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**UNITED STATES****SECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549**

**FORM 10-K**

| (Mark One) |
|------------|
|       |   |
|            | **ANNUAL REPORT PURSUANT TO          SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|       |   |
|            | **FOR THE FISCAL YEAR ENDED          SEPTEMBER 30, 2005** |
|       |   |
| **OR**     |
|       |
|            | **TRANSITION REPORT PURSUANT          TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|       |   |

For the transition period from    ________________to________________

Commission File Number 000-50351

| **Genesis HealthCare Corporation**                            |
|---------------------------------------------------------------|
| (Exact name of Registrant        as specified in its charter) |

 

| **Pennsylvania**                                                           |   |   | **101 East State          Street      Kennett Square, PA 19348** |   |   | **20-0023783**                               |   |
|----------------------------------------------------------------------------|--------|--------|------------------------------------------------------------------|--------|--------|----------------------------------------------|--------|
| (State or other jurisdiction        of      incorporation or organization) |   |   | (Address of principal executive      offices including zip code) |   |   | (I.R.S. Employer      Identification Number) |   |

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

Securities registered pursuant to    Section 12(b) of the Act:

NONE

Securities registered pursuant to Section 12(g) of the Act:

Title of each class

      Common      Stock, par value $.01 per share  Preferred Share Purchase Rights, no parvalue per share

      Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 YES	 NO

      Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

 YES  NO

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

 YES  NO

      Indicate by      check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation      S-K is not contained herein, and will not be contained, to the best of      registrant’s knowledge, in definitive proxy or reports incorporated      by reference in Part III of this Form 10-K or any amendment to this Form      10-K. 

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

 YES  NO

      Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 YES	 NO

      The aggregate  market value of voting and non-voting common stock held by non-affiliates of  the registrant is $844,403,780.(1)  As of December 1, 2005, 19,687,661 shares of the registrant’s common stock  were outstanding, including 134,009 shares currently held in escrow to be issued  in connection with the registrant’s joint plan of reorganization confirmed  by the Bankruptcy Court on September 20, 2001.

APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

      Indicate by      check mark whether the registrant has filed all documents and reports required      to be filed by Section 12, 13, or 15(d) of the Securities Exchange Act      of 1934 subsequent to the distribution of securities under a plan confirmed      by a court.(2)

 YES  NO

DOCUMENTS INCORPORATED BY REFERENCE

NONE

| (1) |   | The aggregate market value of the       voting and non-voting common stock set forth above equals the number of       shares of the registrant’s common stock outstanding, reduced by the number of shares of common stock held by officers, directors and shareholders owning in excess of 10% of the registrant’s common stock, multiplied by the last reported sale price for the registrant’s       common stock on the most recently completed second fiscal quarter. The       information provided shall in no way be construed as an admission that       any officer, director or 10% shareholder of the registrant may or may       not be deemed an affiliate of the registrant or that he/she/it is the       beneficial owner of the shares reported as being held by him/her/it, and       any such inference is hereby disclaimed. The information provided herein       is included solely for record keeping purposes of the Securities and Exchange    Commission. |
|-----|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | In 2000, prior to the creation       of the registrant, a substantial majority of the registrant’s subsidiaries       filed for relief under Chapter 11 of the Bankruptcy code and emerged from    such proceeding in 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |

 

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|                                                       | **INDEX**                                                                                                                   |   |   |
|------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                       |                                                                                                                        |   |   |
| Cautionary Statements Regarding Forward-Looking Statements | 1                                                                                                                           |   |
|                                                       |                                                                                                                        |   |   |
| Risk Factors                                               | 3                                                                                                                           |   |
|                                                       | **PART I**                                                                                                                  |   |   |
|                                                       |                                                                                                                        |   |   |
| ITEM 1:                                                    | BUSINESS                                                                                                                    | 14     |   |
|                                                       |                                                                                                                        |   |   |
| ITEM 1B:                                                   | UNRESOLVED STAFF COMMENTS                                                                                                   | 29     |   |
|                                                       |                                                                                                                        |   |   |
| ITEM 2:                                                    | PROPERTIES                                                                                                                  | 29     |   |
|                                                       |                                                                                                                        |   |   |
| ITEM 3:                                                    | LEGAL PROCEEDINGS                                                                                                           | 30     |   |
|                                                       |                                                                                                                        |   |   |
| ITEM 4:                                                    | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                                         | 30     |   |
|                                                       |                                                                                                                        |   |   |
| ITEM 4A:                                                   | EXECUTIVE OFFICERS OF THE REGISTRANT                                                                                        | 30     |   |
|                                                       |                                                                                                                        |   |   |
|                                                       | **PART II**                                                                                                                 |   |   |
|                                                       |                                                                                                                        |   |   |
| ITEM 5:                                                    | MARKET FOR THE REGISTRANT’S    COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY    SECURITIES | 32     |   |
|                                                       |                                                                                                                        |   |   |
| ITEM 6:                                                    | SELECTED FINANCIAL DATA                                                                                                     | 34     |   |
|                                                       |                                                                                                                        |   |   |
| ITEM 7:                                                    | MANAGEMENT’S DISCUSSION    AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                               | 35     |   |
|                                                       |                                                                                                                        |   |   |
| ITEM 7A:                                                   | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                                  | 66     |   |
|                                                       |                                                                                                                        |   |   |
| ITEM 8:                                                    | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                                                 | 67     |   |
|                                                       |                                                                                                                        |   |   |
| ITEM 9:                                                    | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS    ON ACCOUNTING AND FINANCIAL DISCLOSURE                                     | 112    |   |
|                                                       |                                                                                                                        |   |   |
| ITEM 9A:                                                   | CONTROLS AND PROCEDURES                                                                                                     | 112    |   |
|                                                       |                                                                                                                        |   |   |
| ITEM 9B:                                                   | OTHER INFORMATION                                                                                                           | 114    |   |
|                                                       |                                                                                                                        |   |   |
|                                                       | **PART III**                                                                                                                |   |   |
|                                                       |                                                                                                                        |   |   |
| ITEM 10:                                                   | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                                                          | 115    |   |
|                                                       |                                                                                                                        |   |   |
| ITEM 11:                                                   | EXECUTIVE COMPENSATION                                                                                                      | 115    |   |
|                                                       |                                                                                                                        |   |   |
| ITEM 12:                                                   | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS    AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS                           | 115    |   |
|                                                       |                                                                                                                        |   |   |
| ITEM 13:                                                   | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                                                              | 115    |   |
|                                                       |                                                                                                                        |   |   |
| ITEM 14:                                                   | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                                                                      | 115    |   |
|                                                       |                                                                                                                        |   |   |
|                                                       | **PART IV**                                                                                                                 |   |   |
|                                                       |                                                                                                                        |   |   |
| ITEM 15:                                                   | EXHIBITS                                                                                                                    | 116    |   |

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|   | **Cautionary Statements    Regarding Forward-Looking Statements** |
|--------|-------------------------------------------------------------------|

      As used herein,      unless the context otherwise requires, all references to “GHC,” “we,” “our,” “us,” and similar terms in this report refer to Genesis HealthCare Corporation together with its subsidiaries. All references to “NCI” in      this report refer to NeighborCare, Inc. together with its subsidiaries,      our parent prior to December 1, 2003.

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

|   | • | statements contained in “Risk Factors;”                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|--------|---------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | • | statements contained in “Business” concerning        contract renewals, government regulations and the Medicare and Medicaid        programs, reimbursement for services provided, demographic trends, strategy,        competitive strengths, corporate integrity programs, insurance coverage    and insurance reserves, environmental matters and legal proceedings;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | • | statements contained in “Management’s        Discussion and Analysis of Financial Condition and Results of Operations,” and        the notes to our consolidated financial statements, such as demographic        trends and our ability to take advantage of such demographic trends;        the expected impact of staffing and retention programs; our ability to        meet our working capital requirements, debt service, and future cash        needs; capital sources and capital expenditure, debt and lease requirements;        our potential extension of credit to our joint venture partners; the        expected changes in and effects of government legislation, regulation        and funding on our business; estimates in our pro forma financial data        and critical accounting policies, including the adequacy of our allowance        for doubtful        accounts, any anticipated impact of long-lived asset impairments and        our ability to provide for outstanding losses and loss expenses for self-insured        programs and legal proceedings; and the estimated impact of new accounting    pronouncements upon their adoption; |
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | • | statements contained in “Quantitative and Qualitative Disclosures About Market Risk;” and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | • | statements contained in “Legal Proceedings” regarding    the effects of litigation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |

      The forward-looking statements involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond our control. You are cautioned that these statements are not guarantees of future performance and that actual results and trends in the future may differ materially.

     Factors that could cause actual results to differ materially include, but are not limited to, the following:

|   | • | changes in the reimbursement rates or methods        of payment from Medicare and Medicaid, including those described herein,        or the implementation of other measures to reduce the reimbursement for        our        services; |
|--------|---------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |    |                                                                                                                                                                                                                                     |
|   | • | the expiration of enactments providing for additional governmental funding;                                                                                                                                                              |
|   |    |                                                                                                                                                                                                                                     |
|   | • | the impact of federal and state regulations;                                                                                                                                                                                             |
|   |    |                                                                                                                                                                                                                                     |
|   | • | changes in case mix, payor mix and payment methodologies;                                                                                                                                                                                |
|   |    |                                                                                                                                                                                                                                     |
|   | • | competition in our businesses;                                                                                                                                                                                                           |
|   |    |                                                                                                                                                                                                                                     |
|   | • | the capital intensive nature of our inpatient services segment and the need for extensive capital expenditures in order to modernize and improve our physical infrastructure;                                                            |
|   |    |                                                                                                                                                                                                                                     |
|   | • | an increase in insurance costs and potential liability for losses not covered by, or in excess of, our insurance;                                                                                                                        |
|   |    |                                                                                                                                                                                                                                     |
|   | • | competition for, and availability of, qualified staff in the healthcare industry, and risks of potential labor strikes;                                                                                                                  |

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|   | • | our ability to control operating costs and generate      sufficient cash flow to meet operational and financial requirements;                                                           |
|--------|---------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |    |                                                                                                                                                                                    |
|   | • | our ability, and the ability of our subsidiary      guarantors, to fulfill debt obligations;                                                                                            |
|   |    |                                                                                                                                                                                    |
|   | • | our covenants and restrictions contained in      financing agreements which limit our discretion in the operation of our      business;                                                 |
|   |    |                                                                                                                                                                                    |
|   | • | the economic condition of, or changes in the      laws affecting, our business in those markets in which we operate;                                                                    |
|   |    |                                                                                                                                                                                    |
|   | • | our ability to realize tax benefits relating      to our estimated net operating loss carryforwards;                                                                                    |
|   |    |                                                                                                                                                                                    |
|   | • | the increasing cost of being a publicly owned      company and our ability to provide reasonable assurance of the effectiveness      of our internal controls over financial reporting; |
|   |    |                                                                                                                                                                                    |
|   | • | the impact of new accounting pronouncements;                                                                                                                                            |
|   |    |                                                                                                                                                                                    |
|   | • | the impact of implementing new information systems;                                                                                                                                     |
|   |    |                                                                                                                                                                                    |
|   | • | our charter documents and the Pennsylvania Business      Corporation Law of 1988, as amended, which could delay or prevent a change      of control;                                    |
|   |    |                                                                                                                                                                                    |
|   | •  | the ability to implement and achieve certain      performance improvement objectives in our rehabilitation therapy services      segment;                                               |
|   |    |                                                                                                                                                                                    |
|   | • | the difficulty in evaluating certain of our      financial information due to the spin-off;                                                                                             |
|   |    |                                                                                                                                                                                    |
|   | • | the ability to engage successfully in acquisitions      and other strategic transactions;                                                                                               |
|   |    |                                                                                                                                                                                    |
|   | • | the impact of acquisitions, and our ability      to integrate acquired businesses, on our operations and finances;                                                                      |
|   |    |                                                                                                                                                                                    |
|   | • | federal income tax liabilities and indemnification      obligations related to the spin-off; and                                                                                        |
|   |    |                                                                                                                                                                                    |
|   | • | acts of God or public authorities, war, civil      unrest, terrorism, fire, floods, earthquakes and other matters beyond our      control.                                              |

      In addition to    these factors and any risks and uncertainties specifically identified in    the text surrounding forward-looking statements, any statements in this report    or the reports and other documents filed by us with the Securities and Exchange    Commission that warn of risks or uncertainties associated with future results,    events or    circumstances    also identify factors that could cause actual results to differ materially    from those expressed in or implied by the forward-looking statements. 

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

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**RISK FACTORS**

      *If any of the following risks and uncertainties develop into actual events, this could have a material adverse effect on our business, financial condition or results of operations. In that case, the trading price of our common stock could decline.*

**Risks Related to Our Business**

**     Healthcare-related        legislation has significantly impacted our business, and future legislation        and regulations may negatively affect our financial condition and resultsof operations.**

      Our inpatient        services business currently receives approximately 82% of its revenues        from Medicare and Medicaid.        The healthcare industry is experiencing a strong trend toward cost containment,        as the government seeks to impose lower reimbursement and resource utilization        group rates, limit the scope of covered services and negotiate reduced        payment schedules with providers. These cost containment measures generally        have        resulted in a reduced rate of growth in the reimbursement for the services        that we provide relative to the increase in our cost to provide such      services. Prior reductions in governmental reimbursement rates contributed      to our        predecessor company’s subsidiaries’ bankruptcy filings under        Chapter 11 of the United States Code on June 22, 2000. Additional reductions        in reimbursement rates for our services may further negatively impactour business, results of operations, financial condition and cash flow. 

      Changes to Medicare    and Medicaid reimbursement programs have limited, and are expected to continue    to limit, payment increases under these programs. Also, the timing of payments    made under the Medicare and Medicaid programs is subject to regulatory action    and governmental budgetary constraints resulting in a risk that the time    period between submission of claims and payment could increase. Further,    within the statutory framework of the Medicare and Medicaid programs, a substantial    number of areas are subject to administrative rulings and interpretations    which may further affect payments. In addition, during fiscal year 2006,    legislation was enacted instructing Congress to reduce funding for state    Medicaid programs by $10.0 billion for fiscal years 2007 through 2011. Congress    has not agreed upon the proposed Medicaid reductions, and it remains    unclear as to whether these budget issues will be resolved by the end of 2005. Federal    and state governments may further reduce the funds available under those    programs in the future or require more stringent utilization and quality    reviews of eldercare centers or other providers. 

**     Our revenuescould be affected by changes to the Medicare program.**

      On July 28, 2005,    the Centers for Medicare and Medicaid Services (CMS) released the final fiscal    2006 skilled nursing        facility prospective payment rules, including refinement to the resource        utilization group (RUG) classification system (RUGs refinement). Effective        October 1, 2005, the current skilled nursing facility prospective payment        rates were increased by a 3.1% annual inflation update factor. Effective        January 1, 2006, the rules discontinue certain payment add-ons and establish        nine new payment classifications, alter the case-mix weights for the      remaining 44 RUG payment categories and adjust upward the nursing component      of most        RUG payment categories. Excluding the additional 3.1% annual inflation        factor, and after considering the distribution of our Medicare patient        population under the new system, RUGs refinement is expected to reduce        our Medicare payment rates approximately $9 per patient day beginning      January 1, 2006, thereby reducing fiscal 2006 revenue and EBITDA approximately        $7.5 million and reducing net income approximately $4.5 million. 

      The proposed federal    budget for 2006 also proposes to reduce by 30% the amount that Medicare reimburses    skilled nursing facilities and other non-hospital providers for bad debts    arising from uncollectible Medicare coinsurance and deductibles. As proposed    by CMS, the reduction would be phased-in over a three-year period at 10%    per year. Based on our current volume of Medicare coinsurance bad debts,    this proposed rule would reduce our EBITDA and net income by $1.8 million    and $1.1 million in the first year, respectively. We cannot currently determine    if, or when, this proposal will be implemented. 

      The Medicare Prescription    Drug, Improvement and Modernization Act of 2003, referred to as the Medicare    Modernization Act (MMA), constitutes a significant overhaul of the Medicare    system, including provisions to 

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  provide subsidies to insurers and managed care organizations, and establishes      mechanisms to allow private healthcare coverage plans to compete with Medicare      initially on a pilot basis. The MMA may have a negative      effect upon institutional pharmacy services provided in the long-term care      setting.Effective January 1, 2006,under the MMA, Medicaid coverage of prescription drugs for Medicare beneficiarieswho are also eligible for Medicaid will be shifted to the Medicare program (MedicarePart D). These residents are referred to as “dual eligibles.” Thischange could affect a significant percentage of residents in our nursingfacilities.

      The MMA suspended    application of $1,590 payment caps (therapy caps) on Medicare Part B rehabilitation    through December 31, 2005. The therapy caps in place effective September    1, 2003 imposed payment limits to services provided by independent therapists    as well as to those provided by outpatient rehabilitation facilities and    other forms of rehabilitation agencies. Extension of the moratorium on application    of the therapy caps removed a significant financial threat to our therapy    business for the short term. CMS recently announced in its publication of    the final 2006 physician fee schedules the implementation of the therapy    caps effective January 1, 2006. The therapy caps will be increased to $1,740.    While efforts have been made to introduce legislation in Congress to extend    the moratorium, Congress has not approved this extension. No assurances    can be made or given that Congress will extend the moratorium on application    of    the therapy    caps    beyond    calendar    year 2005. As mandated by the law, the General Accounting Office is conducting    a study of alternatives to the therapy caps. We are unable to predict the    impact an implementation of therapy caps would have on our financial condition    and operating results, but believe it has the potential to reduce our revenue,EBITDA and net income. 

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

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

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

      By law, Medicare    reimbursement for physician and non-physician professional services (including    Medicare Part B physical therapy, speech therapy and occupational therapy    services) are based on fee schedules. CMS has published final payment rules    for calendar year 2006. Unless Congress intervenes, CMS will impose a 4.4%    reduction in average payments for all professional services effective January    1, 2006. The U.S. Senate has passed legislation substituting a 1.0% positive    increase in favor of the 4.4% reduction. It remains uncertain whether Congress    will finalize action in time to prevent the payment reductions. Although    we are unable to predict the outcome of these measures, a reduction in payment    for professional services would have an adverse effect on our business, results    of operations, financial position and cash flows. 

      Changes in the    skilled nursing facility Medicare payment rates could adversely impact the    liquidity of our service related business customers, resulting in their inability    to pay us, or to pay us in a timely manner for our products and services.    This factor, coupled with the adverse impact of skilled nursing facility    rate changes to the 

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liquidity of our inpatient services segment, could require us to borrow in order    to fund our working capital needs, and in turn, cause us to become more highly    leveraged. 

      It is not possible    to quantify fully the effect of legislative changes, the interpretation or    administration of such legislation or other governmental initiatives    on our business and the business of the customers served by our rehabilitation    services business. Accordingly, there can be no assurance that the impact    of any future healthcare legislation or regulation will not further adversely    affect our business. There can be no assurance that payments under governmental    and private third-party payor programs will be timely, will remain at levels    similar to present levels or will, in the future, be sufficient to cover    the costs allocable to patients eligible for reimbursement pursuant to such    programs. Our financial condition and results of operations will be affected    by the reimbursement process, which in the healthcare industry is complex    and can involve lengthy delays between the time that revenue is recognized    and the time that reimbursement amounts are settled. 

**     Our revenues could be impacted by federal andstate changes to Medicaid.**

      Jointly financed      by the federal and state governments, Medicaid is an essential part of      the health coverage and financing system nationally and in every state.      Combined federal and states’ Medicaid outlays are projected to approximate      $322.0 billion in calendar year 2006 and account for nearly 16% of total      national healthcare expenditures. Medicaid is the principal purchaser for      approximately 47% of nursing home services purchased in the United States.      Rapidly increasing Medicaid spending combined with slow state revenue growth      and competing budgetary requirements has led many states to institute measures      aimed at controlling spending growth.Historically, these budget pressures have translated into reductions in the rate      of growth of state Medicaid spending. Given that Medicaid outlays are a      significant component      of state budgets, we expect continuing cost containment pressures on Medicaid      outlays for skilled nursing facilities in the states in which we operate,      which could result in Medicaid rate adjustments that are below the average      inflationary increase in our operating costs. States may be unable to continue      to support financially growing Medicaid programs as currently structured.      There is no assurance that federal assistance with the funding of theseprograms will in fact result, or continue. 

      Medicaid funding    is set annually. The Medicaid program is highly dependent upon levels of    state and federal funding. In 2003, Congress passed temporary relief to states    providing a 2.9% increase in the federal Medicaid Assistance Percentage for    five quarters estimated to provide states $10.0 billion in Medicaid relief.    That assistance terminated on June 30, 2004, however, reimbursement for inpatient    nursing home services was in line with our expectations for fiscal year    2005. The final federal budget for 2006, while agreeing to defer Medicaid    cost reductions for 2006, instructs Congress to make Medicaid cuts of $10.0    billion for fiscal years 2007 through 2011. 

      Legislation enacted    in 2000, entitled the Benefits Improvement and Protection Act, mandates a    phase out of intergovernmental transfer transactions by states whereby states    inflate the payments to certain public facilities to increase federal matching    funds. The reduced federal payments have adversely affected aggregate available    funds, thereby requiring states to consider changes in their payment systems. 

      Most states have    completed legislative actions on their fiscal year 2006 state budgets. We    expect our average Medicaid rate per patient day to increase between approximately    2% to 3% in our fiscal 2006. 

      As part of the    state budget process, a number of states have indicated a desire to divert    individuals from placement in nursing homes through an expansion of home    and community based services. Most of these efforts are being established    under demonstration and waiver authority. To date, these alternative care    programs have not significantly impacted our nursing home admissions. 

      Among the alternative      Medicaid funding approaches that states have explored, and in many states      implemented, are nursing home provider assessments as tools for leveraging      increased Medicaid matching funds. Provider assessment plans generate additional      federal matching funds to the states for Medicaid reimbursement purposes,      and implementation of a provider assessment plan requires approval by CMS      in order to qualify for federal matching funds. These plans usually take      the form of a bed tax or a quality assessment fee, which is imposed uniformly      across classes of providers within the state. In turn, the state generally    utilizes the additional federal matching funds generated by the tax to pay    increased      reimbursement rates to the providers, which often include a repayment of      a portion of the provider tax based on the provider’s percentage of      Medicaid patients. Nursing home provider assessments have been implemented      in eight states where we operate (Massachusetts, West Virginia, Rhode Island,      North Carolina, New Hampshire, Pennsylvania, New Jersey and Connecticut). 

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      The Commonwealth      of Pennsylvania has proposed a reduction in the reimbursement allowance      under its provider assessment program effective July 1, 2005 through June      30, 2006. If the proposed reduction is made final as expected, the amount    we must pay the Commonwealth under this program will exceed the    amount    we are reimbursed. In the quarter ended September 30, 2005, our      revenue and EBITDA were reduced $0.6 million, and our net income was reduced      $0.4 million or $0.02 per diluted share after giving effect to the reduced      reimbursement. If the proposed reduction is made final as expected, our      fiscal 2006 revenue and EBITDA would be reduced approximately $2.4 million,      and our net income would be reduced approximately $1.4 million or $0.08      per diluted share. 

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

      With the 1997 repeal    of the Boren Amendment, which governed federal payment standards for Medicaid    payments to skilled nursing facilities, there can be no assurance that budget    constraints or other factors will not cause states to reduce Medicaid reimbursement    to skilled nursing facilities or that payments to skilled nursing facilities    will be made on a timely basis. 

**     We conduct        business in a heavily regulated industry, and changes in regulations        and violations of regulations may result in increased costs or sanctions,including loss of licensure and decertification.**

      Our business is    subject to extensive federal, state and, in some cases, local regulation    with respect to, among other things, participation in the Medicare and Medicaid    programs, licensure and certification of eldercare centers, and reimbursement.    For our eldercare centers, these regulations relate, among other things,    to the adequacy of physical plant and equipment, qualifications of personnel,    standards of care, government reimbursement and operational requirements.    Compliance with these regulatory requirements, as interpreted and amended    from time to time, can increase operating costs and thereby adversely affect    the financial viability of our business. Because these regulations are amended    from time to time and are subject to interpretation, we cannot predict when    and to what extent liability may arise. Failure to comply with current or    future regulatory requirements could also result in the imposition of various    remedies including (with respect to inpatient care) fines, restrictions on    admission, denial of payment for all or new admissions, the revocation of    licensure, decertification, imposition of temporary management or the closureof a facility or site of service. 

      We are subject    to periodic audits by the Medicare and Medicaid programs, which have various    rights and remedies against us if they assert that we have overcharged the    programs or failed to comply with program requirements. Rights and remedies    available to these programs include repayment of any amounts alleged to be    overpayments or in violation of program requirements, or making deductions    from future amounts due to us. These programs may also impose fines, criminal    penalties or program exclusions. Other third-party payor sources also reserve    rights to conduct audits and make monetary adjustments in connection withor exclusive of audit activities. 

      In the ordinary    course of our business, and in response to regulatory inquiries, investigations    and audits by federal and state agencies, our centers periodically receive    statements of deficiencies regarding our Medicare and Medicaid requirements    for participation. In response, the nursing center implements a plan of correction.    This plan must be acceptable to the regulatory agency prior to its implementation.    Often, the agency conducts a re-survey to confirm regulatory compliance.    In the    event    that    these deficiencies are deemed significant and/or are repeat deficiencies,    the regulatory agency may impose other remedies. 

      These actions      may adversely affect a provider’s ability to continue to operate,      the ability to provide certain services and/or eligibility to participate      in the Medicare or Medicaid programs or to receive payments from other 

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payors. Certain of our centers have received notices that, as aresult of alleged deficiencies, federal and/or state agencies were taking stepsto impose remedies. Additionally, actions taken against one center or servicesite may subject other centers or service sites under common control or ownershipto adverse remedies.

      We are also subject to federal and state laws that govern financial and other arrangements between healthcare providers. These laws often prohibit certain direct and indirect payments or fee-splitting arrangements between healthcare providers that are designed to induce the referral of patients to a particular provider for medical products and services. Possible sanctions for violation of any of these restrictions or prohibitions include loss of eligibility to participate in reimbursement programs and/or civil and criminal penalties. Furthermore, some states restrict certain business relationships between physicians and other providers of healthcare services. Many states prohibit business corporations from providing, or holding themselves out as providers of, medical care. From time to time, we may seek guidance as to the interpretation of these laws; however, there can be no assurance that such laws will ultimately be interpreted in a manner consistent with our practices.

      In recent years it has become more difficult for nursing facilities to maintain licensure and certification. We have experienced and expect to continue to experience increased costs in connection with maintaining our licenses and certifications as well as increased enforcement actions. Failure to provide quality resident care may result in civil and/or criminal fines and penalties.

      The operation of our eldercare centers is subject to federal and state laws prohibiting fraud by healthcare providers, including criminal provisions, which prohibit filing false claims or making false statements to receive payment or certification under Medicare or Medicaid, or failing to refund overpayments or improper payments. Violation of these criminal provisions is a felony punishable by imprisonment and/or fines. We may be subject to fines and treble damage claims if we violate the civil provisions that prohibit the knowing filing of a false claim or the knowing use of false statements to obtain payment.

      State and federal governments are devoting increased attention and resources to anti-fraud initiatives against healthcare providers. The Health Insurance Portability and Accountability Act of 1996 (HIPAA) and the Balanced Budget Act expanded the penalties for healthcare fraud, including broader provisions for the exclusion of providers from the Medicaid program. While we believe that our business practices are consistent with Medicare and Medicaid criteria, those criteria are often vague and subject to change and interpretation. Investigations of alleged fraud could have an adverse effect on our business, results of operations, financial condition and cash flow.

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

     HIPAA requires      us to comply with standards for the use of identifiable health information within      GHC and the sharing of identifiable health information with third parties,      such as payors, business associates, residents and patients. The standards      promulgated under HIPAA regulate the exchange of information in common      healthcare transactions, the      use      of electronic      signatures,      the development of unique      identifiers for providers, employers, health plans and individuals, the      security and privacy of identifiable health information, and enforcement.

      In January 2004, CMS published a rule announcing the adoption of the National Provider Identifier as the standard unique health identifier for healthcare providers to use in filing and processing healthcare claims and other transactions. The rule became effective May 23, 2005, with a compliance date of May 23, 2007.Sanctions for failing to comply with the HIPAA health information practices provisions include criminal penalties and civil sanctions.

      Further, on  April 18, 2005, the Department of Health and Human Services, or DHHS, published  its Proposed Rule on Enforcement of the HIPAA Administrative Simplification  provisions, including the transaction standards, the security standards and  the privacy rule. This proposed enforcement rule addresses, among other issues,  DHHS’s policies for determining violations and calculating civil money  penalties, how DHHS will address the statutory limitations on the imposition  of civil money penalties, and various procedural issues. Although HIPAA was  ultimately intended to reduce administrative expenses and burdens faced within  the healthcare industry, we believe that implementation of this law will result  in additional costs. Failure to comply with HIPAA could result in fines and  penalties that could have a material adverse effect on us.

     **State laws and regulations could affect our ability to grow.**

      Several states      in which we operate our business have adopted certificate of need or similar      laws that generally require that a state agency approve certain acquisitions      and determine the need for certain bed additions, new services and capital      expenditures or other changes prior to the acquisition or addition of beds      or services, the implementation of other changes or the expenditure of      capital. State approvals are generally issued for a specified maximum expenditure      and require implementation of the proposal within a specified period of      time. Failure to obtain the necessary state approval can result in the      inability to provide the service, to operate the centers, to complete the      acquisition, addition or other change, and can also result in the imposition      of sanctions or adverse action on the center’s license and adverse      reimbursement action. There can be no assurance that we will be able to      obtain state approval for all future projects requiring such approval or      that such approvals will be timely.

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     **Possible changes in the case mix of patients as well as payor mix and payment methodologies may significantly affect our profitability.**

      The sources and amounts of our patient revenues will be determined by a number of factors, including licensed bed capacity and occupancy rates of our centers, the mix of patients and the rates of reimbursement among payors. Likewise, therapy services provided by our rehabilitation therapy services business will vary based upon payor and payment methodologies. Changes in the case mix of the patients as well as payor mix among private pay, Medicare and Medicaid will significantly affect our profitability. Particularly, any significant increase in our Medicaid population could have an adverse effect on our business, results of operations, financial condition and cash flow,especially if states operating these programs continue to limit, or more aggressively seek limits on, reimbursement rates.

     **We face intense competition in our business*.***

      The healthcare industry is highly competitive. We compete with a variety of other organizations in providing eldercare services, many of which have greater financial and other resources and may be more established in their respective communities than we are. Competing companies may offer newer or different centers or services than we do and may thereby attract patients or customers who are presently patients, customers or are otherwise receiving our services.

      **Our inpatient services segment is capital intensive, requiring us to continually direct financial resources to the maintenance and enhancement of our physical plant and equipment.**

      As of September  30, 2005, we wholly owned or leased 158 skilled nursing and assisted living  centers. Our ability to maintain and enhance our physical plant and equipment  in a suitable condition to meet regulatory standards, operate efficiently and  remain competitive in our markets requires us to commit a substantial portion  of our free cash flow to continued investment in our physical plant and equipment.  Certain of our competitors may operate centers that are not as old as our centers,  or may appear more modernized than our centers, and therefore may be more attractive  to prospective customers. In addition, the  cost to replace our existing centers through acquisition or construction is  substantially higher than the carrying value of our centers.We  are undertaking a process to allocate more aggressively capital spending within  our owned and leased centers in an effort to address issues that arise in connection  with an aging physical plant.

      If factors,      including factors indicated in these “Risk Factors” and other      factors beyond our control, render us unable to direct the necessary financial      and human resources      to the maintenance, upgrade and modernization of our physical plant and      equipment, our business, results of operations, financial condition and      cash flow could      be adversely impacted.

      **An increase in insurance costs may adversely affect us, and we may be liable for losses not covered by or in excess of our insurance.**

      An increasing      trend in malpractice litigation claims, rising costs of eldercare malpractice      litigation, losses associated with these malpractice lawsuits and a constriction      of insurers have caused many insurance carriers to raise the cost of insurance      premiums or refuse to write insurance policies for nursing homes. Also,      a tightening of the reinsurance market has affected property, auto and      excess liability insurance carriers. Accordingly, the costs of insurance      premiums have increased.

      This increase in insurance costs prompted us to exit our otherwise profitable operations in the State of Florida in fiscal 2003. There is no assurance that liability exposure and the related costs of insurance will not migrate to other states.

      We carry property,      workers’ compensation insurance, general and professional liability      coverage on our behalf and on behalf of our subsidiaries in amounts deemed      adequate by management. However, there can be no assurance that any current      or future claims will not exceed applicable insurance coverage.

      Health insurance premiums in the market rose sharply in recent years. Our business is labor intensive, and therefore health insurance costs represent a significant expense for us. In recent years, we have partially managed the increase in insurance premiums with changes in program offerings. Continuing increases substantially in excess of inflation could have a negative impact on our profitability, as further shifts in responsibility for these cost increases to the employee may not be possible.

      In addition,      we are self-insured for certain of our workers’ compensation insurance,      general and professional liability coverage and health insurance provided      to our employees. Accordingly, we are liable for payments to be made under      those plans. To the extent claims are greater than estimated, they could      adversely affect our business, results of operations, financial condition      and cash flow.

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     **We could experience significant increases in our operating costs due to continued intense competition for qualified staff,minimum staffing laws in the healthcare industry and potential labor strikes.**

      We and the      healthcare industry continue to experience shortages in qualified professional      clinical staff. We compete with other healthcare providers and with non-healthcare      providers for both professional and non-professional employees. As the      demand for these services continually exceeds thesupply of available and qualified staff, we and our competitors have been forced      to offer more attractive wage and benefit packages to these professionals      and to utilize outside contractors for these services at premium rates.      Furthermore, thecompetitive arena for this shrinking labor market has created high turnover among      clinical professional staff as many seek to take advantage of the supply      of available positions, offering new and more attractive wage and benefit      packages.In addition to the wage pressures inherent in this environment, the cost of training      new employees amid the high turnover rates has increased pressure on our      operating margins. Lastly, increased attention to the quality of care provided      inskilled nursing facilities has caused several states to mandate and other states      to consider mandating minimum staffing laws that further increase the gap      between demand for and supply of qualified individuals and lead to higher      labor costs.While we have been able to retain the services of an adequate number of qualified      personnel to staff our facilities appropriately and maintain our standards      of quality care, there can be no assurance that continued shortages will      not inthe future affect our ability to attract and maintain an adequate staff of qualified      healthcare personnel. A lack of qualified personnel at a facility could      result in significant increases in labor costs and an increased reliance      onexpensive temporary professional staffing agencies at such facility or otherwise      adversely affect operations at such facility. Any of these developments      could adversely affect our business, results of operations, financial condition      andcash flow.

      In addition, certain of our centers have certified unions that have entered into collective bargaining agreements. If one or more of these centers experience a lock-out or strike it could create a disruption in our business and increase our operating costs.

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

      Cost containment and lower reimbursement levels relative to inflationary increases in cost by third-party payors, including federal and state governments, have had a significant impact on the healthcare industry as a whole and on our cash flows. Our operating margins continue to be under pressure because of continuing regulatory requirements and scrutiny and growth in operating expenses, such as labor costs and insurance premiums. In addition, as a result of competitive pressures, our ability to maintain operating margins through price increases to private patients is limited.

      Our ability to make payments on our existing and future debt and to pay our expenses will depend on our ability to generate cash in the future. Our ability to generate cash is subject to various risks and uncertainties, including those disclosed in this section and prevailing economic, regulatory and other conditions beyond our control.

      **The agreements that govern our financing agreements contain various covenants that limit our discretion in the operation of our business.**

      The agreements and instruments that govern our financing arrangements contain various restrictive covenants that, among other things, require us to comply with or maintain certain financial tests and ratios and restrict our ability to:

|   | • | incur more debt;                                                   |
|--------|---------|--------------------------------------------------------------------|
|   |    |                                                               |
|   | • | pay dividends, purchase company stock or make other distributions; |
|   |    |                                                               |
|   | • | pay cash upon conversion of the debentures;                        |
|   |    |                                                               |
|   | • | make certain investments;                                          |
|   |    |                                                               |
|   | • | create liens;                                                      |
|   |    |                                                               |
|   | • | enter into transactions with affiliates;                           |
|   |    |                                                               |
|   | • | make acquisitions;                                                 |

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|   | • | merge or consolidate; and |
|--------|---------|---------------------------|
|   |    |                      |
|   | • | transfer or sell assets.  |

     Our ability to comply with these covenants is subject tovarious risks and uncertainties. In addition, events beyond our control could affect our ability to comply with andmaintain the financial tests and ratios. Any failure by us to comply with and maintain all applicable financial tests andratios and to comply with all applicable covenants could result in an event of default with respect to, and theacceleration of the maturity of, and the termination of the commitments to make further extension of credit under, asubstantial portion of our debt. If we were unable to repay debt to our senior lenders, these lenders could proceedagainst the collateral securing that debt. Even if we are able to comply with all applicable covenants, the restrictionson our ability to operate our business in our sole discretion could harm our business by, among other things, limitingour ability to take advantage of financing, mergers, acquisitions and other corporate opportunities.

      **A significant portion of our business is concentrated in certain markets and the respective economic conditions or changes in the laws affecting our business in those markets could have a material adverse effect on our operating results.**

      As of September      30, 2005, we receive approximately 80%  of our inpatient services revenue      from operations in Pennsylvania, New Jersey, Maryland, Massachusetts and      West Virginia.The economic condition of these markets could affect the ability of our patients      and third-party payors to reimburse us  for our services through a reduction      of disposable household income or the ultimate reduction of the tax base      used togenerate state funding of their respective Medicaid programs. An economic downturn,      or changes in the laws affecting our  business in these markets and in      surrounding markets, could have an adverse effect on our business, results      of operations,financial condition and cash flow. 

     **Realization of the tax benefit relating to our net operating loss carryforward is subject to numerous risks.**

     We estimate      our  net operating loss carryforward is approximately $120.9 million at      September  30, 2005 after giving effect to NCI’s consolidated federal tax return  completed for the period ended September 30, 2004. However, such net operating  loss carryforward  may further need to be adjusted pending settlement of any federal tax audit  of tax years ending on or before that date which could materially reduce, or  even eliminate, our estimated net operating loss carryforward. The amount and  timing of any realized tax benefit resulting from the utilization of the net  operating loss carryforward is a function of future taxable income, multiple  change of ownership limitations imposed by Section 382 of the Internal Revenue  Code of 1986, as amended, contractual limitations imposed by the tax sharing  agreement with NCI, and the term of the carryforward period. 

      **Recent legislation and the increasing costs of being publicly owned are likely to impact our future consolidated financial position and results of operations.**

      In connection with the Sarbanes-Oxley Act of 2002, we are subject to rules requiring our management to report on the effectiveness of our internal controls over financial reporting, and further requiring our independent auditor to attest similarly to such effectiveness. If we fail to have effective internal controls and procedures for financial reporting in place, we could be unable to provide timely and reliable financial information which could, in turn, have an adverse effect on our business, results of operations, financial condition and cash flows. 

      Significant      regulatory changes, including the Sarbanes-Oxley Act and rules and regulations      promulgated as a result of the Sarbanes-Oxley Act, have increased, and      in the future are likely to further increase, general and administrative      costs. In order to comply with the Sarbanes-Oxley Act of 2002, the listing      standards of the NASDAQ National Market, and rules implemented by the Securities      and Exchange Commission (SEC), we have had to hire additional personnel      and utilize additional      outside legal, accounting and advisory services, and may continue to require      such additional resources. Moreover, in the rapidly changing regulatory      environment in which we now operate, there is significant uncertainty as      to what will be required to comply with many of the new rules and regulations.      As a result, we may be required to spend substantially more than we currently      estimate, and may need to divert resources from other activities, as we      develop our compliance plans. 

      **New accounting pronouncements or new interpretations of existing standards could require us to make adjustments in our accounting policies that could affect our financial statements.**

      The Financial      Accounting Standards Board, the SEC, or      other accounting organizations or governmental entities issue new pronouncements 

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or new interpretations of existing accounting standards that sometimesrequire us to change our accounting policies and procedures. Future pronouncementsor interpretations could require us to change our policies or procedures andhave a significant impact on our financial statements. 

     **Implementation of new information systems could negatively affect us.**

      We are in the process of implementing certain new information systems to enhance operating efficiencies and provide more effective management of our business. Implementation of new systems carries risks such as project cost overruns and business interruptions. If we experience a material business interruption as a result of the implementation of new information systems or are unable to obtain the projected benefits of new systems, it could have an adverse effect on our business, results of operations, financial condition and cash flow. 

     **We may make acquisitions that could subject us to a number of operating risks.****

      Although our      tax sharing agreement, as amended, with NCI limits our ability to use our      common stock for acquisitions and other similar strategic transactions,      we anticipate      that we may make acquisitions of, investments in, and strategic alliances      with complementary businesses utilizing cash or debt financing to enable      us to capitalize on our position in the geographic markets in which we      operate and to expand our businesses geographically. However, implementation      of this strategy entails a number of risks, including: 

|   | • | inaccurate assessment of undisclosed liabilities;                                                                                                   |
|--------|---------|-----------------------------------------------------------------------------------------------------------------------------------------------------|
|   |    |                                                                                                                                                |
|   | • | diversion of management’s attention from    our existing operations;                                                                           |
|   |    |                                                                                                                                                |
|   | • | difficulties in assimilating the operations of an acquired business or in realizing projected revenue synergies, efficiencies and cost savings; and |
|   |    |                                                                                                                                                |
|   | • | increase in our indebtedness and a limitation on our ability to access additional capital when needed.                                              |

      Certain changes may be necessary to integrate the acquired businesses into our operations to assimilate new employees and to implement reporting, monitoring, compliance and forecasting policies and procedures. 

     **Provisions in Pennsylvania law and our corporate documents could delay or prevent a change in control.**

      As a Pennsylvania      corporation, we are governed by the Pennsylvania Business Corporation Law      of 1988, as amended, referred to as “Pennsylvania corporation law.” Pennsylvania      corporation law provides that the board of directors of a corporation in      discharging its duties, including its response to a potential merger or      takeover, may consider the effect of any action upon employees, shareholders,      suppliers, patients, customers and creditors of the corporation, as well      as upon communities in which offices or other establishments of the corporation      are located and all other pertinent factors. In addition, under Pennsylvania      corporation law, subject to certain exceptions, a business combination      between us and a beneficial owner of more than 20% of our common stock      may be accomplished only if certain conditions are met. 

      Our articles      of incorporation contain certain provisions that may affect a person’s      decision to initiate a takeover of us, including the following provisions: 

|   | • | a classified board of directors;                                                                                                                                                                      |
|--------|---------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |    |                                                                                                                                                                                                  |
|   | • | a provision confirming that we are subject to the restrictions in the Pennsylvania corporation law on certain business combinations involving us that are not approved by the board or directors; and |
|   |    |                                                                                                                                                                                                  |
|   | • | the authority to issue preferred stock with rights to be designated by the board of directors.                                                                                                        |

      Our articles of incorporation also confirm that we are subject to the provisions of Pennsylvania corporation law that deny our shareholders the right to act by partial written consent without a meeting. 

      Additionally, our board of directors adopted a shareholder rights plan, which makes it difficult for any person or group to acquire a significant interest in our common stock without advance approval of our board of directors. 

      The overall effect of the foregoing provisions may be to deter a future tender offer or other offers to acquire us or our shares. Shareholders might view such an offer to be in their best interest if the offer includes a substantial premium over the market price of the common stock at that time. In addition, these provisions may assist our 

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management in retaining its position and place it in a better position to resist changes that the shareholders may want to make if dissatisfied with the conduct of our business. 

     **Our  future profitability could be impacted by our ability to achieve certain performance  improvement objectives in our rehabilitation therapy services segment.**

     Beginning  in fiscal 2004 and throughout fiscal 2005, we and the rehabilitation therapy  services sector are experiencing a shortage of qualified rehabilitation therapists.  As the demand for these services continues to exceed the supply of available  therapists, we and our competitors have been forced to offer more attractive  wage and benefit packages to these professionals while utilizing outside contractors  for these services at premium rates. Due to intense competition for customers,  and through September 30, 2005, we were unable to pass the increase in therapist  labor costs along to our customers in the form of price increases. We have undertaken  a series of actions intended to improve the operating performance of our rehabilitation  therapy services segment. If we are unsuccessful in achieving our performance  improvement objectives, it could have an adverse effect on our business, results  of operations, financial condition and cash flows.

**Risks Related to Establishing Our Company Independently from NCI**

      **Portions of our historical financial information and our pro forma financial information may not be representative of our results as a separate company.**

      Prior to our spin-off on December 1, 2003, our operations were conducted as part of the consolidated NCI entity and not as a stand-alone entity. Accordingly, the financial information included or incorporated by reference in this prospectus as of dates prior to the spin-off may not reflect the results of operations, financial condition and cash flows that would have been achieved had our company been operated independently during such periods and as of such dates presented. 

      Prior to December 1, 2003, costs related to our corporate functions, including legal support, treasury administration, insurance administration, human resource management, internal audit, corporate accounting and income tax administration, which are not directly and solely related to our operations, were allocated to us prior to the spin-off based upon various methodologies deemed reasonable by management. Prior to December 1, 2003, certain assets and liabilities relating to our business were managed and controlled by NCI on a centralized basis. Such assets and liabilities reflected in our financial statements as of dates prior to December 1, 2003 were also allocated to us based upon various methodologies deemed reasonable by management. Although our management believes that the methods used to allocate and estimate such assets, liabilities and expenses are reasonable, there can be no assurance that such financial information is comparable to financial information for periods after the December 1, 2003 spin-off.

      **Our ability to engage in financings and acquisitions and other strategic transactions using our equity securities is subject to limitations because of the United States federal income tax requirements for a tax-free distribution.**

      Current tax      law generally creates a presumption that the spin-off would be taxable      to NCI (but not to its shareholders) if we engage in, or enter into an      agreement to engage in, a transaction that would result in a 50% or greater      change (by vote or by value) in our stock ownership during the four-year      period beginning on the date that begins two years before December 1, 2003,      the distribution date, unless it is established that the transaction is      not pursuant to a plan or series of transactions related to the spin-off.      Temporary Treasury regulations currently in effect generally provide that      whether an acquisition transaction and a distribution are part of a plan      is determined based on all of the facts and circumstances, including but      not limited to those specific factors listed in the regulations. In addition,      the regulations provide several “safe harbors” for acquisition      transactions that are not considered to be part of a plan.

      We entered      into a tax sharing agreement, subsequently amended, with NCI which limits      our ability to use our common stock for acquisitions and other similar      strategic      transactions.      We are also subject to several restrictions (including restrictions on      share issuances, business combinations, sales of assets and similar transactions)      that are designed to preserve the tax-free status of the spin-off. Under      the tax sharing agreement, as amended, we are required to indemnify NCI      against taxes and related losses resulting from actions we take that cause      the      spin-off      to fail to qualify as a tax-free transaction. The amount of any such indemnification      payment could be substantial. See “Management’s Discussion and      Analysis of Financial Condition and Results of Operations — Certain      Transactions and Events — Distribution Transactions.” These      restrictions may prevent us from entering into transactions which might      be advantageous to us, such as issuing equity securities to satisfy our      financing needs or acquiring businesses or assets by issuing equity securities.      Many of our competitors are not subject to similar restrictions and therefore,      may have a competitive advantage over us.

      **We may be responsible for federal income tax liabilities that relate to the distribution of our common stock by NCI.**

      We and NCI      have made certain representations in connection with the private letter      ruling NCI received from the Internal Revenue Service in connection with      the spin-off, and we have agreed to restrictions on certain future actions      designed to preserve the tax-free status of the spin-off.

      If the spin-off were found to be taxable by reason of any act (or failure to act) described in certain covenants contained in the spin-off documents, any acquisition of our equity securities or assets, or any breach of any of our representations in the spin-off documents or in the private letter ruling request, the spin-off would be taxable to NCI 

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and may be taxable to holders of NCI common stock who received sharesof our common stock in the spin-off. In such case, we would be required to indemnifyNCI against any taxes and related losses. The amount of any such indemnificationpayment could be substantial. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Certain Transactions and Events — DistributionTransactions.” 

      **We may be required to satisfy certain indemnification obligations to NCI, or may not be able to collect on indemnification rights from NCI.**

      Under the terms      of a separation and distribution agreement, we and NCI each agreed to indemnify      each other from and after the distribution with respect to the indebtedness,      liabilities and obligations that are retained by our respective companies.      These indemnification obligations could be significant, and we cannot presently      determine the amount of indemnification obligations for which we will be      liable or for which we will seek payment from NCI. Our ability to satisfy      these indemnities, if we are called upon to do so, will depend upon our      future financial performance. Similarly, NCI’s ability to satisfy any such obligations to us will depend on NCI’s      future financial performance. We cannot assure you that we will have the      ability to satisfy any substantial indemnification obligations to NCI.      We also cannot assure you that if NCI is required to indemnify us for any      substantial obligations, NCI will have the ability to satisfy those obligations.

     * ***NCI, our single largest supplier of pharmaceutical products and services, was acquired by Omnicare, Inc. on July 28, 2005.**

      NCI is the single largest supplier of pharmaceutical products and services to our skilled nursing and assisted living centers. While there are other qualified pharmacy suppliers, our multi-year contractual arrangement with NCI requires that NCI, through its subsidiary, NeighborCare Pharmacy Services, Inc., be the exclusive provider of pharmaceutical products and supplies, other than as required by law and certain payor- or resident-specific circumstances. As a result of the acquisition of NCI by Omnicare, Inc. on July 28, 2005, NCI is operating as a wholly owned subsidiary of Omnicare, Inc. We are not able to assess what impact, if any, the acquisition of NCI by Omnicare, Inc. will have on us. Each of NCI and Omnicare, Inc. is also exposed to many of the risks outlined herein, including the Medicare Modernization Act.

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**PART I**

**ITEM 1:****   BUSINESS**

**Description of Our Business**

     Genesis HealthCare      Corporation was incorporated in May 2003 as a Pennsylvania corporation.      On December 1, 2003, NCI completed the distribution (the spin-off)      of our common stock. Our common stock began trading publicly on theNASDAQ      National Market System on December 2, 2003 under the symbol “GHCI.”

