healthcare and Rehabilitation Center, LLC


Delaware



8051



20-1609072St. John Healthcare and Rehabilitation Center, LLC


Delaware



8051



20-8386810St. Luke Healthcare and Rehabilitation Center, LLC


Delaware



8051



20-0366729St. Joseph Transitional Rehabilitation Center, LLC


Delaware



8051



20-4974918St. Theresa Healthcare and Rehabilitation Center, LLC


Delaware



8051



26-0675370Summit Care Corporation


Delaware



6700



95-3656297Summit Care Pharmacy, Inc.


Delaware



6700



95-3747839Sycamore Park Care Center, LLC


Delaware



8051



95-2260970Texas Cityview Care Center GP, LLC


Delaware



6700



20-0080841Texas Cityview Care Center, LP


Delaware



8051



20-0081871Texas Heritage Oaks Nursing and Rehabilitation Center GP, LLC


Delaware



6700



20-0080949Texas Heritage Oaks Nursing and Rehabilitation Center, LP


Delaware



8051



20-0081888The Clairmont Tyler GP, LLC


Delaware



6700



20-0080856The Clairmont Tyler, LP


Delaware



8051



20-0081909The Earlwood, LLC


Delaware



8051



20-0081060The Heights of Summerlin, LLC


Delaware



8051



20-1380043The Rehabilitation Center of Albuquerque, LLC


Delaware



8051



26-0675426The Rehabilitation Center of Raymore, LLC


Delaware



8051



20-8386866The Woodlands Healthcare Center GP, LLC


Delaware



6700



20-0080888The Woodlands Healthcare Center, LP


Delaware



8051



20-0081923Town and Country Manor GP, LLC


Delaware



6700



20-0080866Town and Country Manor, LP


Delaware



8051



20-0081914Valley Healthcare Center, LLC


Delaware



8051



20-0081076Villa Maria Healthcare Center, LLC


Delaware



8051



20-0081090Vintage Park at Atchison, LLC


Delaware



8360



20-1854925 iv




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##### Table of Contents



(State or Other


(Primary StandardJurisdiction of


IndustrialIncorporation or


Classification Code


(I.R.S. Employer(Exact Names of Registrants as Specified in Their
    Charters)

Organization)


Number)


Identification No.)Vintage Park at Baldwin City, LLC


Delaware



8360



20-1854971Vintage Park at Gardner, LLC


Delaware



8360



20-1855022Vintage Park at Lenexa, LLC


Delaware



8360



20-1855099Vintage Park at Louisburg, LLC


Delaware



8360



20-1855153Vintage Park at Osawatomie, LLC


Delaware



8360



20-1855502Vintage Park at Ottawa, LLC


Delaware



8360



20-1855554Vintage Park at Paola, LLC


Delaware



8360



20-1855675Vintage Park at Stanley, LLC


Delaware



8360



20-1855749Wathena Healthcare and Rehabilitation Center, LLC


Delaware



8051



20-1854880West Side Campus of Care GP, LLC


Delaware



6700



20-0080879West Side Campus of Care, LP


Delaware



8051



20-0081918Willow Creek Healthcare Center, LLC


Delaware



8051



20-0081112Woodland Care Center, LLC


Delaware



8051



20-0081237      v




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##### 



SKILLED
    HEALTHCARE GROUP, INC.
  ANNUAL
    REPORT
  INDEX
  
   PageItem 1.

Business


1Item 1A.

Risk Factors


19Item 1B.

Unresolved Staff Comments


36Item 2.

Properties


36Item 3.

Legal Proceedings


36Item 4.

Submission of Matters to a Vote of Security
    Holders


36Item 5.

Market For Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities


37Item 6.

Selected Financial Data


38Item 7.

Managements Discussion and Analysis of
    Financial Condition and Results of Operations


42Item 7A.

Quantitative and Qualitative Disclosures About
    Market Risk


73Item 8.

Financial Statements and Supplementary Data


74Item 9.

Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure


74Item 9A.

Controls and Procedures


74Item 9AT.

Controls and Procedures


74Item 9B.

Other Information


75Item 10.

Directors, Executive Officers and Corporate
    Governance


75Item 11.

Executive Compensation


75Item 12.

Security Ownership of Certain Beneficial Owners
    and Management and Related Stockholder Matters


75Item 13.

Certain Relationships and Related Transactions,
    and Director Independence


75Item 14.

Principal Accountant Fees and Services


75Item 15.

Exhibits and Financial Statement Schedules


76SIGNATURES


80EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32   vi




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##### Table of Contents



PART I
  Item 1.
    Business  Overview
  References in this report to the Company,
    we, us and our refer to
    Skilled Healthcare Group, Inc. and its subsidiaries, unless the
    context requires otherwise.
    2007
    Acquisitions
        Operations
      Long-Term
    Care Services Segment
  Skilled
    Nursing Facilities
   1




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Express
    Recovery tm Express
    Recovery tm Express
    Recovery tm Express
    Recovery tm Express
    Recovery tm Express
    Recovery tm
  Assisted
    Living Facilities
    Ancillary
    Services Segment
  Rehabilitation
    Therapy Services
      Hospice
    Care
   2




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Equity
    Investment in Pharmacy Joint Venture
    Our Local
    Referral Network
      Payment
    Sources
   3




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##### Table of Contents



Percentage Skilled Nursing Patient DaysYear Ended December 31,2007


2006


2005Medicare


18.1
%


18.0
%


17.8
%Managed care


6.0



5.5



4.6Skilled mix


24.1



23.5



22.4Private and other


17.0



16.6



16.2Medicaid


58.9



59.9



61.4Total


100.0
%


100.0
%


100.0
%     Year Ended December 31,2007


2006


2005Medicare


36.8
%


36.0
%


36.3
%Managed care


8.5



8.1



7.3Private pay and other


23.7



23.9



22.9Quality mix


69.0



68.0



66.5Medicaid


31.0



32.0



33.5Total


100.0
%


100.0
%


100.0
%   Sources
    of Reimbursement
    Medicare.
  
    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 the individual has qualified for
    Medicare coverage by a
    three-day
    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. Covered services include
    supervised nursing care, room and 4




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board, social services, pharmaceuticals and supplies as well as
    physical, speech and occupational therapies and other necessary
    services provided by nursing facilities. Medicare Part A also
    covers hospice care.  
    Part B.  Supplemental Medicare insurance,
    which requires the beneficiary to pay monthly premiums, covers
    physician services, limited drug coverage 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.          speech-language speech-language
   5




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##### Table of Contents



Medicaid.
 6




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##### Table of Contents



cost-based
 7




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##### Table of Contents




    California.  In 2005, under State Assembly Bill
    1629, California Medicaid, known as Medi-Cal, switched from a
    prospective payment system to a prospective cost-based system
    for freestanding nursing facilities, which is facility-specific,
    based upon the cost of providing care at that facility. State
    Assembly Bill 1629 included both a rate increase, as well as a
    quality assurance fee that is a provider tax. State Assembly
    Bill 1629 is scheduled to expire, with its prospective
    cost-based system and quality assurance fee becoming
    inoperative, on July 31, 2009, unless a later enacted
    statute extends this date.
    Texas.  Texas has a prospective cost-based
    system that is facility-specific, based upon patient acuity mix
    for that facility. Effective September 1, 2008, Texas will
    transition to a patient-specific rate setting method using a RUG
    classification system similar to the Medicare program but with
    Texas standardized case mix indexing.
    Kansas.  The Kansas Medicaid reimbursement
    system is prospective cost-based and is case mix adjusted for
    resident activity levels.
    Missouri.  The Missouri Medicaid reimbursement
    system is prospective cost-based. The facility-specific rate is
    composed of five cost components: (i) patient care;
    (ii) ancillary care; (iii) administration;
    (iv) capital; and (v) working capital. Missouri has a
    provider tax similar to the previously mentioned California
    provider tax.
    Nevada.  Nevadas reimbursement system is
    prospective cost-based, adjusted for patient acuity mix and
    designed to cover all costs except those currently associated
    with property, return on equity and certain ancillaries Property
    cost is reimbursed at a prospective rate for each facility.
    Nevada has a provider tax similar to the previously mentioned
    California provider tax.
    New Mexico.  New Mexicos reimbursement
    system is a prospective cost-based system that is rebased every
    three years. New Mexicos Medicaid program reimburses
    nursing facilities at the lower of the facilitys billed
    charges or a prospective per diem rate. This per diem rate is
    specific for the facility and determined on the basis of the
    facilitys base-year allowable costs, constrained by rate
    ceilings. In addition, the per diem rate is subject to final
    adjustment for specified additional costs and inflationary
    trends.    Managed Care.
  Private Pay and Other.
  Reimbursement
    for Specific Services
  Reimbursement for Skilled Nursing
    Services.
    Reimbursement for Assisted Living
    Services.
 8




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##### Table of Contents



Reimbursemen for Rehabilitatio Therap Services.
    Reimbursement for Hospice Services. 90-day 60-day
        Government
    Regulation
  General
     9




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##### Table of Contents



Civil
    and Criminal Fraud and Abuse Laws and Enforcement
        Anti-Kickback
    Statute
     10




---



##### Table of Contents



Stark
    Law
          False
    Claims
  and/or
 11




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##### Table of Contents



Health
    Insurance Portability and Accountability Act of
    1996
       12




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##### Table of Contents



State
    Privacy Laws
  and/or
  Certificates
    of Need and Other Regulatory Matters
    State
    Facility Operating License Requirements
    Rehabilitation
    License Requirements
    Regulation
    of our Joint Venture Institutional Pharmacy
     13




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##### Table of Contents



Competition
    Express
    Recovery tm
  third-party
    for-profit
  Labor
    Risk
    Management
  follow-up
 14




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##### Table of Contents



Insurance
    General
    and Professional Liability Insurance
  occurrence-based
    Workers
    Compensation
      Tort
    Law Environment
   15




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##### Table of Contents



Environmental
    Matters
    and/or and/or and/or
  Customers
   16




---



##### Table of Contents



Executive
    Officers of the Registrant
    Name

Age

PositionBoyd Hendrickson


63


Chairman of the Board, Chief Executive Officer and DirectorJose Lynch


38


President, Chief Operating Officer and DirectorJohn E. King(1)


47


Executive Vice President, Treasurer and Chief Financial OfficerDevasis Ghose(1)


54


Executive Vice President, Treasurer and Chief Financial OfficerRoland Rapp


46


Executive Vice President, General Counsel and SecretaryMark Wortley


52


Executive Vice President and President of Ancillary SubsidiariesChristopher N. Felfe


43


Senior Vice President of Finance and Chief Accounting OfficerSusan Whittle


60


Senior Vice President and Chief Compliance Officer     (1)
    
    John King will be stepping down from his position as Executive
    Vice President, Treasurer and Chief Financial Officer in the
    latter part of the first quarter of 2008. Upon termination of
    Mr. Kings employment, Devasis Ghose will become our
    Executive Vice President, Treasurer and Chief Financial Officer.  Boyd Hendrickson, 63, Chairman of the Board, Chief Executive
    Officer and Director.
  Jose Lynch, 38, President, Chief Operating Officer and
    Director.
  Devasis Ghose, 54, Executive Vice President, Treasurer and
    Chief Financial Officer.
 17




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##### Table of Contents



John E. King, 47, Executive Vice President, Treasurer and
    Chief Financial Officer.
  Roland Rapp, 46, Executive Vice President, General Counsel
    and Secretary.
  Mark Wortley, 52, Executive Vice President and President of
    Ancillary Subsidiaries.
  Christopher N. Felfe, 43, Senior Vice President, Finance and
    Chief Accounting Officer.
  Susan Whittle, 60, Senior Vice President and Chief Compliance
    Officer. attorney-at-law.
  Employees
   18




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##### Table of Contents



Available
    Information
  Form 10-K, Form 10-Q, Form 8-K, http://www.skilledhealthcaregroup.com Form 10-K.
  Company
    History
      Item 1A.
    Risk
    Factors      Reductions
    in Medicare reimbursement rates or changes in the rules
    governing the Medicare program could have a material adverse
    effect on our revenue, financial condition and results of
    operations.
   19




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##### Table of Contents




    administrative or legislative changes to base rates or the bases
    of payment;
    limits on the services or types of providers for which Medicare
    will provide reimbursement;
    the reduction or elimination of annual rate increases; or
    an increase in co-payments or deductibles payable by
    beneficiaries.      We
    expect the federal and state governments to continue their
    efforts to contain growth in Medicaid expenditures, which could
    adversely affect our revenue and profitability.
     20




---



##### Table of Contents



(2006-2010).
      Recent
    federal government proposals could limit the states use of
    provider tax programs to generate revenue for their Medicaid
    expenditures, which could result in a reduction in our
    reimbursement rates under Medicaid.
    Revenue
    we receive from Medicare and Medicaid is subject to potential
    retroactive reduction.
     21




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##### Table of Contents



Healthcare
    reform legislation could adversely affect our revenue and
    financial condition.
      We are
    subject to extensive and complex laws and government
    regulations. If we are not operating in compliance with these
    laws and regulations or if these laws and regulations change, we
    could be required to make significant expenditures or change our
    operations in order to bring our facilities and operations into
    compliance.
    
    licensure and certification;
    adequacy and quality of healthcare services;
    qualifications of healthcare and support personnel;
    quality of medical equipment;
    confidentiality, maintenance and security issues associated with
    medical records and claims processing;
    relationships with physicians and other referral sources and
    recipients;
    constraints on protective contractual provisions with patients
    and third-party payors;
    operating policies and procedures;
    addition of facilities and services; and
    billing for services.      
    fraud and abuse;
    quality of care; 22




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##### Table of Contents




    financial relationships with referral sources; and
    the medical necessity of services provided.    We
    face periodic reviews, audits and investigations under federal
    and state government programs and contracts. These audits could
    have adverse findings that may negatively affect our
    business.
    
    refunding amounts we have been paid pursuant to the Medicare or
    Medicaid programs or from managed care payors;
    state or federal agencies imposing fines, penalties and other
    sanctions on us;
    temporary suspension of payment for new patients to the facility;
    decertification or exclusion from participation in the Medicare
    or Medicaid programs or one or more managed care payor networks;
    damage to our reputation;
    the revocation of a facilitys license; and
    loss of certain rights under, or termination of, our contracts
    with managed care payors.    Significant
    legal actions, which are commonplace in our industry, could
    subject us to increased operating costs and substantial
    uninsured liabilities, which would materially and adversely
    affect our results of operations, liquidity and financial
    condition.
   23




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##### Table of Contents



We
    could face significant financial difficultly as a result of one
    or more of the risks discussed above, which could cause us to
    seek protection under bankruptcy laws or could cause our
    creditors to have a receiver appointed on our
    behalf.
          A
    significant portion of our business is concentrated in a few
    markets, and an economic downturn or changes in the laws
    affecting our business in those markets could have a material
    adverse effect on our operating results.
   24




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##### Table of Contents



Possible
    changes in the acuity mix of residents and patients as well as
    payor mix and payment methodologies may significantly reduce our
    profitability or cause us to incur losses.
    It is
    difficult to attract and retain qualified nurses, therapists,
    healthcare professionals and other key personnel, which
    increases our costs relating to these employees and could cause
    us to fail to comply with state staffing requirements at one or
    more of our facilities.
      If we
    are unable to comply with state minimum staffing requirements at
    one or more of our facilities, we could be subject to fines or
    other sanctions.
    on-site
     25




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##### Table of Contents



If we
    fail to attract patients and residents and to compete
    effectively with other healthcare providers, our revenue and
    profitability may decline and we may incur losses.
      Insurance
    coverage may become increasingly expensive and difficult to
    obtain for long-term care companies, and our self-insurance may
    expose us to significant losses.
  and/or
   26