      We are one of the largestproviders of healthcare and support services to the elderly in the United States. Within our network ofgeographically concentrated facilities, we offer services focusing on the primary medical, physical andbehavioral issues facing the medically complex elderly population.

      Our business is comprised oftwo primary business segments: inpatient services and rehabilitation therapy services. These segmentsare supported by complementary service capabilities.

      Approximately 89% of our net revenuesare generated through inpatient services. Our inpatient services are offered through a network of skillednursing and assisted living centers primarily located in the eastern United States. We currently own, lease,manage or jointly own 213 eldercare facilities, consisting of 178 skilled nursing facilities, 22 assistedliving facilities and 13 transitional care units collectively having 25,948 beds. 

      Our rehabilitation  therapy services business, which represents approximately 8% of our net revenues,  provides an extensive range of rehabilitation therapy services to the elderly,  including speech pathology, physical therapy and occupational therapy in our  inpatient market concentrations. 

      We also provide othercomplementary healthcare services, the revenues for which are included in all other servicesrevenues in our segment financial information.

     *Inpatient Services*

      Our eldercare centers arelocated in the following 12 states: Connecticut, Delaware, Maryland, Massachusetts, New Hampshire,New Jersey, North Carolina, Pennsylvania, Rhode Island, Vermont, Virginia and West Virginia.Approximately 72% of our beds are concentrated in the states of Pennsylvania, New Jersey, Maryland and Massachusetts. 

      Through our physicians, nurses,therapists and other members of our interdisciplinary medical care team, we apply a comprehensiveapproach to the complex needs facing the elderly, which we believe has resulted in above industryaverage occupancy levels and an enhanced level of Medicare and private paying patients. We receive higher rates of reimbursement from Medicare and private paying patients. For the twelve months ended September 30, 2005, the average occupancy level in our inpatient facilities was approximately 90%, and approximately 46% of our net revenues were from Medicare and private paying patients.

      We employ physicians, physician assistants and nursepractitioners who are primarily involved in providing medical direction and/or direct patient care at each center. Theemphasis on physician leadership is a strength that differentiates us from many other long-term care companies. Inaddition to physician executives, nursing center medical directors are administratively and clinically accountable forclinical care and quality improvement. The nursing center medical directors are dually accountable to the administratorand the physician executive. This medical staff structure allows for significant involvement of physicians at all levelsof the organization thus ensuring that an emphasis on quality care is maintained. Directed by a senior nurse executive,we maintain a corporate quality improvement program to enhance and continuously improve care provided in each center. Inaddition to clinical care, our centers provide our customers with dietary, housekeeping and laundry services, as well associal and recreational services. 

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      Our assisted      living centers’ staff provides assistance with general activities      of living such as medication management, bathing, dressing and meal preparation.      Our assisted living centers offer a variety of daily social and therapeutic      activities.

      We have established      and actively market programs for the  elderly and other patients who require      more complex levels of medical care. We focus on clinically complex elderlypatients who need extensive therapies and treatments to stabilize health problems      before returning home or transitioning  into a permanent long-term care      setting. Over 89% of patients come to our centers directly from an acute      care hospitalstay and have five or more health problems that affect their ability to carry      out everyday activities. Half of the elders  who enter our centers for      post-acute care are discharged within 26 days while the average stay for      a long-term carepatient is 158 days. Private insurance companies and other third-party payors,      including certain state Medicaid programs,  have recognized that treating      patients requiring complex medical care in centers such as those we operate      is acost-effective alternative to treatment in an acute care or rehabilitation hospital.      We provide high acuity care at rates that we believe are substantially      below      the      rates typically charged by acute care hospitals for comparable services.

      The following table reflects our average number of beds in service and our average occupancy levels for the periods presented. The average beds in service have not been adjusted to exclude discontinued operations; however, the occupancy data does exclude discontinued operations:

|                                            | ****   | **Year Ended    September 30,** |     |
|-------------------------------------------------|--------|---------------------------------|----------|
|                                            |   |                                 |     |
|                                            |   |                            | **2005** |   |   | **2004** |   |   | **2003** |   |
| **Average Beds in Service:**                    |   |                                 |          |   |  |  |   |  |  |   |
| Owned and Leased Facilities                     |   |                            | 20,521   |   |   | 20,805 |   |   | 22,758 |   |
| Managed and Jointly-Owned Facilities            |   |                            | 6,128    |   |   | 5,686 |   |   | 6,320 |   |
| **Occupancy Based on Average Beds in Service:** |   |                            |     |   |   |   |   |   |   |   |
| Owned and Leased Facilities                     |   |                            | 90       | % |   | 91 | % |   | 91 | % |
|                                            |   |                            |     |   |   |   |   |   |   |   |

      The following table reflects the payor mix of inpatient services revenues for the periods presented, and has been adjusted to exclude discontinued operations:

|                  | ****   | **Year Ended September    30,** |     |
|-----------------------|--------|---------------------------------|----------|
|                  |   |                                 |     |
|                  |   |                            | **2005** |   |   | **2004** |   |   | **2003** |   |
|                  |   |                                 |          |   |  |  |   |  |  |   |
| Medicaid              |   |                            | 54       | % |   | 51 | % |   | 50 | % |
| Medicare              |   |                            | 28       | % |   | 29 | % |   | 28 | % |
| Private pay and other |   |                            | 18       | % |   | 20 | % |   | 22 | % |
|                  |   |                                 |          |   |  |  |   |  |  |   |
|                  |   |                            | 100      | % |   | 100 | % |   | 100 | % |
|                  |   |                                 |          |   |  |  |   |  |  |   |

      Growth in the percentage of our Medicaid revenues is attributed to the recognition of provider assessments, which are accompanied by an increase in operating costs in the form of a provider tax.  

See “— Revenue Sources” and “— GovernmentRegulation.” 

     *Rehabilitation Therapy Services Segment*

      We provide      an extensive range of rehabilitation therapy services, including speech      pathology, physical therapy and occupational therapy in all of our inpatient       market concentrations. These services are provided by approximately 4,700      licensed      rehabilitation therapists and assistants employed or contracted by us at      substantially all of the eldercare centers we operate, as well as by contractto healthcare facilities operated by others and through our 

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13 certified outpatient rehabilitation agencies. For the fiscal year ended September 30, 2005, approximately 62% of our rehabilitation therapy services revenue was generated under contracts with unrelated third parties.

     *Other Services*

      We provide      management services to 42 independently and jointly owned eldercare centers      and 13 transitional care units, which are the eldercare centers jointly      owned and/or managed referred to in “ — Inpatient Services” above,      pursuant to management agreements that provide generally for the day-to-day      responsibility for the operation and management of the centers. In turn,      we receive management fees, depending on the agreement, computed as an      overall fixed fee, a fixed fee per customer, a percentage of net revenues      of the center plus an incentive fee, or a percentage of gross revenues      of the center with some incentive clauses. The management agreements, including      renewal option periods, are scheduled to terminate between 2005 and 2036,      27 of which are scheduled to terminate within the next twelve months. We      expect to renew a majority of the terminating contracts.

      We also provide an array of other specialty medical services in certain parts of our eldercare network, including respiratory health services, physician services, hospitality services, staffing services and other related services.

**Our Industry**

      The aging of the population and increased life expectancies are the primary driving forces behind the growth of the nursing and assisted living facilities market in the United States. According to the United States Census Bureau, in 2000, there were approximately 35 million Americans aged 65 or older, comprising approximately 13% of the total United States population. The number of Americans aged 65 or older is expected to climb to approximately 40 million by 2010 and to approximately 54 million by 2020. There are approximately 16,500 nursing homes with approximately 1.8 million total beds certified to provide Medicare and/or Medicaid services in the United States. On average, approximately 3.5 million people live in nursing homes during the course of a year. We believe that these demographic trends will support a growing demand for the servicesprovided by nursing and assisted living facility operators that deliver the most efficient, responsive, cost-effective and highest quality eldercare services to support a full range of needs and acuity levels. We also believe that these demographic considerations will place increased pressure on healthcare providers to find innovative, efficient means of delivering healthcare services. 

See “— Revenue Sources.”

**Our Strategy**

     We  continue to see increasing acuity in the patients we serve as more assisted  living and other community and home based care setting alternatives have become  available for those with lower health care needs and similar market forces drive  sicker patients into the lower cost skilled nursing setting. Our strategy leverages  this trend, by offering services to more medically complex elderly patients  while addressing the growing demands for greater patient privacy and comfort  in residential care. This strategy requires us to:

      ***Focus  on quality care.***We are focused on qualitative and  quantitative clinical performance measures in order to enhance and continuously  improve the care provided in our facilities. We continually seek to enhance  our reputation for providing clinical outcomes in patient care and rehabilitation.  Among other things, our management is financially incentivized by improvement  in clinical performance, and we employ physician executives who are administratively  and clinically accountable for clinical care and quality improvement. 

     ***Focus  on developing clinical specialties*.** Hospitals and physicians  increasingly seek skilled nursing facilities with demonstrated capabilities  to accept and care for complex patients following an acute hospital stay. The  market has also sought qualified and experienced providers of care for individuals  with Alzheimer’s disease and other forms of dementia. We have developed  and effectively implemented branded programs in certain markets and facilities  to address these needs, while assuring that core clinical services are provided  at every facility.

     ***Focus  on developing our resources*.** We are focused on the development  of both our physical plant as well as the implementation of information systems  to grow revenue and better monitor and manage our business. These efforts include  facility modernization to improve occupancy and quality mix, the development  of an integrated clinical, operational and financial system to improve administrative  efficiency and operational performance, and the implementation of tools for  more effective management of purchasing and nursing staff scheduling to reduce  the use of premium staffing, including temporary agency services and overtime.  

     ***Strengthen  our presence in existing markets.***We intend  to expand our presence in our core markets through selective acquisitions of  newer facilities with growth opportunities. Expansion of existing facility clusters  and creation of new clusters in local markets will allow us to leverage existing  operations and to achieve greater operating efficiencies. 

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**Our Competitive Strengths**

      We believe the following competitive strengths will enable us to continue to improve our profitability and cash flow:

      ***Geographically focused network.***We are regionally focused, and within our markets, we have developed strong referral networks with hospitals and discharge planners. By focusing our operations in specific markets, we have achieved lower operating costs through greater purchasing power, operating efficiencies and economies of scale. We are also able to design and customize our systems and services to meet the specific needs of each of our markets.

      ***High          acuity capabilities.***We focus on clinically          complex elderly patients who require extensive therapies and treatments          to stabilize health problems before returning home or transitioning          into a permanent long-term care setting. Over 89% of our patients come          to our facilities directly from an acute care hospital and require          assistance to perform daily activities. Private insurance companies          and other third-party payors have recognized that treating patients          requiring complex care in eldercare facilities, such as those operated          by us, is a cost-effective alternative to treatment in an acute care          or rehabiliation hospital.

      ***High quality eldercare services.***We believe we have a reputation as a leading provider of high quality eldercare services. As a result, we believe we have excellent relationships with hospitals and discharge planners, our primary referral sources. We maintain a corporate compliance program to monitor and collect regulatory compliance data and to enhance and continuously improve the care provided in our facilities.

      ***Significant facility ownership.***We own rather than lease a majority of our eldercare facilities, unlike a number of our competitors. Excluding facilities held for sale, we own 127 facilities with 15,902 beds, which represents approximately 79% of the total number of beds we own or lease. We believe that owning properties increases our operating and financial flexibility by enabling us to control more directly our occupancy costs, divest facilities and exit markets at our discretion and refurbish or remodel facilities in order to satisfy market demand.

      ***Admissions and discharge planning.***We have developed a successful model to process admissions through the automated tracking of bed availability and specialty care capacity at each of our facilities. Our model utilizes a multifaceted approach including clinical care coordinators and toll-free phone lines to assist our marketing staff and direct referral sources.  As a result of our efforts, we have consistently achieved higher occupancy levels as compared to industry averages. For the twelve month period ended September 30, 2005, our occupancy level was approximately 90% compared to the industry median occupancy level of approximately 89%, as reported in the June 2005 Nursing Facility State Occupancy Rate and Median Facility Occupancy Rate for Certified Beds CMS OSCAR Data Current Surveys issued by the American Health Care Association.

      ***Stable and experienced management team.***While      we operate in a healthcare sector which has experienced significant volatility      primarily due to a constantly changing reimbursement environment, our management      team has remained substantially intact, with many years of operating experience      working together. Our management team’s collective experience allows      us to address effectively the continuing challenges facing the industry      while providing the stability necessary to achieve meaningful operational      and financial improvements.

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**Revenue Sources**

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

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

     *Medicare and Medicaid*

     The Health Insurance      for Aged and Disabled Act (Title XVIII of the Social Security Act), known      as  “Medicare,” has      made available to nearly every United States citizen 65 years of age and      older a broad program of health insurance designed to help the nation’selderly meet hospital and other healthcare costs. The Medicareprogram consists of four parts: (i) Medicare Part A, which covers, among otherthings, inpatient hospital, skilled long-term care, home healthcare and certainother types of healthcare services; (ii) Medicare Part B, which covers physicians’ services,outpatient services, certain prescription drugs and certain items and servicesprovidedbymedical suppliers; (iii) a managed care option for beneficiaries who are entitledtoMedicare PartA and enrolled in Medicare Part B, known as Medicare Advantage or Medicare PartC and (iv) a new Medicare Part D benefit that becomes effective January 1, 2006coveringprescription drugs.****Under Medicare Part B, we are entitled to paymentfor medically necessary therapy services and products that replace a bodily function(i.e., ostomy supplies), home medical equipment and supplies and a limited numberof specifically designated prescription drugs. The Medicare program is administeredby the Centers for Medicare and Medicaid Services (CMS).

      Medicaid (Title      XIX of the Social Security Act) is a federal-state matching program, whereby      the federal government, under a need based formula, matches funds provided      by the participating states for medical assistance to “medically indigent” persons. The programs are administered by the applicable state welfare or social service agencies under federal rules. Although Medicaid programs vary from state to state, traditionally they have provided for the payment of certain expenses, up to established limits, at rates determined in accordance with each state’s      regulations. For skilled nursing centers, most states pay prospective rates,      and have some form of acuity adjustment. In addition to facility based      services, most states cover an array of medical ancillary services. Payment      methodologies for these services vary based upon state preferences and      practices permitted under federal rules. 

      State Medicaid programs generally have long-established programs for reimbursement which have been revised and refined over time. Any future changes in such reimbursement programs or in regulations relating thereto, such as reductions in the allowable reimbursement levels or the timing of processing of payments, could adversely affect our business. The annual increase in the federally matched funds could vary from state to state based on a variety of factors. Additionally, any shift from Medicaid to state designated managed care plans could adversely affect our business.****

      Medicare and Medicaid are subject to statutory and regulatory changes, retroactive rate adjustments, administrative rulings and government funding restrictions, all of which may materially affect the timing and/or levels of payments to us for our services. 

      We are subject to periodic audits by the Medicare and Medicaid programs, which have various rights and remedies against us if they assert that we have overcharged the programs or failed to comply with program requirements. These rights and remedies may include requiring the repayment of any amounts alleged to be overpayments or in violation of program requirements, or making deductions from future amounts due to us. Such programs may also impose fines, criminal penalties or program exclusions. Other third-party payor sources also reserve rights to conduct audits and make monetary adjustments in connection with or inclusive of auditing activities.

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     *Laws Affecting Medicare Revenues*

      Participating      skilled nursing facilities are reimbursed under a prospective payment system      for inpatient Medicare covered services. The prospective payment system      commenced with a facility’s first cost reporting period beginning      on or after July 1, 1998 and phased in over a three-year period following      passage of the Balanced Budget Act in 1997. Under the prospective payment      system, or PPS, skilled nursing facilities are paid a predetermined amount      per patient, per day or “per diem” based on the anticipated costs      of treating patients. The per diem rate is determined by classifying each      patient into one of 44 RUGs  (53 effective January 1, 2006) based      on the nature of the patient’s      condition and care needs. There is a separate per diem rate for each of      the RUG classifications. The per diem rate also      covers rehabilitation and non-rehabilitation ancillary services.

      As implemented by CMS, the prospective payment system initially had an adverse impact on the Medicare revenues of many skilled nursing facilities. In 1999 and 2000, refinements were made to the Balanced Budget Act that restored substantial Medicare funding to skilled nursing facilities that was originally eliminated in the initial implementation of the prospective payment system. 

      A number of      refinements made in 1999 and 2000 providing additional funding for Medicare      participating skilled nursing facilities expired on September 30, 2002,      resulting in an approximate 10% reduction in the rates paid to us for providing      services to Medicare patients. We refer to the expiration of the additional      funding as the “skilled nursing facility Medicare cliff.” Effective      October 1, 2002, Medicare rates adjusted for the skilled nursing facility      Medicare cliff were increased by a 2.6% annual inflation update factor.      For us, the net impact of these provisions adversely impacted annual revenue      and EBITDA and net income in fiscal 2003 by approximately $24.8 million      and $15.1 million, respectively.

      On July 28,      2005, CMS released the final fiscal 2006 skilled nursing facility prospective      payment rules, including refinement to the RUG classification system      (RUGs refinement). Effective October 1, 2005, the current skilled nursing      facility prospective payment rates were increased by a 3.1% annual inflation      update factor. Effective January 1, 2006, the rules establish nine new      payment classifications, alter the case-mix weights for the remaining 44      RUG payment categories and adjust upward the nursing component of most      RUG payment categories. Excluding the additional 3.1% annual inflation      factor, and after considering the distribution of our Medicare patient      population under the new system, RUGs refinement is expected to reduce      our Medicare payment rates approximately $9 per patient day beginning January      1, 2006, thereby reducing fiscal 2006 revenue and EBITDA approximately$7.5 million and reducing net income approximately $4.5 million. 

      The proposed federal budget for 2006 also proposes to reduce by 30% the amount that Medicare reimburses skilled nursing facilities and other non-hospital providers for bad debts arising from uncollectible Medicare coinsurance and deductibles. As proposed by CMS, the reduction would be phased-in over a three-year period at 10% per year. Based on our current volume of Medicare coinsurance bad debts, this proposed rule would reduce our EBITDA and net income by $1.8 million and $1.1 million in the first year, respectively. We cannot currently determine if, or when, this proposal will be implemented.****

      The Medicare      Modernization Act (MMA), enacted on December 8, 2003, created a new Medicare      prescription drug benefit, created incentives for greater private competition      within Medicare, adjusted coverage and payment terms for a number of providers      and Part B prescription drugs and reformed the administration of the Medicare      benefit. The MMA suspended application of $1,590 payment caps (therapy      caps) on Medicare Part B rehabilitation through December 31, 2005. The      therapy caps in place effective September 1, 2003 imposed payment limits      to services provided by independent therapists as well as to those provided      by outpatient rehabilitation facilities and other forms of rehabilitation      agencies. The suspension did not have retroactive impact upon Medicare      beneficiaries who exceeded their caps between September 1, 2003 and December      8, 2003. Extension of the moratorium on application of the therapy caps      removed a significant financial threat to our therapy business for the      short term. CMS recently announced in      its publication of the final 2006 physician fee schedules the implementation      of the therapy caps effective January 1, 2006. The therapy caps will be      increased to $1,740. While efforts have been made to introduce legislation      in Congress to extend the moratorium, Congress has not approved this extension. No      assurances can be made or given that Congress will extend the moratorium      on application of the therapy caps beyond calendar year      2005. As mandated by the law, the General Accounting Office is conducting      a study of alternatives to the therapy caps. We are unable to predict the      impact an implementation of therapy caps would have on our financial condition      and operating results, but believe it has the potential to reduce our revenue,      EBITDA and net income. See “Risk Factors — Risk Factors Relating      to Our Business.” 

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

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

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

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

      By law, Medicare      reimbursement for physician and non-physician professional services (including      Medicare Part B physical therapy, speech therapy and occupational therapy      services) are based on fee schedules. CMS has published final payment rules      for calendar year 2006. Unless Congress intervenes, CMS will impose a 4.4%      reduction in average payments for all professional services effective January      1, 2006. The U.S. Senate has passed legislation substituting a 1.0% positive      increase in favor of the 4.4% reduction. It remains uncertain whether Congress      will finalize action in time to prevent the payment reductions. Although      we are unable to predict the outcome of these measures, a reduction in      payment for professional services would have an adverse effect on our      business, results of operations, financial position and cash flows. 

     *Laws Affecting Medicaid Revenues*

     The Balanced      Budget Act of 1997 repealed the “Boren Amendment” federal payment      standard for payments to Medicaid nursing facilities, effective October      1, 1997. This repeal gave the states greater latitude in setting payment      rates for nursing facilities. Budget constraints and other factors have      caused some states to curb Medicaid reimbursement to nursing facilities      and states may continue to curb or delay payments to nursing facilities      in the future. The law also granted the states greater flexibility in establishing      Medicaid managed care programs without the need to obtain a federal waiver.      Although these waiver programs generally exempted institutional care, including      nursing facility services, these programs could ultimately change the Medicaid      reimbursement system for long-term care. Massachusetts has received a Federal      government waiver to initiate a voluntary, long term care managed care      program and Maryland is in the design stage of a waiver request mandating      managed long term care for individuals eligible for      dual eligibles. These changes could include changing reimbursement for      pharmacy services from fee-for-service, or payment per procedure or service      rendered, to a fixed amount per person utilizing managed care negotiated      or capitated rates.

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     The Benefits Improvement and Protection Act of 2000 enacted a phase out of intergovernmental transfer transactions by states whereby states would artificially inflate the payments to certain public facilities to increase federal matching funds. This action may have had the effect of reducing federal support for a number of state Medicaid programs. The reduced federal payments may impact aggregate available funds requiring states to further contain payments to providers. We operate in several of the states that have experienced or will experience a contraction of federal matching funds.

     State budget pressures in recent years have translated into reductions in the rate of state spending growth in certain jurisdictions. Given that Medicaid outlays are a significant component of state budgets, we expect continuing cost containment pressures on Medicaid outlays for skilled nursing facilities in the states in which we operate. In each of the major states where we provide services, we are working with trade groups, consultants and government officials to address responsibly the particular funding issues. 

     The plight of      state governments has helped to elevate issues related to Medicaid onto      the national agenda. In 2003, Congress passed temporary relief to states      providing a 2.9% increase in the federal Medicaid Assistance Percentage      for five quarters estimated to provide states $10.0 billion in Medicaid      relief. That assistance terminated on June 30, 2004. Actions to date on      state Medicaid budgets affirm that many states are adjusting downward the      rate of growth in state Medicaid spending to reflect the loss of the temporary      federal assistance. Medicaid funding is set annually. Most states have      completed      legislative      actions on their fiscal year 2006 state budgets. We expect our average      Medicaid rate per patient day to increase between approximately 2% to 3%      in our fiscal 2006. 

      As part of the state budget process, a number of states have indicated a desire to divert individuals from placement in nursing homes through an expansion of home and community based services. Most of these efforts are being established under demonstration and waiver authority. To date, these alternative care programs have not significantly impacted nursing home admissions. 

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

     Nursing home      provider assessments have been implemented in eight states where we operate      (Massachusetts, West Virginia, Rhode Island, North Carolina, New Hampshire,      Pennsylvania, New Jersey and Connecticut). Three of these plans received      federal approval during this fiscal year. In January 2005, CMS approved      the Pennsylvania provider assessment. The Pennsylvania provider assessment,      which was retroactive to July 1, 2003 and will expire on June 30, 2007,      was recognized cumulatively in the quarter ended March 31, 2005. Recognitionof the Pennsylvania provider assessment resulted in increased revenue, EBITDA and netincome of $50.9 million, $6.6 million and $4.0 million, respectively, in fiscal 2005,of which $30.9 million of revenue, $5.4 million of EBITDA and $3.3 million of net incomerelates to periods prior to the current fiscal year. In February 2005, CMS approved the NewJersey provider assessment. The New Jersey provider assessment, which was retroactive toJuly 1, 2004 and will expire on June 30, 2006, was recognized cumulatively in the quarterended March 31, 2005. Recognition of the New Jersey provider assessment resulted in increasedrevenue, EBITDA and net income of $22.1 million, $6.1 million and $3.7 million, respectively, infiscal 2005, of which $4.3 million of revenue, $1.0 million of EBITDA and $0.6 million of netincome relates to periods prior to the current fiscal year. The Connecticut provider assessment,which was retroactive to July 1, 2005, was recognized in the quarter ended September 30, 2005.Recognition of the Connecticut provider assessment resulted in increased revenue, EBITDA and netincome of $1.8 million, $0.4 million and $0.2 million, respectively, all of which relates to thequarter ended September 30, 2005. 

      The Commonwealth      of Pennsylvania has proposed a reduction in the reimbursement allowance      under its provider assessment program effective July 1, 2005 through June      30, 2006. If the proposed reduction is made final as expected, the amount      we must pay the Commonwealth under this program will exceed the amount      we      are

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reimbursed. In the quarter ended September       30, 2005, our revenue and EBITDA were reduced $0.6 million, and our net      income  was reduced $0.4 million or $0.02 per diluted share to consider the reduced       reimbursement. If the proposed reduction is made final as expected, our      fiscal  2006 revenue and EBITDA would be reduced approximately $2.4 million, and our       net income would be reduced approximately $1.4 million or $0.08 per diluted  share. We believe this adjustment is unique  to the methodology used by the Commonwealth in implementing its Medicaid provider       assessment plan. The Commonwealth has indicated that provider assessment      payments  made for fiscal years 2003 through 2005 were based on lower than actual Medicaid       utilization. Adjustments in the reimbursement allowance are meant to correct  faulty assumptions underlying payment amounts for the prior two years.

      The proposed  federal budget for 2006 included proposed reform of the Medicaid program to  cut a total of $60.0 billion in projected Medicaid expenditure growth over 10  years, including a provision that would reduce the maximum amount of provider  taxes that a state may impose on providers for purposes of qualifying for federal  matching funds from 6% of a state’s Medicaid outlay to 3%. Congress, during  consideration of its fiscal year 2006 First Congressional Budget Resolution,  scaled back the proposed Medicaid reductions. The final enactment is a compromise  establishing a Medicaid Commission authorized to make specific policy recommendations,  while agreeing to defer Medicaid cuts during fiscal year 2006, and providing  reconciliation instructions to Congress to make $10.0 billion in Medicaid reductions  during fiscal years 2007 to 2011. Congress has not agreed upon the proposed  Medicaid reductions and it remains unclear as to whether these budget issues  will be resolved by the end of 2005. No predictions can be made as to the ultimate  outcome of this budget proposal or the future of provider tax plan provisions.  We cannot predict the extent of the impact that such decrease, if any, in spending  by the federal government will have on our business, financial condition, results  of operations and cash flow. 

      It is not possible      to quantify fully the effect of legislative changes, the interpretation      or administration of such legislation or other governmental initiatives      on our business and the business of the customers served by our rehabilitation      services business. Accordingly, there can be no assurance that the impact      of any future healthcare legislation or regulation will not further adversely      affect our business. There can be no assurance that payments under governmental      and private third-party payor programs will be timely, will remain at levels      similar to present levels or will, in the future, be sufficient to cover      the costs allocable to patients eligible for reimbursement pursuant to      such programs. Our financial condition and results of operations are affected      by the reimbursement process, which in the healthcare industry is complex      and can involve lengthy delays between the time that revenue is recognized      and the time that reimbursement amounts are settled. Our bad debt expense      for the twelve months ended September 30, 2005, 2004 and 2003 was $10.9million, $20.2 million and $20.5 million, respectively. 

      The federal      government and state governments continue to focus on efforts to curb spending      on healthcare programs such as Medicare and Medicaid. It is impossible      to predict the outcome of the legislative and regulatory processes. We      cannot at this time predict the extent to which these proposals will be      adopted      or,      if      adopted      and      implemented, what effect, if any, such proposals and existing new legislation      and regulation will have on us. Efforts to impose reduced allowances,      greater discounts and more stringent cost controls by government and other      payors      are expectedto continue. 

**Government Regulation**

     *General*

      Our business is subject to extensive federal, state and, in some cases, local regulation with respect to, among other things, participation in the Medicare and Medicaid programs, licensure, certification and government reimbursement. For our eldercare centers, these regulations relate, among other things, to the adequacy of physical plant and equipment, qualifications of personnel, standards of care, government reimbursement and operational requirements.Compliance with such regulatory requirements, as interpreted and amended from time to time, can increase operating costs and thereby adversely affect the financial viability of our business. Failure to comply with current or future regulatory requirements could also result in the imposition of various remedies including fines, restrictions on admission, denial of payment for all or new admissions, the revocation of licensure, decertification, imposition of temporary management or the closure of the facility.

     *Licensure, Certification and Regulation*

      Our eldercare centers and healthcare services, to the extent required, are currently licensed under applicable law. Our skilled nursing centers and healthcare services, or practitioners providing the services therein, are certified or approved as providers under one or more of the Medicaid and Medicare programs. Generally, assisted living 

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centers are not eligible to be certified under Medicare or Medicaid.Licensing, certification and other applicable standards vary from jurisdictionto jurisdiction and are revised periodically. State and local agencies surveyall skilled nursing centers on a regular basis to determine whether such centersare in compliance with governmental operating and health standards and conditionsfor participation in government sponsored third-party payor programs. We believethat our eldercare centers and other sites of service are in substantial compliancewith the various Medicare, Medicaid and state regulatory requirements applicableto them.  However, in the ordinary course of our business, we receive noticesof deficiencies for failure to comply with condition of participation in theMedicare and Medicaid programs. We review such notices and take appropriate correctiveaction. In these cases, we submit our plan to bring the center into compliancewith regulations which must be accepted by the reviewing agency prior to itsimplementation.Insomecases, the reviewing federal or state agency may take various adverse actionsagainsta provider, including but not limited to:

|   | • | the imposition of fines;                                                                                                                                                      |
|--------|---------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |    |                                                                                                                                                                          |
|   | • | suspension of payments for new or all admissions to the center; and                                                                                                           |
|   |    |                                                                                                                                                                          |
|   | • | in extreme circumstances, decertification from        participation in the Medicare or Medicaid programs and revocation of    a center’s or service site’s license. |

      These actions      may adversely affect a center’s ability to continue to operate, ability      to provide certain services, and/or eligibility to participate in the Medicare      or Medicaid programs or to receive payments from other payors. Certain      of our centers have received notices that, as a result of certain alleged      deficiencies, federal and/or state agencies were taking steps to impose      remedies. Additionally, actions taken by one center or service site may      subject other centers or service sites under common control or ownership      to adverse remedies.

      All of our skilled nursing centers participate in the Medicare and Medicaid programs. Both initial and continuing qualifications of a skilled nursing center to participate in such programs depend upon many factors including accommodations, equipment, services, patient care, safety, personnel, physical environment, and adequate policies, procedures and controls.

      Several states in which we operate have adopted certificate of need or similar laws which generally require that a state agency approve certain acquisitions and determine the need for certain bed additions, new services, and capital expenditures. State approvals are generally issued for a specified maximum expenditure and require implementation of the proposal within a specified period of time. Failure to obtain the necessary state approval can result in:

|   | • | the inability to provide the service;                                                                           |
|--------|---------|-----------------------------------------------------------------------------------------------------------------|
|   |    |                                                                                                            |
|   | • | the inability to operate the centers;                                                                           |
|   |    |                                                                                                            |
|   | • | the inability to complete the acquisition, addition or other change; and                                        |
|   |    |                                                                                                            |
|   | • | the imposition of sanctions or adverse action    on the center’s license and adverse reimbursement action. |

*     Laws Affecting Billing and Business Practices*

      We are also subject to federal and state laws that govern financial and other arrangements between healthcare providers. These laws often prohibit certain direct and indirect payments or fee-splitting arrangements between 

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healthcare providers that are designed to induce the referral of patients to, or the recommendation of, a particular provider for medical products and services. These laws include:

|   | • | the “anti-kickback” provisions of        the federal Medicare and Medicaid programs, which prohibit, among other        things, knowingly and willfully soliciting, receiving, offering or paying        any remuneration (including any kickback, bribe or rebate) directly or        indirectly in return for or to induce the referral of an individual to        a person for the furnishing or arranging for the furnishing of any item        or service for which payment may be made in whole or in part under Medicare        or Medicaid. Penalties may include imprisonment, fines, exclusion from        participation in the Medicare and Medicaid programs and loss of license;    and |
|--------|---------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   | • | the “Stark laws” which prohibit,        with limited exceptions, the referral of patients by physicians for certain        services, including home health services, physical therapy and occupational        therapy, to an entity in which the physician has a financial interest.        Penalties may include denial of payment, mandatory refund of prior payment,        civil monetary penalties and exclusion from participation in the Medicare    and Medicaid programs.                                                                                                                                                                                                                   |

      In addition, some states restrict certain business relationships between physicians and other providers of healthcare services. Possible sanctions for violation of any of these restrictions or prohibitions include loss of licensure or eligibility to participate in reimbursement programs and civil and criminal penalties. These laws vary from state to state, are often complex and have seldom been interpreted by the courts or regulatory agencies. From time to time, we have sought guidance as to the interpretation of these laws; however, there can be no assurance that such laws will ultimately be interpreted in a manner consistent with our practices.

      There have also been anumber of recent federal and state legislative and regulatory initiatives concerning reimbursement under the Medicare and Medicaid programs. During the past few years, the Department of Healthand Human Services, or DHHS, has issued a series of voluntary compliance guidelines. These compliance guidelines provide guidance on acceptable practices. Skilled nursing facility services anddurable medical equipment, prosthetics, orthotics, supplies, and supplier performance practices have been among the services addressed in these publications. Our Corporate Integrity Program isworking to assure that our practices conform to regulatory requirements. DHHS alsoissues fraud alerts and advisory opinions. For example, directives concerningdouble billing, home health services, the provision of medical supplies tonursing facilities, and most recently, contractual joint venture relationshipshave been released. It is anticipated that areas addressed by these advisoriesmay come under closer scrutiny by the government. While we have reviewed government guidance,we cannot predict accurately the impact of any such initiatives.

*     Laws Governing Health Information*

      The Health Insurance  Portability and Accountability Act of 1996 (HIPAA) requires us to comply with  standards for the use of identifiable health information within GHC and the  sharing of such information with third parties, such as payors, business associates,  residents and patients. Among the standards that DHHS may adopt pursuant to  HIPAA are standards for the following: electronic transactions and code sets,  unique identifiers for providers, employers, health plans and individuals, security  and electronic signatures, privacy, and enforcement. Although HIPAA was intended  to ultimately reduce administrative expenses and burdens faced within the healthcare  industry, we believe that implementation of this law has resulted in additional  costs.

      DHHS has released three rules to date mandating the use of new standards with respect to certain healthcare transactions and health information. The first rule establishes uniform standards for common healthcare transactions, including: healthcare claims information; plan eligibility, referral certification and authorization; claims status; plan enrollment and disenrollment; payment and remittance advice; plan premium payments; and coordination of benefits. Second, DHHS has released standards relating to the privacy of individually identifiable health information. These standards not only require our compliance with rules governing the use and disclosure of protected health information, but they also require us to impose those rules, by contract, on any business associate to

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whom we disclose information. Third, DHHS has released rules governing the security of health information maintained or transmitted in electronic form.

      DHHS finalized  the transaction standards on August 17, 2000, effective October 2003. DHHS issued  the privacy standards on December 28, 2000, and, after certain delays, they  became effective on April 14, 2001, with a compliance date of April 14, 2003.  On February 20, 2003, DHHS issued final rules governing the security of health  information, with a compliance date of April 20, 2005. These rules specify a  series of administrative, technical and physical security procedures to assure  the confidentiality of electronic protected health information, effective April  20, 2005.

      Further, on April 18, 2005, DHHS published its Proposed Rule on Enforcement of the HIPAA Administrative Simplification provisions, including the transaction standards, the security standards and the privacy rule.This proposed enforcement rule addresses, among other issues, DHHS’s policies for determining violations and calculating civil money penalties, how DHHS will address the statutory limitations on the imposition of civil money penalties, and various procedural issues. Sanctions for failing to comply with HIPAA health information practices      provisions include criminal penalties and civil sanctions. In January 2004,      CMS announced the adoption of the National Provider Identifier as the standard      unique health identifier for health care providers to use in filing  and      processing health care claims and other transactions, which became effective      May 23, 2005. 

      At this time, we      believe we are in substantial compliance with the HIPAA requirements      that are currently in effect, and we continue to make good faith efforts      to carry out compliance. As part of our Corporate Integrity Program, we      monitor our      compliance with HIPAA. Our compliance and privacy officer is responsible      for administering the Corporate Integrity Program which includes HIPAA      related compliance. Although HIPAA was ultimately intended to reduce administrative      expenses and burdens faced within the healthcare industry, we believe that      implementation of this law will result in additional costs. Failure to      comply with HIPAA could result in fines and penalties that could have amaterial adverse effect on us.

**Corporate Integrity Program**

      Our Corporate Integrity Program was developed to assure that we strive to achieve our goal of providing a high level of care and service in a manner consistent with all applicable state and federal laws and regulations and our internal standard of conduct. This program is intended to allow personnel to prevent, detect and resolve any conduct or action that fails to satisfy all applicable laws and our standard of conduct.

      We have a corporate compliance officer responsible for administering the Corporate Integrity Program. The corporate compliance officer, with the approval of the chief executive officer or the board of directors, may use any of our resources to evaluate and resolve compliance issues. The corporate compliance officer reports significant compliance issues to the board of directors.

      We established the Corporate Integrity Program hotline, which offers a toll-free number available to all of our employees to report compliance issues, including any alleged privacy violations under HIPAA.All calls reporting alleged non-compliance are logged, investigated, addressed and remedied by appropriate company officials.

      The corporate integrity subcommittee was established to ensure a mechanism exists for us to monitor compliance issues. The corporate integrity subcommittee members are senior members of the finance, human resources, information systems, legal, clinical practices, internal audit and operations departments.

      Periodically, we receive information from DHHS regarding individuals and providers that are excluded from participation in Medicare, Medicaid and other federal healthcare programs. Providers may include medical directors, attending physicians, vendors, consultants, therapists and other clinical staff. On a monthly basis, management compares the information provided by DHHS to databases containing providers and individuals doing business with us. Any potential matches are investigated and any necessary corrective action is taken to ensure we cease doing business with that provider and/or individual. 

**Personnel**

      We and our industry continue to experience shortages in qualified professional clinical staff. We compete with other healthcare providers and with non-healthcare providers for both professional and non-professional employees. As the demand for these services continually exceeds the supply of available and qualified staff, we and our competitors have been forced to offer more attractive wage and benefit packages to these professionals and to utilize

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outside contractors for these services at premium rates. Furthermore,the competitive arena for this shrinking labor market has created high turnoveramong clinical professional staff as many seek to take advantage of the supplyof available positions, offering new and more attractive wage and benefit packages.In addition to the wage pressures inherent in this environment, the cost of trainingnew employees amid the high turnover rates has created added pressure on ouroperating margins. Lastly, increased attention to the quality of care providedin skilled nursing facilities has caused several states to mandate and otherstates to consider mandating minimum staffing laws that further increase thegap between demand for and supply of qualified individuals and lead to higherlabor costs.While we have been able to retain the services of an adequate numberof qualified personnel to staff our facilities and sites of service appropriatelyand maintain our standards of quality care, there can be no assurance that continuedshortages will not affect our ability to attract and maintain an adequate staffof qualified healthcare personnel in the future. A lack of qualified personnelat a facility could result in significant increases in labor costs and an increasedreliance on expensive temporary agencies at such facility or otherwise adverselyaffect operations at such facility. Any of these developments could adverselyaffect our operating results or expansion plans.

      In recognition of the competitive nature of clinical staff recruitment and retention, we have implemented the following reward, recognition and professional development programs:

|   | • | Shared Governance, a structure to support the        participation of nurses in the development and implementation of policies,    projects and processes which affect their practice;                                                                  |
|--------|---------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |    |                                                                                                                                                                                                                                                         |
|   | • | STEPP (Steps To Excellence in Professional        Practice), a clinical advancement program which allows nurses to receive    recognition and compensation for clinical expertise; and                                                                       |
|   |    |                                                                                                                                                                                                                                                         |
|   | • | TAP (Tuition Assistance Program), a program        designed to provide eligible employees with financial assistance to pursue        education and training through defined degree and certified programs    of study related to professional career growth. |

     Our focus on recruitment, retention and continuing education has led us to identify even greater needs for professional development. In response, in fiscal 2004 we designated a chief learning officer dedicated to the pursuit of employee retention and growth.

      We employ approximately 35,000 people. We have 56 centers that have certified unions that have entered into collective bargaining agreements. The agreements expire at various dates through 2010 and cover approximately 4,600 employees. We believe that our relationship with our employees is generally good.

      In fiscal 2004,      we entered into an agreement with the Service Employees International Union      (SEIU) to provide for one collective bargaining agreement which covers      the six centers that were unionized SEIU buildings at that time and under      which the SEIU was afforded the opportunity to organize 10 of our non-unionized      centers in the State of New Jersey between September 2004 and December      2005. Consequently, seven of these non-unionized centers have elected to      be represented by the SEIU, and one has elected not to be represented by      the SEIU. The two remaining centers will hold elections in December 2005.      The      agreement emphasizes our positive relationship and common goals shared      with the SEIU in the State of New Jersey. The agreement contains a formula      which ties increases in employee wages and benefits to increases in the      combined per patient day rates of the covered centers and protects us and      our employees from lock-outs and/or strikes. The initial term of the agreement      will expire in September 2008. 

**Marketing**

      Marketing for eldercare centers is focused at the local level and is conducted primarily by a dedicated regional marketing staff that calls on referral sources such as hospitals, hospital discharge planners, doctors and various community organizations. In addition to those efforts, our marketing objective is to maintain public awareness of our eldercare centers and their capabilities. We take advantage of our regional concentrations in our marketing efforts, where appropriate, through consolidated marketing programs, which benefit more than one center. Toll-free 

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regional phone lines assist the marketing staff and direct referral sources, which speeds admissions by automated tracking of bed availability and specialty care capabilities for each of our centers and all of our affiliated centers.

      We market our rehabilitation therapy services and other services through a direct sales force which primarily calls on eldercare centers, hospitals, clinics and home health agencies.

      Historically, we operated our core business under the name Genesis ElderCare. Our logos, trademarks and service marks are featured in print advertisements in publications serving the regional markets in which we operate. We are using advertising, including our toll free ElderCare lines, to promote our brand names in trade, professional and business publications and to promote services directly to consumers.

**Competition**

      We compete with a variety of other companies in providing healthcare services to older adults. Certain competing organizations have greater financial and other resources and may be more established in their respective communities than we are. Competing companies may offer newer or different centers or services than us, including a variety of community based services, and may thereby attract our patients who are either presently residents of our eldercare centers or are otherwise receiving our healthcare services.

      We operate      eldercare centers in 12 states. In each market, our eldercare centers may      compete for patients with rehabilitation hospitals, subacute units of hospitals,      skilled or intermediate nursing centers, and personal care or residential      centers. Certain of these providers are operated by not-for-profit organizations      and similar businesses that can finance capital expenditures on a tax-exempt      basis or receive charitable contributions unavailable to us. In competing      for patients, a center’s local reputation is of paramount importance. Referrals typically come from acute care hospitals, physicians, religious groups, health maintenance organizations, the patient’s      families and friends, and other community organizations.

      Members of      a patient’s family generally actively participate in the selection      of an eldercare center. Competition for medically complex patients is intense      among acute care hospitals with long-term care capability, rehabilitation      hospitals and other specialty providers and is expected to remain so in      the future. Important competitive factors include the reputation in the      community, services offered, the appearance of a center, and the cost of      services.

      We compete in providing rehabilitation therapy services and other healthcare services with a variety of different companies. Generally, this competition is regional and local in nature. The primary competitive factors in these businesses are similar to those in the inpatient services business and include reputation, the cost of services, the quality of clinical services, responsiveness to patient needs, and the ability to provide support in other areas such as third-party reimbursement, information management and patient record-keeping. 

**Insurance**

      The vast majority      of our exposure to general and professional liability claims is insured      by commercial insurers subject to per claim and aggregate retention limits.      The retentions are insured by our wholly owned captive insurance company,      Liberty Health Corporation, Ltd. (LHC). The vast majority of our exposure      to workers’ compensation liability claims is fully insured by LHC.      Growth in general and professional liability insurance premiums for coverage      above our retention has risen dramatically in recent years. We have managed      this increase by assuming additional retention through LHC and by more      proactively managing claims. 

      The dramatic increase in costs are particularly acute in the State of Florida where, because certain laws allow for significantly higher liability awards than in other states, general liability and professional liability costs have increased substantially. In fiscal 2003, we sold all of our approximately 1,500 skilled nursing and assisted living beds in the State of Florida, representing six percent of our then owned and leased beds. 

      We provide several health insurance options to our employees, including a self-insured health plan and several fully-insured health maintenance organizations. Growth in health insurance premiums in the market rose sharply in 

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recent years. Our business is a labor intensive business, and therefore health insurance costs represent a significant expense for us. In recent years, we have partially managed this increase with changes in program offerings. Continuing increases substantially in excess of inflation could have a negative impact on our profitability, as further shifts in responsibility for these cost increases to the employee may not be possible.

     We believe      that adequate reserves are in place to cover the ultimate liability related      to general and professional liability, workers’ compensation and health      insurance claims exposure. However, there can be no assurance that any      current or future claims will not exceed applicable insurance reserves      or that in the future such insurance will be available at a reasonable      price or that we will be able to maintain adequate coverage.

**Other**

     *Environmental Matters*

      We are subject to various federal, state and local statutes and ordinances regulating the discharge of materials into the environment. Management does not believe that we will be required to expend any material amounts in order to comply with these laws and regulations or that compliance will materially affect our capital expenditures, results of operations or financial condition.

     *Reorganization*

      On June 22,      2000, NCI and certain of its direct and indirect subsidiaries filed for      voluntary relief under Chapter 11 of the United States Code, referred to      as the “Bankruptcy Code,” with the United States Bankruptcy Court for the District of Delaware, referred to as the “Bankruptcy Court.” On the same date, NCI’s 43.6% owned affiliate, The Multicare Companies, Inc., and certain of its direct and indirect subsidiaries and certain of its affiliates, referred to as “Multicare,” also      filed for relief under Chapter 11 of the Bankruptcy Code with the Bankruptcy      Court. A substantial majority of NCI and Multicare subsidiaries that became      our subsidiaries following the spin-off filed for bankruptcy.

     See “Risk Factors.”

**Available Information**

      Our internet      address is www.GenesisHCC.com. We make available free of charge on www.GenesisHCC.com      our registration statement on Form 10, annual reports on Form 10-K, quarterly      reports on Form 10-Q and current reports on Form 8-K, and amendments to      such registration statement or reports filed or furnished pursuant to Section      13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable afterwe electronically file such material with, or furnish it to, the Securities and      Exhange Commission.

      In addition, you may request a copy of these filings (excluding exhibits) at no cost by writing or telephoning us at the following address or telephone number: 

Genesis HealthCare Corporation101 East State StreetKennett Square, PA 19348Attention: Investor RelationsTelephone: (610) 925-2000

      Information contained on our website is not part of this annual report on Form 10-K and is not incorporated by reference in this document. Our website is and is only intended to be an inactive textual reference.

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**ITEM 1B:  UNRESOLVED STAFF COMMENTS**

     None. 

**ITEM 2:****   PROPERTIES**

**Inpatient Sites of Service**

      The following table provides information by state as of December 1, 2005 regarding the eldercare centers we own, lease and manage. Included in the center count are 22 stand-alone assisted living facilities with 2,091 units and 15 skilled nursing facilities with 434 assisted living units. 

|           | **Wholly Owned Centers** | **Leased Centers** |     | **Managed Centers (1)** |   | **Total** |           |
|----------------|--------------------------|--------------------|----------|-------------------------|--------|-----------|----------------|
|                |                     |                    |          |                         |
| **State**      | **Facilities**           |               | **Beds** | **Facilities**          |   | **Beds**  | **Facilities** |   | **Beds** | **Facilities** |   | **Beds** |
|           |                          |               |          |                    |        |      |                |   |  |   |  |   |  |   |  |   |
| Pennsylvania   | 32                       |               | 4,218    |                    | 8      |      | 941            |   | 6 |   | 988 |   | 46 |   | 6,147 |   |
| New Jersey     | 20                       |               | 2,820    |                    | 7      |      | 1,356          |   | 6 |   | 697 |   | 33 |   | 4,873 |   |
| Maryland       | 13                       |               | 1,593    |                    | 6      |      | 803            |   | 15 |   | 2,144 |   | 34 |   | 4,540 |   |
| Massachusetts  | 16                       |               | 2,183    |                    | 2      |      | 250            |   | 16 |   | 764 |   | 34 |   | 3,197 |   |
| West Virginia  | 14                       |               | 1,306    |                    | 5      |      | 394            |   | 4 |   | 270 |   | 23 |   | 1,970 |   |
| Connecticut    | 9                        |               | 1,330    |                    | — |      | —         |   | 2 |   | 168 |   | 11 |   | 1,498 |   |
| New Hampshire  | 10                       |               | 972      |                    | 2      |      | 208            |   | 2 |   | 246 |   | 14 |   | 1,426 |   |
| Delaware       | 5                        |               | 583      |                    | — |      | —         |   | 2 |   | 237 |   | 7 |   | 820 |   |
| Virginia       | 2                        |               | 210      |                    | 1      |      | 240            |   | — |   | — |   | 3 |   | 450 |   |
| Rhode Island   | 3                        |               | 373      |                    | — |      | —         |   | — |   | — |   | 3 |   | 373 |   |
| North Carolina | —                   |               | —   |                    | — |      | —         |   | 2 |   | 340 |   | 2 |   | 340 |   |
| Vermont        | 3                        |               | 314      |                    | — |      | —         |   | — |   | — |   | 3 |   | 314 |   |
|           |                          |               |          |                    |        |      |                |   |  |   |  |   |  |   |  |   |
| Total          | 127                      |               | 15,902   |                    | 31     |      | 4,192          |   | 55 |   | 5,854 |   | 213 |   | 25,948 |   |
|           |                          |               |          |                    |        |      |                |   |  |   |  |   |  |   |  |   |
|           |                     |               |     |                    |   |      |           |   |   |   |   |   |   |   |   |   |

| (1) | Managed centers include 12 properties with 1,539 beds that are jointly owned by us and independent third-parties. Also included in managed centers are 13 transitional care units with 331 beds located in hospitals principally in the Commonwealth of Massachusetts. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

      We believe that our physical properties are well maintained and are in a suitable condition for the conduct of our business. In fiscal 2005, we significantly increased our level of capital spending in an effortto upgrade and modernize our physical plant. Our capital spending plan for fiscal 2006 contemplates spending levels in excess of those made in fiscal 2005.