---



##### Table of Contents



If our
    referral sources fail to view us as an attractive long-term care
    provider, our patient base may decrease.
    We may
    be unable to reduce costs to offset decreases in our occupancy
    rates or other expenses completely.
    If we
    do not achieve or maintain a reputation for providing high
    quality of care, our business may be negatively
    affected.
   27




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Consolidation
    of managed care organizations and other third-party payors or
    reductions in reimbursement from these payors may adversely
    affect our revenue and income or cause us to incur
    losses.
      Annual
    caps that limit the amounts that can be paid for outpatient
    therapy services rendered to any Medicare beneficiary may reduce
    our future net operating revenue and profitability or cause us
    to incur losses.
  speech-language
     28




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##### Table of Contents



Delays
    in reimbursement may cause liquidity problems.
          Our
    success is dependent upon retaining key personnel.
    Future
    acquisitions may use significant resources, may be unsuccessful
    and could expose us to unforeseen liabilities.
    
    difficulties integrating acquired operations, personnel and
    accounting and information systems, or in realizing projected
    efficiencies and cost savings;
    diversion of managements attention from other business
    concerns;
    potential loss of key employees or customers of acquired
    companies;
    entry into markets in which we may have limited or no experience; 29




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##### Table of Contents




    increasing our indebtedness and limiting our ability to access
    additional capital when needed;
    assumption of unknown material liabilities or regulatory issues
    of acquired companies, including for failure to comply with
    healthcare regulations or to establish internal financial
    controls; and


    straining of our resources, including internal controls relating
    to information and accounting systems, regulatory compliance,
    logistics and others.    Our
    substantial indebtedness could adversely affect our financial
    health and prevent us from fulfilling our financial
    obligations.
      
    increase our vulnerability to adverse economic and industry
    conditions;
    require us to dedicate a substantial portion of our cash flow
    from operations to payments on our indebtedness, thereby
    reducing the availability of our cash flow to fund working
    capital, capital expenditures and other general corporate
    purposes;
    limit our flexibility in planning for, or reacting to, changes
    in our business and the industry in which we operate;
    place us at a competitive disadvantage compared to our
    competitors that have less debt;
    increase the cost or limit the availability of additional
    financing, if needed or desired, to fund future working capital,
    capital expenditures and other general corporate requirements,
    or to carry out other aspects of our business plan;
    require us to maintain debt coverage and financial ratios at
    specified levels, reducing our financial flexibility; and
    limit our ability to make strategic acquisitions and develop new
    facilities.    Despite
    our substantial indebtedness, we may still be able to incur more
    debt. This could intensify the risks associated with this
    indebtedness.
   30




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##### Table of Contents



If we
    are unable to obtain additional financing on commercially
    reasonable terms or at all, our ability to expand our business
    may be harmed.
    Our
    operations are subject to environmental and occupational health
    and safety regulations, which could subject us to fines,
    penalties and increased operational costs.
  clean-up,
  A
    portion of our workforce has unionized and our operations may be
    adversely affected by work stoppages, strikes or other
    collective actions.
    Natural
    disasters, terrorist attacks or acts of war may seriously harm
    our business.
   31




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##### Table of Contents



The
    efficient operation of our business is dependent on our
    information systems.
    Risks
    Related to Ownership of Our Class A Common Stock
  We are
    controlled by Onex Corporation, whose interests may conflict
    with yours.
      If our
    stock price is volatile, purchasers of our class A common
    stock could incur substantial losses.
    
    the depth and liquidity of the market for our class A
    common stock;
    developments generally affecting the healthcare industry;
    investor perceptions of us and our business;
    actions by institutional or other large stockholders;
    strategic actions, such as acquisitions or restructurings, or
    the introduction of new services by us or our competitors;
    new laws or regulations or new interpretations of existing laws
    or regulations applicable to our business;
    litigation and governmental investigations;
    changes in accounting standards, policies, guidance,
    interpretations or principles; 32




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##### Table of Contents




    adverse conditions in the financial markets or general economic
    conditions, including those resulting from war, incidents of
    terrorism and responses to such events;
    sales of class B common stock by Onex, us or members of our
    management team;
    additions or departures of key personnel; and
    our results of operations, financial performance and future
    prospects.    If
    securities or industry analysts do not publish research or
    reports about our business, if they change their recommendations
    regarding our stock adversely or if our operating results do not
    meet their expectations, our stock price and trading volume
    could decline.
    We do
    not intend to pay dividends on our class A common
    stock.
    Failure
    to achieve and maintain effective internal controls could result
    in a restatement of our financial statements, cause investors to
    lose confidence in our financial statements and our company and
    have a material adverse effect on our business.
     33




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##### Table of Contents



Substantial
    future sales of our class A or class B common stock in
    the public market may cause the price of our stock to
    decline.
      We are
    a controlled company within the meaning of The NYSE
    rules and, as a result, qualify for and rely on exemptions from
    certain corporate governance requirements.
    
    a majority of the board of directors consist of independent
    directors;
    the nominating and corporate governance committee be entirely
    composed of independent directors with a written charter
    addressing the committees purpose and responsibilities; 34




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##### Table of Contents




    the compensation committee be entirely composed of independent
    directors with a written charter addressing the committees
    purpose and responsibilities; and
    there be an annual performance evaluation of the nominating and
    corporate governance and compensation committees.    Our
    amended and restated certificate of incorporation, bylaws and
    Delaware law contain provisions that could discourage
    transactions resulting in a change in control, which may
    negatively affect the market price of our class A common
    stock.
    
    our board of directors is authorized, without prior stockholder
    approval, to create and issue preferred stock, commonly referred
    to as blank check preferred stock, with rights
    senior to those of our class A common stock and
    class B common stock;
    advance notice requirements for stockholders to nominate
    individuals to serve on our board of directors or to submit
    proposals that can be acted upon at stockholder meetings;
    provided, that prior to the date that the total number of
    outstanding shares of our class B common stock is less than
    10% of the total number of shares of common stock outstanding,
    which we refer to as the Transition Date, no such requirement is
    required for holders of at least 10% of our outstanding
    class B common stock;
    our board of directors is classified so not all of the members
    of our board of directors are elected at one time, which may
    make it more difficult for a person who acquires control of a
    majority of our outstanding voting stock to replace our
    directors;
    following the Transition Date, stockholder action by written
    consent will be prohibited;
    special meetings of the stockholders are permitted to be called
    only by the chairman of our board of directors, our chief
    executive officer or by a majority of our board of directors;
    stockholders are not permitted to cumulate their votes for the
    election of directors;
    newly created directorships resulting from an increase in the
    authorized number of directors or vacancies on our board of
    directors will be filled only by majority vote of the remaining
    directors;
    our board of directors is expressly authorized to make, alter or
    repeal our bylaws; and
    stockholders are permitted to amend our bylaws only upon
    receiving at least
    662/3%
    of the votes entitled to be cast by holders of all outstanding
    shares then entitled to vote generally in the election of
    directors, voting together as a single class.   35




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##### Table of Contents



Item 1B.
    Unresolved
    Staff Comments    Item 2.
    Properties      Owned Facilities


Leased Facilities


Total FacilitiesLicensed





Licensed





LicensedNumber


Beds


Number


Beds


Number


BedsCalifornia


14



1,513



17



2,055



31



3,568Texas


21



3,173











21



3,173Kansas


16



904











16



904Nevada










2



290



2



290Missouri


7



1,023











7



1,023New Mexico


2



208



8



972



10



1,180Total


60



6,821



27



3,317



87



10,138Skilled nursing


49



6,132



25



3,051



74



9,183Assisted living


11



689



2



266



13



955     Item 3.Legal
    Proceedings
    Item 4.
    Submission
    of Matters to a Vote of Security Holders   36




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##### Table of Contents



PART II
  Item 5.Market
    for Registrants Common Equity, Related Stockholder Matters
    and Issuer Purchases of Equity Securities
    Year Ended December 31, 2007

High ($)


Low ($)Second quarter (May 15 to June 30)


16.57



14.75Third quarter


16.30



13.02Fourth quarter


16.81



14.14     Dividend
    Payment
    Purchases
    of Equity Securities by the Issuer and Affiliated
    Purchasers
    Securities
    Authorized for Issuance Under Equity Compensation
    Plans
       37




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##### Table of Contents



Item 6.
    Selected
    Financial Data    SELECTED
    CONSOLIDATED FINANCIAL DATA
  Years Ended December 31,2007


2006


2005


2004


2003Successor


Successor


Predecessor


Predecessor


Predecessor(In thousands, except per share data)Consolidated Statement of Operations DataRevenue

$
634,607


$
531,657


$
462,847


$
371,284


$
316,939Expenses:Cost of services (exclusive of rent cost of revenue and
    depreciation and amortization shown below)


473,465



394,936



347,228



281,395



243,520Rent cost of revenue


12,854



10,027



9,815



7,883



7,168General and administrative


47,916



39,872



43,784



25,148



19,219Depreciation and amortization


17,687



13,897



9,991



8,597



8,069551,922



458,732



410,818



323,023



277,976Total other income (expenses), net


(52,584
)


(43,384
)


(44,251
)


(30,108
)


(44,259
)Income (loss) before income taxes, discontinued operations and
    the cumulative effect of a change in accounting principle


30,101



29,541



7,778



18,153



(5,296
)Provision for (benefit from) income taxes


12,952



12,204



(13,048
)


4,421



(1,645
)Income (loss) before discontinued operations and cumulative
    effect of a change in accounting principle


17,149



17,337



20,826



13,732



(3,651
)Discontinued operations, net of tax










14,740



2,789



1,966Cumulative effect of a change in accounting principle, net of tax










(1,628
)






(12,261
)Net income (loss)


17,149



17,337



33,938



16,521



(13,946
)Accretion on preferred stock


(7,354
)


(18,406
)


(744
)


(469
)


Net income(loss) attributable to common stockholders

$
9,795


$
(1,069
)

$
33,194


$
16,052


$
(13,946
)Net Income (loss) Per Share Data:Net income (loss) per common share, basic

$
0.36


$
(0.09
)

$
27.01


$
13.45


$
(12.06
)Net income (loss) per common share, diluted

$
0.35


$
(0.09
)

$
25.73


$
12.47


$
(12.06
)Weighted average common shares outstanding, basic


27,062



11,638



1,229



1,194



1,157Weighted average common shares outstanding, diluted


27,715



11,638



1,290



1,287



1,157Other Financial DataCapital expenditures (excluding acquisitions)

$
29,398


$
22,267


$
11,183


$
8,212


$
6,019Net cash provided by (used in) operating activities


30,530



34,415



15,004



48,358



(15,221
)Net cash used in investing activities


(123,985
)


(74,376
)


(223,785
)


(45,230
)


(26,093
)Net cash provided by (used in) financing activities


95,646



5,644



241,253



(1,132
)


23,486EBITDA(1)


90,311



88,536



57,561



51,120



19,817EBITDA margin(1)


14.2
%


16.7
%


12.4
%


13.8
%


6.3
%Adjusted EBITDA(1)


101,975



88,725


$
77,778


$
58,559


$
45,459Adjusted EBITDA margin(1)


16.1
%


16.7
%


16.8
%


15.8
%


14.3
%   38




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##### Table of Contents



As of December 31,2007


2006


2005


2004


2003Successor


Successor


Successor


Predecessor


Predecessor(In thousands)Balance Sheet DataCash and cash equivalents

$
5,012


$
2,821


$
37,138


$
4,666


$
2,670Working capital


55,122



19,628



59,130



15,036



(9,109
)Property and equipment, net


294,281



230,904



191,151



192,397



157,146Total assets


970,107



838,695



797,082



308,860



260,407Long-term debt (including current portion and the revolving
    credit facility)


458,436



469,055



463,309



280,885



254,040Total stockholders equity (deficit)


374,469



240,648



222,927



(50,475
)


(82,313
)   Notes
  (1)
    
    We define EBITDA as net income (loss) before depreciation,
    amortization and interest expense (net of interest income) and
    the provision for (benefit from) income taxes. EBITDA margin is
    EBITDA as a percentage of revenue. We prepare Adjusted EBITDA by
    adjusting EBITDA (each to the extent applicable in the
    appropriate period) for:  
    discontinued operations, net of tax;
    the effect of a change in accounting principle, net of tax;
    the change in fair value of an interest rate hedge;
    reversal of a charge related to the decertification of a
    facility;
    gains or losses on sale of assets;
    provision for the impairment of long-lived assets;
    the write-off of deferred financing costs of extinguished debt;
    reorganization expenses; and
    fees and expenses related to the Transactions.       39




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##### Table of Contents



period-to-period
        
    they do not reflect our cash expenditures, or future
    requirements, for capital expenditures or contractual
    commitments;
    they do not reflect changes in, or cash requirements for, our
    working capital needs;
    they do not reflect the interest expense, or the cash
    requirements necessary to service interest or principal
    payments, on our debt;
    they do not reflect any income tax payments we may be required
    to make;
    although depreciation and amortization are non-cash charges, the
    assets being depreciated and amortized will often have to be
    replaced in the future, and EBITDA and Adjusted EBITDA do not
    reflect any cash requirements for such replacements;
    they are not adjusted for all non-cash income or expense items
    that are reflected in our consolidated statements of cash flows;
    they do not reflect the impact on earnings of charges resulting
    from certain matters we consider not to be indicative of our
    on-going operations; and
    other companies in our industry may calculate these measures
    differently than we do, which may limit their usefulness as
    comparative measures.   40




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##### Table of Contents



Year Ended December 31,2007


2006


2005


2004


2003Successor


Successor


Predecessor


Predecessor


Predecessor(In thousands)Net income (loss)

$
17,149


$
17,337


$
33,938


$
16,521


$
(13,946
)PlusProvision for (benefit from) income taxes


12,952



12,204



(13,048
)


4,421



(1,645
)Depreciation and amortization


17,687



13,897



9,991



8,597



8,069Interest expense, net of interest income


42,523



45,098



26,680



21,581



27,339EBITDA


90,311



88,536



57,561



51,120



19,817Discontinued operations, net of tax(a)










(14,740
)


(2,789
)


(1,966
)Cumulative effect of a change in accounting principle, net of
    tax(b)










1,628







12,261Change in fair value of interest rate hedge(c)


40



197



165



926



1,006Reversal of charge related to decertification of a facility(d)


















(2,734
)Gain on sale of assets(e)


(24
)


(8
)


(980
)






Premium on redemption of debt and write-off of deferred
    financing costs of extinguished debt(f)


11,648







16,626



7,858



4,111Reorganization expenses(g)










1,007



1,444



12,964Expenses related to the Transactions(h)










16,511







Adjusted EBITDA

$
101,975


$
88,725


$
77,778


$
58,559


$
45,459   Notes
  (a)
    
    In March 2005, we sold our California-based institutional
    pharmacy business and, therefore, the results of operations of
    our California-based pharmacy business have been classified as
    discontinued operations. As our pharmacy business has been sold,
    these amounts are no longer part of our core operating business.(b)
    
    In 2005, we recorded the cumulative effect of a change in
    accounting principle as a result of our adoption of Financial
    Accounting Standards Board, or FASB, Interpretation No. 47,
    Accounting for Conditional Asset Retirement Obligations,or FIN 47. In 2003, we recorded the cumulative effect
    of a change in accounting principle as a result of our adoption
    of Statement of Financial Accounting Standards No. 150
    Accounting for Certain Instruments with Characteristics of
    Both Liabilities and Equity,or SFAS No. 150, which
    requires that financial instruments issued in the form of shares
    that are mandatorily redeemable be classified as liabilities.While these items are required under GAAP, they are not
    reflective of the operating income and losses of our underlying
    business.(c)
    
    Changes in fair value of an interest rate hedge are unrelated to
    our core operating activities and we believe that adjusting for
    these amounts allows us to focus on actual operating costs at
    our facilities.(d)
    