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**ITEM 3:****   LEGAL PROCEEDINGS**

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

     NeighborCare,      Inc., our former parent, is the defendant in an action brought by former      investors in NeighborCare,      Inc. on January 27, 2004 in the Supreme Court of New York, County of New      York. The plaintiffs collectively held over $205.0 millionin subordinated debentures prior to the filing by NeighborCare, Inc. and substantiallyall of our subsidiaries of a Chapter 11 bankruptcy petition in 2000. The claimalleges fraud and grossly negligent misrepresentation by defendants NeighborCare,Inc., Goldman Sachs & Co., Mellon Bank, N.A., Highland Capital Management,LP, and George V. Hager, Jr., our Chief Executive Officer (and former Chief FinancialOfficer of NeighborCare, Inc. prior to the spin-off), in connection with theBankruptcy Court's approval of the plan of reorganization confirmed by the BankruptcyCourt in 2001 which canceled the subordinated debentures. The plaintiffs seekto recover $200.0 million plus interest costs and fees.  The action was removedto the United States Bankruptcy Court for the District of Delaware. In July 2004,we received notice from NeighborCare, Inc. indicating that it believes we areresponsible for 50% of the legal fees related to this matter. In addition, MellonBank, N.A. has asserted a claim against NeighborCare, Inc. for indemnificationfor expenses and damages related to the former investors' claim. On March 28,2005, the Bankruptcy Court ruled that NeighborCare, Inc. would be obligated toreimburse Mellon Bank, N.A. for expenses and damages relating to the claim, otherthan any expenses or damages determined by the Bankruptcy Court to have resultedfrom Mellon Bank’s gross negligence or willful misconduct. On April 27,2005 the Bankruptcy Court dismissed the plaintiff’scomplaint against all named defendants. Plantiff has appealed the BankruptcyCourt’s decision. Whilewe have advanced NeighborCare, Inc. 50% of the deductible under the insurancepolicy related to the former investors' claim, we have not made a determinationwith respect to our ultimate liability, if any, relative to this case.

******ITEM 4:****   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

     There were no matters submitted to a vote of shareholders during the fourth quarter of fiscal 2005. 

      We will hold our 2005 Annual Meeting of Shareholders on Wednesday, February 22, 2006 at 10:00 a.m. local time, at our principal executive offices. 

******ITEM 4A:   EXECUTIVE OFFICERS OF THE REGISTRANT**

      The following table and biographies set forth information with respect to persons who serve as our executive officers:

| **Name**             |   | **Age** |   | **Position**                                                                         |
|----------------------|--------|---------|--------|--------------------------------------------------------------------------------------|
|                      |   |         |   |                                                                                      |
| George V. Hager, Jr. |   | 49      |   | Chief Executive Officer and Class    I Director (Chairman of the Board of Directors) |
| James V. McKeon      |   | 41      |   | Executive Vice President and Chief Financial Officer                                 |
| Robert A. Reitz      |   | 55      |   | Executive Vice President and Chief Operating Officer                                 |
| David C. Almquist    |   | 51      |   | Executive Vice President                                                             |
| Richard P. Blinn     |   | 51      |   | Executive Vice President                                                             |
| Eileen M. Coggins    |   | 41      |   | Senior Vice President, General Counsel and Corporate Secretary                       |
| Barbara J. Hauswald  |   | 46      |   | Senior Vice President, Planning and Development                                      |
| Richard Pell, Jr.    |   | 57      |   | Senior Vice President, Administration                                                |
| Thomas DiVittorio    |   | 37      |   | Vice President, Corporate Controller and Chief Accounting Officer                    |

      *George V. Hager, Jr.*has      served as our chief executive officer and chairman of the board of directors      since our inception in May 2003. Mr. Hager joined NCI in 1992. From 1992      to December 2003, he served as NCI’s chief financial officer and was      responsible for corporate finance, treasury, investor relations, information      services, third-party reimbursement and risk management. Mr. Hager serves      on the board of directors of Adolor Corporation.

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      *James V. McKeon* has      served as our executive vice president and chief financial officer since      December 2003. Mr. McKeon served as NCI’s senior vice president and corporate controller from April 2000 to December 2003. From April 1997 to April 2000, Mr. McKeon served as NCI’s vice president and corporate controller. Mr. McKeon joined NCI in June 1994 as director of financial reporting and investor relations and served as NCI’s      vice president of finance and investor relations from November 1995 to      April 1997.

      *Robert A. “Mike” Reitz*has      served as our executive vice president and chief operating officer since      December 2003. Mr. Reitz served as president of NCI’s Mid-Atlantic      ElderCare region from September 1997 until December 2003. He served in      various management positions with Meridian Healthcare for nineteen years      prior to its acquisition by NCI in 1993.

      *David C. Almquist*has      served as our executive vice president since December 2003. Mr. Almquist      served as president of NCI’s Chesapeake ElderCare region from 1996      until December 2003. Mr. Almquist has over 28 years of experience in the      healthcare industry.

      *Richard P. Blinn*has      served as our executive vice president since December 2003. Mr. Blinn served      as president of NCI’s New England ElderCare region from 1998 until      December 2003. Mr. Blinn has over 26 years of experience in the healthcare      industry.

      *Eileen M. Coggins, Esquire,*has      served as our senior vice president, general counsel and corporate secretary      since December 2003. Ms. Coggins served as NCI’s corporate compliance and privacy officer from December 2002 until December 2003. Prior to that appointment, from April 1998 to December 2002, she was NCI’s vice president of compliance, and prior to that was NCI’s      deputy general counsel.

      *Barbara J. Hauswald* has      served as our senior vice president, planning and development since December      2003. Ms. Hauswald served as NCI’s senior vice president and treasurer      from April 2000 until December 2003, and joined NCI as vice president and      treasurer in April 1998. Prior to joining NCI, Ms. Hauswald served as first      vice president in the healthcare banking department of Mellon Bank N.A.

      *Richard Pell, Jr.* has      served as our senior vice president, administration since December 2003.      Mr. Pell served as NCI’s senior vice president, administration and      chief compliance officer from April 1998 until December 2003, with responsibility      for the following areas: human resources, law, government relations, public      relations, staff development and corporate communications. Prior to joining      NCI, Mr. Pell was the director of the Veterans Affairs Medical Center in      Martinsburg, West Virginia. 

      *Thomas DiVittorio* has      served as our vice president, corporate controller and chief accounting      officer since December 2004, and vice president and corporate controller      since December 2003. From January 2003 to December 2003, Mr. DiVittorio      served as NCI’s vice president and assistant controller. From April 1999 to January 2003, Mr. DiVittorio served as NCI’s director of financial reporting and from November 1996 to April 1999 he served as NCI’s      manager of financial reporting. 

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**PART II**

| ****ITEM    5:**** | ******MARKET            FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS    AND ISSUER PURCHASES OF EQUITY SECURITIES** |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------|

      NCI consummated      the spin-off on December 1, 2003 by distributing, on a pro rata basis,      all of our shares to holders of record of NCI common stock at the close      of business on October 15, 2003, the record date for the spin-off. Based      on the total number of shares of NCI common stock at the close of business      on the record date for the spin-off, each record holder of NCI common stock      received 0.5 shares of our common stock (an aggregate of 19,898,104 shares)      or cash in lieu of a fractional share of our common stock. Immediately      after the spin-off, we issued 130,246 shares of our common stock into an      escrow account for future delivery to former unsecured claimants of NCI      and its subsidiaries that were entitled to receive common equity securities      under the terms of the 2001 joint plan of reorganization. On December 2,      2003, our common stock began trading on the NASDAQ National Market System      under the symbol “GHCI.” 

      The following      table indicates, for each of the quarters in the fiscal years ended September      30, 2005 and 2004, the range of high and low closing prices of our commonstock reported on the NASDAQ National Market System.

| **Quarter Ended**  |   | **High** |   |   | **Low** |   |
|--------------------|--------|----------|--------|--------|---------|--------|
|                    |        |          |   |        |         |   |
| December 31, 2004  | $      | 36.70    |   | $      | 29.24   |   |
| March 31, 2005     |   | 43.27    |   |   | 33.11   |   |
| June 30, 2005      |   | 46.62    |   |   | 35.39   |   |
| September 30, 2005 |   | 47.96    |   |   | 39.16   |   |
|               |   |     |   |   |    |   |
| **Quarter Ended**  |   | **High** |   |   | **Low** |   |
|                    |        |          |   |        |         |   |
| December 31, 2003  | $      | 24.40    |   | $      | 21.12   |   |
| March 31, 2004     |   | 28.47    |   |   | 20.78   |   |
| June 30, 2004      |   | 29.04    |   |   | 22.59   |   |
| September 30, 2004 |   | 31.09    |   |   | 26.10   |   |

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**Issuer Purchases of Equity Securities**

      The following table provides information with respect to common stock repurchased by us during the fourth quarter ended September 30, 2005: 

|     **   Period** |       | **Total Number****of Shares****Repurchased** |       |       | **Average****Price Paid****per Share** |       | **Total Number of****Shares Purchased****as Part of Publicly****Announced Plans or    Programs (1)** |       | **Approximate Dollar****Value of Shares that****May Yet Be****Purchased Under the****Plans or Programs (1)** |       |
|------------------------------------------------------|--------------------------------|----------------------------------------------|--------------------------------|--------------------------------|----------------------------------------|--------------------------------|------------------------------------------------------------------------------------------------------|--------------------------------|--------------------------------------------------------------------------------------------------------------|--------------------------------|
|                                                      |                           |                                              |                           |                                |                                        |                           |                                                                                                      |                           |                                                                                                              |                           |
| 7/1/05 - 7/31/05                                     |                           | —                                       |                           | $                              | —                                 |                           | —                                                                                               |                           | $                                                                                                            | 24,841,604                     |   |
| 8/1/05 - 8/31/05                                     |                           | 84,237                                       |                           |                           | 41.40                                  |                           | 84,237                                                                                               |                           |                                                                                                         | 21,353,806                     |   |
| 9/1/05 - 9/30/05                                     |                           | 86,500                                       |                           |                           | 39.88                                  |                           | 86,500                                                                                               |                           |                                                                                                         | 17,903,843                     |   |
|                                                 |                           |                                              |                           |                                |                                        |                           |                                                                                                      |                           |                                                                                                         |                           |   |
|       Total            |                           | 170,737                                      |                           | $                              | 40.63                                  |                           | 170,737                                                                                              |                           |                                                                                                         |                           |   |
|                                                 |                           |                                              |                           |                                |                                        |                           |                                                                                                      |                           |                                                                                                         |                           |   |

|   |   |   |
|--------|--------|--------|
|        |

| (1) | In November      2004, our board of directors authorized the repurchase of up to $25.0 million      of our common stock commencing in December 2004. In February 2005, our board      of directors authorized an increase to the size of our previously established      share repurchase program from $25.0 million to $50.0 million of our common      stock through December 31, 2006. Share repurchases may take place at management’s      discretion and/or under pre-established, nondiscretionary programs from      time to time, depending on market conditions, in the open market, and in      privately negotiated transactions. There were 787,337 shares of common stock      repurchased at a cost of $32.1 million as of September 30, 2005. Subsequent      to September 30, 2005, we repurchased an additional 288,400 shares of our      common stock at a cost of $10.7 million at an average price paid per share      of $37.07. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

      As of December      1, 2005, there were 3,724 shareholders of record of our common stock. We      have never declared or paid cash dividends on our common stock. Our ability      to pay dividends on our common stock is restricted by our senior credit      agreement and senior subordinated notes agreement. See Item 7— “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.” Management      does not anticipate the payment of cash dividends on our common stock in      the foreseeable future.

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| **ITEM 6:** | **SELECTED FINANCIAL    DATA** |
|-------------|--------------------------------|

|                                                                          |     **Successor Company**    |      |   |   | **Predecessor****Company (3)** |   |
|-------------------------------------------------------------------------------|-----------------------------------------------------------------|-----------|--------|--------|--------------------------------|--------|
|                                                                          |                                                                 |      |   |   |                           |        |   |
| **Year ended September 30,**                                                  |                                                            | **2005**  |   |   | **2004**                       |   |   | **2003** |   |   | **2002** |   |   |   |   | **2001** |   |
|                                                                               |                                                                 |           |   |        |                                |   |  |  |   |  |  |   |   |   |  |  |   |
| **Statement of Operations Data (1)**                                          |                                                            |      |   |   |                           |   |   |   |   |   |   |   |   |   |   |   |   |
|    **(in thousands, except         per share and ratio data)** |                                                            |      |   |   |                           |   |   |   |   |   |   |   |   |   |   |   |   |
| Net revenues                                                                  | $                                                               | 1,683,350 |   | $      | 1,517,553                      |   | $ | 1,375,466 |   | $ | 1,325,566 |   |   |   | $ | 1,255,143 |   |
| Income from continuing operations                                             |                                                            | 42,420    |   |   | 31,748                         |   |   | 31,397 |   |   | 42,991 |   |   |   |   | 144,266 |   |
| Net income                                                                    | $                                                               | 42,169    |   | $      | 29,073                         |   | $ | 11,888 |   | $ | 37,551 |   |   |   | $ | 113,319 |   |
| Diluted         earnings per share from continuing   operations **(2)**       | $                                                               | 2.12      |   | $      | 1.58                           |   |   |   |   |   |   |   |   |   |   |   |   |
| Diluted earnings per share from net income **(2)**                            | $                                                               | 2.11      |   | $      | 1.45                           |   |   |   |   |   |   |   |   |   |   |   |   |
| Ratio of earnings to fixed charges                                            |                                                            | 2.85      | x      |   | 2.35                           | x      |   | 2.54 | x |   | 3.54 | x |   |   |   | 2.37 | x |
| **Operating Data of Inpatient Services Segment:**                             |                                                            |      |   |   |                           |   |   |   |   |   |   |   |   |   |   |   |   |
| Payor Mix                                                                     |                                                            |      |   |   |                           |   |   |   |   |   |   |   |   |   |   |   |   |
|      Medicaid                                        |                                                            | 54        | %      |   | 51                             | %      |   | 50 | % |   | 48 | % |   |   |   | 48 | % |
|      Medicare                                        |                                                            | 28        | %      |   | 29                             | %      |   | 28 | % |   | 29 | % |   |   |   | 27 | % |
|      Private pay and other                           |                                                            | 18        | %      |   | 20                             | %      |   | 22 | % |   | 23 | % |   |   |   | 25 | % |
| Average owned/leased eldercare center beds                                    |                                                            | 20,521    |   |   | 20,805                         |   |   | 22,758 |   |   | 24,139 |   |   |   |   | 24,783 |   |
| Occupancy percentage                                                          |                                                            | 90        | %      |   | 91                             | %      |   | 91 | % |   | 92 | % |   |   |   | 91 | % |
| Average managed eldercare center beds                                         |                                                            | 6,128     |   |   | 5,686                          |   |   | 6,320 |   |   | 7,898 |   |   |   |   | 9,215 |   |
|                                                                          |                                                            |      |   |   |                           |   |   |   |   |   |   |   |   |   |   |   |   |

|                                           |   |      |   |   |      |   |   |      |   |   |      |   |   |      |   |
|------------------------------------------------|--------|-----------|--------|--------|-----------|--------|--------|-----------|--------|--------|-----------|--------|--------|-----------|--------|
| **At September 30,**                           |   | **2005**  |   |   | **2004**  |   |   | **2003**  |   |   | **2002**  |   |   | **2001**  |   |
|                                                |        |           |   |        |           |   |        |           |   |        |           |   |        |           |   |
| **Balance Sheet Data (in thousands)**          |   |      |   |   |      |   |   |      |   |   |      |   |   |      |   |
| Working capital                                | $      | 214,536   |   | $      | 189,836   |   | $      | 97,697    |   | $      | 78,473    |   | $      | 41,598    |   |
| Total assets                                   |   | 1,360,154 |   |   | 1,277,860 |   |   | 1,089,349 |   |   | 1,162,366 |   |   | 1,139,833 |   |
| Long-term debt, including current installments |   | 410,170   |   |   | 403,071   |   |   | 266,232   |   |   | 326,476   |   |   | 328,157   |   |
| Shareholders’ equity                      | $      | 656,649   |   | $      | 564,973   |   | $      | 580,561   |   | $      | 602,764   |   | $      | 572,147   |   |

|            |
|-----------------|
|                 |
| (1)   | For a discussion of operating results       from fiscal 2003 through fiscal 2005, and factors affecting comparability       of financial information, see Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations.” The       net revenues and income from continuing operations data for all       periods presented have been adjusted to exclude discontinued operations.       The payor mix and occupancy data have also been adjusted to exclude discontinued       operations. |
| (2)   | The computation of diluted earnings       per share assumes that the number of our common shares distributed by       NCI on December 1, 2003 in connection with the spin-off was  outstanding       on October 1, 2003, and is therefore presented on a pro forma basis for       the year ended September 30, 2004. |
| (3)   | Upon emergence from Chapter 11       proceedings, we adopted the provisions of fresh-start reporting in accordance       with the American Institute of Certified Public Accountants Statement       of Position No. 90-7, “ Financial Reporting By Entities in Reorganization Under the Bankruptcy Code” (SOP 90-7)/(fresh-start reporting). As a consequence of the implementation of fresh-start reporting effective September 30, 2001, the financial information presented for periods prior and subsequent to October 1, 2001 is generally not comparable. To highlight the lack of comparability, a solid vertical line separates the pre-emergence financial information from the post-emergence financial information. Any information herein labeled “Predecessor Company” refers to the periods prior to the adoption of fresh-start reporting, while information labeled “Successor Company” refers       to periods following the adoption of fresh-start reporting. |

      Please refer      to Item 7— “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Certain Transactions and Events” and — “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Revenue Sources” for      a discussion of significant transactions and material uncertainties.

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| **ITEM 7:** | **MANAGEMENT’S    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS** |
|-------------|---------------------------------------------------------------------------------------------------|

**Overview**

      We are one of the largest providers of healthcare and support services to the elderly in the United States. Within our network of geographically concentrated facilities, we offer services focusing on the primary medical, physical and behavioral issues facing the medically complex elderly population. We are focused on qualitative and quantitative clinical performance measures in order to enhance and improve continuously the care provided in our facilities. Through our physicians, nurses, therapists and other members of our interdisciplinary medical care team, we apply a comprehensive approach to the complex needs facing the elderly, which we believe has resulted in our above-industry average occupancy levels and an enhanced level of Medicare and private paying patients. We receive higher rates of reimbursement from Medicare and private paying patients. For the twelve months ended September 30, 2005, the average occupancy level in our inpatient facilities was approximately 90% and approximately 46% of our net revenues were from Medicare and private paying patients.

      Approximately      89% of our net revenues are generated through our inpatient services segment.      Our inpatient services business is offered through a network of skilled      nursing and assisted living centers primarily located in the eastern United      States. Our eldercare centers are concentrated in the states of Pennsylvania,      New Jersey, Maryland and Massachusetts. We currently own, lease, manage      or jointly own 213 eldercare facilities, consisting of 178 skilled nursing      facilities, 22 assisted living facilities and 13 transitional care units      together totaling 25,948 beds.

      Our rehabilitation therapy segment, which represents approximately 8% of our net revenues, provides an extensive range of rehabilitation therapy services to the elderly, including speech pathology, physical therapy and occupational therapy in our eldercare regional market concentrations. These services are provided by approximately 4,700 licensed rehabilitation therapists and assistants employed or contracted by us at substantially all of the eldercare facilities we operate, as well as by contract to third-party healthcare facilities operated by other providers and through our 13 outpatient rehabilitation agencies. We also provide other complementary healthcare services, the revenues for which are included in all other services revenues in our segment financial information.

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

      Government funded programs, principally Medicaid and Medicare, provide approximately 74% of our revenue. Over the past five years, changes in funding from these government sources has had a significant impact on our cash flows and profitability. Through trade and other organizations, we actively participate in partnership with other healthcare providers to pursue strategies to minimize any potentially adverse impact of government funding proposals. We believe the continuation of government funding at levels sufficient to operate our business profitably is our greatest financial risk.

      Labor costs, including salaries, wages and benefits, account for approximately 71% of our total operating expenses. We compete with other healthcare providers and with non-healthcare providers for both professional and non-professional employees. In recent years, we and our industry have experienced shortages in qualified professional clinical staff. While in our inpatient services segment we have been able to retain the services of an adequate number of qualified personnel to staff our facilities and sites of services, we have used expensive

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temporary nursing agency services to supplement  staffing. If a shortage of nurses or other health care workers occurred in the  geographic areas in which we operate, it could adversely affect our ability  to attract and retain qualified personnel and could further increase our operating  costs, without a corresponding increase in the level of government funded reimbursement.  

     Beginning in fiscal 2004 and throughout fiscal    2005, we and the rehabilitation therapy services sector are experiencing a shortage    of qualified rehabilitation therapists. As the demand for these services continues    to exceed the supply of available therapists, we and our competitors have been    forced to offer more attractive wage and benefit packages to these professionals    while utilizing outside contractors for these services at premium rates. Due    to intense competition for customers, and through September 30, 2005, we were    unable to pass the increase in therapist labor costs along to our customers    in the form of price increases. Although we have been able to retain adequate    levels of qualified therapists to maintain our standards of quality care in    the services we provide, the shortage of qualified therapists has impacted negatively    our profitability and our ability to generate new therapy business. We are implementing    certain initiatives in fiscal 2006 intended to improve our therapist recruitment    and retention capabilities while also being more aggressive in pricing our services    and more selective in our external customer base. These initiatives, along with    the implementation of a more efficient and integrated time collection system    to improve the productivity of our therapist workforce are intended to improve    the profitability of this business.

      For a description      of our material challenges and risks, including an analysis of industry      trends and the effect of recent legislation on our operations, see “Risk Factors — Risk      Factors Relating to Our Business.”

**Certain Transactions and Events**

***     Amendments to NCI Agreements***

      On June 9,      2005, we and NCI entered into the tax sharing amendment and the transition      services amendment. On June 9, 2005, we and NeighborCare Pharmacy Services,      Inc., NCI’s subsidiary (NCPS), entered into the 2005 pharmacy services amendment. A summary of the amendments is provided below. The agreements are described in more detail under “—Distribution      Transactions.” 

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

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

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

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***Issuance and Registration of Convertible Senior Subordinated Debentures***

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

***Senior Credit Facility Amendment*****

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

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

***Share Repurchase***

      In February      2005, our board of directors authorized an increase to the size of our      previously established share repurchase program from $25.0 million to $50.0      million of our common stock. Share repurchases may take place at management’s      discretion and/or under pre-established, nondiscretionary programs from      time to time, depending on market conditions, in the open market, and in      privately negotiated transactions through December 31, 2006. Under this      program, there were 787,337 shares of common stock repurchased at a cost      of $32.1      million through September 30, 2005. 

***Debt Repurchase***

      In February      2005, our board of directors authorized the repurchase of a portion of      our 8% senior subordinated notes due 2013 from time to time in the open      market commencing in March 2005. There were $70.9 million of 8% senior      subordinated notes repurchased through September 30, 2005. The debt repurchases      resulted in a year-to-date prepayment premium charge of $7.4 million and      the write-off of unamortized deferred financing fees and other fees of      $2.7 million, which are included in loss on early extinguishment of debt      in the consolidated statements of operations. 

***Amendment to 2003 Stock Incentive Plan*****

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

***Recognition of Pennsylvania and New Jersey Provider Assessments***

      Provider assessments generate additional federal matching funds to the states for Medicaid reimbursement purposes, and implementation of a provider assessment plan requires approval by the Centers for Medicare and Medicaid Services (CMS) in order to qualify for federal matching funds. These plans usually take the form of a bed tax or a quality assessment fee, which is imposed uniformly across classes of providers within the state. In turn, the 

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state generally utilizes the additional federal matching funds generatedby the tax to pay increased reimbursement rates to the providers, which oftenincludea repayment of a portion of the provider tax based on the provider’s percentageof Medicaid patients. 

      In January 2005, CMS approved the Pennsylvania provider assessment. The Pennsylvania provider assessment, which is retroactive to July 1, 2003 and will expire on June 30, 2007, was recognized cumulatively in the quarter ended March 31, 2005. Recognition of the Pennsylvania provider assessment resulted in increased revenue and net income of $50.9 million and $4.0 million, respectively, in fiscal 2005, of which $30.9 million of revenue and $3.3 million of net income relates to periods prior to fiscal year 2005. 

      In February 2005, CMS approved the New Jersey provider assessment. The New Jersey provider assessment, which is retroactive to July 1, 2004 and will expire on June 30, 2006, was recognized cumulatively in the quarter ended March 31, 2005. Recognition of the New Jersey provider assessment resulted in increased revenue and net income of $22.1 million and $3.7 million, respectively, in fiscal 2005, of which $4.3 million of revenue and $0.6 million of net income relates to periods prior to fiscal year 2005. 

***Purchase of Joint Venture Interests*********

     Effective January 1, 2005, we acquired our joint venture partner’sinterest in a Commonwealth of Massachusettsskilled nursing facility having 123 beds. Prior to that acquisition, we owneda 50% interest in the facility and managed its operations.Upon completion of the transaction, we owned 100% of the facility and began consolidatingthe revenues, expenses, assets and liabilities of the facility on January 1,2005. The aggregate consideration consisted of cash of $0.5 million to acquirethe remaining partnership interests and the assumption of approximately $6.0million of debt, all of which was repaid at the closing of the transaction.

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

***Acquisition of Previously Leased ElderCare Center and Lease Termination*********

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

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

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***Sale of Assets***

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

***The Spin-Off*****

      Prior to December      1, 2003, our operations were owned by NCI. On December 1, 2003, NCI completed      the distribution (the spin-off) of our common stock and our common stock      began trading publicly on the NASDAQ National Market System on December      2, 2003 under the symbol “GHCI.” Prior      to the spin-off, NCI was named Genesis Health Ventures, Inc. 

      NCI consummated the spin-off by distributing, on a pro rata basis, all of our shares to holders of record of NCI common stock at the close of business on October 15, 2003, the record date for the spin-off. Based on the total number of shares of NCI common stock at the close of business on the record date for the spin-off, each record holder of NCI common stock received 0.5 shares of our common stock (an aggregate of 19,898,104 shares), or cash in lieu of a fractional share of our common stock. 

      Additionally, immediately after the spin-off, we issued 130,246 shares of our common stock into an escrow account for future delivery to former unsecured claimants of NCI and its subsidiaries that were entitled to receive common equity securities under the terms of the 2001 joint plan of reorganization. 

***Distribution Transactions*****

     As a result of the spin-off, as of December 1, 2003, we and NCI operate independently of one another.

       We    and NCI have agreed contractually to continue certain transitional arrangements    and practices for a limited time after the spin-off. In addition, we and    NCI have agreed to certain mutually beneficial commercial arrangements intended    to reflect terms similar to those that would be agreed to by parties bargaining    at arm’s length.

*     Separation and Distribution Agreement*

      On October 27, 2003, we and NCI entered into the separation and distribution agreement, which sets forth the agreements between us and NCI with respect to the principal corporate transactions required to consummate the spin-off, and a number of other agreements governing the relationship between us and NCI following the spin-off.

      Pursuant to      the separation and distribution agreement, NCI transferred to us, or caused      their subsidiaries to transfer to us, the legal entities comprising the      eldercare businesses. We agreed to issue 130,246 common shares into an      escrow account for future delivery to NCI’s and its subsidiaries’ former unsecured claimants who are entitled to receive common equity securities under the terms of NCI’s 2001 joint plan of reorganization. We refer to these common shares of ours as the “unsecured claimant shares.” As of December 1, 2005, the number of unsecured claimants’ shares      was 134,009.

      The separation and distribution agreement generally provides for a full and complete release and discharge as of the date of the consummation of the spin-off of all liabilities existing or arising from all acts and events occurring or failing to occur or alleged to have occurred or to have failed to occur and all conditions existing or alleged to have existed on or before the date of the consummation of the spin-off between or among NCI and its affiliates, on the one hand, and us and our affiliates, on the other hand, including any contractual agreements or arrangements existing or alleged to exist between or among those parties on or before that date.

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      We have agreed        to indemnify, defend and hold harmless NCI and its affiliates, and each        of its directors, officers        and employees, from and against all liabilities relating to, arising      out of or resulting from, generally, any liabilities of the eldercare businesses        and the operation of the eldercare businesses at any time before or after        the spin-off, any breach by us or our affiliates of the separation and        distribution agreement or any of the ancillary agreements entered into        in connection therewith,        one-half of any liabilities arising out of NCI’s 2001 joint plan of reorganization (other than certain liabilities specifically allocated in the separation and distribution agreement), and specified disclosure liabilities. See Item 3 — “Legal        Proceedings.”

      NCI has agreed        to indemnify, defend and hold harmless us and our affiliates, and each        of our directors, officers        and employees, from and against all liabilities relating to, arising      out of or resulting from, generally, any of NCI’s liabilities, other than liabilities of the eldercare businesses, and the operation of its business other than the eldercare businesses at any time before or after the spin-off, any breach by NCI or its affiliates of the separation and distribution agreement or any of the ancillary agreements entered into in connection therewith, one-half of any liabilities arising out of NCI’s        2001 joint plan of reorganization (other than certain liabilities specifically        allocated in the separation and distribution agreement), and specified        disclosure liabilities.

*     Tax Sharing Agreement*

      For periods      prior to the spin-off, we are included in NCI’s U.S. federal consolidated income tax group. Our tax liability thus is included in NCI’s and its subsidiaries’ consolidated      federal income tax liability and is included with NCI or certain of its      subsidiaries in consolidated, combined or unitary income tax groups for      state and local tax purposes.

      NCI will prepare      and file the federal consolidated return, and any combined, consolidated      or unitary tax returns that include both NCI or one of its subsidiaries      and us or one of our subsidiaries and will be responsible for all income      taxes and other taxes with respect to such returns. We will prepare and      file any tax return required to be filed by us or any of our subsidiaries      that does not include NCI or any entity that will be its subsidiary after      the spin-off and will be responsible for all income taxes or other taxes      with respect to any such tax return. In general, NCI will be responsible      for any increase (and will receive the benefit of any decrease) in the      income tax of any entity that is or was reflected on a tax return filed      by NCI, and it will control all audits and administrative matters relating      to such tax returns.

      We generally may not (i) take or fail to take any action that would cause any representations, information or covenants in the spin-off documents or documents relating to the private letter ruling request to be untrue, (ii) take or fail to take any action that would cause the spin-off to lose its tax-free status, (iii) sell, issue, redeem or otherwise acquire our equity securities for a period of two years following the spin-off, except in certain specified transactions, and (iv) sell or otherwise dispose of a substantial portion of our assets, liquidate, or merge or consolidate with any other person for a period of two years following the spin-off. During that two-year period, we may take certain actions prohibited by the covenants if, for example, NCI obtains a supplemental private letter ruling or an unqualified opinion of counsel to the effect that these actions will not affect the tax-free nature of the spin-off, in each case satisfactory to NCI in its sole and absolute discretion. Notwithstanding the receipt of any such private letter ruling or opinion, we must indemnify NCI for any taxes and related losses resulting from (i) any act or failure to act described in the covenants above, (ii) any acquisition of our equity securities or assets (or equity securities or assets of any member of our group) and (iii) any breach by us or any member of our group of certain representations in the spin-off documents or the documents relating to the private letter ruling. 

     In June 2005, we and NCI amended the tax sharing agreement. See “—Amendmentsto NCI Agreements.”

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*     Transition Services Agreement*

      The transition      services agreement provides for the provision of certain transitional services      by us to NCI. The services include the provision of information systems      (e.g., access to computer systems that are expected to be owned by us),      tax services, investor relations services, corporate compliance services,      treasury functions, financial systems and reporting, bankruptcy claims processing and certain additional services identified by the parties. The transition services agreement initially provided for a term of 18 months. In March 2005, NCI extended the transition services agreement for an additional six months through September 2005. The pricing is based on actual costs incurred by us in rendering the services. In June 2005,      we and NCI amended the transition services agreement. See “—Amendments      to NCI Agreements.”

*     Tidewater Membership Agreement*

      The Tidewater      membership agreement, referred to as the “Tidewater agreement,” provides      group purchasing and shared service programs to skilled nursing facilities      and assisted living facilities operated by us. Under the Tidewater agreement,      we engaged Tidewater, NCI’s wholly owned group purchasing subsidiary,      as an independent group purchasing organization, and Tidewater  grants      to us access to its vendor contracts. The initial term of the Tidewater      agreement is ten years. We do not make any payments to NCI under the Tidewater      agreement. Instead, Tidewater receives administrative fees from various      suppliers. Such fees are based on a percentage of the volume of purchases      made by all of Tidewater’s      members, including us. We remain directly responsible to vendors for purchases      through the Tidewater agreement. The Tidewater agreement obligates us to      purchase certain minimum amounts; however, we may be a member of other      group purchasing organizations. We may earn financial incentives, such      as fee sharing, for meeting certain purchasing volumes under the Tidewater      agreement.

*     Employee Benefits Agreement*

      We and NCI      entered into an employee benefits agreement which provides for certain      employee compensation, benefit and labor-related matters. In general, after      the spin-off, we and NCI are responsible for all obligations and liabilities      relating to our respective current and former employees and their dependents      and beneficiaries. As of the date of the spin-off, and except with respect      to health and welfare plans and flexible benefit plans as set forth below,      we ceased participation in any benefit plan or trust under any such plan      sponsored or maintained by NCI, and NCI ceased participation in any benefit      plan or trust under any such plan sponsored or maintained by us. With respect      to employees who are transferred to or from us or NCI, both parties mutuallyrecognized and credited service with the other employer.

      Except as otherwise      provided below, all liabilities relating to employee benefits incurred      by or on behalf of either company’s employees or their covered dependents on or before the date of the spin-off remain NCI’s liabilities. Liabilities and assets have been transferred from NCI’s retirement plan to a comparable plan established by us. Similarly, liabilities and assets have been transferred from NCI’s union retirement savings plan, the sponsorship of which was assumed by us. Liabilities under NCI’s deferred compensation plan (a non-qualified plan) and assets relating to such plan held in a rabbi trust were transferred to a comparable plan and trust established by us. In general, all liabilities relating to workers’ compensation claims incurred by or on behalf of either company’s      employees on or before December 1, 2003, the date of the spin-off, remain      our liabilities.

      To avoid the      administrative inconvenience and expense that would result from our having      to establish separate health and welfare plans and flexible benefit plans      for the remainder of the calendar year during which the spin-off occurred,      during the period beginning immediately following the spin-off and ending      on December 31, 2003, current and former employees of ours remained covered      under NCI’s existing health and welfare plans and flexible benefit      plans. We have reimbursed NCI for all expenses it incurred as a result      of this arrangement. As of January 1, 2004, current and former employees      of ours and NCI are covered under their own health insurance plans.

*     Master Agreement for Pharmacy, Pharmacy Consulting and Related Products and Services*

      We and NCI’s subsidiary, NeighborCare Pharmacy Services, Inc., or NCPS, entered into a master agreement for pharmacy, pharmacy consulting and related products and services, referred to as the “pharmacy services agreement.” The      agreement has an initial term of ten years, plus a renewal term of five      years if NCPS matches third-party bids for comparable services. The pharmacy      services agreement provides the terms and conditions on 

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which NCPS and its affiliates provides pharmacy, pharmacy consulting and medical    supply products and services to all long-term care facilities owned or leased    by us and our affiliates. 

      Each of our eldercare    facilities entered into an individual services agreement with NCPS that reflects    the terms of the pharmacy services agreement. The individual services agreements    govern the terms under which pharmacy, pharmacy consulting and medical supply    products and services will be provided to each eldercare facility by NCPS. 

      Pricing under      the pharmacy services agreement is at pre-negotiated prices or formulas      consistent with market pricing for the applicable services and are set      forth in the individual service agreements. NCPS has the right to adjust      prices, other than those that are determined by formula, not more than      once per year to account for increases in its costs in providing the services      (including inflation). We are eligible for a pricing reduction at specified      percentages for certain specified products and services if and so long      as the aggregate number of skilled nursing facility beds served by NCPS      increases to specified targets over a baseline amount. In addition, we      and NCPS will negotiate in good faith to enter into arrangements whereby      we will contract directly with certain manufacturers of enteral nutrition      products, durable medical equipment and other non-pharmaceutical products      historically purchased from NCPS to receive “end user pricing,” and NCPS will distribute enteral nutrition products and durable medical equipment to our facilities for a fee priced at the fair market value of such distribution services. After five years, pricing may be reset depending upon NCPS’s pricing to its other customers of similar size. Moreover, we and NCI will negotiate in good faith to amend the pharmacy services agreement and the individual services agreements in the event of (and in a manner consistent with) a modification of any applicable law or regulation, or interpretation thereof, that has the effect of prohibiting or restricting the terms of the pharmacy services agreement. The pharmacy services agreement further provides that if “average wholesale price” or      other descriptors of pricing in the agreement or any service agreement      are no longer reasonably commercially available to be utilized to determine      pharmacy pricing, we and NCI will re-negotiate the specific pricing applicable      to the services provided to a substantially equivalent amount. 

      On May 7, 2004,      we and NCPS amended the pharmacy services agreement to correct a pricing      error in the original agreement specifically related to intravenous drugs.      The financial impact of the amendment increases our pharmacy costs $1.3      million on an annualized basis, which has been reflected in our financial      results. The amendment also accelerates by nine months our ability to renegotiate      pricing with NCI. In June 2005, we and NCPS further amended the pharmacy      services agreement. See “—Amendments to NCI Agreements.” 

      We may terminate      the pharmacy services agreement with respect to any facility in connection      with a sale of the facility to a third party or the closing of the facility      so long as we use our best efforts to persuade the buyer or successor of      the facility, if any, to assume the applicable service agreement. This      right is limited to five facilities through the first year, 10 facilities      through the second year, 20 facilities through the third year, and a maximum      of 30 facilities over the 10-year term of the pharmacy services agreement.      If the pharmacy services agreement or any individual service agreement      is terminated by us, then NCPS will be entitled to recover a specified      amount per facility based on the remaining number of months in the term.      Both we and NCPS will indemnify the other against all claims, losses and      liabilities arising out of the acts or omissions of the other party in      connection with the pharmacy services agreement. The pharmacy services      agreement provides that we will not compete with NCPS or solicit NCPS’s      employees or customers until 2015 or, if later, two years following termination      of the pharmacy services agreement. 

*     Pharmacy Benefit Management (CareCard) Agreement*

      We and NCI’s subsidiary, CareCard, Inc., entered into a pharmacy benefit management agreement, referred to as the “CareCard agreement.” The CareCard agreement sets forth the agreements between us and CareCard relating to the provision of services to us by NCI’s “CareCard” business.      The term of the CareCard agreement, as amended, expires on December 31,      2007. Under the CareCard agreement, CareCard provides pharmacy benefit      management services to us and access to retail and mail pharmacy services.      We agreed to enroll all of our employees participating in our self-insured      health plan in the CareCard program. The CareCard agreement may be assigned      by either party upon receipt of the written consent of the other (which      consent may not be unreasonably withheld, conditioned or delayed), but      CareCard may assign its interest without our consent to a provider whose      service and/or quality levels are at least similar to those currently provided      by CareCard. 

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*     Master Agreement for Specialty Beds and Oxygen Concentrators*

      The master      agreement for specialty beds and oxygen concentrators, referred to as the “durable medical equipment agreement,” sets forth the agreements between us and NCPS relating to the provision of certain equipment and related services to our skilled nursing and assisted living facilities. The durable medical equipment agreement provides for an initial five-year term with one-year automatic renewals (unless terminated upon 90 days’ notice      prior to the expiration of the then-current term). Under the durable medical      equipment agreement, NCPS agreed to provide our facilities with durable      medical equipment (specialty beds and oxygen concentrators), equipment      maintenance and warehousing of equipment at prices set forth in the durable      medical equipment agreement. The durable medical equipment agreement provides      that, except as otherwise required by law, NCPS will be the exclusive provider      of specialty beds and oxygen concentrators to the contracting facilities.      Either party may assign the agreement upon receipt of the written consent      of the other (which consent may not be unreasonably withheld, conditioned      or delayed), but NCPS may assign its interest without our consent to a      provider whose service and/or quality levels are at least comparable to      those currently provided by NCPS. 

***ElderTrust/Ventas Transactions***

      On August 13,      2003, we acquired the remaining ownership interest in an unconsolidated      joint venture partnership that operates four skilled nursing facilities      with 600 skilled nursing and 125 assisted living beds. Each of the four      eldercare centers had been leased to the partnership from ElderTrust, a      real estate investment trust from which we leased or subleased 18 of our      eldercare facilities and eight of our managed and jointly owned facilities.      We purchased our joint venture partner’s interest in the unconsolidated      partnership for $3.1 million and subsequently purchased one of the four      eldercare properties from ElderTrust for $2.6 million. Additionally, we      paid ElderTrust $2.5 million to reduce the annual cash basis and accrual      basis lease expense of one of the three remaining leased facilities by      $0.4 million and $0.2 million, respectively. The lease terms of the three      facilities that continue to be leased from ElderTrust were extended from      2010 to 2015. 

      On September 11,    2003, we entered into additional agreements with ElderTrust; the principal    terms were as follows: 

|   | • | we agreed to purchase two skilled        nursing facilities having 210 skilled nursing beds and 67 assisted living        beds, and three assisted living facilities having 257 beds, for $24.8        million. We previously leased these properties from ElderTrust at an        annual cash basis and accrual basis lease cost of $2.4 million and $1.5        million, respectively. As of January  2004, we purchased all of the    aforementioned eldercare facilities;                                                            |
|--------|---------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   | • | we agreed to pay ElderTrust $32.3 million to reduce annual cash basis and accrual basis lease cost associated with nine properties by $6.9 million and $1.2 million, respectively, and acquire options to purchase seven properties subleased to us by ElderTrust. On October 29, 2003, we paid ElderTrust $2.3 million to reduce the rents of two of the nine eldercare facilities, and on November 7, 2003 paid ElderTrust the remaining $30.0 million to reduce the rents of the other seven aforementioned eldercare facilities; and |
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   | • | ElderTrust was paid $5.0 million upon consummation        of the spin-off in exchange for ElderTrust’s consent to the assignment    of all remaining leases and guarantees from NCI to us.                                                                                                                                                                                                                                                                                                                                          |

      During the three  months ended September 2005, we reevaluated the classification of certain of  its leases with ElderTrust and determined that five of its center leases previously  classified as operating leases beginning in fiscal 2004 should have been classified  as capital leases. The cumulative effect of correcting this accounting is an  increase to fiscal 2005 depreciation expense of $4.7 million (of which $2.1  million relates to fiscal 2004), an increase to interest expense of $4.7 million  (of which $2.2 million relates to fiscal 2004) and a decrease to lease expense  of $9.3 million (of which $4.3 million relates to fiscal 2004), having no impact  on pre tax or net income. The capitalization of these leases also had the effect  of increasing total assets and total liabilities (principally debt) $34.7 million.  

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      In February 2004,    ElderTrust shareholders approved the merger of ElderTrust with Ventas Sub,    LLC (Ventas), a Delaware limited liability company and a wholly owned subsidiary    of Ventas, Inc., a publicly traded Delaware corporation. This merger did    not have a material impact on us. 

      In June 2004, Ventas    exercised its option to purchase an assisted living facility from us for    cash consideration of $4.9 million. We leased the property back from Ventas    under a 10-year operating lease agreement. We recognized a $1.6 million gain    on the sale of the property, which has been deferred and is being amortized    on a straight line basis to lease expense over the 10-year lease term. 

***Assets Held for Sale and Discontinued Operations***

      In the normal course    of business, we continually evaluate the performance of our operating units,    with an emphasis on selling or closing under-performing or non-strategic    assets. Discontinued businesses, including assets held for sale, are removed    from the results of continuing operations. The results of operations in the    current and prior year periods, along with any cost to exit such businesses    in the year of discontinuation, are classified as discontinued operations    in the consolidated statements of operations. 

      We have classified    several businesses as held for sale or closed. In 2002, we identified, and    have since sold, all of our eldercare centers located in the states of Florida,    Wisconsin and Illinois. In addition to these assets, since 2002 we have identified    other eldercare centers in various states, one rehabilitation therapy services    clinic, two physician services practices and our ambulance and diagnostics    businesses as held for sale or closed due to under-performance. 

      Consolidated interest    expense has been allocated to discontinued operations for all periods presented    based on debt expected to be repaid in connection with the sale of the assets.    The amount of after-tax interest expense allocated to discontinued operations    in fiscal 2005, fiscal 2004 and fiscal 2003 was $0.3 million, $0.7 million,    and $2.7 million, respectively. 

      We have separately    classified $3.9 million and $8.8 million of carrying value associated with    our assets held for sale in our consolidated balance sheets at September    30, 2005 and 2004, respectively. Our assets held for sale are classified    in the consolidated balance sheets within both current and non-current assets.    The current portion of assets held for sale represents those assets for which    we have binding agreements of sale. In December 2004, we sold our two remaining    Wisconsin based eldercare centers for net cash proceeds of $4.6 million. 

      The following table    sets forth net revenues and the components of loss from discontinued operations    for the years ended September 30, 2005, 2004, and 2003 (in thousands): 

|                                            |   | **2005** |   |   | **2004** |   |   | **2003** |   |
|-------------------------------------------------|--------|----------|--------|--------|----------|--------|--------|----------|--------|
|                                            |        |          |   |        |          |   |        |          |   |
| Net revenues                                    | $      | 10,817   |   | $      | 43,496   |   | $      | 171,606  |   |
|                                            |        |          |   |        |          |   |        |          |   |
| Net operating loss of discontinued businesses   | $      | (336     | )      | $      | (4,231   | )      | $      | (19,160  | )      |
| Loss on discontinuation of businesses           |   | (86      | )      |   | (249     | )      |   | (14,047  | )      |
| Income tax benefit                              |   | 171      |   |   | 1,805    |   |   | 13,698   |   |
|                                            |        |          |   |        |          |   |        |          |   |
| Loss from discontinued operations, net of taxes | $      | (251     | )      | $      | (2,675   | )      | $      | (19,509  | )      |
|                                            |        |          |   |        |          |   |        |          |   |

     The loss on discontinuation of businesses includes the write-down of assets to    estimated net realizable value.

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**Revenue Sources**

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

      The following table    reflects the payor mix of inpatient service revenues for the periods presented,    and has been adjusted to exclude discontinued operations: 

|                  | **Year Ended September 30,** |     |
|-----------------------|------------------------------|----------|
|                       |
| **2005**              |                         | **2004** |   | **2003** |
|                  |                              |     |  |   |  |   |
| Medicaid              | 54                           | %        | 51 | % | 50 | % |
| Medicare              | 28                           | %        | 29 | % | 28 | % |
| Private pay and other | 18                           | %        | 20 | % | 22 | % |
|                  |                              |     |  |   |  |   |
|                  | 100                          | %        | 100 | % | 100 | % |
|                  |                              |     |  |   |  |   |

     Growth  in the percentage of our Medicaid revenues is attributed to the recognition  of provider assessments, which are accompanied by an increase in operating costs  in the form of a provider tax. 

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

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

      On July 28, 2005,    CMS released the final fiscal 2006 skilled nursing facility prospective payment    rules, including refinement to the resource utilization group (RUG) classification    system (RUGs refinement). Effective October 1, 2005, the current skilled    nursing facility prospective payment rates were increased by a 3.1% annual    inflation update factor. Effective January 1, 2006, the rules establish nine    new payment classifications, alter the case-mix weights for the remaining    44 RUG payment categories and adjust upward the nursing component of most    RUG payment categories. Excluding the additional 3.1% annual inflation factor,    and after considering the distribution of our Medicare patient population    under the new system, RUGs refinement is expected to reduce our Medicare    payment rates approximately $9 per patient day beginning January 1, 2006,    thereby reducing fiscal 2006 revenue and EBITDA approximately $7.5 million    and reducing net income approximately $4.5 million. 

      The proposed federal    budget for 2006 also proposes to reduce by 30% the amount that Medicare reimburses    skilled nursing facilities and other non-hospital providers for bad debts    arising from uncollectible Medicare coinsurance and deductibles. As proposed    by CMS, the reduction would be phased-in over a three-year period at 10%    per year. Based on our current volume of Medicare coinsurance bad debts,    this proposed rule would reduce our EBITDA and net income by $1.8 million    and $1.1 million in the first year, respectively. We cannot currently determine    if, or when, this proposal will be implemented.****

      The Medicare Modernization    Act (MMA), enacted on December 8, 2003, created a new Medicare prescription    drug benefit, created incentives for greater private competition within Medicare,    adjusted coverage and payment terms for a number of providers and Part B    prescription drugs and reformed the administration of the Medicare benefit.    The MMA may have an impact on institutional pharmacy services provided in    the long-term setting. The law constitutes a significant overhaul of the    Medicare system, including provisions to provide subsidies to insurers and    managed care organizations, and establishes mechanisms to allow private healthcarecoverage plans to compete with Medicare initially on a pilot basis. 

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      The MMA suspended    application of $1,590 payment caps (therapy caps) on Medicare Part B rehabilitation    through December 31, 2005. The therapy caps in place effective September    1, 2003 imposed payment limits to services provided by independent therapists    as well as to those provided by outpatient rehabilitation facilities and    other forms of rehabilitation agencies. Extension of the moratorium on application    of the therapy caps removed a significant financial threat to our therapy    business for the short term. CMS recently announced in its publication of    the final 2006 physician fee schedules the implementation of the therapy    caps effective January 1, 2006. The therapy caps will be increased to $1,740.    While efforts have been made to introduce legislation in Congress to extend    the moratorium, Congress has not approved this extension. No assurances can    be made or given that Congress will extend the moratorium on application    of the therapy caps beyond calendar    year 2005. As mandated by the law, the General Accounting Office is conducting    a study of alternatives to the therapy caps. We are unable to predict the    impact an implementation of therapy caps would have on our financial condition    and operating results, but believe it has the potential to reduce our revenue,    EBITDA and net income. 