    In 2003, we reversed a charge recorded in 2000 related to a
    facility decertification from the Medicare and Medicaid
    programs. We appealed the decertification decision and in
    November 2002 reached a settlement for a recertification,
    resulting in the recovery of previously uncompensated care
    expenses in the amount of approximately $2.7 million. We
    believe our reversal of this charge is appropriate as the amount
    relates to a charge previously recorded in 2000. Even though the
    reversal is appropriate under GAAP, this amount is not
    reflective of our true operating income for 2003. 41




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##### Table of Contents



(e)
    
    While gains or losses on sales of assets are required under
    GAAP, these amounts are also not reflective of income and losses
    of our underlying business.(f)
    
    Write-offs for deferred financing costs are the result of
    distinct capital structure decisions made by our management and
    are unrelated to our day-to-day operations. These write-offs
    reflect (1) deferred financing costs that have been
    expensed in connection with the prepayment of previously
    outstanding debt and deferred financing costs that were expensed
    upon prepayment of our second lien senior secured term loan in
    connection with the Transactions; and (2) a
    $7.7 million redemption premium on $70.0 million of
    our 11.0% senior subordinated noted that we redeemed in
    June 2007, before their scheduled maturities in 2014.(g)
    
    Represents expenses incurred in connection with our
    Chapter 11 reorganization.(h)
    
    Represents (1) $0.2 million in fees paid by us in
    connection with the Transactions for valuation services and an
    acquisition audit; (2) our forgiveness in connection with
    the completion of the Transactions of a $2.5 million note
    issued to us in March 1998 by our then-Chairman of the Board,
    William Scott; (3) a $4.8 million bonus award expense
    incurred in December 2005 upon the completion of the
    Transactions pursuant to cash bonus agreements between us and
    our Chief Financial Officer, John King, and our Executive Vice
    President and President Ancillary Subsidiaries, Mark Wortley, in
    order to compensate them similarly to the economic benefit
    received by other executive officers who had previously
    purchased restricted stock; and (4) non-cash stock
    compensation charges of $9.0 million incurred in connection
    with restricted stock granted to certain of our senior
    executives. As these expenses relate solely to the Transactions,
    we do not expect to incur these types of expenses in the future.  Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  This Managements Discussion and Analysis of Financial
    Condition and Results of Operations is intended to assist in
    understanding and assessing the trends and significant changes
    in our results of operations and financial condition. Historical
    results may not indicate future performance. Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations should be read in conjunction with Selected
    Financial Data in Item 6 of this report and our
    consolidated financial statements and related notes included
    elsewhere in this report.
  Business
    Overview
       42




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##### Table of Contents



Historical
    Overview
  The
    Transactions
        
    Onex made an equity investment in us of approximately
    $211.3 million in cash;
    the rollover investors made an equity investment in us of
    approximately $1.5 million through settlement of a bonus
    payable and $10.1 million in rollover equity;
    our predecessor company assumed SHG Acquisition Corp.s
    $200 million aggregate principal amount of 11% senior
    subordinated notes;
    we paid cash merger consideration of $240.8 million to our
    predecessor companys then-existing stockholders (other
    than, to the extent of their rollover investment, the rollover
    investors) and option holders;
    our predecessor company amended its existing first lien senior
    secured credit facility to provide for a rollover of its
    then-existing $259.4 million term loan and an increase in
    its revolving credit facility from $50.0 million to
    $75.0 million;
    our predecessor company repaid in full its $110.0 million
    second lien senior secured credit facility;
    our predecessor company paid accrued interest on its second lien
    senior secured term loans;
    we increased the cash on our balance sheet by
    $35.2 million; and
    we paid approximately $19.2 million of fees and expenses,
    including placement and other financing fees, and other
    transaction costs and professional expenses.   43




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##### Table of Contents



Acquisitions
    and Divestitures
              136-bed
  Reorganization
    under Chapter 11
    1
   44




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##### Table of Contents



debtors-in-possession,
  
    emphasized quality of care;
    recruited experienced facility level management and nursing
    staff;
    accelerated revenue growth by improving census and payor mix by
    focusing on higher acuity patients;
    managed administrative and facility level operating expenses by
    streamlining support processes and eliminating redundant costs;
    expanded our administrative support infrastructure by
    establishing a risk management team, legal department and human
    resources department; and
    implemented a new information technology system to provide rapid
    data delivery for management decision making.  Key
    Financial Performance Indicators
    
    Average daily number of patients  the total number of
    patients at our skilled nursing facilities in a period divided
    by the number of days in that period.
    Average daily rates  revenue per patient per day for
    Medicare or managed care, Medicaid and private pay and other,
    calculated as total revenue for Medicare or managed care,
    Medicaid and private pay and other at our skilled nursing
    facilities divided by actual patient days for that revenue
    source for any given period.
    EBITDA  net income (loss) before depreciation,
    amortization and interest expenses (net of interest income) and
    the provision for income taxes. Additionally, Adjusted EBITDA
    means EBITDA as adjusted for non-core operating items. See
    footnote 1 under Item 6 of this report, Selected
    Financial Data for an explanation of the adjustments and a
    description of our uses of, and the limitations associated with
    the use of, EBITDA and Adjusted EBITDA.
    Number of facilities and licensed beds  the total
    number of skilled nursing facilities and assisted living
    facilities that we own or operate and the total number of
    licensed beds associated with these facilities.
    Occupancy percentage  the average daily ratio during
    a measurement period of the total number of residents occupying
    a bed in a skilled nursing facility to the number of available
    beds in the skilled nursing facility. During any measurement
    period, the number of licensed beds in a skilled nursing
    facility that are actually available to us may be less than the
    actual licensed bed capacity due to, among other things, bed
    decertifications.
    Percentage of facilities owned  the number of skilled
    nursing facilities and assisted living facilities that we own as
    a percentage of the total number of facilities. We believe that
    our success is influenced by the significant level of ownership
    of the facilities we operate. 45




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##### Table of Contents




    Quality mix  the amount of non-Medicaid revenue from
    each of our business units as a percentage of total revenue. In
    most states, Medicaid rates are generally the lowest of all
    payor types.
    Skilled mix  the number of Medicare and managed care
    patient days at our skilled nursing facilities divided by the
    total number of patient days at our skilled nursing facilities
    for any given period.    Year Ended December 31,2007


2006


2005Revenue from:Medicare


36.8
%


36.0
%


36.3
%Managed care, private pay, and other


32.2



32.0



30.2Quality mix


69.0



68.0



66.5Medicaid


31.0



32.0



33.5Total


100.0
%


100.0
%


100.0
%Occupancy statistics (skilled nursing facilities):Available patient days


2,973,011



2,637,154



2,529,782Actual patient days


2,523,954



2,270,552



2,155,183Occupancy percentage


84.9
%


86.1
%


85.2
%(1)Skilled mix


24.1
%


23.5
%


22.4
%Average daily number of patients


6,915



6,221



5,905EBITDA(2) (in thousands)

$
90,311


$
88,536


$
57,561Adjusted EBITDA(2) (in thousands)

$
101,975


$
88,725


$
77,778Revenue per patient day (skilled nursing facilities)Medicare

$
495


$
459


$
434Managed care


354



348



343Medicaid


131



124



117Private and other


151



144



134Total average

$
214


$
200


$
187   46




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##### Table of Contents



As of December 31,2007


2006


2005Facilities:Skilled nursing facilities:Owned


49



43



39Leased


25



18



17Total skilled nursing facilities


74



61



56Total licensed beds


9,183



7,648



6,937Assisted living facilities:Owned


11



10



10Leased


2



2



2Total assisted living facilities


13



12



12Total licensed beds


955



794



822Total facilities


87



73



68Available beds in service


9,007



7,467



6,848Percentage of owned facilities


69.0
%


72.6
%


72.1
%     (1)
    
    Occupancy percentage was 86.6% excluding Summerlin, Nevada,
    which was in
    start-up
    phase in 2005.(2)
    
    EBITDA and Adjusted EBITDA are supplemental measures of our
    performance that are not required by, or presented in accordance
    with GAAP. We define EBITDA as net income (loss) before
    depreciation, amortization and interest expense (net of interest
    income) and the provision for (benefit from) income taxes. See
    footnote 1 in Item 6 of this report, Selected
    Financial Data for a description of our use of, and the
    limitations associated with the use of, EBITDA and Adjusted
    EBITDA and a reconciliation to net income, which is the most
    directly comparable financial measure presented in accordance
    with GAAP. 47




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##### Table of Contents



Revenue
  Revenue
    by Service Offering
    2007


2006


2005Revenue


Percentage of


Revenue


Percentage of


Revenue


Percentage ofDollars


Revenue


Dollars


Revenue


Dollars


RevenueLong-term care services segment:Skilled nursing facilities

$
537.7



84.7
%

$
454.3



85.5
%

$
402.0



86.8
%Assisted living facilities


17.3



2.7



15.5



2.9



16.0



3.5Total long-term care segment


555.0



87.4



469.8



88.4



418.0



90.3Ancillary services segment:Third-party rehabilitation therapy services


69.0



10.9



56.7



10.6



42.6



9.2Hospice


10.0



1.6



4.7



0.9



1.9



0.4Total ancillary services segment


79.0



12.5



61.4



11.5



44.5



9.6Other:


0.6



0.1



0.5



0.1



0.3



0.1Total

$
634.6



100.0
%

$
531.7



100.0
%

$
462.8



100.0
%     Sources
    of Revenue
  Long-Term
    Care Services Segment
  Skilled Nursing Facilities.
 48




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##### Table of Contents



Percentage Skilled Nursing Patient Days Year Ended
    December 31,2007


2006


2005Medicare


18.1
%


18.0
%


17.8
%Managed care


6.0



5.5



4.6Skilled mix


24.1



23.5



22.4Private and other


17.0



16.6



16.2Medicaid


58.9



59.9



61.4Total


100.0
%


100.0
%


100.0
%   Assisted Living Facilities.
  Ancillary
    Services Segment
  Rehabilitation Therapy.
  Hospice.
  Regulatory
    and other Governmental Actions Affecting Revenue
    2007


2006


2005Revenue


Percentage of


Revenue


Percentage of


Revenue


Percentage ofDollars


Revenue


Dollars


Revenue


Dollars


RevenueMedicare

$
233.6



36.8
%

$
191.2



36.0
%

$
168.2



36.3
%Medicaid


197.0



31.0



170.2



32.0



155.1



33.5Subtotal Medicare and Medicaid


430.6



67.8



361.4



68.0



323.3



69.8Managed Care


53.6



8.5



43.3



8.1



33.8



7.3Private and Other


150.4



23.7



127.0



23.9



105.7



22.9Total

$
634.6



100.0
%

$
531.7



100.0
%

$
462.8



100.0
%     Medicare.
 49




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##### Table of Contents



speech-language speech-language
     50




---



##### Table of Contents



Medicaid.
  
    California.  In 2005, under State Assembly Bill
    1629, California Medicaid, known as Medi-Cal, switched from a
    prospective payment system to a prospective cost-based system
    for freestanding nursing facilities, which is facility-specific,
    based upon the cost of providing care at that facility. State
    Assembly Bill 1629 51




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##### Table of Contents



included both a rate increase, as well as a quality assurance
    fee that is a provider tax. The provider tax is a mechanism for
    states to obtain additional federal funding for the states
    Medicaid program. State Assembly Bill 1629 is scheduled to
    expire, with its prospective cost-based system and quality
    assurance fee becoming inoperative, on July 31, 2009,
    unless a later enacted statute extends this date.  
    Texas.  Texas has a prospective cost-based
    system that is facility-specific based upon patient acuity mix
    for that facility. Effective September 1, 2008, Texas will
    transition to a patient-specific rate setting method using a RUG
    classification system similar to the Medicare program, but with
    Texas standardized case mix indexing.
    Kansas.  The Kansas Medicaid reimbursement
    system is prospective cost-based and is case mix adjusted for
    resident activity levels.
    Missouri.  The Missouri Medicaid reimbursement
    system is prospective cost-based. The facility-specific rate is
    composed of five cost components: (i) patient care;
    (ii) ancillary care; (iii) administration;
    (iv) capital; and (v) working capital. Missouri has a
    provider tax similar to the previously mentioned California
    provider tax.
    Nevada.  Nevadas reimbursement system is
    prospective cost-based, adjusted for patient acuity mix and
    designed to cover all costs except those currently associated
    with property, return on equity and certain ancillaries.
    Property cost is reimbursed at a prospective rate for each
    facility. Nevada has a provider tax similar to the previously
    mentioned California provider tax.
    New Mexico.  New Mexicos reimbursement
    system is a prospective cost-based system that is rebased every
    three years. New Mexicos Medicaid program reimburses
    nursing facilities at the lower of the facilitys billed
    charges or a prospective per diem rate. This per diem rate is
    specific for the facility and determined on the basis of the
    facilitys base-year allowable costs, constrained by rate
    ceilings. In addition, the per diem rate is subject to final
    adjustment for specified additional costs and inflationary
    trends.      Primary
    Expense Components
  Cost
    of Services
      General
    and Administrative
   52




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##### Table of Contents




    increased salaries, bonuses and benefits necessary to attract
    and retain qualified accounting professionals as we seek to
    expand the size and enhance the skills of our accounting and
    finance staff;
    increased professional fees as we complete the process of
    complying with Section 404 of the Sarbanes-Oxley Act,
    including incurring additional audit fees in connection with our
    independent registered public accounting firms audit of
    our assessment of our internal controls over financial reporting;
    increased costs associated with developing a more robust
    internal audit function;
    increased legal costs associated with reviews of our filings
    with the Securities and Exchange Commission; and
    the incurrence of miscellaneous costs, such as New York Stock
    Exchange fees, investor relations fees, SEC filing expenses,
    training expenses, fees for independent directors and increased
    directors and officers liability insurance.  Performance Based Incentive Compensation
    Plan.
  Depreciation
    and Amortization
    Buildings and improvements

15-40 yearsLeasehold improvements

Shorter of the lease term or estimated useful life, generally
    5-10 yearsFurniture and equipment

3-10 years   Rent
    Cost of Revenue
    Dividend
    Accretion on Convertible Preferred Stock
    Critical
    Accounting Policies and Estimates
   53




---



##### Table of Contents



Revenue
    recognition
    Allowance
    for doubtful accounts
    Patient
    liability risks
   54




---



##### Table of Contents



Impairment
    of long-lived assets
      Goodwill
    and Intangible Assets
    Goodwill
    as of December 31, 2007
    start-up
  Goodwill
    Impairment Testing
   55




---



##### Table of Contents



Determination
    of Reporting Units
  Goodwill and other
    Intangible Asset
  
    Long-term care services, which includes our operation of
    skilled nursing and assisted living facilities and is the most
    significant portion of our business,
    Rehabilitation therapy, which provides physical,
    occupational and speech therapy in our facilities and
    unaffiliated facilities, and
    Hospice care, which was established in 2004 and
    provides hospice care in California, Texas and New Mexico.  Income
    Taxes
  Accounting for Uncertainty in Income Taxes  An
    Interpretation of FASB Statement No. 109 Accounting for Income Taxes Business Combinations
      Accounting for Income
    Taxes
   56




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##### Table of Contents



Share-Based
    Payments
  Accounting for Stock-Based
    Compensation
   57




---



##### Table of Contents



Accounting
    for Conditional Asset Retirement Obligations
  Accounting for Conditional Asset
    Retirement Obligations
      Operating
    Leases
  Accounting for Leases Bulletin 85-3, Accounting for Operating Leases with Scheduled Rent
    Increase.
  Recent
    Accounting Standards
  Fair Value Measurements
  The
    Fair Value Option for Financial Assets and Financial
    Liabilities
 58




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##### Table of Contents



Business Combinations
  Noncontrolling Interests in Consolidated Financial
    Statements  an amendment of ARB
    No. 51 not-for-profit
 59




---



##### Table of Contents



Results
    of Operations
    Year Ended December 31,2007


2006


2005Revenue


100
%


100
%


100
%Expenses:Cost of services (exclusive of rent cost of revenue and
    depreciation and amortization shown below)