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

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

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

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

      By law, Medicare  reimbursement for physician and non-physician professional services (including  Medicare Part B physical therapy, speech pathology and occupational therapy  services) are based on fee schedules. CMS has published final payment rules  for calendar year 2006. Unless Congress intervenes, CMS will impose a 4.4% reduction  in average payments for all professional services effective January 1, 2006.  The U.S. Senate has passed legislation substituting a 1.0% positive increase  in favor of the 4.4% reduction. It remains uncertain whether Congress will finalize  action in time to prevent the payment reductions. Although we are unable to  predict the outcome of these measures, a reduction in payment for professional  services would have an adverse effect on our business, results of operations,  financial position and cash flows. 

      State budget pressures    in recent years have translated into reductions in the rate of state spending    growth in certain jurisdictions. Given that Medicaid outlays are a significant    component of state budgets, we expect continuing cost containment pressures    on Medicaid outlays for skilled nursing facilities in the states in which    we 

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operate. In each of the major states where we provide services, we are working with trade groups, consultants and government officials to address responsibly the particular funding issues. 

     The plight of      state governments has helped to elevate issues related to Medicaid onto      the national agenda. In 2003, Congress passed temporary relief to states      providing a 2.9% increase in the federal Medicaid Assistance Percentage      for five quarters estimated to provide states $10.0 billion in Medicaid      relief. That assistance terminated on June 30, 2004. Actions to date on      state Medicaid budgets affirm that many states are adjusting downward the      rate of growth in state Medicaid spending to reflect the loss of the temporary      federal assistance. Medicaid funding is set annually. Most states have      completed      legislative      actions on their fiscal year 2006 state budgets. We expect our average      Medicaid rate per patient day to increase between approximately 2% to 3%      in our fiscal 2006. 

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

      Nursing home providerassessments have been implemented in eight states where we operate (Massachusetts,West Virginia, Rhode Island, North Carolina, New Hampshire, Pennsylvania, New Jerseyand Connecticut). Three of these plans received federal approval during thisfiscal year. In January 2005, CMS approved the Pennsylvania provider assessment.The Pennsylvania provider assessment, which was retroactive to July 1, 2003and will expire on June 30, 2007, was recognized cumulatively in the quarterended March 31, 2005. Recognition of the Pennsylvania provider assessmentresulted in increased revenue, EBITDA and net income of $50.9 million,$6.6 million and $4.0 million, respectively, in fiscal 2005, of which$30.9 million of revenue, $5.4 million of EBITDA and $3.3 million of netincome relates to periods prior to the current fiscal year. In February 2005,CMS approved the New Jersey provider assessment.The New Jersey provider assessment, which was retroactive to July 1, 2004 andwill expire on June 30, 2006, was recognized cumulatively in the quarter endedMarch 31, 2005. Recognition of the New Jersey provider assessment resulted inincreased revenue, EBITDA and net income of $22.1 million, $6.1 million and$3.7 million, respectively, in fiscal 2005, of which $4.3 million of revenue,$1.0 million of EBITDA and $0.6 million of net income relates to periods priorto the current fiscal year. The Connecticut provider assessment, which wasretroactive to July 1, 2005, was recognized in the quarter ended September 30, 2005.Recognition of the Connecticut provider assessment resulted in increased revenue,EBITDA and net income of $1.8 million, $0.4 million and $0.2 million, respectively,all of which relates to the quarter ended September 30, 2005. 

      The Commonwealth  of Pennsylvania has proposed a reduction in the reimbursement allowance under  its provider assessment program effective July 1, 2005 through June 30, 2006.  If the proposed reduction is made final as expected, the amount we must pay  the Commonwealth under this program will exceed the amount we are reimbursed.  In the quarter ended September 30, 2005, our revenue and EBITDA were reduced  $0.6 million, and our net income was reduced $0.4 million or $0.02 per diluted  share to consider the reduced reimbursement. If the proposed reduction is made  final as expected, our fiscal 2006 revenue and EBITDA would be reduced approximately  $2.4 million, and our net income would be reduced approximately $1.4 million  or $0.08 per diluted share. We believe this  adjustment is unique to the methodology used by the Commonwealth in implementing  its Medicaid provider assessment plan. The Commonwealth has indicated that provider  assessment payments made for fiscal years 2003 through 2005 were based on lower  than actual Medicaid utilization. Adjustments in the reimbursement allowance  are meant to correct faulty assumptions underlying payment amounts for the prior  two years.

      The proposed      federal budget for 2006 included proposed reform of the Medicaid program      to cut a total of $60.0 billion in projected Medicaid expenditure growth      over 10 years, including a provision that would reduce the maximum amount      of provider taxes that a state may impose on providers for purposes of      qualifying for federal matching funds from 6% of a state’s Medicaid      outlay to 3%. Congress, during consideration of its fiscal year 2006 First      Congressional Budget Resolution, scaled back the proposed Medicaid reductions.      The final enactment is a compromise establishing a Medicaid Commission      authorized to make specific policy recommendations, while agreeing to defer      Medicaid cuts during fiscal year 2006, and providing reconciliation instructions      to Congress to make $10.0 billion in Medicaid reductions during fiscal      years 2007 to 2011. Congress has not agreed upon the proposed      Medicaid reduction and it remains unclear as to whether these budget issues      will be resolved 

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by the end of 2005. No predictions can be made as to the ultimateoutcomeofthis budget proposal or the future of provider tax plan provisions. We cannotpredictthe extent of the impact that such decrease, if any, in spending by the federalgovernmentwill have on our financial condition and results of operations. 

      It is not possible      to quantify fully the effect of legislative changes, the interpretation      or administration of such legislation or other governmental initiatives      on our business and the business of the customers served by our rehabilitation      services business. Accordingly, there can be no assurance that the impact      of any future healthcare legislation or regulation will not further adversely      affect our business.	  There can be no assurance that payments under governmental      and private third-party payor programs will be timely, will remain at levels      similar to present levels or will, in the future, be sufficient to cover      the costs allocable to patients eligible for reimbursement pursuant to      such programs. Our financial condition and results of operations will be      affected by the reimbursement process, which in the healthcare industry      is complex and can involve lengthy delays between the time that revenue      is recognized and the time that reimbursement amounts are settled.

      The federal      government and state governments continue to focus on efforts to curb spending      on healthcare programs such as Medicare and Medicaid. It is impossible      to predict the outcome of the legislative and regulatory processes.      We cannot at this time predict the extent to which these proposals will      be      adopted      or,      if      adopted      and implemented, what effect, if any, such proposals and existing new legislation      and regulation will have on us. Efforts to impose reduced allowances, greater      discounts and more stringent cost controls by government and other payors      are expected      to continue.

**Results of Operations**

***Factors Affecting Comparability of Financial Information***

      Our consolidated      statements of operations for the twelve months ended September 30, 2003      and for the first two months (through November 30, 2003) of the twelve      months ended September 30, 2004 have been prepared on a basis which reflects      our historical financial statements assuming that the operations of NCI      contributed in the spin-off were organized as a separate legal entity which      owned certain net assets of NCI. 

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

      Management      believes that the consolidated statements of operations for the fiscal      years ended September 30, 2005 and 2004 are generally comparable to the      consolidated statements of operations for the fiscal year ended September      30, 2003, with the exception of interest expense and depreciation      and amortization expense. This lack of comparability is due to the restructuring      of our capital following the spin-off and the related incremental interest      costs and amortization of deferred financing fees in connection with our      new financing arrangements. 

      Also, in fiscal  2005, we reevaluated the classification of certain of our leases and determined  that five center leases previously classified as operating leases beginning  in fiscal 2004 should have been classified as capital leases. The cumulative  effect of correcting this accounting in fiscal 2005 is an increase to depreciation  expense of $4.7 million (of which $2.1 million relates to fiscal 2004), an increase  to interest expense of $4.7 million (of which $2.2 million relates to fiscal  2004) and a decrease to lease expense of $9.3 million (of which $4.3 million  relates to fiscal 2004), having no impact on pre tax or net income. The capitalization  of these leases also had the effect of increasing total assets and total liabilities  (principally debt) $34.7 million. 

***Reasons for Non-GAAP Financial Information***

      The following      discussion includes EBITDA and Adjusted EBITDA which are non-GAAP financial      measures. For purposes of SEC Regulation G, a non-GAAP financial measure      is a numerical measure of a registrant’s historical or future financial      performance, financial position or cash flows that excludes amounts, or      is subject to adjustments that have the effect of excluding amounts, that      are included in the most directly comparable financial 

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measure calculated and presented in accordance with GAAP in the statement of operations, balance sheet or statement of cash flows (or equivalent statements) of the registrant; or includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the most directly comparable financial measure so calculated and presented. In this regard, GAAP refers to accounting principles generally accepted in the United States of America. Pursuant to the requirements of Regulation G, we have provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures.

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

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

      Adjusted EBITDA is presented to exclude certain expenses and gains related to one-time transactional events or settlements. Specifically, in fiscal 2003 we excluded a net gain recognized in connection with the early extinguishment of a mortgage debt. Adjusted EBITDA is presented because management uses this information in evaluating the continuing operations of our business and believes that this information provides investors a useful insight into our operating results. Management also believes that excluding such expenses and gains properly reflects our ongoing operations and provides better comparability to prior year results.

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

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*Reconciliation of Net Income to EBITDA          and Adjusted EBITDA*

|                                                                | **Year ended September 30,** |    |
|---------------------------------------------------------------------|------------------------------|---------|
|                                                                |                              |    |
| **(in thousands)**                                                  | **2005**                     |    | **2004** |   | **2003** |   |
|                                                                     |                              |         |   |  |  |   |  |  |   |
| Net income                                                          | $                            | 42,169  |   | $ | 29,073 |   | $ | 11,888 |   |
| Add back:                                                           |                         |    |   |   |   |   |   |   |   |
|    Loss from discontinued operations, net of taxes   |                         | 251     |   |   | 2,675 |   |   | 19,509 |   |
|    Equity in net income of unconsolidated affiliates |                         | (3,105  | ) |   | (2,235 | ) |   | (794 | ) |
|    Minority interests                                |                         | 441     |   |   | 462 |   |   | 307 |   |
|    Income tax expense                                |                         | 26,032  |   |   | 20,791 |   |   | 12,479 |   |
|    Interest expense                                  |                         | 27,879  |   |   | 26,985 |   |   | 17,014 |   |
|    Depreciation and amortization expense             |                         | 55,087  |   |   | 46,306 |   |   | 38,863 |   |
|                                                                |                              |         |   |  |  |   |  |  |   |
| EBITDA                                                              | $                            | 148,754 |   | $ | 124,057 |   | $ | 99,266 |   |
|    Gain on early extinguishment of debt (1)          |                         | — |   |   | — |   |   | (1,123 | ) |
|                                                                |                              |         |   |  |  |   |  |  |   |
| Adjusted EBITDA                                                     | $                            | 148,754 |   | $ | 124,057 |   | $ | 98,143 |   |
|                                                                |                              |         |   |  |  |   |  |  |   |

|        |
|--------|
|   |   |
| (1)    | The gain on early extinguishment of debt is        the result of a negotiated discount on a mortgage loan liquidated by        us at the request of the mortgage lender. We excluded this gain on early        extinguishment of debt from the calculation of Adjusted EBITDA because        management does not view such a gain as likely to occur in the foreseeable        future, nor have we encountered a similar transaction in recent years.        While we often may be interested in extinguishing certain of our mortgage        loans by refinancing such loans at more favorable rates of interest,        because most of these mortgage loans require expensive prepayment penalties,        it often is not economically feasible for us to do so. To have a mortgage        lender approach us to extinguish mortgage debt so that we are able to        negotiate favorable extinguishment terms is deemed by management to be        an unusual event that is reasonably unlikely to occur within the next    two years. |

***Fiscal 2005 Compared to Fiscal 2004*********

      Fiscal 2005      revenues were $1,683.4 million, an increase of $165.8 million, or 10.9%,      over the prior year. Of this growth, inpatient services revenue increased      by $152.8 million, external rehabilitation therapy services revenue increased      by $9.8 million and external other businesses revenue increased by $3.2      million.

       The $152.8      million of revenue growth in our inpatient services segment is primarily      attributed to increased payor rates and acquisitions. In aggregate, payor      rates increased by $142.2 million versus the prior year with $116.0 million      of such increase occurring in the Medicaid payor category, of which $74.4      million was due to provider tax assessments for New Jersey, Pennsylvania,      New Hampshire and Connecticut, with $36.7 million of such provider tax      assessments pertaining to prior years. The prior year period      contained no provider tax assessments for New Jersey, Pennsylvania or Connecticut.      Medicaid revenue settlements and adjustments increased by $2.0 million      versus the prior year  period. The $39.6 million balance of Medicaid      rate increases, which equate to a 5.7% increase, resulted from both increased      acuity levels and legislative increases. A 5.3% increase in our average      Medicare rate, attributed to the October 1, 2004 upward Medicare rate adjustments      of 2.8% and higher Medicare patient acuity, was the primary reason for      the remainder of the overall rate increase. Approximately $14.1 million      of the overall revenue increase is due to the step acquisition of three      eldercare centers, which we previously jointly owned and managed. We purchased      our joint venture partners’ ownership interests in the centers and      currently we own and consolidate 100% of the operations. Higher Medicare      Part B volume resulted in $4.7 million of increased revenues. Remaining      net revenue increases of $3.8 million were primarily due to increased quality      mix resulting from combined insurance and Medicare census comprising 0.4%      more of our skilled nursing facility census in the current year to date      period versus the prior year to date period. The preceding were partially      offset by a $3.7 million revenue decline as the result of the current year      period having one less day than the same period in the prior "leap" year      and an $8.3 million revenue decline resulting from a decline in overalloccupancy. Overall occupancy

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declined to 90.1% in the current year period from 90.8% in the  same period in the prior year. Total patient days increased 2,425 to 6,691,687  in the current year period compared to 6,689,262 in the same period  of the prior year. A 58,928 patient day increase attributed to the step acquisitions  of three eldercare centers was offset by a decline of 18,392 patient days as  the result of the current year having one less day than the prior year and  a 38,111 patient day decline in our same facility centers which were included  in both reporting periods.

      Increased revenue volume generated by ongoing customer contracts was the primary reason for the $9.8 million (or 8.1%) increase in external rehabilitation therapy services revenue.

      The $3.2 million      increase in external other business revenue primarily resulted from $2.6      million of increased volume in our respiratory therapy business and $2.7      million      of net increases primarily due to increased management fee revenues and      increased investment income resulting from increased cash levels. The preceding      was partially offset by $2.1 million of decreased external business volume      in our non-core hospitality, physician services and staffing services businesses.

      Fiscal 2005      net income increased to $42.2 million from $29.1 million in the same period      in the prior year. Revenue increases of $165.8 million, as previously discussed,      were partially offset by $51.0 million of increased salaries, wages and      benefits and $85.0 million of higher other operating expenses. Of the $51.0      million of increased salaries, wages and benefits, $7.1 million is attributed      to the step acquisitions of three eldercare centers, approximately $6.4      million is attributed to the replacement of higher cost temporary agency      nurses with internally employed nurses, with the balance of the increase      due to normal inflationary growth in wage and benefits in both our inpatient      services segment and rehabilitation therapy services segment, increased      inpatient nursing hours per patient day resulting from servicing higher      acuity patients and increased rehabilitation therapy services business      volume. Of the $85.0 million of increased other operating expenses, $61.2      million is attributed to increased provider assessments primarily for New      Jersey, Pennsylvania and Connecticut, with $28.8 million of such provider      assessments pertaining to periods prior to fiscal 2005, $5.9 million is      attributed to increased utilization of temporary agencies within our rehabilitation      services business as a result of an industry-wide shortage of therapists,      $3.0 million is attributed to an increase in pharmacy, medical supply and      other ancillary costs incurred to treat a higher acuity patient population,      $3.8 million is attributed to step acquisitions of three eldercare centers,      $1.3 million is attributed to increased general and professional liability      insurance and $1.7 million is attributed to increased training costs associated      with employee safety programs. An additional $2.8 million of increased      operating expenses is due to an adjustment to reflect an estimate of previously      unaccrued costs resulting from a weakness in our purchasing cut-off procedures.      We have remediated the internal control weakness and believe that the correction      is not material to any previously reported financial statements or earnings      trends. These increases in other operating expenses were offset by approximately      $6.9 million of reduced costs attributed to the replacement of higher cost      temporary agency nurses with internally employed nurses. The balance of      the increase in other operating expenses of approximately $12.2 million      is largely attributed to normal inflationary increases in cost. General      and administrative costs increased by $14.0 million with $3.6 million of      the increase attributed to higher adverse claims development associated      with our self-insured programs, $2.0 million attributed to increased strategic      consulting costs, $1.5 million attributed to consulting costs incurred      relative to matters associated with the Sarbanes-Oxley Act, $1.6 million      attributed to support costs relative to the implementation of new inpatient      data systems with the balance of the increase primarily resulting from      inflationary increases in payroll costs and increased support staff. The      $9.3 million decrease in the provision for losses on accounts receivable      and notes receivable is primarily due to improvement in the collection      of older accounts receivable. Net income was further reduced from increases      in early extinguishment of debt costs, depreciation and amortization expense,      interest expense and income tax expense as further discussed below. Net      income increased due to lower lease expense, lower after-tax losses of      discontinued operations and higher earnings of less than 100% owned subsidiaries,      each of which is further discussed below.

      For fiscal 2005, EBITDA increased $24.7 million to $148.8 million compared with $124.1 million in the same period of the prior year. Inpatient services EBITDA increased $47.1 million, of which $14.2 million is due to provider tax assessments for New Jersey, Pennsylvania, Connecticut and New Hampshire, with $8.3 million of such provider tax assessments pertaining to periods prior to fiscal 2005. Increased Medicaid revenue settlements and adjustments are responsible for $2.0 million of the increase. Approximately $2.7 million of the increase is due to step acquisitions of three eldercare centers and $9.5 million is due to decreased lease expense, which is further described below, with the remaining $18.7 million increase resulting from the previously discussed other increases

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in payor rates, increased quality mix, reduced utilization of external nursing    agencies and reduced bad debt expense offset by the impact of decreased occupancy    and inflationary increases in cost. EBITDA of our rehabilitation therapy    services segment declined $8.3 million with $14.6 million of combined external    and intersegment revenue increases being offset by $14.9 million of higher    labor related costs, $5.9 million of increased utilization of temporary agencies,    a $1.7 million impairment charge to write-off the investment related to an    abandoned rehabilitation services application system and $0.4 million of    increased other costs. The increase in rehabilitation therapy labor and temporary    agency costs is primarily being driven by high market demand for a limited    pool of qualified therapists. Increased loss on early extinguishment of debt    in the current year to date period decreased EBITDA by $10.1 million. Of    the $11.8 million loss on early extinguishment of debt recognized in fiscal    2005, $0.4 million is due to the write-off of unamortized financing fees    for several repaid mortgages, $1.3 million is due to the full write-off of    unamortized financing fees for the term loan component of our senior credit    facility and $2.7 million is due to the write-off of unamortized financing    fees from the repurchase of our 8% senior subordinated notes. In addition,    prepayment premiums on the repurchased 8% senior subordinated notes resulted    in $7.4 million of debt extinguishment charges. The remaining decrease in    EBITDA of $4.0 million in fiscal 2005 in all other services and corporate    costs resulted principally from $2.0 million of increased strategic consulting    costs, $1.5 million of consulting costs incurred relative to compliance with    the Sarbanes-Oxley Act and $1.6 million of support costs relative to the    implementation of new inpatient data systems.

**     ***Capital Costs and Other*****

      Lease expense      decreased by $9.7 million to $18.4 million in fiscal 2005, compared to      $28.1 million for the same period in the prior year, primarily due to a      $9.3 million reduction of expense resulting from the reclassification of      certain of our leases from operating leases to capital leases,      partially offset by a $1.3 million increase to expense resulting from a      correction to recognize operating lease expense on a straight-line basis.      The balance of the decline is due to the purchase of six previously leased      facilities, offset by inflationary increases in lease costs.

      Depreciation      and amortization expense increased by $8.8 million to $55.1 million in      fiscal 2005 compared to $46.3 million for the same period in the prior      year. The increase is principally attributed to $4.7 million of additional      depreciation expense resulting from the reclassification of certain of      our leases from operating leases to capital leases, $1.3      million of corrections to depreciation expense recorded in the current      year following modifications to the useful lives assigned to certain fixed      assets, with the remaining $2.8 million attributed to additional    depreciation expense on incremental capital additions.

      Interest expense      increased by $0.9 million to $27.9 million in fiscal 2005 compared to $27.0      million for the same period in the prior year, primarily due to $4.7 million      of interest expense recorded as a result of the reclassification of certain      of our leases from operating leases to capital leases. The      preceding was  offset by the restructuring of our debt portfolio      in the March 2005 quarter and resulting decline in overall debt and our      weighted average interest rate.

      Income tax expense    in fiscal 2005 is estimated using an effective tax rate of approximately    40.0%, offset by the recognition of $0.5 million of tax credits, a $0.7 million    tax refund and a $0.3 million adjustment to our income tax liability following    the filing of our fiscal 2004 tax return. Income tax in the prior year was    estimated using an effective tax rate of 39.6%. The increase in the effective    tax rate is attributed to higher permanent deductions principally in the    area of lobbying expenses. Income tax expense includes the provision of taxes    on both equity in net income of unconsolidated affiliates and minority interests.

      Loss from discontinued    operations, net of taxes, was $0.3 million in fiscal 2005 and $2.7 million    in the prior year to date period. The change is primarily due to the relative    results of operations of those businesses identified as discontinued operations.

      Operating results    of our less than 100% owned subsidiaries in the fiscal 2005 improved compared    to the same period in the prior year, resulting in a combined increase of    $0.9 million in equity in net income of unconsolidated affiliates and minority    interests.

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***Fiscal 2004 Compared to Fiscal 2003***

      Fiscal 2004 revenues    were $1,517.6 million, an increase of $142.1 million, or 10.3%, over the    prior year. Of this growth, inpatient services revenue increased by $147.6    million, external rehabilitation therapy services revenue grew $0.5 millionand external other businesses revenue declined $6.0 million.

      The $147.6      million of revenue growth in our inpatient services segment is primarily      attributed to increased payor rates and acquisitions. Of the total increase      in inpatient services revenue, $57.0 million is due to step acquisitions      of eight eldercare centers, which we previously managed. We purchased our      joint venture partners’ ownership interests in these eight centers      and now own 100% of the operations. As a result, the revenues and expenses      of these centers are included in more periods in our current fiscal year      results than in the prior fiscal year. The balance of the increase in inpatient      services revenue is primarily due to increased average rates per patient      day. Our average rate per patient day in the current fiscal year was $202      compared to $189 for the prior year. This increase in the average rate      per patient day is principally driven by increased average Medicaid rates      ($160 in 2004 versus $148 in 2003) and Medicare rates per patient day ($350      in 2004 versus $314 in 2003). Of the $55.4 million of Medicaid rate increases,      $10.7 million resulted from the first-time recognition of provider assessment      revenue for our New Hampshire centers. The 11.5% increase in our Medicare      rate per patient day is attributed to the October 1, 2003 upward Medicare      rate adjustments of 6.26% and higher Medicare patient acuity. Total patient      days increased 299,170 to 6,689,262 in the current year compared to 6,390,092      in the prior year. Of this increase, 304,436 patient days are attributed      to the step acquisition of eight eldercare centers discussed above, and      17,663 are attributed to the current year having one additional calendar      day due to a leap year. The remaining decline of 22,929 patient days is      attributed to a decline in the occupancy of our same facility centers which      were included in both reporting periods. Our overall occupancy declined      to 90.8% in 2004 from  91.0% in 2003.

      External rehabilitation    therapy services revenue increased by $0.5 million, or 0.4%. Rehabilitation    revenue increases of $16.7 million from newly signed contracts and $13.5    million from increased sales volume from existing customer contracts were    partially offset by $27.7 million of lost business and $2.0 million of decreases    in rates charged to existing external customers.

      Management’s      decision to curtail the operations of our hospitality services business      led to a $4.3 million decline in external other business revenue, with    the $1.7 million balance of the decline in other business revenue primarily    resulting      from reduced management fee revenue due to the step acquisitions of the      eight previously managed properties discussed above.

      Fiscal 2004 net    income increased to $29.1 million from $11.9 million in the same period in    the prior year. Revenue increases of $142.1 million, as discussed above,    were partially offset by $94.2 million of increased salaries, wages and benefits    and $5.6 million of increased other operating expenses. Of the $94.2 million    of increased salaries, wages and benefits, $30.3 million is attributed to    the step acquisition of the eight eldercare centers, approximately $10.0    million is attributed to the replacement of higher cost temporary agency    nurses with internally employed nurses, with the balance of the increase    due to both normal inflationary growth in wage and benefits in our inpatient    services segment and disproportionate growth in wage and benefit costs of    our rehabilitation therapy services segment. The $5.6 million increase in    other operating expenses was primarily the net result of approximately $12.1    million of reduced costs attributed to the replacement of higher cost temporary    agency nurses with internally employed nurses being offset by $6.3 million    resulting from the recognition of New Hampshire provider assessment taxes    with the balance of the change primarily due to the step acquisition of the    eight eldercare centers. The $14.6 million increase in general and administrative    costs resulted primarily from the incremental costs of our operating independently    of NCI and general inflationary increases in costs. Improvement in the collection    of aged accounts receivable resulted in a $0.4 million reduction in the provision    for losses on accounts receivable and notes receivable. Net income was further    reduced from increases in lease expense, interest expense, depreciation and    amortization expense and loss (gain) on early extinguishment and income tax    expense as further discussed below. Net income increased due to lower after-tax    losses of discontinued operations and higher earnings of less than 100% owned    subsidiaries, each of which is further discussed below.

      For fiscal 2004,    Adjusted EBITDA was $124.1 million compared with $98.1 million in same period    of the prior year. Increased Adjusted EBITDA in the current fiscal year reflects    a $50.8 million increase in the Adjusted

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EBITDA of our inpatient services segment due to $7.9 million of price reductions    extended by our rehabilitation therapy services segment to our inpatient    services segment, and $4.6 million due to the step acquisition of eight eldercare    centers. The remaining $38.3 million Adjusted EBITDA increase in the inpatient    services segment is primarily the result of the previously discussed increase    in payor rates and provider assessments, reduced utilization of external    nursing agencies and improved pricing for drugs and medical supplies as a    result of our post spin-off pricing arrangements, offset by inflationary    increases in cost. The inpatient services increase in Adjusted EBITDA was    offset by a decrease of $16.8 million in the Adjusted EBITDA of our rehabilitation    therapy services segment primarily due to certain contract pricing reductions,    including the $7.9 million of price reductions extended to our inpatient    services segment, and $8.5 million of higher labor related costs. The increase    in rehabilitation therapy labor costs is being driven by high market demand    for a limited pool of qualified therapists. Increased loss on early extinguishment    of debt in the current year decreased Adjusted EBITDA by $1.7 million. The    remaining decrease in Adjusted EBITDA of $6.3 million in fiscal 2004 is principally    attributed to increased general and administrative costs driven by inflationary    increases in cost and the incremental cost of operating independently of    NCI.

     *Capital Costs and Other*

      Lease expense increased    by $0.5 million to $28.1 million in fiscal 2004 from $27.6 million in the    prior year period primarily due to the step acquisitions of three eldercare    centers subject to leases.

      Depreciation and    amortization expense increased $7.4 million to $46.3 million in fiscal 2004    compared to $38.9 million for the same period in the prior year. The increase    is principally attributed to incremental amortization of deferred financing    fees following the completion of our new financing arrangements and incremental    depreciation expense on information systems following the spin-off. Incremental    depreciation expense on information systems is due to higher levels of such    systems attributed to us from NCI in excess of estimated allocations made    in the prior year carve-out financial statements.

      Interest expense    increased $10.0 million in fiscal 2004 to $27.0 million, compared to $17.0    million for the same period in the prior year, principally due to increased    debt levels above those allocated in the prior year carve-out financial statements    resulting from the October 2003 issuance of our 8% senior subordinated notes    in an aggregate principal amount of $225.0 million and, in December of 2003,    our entering into a senior credit facility consisting of a fully drawn $185.0    million term loan.

      The loss on early    extinguishment of debt recognized in fiscal 2004 is the result of the early    extinguishment of mortgage loans as well as the unscheduled voluntary prepayments    of $50.0 million of the term loan component of our senior credit facility    and principally consists of the write-off of unamortized deferred financing    fees. The gain on early extinguishment of debt recognized in the prior year    is the result of a negotiated discount on a mortgage loan liquidated by us    at the request of the mortgage lender.

      Loss from discontinued    operations, net of taxes, was $2.7 million in fiscal 2004 and $19.5 million    for the same period in the prior year. The change is due in part to a $0.4    million (after-tax) write-down of assets classified as discontinued in fiscal    2004 compared to $8.3 million (after-tax) recorded in the prior year period,    combined with the relative results of operations of those businesses identified    as discontinued operations. The improvement in the operating results of our    discontinued businesses is primarily due to our disposition of certain discontinued    operations since the prior year, including the sale of our discontinued Floridaproperties in the third quarter of the prior fiscal year.

      Income tax expense    in fiscal 2004 was recorded at an effective tax rate of 39.6%. Income tax    expense in fiscal 2003 was offset by the utilization of $4.4 million of tax    losses pursuant to the Job Creation and Worker Assistance Act of 2002. Income    tax expense in fiscal 2003 was otherwise estimated using an effective tax    rate of approximately 39%. The increase in the effective tax rate in fiscal    2004 reflects a reduction in employment tax credits due, in large part,    to enactment of the Working Families Tax Relief Act on October    4, 2004. Since the law was enacted after our fiscal year end, we could not    reflect the benefit of provisions which retroactively extended the credits    for wages paid or incurred for eligible new hires in fiscal 2004. Income    tax expense includes the provision of taxes on both equity in net income    of unconsolidated affiliates and minority interests.

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      Operating results    of our less than 100% owned subsidiaries in fiscal 2004 improved compared    to the same period in the prior year, resulting in a combined increase of    $1.3 million in equity in net income of unconsolidated affiliates and minority    interests. 

**Liquidity and Capital Resources**

***Working Capital and Cash Flows***

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

      Our operating cash    flow has been used to finance trade accounts receivable, fund capital expenditures,    service and repurchase our indebtedness and make selective acquisitions.    Financing trade accounts receivable is necessary because, on average, the    customers    and payors    for our services do not pay us as quickly as we pay our vendors and employees    for their services. Our cash flow from operations for fiscal 2005 and 2004    were $125.0 million and $148.4 million, respectively. The $23.4 million decline    in cash flow from operations in fiscal 2005 primarily resulted from $28.6    million in accounts receivable growth and $26.6 million from the timing of    payments to vendors and employees. The remaining $31.8 million improvement    in operating cash flow primarily resulted from growth in operations. 

      Our investing activities    principally consist of capital expenditures and asset acquisitions and dispositions.    Capital expenditures consist primarily of betterments and expansion of eldercare    centers and investments in computer hardware and software. For the foreseeable    future, we expect to incur capital expenditure costs at levels significantly    above the levels incurred in prior years as we intend to increase our investment    in both physical plant and information systems. Capital expenditures were    $55.2 million, $31.2 million and $30.5 million in fiscals 2005, 2004 and    2003, respectively. For fiscal 2006, capital expenditures are anticipated    to be within the range of $65.0 million to $75.0 million. Investing activities    in fiscals 2005 and 2004 also include proceeds received from the sale of    eldercare centers of $6.7 million and $18.0 million, respectively, principally    from the sale of eldercare centers located in the state of Wisconsin. Proceeds    from eldercare center asset sales of $55.1 million in fiscal 2003 are principally    attributed to sales in the states of Florida and Illinois. We do not expect    to receive significant cash proceeds from asset sales in fiscal 2006. In    fiscal 2005, $7.2 million of net cash was used principally to purchase two    previously leased skilled nursing facilities, and in fiscal 2004, $48.6 million    of cash was used to purchase two centers in which we previously held a 50%    joint venture interest, to purchase five previously leased eldercare centers    and to restructure nine lease agreements in an effort to reduce future lease    payments. Investing activities in fiscals 2005, 2004 and 2003 also include    $2.0 million, $5.3 million and $4.2 million, respectively, of net purchases    of restricted marketable securities held by our wholly owned insurance captive. 

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

      Cash from financing    activities in fiscal 2004 was a net source of cash of $38.6 million, attributed    to $400.7 million of net proceeds from our post spin-off financing arrangements,    offset by the use of $218.5 million to repay indebtedness of NCI, $33.4 million    to repay mortgage and bond debt of eight eldercare centers, $50.0 million    of 

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voluntary prepayment of the term loan portion of our senior credit facility,    $4.7 million of scheduled principal payments and $55.5 million of cash transferred    to NCI prior to and in connection with the spin-off. 

      We continually evaluate  the most efficient use of our capital, including investments in our property  and equipment, information systems, potential asset acquisitions or dispositions,  purchasing, refinancing, exchanging or retiring certain of our outstanding debt  securities to the extent permitted by our existing covenant restrictions. As  part of such ongoing evaluation, our board of directors has authorized the repurchase  of up to $50.0 million of our common stock as well as certain principal amounts  of our 8% senior subordinated notes in accordance with the restrictions of our  amended and restated senior credit agreement through December 31, 2006. Share  and debt repurchases may take place at management’s discretion and/or under  pre-established, nondiscretionary programs from time to time, depending on market  conditions, in the open market, and in privately negotiated transactions. Through  September 30, 2005, there were 787,337 shares of common stock repurchased at  a cost of $32.1 million and $70.9 million of 8% senior subordinated note repurchases.  Subsequent to September 30, 2005, we repurchased an additional 288,400 shares  of our common stock at a cost of $10.7 million.

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

      At September 30,    2005, we had restricted investments in marketable securities of $96.1 million,    which are held by LHC, our wholly owned captive insurance subsidiary incorporated    under the laws of Bermuda. The investments held by LHC are restricted by    statutory capital requirements in Bermuda. As a result of such restrictions    and encumbrances, we and LHC are precluded from freely transferring funds    through intercompany loans, advances or cash dividends. 

***Recent Financing Arrangements***

      *Convertible        senior subordinated debentures*. In March 2005,        we completed a private placement of $180.0 million aggregate principal        amount of our 2.5% convertible senior subordinated debentures due 2025        to qualified institutional buyers under Rule 144A of the Securities Act,        as amended. Interest is payable semi-annually in March and September.        Each of our subsidiaries that guarantee the indebtedness under the senior        subordinated notes also guarantees the convertible senior subordinated        debentures. The guarantees will be released at such time that such subsidiary        ceases to be a guarantor under the senior subordinated notes, all of        the senior subordinated notes are no longer outstanding, or on March20, 2012. In July 2005, we registered with the SECthe resale of the convertible senior subordinated debentures and the relatingguarantees and underlying common stock. 

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

      Subject to certain    exceptions, once debentures are tendered for conversion, the value, or conversion    value, of the cash and shares of our common stock, if any, to be received    by a holder converting $1,000 principal amount of the debentures will be    determined by multiplying the applicable conversion rate by the ten trading    day average closing price of our common stock. We will deliver the conversion    value to holders as follows: (i) an amount in 

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cash, referred to as the principal return, equal to the lesser of (x) the aggregate conversion value of the debentures to be converted and (y) the aggregate principal amount of the debentures to be converted, (ii) if the aggregate conversion value of the debentures to be converted is greater than the principal return, an amount in whole shares, referred to as the net shares, equal to such aggregate conversion value less the principal return, referred to as the net share amount, and (iii) an amount in cash in lieu of any fractional shares of our common stock. The number of net shares to be paid will be determined by dividing the net share amount by the ten trading day average closing price of our common stock. 

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

      The dilutive effect of the common shares that would be issued if the convertible debentures were converted is not included in our diluted weighted average common share balance unless the weighted average market price of our common stock during a reporting period exceeds $54.20 per share. 

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

      *Amendment to Senior Credit Facility.*In connection with the offering of the convertible senior subordinated debentures, we entered into an amended and restated senior credit agreement pursuant to which we refinanced the indebtedness under our existing senior credit agreement. We repaid all outstanding borrowings under the term loan portion of the senior credit facility and expanded the borrowing capacity of the revolving credit portion. The repayment of the term loan portion of the senior credit facility resulted in the write-off of unamortized deferred financing fees of $1.3 million, which is included in loss on early extinguishment of debt in the consolidated statements of operations. 

      Prior to the amendment, the senior credit agreement provided for a revolving credit facility of $75.0 million, with sub limits for swing line loans, letters of credit and term loans. The amended and restated senior credit agreement provides for a $125.0 million revolving credit facility, with sub limits for the issuance of letters of credit and for swing line loans. However, so long as we are not in default and if we find lenders that are willing to commit, the amended and restated senior credit agreement allows us to add up to $50.0 million of additional available credit under the revolver, subject to the approval of our board of directors. Each of our material U.S. subsidiaries provided guarantees of the indebtedness under the amended and restated senior credit agreement.We and the guarantors pledged substantially all of our personal property to secure the obligations under the amended and restated senior credit agreement, subject to certain exceptions agreed upon with the lenders. In addition, the mortgages that we and our subsidiaries provided under the prior credit agreement continue to secure the amended and restated senior credit agreement, but we are not required to provide additional mortgages except under certain limited circumstances. The amended and restated senior credit agreement has a five year term, expiring in March 2010. 

      We pay interest      on the outstanding loans under the amended and restated senior credit agreement      at either a base rate plus a margin or at the London Interbank Offered      Rate (LIBOR) plus a margin. Initially, that margin was 0.50% for base rate      loans and 1.50% for LIBOR loans. The margin is adjusted from time to time,      depending on our leverage ratio, as defined. For base rate loans, the margin      range is from 0.00% to 1.00%. For LIBOR loans, the margin range is from      1.00% to 2.00%. At September 30, 2005, the margin on base rate loans was      0.25% and the margin on LIBOR loans was 1.25%. We originally paid a commitment      fee to the lenders on the unused portion of the revolving credit facility      equal      to 0.50% of the unused amount; that percentage has dropped to 0.375% due      to our total leverage ratio dropping below 2.25:1.00, as defined. 

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      *Senior Subordinated Notes.*In October 2003, we issued 8% senior subordinated notes in an aggregate principal amount of $225.0 million due in 2013. In July 2004, upon the expiration of the exchange offer, $224.0 million aggregate principal amount of senior subordinated notes registered under the Securities Act, as amended, were exchanged for the unregistered notes issued in October 2003. The aggregate principal amount of $1.0 million of unregistered notes was not exchanged and remains outstanding. Under the terms of our senior subordinated notes, the notes are not redeemable until after October 15, 2008. We may, however, use the net proceeds from one or more equity offerings to redeem up to 35% of the aggregate principal amount of the notes issued on or before October 15, 2006 at 108% of the principal amount, plus accrued and unpaid interest to the redemption date, subject to the terms of the notes. In February 2005, our board of directors authorized the repurchase of a portion of the 8% senior subordinated notes due 2013 from time to time in the open market commencing in March 2005. Through September 30, 2005, we repurchased $70.9 million of our 8% senior subordinated notes. The debt repurchases resulted in a prepayment premium charge of $7.4 million and the write-off of unamortized deferred financing fees and other fees of $2.7 million, which are included in loss on early extinguishment of debt in the consolidated statements of operations. 

      The agreements and instruments governing our recent financing arrangements contain various restrictive covenants that, among other things, require us to comply with or maintain certain financial tests and ratios and restrict our ability to: 

|   | • | incur more debt;                                                   |
|--------|---------|--------------------------------------------------------------------|
|   |    |                                                               |
|   | • | pay dividends, purchase company stock or make other distributions; |
|   |    |                                                               |
|   | • | make payments in respect of subordinated debt;                     |
|   |    |                                                               |
|   | • | make certain investments;                                          |
|   |    |                                                               |
|   | • | create liens;                                                      |
|   |    |                                                               |
|   | • | enter into transactions with affiliates;                           |
|   |    |                                                               |
|   | • | make acquisitions;                                                 |
|   |    |                                                               |
|   | • | merge or consolidate; and                                          |
|   |    |                                                               |
|   | • | transfer or sell assets.                                           |

      Our recent financing arrangements require us to maintain compliance with certain financial covenants as defined in the agreement, including a senior leverage ratio, a total leverage ratio and a fixed charge coverage ratio. There is also a limitation on the amount of capital expenditures that we may make. 

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***Contractual Obligations and Off-Balance Sheet Commitments*****

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

|                                |            **Payments Due by Period**      |     |
|-------------------------------------|----------------------------------------------------------------------------------------------------------------------------|--------------------|
|                                |                                                                                                                            |                    |  |  |  |  |  |  |  |  |  |
| **Contractual Obligations**         |                                                                                                                       | **Total**          |   | **Less than 1 year** |   |   | **1-3 years** |   |   | **4-5 years** |   | **Thereafter** |
|                                     |                                                                                                                            |                    |   |  |   |  |  |   |  |  |   |  |   |
| Long-term debt (including interest) | $                                                                                                                          | 586,515            |   | $ | 22,415 |   | $ | 53,169 |   | $ | 41,302 |   | $ | 469,629 |   |
| Operating leases                    |                                                                                                                       | 167,690            |   |   | 20,694 |   |   | 41,390 |   |   | 34,441 |   |   | 71,165 |   |
| Capital leases                      |                                                                                                                       | 44,176             |   |   | 4,102 |   |   | 8,163 |   |   | 30,845 |   |   | 1,066 |   |
|                                |                                                                                                                            |                    |   |  |  |   |  |  |   |  |  |   |  |  |   |
|                                | $                                                                                                                          | 798,381            |   | $ | 47,211 |   | $ | 102,722 |   | $ | 106,588 |   | $ | 541,860 |   |
|                                |                                                                                                                            |                    |   |  |  |   |  |  |   |  |  |   |  |  |   |

      In November and December 2005, we entered into two separate commitments to purchase real property with an aggregate purchase price of approximately $3.7 million.

      In addition to the contractual obligations and commitments described above, we also have contingent obligations related to outstanding lines of credit, letters of credit and guarantees. These commitments as of September 30, 2005 are summarized as follows (in thousands): 

|                         |     **Amount of Commitment Expiration Per Period** |      |
|-----------------------------------|------------------------------------------------------------------------|--------------------------|
|                                   |
|                              |                                                                   |                     |    | **Less than 1** |    |   |   |    |   |   |    |   |   |
| **Off-Balance Sheet Commitments** |  **Total**                                                        |  **year**           | **1-3 years** |  **4-5 years** | **Thereafter** |
|                                   |                                                                        |                          |   |  |  |   |  |  |   |  |  |   |  |  |   |
| Lines of credit                   | $                                                                      | 2,155                    |   | $ | — |   | $ | — |   | $ | — |   | $ | 2,155 |   |
| Letters of credit                 |                                                                   | 2,862                    |   |   | 2,679 |   |   | 183 |   |   | — |   |   | — |   |
| Guarantees                        |                                                                   | 265                      |   |   | — |   |   | 265 |   |   | — |   |   | — |   |
|                              |                                                                        |                          |   |  |  |   |  |  |   |  |  |   |  |  |   |
|                              | $                                                                      | 5,282                    |   | $ | 2,679 |   | $ | 448 |   | $ | — |   | $ | 2,155 |   |
|                              |                                                                        |                          |   |  |  |   |  |  |   |  |  |   |  |  |   |

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

      We have extended      $4.1 million in working capital lines of credit to certain jointly owned      and managed companies, of which $2.2 million were unused at September 30,      2005. In addition, we have agreed to extend credit for working capital      needs of a nursing center managed by us. Under that arrangement, the property’s      owner is responsible for funding working capital needs up to $0.9 million      and we would be required to cover deficits in excess of that limit. To      date, we have not had to perform under that agreement. Credit risk represents      the accounting loss that would be recognized at the reporting date if the      affiliate companies were unable to repay any amounts utilized under the      working capital lines of credit. Commitments to extend credit to third      parties are conditional agreements generally having fixed expiration or      termination dates and specific interest rates and purposes.

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      We have posted      $2.9 million of outstanding letters of credit. The letters of credit guarantee      performance to third parties of various trade activities. The letters of      credit are not recorded as liabilities on our consolidated balance sheet      unless they are probable of being utilized by the third party. The financial      risk approximates the amount of outstanding letters of credit.

      We are a party      to joint venture partnerships whereby our ownership interests are 50% or      less of the total capital of the partnerships. We account for these partnerships      using the equity method of accounting and, therefore, the assets, liabilities      and operating results of these partnerships are not consolidated with ours.      The carrying value of our investment in joint venture partnerships is $9.0      million at September 30, 2005. Although we are not contractually obligated      to fund operating losses of these partnerships, in certain cases, we have      extended credit to such joint venture partnerships in the past and may      decide to do so in the future in order to realize economic benefits from      our joint venture relationship.	  Management assesses the creditworthiness      of such partnerships in the same manner it does other third-parties. We      have provided $0.3 million of financial guarantees related to loan commitments      of one jointly owned and managed company. The guarantees are not recorded      as liabilities on our balance sheet unless we are required to perform under      the guarantee. Credit risk represents the accounting loss that would be      recognized at the reporting date if counter-parties failed to perform completely      as contracted. The credit risk amounts are equal to the contractual amounts,      assuming that the amounts are fully advanced and that no amounts couldbe recovered from other parties.

**Critical Accounting Policies**

      We consider      an accounting policy to be critical if it is important to our financial      condition and results of operations, and requires significant judgment      and estimates on the part of management in its application. Our critical      accounting estimates and the related assumptions are evaluated periodically      as conditions warrant, and changes to such estimates are recorded as new      information or changed conditions require revision. Application of the      critical accounting policies requires management’s significant judgments, often as the result of the need to make estimates of matters that are inherently uncertain. If actual results were to differ materially from the estimates made, the reported results could be materially affected. Our senior management has reviewed these critical accounting policies and estimates with our audit committee. We believe that the following represents our critical accounting policies. For a summary of all of our significant accounting policies, including critical accounting policies, see Item 8 – “Financial Statements and Supplementary Data,” under note 2 — “Summary      of Significant Accounting Policies.”

***Allowance for Doubtful Accounts***

      We utilize      the “aging method” to evaluate the adequacy of our allowance      for doubtful accounts. This method is based upon applying estimated standard      allowance requirement percentages to each accounts receivable aging category      for each type of payor. We have developed estimated standard allowance      requirement percentages by utilizing historical collection trends and our      understanding of the nature and collectibility of receivables in the various      aging categories and the various segments of our business. The standard      allowance percentages are developed by payor type as the accounts receivable      from each payor type have unique characteristics. The allowance for doubtful      accounts is determined utilizing the aging method described above while      also considering accounts specifically identified as uncollectible. Accounts      receivable that we specifically estimate to be uncollectible, based upon      the age of the receivables, the results of collection efforts, or other      circumstances, are fully reserved for in the allowance for doubtful accounts      until they are written-off.

      We continue      to refine our assumptions and methodologies underlying the aging method.      We believe the assumptions used in the aging method, coupled with continued      improvements in our collection patterns, suggest that our allowance for      doubtful accounts is provided for adequately. However, because the assumptions      underlying the aging method are based upon historical collection data,      there is a risk that our current assumptions are not reflective of more      recent collection patterns. Changes in overall collection patterns can      be caused by market conditions and/or budgetary constraints of government      funded programs such as Medicare and Medicaid. See “Risk Factors — Risk Factors Relating to our Business.” Such      changes can adversely impact the collectibility of receivables, but not      be

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addressed in a timely fashion when using the aging method, until updates to our periodic historical collection studies are completed and implemented.

      At least annually, we update our historical collection studies in order to evaluate the propriety of the assumptions underlying the aging method. Any changes to the underlying assumptions are implemented immediately. Changes to these assumptions can have a material impact on our bad debt expense, which is reported in the consolidated statements of operations as a component of the provision for losses on accounts receivable and notes receivable.

***Loss Reserves For Certain Self-Insured Programs***

*General and Professional Liability and Workers’ Compensation*

      Prior to June 1, 2000, we had first dollar coverage for general and professional liability costs with third party insurers; accordingly, we have no exposure for claims prior to that date. Effective June 1, 2000, we began insuring a substantial portion of our professional liability risks through our wholly owned insurance company, LHC. Specifically, we are responsible for the first dollar of each claim (on a claims-made basis), up to a self-insurance retention limit determined by the individual policies, subject to aggregate limits for each policy year. The self-insured retention limits amount to $21.0 million, $19.0 million and $14.0 million for the policy years ended May 31, 2006, 2005 and 2004, respectively. Any costs above these retention limits are covered by third-party insurance carriers.Since the June 1, 2000 inception of the self-insurance program through September 30, 2005, our cumulative self-insurance retention levels are $100.0 million and our provision for these losses is $80.4 million. Assuming our actual losses were to reach our retention limits in each of the policy years, our additional exposure is approximately $19.6 million which, if incurred, would be recognized as an increase to our other operating expenses in our consolidated statements of operations in the period such exposure became known. In addition, we have provided $3.7 million for the estimated costs of claims incurred but not reported as of September 30, 2005.

      We are self-insured      through LHC up to the first $0.5 million per incident for workers’ compensation.      All claims above $0.5 million per incident are insured through a third-party      insurer. We have annual aggregate self-insured retentions of $61.8 million,      $56.0 million and $30.4 million in policy years ended April 30, 2006, 2005      and 2004, respectively. Claims above these aggregate limits are insured      through a third-party insurer as of September 30, 2005. Our provision for      losses in these policy years is $57.3 million as of September 30, 2005.      Our reserve levels are evaluated on a quarterly basis. Any necessary adjustments      are recognized as an adjustment to salaries, wages and benefits in our      consolidated statements of operations.

      We record outstanding      losses and loss expenses for both general and professional liability and      workers’ compensation liability based on the estimates of the amount of reported losses together with a provision for losses incurred but not reported, based on the recommendations of an independent actuary, and management’s      judgment using our past experience and industry experience. As of September      30, 2005, our estimated range of discounted outstanding losses for these      liabilities is $93.8 million to $117.1 million ($81.1 million to $100.2      million net of amounts recoverable from third-party insurance carriers).      Our recorded reserves for these liabilities were $85.3 million as of September      30, 2005, net of $13.6 million recoverable from third-party insurance carriers,      and are included in self-insurance liability reserves in our consolidated      balance sheet. We (through LHC) have restricted investments in marketable      securities of $96.1 million at September 30, 2005 which are substantially      restricted to securing the outstanding claim losses of LHC.

      General and      professional liability and workers’ compensation claims are discounted      at a rate of 4.5% in 2005 and 2004, which estimates the present value of      funds required to pay losses at a future date. Had we provided losses at      undiscounted levels at September 30, 2005 and 2004, the reserve for outstanding      losses and loss expenses would have been increased by approximately $12.5      million in 2005 and $10.4 million in 2004.

      We believe, based upon the recommendations of an independent actuary, that the provision for outstanding losses and loss expenses will be adequate to cover the ultimate cost of losses incurred as of September 30, 2005, but the provision is necessarily an estimate and may ultimately be settled for a significantly greater or lesser amount. It is at least reasonably possible that we will revise our estimates significantly in the near term. Any subsequent differences arising are recorded in the period in which they are determined.

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*     Health Insurance*

      We offer employees an option to participate in a self-insured health plan. Health claims under this plan are self-insured with a stop-loss umbrella policy in place to limit maximum potential liability for both individual claims and total claims for a plan year. Health insurance claims are paid as they are submitted to the plan administrator. We maintain an accrual for claims that have been incurred but not yet reported to the plan administrator and therefore have not been paid. The incurred but not reported reserve is based on the historical claim lag period and current payment trends of health insurance claims (generally 2-3 months). The liability for the self-insured health plan is recorded in accrued compensation in the consolidated balance sheets.

      We charge our employees a portion of the cost of our self-insured and non self-insured health plans, and we determine this charge at the beginning of each plan year based upon historical and projected medical utilization data, along with projected inflationary increases in medical costs. Any differences between our projections and our actual experience are borne by us. A one percent variance between our projections and the actual medical utilization or inflationary increases in cost would result in a $0.4 million change in our expense, which would be reflected in salaries, wages and benefits in our consolidated statements of operations.

***Revenue Recognition / Contractual Allowances***

      We receive payments through reimbursement from Medicaid and Medicare programs and directly from individual residents (private pay), third party insurers and long-term facilities.

      Within our      inpatient services segment, revenue and the related receivables are recorded      in the accounting records at our established billing rates in the period      the related services are rendered. The provision for contractual adjustments,      which represents the difference between the establshed billing rates and      the predetermined reimbursement rates, is deducted from gross revenue to      determine net revenue. We      recorded contractual adjustments from continuing operations of $332.0 million,      $328.8 million and $339.3 million in fiscal year 2005, 2004and 2003, respectively.

      Within our      rehabilitation therapy services segment and ancillary service businesses,      we record revenues at the time services or products are provided or delivered      to the customer. Upon delivery of services or products, we have no additionalperformance obligation to the customer. 

***Long-Lived Asset Impairments***

      We account      for long-lived assets, other than goodwill with an indefinite useful life,      in accordance with the provisions of SFAS No. 144, “*Accounting      for the Impairment or Disposal of Long-Lived Assets*”. This statement      requires that long-lived assets be reviewed for impairment whenever events      or changes      in circumstances indicate the carrying amount of an asset may not be recoverable.      Recoverability of assets to be held and used is measured by comparison      of the carrying amount of an asset to the future cash flows expected to      be generated by the asset. If the carrying amount of an asset exceeds its      estimated future cash flows, an impairment charge is recognized to the      extent the carrying amount of the asset exceeds the fair value of the asset.      Assets to be disposed of are reported at the lower of the carrying amount      or the fair value less costs to sell.

      We account for  goodwill with an indefinite useful life in accordance with SFAS No. 142, “*Goodwill  and Other Intangible Assets*,” (SFAS 142). This statement requires us  to perform an impairment test for goodwill at least annually or more frequently  if adverse events or changes in circumstances indicate that the asset may be  impaired. We perform our annual impairment test at the end of each fiscal year.  No impairment charge was recorded in the most recent three fiscal years in connection  with the annual impairment test.

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**Income Taxes**

      As of September      30, 2005, we have NOL carryforwards available of $120.9      million, which can be utilized to offset future taxable income subject      to an annual limitation of $33.1 million. We regularly assess our ability      to realize the tax benefit from our NOL. The filing of fiscal 2004 federal      and state income tax returns by NCI and us in June and July 2005, respectively,      and the further evaluation of tax issues related to the spin-off, has significantly      reduced the uncertainty that previously caused management to reserve fully      the value of the deferred tax benefit of the NOL. Consequently, we have      eliminated the NOL valuation allowance and, accordingly, our balance sheet      now reflects, on an after-tax basis, a $51.1 million deferred tax assetand a corresponding increase to additional paid-in capital.

**New Accounting Pronouncements**

*     The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments*

      In November      2005, the final version of Financial Accounting Standards Board (FASB)      Staff Position (FSP) SFAS 115-1 and SFAS 124-1, “*The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments*” (FSP      SFAS 115-1) was issued and addresses the determination of when an investment      is considered impaired; whether the impairment is other than temporary;      and how to measure an impairment loss. FSP SFAS 115-1 also addresses accounting      considerations subsequent to the recognition of an other-than-temporary      impairment on a debt security, and requires certain disclosures about unrealized      losses that have not been recognized as other-than-temporary impairments.      FSP SFAS 115-1 replaces the impairment guidance in EITF Issue No. 03-1      with references to existing authoritative literature concerning other-than-temporary      impairment determinations (principally SFAS No. 115 and Staff Accounting      Bulletin No. 59). Under FSP SFAS 115-1, impairment losses must be recognized      in earnings equal to the entire difference between the security's cost      and its fair value at the financial statement date, without considering      partial recoveries subsequent to that date. FSP SFAS 115-1 also requires      that an investor recognize an other-than-temporary impairment loss when      a decision to sell a security has been made and the investor does not expect      the fair value of the security to fully recover prior to the expected time      of sale. FSP SFAS 115-1 is effective for reporting periods beginning after      December 15, 2005, or January 1, 2006 for us. As the majority of our investments      are investment grade government and corporate debt securities that have      maturities of five years or less, and we have both the ability and intent      to hold the investments until maturity, we do not expect FSP SFAS 115-1      to have a material impact on our consolidated financial statements.

*     Accounting for Accumulated Other Comprehensive Income of an Investee*

      In July 2005,      the FASB issued FSP APB 18-1, “*Accounting by an Investor for Its Proportionate Share of Accumulated Other Comprehensive Income of an Investee Accounted for under the Equity Method in Accordance with APB Opinion No. 18 upon a Loss of Significant Influence*” (FSP      APB 18-1). This guidance clarifies the application of paragraph 121 of      SFAS No. 130, “*Reporting Comprehensive Income*” (SFAS No. 130), and clarifies that a company’s proportionate share of an investee’s      equity adjustments for other comprehensive income should be offset against      the carrying value of the investment at the time significant influence      is lost. To the extent that the offset results in a carrying value of the      investment that is less than zero, an investor should (a) reduce the carrying      value of the investment to zero and (b) record the remaining balance in      income. The guidance in FSP APB 18-1, which is effective as of the first      reporting period after July 12, 2005, or October 1, 2005 for us, is not      expected to have a material impact on our consolidated financial statements.

*     Embedded Derivatives*

      In June 2005,      the FASB issued guidance on SFAS No. 133, “*Accounting for Derivative      Instruments and Hedging Activities*” as      amended (SFAS 133) in Derivative Implementation Group (DIG) Issue B38, “*Embedded      Derivatives: Evaluation of Net Settlement with Respect to the Settlement      of a Debt Instrument through Exercise of an Embedded Put Option or Call      Option*” (DIG      Issue B38) and Issue B39, “*Embedded Derivatives: Application of      Paragraph 13(b) to Call Options That Are Exercisable Only by the Debtor*” (DIG      Issue B39). The guidance in DIG Issue B38 clarifies that the potential      settlement of a debtor’s      obligation to a creditor that would occur upon exercise of      a put or call option meets the net settlement criteria of SFAS No. 133.      The guidance in DIG Issue B39 clarifies that an embedded call option that      can accelerate the settlement of a debt host financial instrument should      not be bifurcated and fair valued if the right to accelerate the settlement      can be exercised only by the debtor (issuer/borrower), it is underlying      an interest rate index and the investor will recover substantially all      of its initial net investment. Both DIG issues will be effective for the      fiscal quarter beginning after December 15, 2005, or January 1, 2006 for      us. We are currently evaluating the impact, if any, of adopting DIG Issue      B38 and DIG Issue B39 on our consolidated financial statements. 

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     *General Partner Control of Limited Partnerships*

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

*     Accounting Changes and Error Corrections*

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

*     Share Based Payments*

      In December      2004, the FASB issued SFAS No. 123R, *“Share-Based        Payment”* (SFAS 123R), which requires companies to measure and        recognize compensation expense for all stock-based payments at fair value.        On April 14, 2005, the SEC issued rules to allow companies to adopt the        standard at the beginning of the fiscal year that begins after June 15,        2005 or October 1, 2005 for us. SFAS 123R allows companies to adopt the        new standard using the modified prospective or modified        retrospective method. We will adopt SFAS 123R using the modified prospective        method. Under this method, we will recognize compensation cost, on a        prospective basis, for the portion of outstanding awards for which the        requisite service has not yet been rendered as of October 1, 2005, based        upon the grant-date fair value of those awards calculated under SFAS        123 for pro forma disclosure purposes. Compensation cost will also be        recorded on all future awards granted after the adoption        of SFAS 123R based upon the fair value determined as of the grant date.        We estimate that adoption of the expensing requirements of SFAS 123R        will reduce fiscal 2006 earnings per diluted share approximately $0.10.        The actual impact of adopting SFAS 123R in fiscal 2006 could differ from        this estimate depending upon the number and timing of options granted        during fiscal 2006, as well as their vesting period and vesting criteria.****

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      We currently      determine the fair value of stock-based compensation using a Black-Scholes      option-pricing model. In connection with adopting SFAS 123R, we will implement      a lattice valuation model to determine the fair market value of future      stock-based compensation awards. The new methodologies and assumptions      will be different than those employed by us for periods prior to October      1, 2005 in disclosing the impact of applying the fair value-based method      under SFAS 123 to outstanding and unvested awards. See Item 8 — “FinancialStatements and Supplementary Data” — note2 — “Summary of Significant Accounting Policies – Stock OptionPlan” forinformation related to the pro forma effects of stock-based employee compensationon our reported results assuming application of the fair value recognition provisionsof SFAS 123. 

**Other**

      We manage the      operations of 42 independently and jointly owned eldercare centers and      13 transitional care units. Under a majority of these arrangements, we      employ the operational staff of the managed center for ease of benefit      administration and bill the related wage and benefit costs on a dollar-for-dollar      basis to the owner of the managed property. In this capacity, we operate      as an agent on behalf of the managed property owner and are not the primary      obligor in the context of a traditional employee/employer relationship.      Historically, we have treated these transactions on a “net basis” thereby      not reflecting the billed labor and benefit costs as a component of our      net revenue or expenses. For the fiscal years 2005, 2004 and 2003, we billed      our managed clients $114.7 million, $110.4 million, and $125.1 million,      respectively, for such labor related costs.

**Seasonality**

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

**Impact of Inflation**

      The healthcare      industry is labor intensive. Wages and other labor costs are especially      sensitive to inflation and marketplace labor shortages. We have implemented      cost control measures to limit increases in operating costs and expenses      but cannot predict our ability to control such operating cost increases      in the future. See “Cautionary Statements Regarding Forward-Looking Statements,” “Risk Factors” and Item 7 — “Management’sDiscussion and Analysis of Financial Condition and Results of Operations.” 

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

     In March 2005, we repaid our entire previously held variable rate senior credit facility indebtedness with the proceeds of our 2.5% fixed rate convertible senior subordinated debentures. At September 30, 2005, our overall debt mix is approximately 98% fixed and 2% variable, effectively eliminating any exposure to rising rates of interest.

      At September 30, 2005, we have $109.0 million of cash and equivalents that are affected by market rates of interest. A one percent change in the rate of interest would result in a change to interest income of $1.1 million annually. 

      Our wholly owned subsidiary, Liberty Health Corporation, Ltd., holds restricted investments in marketable securities. Securities that are affected by market rates of interest at September 30, 2005 amounted to $21.5 million. A one percent change in the rate of interest would result in a change to interest income of $0.2 million annually. 

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| **ITEM 8:** | **FINANCIAL STATEMENTS AND SUPPLEMENTARY    DATA** |
|-------------|----------------------------------------------------|

 

| **INDEX TO CONSOLIDATED FINANCIALSTATEMENTS**                                                                 |     |   |
|---------------------------------------------------------------------------------------------------------------|----------|--------|
|                                                                                                          | **Page** |   |
|                                                                                                          |     |   |
| Report of Independent Registered         Public Accounting Firm                                               | 68       |        |
|                                                                                                          |     |   |
| Consolidated Balance Sheets as of September 30, 2005 and 2004                                                 | 69       |        |
|                                                                                                          |     |   |
| Consolidated Statements of Operations for the years ended September 30, 2005, 2004 and 2003                   | 70       |        |
|                                                                                                          |     |   |
| Consolidated Statements of Shareholders’ Equity    for the years ended September 30, 2005, 2004 and 2003 | 71       |        |
|                                                                                                          |     |   |
| Consolidated Statements of Cash Flows for the years ended September 30, 2005, 2004, and 2003                  | 72       |        |
|                                                                                                          |     |   |
| Notes to Consolidated Financial Statements                                                                    | 73       |        |
|                                                                                                          |     |   |
| Schedule II – Valuation    and Qualifying Accounts                                                       | 111      |        |

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**Report of Independent Registered Public Accounting Firm**

The Board of Directors and ShareholdersGenesis HealthCare Corporation: 

We have audited the accompanying consolidated balance sheets ofGenesis HealthCare Corporation and subsidiaries (the Company) as of September30, 2005 and 2004, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the years in the three-year period ended September 30, 2005. In connection with our audits of the consolidated financial statements, we also have audited financial statement schedule II. These consolidated financial statements and financial statement schedule are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these consolidatedfinancial statements and financial statement schedule based on our audits. 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Genesis HealthCare Corporation and subsidiaries as of September 30, 2005 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended September 30, 2005, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. 

We also have audited, in accordance with the standards of the PublicCompany Accounting Oversight Board (United States), the effectiveness of GenesisHealthCare Corporation’s internal control over financial reporting as of September 30, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated December 13, 2005 expressed an unqualified opinion on management’sassessment of, and the effective operation of, internal control over financialreporting. 

/s/ KPMG LLP

Philadelphia, PennsylvaniaDecember 13, 2005 

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**GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES****CONSOLIDATED BALANCE SHEETS****SEPTEMBER 30, 2005 AND 2004(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)**

|                                                                                                                                                                                                                         |   |               | **September 30, 2005** |               |               | **September 30, 2004** |               |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|------------------------|--------------------|--------------------|------------------------|--------------------|
|                                                                                                                                                                                                                         |   |                    |                        |               |                    |                        |               |
| **Assets:**                                                                                                                                                                                                                  |   |               |                   |               |               |                   |               |
| Current assets:                                                                                                                                                                                                              |   |               |                   |               |               |                   |               |
|      Cash      and equivalents, $7,442 and $4,147 restricted      at September 30, 2005 and 2004, respectively                                                                                      |   | $             | 109,041                |               | $             | 126,071                |               |
|      Current portion of restricted investments in marketable securities                                                                                                                             |   |               | 39,875                 |               |               | 29,887                 |               |
|      Accounts         receivable, net of allowances for doubtful accounts of $22,921 and $29,382,    at September 30, 2005 and 2004, respectively                                              |   |               | 184,616                |               |               | 175,292                |               |
|      Prepaid expenses and other current assets                                                                                                                                                      |   |               | 37,185                 |               |               | 33,526                 |               |
|      Current portion of deferred income taxes                                                                                                                                                       |   |               | 43,148                 |               |               | 32,916                 |               |
|      Current portion of assets held for sale                                                                                                                                                        |   |               | —                |               |               | 6,267                  |               |
|                                                                                                                                                                                                                         |   |                    |                        |               |                    |                        |               |
|           Total current assets                                                                                                                                             |   |               | 413,865                |               |               | 403,959                |               |
|                                                                                                                                                                                                                         |   |                    |                        |               |                    |                        |               |
|   Property         and equipment, net of accumulated depreciation of $161,229  and    $114,162, at     September 30, 2005 and 2004, respectively                                                         |   |               | 783,359                |               |               | 695,511                |               |
| Assets held for sale                                                                                                                                                                                                         |   |               | 3,911                  |               |               | 2,511                  |               |
| Restricted investments in marketable securities                                                                                                                                                                              |   |               | 56,197                 |               |               | 65,121                 |               |
| Other long-term assets                                                                                                                                                                                                       |   |               | 85,892                 |               |               | 101,816                |               |
| Deferred income taxes                                                                                                                                                                                                        |   |               | 7,972                  |               |               | —                |               |
| Identifiable         intangible assets, net of accumulated amortization of $1,633 and    $1,006, at     September 30, 2005 and 2004, respectively                                                                       |   |               | 1,095                  |               |               | 1,722                  |               |
| Goodwill                                                                                                                                                                                                                     |   |               | 7,863                  |               |               | 7,220                  |               |
|                                                                                                                                                                                                                         |   |                    |                        |               |                    |                        |               |
|           Total assets                                                                                                                                                     |   | $                  | 1,360,154              |               | $                  | 1,277,860              |               |
|                                                                                                                                                                                                                         |   |                    |                        |               |                    |                        |               |
| **Liabilities and    Shareholders’ Equity:**                                                                                                                                                                            |   |               |                   |               |               |                   |               |
| Current liabilities:                                                                                                                                                                                                         |   |               |                   |               |               |                   |               |
|      Current installments of long-term debt                                                                                                                                                         |   | $                  | 4,537                  |               | $                  | 27,230                 |               |
|      Accounts payable                                                                                                                                                                               |   |               | 56,711                 |               |               | 34,848                 |               |
|      Accrued expenses                                                                                                                                                                               |   |               | 23,059                 |               |               | 22,311                 |               |
|      Accrued compensation                                                                                                                                                                           |   |               | 67,845                 |               |               | 87,442                 |               |
|      Accrued interest                                                                                                                                                                               |   |               | 6,260                  |               |               | 8,673                  |               |
|      Current portion of self-insurance liability reserves                                                                                                                                           |   |               | 39,875                 |               |               | 29,887                 |               |
|      Income taxes payable                                                                                                                                                                           |   |               | 1,042                  |               |               | 3,732                  |               |
|                                                                                                                                                                                                                         |   |                    |                        |               |                    |                        |               |
|           Total current liabilities                                                                                                                                        |   |               | 199,329                |               |               | 214,123                |               |
|                                                                                                                                                                                                                         |   |                    |                        |               |                    |                        |               |
| Long-term debt                                                                                                                                                                                                               |   |               | 405,633                |               |               | 375,841                |               |
| Deferred income taxes                                                                                                                                                                                                        |   |               | —                |               |               | 31,145                 |               |
| Self-insurance liability reserves                                                                                                                                                                                            |   |               | 58,995                 |               |               | 62,920                 |               |
| Other long-term liabilities                                                                                                                                                                                                  |   |               | 39,548                 |               |               | 28,858                 |               |
| Commitments and contingencies                                                                                                                                                                                                |   |               |                   |               |               |                   |               |
| Shareholders’ equity:                                                                                                                                                                                                   |   |               |                   |               |               |                   |               |
|      Common         stock - par $0.01, 45,000,000 shares authorized at September 30, 2005         and 2004, 20,429,110 and 20,011,795 shares issued at September 30, 2005    and 2004, respectively |   |     |   204        |     |     |   200        |     |
|      Additional paid-in       capital                                                                                                                                                               |   |               | 632,199                |               |               | 547,841                |               |
|      Retained earnings                                                                                                                                                                              |   |               | 62,673                 |               |               | 20,504                 |               |
|      Accumulated other comprehensive (loss) income                                                                                                                                                  |   |               | (603                   | )                  |               | 221                    |               |
|      Treasury stock at cost, 787,337 shares at September 30, 2005                                                                                                                                   |   |               | (32,096                | )                  |               | -                      |               |
|      Common         stock held in deferred compensation plan at cost, 163,135 and 158,394    shares at September 30, 2005 and 2004, respectively                                                    |   |               | (5,728                 | )             |               | (3,793                 | )             |
|                                                                                                                                                                                                                         |   |                    |                        |               |                    |                        |               |
|           Total shareholders' equity                                                                                                                                       |   |               | 656,649                |               |               | 564,973                |               |
|                                                                                                                                                                                                                         |   |                    |                        |               |                    |                        |               |
|           Total liabilities and    shareholders’ equity                                                                                                               |   | $                  | 1,360,154              |               | $                  | 1,277,860              |               |
|                                                                                                                                                                                                                         |   |                    |                        |               |                    |                        |               |
| See accompanying notes to the consolidated    financial statements.                                                                                                                                                          |   |               |                   |               |               |                   |               |

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**GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES**     **CONSOLIDATED STATEMENTS OF OPERATIONSFOR THE YEARS ENDED SEPTEMBER 30, 2005, 2004 AND 2003(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)**

|                                                                               |   |   | **Year ended Se****ptember 30,** |   |
|------------------------------------------------------------------------------------|--------|--------|----------------------------------|--------|
|                                                                               |   |   | **2005**                         |   |   | **2004** |   |   | **2003** |   |
|                                                                               |   |        |                                  |   |  |  |   |  |  |   |
| Net revenues                                                                       |   | $      | 1,683,350                        |   | $ | 1,517,553 |   | $ | 1,375,466 |   |
| Operating expenses:                                                                |   |   |                             |   |   |   |   |   |   |   |
|    Salaries, wages and benefits                                     |   |   | 1,013,139                        |   |   | 962,138 |   |   | 867,970 |   |
|    Other operating expenses                                         |   |   | 384,760                          |   |   | 299,752 |   |   | 294,200 |   |
|    General and administrative costs                                 |   |   | 95,706                           |   |   | 81,684 |   |   | 67,069 |   |
|    Provision for losses on accounts receivable and notes receivable |   |   | 10,859                           |   |   | 20,157 |   |   | 20,529 |   |
|    Loss (gain) on early extinguishment of debt                      |   |   | 11,765                           |   |   | 1,692 |   |   | (1,123 | ) |
| Lease expense                                                                      |   |   | 18,367                           |   |   | 28,073 |   |   | 27,555 |   |
| Depreciation and amortization expense                                              |   |   | 55,087                           |   |   | 46,306 |   |   | 38,863 |   |
| Interest expense                                                                   |   |   | 27,879                           |   |   | 26,985 |   |   | 17,014 |   |
|                                                                               |   |        |                                  |   |  |  |   |  |  |   |
| Income before income tax expense, equity in net income                             |   |   |                             |   |   |   |   |   |   |   |
|    of unconsolidated affiliates and minority interests              |   |   | 65,788                           |   |   | 50,766 |   |   | 43,389 |   |
| Income tax expense                                                                 |   |   | 26,032                           |   |   | 20,791 |   |   | 12,479 |   |
|                                                                               |   |        |                                  |   |  |  |   |  |  |   |
| Income before equity in net income of unconsolidated                               |   |   |                             |   |   |   |   |   |   |   |
|    affiliates and minority interests                                |   |   | 39,756                           |   |   | 29,975 |   |   | 30,910 |   |
| Equity in net income of unconsolidated affiliates                                  |   |   | 3,105                            |   |   | 2,235 |   |   | 794 |   |
| Minority interests                                                                 |   |   | (441                             | )      |   | (462 | ) |   | (307 | ) |
|                                                                               |   |        |                                  |   |  |  |   |  |  |   |
| Income from continuing operations                                                  |   |   | 42,420                           |   |   | 31,748 |   |   | 31,397 |   |
| Loss from discontinued operations, net of taxes                                    |   |   | (251                             | )      |   | (2,675 | ) |   | (19,509 | ) |
|                                                                               |   |        |                                  |   |  |  |   |  |  |   |
| Net income                                                                         |   | $      | 42,169                           |   | $ | 29,073 |   | $ | 11,888 |   |
|                                                                               |   |        |                                  |   |  |  |   |  |  |   |

Per common share data in 2005 and pro forma per common share datain 2004 (see note 2 — “Summary of Significant Accounting Policies- EarningsPer Share”):

| Basic:                                                     |   |       |   |   |       |   |   |   |   |
|------------------------------------------------------------|--------|------------|--------|--------|------------|--------|--------|--------|--------|
|    Income from continuing        operations | $      | 2.15       |   | $      | 1.59       |   |   |   |   |
|    Loss from discontinued        operations |   | (0.01      | )      |   | (0.13      | )      |   |   |   |
|    Net income                               | $      | 2.14       |   | $      | 1.46       |   |   |   |   |
|    Weighted average shares                  |   | 19,713,478 |   |   | 19,947,177 |   |   |   |   |
|                                                       |   |       |   |   |       |   |   |   |   |
| Diluted:                                                   |   |       |   |   |       |   |   |   |   |
|    Income from continuing        operations | $      | 2.12       |   | $      | 1.58       |   |   |   |   |
|    Loss from discontinued        operations |   | (0.01      | )      |   | (0.13      | )      |   |   |   |
|    Net income                               | $      | 2.11       |   | $      | 1.45       |   |   |   |   |
|    Weighted average shares                  |   | 20,021,811 |   |   | 20,118,292 |   |   |   |   |

See accompanying notes to the consolidated financial statements.

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**GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES  CONSOLIDATED  STATEMENTS OF SHAREHOLDERS' EQUITY  FOR THE YEARS ENDED SEPTEMBER 30, 2005,  2004 AND 2003  (IN THOUSANDS)**

|                                                                         |   | **NCI’s    equity in GHC** |     | **Common stock** |   | **Additional    paid-in capital** |   | **Retained    earnings** |    | **Accumulated   other   comprehensive   income    (loss)** |   | **Treasury    stock** |   | **Common    stock	held in deferred	compensation	plan** |    | **Total   shareholders’   equity** |   | **Total   comprehensive   income** |   |
|------------------------------------------------------------------------------|--------|---------------------------------|----------|------------------|--------|-----------------------------------|--------|--------------------------|---------|------------------------------------------------------------|--------|-----------------------|--------|--------------------------------------------------------|---------|-----------------------------------------|--------|------------------------------------|--------|
|                                                                         |   |                                 |     |                  |   |                                   |   |                          |    |                                                            |   |                       |   |                                                        |    |                                         |   |                                    |   |
|                                                                         |   |                            |     |             |   |                              |   |                     |    |                                                       |   |                  |   |                                                   |    |                                    |   |                               |   |   |   |   |   |   |   |   |   |   |
| Balance at September 30, 2002                                                |   | $                               | 601,925  |             | $      | —                           |   | $                        | — |                                                       | $      | —               |   | $                                                      | 839     |                                    | $      | —                            |   | $ | — |   | $ | 602,764 |   |   |   |   |
|                                                                         |   |                                 |          |             |        |                                   |   |                          |         |                                                       |        |                       |   |                                                        |         |                                    |        |                                    |   |  |  |   |  |  |   |  |  |   |
| Comprehensive income                                                         |   |                            |     |             |   |                              |   |                     |    |                                                       |   |                  |   |                                                   |    |                                    |   |                               |   |   |   |   |   |   |   |   |   |   |
| Net    income                                                                |   |                            | 11,888   |             |   | —                           |   |                     | — |                                                       |   | —               |   |                                                   | — |                                    |   | —                            |   |   | — |   |   | 11,888 |   | $ | 11,888 |   |
| Net    unrealized gain on marketable securities                              |   |                            | —  |             |   | —                           |   |                     | — |                                                       |   | —               |   |                                                   | 262     |                                    |   | —                            |   |   | — |   |   | 262 |   |   | 262 |   |
|                                                                         |   |                            |     |             |   |                              |   |                     |    |                                                       |   |                  |   |                                                   |    |                                    |   |                               |   |   |   |   |   |   |   |  |  |   |
| Total comprehensive income                                                   |   |                            |     |             |   |                              |   |                     |    |                                                       |   |                  |   |                                                   |    |                                    |   |                               |   |   |   |   |   |   |   | $ | 12,150 |   |
|                                                                         |   |                            |     |             |   |                              |   |                     |    |                                                       |   |                  |   |                                                   |    |                                    |   |                               |   |   |   |   |   |   |   |  |  |   |
| Distributions to NCI, net of advances                                        |   |                            | (34,353  | )                |   | —                           |   |                     | — |                                                       |   | —               |   |                                                   | — |                                    |   | —                            |   |   | — |   |   | (34,353 | ) |   |   |   |
|                                                                         |   |                                 |          |             |        |                                   |   |                          |         |                                                       |        |                       |   |                                                        |         |                                    |        |                                    |   |  |  |   |  |  |   |  |  |   |
| Balance at September 30, 2003                                                |   | $                               | 579,460  |             | $      | —                           |   | $                        | — |                                                       | $      | —               |   | $                                                      | 1,101   |                                    | $      | —                            |   | $ | — |   | $ | 580,561 |   |   |   |   |
|                                                                         |   |                                 |          |             |        |                                   |   |                          |         |                                                       |        |                       |   |                                                        |         |                                    |        |                                    |   |  |  |   |  |  |   |  |  |   |
| Comprehensive income                                                         |   |                            |     |             |   |                              |   |                     |    |                                                       |   |                  |   |                                                   |    |                                    |   |                               |   |   |   |   |   |   |   |   |   |   |
| Net    income prior to the spin-off                                          |   |                            | 8,569    |             |   | —                           |   |                     | — |                                                       |   | —               |   |                                                   | — |                                    |   | —                            |   |   | — |   |   | 8,569 |   | $ | 8,569 |   |
| Net    income subsequent to the spin-off                                     |   |                            | —  |             |   | —                           |   |                     | — |                                                       |   | 20,504                |   |                                                   | — |                                    |   | —                            |   |   | — |   |   | 20,504 |   |   | 20,504 |   |
| Net    unrealized loss on marketable securities                              |   |                            | —  |             |   | —                           |   |                     | — |                                                       |   | —               |   |                                                   | (880    | )                                       |   | —                            |   |   | — |   |   | (880 | ) |   | (880 | ) |
|                                                                         |   |                            |     |             |   |                              |   |                     |    |                                                       |   |                  |   |                                                   |    |                                    |   |                               |   |   |   |   |   |   |   |  |  |   |
| Total comprehensive income                                                   |   |                            |     |             |   |                              |   |                     |    |                                                       |   |                  |   |                                                   |    |                                    |   |                               |   |   |   |   |   |   |   | $ | 28,193 |   |
|                                                                         |   |                            |     |             |   |                              |   |                     |    |                                                       |   |                  |   |                                                   |    |                                    |   |                               |   |   |   |   |   |   |   |  |  |   |
| Issuance    of common stock in connection with the spin-off                  |   |                            | —  |             |   | 199                               |   |                     | (199    | )                                                          |   | —               |   |                                                   | — |                                    |   | —                            |   |   | — |   |   | — |   |   |   |   |
| Dividend    and distributions to NCI, net of advances                        |   |                            | (588,029 | )                |   | —                           |   |                     | 538,925 |                                                       |   | —               |   |                                                   | — |                                    |   | —                            |   |   | — |   |   | (49,104 | ) |   |   |   |
| Utilization    of tax benefits under SOP90-7                                 |   |                            | —  |             |   | —                           |   |                     | 6,593   |                                                       |   | —               |   |                                                   | — |                                    |   | —                            |   |   | — |   |   | 6,593 |   |   |   |   |
| Issuance    of common stock under stock option plan and stock incentive plan |   |                            | —  |             |   | 1                                 |   |                     | 2,522   |                                                       |   | —               |   |                                                   | — |                                    |   | —                            |   |   | — |   |   | 2,523 |   |   |   |   |
| Purchases    of common stock in deferred compensation plan                   |   |                            | —  |             |   | —                           |   |                     | — |                                                       |   | —               |   |                                                   | — |                                    |   | —                            |   |   | (3,793 | ) |   | (3,793 | ) |   |   |   |
|                                                                         |   |                                 |          |             |        |                                   |   |                          |         |                                                       |        |                       |   |                                                        |         |                                    |        |                                    |   |  |  |   |  |  |   |  |  |   |
| Balance at September 30, 2004                                                |   | $                               | —  |             | $      | 200                               |   | $                        | 547,841 |                                                       | $      | 20,504                |   | $                                                      | 221     |                                    | $      | —                            |   | $ | (3,793 | ) | $ | 564,973 |   |   |   |   |
|                                                                         |   |                                 |          |             |        |                                   |   |                          |         |                                                       |        |                       |   |                                                        |         |                                    |        |                                    |   |  |  |   |  |  |   |  |  |   |
| Comprehensive income                                                         |   |                            |     |             |   |                              |   |                     |    |                                                       |   |                  |   |                                                   |    |                                    |   |                               |   |   |   |   |   |   |   |   |   |   |
| Net    income                                                                |   |                            | —  |             |   | —                           |   |                     | — |                                                       |   | 42,169                |   |                                                   | — |                                    |   | —                            |   |   | — |   |   | 42,169 |   | $ | 42,169 |   |
| Net    unrealized loss on marketable securities                              |   |                            | —  |             |   | —                           |   |                     | — |                                                       |   | —               |   |                                                   | (667    | )                                       |   | —                            |   |   | — |   |   | (667 | ) |   | (667 | ) |
| Net    minimum pension liability                                             |   |                            | —  |             |   | —                           |   |                     | — |                                                       |   | —               |   |                                                   | (157    | )                                       |   | —                            |   |   | — |   |   | (157 | ) |   | (157 | ) |
|                                                                         |   |                            |     |             |   |                              |   |                     |    |                                                       |   |                  |   |                                                   |    |                                    |   |                               |   |   |   |   |   |   |   |  |  |   |
| Total comprehensive income                                                   |   |                            |     |             |   |                              |   |                     |    |                                                       |   |                  |   |                                                   |    |                                    |   |                               |   |   |   |   |   |   |   | $ | 41,345 |   |
|                                                                         |   |                            |     |             |   |                              |   |                     |    |                                                       |   |                  |   |                                                   |    |                                    |   |                               |   |   |   |   |   |   |   |  |  |   |
| Utilization    of tax benefits under SOP 90-7                                |   |                            | —  |             |   | —                           |   |                     | 20,893  |                                                       |   | —               |   |                                                   | — |                                    |   | —                            |   |   | — |   |   | 20,893 |   |   |   |   |
| Pre    emergence deferred tax valuation allowance adjustment                 |   |                            | —  |             |   | —                           |   |                     | 51,066  |                                                       |   | —               |   |                                                   | — |                                    |   | —                            |   |   | — |   |   | 51,066 |   |   |   |   |
| Issuance    of common stock under stock option plan and stock incentive plan |   |                            | —  |             |   | 4                                 |   |                     | 10,489  |                                                       |   | —               |   |                                                   | — |                                    |   | —                            |   |   | — |   |   | 10,493 |   |   |   |   |
| Purchases    of common stock for treasury                                    |   |                            | —  |             |   | —                           |   |                     | — |                                                       |   | —               |   |                                                   | — |                                    |   | (32,096                            | )      |   | — |   |   | (32,096 | ) |   |   |   |
| Purchases    and sales of common stock in deferred compensation plan         |   |                            | —  |             |   | —                           |   |                     | 1,910   |                                                       |   | —               |   |                                                   | — |                                    |   | —                            |   |   | (1,935 | ) |   | (25 | ) |   |   |   |
|                                                                         |   |                                 |          |             |        |                                   |   |                          |         |                                                       |        |                       |   |                                                        |         |                                    |        |                                    |   |  |  |   |  |  |   |   |   |   |
| Balance at September 30, 2005                                                |   | $                               | —  |             | $      | 204                               |   | $                        | 632,199 |                                                       | $      | 62,673                |   | $                                                      | (603    | )                                       | $      | (32,096                            | )      | $ | (5,728 | ) | $ | 656,649 |   |   |   |   |
|                                                                         |   |                                 |          |             |        |                                   |   |                          |         |                                                       |        |                       |   |                                                        |         |                                    |        |                                    |   |  |  |   |  |  |   |   |   |   |

See accompanying notes to the consolidated financial statements.

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**GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES****CONSOLIDATED STATEMENTS OF CASH FLOWSFORTHE YEARS ENDED SEPTEMBER 30, 2005, 2004 AND 2003(IN THOUSANDS)**

|                                                                                                                                 |   | **Year ended Se**ptember    30,**** |     |
|--------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------|----------|
|                                                                                                                                 |   | **2005**                            |     | **2004** |   | **2003** |   |
|                                                                                                                                 |   |                                     |          |   |  |  |   |  |  |   |
| Cash flows from operating activities:                                                                                                |   |                                |     |   |   |   |   |   |   |   |
|      Net income                                                                                             |   | $                                   | 42,169   |   | $ | 29,073 |   | $ | 11,888 |   |
|      Net charges included in operations not requiring funds:                                                |   |                                |     |   |   |   |   |   |   |   |
|           Non-cash compensation expenses                                           |   |                                | 6,657    |   |   | 2,867 |   |   | 697 |   |
|           Loss on impairment of assets and other charges                           |   |                                | 13,153   |   |   | 2,275 |   |   | 12,368 |   |
|           Depreciation and amortization                                            |   |                                | 55,087   |   |   | 46,546 |   |   | 39,626 |   |
|           Non-cash lease and interest adjustments                                  |   |                                | (3,312   | ) |   | — |   |   | — |   |
|           Provision for losses on accounts receivable and notes receivable         |   |                                | 10,859   |   |   | 21,059 |   |   | 21,091 |   |
|           Equity in net income of unconsolidated affiliates and minority interests |   |                                | (2,664   | ) |   | (1,773 | ) |   | (487 | ) |
|           Provision (benefit) for deferred taxes                                   |   |                                | 22,332   |   |   | 16,202 |   |   | (1,487 | ) |
|           Amortization of deferred rents                                           |   |                                | 2,788    |   |   | 2,259 |   |   | (4,660 | ) |
|      Changes in assets and liabilities:                                                                     |   |                                |     |   |   |   |   |   |   |   |
|           Accounts receivable                                                      |   |                                | (24,135  | ) |   | 4,477 |   |   | (10,121 | ) |
|           Accounts payable and accrued expenses                                    |   |                                | 2,644    |   |   | 29,292 |   |   | (3,993 | ) |
|           Other, net                                                               |   |                                | (600     | ) |   | (3,881 | ) |   | 3,750 |   |
|                                                                                                                                 |   |                                     |          |   |  |  |   |  |  |   |
|      Total adjustments                                                                                      |   |                                | 82,809   |   |   | 119,323 |   |   | 56,784 |   |
|                                                                                                                                 |   |                                     |          |   |  |  |   |  |  |   |
|      Net cash provided by operating activities                                                              |   |                                | 124,978  |   |   | 148,396 |   |   | 68,672 |   |
|                                                                                                                                 |   |                                     |          |   |  |  |   |  |  |   |
| Cash flows from investing activities:                                                                                                |   |                                |     |   |   |   |   |   |   |   |
|      Capital expenditures                                                                                   |   |                                | (55,227  | ) |   | (31,183 | ) |   | (30,472 | ) |
|      Purchases of restricted marketable securities                                                          |   |                                | (148,863 | ) |   | (209,769 | ) |   | (43,948 | ) |
|      Proceeds on maturity or sale of restricted marketable securities                                       |   |                                | 146,893  |   |   | 204,472 |   |   | 39,765 |   |
|      Purchases of eldercare centers and lease amendments                                                    |   |                                | (7,208   | ) |   | (48,641 | ) |   | (5,325 | ) |
|      Purchase of rehabilitation services business                                                           |   |                                | —   |   |   | — |   |   | (5,923 | ) |
|      Proceeds from sales of eldercare assets                                                                |   |                                | 6,664    |   |   | 17,956 |   |   | 55,123 |   |
|      Other, net                                                                                             |   |                                | 607      |   |   | (2,535 | ) |   | 3,684 |   |
|                                                                                                                                 |   |                                     |          |   |  |  |   |  |  |   |
|      Net cash (used in) provided by investing activities                                                    |   |                                | (57,134  | ) |   | (69,700 | ) |   | 12,904 |   |
|                                                                                                                                 |   |                                     |          |   |  |  |   |  |  |   |
| Cash flows from financing activities:                                                                                                |   |                                |     |   |   |   |   |   |   |   |
|      Proceeds from issuance of long-term debt                                                               |   |                                | 180,000  |   |   | 410,000 |   |   | — |   |
|      Repayment of long-term debt                                                                            |   |                                | (225,714 | ) |   | (306,531 | ) |   | (60,244 | ) |
|      Debt issuance costs and debt prepayment premium                                                        |   |                                | (14,303  | ) |   | (9,337 | ) |   | — |   |
|      Purchase of common stock for treasury                                                                  |   |                                | (32,096  | ) |   | — |   |   | — |   |
|      Proceeds from exercise of stock options                                                                |   |                                | 7,239    |   |   | — |   |   | — |   |
|      Net transactions with NCI, prior to the spin-off                                                       |   |                                | —   |   |   | (55,548 | ) |   | (19,961 | ) |
|                                                                                                                                 |   |                                     |          |   |  |  |   |  |  |   |
|      Net cash (used in) provided by financing activities                                                    |   |                                | (84,874  | ) |   | 38,584 |   |   | (80,205 | ) |
|                                                                                                                                 |   |                                     |          |   |  |  |   |  |  |   |
| Net (decrease) increase in cash and equivalents                                                                                      |   | $                                   | (17,030  | ) | $ | 117,280 |   | $ | 1,371 |   |
| Cash and equivalents:                                                                                                                |   |                                |     |   |   |   |   |   |   |   |
|      Beginning of period                                                                                    |   |                                | 126,071  |   |   | 8,791 |   |   | 7,420 |   |
|                                                                                                                                 |   |                                     |          |   |  |  |   |  |  |   |
|      End of period                                                                                          |   | $                                   | 109,041  |   | $ | 126,071 |   | $ | 8,791 |   |
|                                                                                                                                 |   |                                     |          |   |  |  |   |  |  |   |
| Supplemental disclosure of cash flow information:                                                                                    |   |                                |     |   |   |   |   |   |   |   |
|      Interest paid                                                                                          |   | $                                   | 25,466   |   | $ | 19,537 |   | $ | 18,140 |   |
|      Taxes paid                                                                                             |   |                                | 4,562    |   |   | 3,272 |   |   | — |   |
|                                                                                                                                 |   |                                     |          |   |  |  |   |  |  |   |
| Non-cash financing activities:                                                                                                       |   |                                |     |   |   |   |   |   |   |   |
|      Capital leases                                                                                         |   | $                                   | 3,951    |   | $ | — |   | $ | — |   |
|      Assumption of debt                                                                                     |   |                                | 15,533   |   |   | 34,014 |   |   | — |   |

See accompanying notes to the consolidated financial statements.

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**Genesis HealthCare Corporation and Subsidiaries      Notes to Consolidated      Financial Statements**

**(1)     Organization and Basis of Presentation**

***Description of Business***

     Genesis HealthCare      Corporation and subsidiaries (GHC or the Company) is comprised of two primary      business      segments, inpatient services and rehabilitation therapy services. These      segments are          supported by complementary service capabilities and a general and administrative          function.

     GHC provides inpatient services through            skilled nursing and assisted living centers primarily located in      the eastern United States. The Company has 215 owned, leased, managed and      jointly  owned          eldercare centers with 26,382 beds. Revenues of GHC’s owned and          leased centers constitute approximately 89% of its revenues in fiscal          2005, and are presented in GHC’s            segment information as inpatient services revenues. Management fees          earned from centers that are managed and/or jointly owned by GHC are          included in all other            services’ revenues presented in GHC’s segment information.            See note 19 — “Segment Information.”

      GHC provides      an extensive range of rehabilitation therapy services, including speech      pathology, physical therapy              and occupational therapy. These services are provided by approximately      4,700 licensed rehabilitation therapists and assistants employed or contracted      at            substantially all of the centers operated by GHC, as well as by contract      to healthcare facilities              operated by others and through GHC’s 13 certified outpatient              rehabilitation agencies. After the elimination of intercompany              revenues, the rehabilitation              therapy services segment constitutes approximately 8% of GHC’s              revenues in fiscal 2005.

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

***Spin-off***

      On December 1,      2003, NeighborCare, Inc. (NCI) completed the distribution (the spin-off)      of the common stock of                  GHC. The spin-off was effected by way of a pro-rata tax free      distribution of GHC’s                    common stock to holders of NCI’s common stock on December                    1, 2003 at a rate of 0.5 shares of GHC stock for each share                    of NCI stock owned as of October 15,                    2003. NCI received a private letter ruling from the Internal                    Revenue Service to the effect that, for United States federal                    income tax purposes, the distribution                    of GHC’s common stock qualified as tax free for its                    and NCI’s shareholders,                    with the exception of cash received for fractional shares.                    GHC’s common                    stock began trading publicly on the NASDAQ National                    Market System on December 2, 2003 under the symbol “GHCI.” Prior                    to the spin-off, NCI was named Genesis Health Ventures, Inc.                    In July 2005,                    NCI was acquired                    by Omnicare,                    Inc.

      In connection with the spin-off,                      NCI and GHC agreed contractually to continue certain transitional arrangements                      and practices for a limited time after the spin-off. In addition, NCI and GHC                      entered into certain mutually beneficial commercial arrangements. Specifically,                      NCI and GHC entered into a separation and distribution agreement, a tax sharing                      agreement, as amended, a transition services agreement, as amended, a group                    purchasing agreement, an employee benefits agreement, a pharmacy services agreement,                    as                      amended, a pharmacy benefit management agreement, as amended, and a durable                    medical equipment agreement. In connection with the spin-off, GHC entered into                    new financing                      arrangements. See note 9 — “Long-Term Debt.”

     The                        following unaudited pro forma financial information gives                        effect to the spin-off as if it occurred                        on October 1, 2003. The unaudited pro forma data is for                        informational purposes only and does not purport to represent                                the results of future periods. The unaudited                        pro forma                                data reflects                                adjustments based                                upon available information and certain assumptions                                that management of GHC                                considers reasonable. No changes in operating                        revenues and expenses have been made to reflect the results                                of any modifications                                to operations                                that                                might have been made had the spin-off been completed                                on the aforesaid effective date for purposes                        of                                the pro forma                                results.                                The following                                unaudited pro forma information is presented                        in thousands, except per share information:

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|                                                            |   | **Year ended September 30,            2004** |            |
|-----------------------------------------------------------------|--------|----------------------------------------------|-----------------|
|                                                            |   |                                              |            |
|                                                            |   |                                         | **As reported** |   |   | **Pro forma** |   |
|                                                            |   |                                              |                 |   |  |  |   |
| Net revenues                                                    |   | $                                            | 1,517,553       |   | $ | 1,517,553 |   |
| Income from continuing operations                               |   |                                         | 31,748          |   |   | 30,569 |   |
| Diluted earnings per share – from continuing    operations |   |                                         | 1.58            |   |   | 1.52 |   |
|                                                            |   |                                              |                 |   |  |  |   |

***Basis of Presentation***

      The accompanying financial statements through November 30, 2003 have been prepared on a basis which reflects the historical financial statements of GHC assuming that the operations of NCI contributed in the spin-off were organized as a separate legal entity, owning certain net assets of NCI. Beginning December 1, 2003, the accompanying consolidated financial statements have been prepared on a basis which reflects the operations of GHC as a stand-alone entity, including the consolidation of its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation for all periods presented.

      Historically,      NCI provided certain general and administrative services to GHC, including      finance, legal, treasury, information systems and human resources. The      cost for these services in fiscal 2003 was allocated to GHC based upon      various allocation percentages dependent upon the type of service provided.      For instance, certain costs were allocated based upon GHC’s proportionate      share of revenue, labor related costs or other operating expenses; as well      as other methods which management believes to be reasonable. These cost      allocations were $43.2 million in fiscal 2003. No such costs were allocated      to GHC in fiscal 2004 or 2005 because the general and administrative service      functions were established to operate GHC as an independent organization      beginning in October 2003.

      Prior to the      spin-off, substantially all of GHC’s cash accounts were linked to NCI’s	  centralized cash management system. Accordingly, substantially all cash generated	  from or used in GHC’s operations had been transferred to and from NCI. For instance,	  NCI funded nearly all routine and capital cash disbursements on behalf of GHC. Likewise,	  on a daily basis, GHC transferred its cash receipts directly to the concentrated bank account	  of NCI. The net effect of these cash transfers has been reflected in the “NCI’s	  Equity in GHC” account as shown in the consolidated statements of shareholders’	  equity. Cash and equivalents not specifically owned by legal entities which comprise GHC were	  not allocated to GHC in the pre spin-off financial statements. The net transactions with NCI	  as reflected in the statements of cash flows represent pre spin-off cash activities between	  NCI and GHC as previously described. The advances and distributions to and from NCI as reflected	  in the statement of shareholders’ equity include the cash activities as reflected in the	  statements of cash flows as well as certain non-cash adjustments to NCI’s equity in GHC.	  Such non-cash adjustments to NCI’s equity in GHC principally relate to non-cash income tax	  provisions. The financing activities between NCI and GHC had been in the form of equity capital	  advances and there were no formal repayment or interest arrangements. The average balance of	  NCI’s equity in GHC for the year ended September 30, 2003 was $590.7 million.

      Investments      in unconsolidated affiliated companies, owned 20% to 50% inclusive, are      stated at cost of acquisition plus the Company’s equity in undistributed      net income (loss) since acquisition. The equity in net income (loss) of      these companies is reflected as a component of net income in the consolidated      statements of operations.