74.6



74.3



75.0Rent cost of revenue


2.0



1.8



2.1General and administrative


7.6



7.5



9.5Depreciation and amortization


2.8



2.6



2.287.0



86.2



88.8Other income (expenses):Interest expense


(7.0
)


(8.8
)


(6.0
)Interest income


0.2



0.2



0.2Equity in earnings of joint venture


0.3



0.4



0.4Change in fair value of interest rate hedge










Premium on redemption of bond and write-off of deferred
    financing costs


(1.8
)






(3.6
)Forgiveness of stockholder loan










(0.5
)Reorganization expenses










(0.2
)Gain on sale of assets










0.2Total other income (expenses), net


(8.3
)


(8.2
)


(9.5
)Income before provision for (benefit from) income taxes,
    discontinued operations and the cumulative effect of a change in
    accounting principle


4.7



5.6



1.7Provision for (benefit from) income tax


2.0



2.3



(2.8
)Income before discontinued operations and the cumulative effect
    of a change in accounting principle


2.7



3.3



4.5Income from discontinued operations, net of tax










3.2Cumulative effect of a change in accounting principle, net of tax










(0.4
)Net income


2.7
%


3.3
%


7.3
%EBITDA margin(1)


14.2
%


16.7
%


12.4
%Adjusted EBITDA margin(1)


16.1
%


16.7
%


16.8
%     (1)
    
    See footnote 1 to Item 6 of this report, Selected
    Financial Data for a calculation of EBITDA and Adjusted
    EBITDA and for a description of our uses of, and the limitations
    associated with the use of, EBITDA and Adjusted EBITDA.  Year
    Ended December 31, 2007 Compared to Year Ended
    December 31, 2006
  Revenue.
   60




---



##### Table of Contents



third-party
  Cost of Services Expenses.
         61




---



##### Table of Contents



Rent cost of revenue.
  General and Administrative Services
    Expenses.
  Depreciation and Amortization.
  Interest Expense.
  Interest Income.
  Premium on Redemption of Debt and Write-off of Related
    Deferred Financing Costs.
  Provision for Income Taxes.
  EBITDA.
   62




---



##### Table of Contents



Net Income.
  Year
    Ended December 31, 2006 Compared to Year Ended
    December 31, 2005
  Revenue.
      Cost of Services Expenses.
   63




---



##### Table of Contents



Rent cost of revenue.
  General and Administrative Services
    Expenses.
  Depreciation and Amortization.
  Interest Expense.
 64




---



##### Table of Contents



Interest income.
  Write-off of deferred financing
    costs.
  Forgiveness of stockholder loan.
  Provision for (Benefit from) Income Taxes.
  Discontinued operations, net of
    tax.
  EBITDA.
      Net Income.
 65




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##### Table of Contents



Quarterly
    Data
    Three Months EndedDecember 31,


September 30,


June 30,


March 31,


December 31,


September 30,


June 30,


March 31,2007


2007


2007


2007


2006


2006


2006


2006Successor


Successor


Successor


Successor


Successor


SuccessorSuccessor


Successor


(In thousands, except per share data)Consolidated Statement of Operations DataRevenue

$
177,393


$
161,468


$
151,091


$
144,655


$
139,904


$
135,396


$
131,171


$
125,186Expenses:Cost of sales (exclusive of rent cost of revenue and
    depreciation and amortization shown below)


131,932



120,826



113,494



107,213



102,500



101,695



98,430



92,311Rent cost of revenue


4,398



3,235



2,527



2,694



2,570



2,704



2,302



2,451General and administrative


14,008



12,008



10,403



11,497



10,916



10,092



9,298



9,566Depreciation and amortization


5,067



4,420



4,239



3,961



3,458



3,192



3,573



3,674155,405



140,489



130,663



125,365



119,444



117,683



113,603



108,002Other income (expenses):Interest expense


(10,178
)


(9,914
)


(11,926
)


(12,092
)


(11,754
)


(11,693
)


(11,612
)


(11,227
)Premium on redemption of debt and write-off of related deferred
    financing costs










(11,648
)


















Interest income


289



384



587



327



306



254



242



386Other


86



(159
)


97







8











Change in fair value of interest rate hedge


(1
)


(6
)






(33
)


(26
)


(227
)


77



(21
)Equity in earnings of joint venture


329



381



353



540



509



502



511



381Total other income (expenses), net


(9,475
)


(9,314
)


(22,537
)


(11,258
)


(10,957
)


(11,164
)


(10,782
)


(10,481
)Income (loss) before provision for (benefit from) income taxes,
    discontinued operations and cumulative effect of a change in
    accounting principle


12,513



11,665



(2,109
)


8,032



9,503



6,549



6,786



6,703Provision for (benefit from) income taxes


5,329



4,801



(556
)


3,378



3,944



2,588



3,071



2,601Net income (loss)


7,184



6,864



(1,553
)


4,654



5,559



3,961



3,715



4,102Accretion on preferred stock










(2,582
)


(4,772
)


(4,781
)


(4,684
)


(4,540
)


(4,401
)Net (loss) income attributable to common stockholders

$
7,184


$
6,864


$
(4,135
)

$
(118
)

$
778


$
(723
)

$
(825
)

$
(299
)Net (loss) income per share data:Net (loss) income per common share, basic

$
0.20


$
0.19


$
(0.18
)

$
(0.01
)

$
0.07


$
(0.06
)

$
(0.07
)

$
(0.03
)Net (loss) income per common share, diluted

$
0.19


$
0.19


$
(0.18
)

$
(0.01
)

$
0.06


$
(0.06
)

$
(0.07
)

$
(0.03
)Weighted average common shares outstanding, basic


36,249



36,236



23,437



11,959



11,653



11,636



11,634



11,618Weighted average common shares outstanding, diluted


36,886



36,917



23,437



11,959



12,003



11,636



11,634



11,618  66




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##### Table of Contents



Liquidity
    and Capital Resources
    Years Ended December 31,2007


2006


2005(In thousands)Net cash provided by operating activities

$
30,530


$
34,415


$
15,004Net cash used in investing activities


(123,985
)


(74,376
)


(223,785
)Net cash provided by financing activities


95,646



5,644



241,253Net increase (decrease) in cash and equivalents


2,191



(34,317
)


32,472Cash and equivalents at beginning of period


2,821



37,138



4,666Cash and equivalents at end of period

$
5,012


$
2,821


$
37,138   Years
    Ended December 31, 2007 and 2006
        
    $15.8 million was due to a decrease in cash provided by the
    change in other current assets, primarily prepaids, to a
    $3.6 million use of cash in 2007 from a $12.3 million
    provision of cash in 2006, primarily in prepaids and income
    taxes receivable, due to the offset of a $9.4 million
    income tax receivable from 2005 against tax payments in 2006.
    a $5.2 million decrease in cash provided by the change in
    insurance liability risks to a $3.7 million use of cash in
    2007 from a $1.5 million provision of cash in 2006.
    a $8.2 million decrease in cash provided by the change in
    accounts payable and accrued liabilities to a $5.8 million
    provision of cash in 2007 from a $14.0 provision of cash in
    2006, primarily due to the release of tax amounts accrued
    related to the Transactions.  Express
    Recovery tm
   67




---



##### Table of Contents



Years
    Ended December 31, 2006 and 2005
      
    $24.9 million was due to a decrease in cash used by the
    change in other current assets, primarily prepaids and income
    taxes receivable, to a $12.3 million provision of cash in
    2006 from a $12.6 million use of cash in 2005 primarily due
    to the offset of a $9.4 million income tax receivable from
    2005 against tax payments in 2006 as well lower prepaids in 2006
    compared to 2005 primarily due to timing of payments.
    a $3.6 million decrease in cash provided by the change in
    insurance liability risks to a $1.6 million provision of
    cash in 2006 from a $5.2 million provision of cash in 2005.  Express
    Recovery tm Express
    Recovery tm
      
    $211.3 million of equity investments made in us associated
    with the Transactions;
    $123.1 million received from a refinancing of debt in July
    2005;
    $198.7 million received from the issuance of our
    11% senior subordinated notes in December 2005;
    $0.1 million received from the exercise of stock options
    and warrants; and
    $0.1 million in proceeds received from the sale of an
    interest rate hedge.    
    $110.0 million to fully pay-off our second lien term loan;
    $108.6 million to pay a special dividend to our
    stockholders;
    $28.3 million incurred in deferred financing costs,
    purchase of an interest rate hedge and early termination fees
    associated with our new debt issuances;
    $15.7 million to fully redeem our series A preferred
    stock in accordance with our new senior debt structure;
    $15.0 million to reduce the outstanding balance under our
    revolver; and
    $14.4 million in repayments on long-term debt and capital
    leases. 68




---



##### Table of Contents



Cash
    flows from Discontinued Operations
    Principal
    Debt Obligations
        Term Loan
    and Revolving Loan
   69




---



##### Table of Contents



and/or
  Senior
    Subordinated Notes
        12-month
  Capital
    Expenditures
    Express
    Recovery tm Express
    Recovery tm Express
    Recovery tm tm
 70




---



##### Table of Contents



tm
  Liquidity
      Other
    Factors Affecting Liquidity and Capital Resources
  Medical and Professional Malpractice and Workers
    Compensation Insurance.
 71




---



##### Table of Contents



Inflation.
    Seasonality.
  Off
    Balance Sheet Arrangements
    Contractual
    Obligations
    Less Than








More ThanTotal


1 Yr.


1-3 Yrs.


3-5 Yrs.


5 Yrs.Senior subordinated notes

$
216,396


$
14,300


$
28,600


$
28,600


$
144,896First lien credit agreement


399,743



22,322



108,073



269,348



Capital lease obligations


3,840



1,656



2,184







Other long-term debt obligations


4,696



2,681



681



681



653Purchase commitments


11,933



11,933











Operating lease obligations(1)


150,910



16,827



32,385



28,803



72,895$
787,518


$
69,719


$
171,923


$
327,432


$
218,444     (1)
    
    We lease some of our facilities under non-cancelable operating
    leases. The leases generally provide for our payment of property
    taxes, insurance and repairs, and have rent escalation clauses,
    principally based upon the Consumer Price Index or other fixed
    annual adjustments. The amounts shown reflect the future minimum
    rental payments under these leases. 72




---



##### Table of Contents



Item 7A.
    Quantitative
    and Qualitative Disclosures About Market Risk    Interest
    Rate Exposure  Interest Rate Risk
    Management
  90-day
      Fair2008


2009


2010


2011


Thereafter


Total


ValueFixed-rate debt(1)

$
2,534


$
239


$
255


$
272


$
130,903


$
134,203


$
143,303Average interest rate


4.2
%


6.5
%


6.5
%


6.5
%


11.0
%Variable-rate debt

$
2,600


$
2,600


$
70,600


$
2,600


$
243,100


$
321,500


$
306,290Average interest rate(2)


6.0
%


5.5
%


6.8
%


6.4
%


7.1
%     (1)
    
    Excludes unamortized original issue discount of
    $0.7 million on our 11% senior subordinated notes.(2)
    
    Based on implied forward three-month LIBOR rates in the yield
    curve as of December 31, 2007.    Year EndedNotional


Trade


Effective





December 31,


Fair ValueLoan

Amount


Date


Date


Maturity


2007


(Pre-tax)First Lien

$
100,000



10/24/07



10/31/07



12/31/09


$
99


$
1,228   Accounting for
    Derivative Instruments and Hedging Activities
 73




---



##### Table of Contents



Item 8.
    Financial
    Statements and Supplementary Data    Item 9.
    Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosure    Item 9A.
    Controls
    and Procedures  Not applicable.
  Item 9A(T).
    Controls
    and Procedures  Disclosure
    Controls and Procedures
  Rules 13a-15(e) 15d-15(e)
  Form 10-K
  Internal
    Control Over Financial Reporting
  Rule 13a-15(f) 15d-15(f)
   74




---



##### Table of Contents



Item 9B.
    Other
    Information    PART III
  Item 10.
    Directors,
    Executive Officers and Corporate Governance    Code of
    Ethics
  Form 8-K
  Item 11.
    Executive
    Compensation    Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Stockholder Matters    Item 13.
    Certain
    Relationships and Related Transactions, and Director
    Independence    Item 14.
    Principal
    Accountant Fees and Services   75




---



##### 



PART IV
  Item 15.
    Exhibits
    and Financial Statement Schedules  Consolidated Financial Statements and
    Supplementary Data:
     
 PageNumberReport of Registered Public Accounting Firm


F-1Consolidated Balance Sheets at December 31,
    2007 and 2006


F-2Consolidated Statements of Operations for Each of
    the Years in the Three Year Period Ended December 31,
    2007


F-3Consolidated Statements of Stockholders
    Equity (Deficit) for Each of the Years in the Three Year Period
    Ended December 31, 2007


F-4Consolidated Statements of Cash Flows for Each of
    the Years in the Three Year Period Ended December 31,
    2007


F-5Notes to Consolidated Financial Statements


F-6   Financial Statement Schedule:
 PageNumberSchedule II  Valuation and
    Qualifying Accounts


S-1     76




---



##### Table of Contents



Exhibits:
  INDEX OF
    EXHIBITS
  Number

Description2
.1

Agreement and Plan of Merger, dated as of October 22, 2005,
    among SHG Acquisition Corp., SHG Holding Solutions, Inc.
    and Skilled Healthcare Group, Inc. (filed as Exhibit 2.1 to our
    Registration Statement on Form S-1, No. 333-137897, filed on
    October 10, 2006, and incorporated herein by reference).2
.2

Amendment No. 1 to Agreement and Plan of Merger, dated October
    22, 2005, by and between SHG Holding Solutions, Inc. and
    Skilled Healthcare Group, Inc. (filed as Exhibit 2.2 to our
    Registration Statement on Form S-1, No. 333-137897, filed on
    October 10, 2006, and incorporated herein by reference).2
.3

Asset Purchase Agreement, dated as of January 31, 2006, by and
    among Skilled Healthcare Group, Inc., each of the entities
    listed on Schedule 2.1 thereto, M. Terence Reardon and M. Sue
    Reardon, individually and as Trustee of the M. Terence Reardon
    Trust U.T.A. dated June 26, 2003, and M. Sue Reardon and M.
    Terence Reardon, as Trustees of the M. Sue Reardon Trust U.T.A.
    dated June 26, 2003 (filed as Exhibit 2.3 to our Registration
    Statement on Form S-1, No. 333-137897, filed on October 10,
    2006, and incorporated herein by reference).2
.4

Agreement and Plan of Merger, dated as of February 7, 2007, by
    and among SHG Holding Solutions, Inc., and Skilled Healthcare
    Group, Inc. (filed as Exhibit 2.4 to our Registration Statement
    on Form S-1/A, No. 333-137897, filed on February 9, 2007, and
    incorporated herein by reference).2
.5

Asset Purchase Agreement, dated February 8, 2007, by and among
    Skilled Healthcare Group, Inc., Raymore Care Center LLC, Blue
    River Care Center LLC, MLD Healthcare LLC, Blue River Real
    Estate LLC, MLD Real Estate LLC, Melvin Dunsworth and Raymore
    Health Care, Inc. (filed as Exhibit 2.5 to our Registration
    Statement on Form S-1/A, No. 333-137897, filed on April 23,
    2007, and incorporated herein by reference).2
.6

Asset Purchase Agreement, dated as of July 31, 2007, by and
    among Skilled Healthcare Group, Inc. and certain affiliates of
    Laurel Healthcare Providers, LLC (filed as Exhibit 2.6 to our
    Form 10-Q for the quarter ended June 30, 2007, and incorporated
    herein by reference).3
.1

Amended and Restated Certificate of Incorporation of Skilled
    Healthcare Group, Inc. (filed as Exhibit 3.2 to our Form 10-Q
    for the quarter ended June 30, 2007, and incorporated herein by
    reference).3
.2