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

      Certain prior year amounts have been reclassified to conform with the current period presentation, the effect of which was not material.

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***Factors Affecting Comparability of Financial Information***

      The Company’s statements of operations for the fiscal year ended September 30, 2003 and for the first two months (through November 30, 2003) of the fiscal year ended September 30, 2004 have been prepared on a basis which reflects the Company’s      historical financial statements assuming that the operations of NCI contributed      in the spin-off were organized as a separate legal entity which owned certain      net assets of NCI. 

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

      The Company      believes that the consolidated statements of operations for the fiscal      years ended September 30, 2005 and 2004 are generally comparable to the      statement of operations for the fiscal year ended September 30, 2003, with      the exception of interest expense and depreciation and amortization expense.      This lack of comparability is due to the restructuring of GHC’s capital      following the spin-off and the related incremental interest costs and amortization      of deferred financing fees in connection with its new financing arrangements. 

      Also, in fiscal      2005, the Company reevaluated the classification of certain of its leases      and determined that five center leases previously classified as operating      leases beginning in fiscal 2004 should have been classified as capital      leases. The correction of this accounting in fiscal 2005 had the effect      of decreasing lease expense and increasing interest expense and depreciation      expense. The cumulative effect of the correction is described in more detail      below under the subheading Correction of Errors. 

***Correction of Errors***

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

      During the      three  months ended September 30, 2005, the Company determined it was not      properly  accounting for operating lease expense on a straight-line basis, as required       by Statement of Financial Accounting Standards (SFAS) No. 13, “*Accounting        for Leases*”, and Financial Accounting Standards Board (FASB)        Technical  Bulletin No. 85-3, “*Accounting for Operating Leases        with Scheduled Rent  Increases*”. The impact of this correction        through September 30, 2005 resulted in a $1.3 million pre tax increase        to lease expense, of which $0.7  million relates to prior years. In addition, the Company reevaluated the classification  of certain of its leases and determined that five of its center leases previously  classified as operating leases beginning in fiscal 2004 should have been classified  as capital leases. The cumulative effect of correcting this accounting in fiscal  2005 is an increase to depreciation expense of $4.7 million (of which $2.1  million  relates to fiscal 2004), an increase to interest expense of $4.7 million (of  which $2.2 million relates to fiscal 2004) and a decrease to lease expense  of  $9.3 million (of which $4.3 million relates to fiscal 2004), having no impact         on pre tax or net income. The capitalization of these leases also had        the effect  of increasing total assets and total liabilities (principally debt) $34.7 million.  

      During the      three months ended June 30, 2005, the Company identified that it was not      properly accounting for its deferred compensation plan in accordance with      Emerging Issues Task Force (EITF) Issue No. 97-14, “*Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested*” (EITF No. 97-14). GHC employee compensation deferrals are invested in a rabbi trust, which is a funding vehicle used to protect deferred compensation benefits from various events, excluding bankruptcy or insolvency. The accounting treatment for assets invested in a rabbi trust under EITF No. 97-14 differs depending upon the level of restrictions placed on a participant’s ability to diversify deferred compensation that is invested in Company stock. In its application of EITF 97-14, the Company recognized that GHC common stock held in its rabbi trust was not properly classified as a component of shareholders’ equity      at cost; and GHC common stock held in its rabbi trust was improperly marked      to market each reporting period, resulting in an inappropriate recognition      of unrealized gains and 

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losses from fluctuations in the market value       of GHC’s common stock. The correction resulted in a decrease to revenues       of $3.0 million, of which $1.0 million relates to fiscal 2004.

       During the  three months ended March 31, 2005, the Company recorded an increase to depreciation  expense and accumulated depreciation resulting from corrections to the useful  lives assigned to certain fixed assets. The cumulative error of $1.3 million,  includes $1.1 million that relates to the period beginning after the Company’s  adoption of fresh start reporting, or October 1, 2001 through September 30,  2004.

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

**(2)     Summary of Significant Accounting        Policies**

***Revenue Recognition/Contractual Allowances***

      The Company receives payments through reimbursement      from Medicaid and Medicare programs and directly from individual residents      (private pay), third-party insurers and long-term care facilities.

      Within the Company’s inpatient              services segment, revenue and the related receivables are recorded in the accounting              records at the Company’s established billing rates in the period the related              services are rendered. The provision for contractual adjustments, which represents              the differences between the established billing rates and predetermined reimbursement              rates, is deducted from gross revenue to determine net revenue. The Company              recorded contractual allowances from continuing operations of $332.0 million,              $328.8 million            and $339.3 million in fiscal years 2005, 2004 and 2003, respectively.

      Within the Company’s  rehabilitation therapy services business and other ancillary service businesses,  the Company records revenues at the time services or products are provided or  delivered to the customer. Upon delivery of products or services, the Company  has no additional performance obligation to the customer.

***Use of Estimates***

      The Company      has made a number of estimates relating to the reporting of assets and      liabilities, revenues and                  expenses and the disclosure of contingent assets and liabilities      to prepare these consolidated                    financial statements in conformity with accounting principles      generally accepted in the United States of America. Some of the more significant      estimates impact                    accounts receivable, long-lived assets and loss reserves      for self-insurance programs. Additionally, the preparation of the financial      statements prior to                  the December                    1, 2003 spin-off required an extensive use of estimates to      allocate assets, liabilities, revenues and expenses to GHC. Actual results      could differ significantly                  from                  those estimates. See note 1— “Organization and Basis                  of Presentation — Spin-off.”

***Cash and Equivalents***

      Short-term investments that have                        a maturity of ninety days or less at acquisition are considered cash equivalents.                        Investments in cash equivalents are carried at cost, which approximates fair                        value. Restricted cash includes cash held in trust on behalf of our eldercare                        residents and cash that is restricted under certain of our loan agreements,                      as well as cash held by the Company’s wholly owned captive insurance subsidiary,                        Liberty Health Corporation, Ltd. (LHC), which is substantially restricted to                        securing the outstanding claims losses of LHC. The restricted cash balances                      at September 30, 2005 and 2004 were $7.4 million and $4.1 million, respectively.

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***Restricted Investments in Marketable Securities***

      Restricted      investments in marketable securities,  comprised of fixed interest      rate securities, equity securities and money market funds are considered      to be available for sale and accordingly are reported at fair value with      unrealized gains and losses, net of related tax effects, included within      accumulated other comprehensive income (loss) as a separate component of      shareholders’ equity. Fair values for fixed interest rate securities      and equity securities are based on quoted market prices. Premiums and discounts      on fixed interest rate securities are amortized or accreted over the life      of the related security as an adjustment to yield. All equity securities      were sold in fiscal 2004.

      A decline in the market value of any security below cost that is deemed other-than-temporary is charged to earnings, resulting in the establishment of a new cost basis for the security. Realized gains and losses for securities classified as available for sale are derived using the specific identification method for determining the cost of securities sold.

      Marketable securities are held by LHC and are substantially restricted to securing the outstanding claims losses of LHC.

***Allowance for Doubtful Accounts***

      The Company      utilizes the “aging method” to evaluate the adequacy of its allowance for doubtful accounts. This method is based upon applying estimated standard allowance requirement percentages to each accounts receivable aging category for each type of payor. The Company has developed estimated standard allowance requirement percentages by utilizing historical collection trends and its understanding of the nature and collectibility of receivables in the various aging categories and the various segments of the Company’s      business. The standard allowance percentages are developed by payor type      as the accounts receivable from each payor type have unique characteristics.      The allowance for doubtful accounts is determined utilizing the aging method      described above while also considering accounts specifically identified      as uncollectible. Accounts receivable that Company management specifically      estimates to be uncollectible, based upon the age of the receivables, the      results of collection efforts, or other circumstances, are reserved for      in the allowance for doubtful accounts until they are written-off.

      Management      believes the assumptions used in the aging method, coupled with continued      improvements in GHC’s collection patterns suggest the allowance for doubtful accounts is adequately provided. However, because the assumptions underlying the aging method are based upon historical collection data, there is a risk that GHC’s current assumptions are not reflective of more recent collection patterns. Changes in overall collection patterns can be caused by market conditions and/or budgetary constraints of government funded programs such as Medicare and Medicaid. Such changes can adversely impact the collectibility of receivables, but not be addressed in a timely fashion when using the aging method, until updates to GHC’s      periodic historical collection studies are completed and implemented. 

      At least annually,      GHC updates its historical collection studies in order to evaluate the      propriety of the assumptions underlying the aging method. Any changes to      the underlying assumptions are implemented immediately. Changes to these      assumptions can have a material impact on the Company’s bad debt expense,      which is reported in the consolidated statements of operations as a component      of the provision for losses on accounts receivable and notes receivable.

***Property and Equipment***

      Property and      equipment are recorded at cost. Depreciation is calculated using the straight-line      method over estimated useful lives of 20-35 years for building improvements,      land improvements and buildings, and 3-15 years for equipment, furniture      and fixtures and information systems. Depreciation expense on leasehold      improvements and assets held under capital leases is calculated using the      straight-line method over the lesser of the lease term or the estimated      useful life of the asset. Expenditures for maintenance and repairs necessary      to maintain property and 

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equipment in efficient operating condition are charged to operations as incurred. Costs of additions and betterments are capitalized. Interest costs associated with major construction or renovation projects are capitalized in the period in which they are incurred.

      Total depreciation  expense from continuing operations for the years ended September 30, 2005, 2004  and 2003 was $52.9 million, $43.7 million and $35.1 million, respectively.

***Allowance for Notes Receivable***

      GHC classifies      its notes receivable balances, net of allowances, in other long-term assets      in its consolidated balance sheets. See note 7 – “Other Long-Term Assets.” These long-term receivables represent the net realizable value of GHC’s      loans receivable resulting principally from the conversion of trade accounts      and consideration received for certain enterprise sales transactions. The      notes include varying payment terms, rates of interest and maturity dates      based upon circumstances specific to each agreement. At least annually,      the Company reviews the collectibility of its notes receivable on an individual      basis to determine possible impairments and/or non-accrual status for interest      terms. Impairments or write-downs to net realizable value are recorded      in the consolidated statements of operations as a component of the provision      for losses on accounts receivable and notes receivable. 

***Long-Lived Assets***

      The Company      accounts for long-lived assets, other than goodwill with an indefinite      useful life, in accordance with the provisions of SFAS No. 144, “*Accounting for the Impairment or Disposal of Long-Lived Assets*”.      This statement requires that long-lived assets be reviewed for impairment      whenever events or changes in circumstances indicate the carrying amount      of an asset may not be recoverable. Recoverability of assets to be held      and used is measured by comparison of the carrying amount of an asset to      the future cash flows expected to be generated by the asset. If the carrying      amount of an asset exceeds its estimated future cash flows, an impairment      charge is recognized to the extent the carrying amount of the asset exceeds      the fair value of the asset. Assets to be disposed of are reported at the      lower of the carrying amount or the fair value less costs to sell.

      The Company      accounts for goodwill with an indefinite useful life in accordance with      the provisions of SFAS No. 142, “*Goodwill and Other Intangible Assets.*” This      statement requires the Company to perform an impairment test for goodwill      at least annually or more frequently if adverse events or changes in circumstances      indicate that the asset may be impaired. The Company performs its annual      impairment test at the end of each fiscal year. No impairment charge was      recorded in any of the fiscal years presented herein in connection with      the annual impairment test. 

***Self-Insurance Risks***

      GHC records      outstanding losses and loss expenses for both general and professional      liability and workers’ compensation liability based on the estimates of the amount of reported self-insured losses together with a provision for losses incurred but not reported, based upon the recommendations of an independent actuary, and management’s judgment using its past experience and industry experience. The claims are discounted at a rate which estimates the present value of funds required to pay losses at a future date. GHC believes, based upon the recommendations of an independent actuary, that the provision for outstanding losses and loss expenses will be adequate to cover the ultimate cost of losses incurred as of September 30, 2005, but the provision is necessarily an estimate and may be settled for a significantly greater or lesser amount. It is at least reasonably possible that GHC will revise its estimates significantly in the near term. Any subsequent differences arising are recorded in the period in which they are determined. See note 12 – “Loss      Reserves for Certain Self-Insured Programs.” 

***Income Taxes***

      The provision      for current income taxes is based upon management’s estimate of taxable      income or loss for each respective accounting period. Deferred income taxes      arise from the recognition of the tax consequences of temporary differences      between the tax bases of assets and liabilities and their reported amounts      in the consolidated 

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financial statements. These temporary differences will result in taxable or deductible amounts in future years when the reported amounts of the assets are recovered or liabilities are settled. The Company also recognizes as deferred tax assets the future tax benefits from net operating loss  (NOL) carryforwards. A valuation allowance is provided for these deferred tax assets if it is more likely than not that some portion or all of the net deferred tax assets will not be realized. 

***Comprehensive Income***

      Pursuant to      the adoption of SFAS No. 130, “*Reporting Comprehensive Income*”, comprehensive income includes all changes to shareholders’ equity during a period, except those resulting from investments by and distributions to shareholders. The components of comprehensive income are shown in the consolidated statements of shareholders’ equity. See note 20 — “Comprehensive      Income.”

***Leases***

      The Company accounts for lease arrangements in accordance with SFAS No. 13, *“Accounting        for Leases.”*Lease arrangements are capitalized when such leases convey substantially all the risks and benefits incidental to ownership. Capital leases are amortized over either the lease term or the life of the related assets, depending upon available purchase options and lease renewal features. Amortization related to capital leases is included in the consolidated statements of operations within depreciation and amortization expense. 

      Deferred lease      balances carried in the consolidated balance sheet represent future differences between      lease expense recognized on an accrual basis and the amount of cash disbursed      for lease obligations. Deferred lease balances are amortized on a straight-line      basis over the lease term and are more fully described in note 10 – “Leases      and Lease Commitments.”

***Stock Option Plan***

      GHC applies      the intrinsic-value-based method of accounting prescribed by Accounting      Principles Board (APB) Opinion No. 25, “*Accounting for Stock Issued to Employees*,” and      related interpretations including FASB Interpretation No. 44, “*Accounting for Certain Transactions Involving Stock Compensation, an interpretation of APB Opinion No. 25*,” to      account for its fixed-plan stock options. Under this method, compensation      expense is recorded on the date of grant only if the current market price      of the underlying stock exceeded the exercise price. SFAS No. 123, “*Accounting for Stock-Based Compensation*,” established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, GHC has elected to continue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of SFAS No. 123. See note 2 – “Summary of Significant Accounting Policies – New Accounting Pronouncements – Share Based Payments” regarding      the issuance of SFAS No. 123R.

      Following the      spin-off, GHC adopted a stock option plan (the GHC Plan). Prior to the      spin-off, GHC’s employees participated in a stock option plan sponsored      by NCI (the NCI Plan). In May 2003, substantially all employee stock      options under the NCI Plan were tendered in consideration for either cash      or an accelerated vesting of restricted stock grants held by certain key      executives. 

      The following      table illustrates the effect on net income (in thousands, except per share      data) if the fair-value-based method had been applied to all outstanding      and unvested awards in each period. Pro forma compensation expense in fiscal      2003 has been allocated to GHC using management’s estimate of the      portion of stock option grants made under the NCI Plan to employees that      provided services to GHC. 

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|                                                                                                                                                                                  | **Year Ended September 30,** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------|--------|
|                                                                                                                                                                                  |                              |   |
|                                                                                                                                                                                  | **2005**                     |   | **2004** |   | **2003** |   |
|                                                                                                                                                                                  |                              |        |   |  |  |   |  |  |   |
| Net income, as reported                                                                                                                                                               | $                            | 42,169 |   | $ | 29,073 |   | $ | 11,888 |   |
| Adjustments:                                                                                                                                                                          |                         |   |   |   |   |   |   |   |   |
|      Stock-based       compensation included in net income, net of tax effects                                                                               |                         | 3,994  |   |   | 1,720 |   |   | 418 |   |
|      Stock-based    compensation determined under fair value based method, net of tax              effects |                         | (6,177 | ) |   | (5,298 | ) |   | (2,963 | ) |
|                                                                                                                                                                                  |                              |        |   |  |  |   |  |  |   |
|      Pro forma net      income                                                                                                                               | $                            | 39,986 |   | $ | 25,495 |   | $ | 9,343 |   |
|                                                                                                                                                                                  |                              |        |   |  |  |   |  |  |   |
|                                                                                                                                                                                  |                         |   |   |   |   |   |   |   |   |
| Per common share data in 2005 and pro forma per common share data in 2004:                                                                                                            |                         |   |   |   |   |   |   |   |   |
| Basic:                                                                                                                                                                                |                         |   |   |   |   |   |   |   |   |
|      Net income as reported                                                                                                                                  | $                            | 2.14   |   | $ | 1.46 |   |   |   |   |
|      Net income as adjusted                                                                                                                                  |                         | 2.03   |   |   | 1.28 |   |   |   |   |
| Diluted:                                                                                                                                                                              |                         |   |   |   |   |   |   |   |   |
|      Net income as reported                                                                                                                                  | $                            | 2.11   |   | $ | 1.45 |   |   |   |   |
|      Net income as adjusted                                                                                                                                  |                         | 2.00   |   |   | 1.27 |   |   |   |   |
|                                                                                                                                                                                  |                              |        |   |  |  |   |   |   |   |

     The Company previously reported pro forma net income of $22.9 million for the year ended September 30, 2004, after considering adjustments for the estimated compensation expense associated with stock based awards under the fair value based method.  The revised pro forma net income of $25.5 million for the year ended September 30, 2004 reflects changes to the Company’s previous assumptions regarding expected volatility, expected life and the related tax effects of stock options.  These changes were prompted by the Company’s evaluation of more recent guidance regarding the application and methods used to determine fair value based compensation expense.

      The fair value  of stock options granted in 2004 were estimated at the grant date using the  Black-Scholes option pricing model with the following assumptions: volatility  (51%), expected life (6.6 years), risk free rate of return (4.04%), dividend  yield (0.00%) and weighted average fair value ($12.01). There were no stock  options granted in fiscal 2005 or 2003.

***Reimbursement of Managed Property Labor Costs***

      The Company      manages the operations of 44 independently and jointly owned eldercare      centers and 13 transitional care units. Under a majority of these arrangements,      the Company employs the operational staff of the managed center for ease      of benefit administration and bills the related wage and benefit costs      on a dollar-for-dollar basis to the owner of the managed property. In this      capacity, the Company operates as an agent on behalf of the managed property      owner and is not the primary obligor in the context of a traditional employee/employer      relationship. Historically, the Company has treated these transactions      on a “net basis,” thereby not reflecting the billed labor and      benefit costs as a component of its net revenue or expenses. For the years      ended September 30, 2005, 2004 and 2003 the Company billed its managed      clients $114.7 million, $110.4 million, and $125.1 million, respectively,      for such labor related costs.

***Earnings Per Share***

      The computation      of basic net income per common share is calculated by dividing net income      by the weighted average number of common shares outstanding during the      reporting period. The computation of basic weighted average common shares      for the fiscal year ended September 30, 2004 is based upon the number of      GHC shares distributed by NCI on December 1, 2003 in connection with the      spin-off, assuming such distribution took place on October 1, 2003. Therefore,      the basic weighted average common shares presented for the fiscal year      ended September 30, 2004 are labeled “pro forma”. The computation of diluted net income per common share is calculated by dividing net income by the sum of the weighted average basic common shares and potentially dilutive securities. GHC applies the treasury stock method in calculating potentially dilutive securities which assumes that the proceeds from the exercise of all GHC stock options are used to repurchase GHC common stock at the average market price for the period. For the fiscal year ended September 30, 2005, GHC’s outstanding stock options yielded 169,777 potentially dilutive securities, in comparison to the fiscal year ended September 30, 2004, in which GHC’s      outstanding stock options yielded 60,326 potentially dilutive securities.      For the fiscal year ended September 30, 

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2005, GHC’s unvested restricted stock yielded an additional 138,556 potentially dilutive securities under the treasury stock method in comparison to the fiscal year ended September 30, 2004, in which GHC’sunvested restricted stock yielded 110,789 potentially dilutive securities. 

***New Accounting Pronouncements***

*     The Meaning of Other-Than-Temporary Impairmentand Its Application to Certain Investments*

      In November      2005, the final version of FASB      Staff Position (FSP) SFAS 115-1 and SFAS 124-1, “*The Meaning of      Other-Than-Temporary Impairment and Its Application to Certain Investments*” (FSP      SFAS 115-1) was issued and addresses the determination of when an investment      is considered impaired; whether the impairment is other than temporary;      and      how to measure      an impairment loss. FSP SFAS 115-1 also addresses accounting considerations      subsequent to the recognition of an other-than-temporary impairment on      a debt security, and requires certain disclosures about unrealized losses      that have not been recognized as other-than-temporary impairments. FSP      SFAS 115-1 replaces the impairment guidance in EITF Issue No. 03-1 with      references to existing authoritative literature concerning other-than-temporary      impairment determinations (principally SFAS No. 115 and Staff Accounting      Bulletin No. 59). Under FSP SFAS 115-1, impairment losses must be recognized      in earnings equal to the entire difference between the security's cost      and its fair value at the financial statement date, without considering      partial recoveries subsequent to that date. FSP SFAS 115-1 also requires      that an investor recognize an other-than-temporary impairment loss when      a decision to sell a security has been made and the investor does not expect      the fair value of the security to fully recover prior to the expected time      of sale. FSP SFAS 115-1 is effective for reporting periods beginning after      December 15, 2005, or January 1, 2006 for GHC. As the majority of GHC’s      investments are investment grade government and corporate debt securities      that have maturities of five years or less, and GHC has both the ability      and intent to hold the investments until maturity, it does not expect FSP      SFAS 115-1 to have a material impact on its consolidated financial statements. 

*     Accounting for Accumulated Other ComprehensiveIncome of an Investee*

      In July 2005,      the FASB issued FSB APB 18-1, “*Accounting by an Investor for Its Proportionate Share of Accumulated Other Comprehensive Income of an Investee Accounted for under the Equity Method in Accordance with APB Opinion No. 18 upon a Loss of Significant Influence* ” (FSP      APB 18-1). This guidance clarifies the application of paragraph 121 of      SFAS No. 130, “*Reporting Comprehensive Income*” (SFAS No. 130), and clarifies that a company’s proportionate share of an investee’s equity adjustments for other comprehensive income should be offset against the carrying value of the investment at the time significant influence is lost. To the extent that the offset results in a carrying value of the investment that is less than zero, an investor should (a) reduce the carrying value of the investment to zero and (b) record the remaining balance in income. The guidance in FSP APB 18-1, which is effective as of the first reporting period after July 12, 2005, or October 1, 2005 for GHC, is not expected to have a material impact on the Company’s      consolidated financial statements. 

*     Embedded Derivatives*

      In June 2005,      the FASB issued guidance on SFAS No. 133, “*Accounting for Derivative      Instruments and Hedging Activities*” as      amended (SFAS 133) in Derivative Implementation Group (DIG) Issue B38, “*Embedded      Derivatives: Evaluation of Net Settlement with Respect to the Settlement      of a Debt Instrument through Exercise of an Embedded Put Option or Call      Option*” (DIG      Issue B38) and Issue B39, “*Embedded Derivatives: Application of      Paragraph 13(b) to Call Options That Are Exercisable Only by the Debtor*” (DIG      Issue B39). The guidance in DIG Issue B38 clarifies that the potential      settlement of a debtor’s      obligation to a creditor that would occur upon exercise of a put or call      option meets the net settlement criteria of SFAS No. 133. The guidance      in DIG Issue B39 clarifies that an embedded call option that can accelerate      the settlement of a debt host financial instrument should not be bifurcated      and fair valued if the right to accelerate the settlement can be exercised      only by the debtor (issuer/borrower), it is underlying an interest rate      index and the investor will recover substantially all of its initial net      investment. Both DIG issues will be effective for the fiscal quarter beginning      after December 15, 2005, or January 1, 2006 for GHC. The Company is currently      evaluating the impact, if any, of adopting DIG Issue B38 and DIG Issue      B39 on its consolidated financial statements. 

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*     General Partner Control of Limited Partnerships*

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

*     Accounting Changes and Error Corrections*

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

*     Share Based Payments*

      In December 2004,    the FASB issued SFAS No. 123R, *“Share-Based          Payment”* (SFAS 123R), which requires companies to measure          and recognize compensation expense for all stock-based payments at          fair value. On April 14, 2005, the Securities and Exchange Commission          issued rules to allow companies to adopt the standard at the beginning          of the fiscal year that begins after June 15, 2005, or October 1, 2005          for GHC. SFAS 123R allows companies to adopt the new standard using          the modified prospective or modified retrospective method. GHC will          adopt SFAS 123R using the modified prospective method. Under this method,          GHC will recognize compensation cost, on a prospective basis, for the          portion of outstanding awards for which the requisite service has not          yet been rendered as of October 1, 2005, based upon the grant-date          fair value of those awards calculated under SFAS 123 for pro forma          disclosure purposes.		  Compensation cost will also be recorded on all          future awards granted after the adoption of SFAS 123R based upon the          fair value determined as of the grant date. GHC estimates that adoption          of the expensing requirements of SFAS 123R will reduce fiscal 2006          earnings per diluted share approximately $0.10. The actual impact of          adopting SFAS 123R in fiscal 2006 could differ from this estimate depending          upon the number and timing of options granted during fiscal 2006, as          well as their vesting period and vesting criteria.****

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      The Company currently determines the fair value  of stock-based compensation using a Black-Scholes option-pricing model. In connection  with adopting SFAS 123R, the Company will implement a lattice valuation model  to determine the fair market value of future stock-based compensation awards.  The new methodologies and assumptions will be different than those employed by  GHC for periods prior to October 1, 2005 in disclosing the impact of applying  the fair value-based method under SFAS 123 to outstanding and unvested awards.  See note 2 –“Summary of Significant Accounting Policies – Stock  Option Plan” for information related to the pro forma effects of stock-based  employee compensation on GHC’s reported results assuming application of  the fair value recognition provisions of SFAS 123.

**(3)**     **Certain    Significant Risks and Uncertainties**

***Revenue Sources***

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

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

      It is not possible    to quantify fully the effect of legislative changes, the interpretation or    administration of such legislation            or other governmental initiatives on GHC’s business and the            business of the customers served by GHC’s rehabilitation therapy            business. Accordingly, there can be no assurance that the impact            of any future healthcare legislation            or regulation will not further adversely affect GHC’s business.            There can be no assurance that payments under governmental and private            third-party payor            programs will be timely, will remain at levels similar to present            levels or will, in the future, be sufficient to cover the costs allocable            to patients eligible            for reimbursement pursuant to such programs. GHC’s financial            condition and results of operations will be affected by the reimbursement            process,            which in            the healthcare industry is complex and can involve lengthy delays            between the time that revenue is recognized and the time that reimbursement            amounts            are settled.

        GHC’s inpatient services segment earned revenues from the following              payor sources for the periods presented:

|                  | **Year Ended September 30,** |     |
|-----------------------|------------------------------|----------|
|                       |
| **2005**              |                         | **2004** |   | **2003** |
|                       |                         |          |   |  |
| Medicaid              | 54                           | %        | 51 | % | 50 | % |
| Medicare              | 28                           | %        | 29 | % | 28 | % |
| Private pay and other | 18                           | %        | 20 | % | 22 | % |
|                  |                              |     |  |   |  |   |
|                  | 100                          | %        | 100 | % | 100 | % |
|                  |                              |     |  |   |  |   |

     Growth in the Company’s Medicaid revenues is attributed to the recognition of provider assessments, which are accompanied by an increase in operating costs in the form of a provider tax.  

**(4)**     **Significant Transactions and Events**

***Amendments to NCI Agreements***

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

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as of December 1, 2003 (the pharmacy services agreement), as amendedon May 7, 2004 (the 2004 pharmacy services amendment). A summary of the amendmentsis provided below. 

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

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

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

***Issuance and Registration of Convertible Senior Subordinated Debentures***

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

***Senior Credit Facility Amendment***

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

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

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***Share Repurchase***

      In February      2005, GHC’s board of directors authorized an increase to the size      of its previously established share repurchase program from $25.0 million      to $50.0 million of the Company’s common stock through December 31,      2006. Share repurchases may take place at management’s      discretion and/or under pre-established, nondiscretionary programs from      time to time, depending on market conditions, in the open market, and in      privately negotiated transactions. Under this program, there were 787,337      shares of common stock repurchased at a cost of $32.1 million through September      30, 2005.

***Debt Repurchase***

      In February      2005, GHC’s board of directors authorized the repurchase of a portion      of GHC's 8% senior subordinated notes due 2013 from time to time in the      open market commencing in March 2005. There were $70.9 million of 8% senior      subordinated notes repurchased through September 30, 2005. The debt repurchases      resulted in a prepayment premium charge of $7.4 million and the write-off      of unamortized deferred financing fees and other fees of $2.7 million,      which are included in loss on early extinguishment of debt in the consolidated      statements of operations.

***Amendment to 2003 Stock Incentive Plan***

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

***Recognition of Pennsylvania and New Jersey Provider Assessments***

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

      In January 2005,    CMS approved the Pennsylvania provider assessment. The Pennsylvania provider    assessment, which was retroactive to July 1, 2003 and will expire on June    30, 2007, was recognized cumulatively in the quarter ended March 31, 2005.    Recognition of the Pennsylvania provider assessment resulted in increased    revenue and net income of $50.9 million and $4.0 million, respectively, in    fiscal 2005, of which $30.9 million of revenue and $3.3 million of net income    relates to periods prior to fiscal 2005.

      In February 2005,    CMS approved the New Jersey provider assessment. The New Jersey provider    assessment, which was retroactive to July 1, 2004 and will expire on June    30, 2006, was recognized cumulatively in the quarter ended March 31, 2005.    Recognition of the New Jersey provider assessment resulted in increased revenue    and net income of $22.1 million and $3.7 million, respectively, in fiscal    2005, of which $4.3 million of revenue and $0.6 million of net income relates    to periods prior to fiscal 2005.

***Purchase of Joint Venture Interests***

      Effective January 1, 2005, GHC acquired its jointventure partner’sinterest in a Commonwealth of  Massachusettsskilled nursing facility having 123 beds. Prior to that acquisition, the Companyowned a 50% interest in the facility and managedits operations. Upon completion of the transaction, GHC owned 100% of the facilityand began consolidating the revenues, expenses, assets and liabilities of thefacility on January 1, 2005. The aggregate consideration consisted of cash of$0.5 million to acquire the remaining partnership interests and the assumptionof approximately $6.0 million of debt, all of which was repaid at the closingof the transaction. 

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

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***Acquisition of Previously Leased ElderCare    Center and Lease Termination***

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

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

***Sale of Assets***

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

***ElderTrust/Ventas Transactions*****

      On August 13,      2003, GHC acquired the remaining ownership interest in an unconsolidated      joint venture partnership that operates four skilled nursing facilities      with 600 skilled nursing and 125 assisted living beds. Each of the four      eldercare centers had been leased to the partnership from ElderTrust, a      real estate investment trust from which GHC leased or subleased 18 of its      eldercare facilities and eight managed and jointly owned facilities. GHC      purchased its joint venture partner’s interest in the unconsolidated      partnership for $3.1 million and subsequently purchased one of the four      eldercare properties from ElderTrust for $2.6 million. Additionally, GHC      paid ElderTrust $2.5 million to reduce the annual cash basis and accrual      basis lease expense of one of the three remaining leased facilities by      $0.4 million and $0.2 million, respectively. The lease terms of the three      facilities that continue to be leased from ElderTrust were extended from      2010 to 2015.

      On September 11,    2003, GHC entered into additional agreements with ElderTrust. The principal    terms of the agreements were as follows:

|   | • | GHC agreed to purchase two skilled nursing facilities having 210 skilled nursing beds and 67 assisted living beds, and three assisted living facilities having 257 beds, for $24.8 million. GHC previously leased these properties from ElderTrust at an annual cash basis and accrual basis lease cost of $2.4 million and $1.5 million, respectively. By January 2004, GHC purchased all of the aforementioned facilities;                                                                                                                |
|--------|---------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   | • | GHC agreed to pay ElderTrust $32.3 million to reduce annual cash basis and accrual basis lease cost associated with nine properties by $6.9 million and $1.2 million, respectively, and acquire options to purchase seven properties subleased to GHC by ElderTrust. On October 29, 2003, GHC paid ElderTrust $2.3 million to reduce the rents of two of the nine eldercare facilities, and on November 7, 2003 paid ElderTrust the remaining $30.0 million to reduce the rents of the other seven aforementioned eldercare facilities; and |
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   | • | ElderTrust was paid $5.0 million upon consummation        of the spin-off in exchange for ElderTrust’s consent to the assignment    of all remaining leases and guarantees from NCI to GHC.                                                                                                                                                                                                                                                                                                                                            |

      During the three  months ended September 2005, the Company reevaluated the classification of certain  of its leases with ElderTrust and determined that five of its center leases  previously classified as operating leases beginning in fiscal 2004 should have  been classified as capital leases.

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 The capitalization of these leases had the effect  of increasing total assets and total liabilities (principally debt) $34.7 million.

      In February 2004,    ElderTrust shareholders approved the merger of ElderTrust with Ventas Sub,    LLC (Ventas), a Delaware limited liability    company and a wholly owned subsidiary of Ventas, Inc., a publicly traded Delawarecorporation. This merger did not have a material impact on GHC.

      In June 2004, Ventas exercised its option to purchase      an assisted living facility from GHC for cash consideration of $4.9 million.      GHC leased the property back from Ventas under a 10-year operating lease agreement.      GHC recognized a $1.6 million gain on the sale of the property, which has been      deferred and is being amortized on a straight line basis to lease expense overthe 10-year lease term.

**(5)**     **Restricted Investments in Marketable Securities**

      Marketable securities (classified as available          for sale) are held by the Company’s wholly owned subsidiary, Liberty          Health Corporation, Ltd. (LHC), incorporated under the laws of Bermuda.          LHC provides          various insurance coverages to the Company and to unrelated entities,most of which are managed by the Company.

      The current portion    of restricted investments in marketable securities represents an estimate    of the level of outstandinglosses the Company expects to pay in the succeeding year.

      Marketable securities at September 30, 2005 consist    of the following (in thousands):

|                                                          | **Amortized** |       | **Unrealized** |   | **Unrealized** |   |   |    |   |
|---------------------------------------------------------------|---------------|------------|----------------|--------|----------------|--------|--------|---------|--------|
| **cost**                                                      | **gains**     | **losses** | **Fair value** |
|                                                          |               |            |           |        |           |        |        |    |        |   |
| Fixed interest securities:                                    |          |       |           |   |           |   |   |    |   |   |   |   |
|      U.S. mortgage backed securities | $             | 24,006     |           | $      | 59             |   | $      | (299    | )      | $ | 23,766 |   |
|      Corporate bonds                 |          | 48,739     |           |   | 47             |   |   | (643    | )      |   | 48,143 |   |
|      Government bonds                |          | 19,531     |           |   | 351            |   |   | (201    | )      |   | 19,681 |   |
| Money market funds                                            |          | 4,482      |           |   | —        |   |   | — |   |   | 4,482 |   |
|                                                          |               |            |           |        |                |   |        |         |   |  |  |   |
|                                                          | $             | 96,758     |           | $      | 457            |   | $      | (1,143  | )      | $ | 96,072 |   |
|                                                          |               |            |           |        |                |   |        |         |   |  |  |   |
| Less: Current portion of restricted investments               |          |       |           |   |           |   |   |    |   |   | (39,875 | ) |
|                                                          |               |            |           |        |                |   |        |         |   |  |  |   |
| Long-term restricted investments                              |          |       |           |   |           |   |   |    |   | $ | 56,197 |   |
|                                                          |          |       |           |   |           |   |   |    |   |  |  |   |

     Marketable securities at September 30, 2004 consist of the following (in thousands):

|                                                          | **Amortized** |    | **Unrealized** |    | **Unrealized** |    |   |    |   |
|---------------------------------------------------------------|---------------|--------------|----------------|--------------|----------------|--------------|--------|---------|--------|
| **cost**                                                      | **gains**     | **losses**   | **Fair value** |
|                                                          |               |              |           |              |           |              |   |         |   |
| Fixed interest securities:                                    |          |         |           |         |           |         |   |    |   |   |   |   |
|      U.S. mortgage backed securities | $             | 25,187       |           | $            | 320            |         | $      | (27     | )      | $ | 25,480 |   |
|      Corporate bonds                 |          | 33,934       |           |         | 2              |         |   | (127    | )      |   | 33,809 |   |
|      Government bonds                |          | 20,020       |           |         | 198            |         |   | (26     | )      |   | 20,192 |   |
| Money market funds                                            |          | 15,527       |           |         | —        |         |   | — |   |   | 15,527 |   |
|                                                          |               |              |           |              |                |         |        |         |   |  |  |   |
|                                                          | $             | 94,668       |           | $            | 520            |         | $      | (180    | )      | $ | 95,008 |   |
|                                                          |               |              |           |              |                |         |        |         |   |  |  |   |
| Less: Current portion of restricted investments               |          |         |           |         |           |         |   |    |   |   | (29,887 | ) |
|                                                          |               |              |           |              |                |         |        |         |   |  |  |   |
| Long-term restricted investments                              |          |         |           |         |           |         |   |    |   | $ | 65,121 |   |
|                                                          |          |         |           |         |           |         |   |    |   |  |  |   |

      Maturities of restricted  investments yielded proceeds of $0.5 million, $3.1 million and $2.4 million  for the years ended September 30, 2005, 2004 and 2003, respectively. Sales of  investments yielded proceeds of $146.4 million, $201.4 million and $37.3 million  for the years ended September 30, 2005, 2004 and 2003, respectively, with associated  gross realized gains of $0.1

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 million and $1.3 million and gross realized losses  of $0.6 million and $0.1 million for the years ended September 30, 2005 and  2004, respectively. The gross realized gains and losses for the year ended September  30, 2003 were not significant.

     At September    30, 2005, there are restricted investments held continuously for less than    12 months having $0.7 million of unrealized losses, and restricted investments    held continuously for greater than 12 months having $0.5 million of unrealized    losses. At September 30, 2004, there were no restricted investments with    unrealized losses held continuously for greater than 12 months. As the majorityof GHC’s investments      are investment grade government and corporate debt securities that have      maturities of five years or less, and GHC has both the ability and intent      to hold the investments until maturity, it does not expect to realize any      significant losses on such investments.

     Fixed interest securities held at September 30, 2005 mature as follows (in thousands):

|                               | **Amortized** |     |    | **Fair** |   |
|------------------------------------|---------------|--------------------|--------------|----------|--------|
| **cost**                           | **value**     |
|                                    |               |                    |
| Due in one year or less            | $             | 2,001              |         | $        | 2,032  |   |
| Due after 1 year through 5 years   |          | 67,201             |         |     | 66,120 |   |
| Due after 5 years through 10 years |          | 17,466             |         |     | 17,694 |   |
| Due after 10 years                 |          | 5,608              |         |     | 5,744  |   |
|                               |               |                    |         |          |        |   |
|                               | $             | 92,276             |         | $        | 91,590 |   |
|                               |               |                    |         |          |        |   |

      Actual    maturities may differ from stated maturities because borrowers have the right    to call or prepay certain obligations with or without prepayment penalties.

      LHC has issued      letters of credit totaling $90.1 million at September 30, 2005 and $78.9      million at September 30, 2004 to its third party administrators and GHC’s      excess insurance carriers. Investments with an amortized cost of $92.3      million and a market value of $91.6 million are pledged as security forthese letters of credit as of September 30, 2005.

**(6)**     **Property and Equipment**

       Property and equipment    at September 30, 2005 and 2004 consist of the following (in thousands):

|                              |   | **2005** |   |   | **2004** |   |
|-----------------------------------|--------|----------|--------|--------|----------|--------|
|                                   |        |          |        |
| Land                              | $      | 76,682   |   | $      | 74,082   |   |
| Buildings and improvements        |   | 666,368  |   |   | 616,694  |   |
| Equipment, furniture and fixtures |   | 200,029  |   |   | 116,884  |   |
| Construction in progress          |   | 1,509    |   |   | 2,013    |   |
|                              |        |          |   |        |          |   |
| Gross property and equipment      |   | 944,588  |   |   | 809,673  |   |
| Less: accumulated depreciation    |   | (161,229 | )      |   | (114,162 | )      |
|                              |        |          |   |        |          |   |
| Net property and equipment        | $      | 783,359  |   | $      | 695,511  |   |
|                              |        |          |   |        |          |   |

      Assets    held under capital leases, which are principally carried in building and    improvements above, were $51.4 million at September 30, 2005. Accumulated    depreciation on assets held under capital leases was $4.9 million at September    30, 2005.

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**(7)**     **Other Long-Term Assets**

       Other long-term assets at September 30, 2005 and 2004 consist of the following    (in thousands):

|                                       |   | **2005** |   |   | **2004** |   |
|--------------------------------------------|--------|----------|--------|--------|----------|--------|
|                                       |        |          |   |        |          |   |
| Notes receivable, net                      | $      | 16,493   |   | $      | 15,099   |   |
| Assets held in Rabbi Trust                 |   | 14,119   |   |   | 8,967    |   |
| Insurance claims recoverable               |   | 13,554   |   |   | 17,849   |   |
| Deferred financing fees, net               |   | 12,148   |   |   | 10,592   |   |
| Property deposits and funds held in escrow |   | 10,008   |   |   | 16,465   |   |
| Advanced rents                             |   | 9,608    |   |   | 19,974   |   |
| Investments in unconsolidated affiliates   |   | 8,970    |   |   | 8,580    |   |
| Cost report receivables, net               |   | 674      |   |   | 3,844    |   |
| Other, net                                 |   | 318      |   |   | 446      |   |
|                                       |        |          |   |        |          |   |
| Other long-term assets                     | $      | 85,892   |   | $      | 101,816  |   |
|                                       |        |          |   |        |          |   |

      Notes receivable    are recorded net of allowances of $25.6 million and $30.9 million at September    30, 2005 and 2004, respectively.

      Deferred financing    fees are recorded net of accumulated amortization of $2.3 million and $1.6million at September 30, 2005 and 2004, respectively.

**(8)**     **Goodwill and IdentifiableIntangible Assets**

      The changes in    the carrying value of goodwill for the years ended September 30, 2005 and    2004 is as follows (in thousands):

|                                                     |   | **2005** |   |   | **2004** |   |
|----------------------------------------------------------|--------|----------|--------|--------|----------|--------|
|                                                     |        |          |   |        |          |   |
| Balance at beginning of period                           | $      | 7,220    |   | $      | 2,953    |   |
| Goodwill related to contingent consideration adjustments |   | 643      |   |   | 487      |   |
| Goodwill related to current year acquisitions            |   | —  |   |   | 3,780    |   |
|                                                     |        |          |   |        |          |   |
| Balance at end of period                                 | $      | 7,863    |   | $      | 7,220    |   |
|                                                     |        |          |   |        |          |   |

      Identifiable intangible assets at September 30, 2005 and 2004 consist of the    following (in thousands):

| **Classification**                   | **2005** |   |   | **2004** |   | **Estimated Life    (Years)** |   |
|--------------------------------------|----------|--------|--------|----------|--------|-------------------------------|--------|
|                                 |          |        |   |          |        |                          |        |   |
| Customer Contracts                   | $        | 1,605  |   | $        | 1,605  |                          | 4-5    |   |
| Non-Competition agreements           |     | 1,123  |   |     | 1,123  |                          | 4-5    |   |
|                                 |          |        |   |          |        |                          |   |   |
| Indentifiable intangible assets      |     | 2,728  |   |     | 2,728  |                          |   |   |
|                                 |          |        |   |          |        |                          |   |   |
| Accumulated amortization             |     | (1,633 | )      |     | (1,006 | )                             |   |   |
|                                 |          |        |   |          |        |                          |   |   |
| Indentifiable intangible assets, net | $        | 1,095  |   | $        | 1,722  |                          |   |   |
|                                 |          |        |   |          |        |                          |   |   |

      Aggregate    amortization expense for identifiable intangible assets for the year ended    September 30, 2005 was $0.6 million. Amortization expense for the next three    fiscal years is $0.5 million in fiscal 2006, $0.5 million in fiscal 2007    and $0.1 million in fiscal 2008.

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**(9)**     **Long-Term Debt**

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

|                                       |   | **September 30, 2005** |   |   | **September 30, 2004** |   |
|--------------------------------------------|--------|------------------------|--------|--------|------------------------|--------|
|                                       |        |                        |   |        |                        |   |
|                                       |   |                   |   |   |                   |   |
| Senior credit facility – term loan    | $      | —                |   | $      | 134,075                |   |
| Senior subordinated notes                  |   | 154,150                |   |   | 225,000                |   |
| Convertible senior subordinated debentures |   | 180,000                |   |   | —                |   |
| Mortgages and other secured debt           |   | 39,600                 |   |   | 43,996                 |   |
| Capital lease obligations                  |   | 36,420                 |   |   | —                |   |
|                                       |        |                        |   |        |                        |   |
|                                       |   | 410,170                |   |   | 403,071                |   |
| Less:                                      |   |                   |   |   |                   |   |
| Current installments of long-term debt     |   | (4,537                 | )      |   | (27,230                | )      |
|                                       |        |                        |   |        |                        |   |
| Long-term debt                             | $      | 405,633                |   | $      | 375,841                |   |
|                                       |        |                        |   |        |                        |   |

      *Senior credit facility.* On December 1, 2003, GHC entered into a senior credit facility that provided for a fully drawn $185.0 million term loan and a revolving credit facility of $75.0 million. In March 2005, in connection with the offering of the convertible senior subordinated debentures, GHC entered into an amended and restated senior credit agreement pursuant to which the Company refinanced the indebtedness under its existing senior credit agreement. The Company repaid all outstanding borrowings under the term loan portion of the senior credit facility and expanded the borrowing capacity of the $75.0 million revolving credit portion of the senior credit facility. The repayment of the term loan portion of the senior credit facility resulted in the write-off of unamortized deferred financing fees of $1.3 million, which is included in loss on early extinguishment of debt in the consolidated statements of operations. 

      The amended      and restated senior credit agreement provides for a $125.0 million revolving      credit facility, with sub limits for the issuance of letters of credit      and for swing line loans. However, so long as GHC is not in default and      if it finds lenders that are willing to commit, the amended and restated      senior credit agreement allows GHC to add up to $50.0 million of additional      available credit under the revolver, subject to the approval of GHC’s board of directors. Each of GHC’s      material U.S. subsidiaries provided guarantees of the indebtedness under      the amended and restated senior credit agreement. GHC and the guarantors      pledged substantially all of their personal property to secure the obligations      under the amended and restated senior credit agreement, subject to certain      exceptions agreed upon with the lenders. In addition, the mortgages that      GHC and its subsidiaries provided under the prior credit agreement continue      to secure the amended and restated senior credit agreement, but GHC is      not required to provide additional mortgages except under certain limited      circumstances. The amended and restated senior credit agreement has a five      year term, expiring in March 2010. 

      GHC pays interest      monthly on the outstanding loans under the amended and restated senior      credit agreement at either a base rate plus a margin or at the London Interbank      Offered Rate (LIBOR) plus a margin. Initially, that margin was 0.50% for      base rate loans and 1.50% for LIBOR loans. The margin is adjusted from      time to time, depending on GHC’s leverage ratio. For base rate loans,      the margin range is from 0.00% to 1.00%. For LIBOR loans, the margin range      is from 1.00% to 2.00%. At September 30, 2005, the margin on base rate      loans was 0.25% and the margin on LIBOR loans was 1.25%. GHC originally      paid a commitment fee to the lenders on the unused portion of the revolving      credit      facility      equal to 0.50% of the unused amount; that percentage has dropped to 0.375%      due to GHC’s      total leverage ratio dropping below 2.25:1.00, as defined. 

      The agreements    and instruments governing the amended and restated senior credit agreement    contain various restrictive covenants that, among other things, restrict    the ability of GHC and its subsidiaries that guarantee the indebtedness under    the amended and restated senior credit agreement to: incur more debt; pay    dividends; purchase 

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GHC common stock or make other distributions; make payments    in respect of subordinated debt; make certain investments; create liens;    enter into transactions with affiliates; make acquisitions, merge or consolidate;and transfer or sell assets.

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

      *Senior subordinated notes*.    In October 2003, GHC issued 8% senior subordinated notes in an aggregate principal    amount of $225.0 million due in 2013. Interest is payable semi-annually in April    and October. In July 2004, upon the expiration of an exchange offer, $224.0 million    aggregate principal amount of senior subordinated notes registered under the    Securities Act, as amended, were exchanged for the unregistered notes issued    in October 2003. The aggregate principal amount of $1.0 million of unregistered    notes was not exchanged and remains outstanding. Each of GHC’s subsidiaries    that guarantee the indebtedness under the amended and restated senior credit    agreement also guarantees the senior subordinated notes. The guarantees will    be released at such time that such subsidiary ceases to be a guarantor under    the amended and restated senior credit agreement or all of the senior subordinatednotes are no longer outstanding.

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

      In February 2005, GHC’s board        of directors authorized the repurchase of a portion of GHC's 8% senior subordinated        notes due 2013 from time to time in the open market commencing in March 2005.        There were $70.9 million of GHC’s 8% senior subordinated notes repurchased        through September 30, 2005. The debt repurchases resulted in a prepayment premium        charge of $7.4 million and the write-off of unamortized deferred financing fees        and other fees of $2.7 million, which are included in loss on early extinguishmentof debt in the consolidated statements of operations.

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

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

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

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

      The dilutive      effect of the common shares that would be issued if the convertible debentures      were converted is not included in GHC’s diluted weighted average common share balance unless the weighted average market price of GHC’s      common stock during a reporting period exceeds $54.20 per share. 

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

      *Mortgages and other secured debts.*At September 30, 2005 and 2004, GHC had $39.6 million and $44.0 million, respectively, of other secured debt consisting principally of revenue bonds and secured bank loans, including loans insured by the Department of Housing and Urban Development. These loans are secured by the underlying real and personal property of individual eldercare centers and have fixed or variable rates of interest ranging from 3.0% to 11.0%, with a weighted average interest rate of 6.6% and 7.4% at September 30, 2005 and 2004, respectively. On November 30, 2004, GHC prepaid an $11.0 million, 11% fixed rate mortgage. GHC paid the lenders a $0.3 million penalty in connection with the prepayment. On January 31, 2005, GHC acquired the land and building of a State of New Jersey skilled nursing facility assuming a $9.5 million, 6% fixed rate mortgage that matures in October 2007.