Amended and Restated By-Laws of Skilled Healthcare Group, Inc.
    (filed as Exhibit 3.4 to our Registration Statement on Form
    S-1/A, No. 333-137897, filed on April 27, 2007, and incorporated
    herein by reference).3
.3

Certificate of Ownership and Merger of Skilled Healthcare Group,
    Inc., dated February 7, 2007 (filed as Exhibit 3.1.1 to our
    Registration Statement on Form S-1/A, No. 333-137897, filed on
    April 27, 2007, and incorporated herein by reference).4
.1

Indenture, dated as of December 27, 2005, by and among SHG
    Acquisition Corp., Wells Fargo Bank, N.A. and certain
    subsidiaries of Skilled Healthcare Group, Inc. (filed as Exhibit
    4.2 to our Registration Statement on Form S-1, No. 333-137897,
    filed on October 10, 2006, and incorporated herein by reference).4
.2

Registration Rights Agreement, dated as of December 27, 2005, by
    and among SHG Acquisition Corp., all the subsidiaries of Skilled
    Healthcare Group, Inc. listed therein, Credit Suisse First
    Boston, LLC and J.P. Morgan Securities, Inc. (filed as
    Exhibit 4.3 to our Registration Statement on Form S-1, No.
    333-137897, filed on October 10, 2006, and incorporated herein
    by reference).4
.3

Investor Stockholders Agreement, dated as of December 27,
    2005, among SHG Holding Solutions, Inc., Onex Partners LP and
    the stockholders listed on the signature pages thereto (filed as
    Exhibit 4.4 to our Registration Statement on Form S-1, No.
    333-137897, filed on October 10, 2006, and incorporated herein
    by reference).4
.4

Employment Agreement dated December 27, 2005, among SHG Holding
    Solutions, Inc. and the persons listed thereon (filed as Exhibit
    4.5 to our Registration Statement on Form S-1,
    No. 333-137897,
    filed on October 10, 2006, and incorporated herein by
    reference). 77




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##### Table of Contents



Number

Description4
.5

Form of specimen certificate for Skilled Healthcare Group,
    Inc.s class A common stock (filed as Exhibit 4.1 to our
    Registration Statement on Form S-1/A, No. 333-137897, filed on
    April 27, 2007, and incorporated herein by reference).4
.6

Form of 11% Senior Subordinated Notes due 2014 (included in
    exhibit 4.5).10
.1*

Skilled Healthcare Group, Inc. Restricted Stock Plan (filed as
    Exhibit 10.1 to our Registration Statement on Form S-1, No.
    333-137897, filed on October 10, 2006 and incorporated herein by
    reference).10
.2*

Form of Restricted Stock Agreement (filed as Exhibit 10.2 to our
    Registration Statement on
    Form S-1,
    No. 333-137897, filed on October 10, 2006 and incorporated
    herein by reference).10
.3

Second Amended and Restated First Lien Credit Agreement, dated
    as of December 27, 2005, by and among SHG Holding Solutions,
    Inc., Skilled Healthcare Group, Inc., the financial institutions
    party thereto, and Credit Suisse, Cayman Islands, as
    administrative agent and collateral agent (filed as Exhibit 10.4
    to our Registration Statement on Form S-1, No. 333-137897, filed
    on October 10, 2006 and incorporated herein by reference).10
.4*

Employment Agreement, dated April 30, 2005, by and between
    Skilled Healthcare Group, Inc. and Boyd Hendrickson (filed as
    Exhibit 10.5 to our Registration Statement on Form S-1,
    No. 333-137897,
    filed on October 10, 2006 and incorporated herein by reference).10
.5*

Employment Agreement, dated December 27, 2005, by and between
    Skilled Healthcare Group, Inc. and Jose Lynch (filed as Exhibit
    10.6 to our Registration Statement on Form S-1, No. 333-137897,
    filed on October 10, 2006 and incorporated herein by reference).10
.6*

Employment Agreement, dated December 27, 2005, by and among
    Skilled Healthcare Group, Inc. and John E. King (filed as
    Exhibit 10.7 to our Registration Statement on Form S-1, No.
    333-137897, filed on October 10, 2006 and incorporated herein by
    reference).10
.7*

Employment Agreement, dated December 27, 2005, by and between
    Skilled Healthcare Group, Inc. and Roland G. Rapp (filed as
    Exhibit 10.8 to our Registration Statement on Form S-1,
    No. 333-137897,
    filed on October 10, 2006 and incorporated herein by reference).10
.8*

Employment Agreement, dated December 27, 2005, by and between
    Skilled Healthcare Group, Inc. and Mark Wortley (filed as
    Exhibit 10.9 to our Registration Statement on Form S-1, No.
    333-137897, filed on October 10, 2006 and incorporated herein by
    reference).10
.9*

Trigger Event Cash Bonus Agreement, dated April 30, 2005, by and
    between Skilled Healthcare Group, Inc. and John E. King (filed
    as Exhibit 10.10 to our Registration Statement on Form S-1,
    No. 333-137897,
    filed on October 10, 2006 and incorporated herein by reference).10
.10*

Trigger Event Cash Bonus Agreement, dated April 30, 2005, by and
    between Skilled Healthcare Group, Inc. and Mark Wortley (filed
    as Exhibit 10.11 to our Registration Statement on Form S-1, No.
    333-137897, filed on October 10, 2006 and incorporated herein by
    reference).10
.11

Lease, dated as of August 26, 2002, by and between CT Foothill
    10/241, LLC, and Fountain View, Inc., and amendments thereto
    (filed as Exhibit 10.13 to our Registration Statement on Form
    S-1,
    No. 333-137897,
    filed on October 10, 2006 and incorporated herein by reference).10
.12

First Amendment to Second Amended and Restated First Lien Credit
    Agreement, dated as of January 31, 2007, by and among Skilled
    Healthcare Group, Inc., SHG Holding Solutions, Inc., the
    financial institutions parties thereto, and Credit Suisse,
    Cayman Islands, as administrative agent and collateral agent
    (filed as Exhibit 10.12 to our Registration Statement on Form
    S-1/A, No. 333-137897, filed on April 23, 2007 and incorporated
    herein by reference).10
.13*

Employment Agreement, dated as of August 14, 2007, by and
    between Skilled Healthcare LLC and Christopher N. Felfe (filed
    as Exhibit 10.1 to our Form 10-Q for the quarter ended September
    30, 2007, and incorporated herein by reference).10
.14*

Side Letter, dated as of August 14, 2007, by and between Skilled
    Healthcare, LLC and Christopher N. Felfe (filed as Exhibit 10.2
    to our Form 10-Q for the quarter ended September 30, 2007, and
    incorporated herein by reference).10
.15*

Skilled Healthcare Group, Inc. 2007 Incentive Award Plan (filed
    as Exhibit 10.3 to our Registration Statement on Form S-1/A, No.
    333-137897, filed on April 27, 2007, and incorporated herein by
    reference). 78




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##### Table of Contents



Number

Description10
.16*

Form of Indemnification Agreement with Skilled Healthcare
    Groups directors, executive officers, and certain
    employees (filed as Exhibit 10.10 to our Registration Statement
    on Form S-1/A,
    No. 333-137897,
    filed on April 27, 2007, and incorporated herein by
    reference).(1)10
.17

Instrument of Joinder, dated as of May 11, 2007, by and among
    Skilled Healthcare Group, Inc., Bank of America, N.A., UBS
    Loan Finance LLC and Credit Suisse, Cayman Islands Branch (filed
    as Exhibit 10.3 to our Form 10-Q for the quarter ended June 30,
    2007, and incorporated herein by reference).10
.18*

Employment Agreement, dated as of November 30, 2007, by and
    between Skilled Healthcare LLC and Devasis Ghose (filed as
    Exhibit 10.1 to our Form 8-K dated November 30, 2007, and
    incorporated herein by reference).23
.1

Consent of Independent Registered Public Accounting Firm.31
.1

Certification pursuant to Section 302 of the Sarbanes-Oxley Act
    of 2002 for Boyd Hendrickson.31
.2

Certification pursuant to Section 302 of the Sarbanes-Oxley Act
    of 2002 for John E. King.32


Certification pursuant to 18 U.S.C. Section 1350, as
    adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
    2002.     *
    
    Management contract or compensatory plan or arrangement.(1)
    
    Skilled Healthcare Group, Inc. has entered into an
    indemnification agreement with the following individuals: Boyd
    Hendrickson, Chairman of the Board, Chief Executive Officer and
    Director; Jose Lynch, President, Chief Operating Officer and
    Director; Devasis Ghose, Executive Vice President, Treasurer and
    Chief Financial Officer (upon John E. King departure); John E.
    King, Executive Vice President, Treasurer and Chief Financial
    Officer; Roland Rapp, General Counsel, Secretary and Chief
    Administrative Officer; Mark Wortley, Executive Vice President
    and President of Ancillary Subsidiaries; Christopher N. Felfe,
    Senior Vice President, Finance and Chief Accounting Officer;
    Susan Whittle, Senior Vice President and Chief Compliance
    Officer; Robert M. Le Blanc, Lead Director; Michael E. Boxer,
    Director; John M. Miller, Director; M. Bernard Puckett,
    Director; Glenn S. Schafer, Director; William C. Scott,
    Director; Michael D. Stephens, Director; Kelly Atkins, Senior
    Vice President of Operations, Pacific Division; Brad Gibson,
    Senior Vice President of Operations, Finance; Matt Moore, Senior
    Vice President of Operations, Midwest Division; Aisha Salaam,
    Senior Vice President of Professional Services.  (b)
    Item 601 Exhibits   79




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##### Table of Contents



SIGNATURES      By
    /s/  Boyd
    Hendrickson          By
    /s/  Boyd
    Hendrickson   Chairman of the Board, 
    Chief Executive Officer and Director
   By
    /s/  Jose
    Lynch   President, Chief Operating Officer and Director
   By
    /s/  John
    E. King   Executive Vice President, Treasurer and
    Chief Financial Officer
    (Principal Financial Officer)
   By
    /s/  Christopher
    N. Felfe   Senior Vice President of Finance
    and Chief Accounting Officer
    (Principal Accounting Officer)
   By
    /s/  Robert
    M. Le Blanc  Lead Director
 80




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##### Table of Contents



By
    /s/  Michael
    Boxer   Director
   By
    /s/  John
    M. Miller, V  Director
   By  Director
   By
    /s/  Glenn
    Schafer  Director
   By
    /s/  William
    Scott  Director
   By
    /s/  Michael
    D. Stephens  Director
 81




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##### Table of Contents



Report of
    Independent Registered Public Accounting Firm           
    F-1




---



##### Table of Contents



Skilled
    Healthcare Group, Inc.
  Consolidated
    Balance Sheets
  December 31,2007


2006(In thousands, except per share data)ASSETSCurrent assets:Cash and cash equivalents

$
5,012


$
2,821Accounts receivable, less allowance for doubtful accounts of
    $9,717 and $7,889 at December 31, 2007 and 2006,
    respectively


112,919



86,168Deferred income taxes


14,968



13,248Prepaid expenses


5,708



2,101Other current assets


11,697



10,296Total current assets


150,304



114,634Property and equipment, net


294,281



230,904Other assets:Notes receivable


5,102



4,968Deferred financing costs, net


11,869



15,764Goodwill


449,710



411,349Intangible assets, net


34,092



33,843Non-current income tax receivable


2,288



1,882Deferred income taxes






1,504Other assets


22,461



23,847Total other assets


525,522



493,157Total assets

$
970,107


$
838,695LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable and accrued liabilities

$
59,218


$
69,136Employee compensation and benefits


29,629



22,693Current portion of long-term debt and capital leases


6,335



3,177Total current liabilities


95,182



95,006Long-term liabilities:Insurance liability risks


24,248



28,306Deferred income tax


2,297



Other long-term liabilities


21,810



8,857Long-term debt and capital leases, less current portion


452,101



465,878Total liabilities


595,638



598,047Stockholders equity:Preferred stock, no shares authorized at December 31, 2007
    and 50 shares authorized, 25 shares Class A
    convertible shares and 25 Class B shares at
    December 31, 2006Class A, $0.001 par value per share; no shares and
    22 shares issued and outstanding at December 31, 2007
    and 2006, respectively, liquidation preference of $0 and $18,652
    at December 31, 2007 and 2006, respectively






18,652Class B, $0.001 par value per share; no shares issued
    and outstanding at December 31, 2007 and 2006, respectively






Preferred stock, 25,000 shares authorized, $0.001 par
    value per share, at December 31, 2007 and no shares
    authorized at December 31, 2006; no shares issued and
    outstanding at December 31, 2007 and 2006, respectively


Common stock, no shares authorized at December 31, 2007 and
    25,350 shares authorized, $0.001 par value per share,
    at December 31, 2006; no shares and 12,636 shares
    issued and outstanding at December 31, 2007 and 2006,
    respectively






13Class A common stock, 175,000 shares authorized,
    $0.001 par value per share, at December 31, 2007 and
    no shares authorized at December 31, 2006; 19,261 and no
    shares issued and outstanding at December 31, 2007 and
    December 31, 2006, respectively


19Class B common stock, 30,000 shares authorized,
    $0.001 par value per share, at December 31, 2007 and
    no shares authorized at December 31, 2006; 17,696 and no
    shares issued and outstanding at December 31, 2007 and
    2006, respectively


18Additional
    paid-in-capital


365,051



221,983Retained earnings


10,134



Accumulated other comprehensive loss


(753
)


Total stockholders equity


374,469



240,648Total liabilities and stockholders equity

$
970,107


$
838,695    F-2




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##### Table of Contents



Skilled
    Healthcare Group, Inc.
  Consolidated Statements of Operations
  Year Ended December 31,2007


2006


2005Successor


Successor


Predecessor(In thousands except per share data)Revenue

$
634,607


$
531,657


$
462,847Expenses:Cost of services (exclusive of rent cost of revenue and
    depreciation and amortization shown below)


473,465



394,936



347,228Rent cost of revenue


12,854



10,027



9,815General and administrative


47,916



39,872



43,784Depreciation and amortization


17,687



13,897



9,991551,922



458,732



410,818Other income (expenses):Interest expense


(44,110
)


(46,286
)


(27,629
)Premium on redemption of debt and write-off of related deferred
    financing costs


(11,648
)






(16,626
)Interest income


1,587



1,188



949Equity in earnings of joint venture


1,603



1,903



1,787Change in fair value of interest rate hedge


(40
)


(197
)


(165
)Reorganization expenses










(1,007
)Forgiveness of stockholder loan










(2,540
)Other


24



8



980Total other income (expenses), net


(52,584
)


(43,384
)


(44,251
)Income before provision for income taxes, discontinued
    operations and cumulative effect of a change in accounting
    principle


30,101



29,541



7,778Provision for (benefit from) income taxes


12,952



12,204



(13,048
)Income before discontinued operations and cumulative effect of a
    change in accounting principle


17,149



17,337



20,826Discontinued operations, net of tax










14,740Cumulative effect of a change in accounting principle, net of tax










(1,628
)Net income


17,149



17,337



33,938Accretion on preferred stock


(7,354
)


(18,406
)


(744
)Net income (loss) attributable to common stockholders

$
9,795


$
(1,069
)

$
33,194Net income (loss) per share data:Income (loss) before discontinued operations and cumulative
    effect of a change in accounting principle per common share,
    basic

$
0.36


$
(0.09
)

$
16.34Discontinued operations per common share, basic










11.99Cumulative effect of a change in accounting principle per common
    share, basic










(1.32
)Net income (loss) per common share, basic

$
0.36


$
(0.09
)

$
27.01Income (loss) before discontinued operations and cumulative
    effect of a change in accounting principle per common share,
    diluted

$
0.35


$
(0.09
)

$
15.56Discontinued operations per common share, diluted










11.43Cumulative effect of a change in accounting principle per common
    share, diluted