      The maturity of total debt, excluding capital lease obligations, of $373.8 million at September 30, 2005 is as follows: $3.1 million in fiscal 2006, $3.3 million in fiscal 2007, $12.3 million in fiscal 2008, $1.0 million in fiscal 2009, $4.2 million in fiscal 2010 and $349.9 million thereafter. 

      *Capital lease obligations.*In fiscal 2005, the Company reevaluated the classification of certain of its leases and determined that five of its center leases previously classified as operating leases beginning in fiscal 2004 should have been classified as capital leases. The capitalization of these leases had the effect of increasing total debt $33.3 million. Also, on June 30, 2005, GHC amended the lease of one of its facilities located in the State of New Hampshire to include a purchase agreement of the facility to be exercised at the end of the lease term on April 30, 2007. The amended lease is being accounted for as a capital lease, resulting in a $2.1 million capital lease obligation at September 30, 2005. 

      The capital      lease obligations represent the present value of minimum lease payments      under such capital lease arrangements and bear imputed interest at rates      ranging from 5.00% to 7.75% and mature at dates ranging primarily from      2006 to 2009. See note 10 – “Leases and Lease Commitments.” 

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**(10)     Leases and Lease Commitments**

     The Company leases certain facilities    under capital and operating leases. Future minimum payments for the next five    years and thereafter under such leases at September 30, 2005 are as follows (in    thousands):

| **Year ending September 30,**               |  **Capital Leases** |    | **Operating Leases** |    |
|---------------------------------------------|--------------------------|--------------|----------------------|--------------|
|                                             |                          |              |                      |
| 2006                                        | $                        | 4,102        |                 | $            | 20,694 |   |
| 2007                                        |                     | 4,979        |                 |         | 20,762 |   |
| 2008                                        |                     | 3,184        |                 |         | 20,628 |   |
| 2009                                        |                     | 30,353       |                 |         | 17,393 |   |
| 2010                                        |                     | 492          |                 |         | 17,048 |   |
| Thereafter                                  |                     | 1,066        |                 |         | 71,165 |   |
|                                        |                          |              |                 |              |  |   |
| Total future minimum lease payments         | $                        | 44,176       |                 | $            | 167,690 |   |
| Less amount representing interest           |                     | (7,756       | )                    |              |  |   |
|                                        |                          |              |                 |         |   |   |
| Present value of net minimum lease payments |                     | 36,420       |                 |         |   |   |
| Less current portion                        |                     | (1,467       | )                    |         |   |   |
|                                        |                          |              |                 |         |   |   |
| Long-term capital lease obligation          | $                        | 34,953       |                 |         |   |   |
|                                        |                          |              |                 |         |   |   |

      GHC holds fixed      price purchase options to acquire the land and buildings of eight centers      and one tract of land for $70.8 million with expirations ranging from 2006      to 2009. Three of these options are deemed to be bargain purchases and,      consequently, these leases have been classified as capital leases contributing      $29.0 million in capital lease obligations of the total $36.4 million at      September 30, 2005. The large capital lease obligation in fiscal 2009 is      caused by the three bargain purchase options which become exercisable in      that year. In June 2005, GHC amended the lease of one of its centers      to include a      purchase      agreement      to be exercised      at      the      end      of the lease term in fiscal 2007. The amended lease is being accounted      for as a capital lease, resulting in a $2.1 million capital lease obligation      at September 30, 2005. GHC also classifies two other center leases and      certain equipment leases as capital leases contributing $5.3 million to      the capital lease obligation at September 30, 2005. 

      In fiscal 2005,      the Company determined it was not properly accounting for operating lease      expense on a straight-line basis, as required by SFAS No. 13, *“Accounting      for Leases”*, and FASB Technical Bulletin      No. 85-3, *“Accounting for Operating Leases with Scheduled Rent      Increases”*.      The impact of this correction through September 30, 2005 resulted in a      $1.3 million pre tax increase to lease expense, of which $0.7 million relates      to prior years.

      In addition,  the Company reevaluated the classification of certain of its leases and determined  that five of its center leases previously classified as operating leases beginning  in fiscal 2004 should have been classified as capital leases. The capitalization  of these leases also had the effect of increasing assets and total liabilities  (principally debt) $34.7 million. 

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      Deferred lease      balances carried on the consolidated balance sheets represent future differences      between accrual basis and cash basis lease costs. Differences between lease      expense on an accrual basis and the amount of cash dispersed for lease      obligations is caused by: 

|   | • | Unfavorable or favorable lease balances established        in GHC’s September 30, 2001 adoption of fresh-start reporting which    are amortized on a straight-line basis over the lease term; |
|--------|---------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |    |                                                                                                                                                                                               |
|   | • | Lease balances established in GHC’s fourth        quarter of fiscal year 2005 to account for operating lease costs on a    straight-line basis; and                                           |
|   |    |                                                                                                                                                                                               |
|   | • | Advanced rent payments made to lessors in order to reduce future lease payments which are amortized on a straight-line basis over the lease term.                                                  |

      The net balance      of unfavorable/favorable leases and deferred gain on sale lease back at      September 30, 2005 of $0.3 million is included in other long-term liabilities      on the consolidated balance sheets and will be amortized as a reduction      to lease expense over the remaining lease terms, which have a weighted      average term of 5.5 years. The net balance of the straight-line lease adjustment      at September 30, 2005 of $1.3 million is included in other long-term liabilities      on the consolidated balance sheets and will be adjusted accordingly going      forward. The balance of advanced rent payments at September 30, 2005 of      $9.6 million is included in other long-term assets in the consolidated      balance sheets and will be amortized as an increase to lease expense overthe remaining lease terms, which have a weighted average term of 4.9 years.

**(11)     Income Taxes**

     Total income tax expense (benefit)for the years ended September 30, 2005, 2004 and 2003 was as follows (in thousands):

|                         |  **2005** |   |  **2004** |   |  **2003** |   |
|------------------------------|----------------|--------|----------------|--------|----------------|--------|
|                              |                |        |                |        |                |
| From continuing operations   | $              | 26,032 |           | $      | 20,791         |   | $ | 12,479 |   |
| From discontinued operations |           | (171   | )              |   | (1,805         | )      |   | (13,698 | ) |
|                         |                |        |           |        |                |   |  |  |   |
| Total                        | $              | 25,861 |           | $      | 18,986         |   | $ | (1,219 | ) |
|                         |                |        |           |        |                |   |  |  |   |

      The components of the provision for income taxes on income from continuing operations for the years ended September 30, 2005, 2004 and 2003 were as follows (in thousands): 

|                      |  **2005** |   |  **2004** |   |  **2003** |   |
|---------------------------|----------------|--------|----------------|--------|----------------|--------|
|                           |                |        |                |        |                |
| Current:                  |           |   |           |   |           |   |   |   |   |
|    Federal | $              | 2,839  |           | $      | 274            |   | $ | (4,443 | ) |
|    State   |           | 690    |           |   | 2,831          |   |   | - |   |
|                      |                |        |           |        |                |   |  |  |   |
|                      |           | 3,529  |           |   | 3,105          |   |   | (4,443 | ) |
|                      |                |        |           |        |                |   |  |  |   |
| Deferred:                 |           |   |           |   |           |   |   |   |   |
|    Federal |           | 17,557 |           |   | 16,408         |   |   | 12,594 |   |
|    State   |           | 4,946  |           |   | 1,278          |   |   | 4,328 |   |
|                      |                |        |           |        |                |   |  |  |   |
|                      |           | 22,503 |           |   | 17,686         |   |   | 16,922 |   |
|                      |                |        |           |        |                |   |  |  |   |
| Total                     | $              | 26,032 |           | $      | 20,791         |   | $ | 12,479 |   |
|                      |                |        |           |        |                |   |  |  |   |

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      Total income tax expense for the years ended September 30, 2005, 2004 and 2003 differed from the amounts computed by applying the U.S. federal income tax rate of 35% to income from continuing operations before income taxes, equity in net income of unconsolidated affiliates and minority interests as illustrated below (in thousands): 

|                                                                   | **2005** |    | **2004** |    | **2003** |    |
|-----------------------------------------------------------------------------|----------|--------------|----------|--------------|----------|--------------|
|                                                                             |          |              |          |              |          |
| Computed “expected” tax                                           | $        | 23,026       |     | $            | 17,768   |         | $ | 15,186 |   |
| Increase (reduction) in income taxes resulting from:                        |     |         |     |         |     |         |   |   |   |
|    State and local income taxes, net of federal tax benefits |     | 3,664        |     |         | 2,671    |         |   | 2,817 |   |
|    Targeted jobs tax credit                                  |     | (1,247       | )        |         | (560     | )            |   | (1,090 | ) |
|    Carryback of losses allowed under Job Creation and        |     |         |     |         |     |         |   |   |   |
|       Worker Assistance Act of 2002           |     | (669         | )        |         | —  |         |   | (4,443 | ) |
|    Other, net                                                |     | 1,258        |     |         | 912      |         |   | 9 |   |
|                                                                        |          |              |     |              |          |         |  |  |   |
| Total income tax expense                                                    | $        | 26,032       |     | $            | 20,791   |         | $ | 12,479 |   |
|                                                                        |          |              |     |              |          |         |  |  |   |

      The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at September 30, 2005 and 2004 are presented below (in thousands): 

|                                               | **2005** |    | **2004** |   |
|----------------------------------------------------|----------|---------|----------|--------|
|                                                    |          |         |          |
| Deferred Tax Assets:                               |     |    |     |   |   |   |
|    Accounts receivable              | $        | 20,877  |     | $      | 23,917 |   |
|    Accrued liabilities and reserves |     | 32,326  |     |   | 25,820 |   |
|    Net operating loss carryforwards |     | 50,786  |     |   | 77,748 |   |
|    Net unfavorable leases           |     | 2,845   |     |   | 3,360 |   |
|    Other                            |     | 6,078   |     |   | 6,506 |   |
|                                               |          |         |     |        |  |   |
| Total deferred tax assets                          |     | 112,912 |     |   | 137,351 |   |
|                                               |          |         |     |        |  |   |
| Valuation allowance                                |     | — |     |   | (77,748 | ) |
|                                               |          |         |     |        |  |   |
| Deferred tax assets, net of valuation allowance    |     | 112,912 |     |   | 59,603 |   |
|                                               |          |         |     |        |  |   |
| Deferred Tax Liabilities:                          |     |    |     |   |   |   |
|    Accrued liabilities and reserves |     | (1,935  | )        |   | (1,770 | ) |
|    Depreciation                     |     | (59,857 | )        |   | (56,062 | ) |
|                                               |          |         |     |        |  |   |
| Total deferred tax liabilities                     |     | (61,792 | )        |   | (57,832 | ) |
|                                               |          |         |     |        |  |   |
| Net deferred tax assets                            | $        | 51,120  |     | $      | 1,771 |   |
|                                               |          |         |     |        |  |   |

      Prior to the spin-off, GHC did not file a separate federal tax return. It was included in the consolidated federal tax return filed by NCI. GHC files its own federal tax returns for periods subsequent to the spin-off. The first such tax period was comprised of the ten months ended September 30, 2004. Under terms of the Tax Sharing Agreement, as amended, between NCI and GHC, NCI bears responsibility for all consolidated, combined or unitary tax returns through the date of the spin-off. 

      The tax provisions reflected in the consolidated statements of operations and the deferred tax and current tax amounts reflected in the consolidated balance sheets have been computed based on GHC's separate company book/tax differences to arrive at GHC's taxable income. GHC's NOL carryforward represents unutilized taxable losses available for carryforward. 

      Current and deferred taxes calculated under the separate company approach to intercorporate tax allocation followed in preparing the consolidated financial statements for pre-spin-off periods may not necessarily reflect the impact of income taxes on the results of operations, cash flows or financial position of GHC in the future. 

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     For the years  ended September 2005, 2004 and 2003, GHC provided $26.0 million, $20.8 million,  and $12.5 million, respectively, for income taxes from continuing operations.  To the extent GHC had deferred tax assets in excess of deferred tax liabilities  at the year-end dates, management believes the net deferred tax assets, except  for tax benefits related to NOL carryforwards as next noted, were more likely  than not to be realized. As of September 30, 2005, GHC expects it will have sufficient taxable income  in future periods such that the remaining NOL would be utilized well within  the carryforward period. Prior to September 2005, the tax benefit of the NOL  carryforwards were subject to a full valuation allowance due to the uncertainty  caused by utilization limitations based on taxable income, tax statutes, and  contractual provisions between NCI and GHC, and filing positions to be determined  by NCI. This uncertainty was largely resolved with the filing of NCI’s  fiscal 2004 federal and state income tax returns in June and July 2005, respectively,  prompting GHC to remove the valuation allowance. During the year ended September  30, 2005, GHC utilized $37.8 million in NOL carryforwards and had NOL carryforwards  remaining of $120.9 million after adjustment to reflect NCI's federal tax return  for its fiscal year ended September 30, 2004. The NOL arose in fiscal 2000 and  2001 and has a carryforward period of 20 years. Pursuant to the American Institute  of Certified Public Accountants Statement of Position No. 90-7, “*Financial  Reporting By Entities in Reorganization Under the Bankruptcy Code*”  (SOP 90-7), utilization of deferred tax assets existing at the October 2, 2001  bankruptcy emergence date must be applied first as a reduction of identifiable  intangible assets and, then, as an increase to shareholders’ equity. The  Company recorded an increase to shareholders’ equity in fiscal 2005 and  fiscal 2004 of $20.9 million and $6.6 million, respectively, pursuant to SOP  90-7. The reversal of the remaining NOL valuation allowance of $51.1 million  served to further increase shareholders’ equity in fiscal 2005.

**(12)     Loss        Reserves For Certain Self-Insured Programs**

     *General andProfessional Liability and Workers’ Compensation*

     Prior to June      1, 2000, GHC had first dollar coverage for general and professional liability      costs with third party  insurers; accordingly, it has no exposure for claims prior to that date. Effective  June 1, 2000, GHC began insuring a substantial portion of its professional      liability risks through LHC. Specifically, it is responsible for the first      dollar of each  claim (on a claims-made basis), up to a self-insurance retention limit determined  by the individual policies, subject to aggregate limits for each policy year.  The self-insured retention limits amount to $21.0 million, $19.0 million and  $14.0 million for the policy years ended May 31, 2006, 2005 and 2004, respectively.  Any costs above these retention limits are covered by third-party insurance      carriers. Since the June 1, 2000 inception of the self-insurance program      through September  30, 2005, GHC’s cumulative self-insurance retention levels are $100.0 million  and its provision for these losses is $80.4 million. Assuming GHC’s actual  losses were to reach its retention limits in each of the policy years, its  additional exposure is approximately $19.6 million which, if incurred, would  be recognized  as an increase to its other operating expenses in its consolidated statements  of operations in the period such exposure became known. In addition, GHC has  provided $3.7 million for the estimated costs of claims incurred but not reported  as of September 30, 2005.

      GHC is self-insured      through LHC up to the first $0.5 million per incident for workers’ compensation. All claims  above $0.5 million per incident are insured through a third-party insurer. GHC  has annual aggregate self-insured retentions of $61.8 million, $56.0 million  and $30.4 million in policy years ended April 30, 2006, 2005 and 2004, respectively.  Claims above these aggregate limits are insured through a third-party insurer  as of September 30, 2005. GHC’s provision for losses in these policy years  is $57.3 million as of September 30, 2005. GHC’s reserve levels are evaluated  on a quarterly basis. Any necessary adjustments are recognized as an adjustment  to salaries, wages and benefits in its consolidated statements of operations.

      GHC records      outstanding losses and loss expenses for both general and professional      liability and workers’ compensation  liability based on the estimates of the amount of reported losses together with  a provision for losses incurred but not reported, based on the recommendations  of an independent actuary, and management’s judgment using its past experience  and industry experience. As of September 30, 2005, GHC’s estimated range  of discounted outstanding losses for these liabilities is $93.8 million to  $117.1 million ($81.1 million to $100.2 million net of amounts recoverable  from third-party  insurance carriers). GHC recorded reserves for these liabilities were $85.3  million as of September 30, 2005, net of $13.6 million recoverable from third-party  insurance  carriers, and are included in self-insurance liability reserves in its consolidated  balance sheet. GHC (through LHC) has restricted

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investments in marketable securities of $96.1      million at September 30, 2005 which are substantially restricted to securing      the outstanding claim losses of LHC.

      General and professional liabilityand workers’ compensation claims are discounted at a rate of 4.5% in 2005and 2004, which estimates the present value of funds required to pay losses ata future date. Had GHC provided losses at undiscounted levels at September 30,2005 and 2004, the reserve for outstanding losses and loss expenses would havebeen increased by approximately $12.5 million in 2005 and $10.4 million in 2004.

      GHC believes, based upon its valuation and discussions with an independent actuary, that the provision for outstanding losses and lossexpenses will be adequate to cover the ultimate cost of losses incurred as ofSeptember 30, 2005, but the provision is necessarily an estimate and may ultimatelybe settled for a significantly greater or lesser amount. It is at least reasonablypossible that GHC will revise its estimates significantly in the near term. Anysubsequent differences arising are recorded in the period in which they are determined.

*     Health Insurance*

      GHC offers employees an option toparticipate in a self-insured health plan. Health claims under this plan areself-insured with a stop-loss umbrella policy in place to limit maximum potentialliability for both individual claims and total claims for a plan year. Healthinsurance claims are paid as they are submitted to the plan administrator. GHCmaintains an accrual for claims that have been incurred but not yet reportedto the plan administrator and therefore have not been paid. The incurred butnot reported reserve is based on the historical claim lag period and currentpayment trends of health insurance claims (generally 2-3 months). The liabilityfor the self-insured health plan is recorded in accrued compensation in the consolidatedbalance sheets.

      GHC charges its employees a portionof the cost of its self-insured and non self-insured health plans, and it determinesthis charge at the beginning of each plan year based upon historical and projectedmedical utilization data, along with projected inflationary increases in medicalcosts. Any differences between GHC’s projections and its actual experienceare borne by it. A one percent variance between GHC’s projections and theactual medical utilization or inflationary increases in cost would result ina $0.4 million change in its expense, which would be reflected in salaries, wagesand benefits in its consolidated statements of operations.

**(13)  Related      Party Transactions**

      GHC has a continuing relationshipwith NCI as a result of the agreements it entered into in connection with thespin-off. GHC believes the charges for services under the transition servicesagreement, as amended, the Tidewater agreement and the pharmacy services agreement,as amended, are no less favorable to GHC than those that could have been obtainedby negotiating those agreements with an independent third party.

      Certain GHC officers and directorsowned shares of NCI common stock and options to acquire additional shares ofNCI common stock at the time of the spin-off. Additionally, GHC’s lead directorwas an executive officer of NCI at the time GHC entered into the spin-off agreementswith NCI. Ownership of NCI common stock, including options to acquire NCI commonstock could have created or appeared to create conflicts of interest for suchdirectors and officers when faced with decisions that could have disparate implicationsfor GHC.

      Prior to the spin-off, cash collectedby GHC in excess of operating needs was transferred to NCI, and GHC’s cashrequirements were funded by NCI. NCI provided certain general and administrativeservices to GHC, including finance, legal, treasury, information systems andhuman resources. The cost for these services were allocated to GHC based uponvarious allocation percentages dependent upon the type of service provided. Forinstance, certain costs were allocated based upon GHC’s proportionate shareof revenues, labor related costs or other operating expenses, as well as othermethods which management believes to be reasonable. These cost allocations were$43.2 million in fiscal 2003. Following the spin-off, GHC performed these generaland administrative services using its own resources. GHC and NCI have agreedcontractually to continue certain amended transitional arrangements and practicesfor a limited time after the spin-off.

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     On July 28,      2005, NCI was acquired by and now operates as a wholly owned subsidiary      of Omnicare, Inc. GHC is not able to assess what impact, if any, the acquisition      of NCI by Omnicare, Inc. will have on GHC. Omnicare, Inc. is not a related      party of GHC.

     In October 2003, GHC purchased for$0.2 million the 10% general partnership interest in a partnership which leasedfour eldercare centers. GHC owned the 90% limited partnership interest in thepartnership. The principal of the seller of the general partnership became adirector of GHC subsequent to the transaction. Simultaneously with the purchaseof the general partnership interest, GHC made a lease termination payment toElderTrust and sold the leasehold rights to an unrelated third party.

**(14)     Shareholders’ Equity**

     The Company’s authorized capitalstock consists of 50,000,000 shares, including 45,000,000 shares of common stock,$0.01 par value, and 5,000,000 shares of preferred stock, $0.01 par value. TheCompany’s board of directors may from time to time authorize the issuanceof one or more classes or series of preferred stock without shareholder approval.

*     Common Stock*

     Authorized common stock consistsof 45,000,000 shares, $0.01 par value, of which 20,429,110 shares were issuedat September 30, 2005, including 134,009 common shares held in an escrow accountfor future delivery to former unsecured claimants of NCI and its subsidiaries,including subsidiaries of GHC, that were entitled to receive common equity securitiesunder the terms of the 2001 joint plan of reorganization.

*     Treasury Stock*

     On November 16, 2004, GHC’sboard of directors authorized the repurchase of up to $25.0 million of GHC’scommon stock commencing in December 2004. On February 23, 2005, GHC’s boardof directors authorized an increase to its previously established share repurchaseprogram from $25.0 million to $50.0 million of GHC’s common stock throughDecember 31, 2006. Under this program, there were 787,337 shares of common stockrepurchased at a cost of $32.1 million through September 30, 2005. The Companyaccounted for the repurchases under the cost method.

*     Common Stock Held in Deferred Compensation Plan*

     In 2004, GHC established    a non-qualified deferred compensation plan for certain of its employees.    Plan participants areable to defer cash and stock based compensation until some future point in time.Under the provisions of the plan, a rabbi trust was established to maintain theamounts deferred by the participants. A rabbi trust is a funding vehicle usedto protect deferred compensation benefits from various events, excluding bankruptcyor insolvency. To satisfy a portion of the Company’s obligation under theplan, GHC held 163,135 and 158,394 shares of its common stock in the rabbi trustat September 30, 2005 and 2004, respectively. In accordance with the provisionsof EITF Issue No. 97-14, “*Accounting for Deferred Compensation ArrangementsWhere Amounts earned Are Held in a Rabbi Trust and Invested*,” (EITF97-14), the Company has recorded the $5.7 million and $3.8 million cost of theshares of common stock as a reduction of shareholders’ equity as of September30,2005and2004, respectively. Also, as prescribed by EITF 97-14, the Company is requiredto recognizefuturechangesin the fair value of the common stock held in the rabbi trust as periodic chargesor credits to compensation cost. During fiscal 2005, the Company sold 82,267shares of GHC common stock held in the rabbi trust at a net realized gain of$1.9 million, which was recorded as an increase to additional paid-in capital.

*     Preferred Stock*

     Authorized preferred stock consistsof 5,000,000 shares, $0.01 par value, including 1,000,000 shares that have beendesignated Series A Junior Participating Preferred Shares, none of which areissued or outstanding at September 30, 2005.

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*     Preferred Share Purchase Rights*

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

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

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

*     NCI’s Equity in GHC*

     Prior to the      spin-off, substantially all of the Company’s cash accounts were linked to NCI’s centralized cash management system. Accordingly, substantially all cash generated from or used in GHC’s operations was transferred to and from NCI. For instance, NCI funded nearly all routine and capital cash disbursements on behalf of GHC. Likewise, on a daily basis, GHC transferred its cash receipts directly to the concentrated bank account of NCI. The net transactions with NCI as reflected in GHC’s statements of cash flows represent cash activities between NCI and GHC as previously described. The advances and distributions to and from NCI as reflected in the consolidated statements of shareholders’ equity include the cash activities as reflected in the consolidated statements of cash flows as well as certain non-cash adjustments to NCI’s equity in GHC. Such non-cash adjustments to NCI’s      equity in GHC principally relate to non-cash income tax provisions. The      financing activities between NCI and GHC were in the form of equity capital      advances and there were no formal repayment or interest arrangements.

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**(15)     Stock-Based Benefit Plans**

***Stock Option Plans***

     GHC has a stock    option plan that provides for the grant of incentive stock options and non-qualified    stock optionsfor officers, key employees and non-employee directors. A total of 1,500,000shares of GHC common stock were reserved for issuance under the stock optionplan, of which 600,000 are available for grant at September 30, 2005. The exercise    price of each stock option equals 100% of the market priceof GHC’s common stock on the date of grant and generally has a maximum termof 10 years. Stock options are generally subject to vesting, which means theoptionee earns the right to exercise an increasing number of the shares underlyingthe option over a specific period of time only if he or she continues to provideservices to GHC over that period. Options generally vest ratably over three years.The total changes to the stock option plan for the years ended September 30,2005 and 2004 are as follows:

|                                    | **2005**    |   |    **2004**                    |   |
|-----------------------------------------|----------------------------|--------|----------------------------------------------------|--------|
|                                    |                            |   |                                                    |   |
|                                    | **Shares**                 |   |  **Weighted    Average    Exercise    Price** |   | **Shares** |   |  **Weighted    Average    Exercise    Price** |   |
|                                    |                            |   |                                                    |        |   |  |   |  |  |   |
| Outstanding at beginning of fiscal year | 879,929                    |   | $                                                  | 23.67  |   | — |   | $ | — |   |
|                                    |                            |   |                                                    |        |   |  |   |  |  |   |
| Granted                                 | —                     |   |                                               | — |   | 900,000 |   |   | 23.63 |   |
| Exercised                               | (302,953                   | )      |                                               | 23.57  |   | (20,071 | ) |   | 21.81 |   |
|                                    |                            |   |                                                    |        |   |  |   |  |  |   |
| Outstanding at end of fiscal year       | 576,976                    |   | $                                                  | 23.72  |   | 879,929 |   | $ | 23.67 |   |
|                                    |                            |   |                                                    |        |   |  |   |  |  |   |
| Exercisable at end of fiscal year       | 195,713                    |   | $                                                  | 23.43  |   | 182,067 |   | $ | 22.90 |   |
|                                    |                            |   |                                                    |        |   |  |   |  |  |   |

     Stock options outstanding at September 30, 2005 are summarized as follows:

|                         |   | **Stock Options Outstanding** |   | **Stock Options Exercisable**                                                  |   |
|------------------------------|--------|-------------------------------|--------|--------------------------------------------------------------------------------|--------|
|                         |   |                               |   |                                                                                |   |
| **Range of Exercise Prices** |   | ****Number****                |   | **********Weighted**     Average**     Remaining**     Contractual**    Life** |   |  ********Weighted**     Average**     Exercise**    Price** |   | ****Number**** |   | **********Weighted**     Average**     Remaining**     Contractual**    Life** |   |  ********Weighted**     Average**     Exercise**    Price** |   |
|                              |   |                               |   |                                                                                |   |  |   |  |   |  |   |  |   |
| $21.37 - $25.87              |   | 576,976                       |   | 8.38                                                                           |   | $ | 23.72 |   | 195,713 |   | 8.32 |   | $ | 23.43 |   |

     Prior      to the spin-off, GHC’s employees participated in a stock option plan      sponsored by NCI. In May 2003, the NCI stock options were tendered in consideration      for either an accelerated vesting of restricted stock grants held by certain      key executives and/or cash.

***Stock Incentive Plan***

     GHC has a stock incentive plan that provides for the grant of restricted stock to certain GHC officers, directors and employees. At the 2005 Annual Meeting of Shareholders of GHC held in February 2005, the shareholders of GHC approved an amendment to the 2003 Stock Incentive Plan to increase the number of shares of common stock available for issuance under the 2003 Stock Incentive Plan from 750,000 to 1,000,000.Restrictions on the awards to GHC employees typically vest quarterly over a five year period from the date of grant such that the employee cannot sell or trade the restricted stock until it becomes vested.

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      GHC recognizes compensation expense ratably      over each vesting period at the market value of GHC’s common stock      on the grant date. GHC recorded compensation expense of $3.0 million and      $2.2 million in fiscal 2005 and 2004, respectively, for the scheduled vesting      of employee restricted stock grants, which is included in salaries, wagesand benefits in the statement of operations.

     GHC also makes annual restricted  grants of $95,000 worth of shares of its common stock to each of its seven non-employeedirectors, which vest three years from the date of grant.

     At September      30, 2005, 725,564 shares of GHC common stock have been granted under the      stock incentive plan at a weighted average fair value of $22.65 per share.      GHC issued 114,362 and 93,619 shares in fiscal 2005 and 2004, respectively,      in connectionwith the quarterly vesting under the stock incentive plan.

**(16)     Commitments and Contingencies**

***Financial Commitments***

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

      The Company has extended $4.1 million            in working capital lines of credit to certain jointly owned and managed companies,            of which $2.2 million was unused at September 30, 2005. In addition, the Company            has agreed to extend credit for working capital needs of one managed nursing            center. Under that arrangement, the property’s owner is responsible for            funding working capital needs up to $0.9 million and the Company would be required            to cover deficits in excess of that limit. To date, the Company has not had to            perform under that agreement. Credit risk represents the accounting loss that            would be recognized at the reporting date if the affiliate companies were unable            to repay any amounts utilized under the working capital lines of credit. Commitments            to extend credit to third parties are conditional agreements generally havingfixed expiration or termination dates and specific interest rates and purposes.

      The Company has posted $2.9 million              of outstanding letters of credit. The letters of credit guarantee performance              to third parties of various trade activities. The letters of credit are not recorded              as liabilities on the Company’s consolidated balance sheet unless they are              probable of being utilized by the third party. The financial risk approximatesthe amount of outstanding letters of credit.

      The Company is a party to joint venture                partnerships whereby its ownership interests are 50% or less of the total capital                of the partnerships. The Company accounts for these partnerships using either                the cost or equity method of accounting depending on the percentage of ownership                interest, and therefore, the assets, liabilities and operating results of these                partnerships are not consolidated with the Company’s. The carrying value                of the Company’s investment in joint venture partnerships is $9.0 million                and $8.6 million at September 30, 2005 and 2004, respectively. Although the Company                is not contractually obligated to fund operating losses of these partnerships,                in certain cases it has extended credit to such joint venture partnerships in                the past and may decide to do so in the future in order to realize economic benefits                from its joint venture relationship. Management assesses the creditworthiness                of such partnerships in the same manner it does other third-parties. As of September                30, 2005, the Company has provided $0.3 million of financial guarantees related                to loan commitments of one jointly owned and managed company. Guarantees are                not recorded as liabilities on the Company’s consolidated balance sheet                unless it is required to perform under the guarantee. Credit risk represents                the accounting loss that would be recognized at the reporting date if the counter-parties                failed to perform completely as contracted. The credit risk amounts are equal                to the contractual amounts, assuming that the amounts are fully advanced and                that no amounts could be recovered from other parties.

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***Legal Proceedings***

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

***Spin-off Contingencies***

      The separation and distribution agreement generally provides for a full and complete release and discharge as of the date of the consummation of the spin-off of all liabilities existing or arising from all acts and events occurring or failing to occur or alleged to have occurred or to have failed to occur and all conditions existing or alleged to have existed on or before the date of the consummation of the spin-off between or among NCI and its affiliates, on the one hand, and GHC and its affiliates, on the other hand, including any contractual agreements or arrangements existing or alleged to exist between or among those parties on or before that date.

      GHC has agreed to indemnify, defend and hold harmless NCI and its affiliates, and each of its directors, officers and employees, from and against all liabilities relating to, arising out of or resulting from:

|   | • | the failure of GHC, or its affiliates, or any other person to pay, perform or otherwise promptly discharge any of the liabilities of the eldercare businesses;                                 |
|--------|---------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |    |                                                                                                                                                                                           |
|   | • | any liabilities of the eldercare businesses and the operation of the eldercare businesses at any time before or after the spin-off;                                                            |
|   |    |                                                                                                                                                                                           |
|   | • | any breach by GHC or its affiliates of the separation and distribution agreement or any of the ancillary agreements entered into in connection with the separation and distribution agreement; |
|   |    |                                                                                                                                                                                           |
|   | • | one-half of any liabilities arising out of the 2001 joint plan of reorganization (other than certain liabilities specifically allocated in the separation and distribution agreement); and     |
|   |    |                                                                                                                                                                                           |
|   | • | specified disclosure liabilities.                                                                                                                                                         |

      NCI has agreed to indemnify, defend and hold harmless GHC and its affiliates, and each of its directors, officers and employees, from and against all liabilities relating to, arising out of or resulting from:

|   | • | the failure of NCI, or its affiliates, or any other person to pay, perform or otherwise promptly discharge any of its liabilities, other than liabilities of the eldercare businesses;         |
|--------|---------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |    |                                                                                                                                                                                           |
|   | • | any of NCI liabilities, other than liabilities of the eldercare businesses, and the operation of its business other than the eldercare businesses at any time before or after the spin-off;    |
|   |    |                                                                                                                                                                                           |
|   | • | any breach by NCI or its affiliates of the separation and distribution agreement or any of the ancillary agreements entered into in connection with the separation and distribution agreement; |
|   |    |                                                                                                                                                                                           |
|   | • | one-half of any liabilities arising out of the 2001 joint plan of reorganization (other than certain liabilities specifically allocated in the separation and distribution agreement); and     |
|   |    |                                                                                                                                                                                           |
|   | • | specified disclosure liabilities.                                                                                                                                                         |

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**(17)     ****FairValue of Financial Instruments**

     The carrying amount and fair value of financial      instruments at September 30, 2005 and 2004 consist of the following (inthousands):

|                                            |   | **2005** |                    | **2004****** |   |
|-------------------------------------------------|--------|----------|-------------------------|--------------|--------|
|                                            |   | ****     |                    | ****         |        |   |
|                                            |   |     | ****Carrying** Amount** |         |   | **Fair Value** |   |   | ****Carrying**Amount** |   |   | **Fair Value** |   |
|                                            |   |          |                    |              |   |  |   |  |   |
| Cash and equivalents                            |   | $        | 109,041                 |         | $      | 109,041 |   | $ | 126,071 |   | $ | 126,071 |   |
| Restricted investments in marketable securities |   |     | 96,072                  |         |   | 96,072 |   |   | 95,008 |   |   | 95,008 |   |
| Accounts receivable, net                        |   |     | 184,616                 |         |   | 184,616 |   |   | 175,292 |   |   | 175,292 |   |
| Accounts payable                                |   |     | 56,711                  |         |   | 56,711 |   |   | 34,848 |   |   | 34,848 |   |
| Debt, excluding capital leases                  |   |     | 373,750                 |         |   | 382,866 |   |   | 403,071 |   |   | 447,125 |   |
|                                            |   |          |                         |         |        |  |   |  |  |   |  |  |   |

      The carrying value of cash and equivalents,      net accounts receivable and accounts payable is equal to its fair value      due to their short maturity. The Company’s restricted investments      in marketable securities are carried at fair value. The fair value of debt      is based upon quoted market prices or is computed using discounted cash      flow analysis, based on the Company’s estimated borrowing rate atthe end of each fiscal period presented.

      The Company places its cash and equivalents  and restricted investments in marketable securities in quality financial instruments  and limits the amount invested in any one institution or in any one type of instrument.  The Company has not experienced any significant losses on its cash or restricted  investments in marketable securities.

****(18)     **Assets Held for Sale and Discontinued Operations**

      In the normal course of business,      GHC continually evaluates the performance of its operating units, with an emphasis      on selling or closing under-performing or non-strategic assets. Discontinued      businesses, including assets held for sale, are removed from the results of continuing      operations. The results of operations in the current and prior year periods,      along with any cost to exit such businesses in the year of discontinuation, are      classified as discontinued operations in the consolidated statements of operations.

      The Company has classified several        businesses as held for sale or closed. In 2002, GHC identified, and has since        sold, all of its eldercare centers located in the states of Florida, Wisconsin        and Illinois. In addition to these assets, since fiscal 2002 GHC has identified        other eldercare centers in various states, one rehabilitation therapy services        clinic, two physician service practices and its ambulance and diagnostics businesses        as held for sale or closed due to under-performance.

      Consolidated interest expense has          been allocated to discontinued operations for all periods presented based on          allocated debt that could be repaid in connection with the sale of the assets.          The amount of after-tax interest expense allocated to discontinued operations          in fiscal 2005, fiscal 2004 and fiscal 2003 was $0.3 million, $0.7 million, and          $2.7 million, respectively.

      GHC has separately classified $3.9            million and $8.8 million of carrying value associated with its assets held for            sale in its consolidated balance sheets at September 30, 2005 and 2004, respectively.            GHC’s assets held for sale are classified in the consolidated balance sheets            within both current and non-current assets. The current portion of assets held            for sale represents those assets for which the Company has binding agreements            of sale.

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      The following table sets forth net revenues and the components of loss from discontinued operations for the years ended September 30, 2005, 2004 and 2003 (in thousands):

|                                            |   |   | **2005** |   |   | **2004** |   |   | **2003** |   |
|-------------------------------------------------|--------|--------|----------|--------|--------|----------|--------|--------|----------|--------|
|                                            |   |        |     |        |   |          |   |
| Net revenues                                    |   | $      | 10,817   |   | $      | 43,496   |   | $      | 171,606  |   |
|                                            |   |        |     |        |   |          |   |
| Net operating loss of discontinued businesses   |   | $      | (336     | )      | $      | (4,231   | )      | $      | (19,160  | )      |
| Loss on discontinuation of businesses           |   |   | (86      | )      |   | (249     | )      |   | (14,047  | )      |
| Income tax benefit                              |   |   | 171      |   |   | 1,805    |   |   | 13,698   |   |
|                                            |   |        |     |        |   |          |   |
| Loss from discontinued operations, net of taxes |   | $      | (251     | )      | $      | (2,675   | )      | $      | (19,509  | )      |
|                                            |   |        |     |        |   |          |   |
|                                            |

**(19)     ****SegmentInformation**

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

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

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

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

      Summarized financial information          concerning the Company’s reportable segments is shown in the following table.          The “All other services and corporate costs” category of revenues and          EBITDA represents operating information of business units below the prescribed          quantitative thresholds that trigger segment reporting requirements, and our          corporate support functions. The operating business units in this category derive          revenues from the following services: management services, respiratory health          services, physician services, hospitality services, staffing services and other          healthcare related services. This approach to segment reporting is consistent          with the Company’s internal financial reporting and the information used          by the chief operating decision maker regarding the performance of our reportable          and non-reportable segments.

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|                                                                |   | **Year ended September 30,** |      |
|---------------------------------------------------------------------|--------|------------------------------|-----------|
| **(in thousands)**                                                  |   |                         | **2005**  |   | **2004** |   |   | **2003** |   |
|                                                                |   |                              |      |  |   |  |   |
| Revenues:                                                           |   |                         |      |   |   |   |   |   |   |   |
|    Inpatient services - external                     |   | $                            | 1,505,985 |   | $ | 1,353,163 |   | $ | 1,205,538 |   |
|    Rehabilitation services:                          |   |                         |      |   |   |   |   |   |   |   |
|       External                        |   |                         | 130,509   |   |   | 120,758 |   |   | 120,306 |   |
|       Intersegment                    |   |                         | 81,216    |   |   | 76,320 |   |   | 82,215 |   |
|    All other services:                               |   |                         |      |   |   |   |   |   |   |   |
|       External                        |   |                         | 46,856    |   |   | 43,632 |   |   | 49,622 |   |
|       Intersegment                    |   |                         | 58,329    |   |   | 71,521 |   |   | 99,327 |   |
|    Elimination of intersegment revenues              |   |                         | (139,545  | ) |   | (147,841 | ) |   | (181,542 | ) |
|                                                                |   |                              |           |   |  |  |   |  |  |   |
|       Total net revenues              |   |                         | 1,683,350 |   |   | 1,517,553 |   |   | 1,375,466 |   |
|                                                                |   |                              |           |   |  |  |   |  |  |   |
| EBITDA (1):                                                         |   |                         |      |   |   |   |   |   |   |   |
|    Inpatient services                                |   |                         | 218,175   |   |   | 171,086 |   |   | 120,255 |   |
|    Rehabilitation services                           |   |                         | 5,927     |   |   | 14,193 |   |   | 30,991 |   |
|    All other services and corporate costs            |   |                         | (63,583   | ) |   | (59,530 | ) |   | (53,103 | ) |
|    (Loss) gain on early extinguishment of debt       |   |                         | (11,765   | ) |   | (1,692 | ) |   | 1,123 |   |
|                                                                |   |                              |           |   |  |  |   |  |  |   |
|       Total EBITDA                    |   |                         | 148,754   |   |   | 124,057 |   |   | 99,266 |   |
|                                                                |   |                              |           |   |  |  |   |  |  |   |
| Capital and other:                                                  |   |                         |      |   |   |   |   |   |   |   |
|    Depreciation and amortization expense             |   |                         | (55,087   | ) |   | (46,306 | ) |   | (38,863 | ) |
|    Interest expense                                  |   |                         | (27,879   | ) |   | (26,985 | ) |   | (17,014 | ) |
|    Income tax expense                                |   |                         | (26,032   | ) |   | (20,791 | ) |   | (12,479 | ) |
|    Equity in net income of unconsolidated affiliates |   |                         | 3,105     |   |   | 2,235 |   |   | 794 |   |
|    Minority interests                                |   |                         | (441      | ) |   | (462 | ) |   | (307 | ) |
|                                                                |   |                              |           |   |  |  |   |  |  |   |
|    Income from continuing operations                 |   |                         | 42,420    |   |   | 31,748 |   |   | 31,397 |   |
|    Loss from discontinued operations, net of taxes   |   |                         | (251      | ) |   | (2,675 | ) |   | (19,509 | ) |
|                                                                |   |                              |           |   |  |  |   |  |  |   |
|    Net income                                        |   | $                            | 42,169    |   | $ | 29,073 |   | $ | 11,888 |   |
|                                                                |   |                              |           |   |  |  |   |   |  |   |

| (1) | EBITDA is defined by GHC as earnings before        interest expense, income taxes, depreciation and amortization expense        of continuing operations. EBITDA can be calculated through GHC’s consolidated statements of operations by adding back interest expense, income taxes, depreciation and amortization, equity in net income of unconsolidated affiliates and minority interests to GHC’s        income from continuing operations.  |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|                            |   |   | **2005**  |   |   | **2004**  |   |
|---------------------------------|--------|--------|-----------|--------|--------|-----------|--------|
|                            |   |        |           |   |        |           |   |
| Inpatient services              |   | $      | 947,492   |   | $      | 871,785   |   |
| Rehabilitation therapy services |   |   | 38,689    |   |   | 36,212    |   |
| All other                       |   |   | 373,973   |   |   | 369,863   |   |
|                            |   |        |           |   |        |           |   |
| Total assets                    |   | $      | 1,360,154 |   | $      | 1,277,860 |   |
|                            |   |        |           |   |        |           |   |

      Capital expenditures as reflected in the consolidated statements of cash flows in all periods presented are principally concentrated in the inpatient services segment. The inpatient services segment and the rehabilitation therapy services segment respectively carry $4.2 million and $3.7 million of the $7.9 million consolidated goodwill balance at September 30, 2005. The rehabilitation therapy segment carries all of the $1.1 million consolidated net identifiable intangible balance at September 30, 2005. 

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**(20)     Comprehensive Income**

     The following table sets forth the computation      of comprehensive income for the years ended September 30, 2005, 2004 and2003 (in thousands):

|                                                 |   |   | **2005** |   |   | **2004** |   |   | **2003** |   |
|------------------------------------------------------|--------|--------|----------|--------|--------|----------|--------|--------|----------|--------|
|                                                 |   |        |     |        |   |          |   |
| Net income                                           |   | $      | 42,169   |   | $      | 29,073   |   | $      | 11,888   |   |
| Net unrealized (loss) gain on restricted investments |   |   |     |   |   |     |   |   |     |   |
|    in marketable securities           |   |   | (667     | )      |   | (880     | )      |   | 262      |   |
| Net minimum pension liability                        |   |   | (157     | )      |   | —  |   |   | —  |   |
|                                                 |   |        |     |        |   |          |   |
| Total comprehensive income                           |   | $      | 41,345   |   | $      | 28,193   |   | $      | 12,150   |   |
|                                                 |   |        |     |        |   |          |   |

     The unrealized (loss) gain on restricted investments      in marketable securities are net of income tax (benefits) expenses of $(0.4)      million, $(0.5) million and $0.1 million for the years ended September      30, 2005, 2004 and 2003, respectively. The minimum pension liability is      net of income tax benefits of $0.1 million for the year ended September30, 2005.

**(21)     Condensed Consolidating and Combining        FinancialStatements of Genesis HealthCare Corporation and Subsidiaries**

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

      These condensed consolidating and    combining financial statements have been prepared on the same basis of accounting    as the consolidated financial statements. GHC is the borrower under the senior    credit facility and certain other senior debt described in note 9 — “Long-Term    Debt,” that is registered under the Securities Act, as amended. The senior    subordinated notes and the convertible senior subordinated debentures are fully    and unconditionally guaranteed on a joint and several basis by certain 100% owned    subsidiaries of GHC (Guarantors). Non-guarantor subsidiaries do not guarantee    the registered senior subordinated notes and the convertible senior subordinated    debentures and principally consist of LHC, GHC’s wholly owned insurance    captive, and certain separately mortgaged centers (Non-guarantors). The following    financial information for periods prior to the December 1, 2003 spin-off were    prepared using the carve-out method of accounting and are therefore labeled “combining” rather    than “consolidating”. The following tables present the condensed consolidating    and combining financial statements of GHC (Parent), the Guarantors and the Non-guarantors.