(1.26
)Net income (loss) per common share, diluted

$
0.35


$
(0.09
)

$
25.73Weighted average common shares outstanding, basic


27,062



11,638



1,229Weighted average common shares outstanding, diluted


27,715



11,638



1,290    F-3




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##### Table of Contents





Skilled
    Healthcare Group, Inc.
  Consolidated Statements of Stockholders
    Equity (Deficit)
  Class A


Class B





Additional


Retained


OtherPreferred Stock


Common Stock


Common Stock


Common Stock


Deferred


Paid-In


(Deficit)


Comprehensive


Due FromShares


Amount


Shares


Amount


Shares


Amount


Shares


Amount


Comp


Capital


Earnings


Loss


Stockholder


Total(In thousands)PredecessorBalance at December 31, 2004


15


$
15,469



1,194


$
12






$




66


$
1


$
(848
)

$
108,255


$
(170,824
)

$



$
(2,540
)

$
(50,475
)Accretion on preferred stock






498































(498
)














Dividends paid






(967
)






























(107,637
)














(108,604
)Redemption of preferred stock


(15
)


(15,000
)














































(15,000
)Forgiveness of stockholder loan


















































2,540



2,540Exercise of warrants and cash settlement of stock options










43



82







































82Repurchase of common stock










(1
)


























(7
)














(7
)Cancellation of common stock by Bankruptcy Court










(1
)










































Deferred compensation related to restricted stock awards


































(8,940
)


8,940















Stock-based compensation and amortization of deferred
    compensation


































9,788



















9,788Net income










































33,938











33,938







1,235



94











66



1







9,053



(136,886
)










(127,738
)SuccessorEffect of the Onex Transaction










(1,235
)


(94
)










(66
)


(1
)






(9,053
)


136,886











127,738Onex and other equity contributions


22







11,299



12























222,853















222,865Deferred compensation related to restricted stock awards










1,254



1



















(247
)


246















Amortization of deferred compensation


































62



















62Accretion on preferred stock






246































(246
)














Balance at December 31, 2005


22



246



12,553



13



















(185
)


222,853















222,927Proceeds from issuance of stock










5



























100















100Net income










































17,337











17,337Reclassification of deferred compensation upon adopting
    SFAS No. 123R


































185



(185
)














Issuance of restricted stock










78











































Stock-based compensation






































284















284Accretion on preferred stock






18,406































(1,069
)


(17,337
)










Balance at December 31, 2006


22



18,652



12,636



13























221,983















240,648Net income










































17,149











17,149Conversion of preferred stock into class B common stock


(22
)


(26,006
)


















15,928



16







25,990















Conversion of common stock into class B common stock










(12,636
)


(13
)










12,636



13























Issuance of class A common stock in IPO, net of related
    costs


















8,333



8















116,785















116,793Conversion of class B common stock into class A common
    stock


















10,850



11



(10,850
)


(11
)






















Issuance of restricted stock


















78



































Forfeiture of restricted stock


























(18
)


























Stock-based compensation






































632















632Accretion on preferred stock






7,354































(339
)


(7,015
)










Unrealized loss on interest rate swap














































(753
)






(753
)Balance at December 31, 2007





$







$




19,261


$
19



17,696


$
18


$



$
365,051


$
10,134


$
(753
)

$



$
374,469  F-4




---



##### Table of Contents





Skilled
    Healthcare Group, Inc.
  Consolidated Statements of Cash Flows
  Year Ended December 31,2007


2006


2005Successor


Successor


Predecessor(In thousands)Operating ActivitiesNet income

$
17,149


$
17,337


$
33,938Adjustments to reconcile net income to net cash provided by
    operating activities:Depreciation and amortization


17,687



13,897



9,991Reorganization expenses










1,007Provision for doubtful accounts


6,116



5,439



3,968Non-cash stock-based compensation


632



284



9,850Cumulative effect of a change in accounting principle










1,628Gain on sale of assets










(23,892
)Amortization of deferred financing costs


2,640



2,640



1,657Premium on redemption of debt and write-off of deferred
    financing costs


11,648







16,626Forgiveness of stockholder loan










2,540Deferred income taxes


349



(6,363
)


(23,129
)Change in fair value of interest rate hedge


40



197



165Amortization of discount on senior subordinated notes


140



164



Changes in operating assets and liabilities:Accounts receivable


(32,867
)


(29,046
)


(28,242
)Other current assets


(3,578
)


12,267



(12,630
)Accounts payable and accrued liabilities


5,843



14,019



13,983Employee compensation and benefits


6,453



3,588



2,393Non-current income tax receivable


(406
)


(1,882
)


Insurance liability risks


(3,722
)


1,547



5,173Other long-term liabilities


2,406



327



1,015Net cash paid for reorganization costs










(1,037
)Net cash provided by operating activities


30,530



34,415



15,004Investing activitiesChange in notes receivable


(134
)


(1,052
)


171Acquisition of healthcare facilities


(88,447
)


(43,030
)


Proceeds from disposal of property and equipment










41,059Additions to property and equipment


(29,398
)


(22,267
)


(11,183
)Changes in other assets


1,324



(7,680
)


(482
)Cash distributed related to the Onex Transaction


(7,330
)


(347
)


(253,350
)Net cash used in investing activities


(123,985
)


(74,376
)


(223,785
)Financing activitiesBorrowings (repayments) under line of credit


59,500



8,500



(15,000
)Repayments on long-term debt and capital leases


(70,635
)


(2,918
)


(14,362
)Repayments on long-term debt through refinancing










(110,000
)Fees paid for early extinguishment of debt


(7,700
)






(6,300
)Proceeds from issuance of long-term debt










321,786Additions to deferred financing costs of new debt


(2,312
)


(38
)


(21,765
)Redemption of preferred stock










(15,732
)Purchase of treasury stock










(7
)Proceeds from IPO, net of expenses


116,793







Proceeds from exercise of warrants and cash settlement of stock
    options










82Dividends paid










(108,604
)Proceeds from capital contributions related to the Onex
    Transaction










211,300Proceeds from the issuance of new common stock






100



Proceeds from sale of interest rate hedge










130Purchase of interest rate hedge










(275
)Net cash provided by financing activities


95,646



5,644



241,253Increase (decrease) in cash and cash equivalents


2,191



(34,317
)


32,472Cash and cash equivalents at beginning of year


2,821



37,138



4,666Cash and cash equivalents at end of year

$
5,012


$
2,821


$
37,138Supplemental cash flow informationCash paid for:Interest, net of capitalized interest

$
42,042


$
31,620


$
26,068Income taxes

$
13,229


$
2,655


$
25,222Supplemental disclosure of non-cash investing and financing
    activities:Reclassification of accounts receivable to notes receivable

$
2,437


$
2,265


$
    F-5




---



##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES
    TO CONSOLIDATED FINANCIAL STATEMENTS
 (Amounts In Thousands, Except Per Share Data)
  1.
    Description
    of Business  Current
    Business
    The
    Onex Transaction
  Business
    Combinations
     F-6




---



##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
      Issuance of common and preferred stock for cash

$
211,300Issuance of common and preferred stock for rollover consideration


10,065Issuance of common and preferred stock in consideration for
    settlement of accrued liabilities


1,500Total issuance of common and preferred stock


222,865Issuance of 11% Senior Subordinated Notes due 2014


198,668Amended First Lien Credit Agreement, assumed under Agreement


259,350Total sources of financing

$
680,883       Cash paid to stockholders, including amounts held in escrow

$
240,814Rollover consideration


10,065Accrued liability settled in consideration for common and
    preferred stock


1,500Amended First Lien Credit Agreement, assumed under Agreement


259,350Amounts paid to settle Second Lien Credit Agreement


110,000Accrued interest and prepayment penalty on Second Lien Credit
    Agreement


4,798Transaction costs


7,739Deferred financing costs


11,439Total purchase price

$
645,705Net cash retained in successor company from the Onex Transaction

$
35,178    F-7




---



##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
    Purchase price:





$
645,705Cash held in predecessor company


2,744Other current assets


90,628Property and equipment


191,151Identifiable intangible assets


35,823Other long-term assets


63,011Current liabilities


(67,464
)Other long-term liabilities


(66,223
)Net assets acquired






249,670Goodwill





$
396,035     Tangible assets and other long-term liabilities
  
    Land and buildings:  The valuation of land and
    buildings was calculated using an income approach by employing a
    direct capitalization analysis where an estimated market rental
    rate was used to determine the potential income for each
    property. Actual and estimated operating expenses by property
    were then deducted and the resulting net operating income was
    capitalized by a market-derived capitalization rate to determine
    the value of the property. The total fair value assigned to land
    and buildings was $174,383.
    Other property and equipment:  Other property
    and equipment consisted of furniture and equipment and
    construction in progress, for which the fair value was estimated
    to equal net book value as of the date of the Onex Transaction.
    The total fair value assigned to other property and equipment
    was $16,768.
    Other long-term assets and
    liabilities:  Other long-term assets, consisting
    primarily of deferred income taxes, restricted cash, deferred
    financing and deposits, were valued at book value as of the date
    of the Onex Transaction. The total fair value assigned to other
    long-term assets was $63,011. Other long-term liabilities,
    consisting primarily of insurance liability risks and deferred
    income taxes, were valued at book value as of the date of the
    Onex Transaction. The total fair value assigned to other
    long-term liabilities was $66,223.  Intangible assets
    
    Patient lists and managed care contracts:  The
    valuation of patient lists and managed care contracts was
    calculated using an income approach by employing an excess
    earnings method that examined the economic returns contributed
    by the identified tangible and intangible assets of the Company,
    and then isolating the excess return, which was attributed to
    the pool of intangible assets being valued. The excess return
    was then discounted to present value to determine the fair value
    of the patient lists and managed care contracts. The
    amortization periods of the managed care contracts were
    determined to be five years. The amortization period of the
    patient lists was determined to be four months. The fair value
    assigned to managed care contracts and patient lists was $7,700
    and $800, respectively. F-8




---



##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
   
    Leasehold interests:  The valuation of the
    leasehold interests was calculated using a market approach by
    determining the present value of the difference (the
    disadvantage or advantage) between the current and future
    contract lease obligation and the estimated market lease rate
    over the term of the lease for each lease acquired. The
    resulting advantages and disadvantages were aggregated, netted
    and discounted to present value to determine the amount of the
    purchase price to be allocated to leasehold interests. The
    weighted-average amortization period for the leasehold interests
    was determined to be approximately 10 years. The total fair
    value assigned to leasehold interests was $7,012.
    Lease acquisition costs and
    covenants-not-to-compete:  The fair value was
    determined to be book value as of the date of the Onex
    Transaction. The lease acquisition costs were fully amortized in
    2006. The remaining amortization period of the
    covenants-not-to-compete was approximately four years. The total
    fair value assigned to these items was $3,311.
    Trade names:  The valuation of the trade names
    was calculated using an income approach, specifically the
    royalty savings method, by projecting revenue attributable to
    the services using the trade names, the royalty rate that would
    hypothetically be charged by a licensor of the trade name to a
    licensee, and a discount rate to reflect the inherent risk of
    the projected cash flows. The resulting cash flows were then
    discounted to present value to determine the fair value of the
    trade names. The trade names were determined to have an
    indefinite life and therefore were not subject to amortization.
    The total fair value assigned to the trade names was $17,000.    Prior Basis ofAccounting,


MergerBalance Sheet Accounts

December 27, 2005


Adjustments


As AdjustedCash and cash equivalents(1)

$
1,960


$
35,178


$
37,138Other current assets(2)


12,865



6,000



18,865Property and equipment, net(3)


190,903



248



191,151Deferred financing costs, net(4)


7,112



11,439



18,551Deferred income tax asset, net(5)


11,739



(11,718
)


21Goodwill(6)


20,491



375,544



396,035Other intangibles(7)


3,311



32,512



35,823Accounts payable and accrued liabilities(8)


50,251



4,982



55,233Other long-term liabilities(9)


3,580



4,950



8,53011% Senior Subordinated Notes(10)






198,668



198,668Second Lien credit agreement(11)


110,000



(110,000
)


     (1)
    
    Cash and cash equivalents increased by $35,178 as a result of
    financing sources exceeding the purchase price.(2)
    
    Other current assets increased by $6,000 as a result of the
    amount held in escrow for potential tax liabilities.(3)
    
    Property and equipment, net increased by $248 as a result of
    reflecting fixed assets at fair value at the date of the Onex
    Transaction.(4)
    
    Deferred financing costs, net increased by $11,439 as a result
    of the costs related to the financing of the 11% Senior
    Subordinated Notes due 2014.(5)
    
    Net deferred income tax assets decreased as a result of the Onex
    Transaction.(6)
    
    Goodwill of $396,035 represents the excess of the purchase price
    over the fair values of the net assets acquired.(7)
    
    Other intangibles increased by $32,512. Other intangibles are
    listed in Note 4. F-9




---



##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
   (8)
    
    Accounts payable and accrued liabilities increased by $4,982
    primarily as a result of an accrual for amounts due to Heritage
    related to SHGs December 27, 2005 tax return,
    partially offset by accrued interest and a prepayment penalty
    related to the settlement of SHGs Second Lien Credit
    Agreement.(9)
    
    Other long-term liabilities increased by $4,950 to record the
    fair value of certain asset retirement obligations.(10)
    
    Concurrent with the Onex Transaction, 11% Senior
    Subordinated Notes due 2014 with a face value of $200,000 were
    issued at a discount of $1,332.(11)
    
    Concurrent with the Onex Transaction, SHGs Second Lien
    Credit Agreement was settled.    Reorganization
    Under Chapter 11
    debtor-in-possession
    Year EndedDecember 31, 2005Professional fees

$
600Court-related services


40Refinancing costs


5Other fees


362Total

$
1,007     Year EndedDecember 31, 2005Operating cash receipts

$
Cash payments to suppliers for reorganization services:Professional fees


600Court-related services


40Refinancing costs


5Other fees


392Total

$
1,037  F-10




---



##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
  2.
    Summary
    of Significant Accounting Policies  Basis of
    Presentation
    Reclassifications
    Estimates
    and Assumptions
    Revenue
    and Receivables
      2007


2006


2005Revenue


Percentage of


Revenue


Percentage of


Revenue


Percentage ofDollars


Revenue


Dollars


Revenue


Dollars


RevenueMedicare

$
233,660



36.8
%

$
191,263



36.0
%

$
168,144



36.3
%Medicaid


196,978



31.0



170,171



32.0



155,128



33.5Subtotal Medicare and Medicaid


430,638



67.8



361,434



68.0



323,272



69.8Managed Care


53,589



8.5



43,267



8.1



33,844



7.3Private and Other


150,380



23.7



126,956



23.9



105,731



22.9Total

$
634,607



100.0
%

$
531,657



100.0
%

$
462,847



100.0
%     Risks and
    Uncertainties
   F-11




---



##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
      Concentration
    of Credit Risk
    Cash and
    Cash Equivalents
    Property
    and Equipment
    Buildings and improvements

15-40 yearsLeasehold improvements

Shorter of the lease term or estimated useful life, generally
    5-10 yearsFurniture and equipment

3-10 years    F-12




---



##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
  Goodwill
    and Intangible Assets
  Goodwill and Other Intangible Assets, ,
  Determination
    of Reporting Units
    
    Long-term care services, which includes the operation of
    skilled nursing and assisted living facilities and is the most
    significant portion of the Companys business;
    Rehabilitation therapy, which provides physical,
    occupational and speech therapy in Company-operated facilities
    and unaffiliated facilities; and
    Hospice care, which was established in 2004 and provides
    hospice care in Texas, California and New Mexico.  start-up
  Goodwill
    Impairment Testing
      Deferred
    Financing Costs
   F-13