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**GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES****CONDENSED CONSOLIDATING BALANCE SHEETS****SEPTEMBER 30, 2005(IN THOUSANDS)**

|                                          |   | **Parent** |   |   | **Guarantors** |   | **Non-guarantors** |    |   | **Eliminations** |     |   | **Consolidated** |      |
|-----------------------------------------------|--------|------------|--------|--------|----------------|--------|--------------------|---------|--------|------------------|----------|--------|------------------|-----------|
|                                          |        |            |   |        |                |   |                    |    |        |                  |     |        |                  |      |
| Assets:                                       |   |       |   |   |           |   |               |    |   |             |     |   |             |      |   |
|    Current assets              | $      | 150,087    |   | $      | 211,733        |   | $                  | 52,090  |   | $                | (45      | )      | $                | 413,865   |   |
|    Property and equipment, net |   | 25,043     |   |   | 751,055        |   |               | 7,261   |   |             | —   |   |             | 783,359   |   |
|    Other long-term assets      |   | 104,668    |   |   | 25,738         |   |               | 67,352  |   |             | (34,828  | )      |             | 162,930   |   |
|    Investments in subsidiaries |   | 424,662    |   |   | —         |   |               | —  |   |             | (424,662 | )      |             | —    |   |
|    Intercompany receivables    |   | 397,272    |   |   | —         |   |               | —  |   |             | (397,272 | )      |             | —    |   |
|                                          |        |            |   |        |                |   |                    |         |   |                  |          |   |                  |           |   |
| Total assets                                  | $      | 1,101,732  |   | $      | 988,526        |   | $                  | 126,703 |   | $                | (856,807 | )      | $                | 1,360,154 |   |
|                                          |        |            |   |        |                |   |                    |         |   |                  |          |   |                  |           |   |
| Liabilities and shareholders' equity:         |   |       |   |   |           |   |               |    |   |             |     |   |             |      |   |
|    Current liabilities         | $      | 54,979     |   | $      | 98,287         |   | $                  | 47,596  |   | $                | (1,533   | )      | $                | 199,329   |   |
|    Intercompany payables       |   | —     |   |   | 391,104        |   |               | 6,168   |   |             | (397,272 | )      |             | —    |   |
|    Long-term debt              |   | 338,780    |   |   | 59,185         |   |               | 12,111  |   |             | (4,443   | )      |             | 405,633   |   |
|    Other long-term liabilities |   | 51,324     |   |   | 1,611          |   |               | 47,289  |   |             | (1,681   | )      |             | 98,543    |   |
|    Shareholders' equity        |   | 656,649    |   |   | 438,339        |   |               | 13,539  |   |             | (451,878 | )      |             | 656,649   |   |
|                                          |        |            |   |        |                |   |                    |         |   |                  |          |   |                  |           |   |
| Total liabilities and shareholders' equity    | $      | 1,101,732  |   | $      | 988,526        |   | $                  | 126,703 |   | $                | (856,807 | )      | $                | 1,360,154 |   |
|                                          |        |            |   |        |                |   |                    |         |   |                  |          |   |                  |           |   |

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

|                                          |   | **Parent** |   |   | **Guarantors** |   | ****   | ****Non**-guarantors** |   |   | **Eliminations** |   |   | **Consolidated** |   |
|-----------------------------------------------|--------|------------|--------|--------|----------------|--------|--------|------------------------|--------|--------|------------------|--------|--------|------------------|--------|
|                                          |        |            |   |        |                |   |        |                        |   |        |                  |   |        |                  |   |
| Assets:                                       |   |       |   |   |           |   |   |                   |   |   |             |   |   |             |   |
|    Current assets              | $      | 160,712    |   | $      | 199,598        |   | $      | 45,139                 |   | $      | (1,490           | )      | $      | 403,959          |   |
|    Property and equipment, net |   | 21,489     |   |   | 657,866        |   |   | 16,156                 |   |   | —           |   |   | 695,511          |   |
|    Other long-term assets      |   | 87,755     |   |   | 34,376         |   |   | 72,334                 |   |   | (16,075          | )      |   | 178,390          |   |
|    Investments in subsidiaries |   | 255,978    |   |   | —         |   |   | —                 |   |   | (255,978         | )      |   | —           |   |
|    Intercompany receivables    |   | 547,964    |   |   | —         |   |   | —                 |   |   | (547,964         | )      |   | —           |   |
|                                          |        |            |   |        |                |   |        |                        |   |        |                  |   |        |                  |   |
| Total assets                                  | $      | 1,073,898  |   | $      | 891,840        |   | $      | 133,629                |   | $      | (821,507         | )      | $      | 1,277,860        |   |
|                                          |        |            |   |        |                |   |        |                        |   |        |                  |   |        |                  |   |
| Liabilities and shareholders' equity:         |   |       |   |   |           |   |   |                   |   |   |             |   |   |             |   |
|    Current liabilities         | $      | 90,174     |   | $      | 83,069         |   | $      | 46,152                 |   | $      | (5,272           | )      | $      | 214,123          |   |
|    Intercompany payables       |   | —    |   |   | 520,640        |   |   | 27,324                 |   |   | (547,964         | )      |   | —           |   |
|    Long-term debt              |   | 341,596    |   |   | 26,500         |   |   | 12,188                 |   |   | (4,443           | )      |   | 375,841          |   |
|    Other long-term liabilities |   | 77,155     |   |   | 422            |   |   | 45,346                 |   |   | —          |   |   | 122,923          |   |
|    Shareholders' equity        |   | 564,973    |   |   | 261,209        |   |   | 2,619                  |   |   | (263,828         | )      |   | 564,973          |   |
|                                          |        |            |   |        |                |   |        |                        |   |        |                  |   |        |                  |   |
| Total liabilities and shareholders' equity    | $      | 1,073,898  |   | $      | 891,840        |   | $      | 133,629                |   | $      | (821,507         | )      | $      | 1,277,860        |   |
|                                          |        |            |   |        |                |   |        |                        |   |        |                  |   |        |                  |   |

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**GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES  CONDENSED CONSOLIDATING  STATEMENTS OF OPERATIONS****YEAR ENDED SEPTEMBER 30, 2005(IN THOUSANDS)**

|                                                               |   | **Parent** |   |   | **Guarantors** |   | **Non-guarantors** |   |   | **Eliminations** |     |   | **Consolidated** |      |
|--------------------------------------------------------------------|--------|------------|--------|--------|----------------|--------|--------------------|--------|--------|------------------|----------|--------|------------------|-----------|
|                                                               |        |            |   |        |                |   |                    |   |        |                  |     |        |                  |      |
| Net revenues                                                       | $      | 6,068      |   | $      | 1,764,859      |   | $                  | 51,968 |   | $                | (139,545 | )      | $                | 1,683,350 |   |
| Equity in net income of subsidiaries                               |   | 129,684    |   |   | —         |   |               | — |   |             | (129,684 | )      |             | —    |   |
| Operating expenses                                                 |   | 115,660    |   |   | 1,482,921      |   |               | 58,472 |   |             | (140,824 | )      |             | 1,516,229 |   |
| Lease expense                                                      |   | 1,550      |   |   | 16,817         |   |               | — |   |             | —   |   |             | 18,367    |   |
| Depreciation and amortization expense                              |   | 9,194      |   |   | 45,510         |   |               | 383    |   |             | —   |   |             | 55,087    |   |
| Interest expense                                                   |   | 20,920     |   |   | 6,242          |   |               | 1,043  |   |             | (326     | )      |             | 27,879    |   |
|                                                               |        |            |   |        |                |   |                    |        |   |                  |          |   |                  |           |   |
| Income (loss) before income tax (benefit) expense,                 |   |       |   |   |           |   |               |   |   |             |     |   |             |      |   |
|    equity in net income of unconsolidated           |   |       |   |   |           |   |               |   |   |             |     |   |             |      |   |
|    affiliates and minority interests                |   | (11,572    | )      |   | 213,369        |   |               | (7,930 | )      |             | (128,079 | )      |             | 65,788    |   |
| Income tax (benefit) expense                                       |   | (48,090    | )      |   | 77,153         |   |               | (3,174 | )      |             | 143      |   |             | 26,032    |   |
|                                                               |        |            |   |        |                |   |                    |        |   |                  |          |   |                  |           |   |
| Income (loss) before equity in net income of                       |   |       |   |   |           |   |               |   |   |             |     |   |             |      |   |
|    unconsolidated affiliates and minority interests |   | 36,518     |   |   | 136,216        |   |               | (4,756 | )      |             | (128,222 | )      |             | 39,756    |   |
| Equity in net income of unconsolidated affiliates                  |   | 3,911      |   |   | —         |   |               | — |   |             | (806     | )      |             | 3,105     |   |
| Minority interests                                                 |   | —     |   |   | —         |   |               | — |   |             | (441     | )      |             | (441      | ) |
|                                                               |        |            |   |        |                |   |                    |        |   |                  |          |   |                  |           |   |
| Income (loss) from continuing operations                           |   | 40,429     |   |   | 136,216        |   |               | (4,756 | )      |             | (129,469 | )      |             | 42,420    |   |
| Income (loss) from discontinued operations, net of taxes           |   | 1,740      |   |   | (1,201         | )      |               | (790   | )      |             | —   |   |             | (251      | ) |
|                                                               |        |            |   |        |                |   |                    |        |   |                  |          |   |                  |           |   |
| Net income (loss)                                                  | $      | 42,169     |   | $      | 135,015        |   | $                  | (5,546 | )      | $                | (129,469 | )      | $                | 42,169    |   |
|                                                               |        |            |   |        |                |   |                    |        |   |                  |          |   |                  |           |   |

**GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATINGSTATEMENTS OF OPERATIONS****YEAR ENDED SEPTEMBER 30, 2004(IN THOUSANDS)**

|                                                               |   | **Parent** |   |   | **Guarantors** |   | **Non-guarantors** |   |   | **Eliminations** |     |   | **Consolidated** |      |
|--------------------------------------------------------------------|--------|------------|--------|--------|----------------|--------|--------------------|--------|--------|------------------|----------|--------|------------------|-----------|
|                                                               |        |            |   |        |                |   |                    |   |        |                  |     |        |                  |      |
| Net revenues                                                       | $      | 14,404     |   | $      | 1,587,938      |   | $                  | 63,019 |   | $                | (147,808 | )      | $                | 1,517,553 |   |
| Equity in net income of subsidiaries                               |   | 95,659     |   |   | —         |   |               | — |   |             | (95,659  | )      |             | —    |   |
| Operating expenses                                                 |   | 94,256     |   |   | 1,356,963      |   |               | 61,896 |   |             | (147,692 | )      |             | 1,365,423 |   |
| Lease expense                                                      |   | 2,124      |   |   | 25,949         |   |               | — |   |             | —   |   |             | 28,073    |   |
| Depreciation and amortization expense                              |   | 7,690      |   |   | 36,111         |   |               | 2,505  |   |             | —   |   |             | 46,306    |   |
| Interest expense                                                   |   | 23,680     |   |   | 2,627          |   |               | 938    |   |             | (260     | )      |             | 26,985    |   |
|                                                               |        |            |   |        |                |   |                    |        |   |                  |          |   |                  |           |   |
| Income (loss) before income tax (benefit) expense,                 |   |       |   |   |           |   |               |   |   |             |     |   |             |      |   |
|    equity in net income of unconsolidated           |   |       |   |   |           |   |               |   |   |             |     |   |             |      |   |
|    affiliates and minority interests                |   | (17,687    | )      |   | 166,288        |   |               | (2,320 | )      |             | (95,515  | )      |             | 50,766    |   |
| Income tax (benefit) expense                                       |   | (43,842    | )      |   | 65,963         |   |               | (919   | )      |             | (411     | )      |             | 20,791    |   |
|                                                               |        |            |   |        |                |   |                    |        |   |                  |          |   |                  |           |   |
| Income (loss) before equity in net income of                       |   |       |   |   |           |   |               |   |   |             |     |   |             |      |   |
|    unconsolidated affiliates and minority interests |   | 26,155     |   |   | 100,325        |   |               | (1,401 | )      |             | (95,104  | )      |             | 29,975    |   |
| Equity in net income of unconsolidated affiliates                  |   | 2,918      |   |   | —         |   |               | — |   |             | (683     | )      |             | 2,235     |   |
| Minority interests                                                 |   | —     |   |   | —         |   |               | — |   |             | (462     | )      |             | (462      | ) |
|                                                               |        |            |   |        |                |   |                    |        |   |                  |          |   |                  |           |   |
| Income (loss) from continuing operations                           |   | 29,073     |   |   | 100,325        |   |               | (1,401 | )      |             | (96,249  | )      |             | 31,748    |   |
| Loss from discontinued operations, net of taxes                    |   | —     |   |   | (2,571         | )      |               | (104   | )      |             | —   |   |             | (2,675    | ) |
|                                                               |        |            |   |        |                |   |                    |        |   |                  |          |   |                  |           |   |
| Net income (loss)                                                  | $      | 29,073     |   | $      | 97,754         |   | $                  | (1,505 | )      | $                | (96,249  | )      | $                | 29,073    |   |
|                                                               |        |            |   |        |                |   |                    |        |   |                  |          |   |                  |           |   |

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**GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES  CONDENSED COMBINING  STATEMENTS OF OPERATIONS****YEAR ENDED SEPTEMBER 30, 2003(IN THOUSANDS)**

|                                                               |   | **Parent** |   |   | **Guarantors** |   | **Non-guarantors** |   |   | **Eliminations** |     |   | **Combined** |      |
|--------------------------------------------------------------------|--------|------------|--------|--------|----------------|--------|--------------------|--------|--------|------------------|----------|--------|--------------|-----------|
|                                                               |        |            |   |        |                |   |                    |   |        |                  |     |        |              |      |
| Net revenues                                                       | $      | 14,687     |   | $      | 1,495,190      |   | $                  | 48,223 |   | $                | (182,634 | )      | $            | 1,375,466 |   |
| Equity in net income of subsidiaries                               |   | 71,136     |   |   | —         |   |               | — |   |             | (71,136  | )      |         | —    |   |
| Operating expenses                                                 |   | 92,641     |   |   | 1,290,541      |   |               | 48,097 |   |             | (182,634 | )      |         | 1,248,645 |   |
| Lease expense                                                      |   | 2,755      |   |   | 24,800         |   |               | — |   |             | —   |   |         | 27,555    |   |
| Depreciation and amortization expense                              |   | 2,633      |   |   | 34,087         |   |               | 2,143  |   |             | —   |   |         | 38,863    |   |
| Interest expense                                                   |   | 13,008     |   |   | 3,334          |   |               | 672    |   |             | —   |   |         | 17,014    |   |
|                                                               |        |            |   |        |                |   |                    |        |   |                  |          |   |              |           |   |
| Income (loss) before income tax (benefit) expense,                 |   |       |   |   |           |   |               |   |   |             |     |   |         |      |   |
|    equity in net income of unconsolidated           |   |       |   |   |           |   |               |   |   |             |     |   |         |      |   |
|    affiliates and minority interests                |   | (25,214    | )      |   | 142,428        |   |               | (2,689 | )      |             | (71,136  | )      |         | 43,389    |   |
| Income tax (benefit) expense                                       |   | (37,882    | )      |   | 51,409         |   |               | (1,048 | )      |             | —   |   |         | 12,479    |   |
|                                                               |        |            |   |        |                |   |                    |        |   |                  |          |   |              |           |   |
| Income (loss) before equity in net income of                       |   |       |   |   |           |   |               |   |   |             |     |   |         |      |   |
|    unconsolidated affiliates and minority interests |   | 12,668     |   |   | 91,019         |   |               | (1,641 | )      |             | (71,136  | )      |         | 30,910    |   |
| Equity in net income of unconsolidated affiliates                  |   | (473       | )      |   | 1,267          |   |               | — |   |             | —   |   |         | 794       |   |
| Minority interests                                                 |   | (307       | )      |   | —         |   |               | — |   |             | —   |   |         | (307      | ) |
|                                                               |        |            |   |        |                |   |                    |        |   |                  |          |   |              |           |   |
| Income (loss) from continuing operations                           |   | 11,888     |   |   | 92,286         |   |               | (1,641 | )      |             | (71,136  | )      |         | 31,397    |   |
| Loss from discontinued operations, net of taxes                    |   | —     |   |   | (15,309        | )      |               | (4,200 | )      |             | —   |   |         | (19,509   | ) |
|                                                               |        |            |   |        |                |   |                    |        |   |                  |          |   |              |           |   |
| Net income (loss)                                                  | $      | 11,888     |   | $      | 76,977         |   | $                  | (5,841 | )      | $                | (71,136  | )      | $            | 11,888    |   |
|                                                               |        |            |   |        |                |   |                    |        |   |                  |          |   |              |           |   |

**GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATINGSTATEMENTS OF CASH FLOWS****YEAR ENDED SEPTEMBER 30, 2005(IN THOUSANDS)**

|                                                |   | **Parent** |   |   | **Guarantors** |   | **Non-guarantors** |    |   | **Consolidated** |    |
|-----------------------------------------------------|--------|------------|--------|--------|----------------|--------|--------------------|---------|--------|------------------|---------|
|                                                |        |            |   |        |                |   |                    |    |        |                  |    |
| Net cash (used in) provided by operating activities | $      | (127,314   | )      | $      | 250,143        |   | $                  | 2,149   |   | $                | 124,978 |   |
| Net cash (used in) provided by investing activities |   | (4,287     | )      |   | (55,666        | )      |               | 2,819   |   |             | (57,134 | ) |
| Net cash provided by (used in) financing activities |   | 83,749     |   |   | (158,497       | )      |               | (10,126 | )      |             | (84,874 | ) |
|                                                |        |            |   |        |                |   |                    |         |   |                  |         |   |
| Net (decrease) increase in cash and equivalents     | $      | (47,852    | )      | $      | 35,980         |   | $                  | (5,158  | )      | $                | (17,030 | ) |
|                                                |        |            |   |        |                |   |                    |         |   |                  |         |   |

**GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATINGSTATEMENTS OF CASH FLOWS****YEAR ENDED SEPTEMBER 30, 2004(IN THOUSANDS)**

|                                                |   | **Parent** |   |   | **Guarantors** |   | **Non-guarantors** |   |   | **Consolidated** |    |
|-----------------------------------------------------|--------|------------|--------|--------|----------------|--------|--------------------|--------|--------|------------------|---------|
|                                                |        |            |   |        |                |   |                    |   |        |                  |    |
| Net cash (used in) provided by operating activities | $      | (85,812    | )      | $      | 231,606        |   | $                  | 2,602  |   | $                | 148,396 |   |
| Net cash (used in) provided by investing activities |   | (24,755    | )      |   | (45,126        | )      |               | 181    |   |             | (69,700 | ) |
| Net cash provided by (used in) financing activities |   | 231,500    |   |   | (188,549       | )      |               | (4,367 | )      |             | 38,584  |   |
|                                                |        |            |   |        |                |   |                    |        |   |                  |         |   |
| Net increase (decrease) in cash and equivalents     | $      | 120,933    |   | $      | (2,069         | )      | $                  | (1,584 | )      | $                | 117,280 |   |
|                                                |        |            |   |        |                |   |                    |        |   |                  |         |   |

**GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIESCONDENSED COMBININGSTATEMENTS OF CASH FLOWS****YEAR ENDED SEPTEMBER 30, 2003(IN THOUSANDS)**

|                                                |   | **Parent** |   |   | **Guarantors** |   | **Non-guarantors** |   |   | **Combined** |    |
|-----------------------------------------------------|--------|------------|--------|--------|----------------|--------|--------------------|--------|--------|--------------|---------|
|                                                |        |            |   |        |                |   |                    |   |        |              |    |
| Net cash (used in) provided by operating activities | $      | (102,254   | )      | $      | 169,478        |   | $                  | 1,448  |   | $            | 68,672  |   |
| Net cash (used in) provided by investing activities |   | (1,877     | )      |   | 5,605          |   |               | 9,176  |   |         | 12,904  |   |
| Net cash provided by (used in) financing activities |   | 1,789      |   |   | (75,298        | )      |               | (6,696 | )      |         | (80,205 | ) |
|                                                |        |            |   |        |                |   |                    |        |   |              |         |   |
| Net (decrease) increase in cash and equivalents     | $      | (102,342   | )      | $      | 99,785         |   | $                  | 3,928  |   | $            | 1,371   |   |
|                                                |        |            |   |        |                |   |                    |        |   |              |         |   |

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**(22)     SubsequentEvents**

    Subsequent to September  30, 2005, the Company repurchased an additional 288,400 shares of its common  stock at a cost of $10.7 million.

    Also, subsequent to  September 30, 2005, the Company entered into two separate commitments to purchase  real property with an aggregate purchase price of approximately $3.7 million.

**(23)     Quarterly Financial Data (Unaudited)**

     GHC’s unaudited quarterly financial information is as follows(in thousands, except per share data):

|                   |          |        |           | **Income**     |   |           |   |   |                     |   |   |        |   |   |
|------------------------|---------------|-------------|----------------|----------------|--------|----------------|--------|--------|--------------------------|--------|--------|-------------|--------|--------|
|                   |          |        |           | **from**       |   |           |   |   |                     |   |   |        |   |   |
|                   | **Total Net** |        | **Continuing** |           |   |           |   |   | **Net Income Per Share** |   |
|                   |          | **Revenue** |           | **Operations** |   | **Net Income** |   |   | **Basic**                |   |   | **Diluted** |   |
|                   |               |             |           |                |   |                |   |        |                          |   |        |             |   |
| **Quarter ended (1):** |          |        |           |           |   |           |   |   |                     |   |   |        |   |   |   |
| December 31, 2004      | $             | 399,027     |           | $              | 10,325 |           | $      | 10,848 |                     | $      | 0.54   |        | $      | 0.54   |   |
| March 31, 2005         |          | 454,566     |           |           | 13,631 |           |   | 13,467 |                     |   | 0.67   |        |   | 0.66   |   |
| June 30, 2005          |          | 408,971     |           |           | 8,991  |           |   | 7,641  |                     |   | 0.39   |        |   | 0.38   |   |
| September 30, 2005     |          | 420,786     |           |           | 9,473  |           |   | 10,213 |                     |   | 0.52   |        |   | 0.51   |   |
|                        |               |             |                |                |        |                |        |        |                          |        |        |             |        |        |  |
| **Quarter ended:**     |          |        |           |           |   |           |   |   |                     |   |   |        |   |   |   |
| December 31, 2003 (2)  | $             | 366,310     |           | $              | 7,431  |           | $      | 6,006  |                     | $      | 0.30   |        | $      | 0.30   |   |
| March 31, 2004         |          | 378,681     |           |           | 6,151  |           |   | 5,574  |                     |   | 0.28   |        |   | 0.28   |   |
| June 30, 2004          |          | 375,273     |           |           | 7,641  |           |   | 6,722  |                     |   | 0.34   |        |   | 0.33   |   |
| September 30, 2004     |          | 397,289     |           |           | 10,525 |           |   | 10,771 |                     |   | 0.54   |        |   | 0.53   |   |
|                        |               |             |                |                |        |                |        |        |                          |        |        |             |        |        |  |

|      |                                                                                                                                                                                                                        |
|-----------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1)       | For unusual and otherwise infrequently          occuring items recognized in each of the quarters in fiscal 2005, see          note 1 - “Organization and Basis of Presentation - Correction          of Errors.” |
|      |                                                                                                                                                                                                                        |
| (2)  | Per common share data for quarter ended      December 31, 2003 is labeled “pro forma”. See note 2 - “Summary      of Significant Accounting Policies - Earnings Per Share.”                         |

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**Schedule II**

**GENESIS HEALTH CARE CORPORATION AND SUBSIDIARIES  VALUATION AND QUALIFYING ACCOUNTS  FOR THE YEARS ENDED SEPTEMBER 30, 2005, 2004  AND 2003  (IN THOUSANDS)**

|                                   | **Balance at** |           |                   |       |   |   |   | **Balance at** |    |
|----------------------------------------|----------------|----------------|------------------------|------------|--------|--------|--------|----------------|---------|
| **Beginning of**                       | **Charged to** | **End of**     |
| **Description**                        | **Period**     | **Operations** | **Deductions (1) (2)** | **Period** |
|                                        |           |                |                   |            |   |        |   |           |         |   |
| **Year Ended September 30, 2005**      |           |           |                   |       |   |   |   |           |    |   |
| Allowance for Doubtful Accounts        | $              | 29,382         |                   | 12,714     |   | 19,175 |   | $              | 22,921  |   |
| Deferred Tax Asset Valuation Allowance |           | 77,748         |                   | —     |   | 77,748 |   |           | —  |   |
| **Year Ended September 30, 2004**      |           |           |                   |       |   |   |   |           |    |   |
| Allowance for Doubtful Accounts        | $              | 32,170         |                   | 18,670     |   | 21,458 |   | $              | 29,382  |   |
| Deferred Tax Asset Valuation Allowance |           | 127,573        |                   | —     |   | 49,825 |   |           | 77,748  |   |
| **Year Ended September 30, 2003**      |           |           |                   |       |   |   |   |           |    |   |
| Allowance for Doubtful Accounts        | $              | 36,566         |                   | 21,091     |   | 25,487 |   | $              | 32,170  |   |
| Deferred Tax Asset Valuation Allowance |           | 130,797        |                   | —     |   | 3,224  |   |           | 127,573 |   |

|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|-----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1)   | Allowance for Doubtful Accounts      deductions represent amounts written off as uncollectible.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (2)   | Deferred Tax Asset Valuation         Allowance deductions in the year ended September 30, 2004 result from        a      change in presentation of GHC’s historical financial statements from      that of a group determining income and loss separate and apart from NCI      and its subsidiaries, to one reflecting the post spin-off allocation of      loss carryforwards after utilization by NCI during their period of affiliation.      Deductions in the year ended September 30, 2005 represent the utilization      of the net operating loss (NOL) and also include the reversal of the remaining      $51.1 million of Deferred      Tax Asset Valuation Allowance. Prior to September 2005, the tax benefit      of the NOL carryforwards were fully reserved due to      the uncertainty caused by utilization limitations based on taxable income,      tax statutes, and contractual provisions between NCI and GHC, and filing      positions to be determined by NCI. This uncertainty was largely resolved      with the filing of NCI’s fiscal 2004 federal and state income tax      returns  in June and July 2005, prompting GHC to remove the valuation allowance.      Because these NOLs were generated during the period pre dating the emergence       from bankruptcy, the realization of these NOLs is credited, pursuant to      SOP 90-7, to shareholders’ equity and not to operations. |

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

     None.

| **ITEM 9A:****** | **CONTROLS AND PROCEDURES** |
|------------------|-----------------------------|

***Effectiveness of Disclosure Controls and Procedures***

      As required  by Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the Exchange  Act), our management, including our chief executive officer and chief financial  officer, conducted an evaluation of the effectiveness of the design and operation  of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e))  as of September 30, 2005. Disclosure controls and procedures include controls  and procedures designed to ensure that information required to be disclosed  in our reports filed or submitted under the Exchange Act, such as this Form  10-K, is properly recorded, processed, summarized and reported within the time  periods required by the Securities and Exchange Commission’s rules and  forms. Management necessarily applied its judgment in assessing the costs and  benefits of such controls and procedures that, by their nature, can provide  only reasonable assurance regarding management’s control objectives. Management  does not expect that its disclosure controls and procedures will prevent all  errors and fraud. A control system, irrespective of how well it is designed  and operated, can only provide reasonable assurance, and cannot guarantee that  it will succeed in its stated objectives.

      Based on an  evaluation of the effectiveness of the design and operation  disclosure controls and procedures, our chief executive  officer and chief financial officer concluded that, as of September 30,  2005, our disclosure controls and procedures were effective in reaching a reasonable  level of assurance that information required to be disclosed by us in the reports  that we file or submit under the Exchange Act is recorded, processed, summarized  and reported within the time period specified in the Securities and Exchange  Commission’s rules and forms. 

***Management’s Annual Report on Internal Control over FinancialReporting***

      Our management      is responsible for establishing and maintaining adequate internal control      over financial reporting, as such term is defined in Exchange Act Rules      13a-15(f) and 15d-15(f). Under the supervision and with the participation      of our management, including our chief executive officer and chief      financial officer, we conducted an evaluation of the effectiveness of our      internal control over financial reporting as of September 30, 2005 based      on the framework in Internal Control — Integrated Framework issued      by the Committee of Sponsoring Organizations of the Treadway Commission      (COSO). 

      Based on management’s      evaluation under the COSO framework of our internal control over financial      reporting, management concluded that our internal control over financial      reporting was effective as of September 30, 2005. 

      All internal      control systems, no matter how well designed, have inherent limitations.      Therefore, even those systems determined to be effective can provide only      reasonable assurance regarding the reliability of financial reporting and      the preparation of financial statements for external purposes in accordance      with U.S. GAAP. 

      KPMG LLP, our      independent registered public accounting firm, audited our management’s      assessment of the effectiveness of our internal control over financial      reporting as of September 30, 2005, as stated in their report, which appears      below. 

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**Report of Independent Registered Public Accounting Firm**

The Board of Directors and ShareholdersGenesis HealthCare Corporation: 

We have audited management's assessment, included in the accompanyingManagement’s Annual Report on Internal Control Over Financial Reporting*,*thatGenesis HealthCare Corporation (the Company) maintained effective internal controlover financial reporting as of September 30, 2005, based on criteria establishedin Internal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO).**Genesis HealthCare Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company’sinternal control over financial reporting based on our audit. 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. 

A company's internal control over financial reporting is a processdesigned to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles. A company's internalcontrol over financial reporting includes those policies and procedures that(1) pertain to the maintenance of records that, in reasonable detail, accuratelyand fairly reflect the transactions and dispositions of the assets of the company;(2) provide reasonable assurance that transactions are recorded as necessaryto permit preparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of the company’sassets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 

In our opinion, management's assessment that Genesis HealthCareCorporation maintained effective internal control over financial reporting asof September 30, 2005, is fairly stated, in all material respects, based on criteriaestablished in Internal Control—Integrated Framework issued by the Committeeof Sponsoring Organizations of the Treadway Commission (COSO).**Also, inour opinion, Genesis HealthCare Corporation maintained, in all material respects,effective internal control over financial reporting as of September 30, 2005,based on criteria established in Internal Control—Integrated Framework issuedby the Committee of Sponsoring Organizations of the Treadway Commission (COSO).**

We also have audited, in accordance with the standards of the PublicCompany Accounting Oversight Board (United States), the consolidated balancesheets of Genesis HealthCare Corporation and subsidiaries as of September 30,2005 and 2004, and the related consolidated statements of operations, shareholders’ equityand cash flows for each of the years in the three-year period ended September30, 2005 and related financial statement schedule, and our report dated December13, 2005 expressed an unqualified opinion on those consolidated financial statementsand related financial statement schedule. 

/s/ KPMG LLP

Philadelphia, PennsylvaniaDecember 13, 2005**

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***Changes in Internal Control Over Financial Reporting***

      During the      fourth quarter of fiscal year 2005, management implemented certain controls      including implementing a secondary review of new and modified leases to      ensure that our leases are accounted for in accordance with Statement of      Financial      Accounting Standards No. 13, “*Accounting for Leases,”* and      Financial Accounting Standards Board Technical Bulletin No. 85-3, “*Accounting      for Operating Leases with Scheduled Rent Increases.”*The implementation      of these controls followed a change in our accounting of lease expense,      which had previously not been in compliance with the Technical Bulletin.      We do not believe that the impact of this change was material to any prior      periods. 

      Other than      the change in controls described above, there have been no significant      changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) of the Securities Exchange Act of 1934, as amended that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to material affect, the Company’s      internal control over financial reporting. 

| **ITEM 9B:** | **OTHER INFORMATION** |
|--------------|-----------------------|

     None.

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**PART III**

| **ITEM 10:** | **DIRECTORS AND EXECUTIVE OFFICERS OF    THE REGISTRANT** |
|--------------|-----------------------------------------------------------|

      The information required under Item 10 is incorporated herein by reference to our Proxy Statement, which we will file pursuant to Exchange Act Regulation 14A within 120 days after the end of fiscal 2005. 

| **ITEM 11:** | **EXECUTIVE COMPENSATION** |
|--------------|----------------------------|

      The information required under Item 11 is incorporated herein by reference to our Proxy Statement, which we will file pursuant to Exchange Act Regulation 14A within 120 days after the end of fiscal 2005. 

| **ITEM 12:** | **SECURITY OWNERSHIP OF CERTAIN BENEFICIAL    OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS** |
|--------------|-------------------------------------------------------------------------------------------------------|

      The information required under Item 12 is incorporated herein by reference to our Proxy Statement, which we will file pursuant to Exchange Act Regulation 14A within 120 days after the end of fiscal 2005. 

**EQUITY COMPENSATION PLAN INFORMATION**

     The  following table details information regarding the Genesis’ existing equity  compensation plans as of September 30, 2005:

| **Plan Category**                                                                                      |   |   | **(a)****Number of securities to be issued upon exercise of      outstanding options, warrants and rights** |   |   | **(b)****Weighted-average exercise price of outstanding options,      warrants and rights** |   |   | **(c)****Number of securities remaining available for future      issuance under equity compensation plans (excluding securities reflected      in column (a))** |   |
|--------------------------------------------------------------------------------------------------------|--------|--------|-------------------------------------------------------------------------------------------------------------|--------|--------|---------------------------------------------------------------------------------------------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                        |   |   |                                                                                                             |   |        |                                                                                             |   |   |                                                                                                                                                                  |   |
| Equity compensation         plans approved by security           holders (1)  |   |   | 195,713                                                                                                     |   | $      | 23.43                                                                                       |   |   | 1,451,412                                                                                                                                                        |   |
| Equity compensation         plans not approved by            security holders |   |   | —                                                                                                      |   |   | —                                                                                      |   |   | —                                                                                                                                                           |   |
| Total                                                                                                  |   |   | 195,713                                                                                                     |   | $      | 23.43                                                                                       |   |   | 1,451,412                                                                                                                                                        |   |

|   | ________________________ |
|--------|--------------------------|

| (1) | At September 30, 2005, under the 2003 Stock OptionPlan there were options currently exercisable to purchase 195,713 shares of commonstock, options granted but not yet exercisable to purchase 576,976 shares ofcommon stock and 600,000 shares of common stock eligible for future grant ofoptions. At September 30, 2005, under the 2003 Stock Incentive Plan there were274,436 shares of common stock eligible for future awards of restricted stock. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **ITEM 13:****** | **CERTAIN RELATIONSHIPS AND RELATED    TRANSACTIONS** |
|------------------|-------------------------------------------------------|

      The information required under Item 13 is incorporated herein by reference to our Proxy Statement, which we will file pursuant to Exchange Act Regulation 14A within 120 days after the end of fiscal 2005. 

| **ITEM 14:** | **PRINCIPAL ACCOUNTANT FEES AND SERVICES** |
|--------------|--------------------------------------------|

      The information required under Item 14 is incorporated herein by reference to our Proxy Statement, which we will file pursuant to Exchange Act Regulation 14A within 120 days after the end of fiscal 2005. 

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**PART IV**

| **ITEM 15:** | **EXHIBITS AND FINANCIAL STATEMENT SCHEDULE** |
|--------------|-----------------------------------------------|

|   |                                                                                                                                                                                                                                                                                                                                                                                              |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (a)(1) | The following consolidated financial          statements of GHC are filed as part of this Form 10-K in Part II Item    8:                                                                                                                                                                                                                                                                         |
|   |                                                                                                                                                                                                                                                                                                                                                                                              |
|   | Report of Independent Registered Public    Accounting Firm                                                                                                                                                                                                                                                                                                                                        |
|   | Consolidated Balance Sheets as of September    30, 2005 and 2004                                                                                                                                                                                                                                                                                                                                  |
|   | Consolidated Statements of Operations    for the years ended September 30, 2005, 2004, and 2003                                                                                                                                                                                                                                                                                                   |
|   | Consolidated Statements of Shareholders’ Equity    for the years ended September 30, 2005, 2004, and 2003                                                                                                                                                                                                                                                                                    |
|   | Consolidated Statements of Cash Flows    for the years ended September 30, 2005, 2004, and 2003                                                                                                                                                                                                                                                                                                   |
|   | Notes to Consolidated Financial Statements                                                                                                                                                                                                                                                                                                                                                        |
|   |                                                                                                                                                                                                                                                                                                                                                                                              |
| (a)(2) | Schedule                                                                                                                                                                                                                                                                                                                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                                                              |
|   | Schedule II - Valuation and Qualifying          Accounts for the years ended September 30, 2005, 2004 and 2003. Schedule          II is included under Part II Item 8. All other schedules not listed          have been omitted since the required information is included in the          consolidated          financial    statements or the notes thereto, or is not applicable or required. |
|   |                                                                                                                                                                                                                                                                                                                                                                                              |
| (a)(3) | Exhibits                                                                                                                                                                                                                                                                                                                                                                                          |

     The following documents are filed as exhibits hereto: 

| **Exhibit** |            | ****                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|-------------|-----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  | **Description** |
|             |            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 2.1(1)      |            | Separation and Distribution Agreement          by and between NeighborCare, Inc. (formerly Genesis Health Ventures,          Inc.) and Genesis HealthCare Corporation, dated as of October 27, 2003.          (Schedules and Exhibits are omitted pursuant to Regulation S-K, Item          601(b)(2); Genesis HealthCare Corporation agrees to furnish supplementally          a copy of such schedules and/or exhibits to the Securities and Exchange    Commission upon request). |
|        |            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 3.1(2)      |            | Amended and Restated Articles of Incorporation          of Genesis HealthCareCorporation.                                                                                                                                                                                                                                                                                                                                                                                            |
|        |            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 3.2(2)      |            | Articles of Amendment to Genesis HealthCare          Corporation’s Amended and Restated Articles of Incorporation,          effective as of December 1, 2003, designating the Company’s Series    A Junior Participating Preferred Shares, par value $0.01 per share.                                                                                                                                                                                                      |
|        |            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 3.3(3)      |            | Amended and Restated Bylaws of Genesis          HealthCare Corporation,as amended.                                                                                                                                                                                                                                                                                                                                                                                                   |
|        |            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.1(4)      |            | Form    of Genesis HealthCare Corporation Common Stock certificate.                                                                                                                                                                                                                                                                                                                                                                                                                  |
|        |            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.2(5)      |            | Rights Agreement, dated as of November          18, 2003, between Genesis HealthCare Corporation and StockTrans, Inc.,          which includes the form of Rights Certificate as Exhibit B and the    Summary of Rights to Purchase Preferred Shares as Exhibit C.                                                                                                                                                                                                                   |
|        |            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.3(6)      |            | Indenture with respect to the 8% Senior          Subordinated Notes due 2013 among Genesis HealthCare Corporation, NeighborCare,          Inc. (formerly Genesis Health Ventures, Inc.), the subsidiary guarantors          named therein and The Bank of New York, as trustee, dated as of October    28, 2003.                                                                                                                                                                     |

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| 4.4(2)    |   | Articles        of Amendment to Genesis HealthCare Corporation’s Amended and Restated        Articles of Incorporation, effective as of December 1, 2003, designating        the Company’s Series        A Junior Participating Preferred Shares, par value $0.01 per share (included        in Exhibit        3.2). |
|-----------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|      |   |                                                                                                                                                                                                                                                                                                                           |
| 4.5(7)    |   | Supplemental        Indenture with respect to the 8% Senior Subordinated Notes due 2013 of        Genesis HealthCare Corporation by and among Genesis HealthCare Corporation,        the subsidiary        guarantors named there in and the Bank of New York, as trustee, dated        as of January        20, 2004.         |
|      |   |                                                                                                                                                                                                                                                                                                                           |
| 4.6(8)    |   | Supplemental        Indenture with respect to the 8% Senior Subordinated Notes due 2013 of        Genesis HealthCare Corporation by and among Genesis HealthCare Corporation,        the subsidiary        guarantors named therein and The Bank of New York, as trustee, dated        March 16, 2005.                         |
|      |   |                                                                                                                                                                                                                                                                                                                           |
| 4.7(8)    |   | Indenture        with respect to the 2.5% Convertible Senior Subordinated Debentures due        2025 of Genesis HealthCare Corporation by and among Genesis HealthCare        Corporation,        the subsidiary guarantors named therein and The Bank of New York, as        trustee, dated as of March 2, 2005.              |
|      |   |                                                                                                                                                                                                                                                                                                                           |
| 10.1(2)   |   | Tax        Sharing Agreement by and between NeighborCare, Inc. (formerly Genesis        Health Ventures,        Inc.) and Genesis HealthCare Corporation, dated as of December 1, 2003.                                                                                                                                        |
|      |   |                                                                                                                                                                                                                                                                                                                           |
| 10.2(2)   |   | Transition        Services Agreement by and between NeighborCare, Inc. (formerly Genesis        Health Ventures, Inc.) and Genesis HealthCare Corporation, dated as of        December        1, 2003.                                                                                                                         |
|      |   |                                                                                                                                                                                                                                                                                                                           |
| 10.3(2)   |   | Tidewater        Membership Agreement by and between Tidewater Healthcare Shared Services        Group, Inc. and Genesis HealthCare Corporation, dated as of December        1, 2003.                                                                                                                                          |
|      |   |                                                                                                                                                                                                                                                                                                                           |
| 10.4(2)+  |   | Employee        Benefits Agreement by and between NeighborCare, Inc. (formerly Genesis        Health Ventures, Inc.) and Genesis HealthCare Corporation, dated as of        December        1, 2003.                                                                                                                           |
|      |   |                                                                                                                                                                                                                                                                                                                           |
| 10.5(2)   |   | Master        Agreement for Pharmacy, Pharmacy Consulting and Related Products and        Services by and between NeighborCare Pharmacy Services, Inc. and Genesis        HealthCare        Corporation, dated as of December 1, 2003.                                                                                         |
|      |   |                                                                                                                                                                                                                                                                                                                           |
| 10.6(2)   |   | Pharmacy        Benefit Management Agreement by and between Genesis HealthCare Corporation        and CareCard, Inc., dated as of December 1, 2003.                                                                                                                                                                            |
|      |   |                                                                                                                                                                                                                                                                                                                           |
| 10.7(2)   |   | Master        Agreement for Specialty Beds and Oxygen Concentrators by and between        Genesis HealthCare Corporation and NeighborCare Pharmacy Services, Inc.,        dated        as of December        1, 2003.                                                                                                          |
|      |   |                                                                                                                                                                                                                                                                                                                           |
| 10.8(6)+  |   | Employment        Agreement by and between Genesis HealthCare Corporation and George V.        Hager, Jr., dated as of November 25, 2003.                                                                                                                                                                                      |
|      |   |                                                                                                                                                                                                                                                                                                                           |
| 10.9(9)+  |   | 2003        Stock Option Plan.                                                                                                                                                                                                                                                                                                 |
|      |   |                                                                                                                                                                                                                                                                                                                           |
| 10.10+    |   | Amended        and Restated 2003 Stock Incentive Plan.                                                                                                                                                                                                                                                                         |
|      |   |                                                                                                                                                                                                                                                                                                                           |
| 10.11(4)+ |   | Deferred        Compensation Plan.                                                                                                                                                                                                                                                                                             |

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| 10.12(9)   |   | Registration        Rights Agreement regarding the 8% Senior Subordinated Notes due 2013        of Genesis HealthCare Corporation by and among Genesis HealthCare Corporation,        NeighborCare,        Inc. (formerly Genesis Health Ventures, Inc.), the subsidiary guarantors        named therein and the initial purchasers named therein, dated as of October        28, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.13(9)+  |   | First        Amended and Restated Letter Agreement between Genesis HealthCare Corporation        and NeighborCare, Inc. (formerly Genesis Health Ventures, Inc.) and David        C. Almquist,        dated as of July 15, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.14(9)+  |   | First        Amended and Restated Letter Agreement between Genesis HealthCare Corporation        and NeighborCare, Inc. (formerly Genesis Health Ventures, Inc.) and Richard        P. Blinn, dated        as of July 15, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.15(9)+  |   | First        Amended and Restated Letter Agreement between Genesis HealthCare Corporation        and NeighborCare, Inc. (formerly Genesis Health Ventures, Inc.) and James        McKeon, dated        as of July 15, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.16(9)+  |   | First        Amended and Restated Letter Agreement between Genesis HealthCare Corporation        and NeighborCare, Inc. (formerly Genesis Health Ventures, Inc.) and Robert        A. Reitz, dated        as of July 15, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.17(6)+  |   | Employment        Agreement by and between Genesis HealthCare Corporation and David C.        Almquist dated as of December 1, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.18(6)+  |   | Employment        Agreement by and between Genesis HealthCare Corporation and Richard P.        Blinn dated as of December 1, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.19(6)+  |   | Employment        Agreement by and between Genesis HealthCare Corporation and James McKeon        dated as of December 1, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.20(6)+  |   | Employment        Agreement by and between Genesis HealthCare Corporation and Robert A.        Reitz dated as of December 1, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.21(8)   |   | Amended        and Restated Credit, Security, Guaranty and Pledge Agreement, dated as        of March        2, 2005, by and among Genesis HealthCare Corporation, as Borrower, the        Guarantors referred to therein, and the Lenders referred to therein,        and Wachovia Capital        Markets LLC as co-lead arranger and bookrunner, Wachovia Bank, National        Association as administrative agent, General Electric Capital Corporation        as co-lead arranger        and documentation agent, Citicorp North America, Inc. as syndication        agent and        Merrill Lynch Capital, a Division of Merrill Lynch Business Financial        Services, Inc. as        syndication agent (Schedules and exhibits are omitted; Genesis HealthCare        Corporation agrees to furnish supplementally a copy of such schedules        and/or exhibits        to the        Securities and Exchange Commission upon request). |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.22(10)  |   | Amendment        No. 1, dated as of May 7, 2004, to Master Agreement for Pharmacy, Pharmacy        Consulting and Related Products and Services by and between NeighborCare        Pharmacy Services, Inc. and Genesis HealthCare Corporation dated as of        December        1, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.23(11)+ |   | Form        of Restricted Stock Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.24(8)   |   | Purchase        Agreement relating to the 2.5% Convertible Senior Subordinated Debentures        due 2025 of Genesis HealthCare Corporation by and among Genesis HealthCare        Corporation,        the subsidiary guarantors named therein and the Initial Purchasers named        therein, dated as of February 24, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |

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| 10.25(8)  |   | Registration        Rights Agreement relating to the 2.5% Convertible Senior Subordinated        Debentures due 2025 of Genesis HealthCare Corporation by and among Genesis        HealthCare        Corporation, the subsidiary guarantors named therein and Wachovia Capital        Markets LLC, on behalf of the Initial Purchasers, dated as of March 2,        2005. |
|-----------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|      |   |                                                                                                                                                                                                                                                                                                                                                                      |
| 10.26(12) |   | Amendment        No. 1, dated as of June 9, 2005, to the Tax Sharing Agreement, dated        as of December        1, 2003, by and between NeighborCare, Inc. (formerly Genesis Health Ventures,        Inc.) and Genesis HealthCare Corporation.                                                                                                                         |
|      |   |                                                                                                                                                                                                                                                                                                                                                                      |
| 10.27(12) |   | Amendment        No. 1, dated as of June 9, 2005, to the Transition Services Agreement,        dated as of December 1, 2003, by and between NeighborCare, Inc. (formerly        Genesis Health        Ventures, Inc.) and Genesis HealthCare Corporation.                                                                                                                 |
|      |   |                                                                                                                                                                                                                                                                                                                                                                      |
| 10.28(12) |   | Amendment        No. 2, dated as of June 9, 2005, to the Master Agreement for Pharmacy,        Pharmacy Consulting and Related Products and Services, dated as of December        1,        2003 and        as amended on May 7, 2004, by and between NeighborCare Pharmacy Services,        Inc. and        Genesis HealthCare Corporation.                              |
|      |   |                                                                                                                                                                                                                                                                                                                                                                      |
| 10.29+    |   | Summary        Sheet regarding Director and Executive Officer Compensation.                                                                                                                                                                                                                                                                                               |
|      |   |                                                                                                                                                                                                                                                                                                                                                                      |
| 12.1      |   | Statement        Re: Computation of Earnings to Fixed Charges Ratio.                                                                                                                                                                                                                                                                                                      |
|      |   |                                                                                                                                                                                                                                                                                                                                                                      |
| 14.1(13)  |   | Code        of Business Conduct and Ethics of Genesis HealthCare Corporation.                                                                                                                                                                                                                                                                                             |
|      |   |                                                                                                                                                                                                                                                                                                                                                                      |
| 21.1      |   | Subsidiaries        of Genesis HealthCare Corporation.                                                                                                                                                                                                                                                                                                                    |
|      |   |                                                                                                                                                                                                                                                                                                                                                                      |
| 23.1      |   | Consent        of KPMG LLP.                                                                                                                                                                                                                                                                                                                                               |
|      |   |                                                                                                                                                                                                                                                                                                                                                                      |
| 31.1      |   | Certificate        of George V. Hager, Jr., Chief Executive Officer of Genesis HealthCare        Corporation, pursuant to Exchange Act Rule 13a-14(a).                                                                                                                                                                                                                    |
|      |   |                                                                                                                                                                                                                                                                                                                                                                      |
| 31.2      |   | Certificate        of James V. McKeon, Chief Financial Officer of Genesis HealthCare Corporation,        pursuant to Exchange Act Rule 13a-14(a).                                                                                                                                                                                                                         |
|      |   |                                                                                                                                                                                                                                                                                                                                                                      |
| 32.1      |   | Certificate        of George V. Hager, Jr., Chief Executive Officer of Genesis HealthCare        Corporation, pursuant to 18 U.S.C. Section 1350.                                                                                                                                                                                                                         |
|      |   |                                                                                                                                                                                                                                                                                                                                                                      |
| 32.2      |   | Certificate        of James V. McKeon, Chief Financial Officer of Genesis HealthCare Corporation,        pursuant to 18 U.S.C. Section 1350.                                                                                                                                                                                                                              |
|      |   |                                                                                                                                                                                                                                                                                                                                                                      |

|        |
|--------|
| +      | Management        contract or compensatory plan.  |
|   |   |
| (1)    | Incorporated        by reference to Genesis HealthCare Corporation’s Registration Statement        on Form 10 filed on November 14, 2003 (as amended).  |
|   |   |
| (2)    | Incorporated        by reference to Genesis HealthCare Corporation’s Current Report        on Form 8-K filed on December 9, 2003.  |
|   |   |
| (3)    | Incorporated        by reference to Genesis HealthCare Corporation’s Annual Report on        Form 10-K for the annual period ended September 30, 2004 filed on December        14, 2004.  |
|   |   |
| (4)    | Incorporated        by reference to Genesis HealthCare Corporation’s Registration Statement        on Form 10 filed on October 10, 2003.  |
|   |   |
| (5)    | Incorporated        by reference to Genesis HealthCare Corporation’s Registration Statement        on Form 8-A filed on November 18, 2003.  |
|   |   |
| (6)    | Incorporated        by reference to Genesis HealthCare Corporation’s Annual Report on        Form 10-K for the annual period ended September 30, 2003 filed on February        4, 2004.  |
|   |   |
| (7)    | Incorporated        by reference to Genesis HealthCare Corporation’s Registration Statement        on Form S-4 filed April 5, 2004 (as amended).  |

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| (8)    | Incorporated        by reference to Genesis HealthCare Corporation’s Quarterly Report        on Form 10-Q for the quarterly        period ended March 31, 2005 filed on May 10, 2005. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                       |
| (9)    | Incorporated        by reference to Genesis HealthCare Corporation’s Registration Statement        on Form 10 (as amended)        filed on November 6, 2003.                          |
|   |                                                                                                                                                                                       |
| (10)   | Incorporated        by reference to Genesis HealthCare Corporation’s Quarterly Report        on Form 10-Q for the quarterly        period ended March 31, 2004 filed on May 14, 2004. |
|   |                                                                                                                                                                                       |
| (11)   | Incorporated        by reference to Genesis HealthCare Corporation’s Current Report        on Form 8-K filed on November        22, 2004.                                             |
|   |                                                                                                                                                                                       |
| (12)   | Incorporated        by reference to Genesis HealthCare Corporation’s Current Report        on Form 8-K filed on June 30, 2004.                                                        |
|   |                                                                                                                                                                                       |
| (13)   | Incorporated        by reference to Genesis HealthCare Corporation’s Form 8-K filed        on June 14, 2005.                                                                          |

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**SIGNATURES**

Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf on December 14, 2005 by the undersigned thereunto duly authorized.

|        | Genesis HealthCare    Corporation |
|--------|-----------------------------------|
|   |                              |
|        |  By:                         | /s/ James V. McKeon |
|        |                              |  |
|        |                              | James V. McKeon |
|        |                                   | Chief Financial Officer  |

Pursuant to the requirements of the Securities Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on December 14, 2005.

| **Signature**               | **Capacity**                                              |
|-----------------------------|-----------------------------------------------------------|
|                        |                                                      |
| /s/ George V. Hager, Jr.    |                                                      |
|                             |                                                      |
| George V. Hager, Jr.        | Chief Executive Officer (principal executive officer) and |
|                        | Chairman of the Board                                     |
|                        |                                                      |
| /s/ John F. DePodesta       |                                                      |
|                             |                                                      |
| John F. DePodesta           | Director                                                  |
|                        |                                                      |
| /s/ Robert H. Fish          |                                                      |
|                             |                                                      |
| Robert H. Fish              | Director                                                  |
|                        |                                                      |
| /s/ J. Michael Gallagher    |                                                      |
|                             |                                                      |
| J. Michael Gallagher        | Director                                                  |
|                        |                                                      |
| /s/ Kevin M. Kelley         |                                                      |
|                             |                                                      |
| Kevin M. Kelley             | Director                                                  |
|                        |                                                      |
| /s/ Charles W. McQueary     |                                                      |
|                             |                                                      |
| Charles W. McQueary         | Director                                                  |
|                        |                                                      |
| /s/ Charlene Connolly Quinn |                                                      |
|                             |                                                      |
| Charlene Connolly Quinn     | Director                                                  |
|                        |                                                      |
| /s/ Terry Allison Rappuhn   |                                                      |
|                             |                                                      |
| Terry Allison Rappuhn       | Director                                                  |
|                        |                                                      |
| /s/ James V. McKeon         |                                                      |
|                             |                                                      |
| James V. McKeon             | Chief Financial Officer (principal financial officer)     |
|                        |                                                      |
| /s/ Thomas DiVittorio       |                                                      |
|                             |                                                      |
| Thomas DiVittorio           | Vice President and Corporate Controller (principal        |
|                        | accounting officer)                                       |

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