---



##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
  Income
    Taxes
  Accounting for
    Income Taxes
  Accounting for Uncertainty in Income Taxes  An
    Interpretation of FASB Statement No. 109 Income Taxes.
  Impairment
    of Long-Lived Assets
    Interest
    Rate Caps and Swaps
    Stock
    Options and Equity Related Charges
  Share-Based Payments,
   F-14




---



##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
  Accounting for Stock Issued to Employees Accounting for Stock-Based
    Compensation
    Asset
    Retirement Obligations
  Accounting for Conditional Asset Retirement Obligations Accounting for Asset Retirement
    Obligations and/or
        Operating
    Leases
  Accounting for Leases, Bulletin 85-3, Accounting for Operating Leases with Scheduled Rent
    Increases
 F-15




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##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
    Net
    (Loss) Income per Share
  Earnings Per Share
      December 31, 2007Class A


Class B


TotalNet income per share, basicNumerator:Allocation of income attributable to common stockholders

$
4,315


$
5,480


$
9,795Denominator:Weighted-average common shares outstanding


11,922



15,140



27,062Net income per common share, basic

$
0.36


$
0.36


$
0.36Net income per share, dilutedNumerator:Allocation of income attributable to common stockholders

$
4,215


$
5,580


$
9,795Denominator:Weighted-average common shares outstanding


11,922



15,140



27,062Plus: incremental shares related to dilutive effect of stock
    options and restricted stock, if applicable


4



649



653Adjusted weighted-average common shares outstanding


11,926



15,789



27,715Net income per common share, Diluted

$
0.35


$
0.35


$
0.35  F-16




---



##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
    Year Ended December 312006


2005Numerator:Net income, as reported

$
17,337


$
33,938Accretion on preferred stock


(18,406
)


(744
)Net (loss) income attributable to common stockholders

$
(1,069
)

$
33,194Denominator:Weighted average common shares outstanding


11,638



1,229Net (loss) income per common share, basic

$
(0.09
)

$
27.01     Year Ended December 31,2006


2005Numerator:Net (loss) income attributable to common stockholders

$
(1,069
)

$
33,194Net (loss) income attributable to common stockholders plus
    effect of assumed conversions

$
(1,069
)

$
33,194Denominator:Weighted average common shares outstanding


11,638



1,229Plus: incremental shares from assumed conversions, if applicable






61Adjusted weighted average common shares outstanding


11,638



1,290Net (loss) income per common share, diluted

$
(0.09
)

$
25.73   Comprehensive
    Income
      2007

2006

2005Net unrealized loss, net of tax effect of $477 in 2007, $0 in
    2006, and $0 in 2005

$
(753
)

$



$
  F-17




---



##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
  Recent
    Accounting Pronouncements
  Fair Value Measurements
  The
    Fair Value Option for Financial Assets and Financial Liabilities
  Business Combinations
  Noncontrolling Interests in Consolidated Financial
    Statements  an amendment of ARB No. 51 not-for-profit
  3.
    Fair
    Value of Financial Instruments   F-18




---



##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
  Cash
    and Cash Equivalents
    Interest
    Rate Caps and Swaps
    Long-Term
    Debt
    4.
    Intangible
    Assets    Life


AccumulatedCost


(in years)


Amortization


Net BalanceIntangible assets subject to amortization:Covenants
    not-to-compete

$
2,987



5.0


$
(1,467
)

$
1,520Managed care contracts


10,920



5.0



(3,331
)


7,589Leasehold interests


9,062



9.6



(1,689
)


7,373Patient lists


530



0.5



(353
)


177Total

$
23,499



6.7


$
(6,840
)


16,659Intangible assets not subject to amortization:Trade names














17,130Other long-lived intangibles














303Balance at December 31, 2007













$
34,092   F-19




---



##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
  Life


AccumulatedCost


(in years)


Amortization


Net BalanceIntangible assets subject to amortization:Covenants
    not-to-compete

$
2,987



5.0


$
(713
)

$
2,274Managed care contracts


7,700



5.0



(1,541
)


6,159Leasehold interests


9,227



9.5



(817
)


8,410Total

$
19,914



7.1


$
(3,071
)


16,843Intangible assets not subject to amortization:Trade names














17,000Balance at December 31, 2006













$
33,843   5.
    Discontinued
    Operations        2005Revenue

$
13,109Expenses


(12,074
)Gain on sale of assets


22,912Pre-tax income


23,947Provision for income taxes


(9,207
)Discontinued operations, net of taxes

$
14,740   6.
    Acquisitions     F-20




---



##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
    Purchase price and other costs related to the purchase





$
31,376Land and land improvements


1,530Buildings and leasehold improvements


18,071Furniture and equipment


855Total assets acquired






20,456Goodwill





$
10,920       Revenue

$
535,373Income from continuing operations

$
17,518Net loss available to common stockholders

$
(888
)Net loss available to common stockholders per common share, basic

$
(0.08
)Net loss available to common stockholders per common share,
    diluted

$
(0.08
)         Purchase price and other costs related to the purchase





$
30,647Land and land improvements

$
1,360Buildings and leasehold improvements


22,415Furniture and equipment


545Other


90Total assets acquired






24,410Goodwill





$
6,237    F-21




---



##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
    Purchase price and other costs related to the purchase





$
53,234Land and land improvements

$
4,570Buildings and leasehold improvements


12,240Furniture and equipment


2,214Amortizable intangibles


3,880Other


236Total assets acquired






23,140Goodwill





$
30,094     Year Ended December 31,2007


2006Revenue

$
688,005


$
627,955Income from continuing operations

$
16,474


$
17,547Net income (loss) available to common stockholders

$
9,120


$
(859
)Net income (loss) available to common stockholders per common
    share, basic

$
0.34


$
(0.07
)Net income (loss) available to common stockholders per common
    share, diluted

$
0.33


$
(0.07
)   7.
    Business
    Segments    sub-acute,
   F-22




---



##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
  mark-up;
    Long-term


AncillaryCare Services


Services


Other(2)


TotalYear ended December 31, 2007Revenue from external customers

$
555,018


$
78,987


$
602


$
634,607Intersegment revenue


1,448



60,446







61,894Total revenue

$
556,466


$
139,433


$
602


$
696,501Segment capital expenditures

$
27,931


$
479


$
988


$
29,398EBITDA(1)

$
89,680


$
20,296


$
(19,665
)

$
90,311Year ended December 31, 2006Revenue from external customers

$
469,758


$
61,394


$
505


$
531,657Intersegment revenue






51,428







51,428Total revenue

$
469,758


$
112,822


$
505


$
583,085Segment capital expenditures

$
20,086


$
606


$
1,575


$
22,267EBITDA(1)

$
75,213


$
18,828


$
(5,505
)

$
88,536Year ended December 31, 2005Revenue from external customers

$
418,028


$
44,519


$
300


$
462,847Intersegment revenue






43,216



5,176



48,392Total revenue

$
418,028


$
87,735


$
5,476


$
511,239Segment capital expenditures

$
9,724


$
189


$
1,270


$
11,183EBITDA(1)

$
64,348


$
14,801


$
(21,588
)

$
57,561     (1)
    
    EBITDA is defined as net income before depreciation,
    amortization and interest expense (net) and the provision for
    (benefit from) income taxes.(2)
    
    Other includes discontinued operations in 2005. F-23




---



##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
     Long-term


AncillaryCare Services


Services


Other


TotalDecember 31, 2007:Segment total assets

$
600,174


$
71,695


$
298,238


$
970,107Goodwill and intangibles included in total assets

$
447,304


$
36,498


$



$
483,802December 31, 2006:Segment total assets

$
704,797


$
66,358


$
67,540


$
838,695Goodwill and intangibles included in total assets(1)

$
408,642


$
36,550


$



$
445,192     (1)
    
    Goodwill from the Onex Transaction was allocated based on the
    relative fair value of the assets on the date of the Onex
    Transaction.  8.
    Debt    2007


2006Revolving Loan, swing line subfacility, interest rate based on
    prime plus 1.75% (9.0% at December 31, 2007), due 2010

$
8,000


$
4,500Revolving Loan, interest rate based on LIBOR plus 2.75% (7.62%
    at December 31, 2007) collateralized by real property,
    due 2010


60,000



4,000Term Loan, interest rate based on LIBOR plus 2.00% (6.96% at
    December 31, 2007) collateralized by real property,
    due 2012


253,500



256,100Senior Subordinated Notes, interest rate 11.0%, with an original
    issue discount of $652 and $1,168 at December 31, 2007 and
    2006, respectively, interest payable semiannually, principal due
    2014, unsecured


129,348



198,832Notes payable, fixed interest rate 6.5%, payable in monthly
    installments, collateralized by a first priority deed of trust,
    due November 2014


1,893



2,104Other


2,310



Present value of capital lease obligations at effective interest
    rates, collateralized by property and equipment


3,385



3,519Total long-term debt and capital leases


458,436



469,055Less amounts due within one year


(6,335
)


(3,177
)Long-term debt and capital leases, net of current portion

$
452,101


$
465,878     Term
    Loan and Revolving Loan
   F-24




---



##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
  and/or
  Senior
    Subordinated Notes
        12-month
 F-25




---



##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
  Debt
    Covenants
      Scheduled
    Maturities of Long-Term Debt
    Capital


Long-TermLeases


Debt


Total2008

$
1,656


$
5,134


$
6,7902009


2,184



2,839



5,0232010






70,855



70,8552011






2,872



2,8722012






243,391



243,391Thereafter






130,612



130,6123,840



455,703



459,543Less original issue discount at December 31, 2007






652



652Less amount representing interest


455







455$
3,385


$
455,051


$
458,436   Interest
    Rate Swap
    Accounting for Derivative Instruments
    and Hedging Activities
 F-26




---



##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
    Year EndedNotional



Effective



December 31,

Fair ValueLoan

Amount

Trade Date

Date

Maturity

2007

(Pre-tax)First Lien

$
100,000



10/24/07



10/31/07



12/31/09


$
99


$
1,228   90-day
    9.
    Other
    Current Assets and Other Assets    2007


2006Receivable from escrow

$
7,031


$
6,000Supply inventories


2,533



2,152Current portion of notes receivable


2,056



2,144Other current assets


77



$
11,697


$
10,296     2007


2006Equity investment in Pharmacy joint venture

$
4,183


$
4,170Restricted cash


10,697



8,448Investments


2,666



4,856Deposits and other assets


4,915



4,695Expenses related to initial public offering






1,678$
22,461


$
23,847   Equity
    Investment in Pharmacy Joint Venture
    Restricted
    Cash
   F-27




---



##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
    Investments
  available-for-sale.  other-than-temporary
  Deposits
    10.
    Property
    and Equipment    2007


2006Land and land improvements

$
55,508


$
43,333Buildings and leasehold improvements


207,447



164,105Furniture and equipment


31,630



24,372Construction in progress


23,215



8,913317,800



240,723Less amortization and accumulated depreciation


(23,519
)


(9,819
)$
294,281


$
230,904   11.
    Income
    Taxes    2007


2006


2005Federal:Current

$
7,886


$
14,118


$
8,187Deferred


2,710



(3,648
)


(18,822
)State:Current


2,163



2,377



695Deferred


193



(643
)


(3,108
)$
12,952


$
12,204


$
(13,048
)  F-28




---



##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
    Year Ended December 31,2007


2006


2005Income tax expense (benefit) on continuing operations

$
12,952


$
12,204


$
(13,048
)Income tax on discontinued operations










9,207Income tax benefit on cumulative effect of change in accounting
    principle










(1,017
)$
12,952


$
12,204


$
(4,858
)     2007


2006


2005Federal rate (35)%

$
10,535


$
10,339


$
2,722State taxes, net of federal tax benefit


1,531



1,127



1,748Change in valuation allowance










(25,177
)Reorganization costs










3,758Interest, net of tax benefit


916



451



107Restricted stock compensation










3,551Other, net


(30
)


287



243$
12,952


$
12,204


$
(13,048
)        F-29




---



##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
      2007


2006Non-





Non-Current


Current


Current


CurrentDeferred income tax assets:Vacation and other accrued expenses

$
3,849


$
2,437


$
3,915


$
1,704Allowance for doubtful accounts


3,778







3,033



Professional liability accrual


6,482



6,206



6,540



8,392Rent accrual


528



1,454



142



1,543Asset retirement obligation, net






1,232







1,187Other


331



1,395







1,503Total deferred income tax assets


14,968



12,724



13,630



14,329Deferred income tax liabilities:Intangible assets






(11,007
)






(11,561
)Fixed assets






(2,714
)






Other










(382
)


Total deferred income tax liabilities






(13,721
)


(382
)


(11,561
)Net deferred income tax assets


14,968



(997
)


13,248



2,768Valuation allowance






(1,300
)






(1,264
)Net deferred income tax assets (liabilities)

$
14,968


$
(2,297
)

$
13,248


$
1,504      F-30




---



##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
    Balance at January 1, 2007

$
11,107Additions based on tax positions related to the current year


Additions for tax positions of prior years


1,482Reductions for tax positions of prior years


(1,482
)Settlements


(80
)Reductions for lapses of statutes


Balance at December 31, 2007

$
11,027         12.
    Stockholders
    Equity        
    authorized 25,000 shares of preferred stock,
    $0.001 par value per share; F-31




---



##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
   
    authorized 175,000 shares of class A common stock,
    voting power of one vote per share, $0.001 par value per
    share;
    authorized 30,000 shares of class B common stock,
    voting power of ten votes per share, $0.001 par value per
    share; and
    provided for mandatory and optional conversion of the
    class B common stock into class A common stock on a
    one-for-one basis under certain circumstances.  507-for-one
    Dividend
    Payment
      Comprehensive
    Income
    2005
    Restricted Stock Plan
   F-32




---



##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
  2007
    Incentive Award Plan
          Weighted-AverageNumber of


Grant DateShares


Fair ValueNon-vested balance at December 31, 2006


680


$
0.20Granted


78



14.23Vested


(332
)


0.20Forfeited


(18
)


0.20Non-vested balance at December 31, 2007


408


$
2.85       Risk-free interest rate


4.51%Expected life


5.85 yearsDividend yield


0%Volatility


32.7%Estimated forfeitures


9.00%Weighted-average fair value

$
6.16  F-33




---



##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
    Weighted-AverageWeighted -


RemainingAverage


Contractual


AggregateNumber of


Exercise


Term


IntrinsicShares


Price


(in years)


ValueOutstanding at December 31, 2006





$
Granted


169


$
15.42Exercised





$
Forfeited or cancelled





$
Outstanding at December 31, 2007


169


$
15.42



9.47


$
Exercisable at December 31, 2007


34


$
15.50



9.37


$
       13.
    Commitments
    and Contingencies  Leases
      2008


16,8272009


16,9182010


15,4672011


14,7652012


14,038Thereafter


72,895$
150,910   Litigation
   F-34




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##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
      Insurance
    Workers
    Compensation
          General
    and Professional Liability
   F-35




---



##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
            December 31,2007


2006General and











General andProfessional


Employee


Workers





Professional


Employee


WorkersLiability


Medical


Compensation


Total


Liability


Medical


Compensation


TotalReserve for insurance risks:Current

$
15,909
(1)

$
1,070
(2)

$
3,546
(2)

$
20,525


$
16,056
(1)

$
946
(2)

$
3,064(2
)

$
20,066Non-current


15,230







9,018



24,248



20,591







7,715



28,306$
31,139


$
1,070


$
12,564


$
44,773


$
36,647


$
946


$
10,779


$
48,372     (1)
    
    Included in accounts payable and accrued liabilities.(2)
    
    Included in employee compensation and benefits.  Hallmark
    Indemnification
    Financial
    Guarantees
   F-36




---



##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
    Purchase
    Commitment
    14.
    Material
    Transactions with Related Parties  Agreement
    with Onex Partners Manager LP
    15.
    Defined
    Contribution Plan    16.
    Quarterly
    Financial Information (Unaudited)    Quarter EndedDecember 31


September 30


June 30


March 312007:Revenue

$
177,393


$
161,468


$
151,091


$
144,655Total expense


155,405



140,489



130,663



125,365Other income (expenses), net


(9,475
)


(9,314
)


(22,537
)


(11,258
)Income before provision for income taxes


12,513



11,665



(2,109
)


8,032Provision (benefit) for income taxes


5,329



4,801



(556
)


3,378Net income (loss)


7,184



6,864



(1,553
)


4,654Accretion on preferred stock










(2,582
)


(4,772
)Net (loss) income attributable to common stockholders

$
7,184


$
6,864


$
(4,135
)

$
(118
)Net (loss) income per share data:Net (loss) income per common share, basic

$
0.20


$
0.19


$
(0.18
)

$
(0.01
)Net (loss) income per common share, diluted

$
0.19


$
0.19


$
(0.18
)

$
(0.01
)Weighted average common shares outstanding, basic


36,249



36,236



23,437



11,959Weighted average common shares outstanding, diluted


36,886



36,917



23,437



11,959   F-37




---



##### Table of Contents



SKILLED
    HEALTHCARE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
 (Amounts In Thousands, Except Per Share Data)
  Quarter EndedDecember 31


September 30


June 30


March 31(Unaudited)2006Revenue

$
139,904


$
135,396


$
131,171


$
125,186Total expenses


119,444



117,683



113,603



108,002Other income (expenses), net


(10,957
)


(11,164
)


(10,782
)


(10,481
)Income before provision for income taxes


9,503



6,549



6,786



6,703Provision for income taxes


3,944



2,588



3,071



2,601Net income


5,559



3,961



3,715



4,102Accretion on preferred stock


(4,781
)


(4,684
)


(4,540
)


(4,401
)Net (loss) income attributable to common stockholders

$
778


$
(723
)

$
(825
)

$
(299
)Net (loss) income per share data:Net (loss) income per common share, basic

$
0.07


$
(0.06
)

$
(0.07
)

$
(0.03
)Net (loss) income per common share, diluted

$
0.06


$
(0.06
)

$
(0.07
)

$
(0.03
)Weighted average common shares outstanding, basic


11,653



11,636



11,634



11,618Weighted average common shares outstanding, diluted


12,003



11,636



11,634



11,618    F-38




---



##### Table of Contents



(a)
    2.
    Financial Statement Schedule:  SKILLED
    HEALTHCARE GROUP, INC.
  SCHEDULE II 
    VALUATION ACCOUNTS
  Balance at


Charged to





Balance atBeginning of


Costs and





End ofPeriod


Expenses


Deductions(1)


Period(In thousands)Accounts receivable allowancesYear Ended December 31, 2007

$
7,889


$
6,116


$
(4,288
)

$
9,717Year Ended December 31, 2006

$
5,678


$
5,791


$
(3,580
)

$
7,889Year Ended December 31, 2005

$
4,750


$
4,468


$
(3,540
)

$
5,678Notes receivable allowancesYear Ended December 31, 2007

$



$



$



$
Year Ended December 31, 2006

$
631


$
(352
)

$
(279
)

$
Year Ended December 31, 2005

$
1,288


$
(500
)

$
(157
)

$
631     (1)
    
    Uncollectible accounts written off, net of recoveries S-1




---



##### Table of Contents



INDEX OF
    EXHIBITS
  Number

Description2
.1

Agreement and Plan of Merger, dated as of October 22, 2005,
    among SHG Acquisition Corp., SHG Holding Solutions, Inc.
    and Skilled Healthcare Group, Inc. (filed as Exhibit 2.1 to
    our Registration Statement on
    Form S-1,
    No. 333-137897,
    filed on October 10, 2006, and incorporated herein by
    reference)2
.2

Amendment No. 1 to Agreement and Plan of Merger, dated
    October 22, 2005, by and between SHG Holding
    Solutions, Inc. and Skilled Healthcare Group, Inc. (filed as
    Exhibit 2.2 to our Registration Statement on
    Form S-1,
    No. 333-137897,
    filed on October 10, 2006, and incorporated herein by
    reference)2
.3

Asset Purchase Agreement, dated as of January 31, 2006, by
    and among Skilled Healthcare Group, Inc., each of the entities
    listed on Schedule 2.1 thereto, M. Terence Reardon and M.
    Sue Reardon, individually and as Trustee of the M. Terence
    Reardon Trust U.T.A. dated June 26, 2003, and
    M. Sue Reardon and M. Terence Reardon, as Trustees of the
    M. Sue Reardon Trust U.T.A. dated June 26, 2003 (filed
    as Exhibit 2.3 to our Registration Statement on
    Form S-1,
    No. 333-137897,
    filed on October 10, 2006, and incorporated herein by
    reference)2
.4

Agreement and Plan of Merger, dated as of February 7, 2007,
    by and among SHG Holding Solutions, Inc., and Skilled Healthcare
    Group, Inc. (filed as Exhibit 2.4 to our Registration
    Statement on
    Form S-1/A,
    No. 333-137897,
    filed on February 9, 2007, and incorporated herein by
    reference).2
.5

Asset Purchase Agreement, dated February 8, 2007, by and
    among Skilled Healthcare Group, Inc., Raymore Care Center LLC,
    Blue River Care Center LLC, MLD Healthcare LLC, Blue River Real
    Estate LLC, MLD Real Estate LLC, Melvin Dunsworth and Raymore
    Health Care, Inc. (filed as Exhibit 2.5 to our Registration
    Statement on
    Form S-1/A,
    No. 333-137897,
    filed on April 23, 2007, and incorporated herein by
    reference).2
.6

Asset Purchase Agreement, dated as of July 31, 2007, by and
    among Skilled Healthcare Group, Inc. and certain affiliates of
    Laurel Healthcare Providers, LLC (filed as Exhibit 2.6 to
    our
    Form 10-Q
    for the quarter ended June 30, 2007, and incorporated
    herein by reference ).3
.1

Amended and Restated Certificate of Incorporation of Skilled
    Healthcare Group, Inc. (filed as Exhibit 3.2 to our
    Form 10-Q
    for the quarter ended June 30, 2007, and incorporated
    herein by reference).3
.2

Amended and Restated By-Laws of Skilled Healthcare Group, Inc.
    (filed as Exhibit 3.4 to our Registration Statement on
    Form S-1/A,
    No. 333-137897,
    filed on April 27, 2007, and incorporated herein by
    reference).3
.3

Certificate of Ownership and Merger of Skilled Healthcare Group,
    Inc., dated February 7, 2007 (filed as
    Exhibit 3.1.1 to our Registration Statement on
    Form S-1/A,
    No. 333-137897,
    filed on April 27, 2007, and incorporated herein by
    reference).4
.1

Indenture, dated as of December 27, 2005, by and among SHG
    Acquisition Corp., Wells Fargo Bank, N.A. and certain
    subsidiaries of Skilled Healthcare Group, Inc. (filed as
    Exhibit 4.2 to our Registration Statement on
    Form S-1,
    No. 333-137897,
    filed on October 10, 2006, and incorporated herein by
    reference).4
.2

Registration Rights Agreement, dated as of December 27,
    2005, by and among SHG Acquisition Corp., all the subsidiaries
    of Skilled Healthcare Group, Inc. listed therein, Credit Suisse
    First Boston, LLC and J.P. Morgan Securities, Inc. (filed
    as Exhibit 4.3 to our Registration Statement on
    Form S-1,
    No. 333-137897,
    filed on October 10, 2006, and incorporated herein by
    reference).4
.3

Investor Stockholders Agreement, dated as of
    December 27, 2005, among SHG Holding Solutions, Inc., Onex
    Partners LP and the stockholders listed on the signature pages
    thereto (filed as Exhibit 4.4 to our Registration Statement
    on
    Form S-1,
    No. 333-137897,
    filed on October 10, 2006, and incorporated herein by
    reference).4
.4

Registration Agreement dated as of December 27, 2005, among
    SHG Holding Solutions, Inc. and the persons listed thereon
    (filed as Exhibit 4.5 to our Registration Statement on
    Form S-1,
    No. 333-137897,
    filed on October 10, 2006, and incorporated herein by
    reference).4
.5

Form of specimen certificate for Skilled Healthcare Group,
    Inc.s class A common stock (filed as Exhibit 4.1
    to our Registration Statement on
    Form S-1/A,
    No. 333-137897,
    filed on April 27, 2007, and incorporated herein by
    reference).4
.6

Form of 11% Senior Subordinated Notes due 2014 (included in
    exhibit 4.5).




---



##### Table of Contents



Number

Description10
.1*

Skilled Healthcare Group, Inc. Restricted Stock Plan (filed as
    Exhibit 10.1 to our Registration Statement on
    Form S-1,
    No. 333-137897,
    filed on October 10, 2006 and incorporated herein by
    reference).10
.2*

Form of Restricted Stock Agreement (filed as Exhibit 10.2
    to our Registration Statement on
    Form S-1,
    No. 333-137897,
    filed on October 10, 2006 and incorporated herein by
    reference).10
.3

Second Amended and Restated First Lien Credit Agreement, dated
    as of December 27, 2005, by and among SHG Holding
    Solutions, Inc., Skilled Healthcare Group, Inc., the financial
    institutions party thereto, and Credit Suisse, Cayman Islands,
    as administrative agent and collateral agent (filed as
    Exhibit 10.4 to our Registration Statement on
    Form S-1,
    No. 333-137897,
    filed on October 10, 2006 and incorporated herein by
    reference).10
.4*

Employment Agreement, dated December 27, 2005, by and
    between Skilled Healthcare Group, Inc. and Boyd Hendrickson
    (filed as Exhibit 10.5 to our Registration Statement on
    Form S-1,
    No. 333-137897,
    filed on October 10, 2006 and incorporated herein by
    reference).10
.5*

Employment Agreement, dated December 27, 2005, by and
    between Skilled Healthcare Group, Inc. and Jose Lynch (filed as
    Exhibit 10.6 to our Registration Statement on
    Form S-1,
    No. 333-137897,
    filed on October 10, 2006 and incorporated herein by
    reference).10
.6*

Employment Agreement, dated December 27, 2005, by and
    between Skilled Healthcare Group, Inc. and John E. King (filed
    as Exhibit 10.7 to our Registration Statement on
    Form S-1,
    No. 333-137897,
    filed on October 10, 2006 and incorporated herein by
    reference).10
.7*

Employment Agreement, dated December 27, 2005, by and
    between Skilled Healthcare Group, Inc. and Roland G. Rapp (filed
    as Exhibit 10.8 to our Registration Statement on
    Form S-1,
    No. 333-137897,
    filed on October 10, 2006 and incorporated herein by
    reference).10
.8*

Employment Agreement, dated December 27, 2005, by and
    between Skilled Healthcare Group, Inc. and Mark Wortley (filed
    as Exhibit 10.9 to our Registration Statement on
    Form S-1,
    No. 333-137897,
    filed on October 10, 2006 and incorporated herein by
    reference).10
.9*

Trigger Event Cash Bonus Agreement, dated April 30, 2005,
    by and between Skilled Healthcare Group, Inc. and John E. King
    (filed as Exhibit 10.10 to our Registration Statement on
    Form S-1,
    No. 333-137897,
    filed on October 10, 2006 and incorporated by reference
    herein).10
.10*

Trigger Event Cash Bonus Agreement, dated April 30, 2005,
    by and between Skilled Healthcare Group, Inc. and Mark Wortley
    (filed as Exhibit 10.11 to our Registration Statement on
    Form S-1,
    No. 333-137897,
    filed on October 10, 2006 and incorporated herein by
    reference).10
.11

Lease, dated as of August 26, 2002, by and between CT
    Foothill 10/241, LLC, and Fountain View, Inc., and amendments
    thereto (filed as Exhibit 10.13 to our Registration
    Statement on
    Form S-1,
    No. 333-137897,
    filed on October 10, 2006 and incorporated herein by
    reference).10
.12

First Amendment to Second Amended and Restated First Lien Credit
    Agreement, dated as of January 31, 2007, by and among
    Skilled Healthcare Group, Inc., SHG Holding Solutions, Inc., the
    financial institutions parties thereto, and Credit Suisse,
    Cayman Islands, as administrative agent and collateral agent
    (filed as Exhibit 10.12 to our Registration Statement on
    Form S-1/A,
    No. 333-137897,
    filed on April 23, 2007 and incorporated herein by
    reference).10
.13*

Employment Agreement, dated as of August 14, 2007, by and
    between Skilled Healthcare LLC and Christopher N. Felfe (filed
    as Exhibit 10.1 to our
    Form 10-Q
    for the quarter ended September 30, 2007, and incorporated
    herein by reference).10
.14*

Side Letter, dated as of August 14, 2007, by and between
    Skilled Healthcare, LLC and Christopher N. Felfe (filed as
    Exhibit 10.2 to our
    Form 10-Q
    for the quarter ended September 30, 2007, and incorporated
    herein by reference).10
.15*

Skilled Healthcare Group, Inc. 2007 Incentive Award Plan (filed
    as Exhibit 10.3 to our Registration Statement on
    Form S-1/A,
    No. 333-137897,
    filed on April 27, 2007, and incorporated herein by
    reference).10
.16*

Form of Indemnification Agreement with Skilled Healthcare
    Groups directors, executive officers and certain employees
    (filed as Exhibit 10.10 to the Companys Registration
    Statement on
    Form S-1/A,
    No. 333-137897,
    filed on April 27, 2007, and incorporated herein by
    reference).(1)10
.17

Instrument of Joinder, dated as of May 11, 2007, by and
    among Skilled Healthcare Group, Inc., Bank of America, N.A., UBS
    Loan Finance LLC and Credit Suisse, Cayman Islands Branch (filed
    as Exhibit 10.3 to our
    Form 10-Q
    for the quarter ended June 30, 2007, and incorporated
    herein by reference).




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##### Table of Contents



Number

Description10
.18*

Employment Agreement, dated as of November 30, 2007, by and
    between Skilled Healthcare LLC and Devasis Ghose (filed as
    Exhibit 10.1 to our
    Form 8-K
    dated November 30, 2007, and incorporated herein by
    reference).23
.1

Consent of Independent Registered Public Accounting Firm.31
.1

Certification pursuant to Section 302 of the Sarbanes-Oxley
    Act of 2002 for Boyd Hendrickson.31
.2

Certification pursuant to Section 302 of the Sarbanes-Oxley
    Act of 2002 for John E. King.32


Certification pursuant to 18 U.S.C. Section 1350, as
    adopted pursuant to Section 906 of the Sarbanes-Oxley Act
    of 2002.     *
    
    Management contract or compensatory plan or arrangement.(1)
    
    Skilled Healthcare Group, Inc. has entered into an
    indemnification agreement with the following individuals: Boyd
    Hendrickson, Chairman of the Board, Chief Executive Officer and
    Director; Jose Lynch, President, Chief Operating Officer and
    Director; Devasis Ghose, Executive Vice President, Treasurer and
    Chief Financial Officer (upon John E. King departure); John
    E. King, Executive Vice President, Treasurer and Chief Financial
    Officer; Roland Rapp, General Counsel, Secretary and Chief
    Administrative Officer; Mark Wortley, Executive Vice President
    and President of Ancillary Subsidiaries; Christopher N. Felfe,
    Senior Vice President, Finance and Chief Accounting Officer;
    Susan Whittle, Senior Vice President and Chief Compliance
    Officer; Robert M. Le Blanc, Lead Director; Michael E. Boxer,
    Director; John M. Miller, Director; M. Bernard Puckett,
    Director; Glenn S. Schafer, Director; William C. Scott,
    Director; Michael D. Stephens, Director; Kelly Atkins, Senior
    Vice President of Operations, Pacific Division;
    Brad Gibson, Senior Vice President of Operations, Finance;
    Matt Moore, Senior Vice President of Operations, Midwest
    Division; Aisha Salaam, Senior Vice President of Professional
    Services.