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UNITED
  STATES

SECURITIES
  AND EXCHANGE COMMISSION

Washington,
  D.C. 20549

FORM
  10-K/A

Amendment No. 1 to 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(State or other jurisdiction ofincorporation or organization) | 101 East State StreetKennett Square, PA  19348(Address of principal executiveoffices including zip code) | 20-0023783(I.R.S. EmployerIdentification 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 par value per share



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

YESNO

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

YESNO

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.

YESNO

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).

YESNO

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)

YESNO

DOCUMENTS INCORPORATED BY REFERENCE

NONE



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|(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.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

EXPLANATORY NOTE

This Amendment No. 1 on Form 10-K/A (Amendment) to the registrants Annual Report on Form 10-K for the fiscal year ended September 30, 2005, initially filed with the Securities and Exchange Commission (SEC) on December 14, 2005, is being filed to reflect the restatement of its consolidated balance sheets at September 30, 2005 and 2004, and the related consolidated statements of operations, shareholders equity and cash flows for each of the years in the three-years ended September 30, 2005 and the notes related thereto (Historical Financial Statements). For a more detailed discussion of the restatement see Item 8, note 3  Restatement of Consolidated Financial Statements to the consolidated financial statements.

On April 27, 2006, the registrants management and Audit Committee of the Board of Directors concluded the registrant would restate the Historical Financial Statements. The registrant arrived at this conclusion during the course of responding to inquiries arising from comments from the SEC relating to the registrants Annual Report on Form 10-K for the fiscal year ended September 30, 2005 and Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2005.

The Historical Financial Statements are being restated to reflect self-insured general and professional liability claims and workers compensation claims on an undiscounted basis and to consolidate certain joint venture partnerships in accordance with FIN 46 (later defined). In addition, the restatement includes changes in certain account classifications to conform with U.S. generally accepted accounting principles and to correct all errors previously reported by the registrant to include them in the appropriate period.

This Amendment is being filed solely for the purpose of amending and restating Items 6, 7, 7A, 8, 9 and 9A of Part II and Item 15 of Part IV of the Annual Report on Form 10-K originally filed solely to the extent necessary (i) to reflect the restatement of the Historical Financial Statements as described in note 3  Restatement of Consolidated Financial Statements to the consolidated financial statements, (ii) to make revisions to Managements Discussion and Analysis of Financial Condition and Results of Operations as warranted by the restatement, (iii) to make revisions to Item 9A of Part II to reflect the registrants evaluation of controls and procedures as of the date of filing this Amendment, (iv) to include the certifications required by the Sarbanes-Oxley Act of 2002 and (v) to update Schedule II Valuation and Qualifying Accounts. The
registrant has also made conforming updates to the index and signature pages.

With the exception of figures impacted by the restatement and minor typographical errors, the registrant has made no further changes to Cautionary Statements Regarding Forward-Looking Statements, Risk Factors, Part I or Part III of the originally filed Form 10-K. Therefore, this Amendment continues to describe conditions (including, without limitation, conditions related to Revenue Sources) as of the date of the original filing of the Annual Report on Form 10-K. Accordingly, this Amendment should be read in conjunction with the registrants filings made subsequent to the filing of the original Form 10-K. The registrant has not amended its Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for periods affected by the restatement that ended prior to September 30, 2005, and the consolidated financial statements and related financial information contained in such reports should
no longer be relied upon.






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INDEX



|Cautionary Statements Regarding Forward-Looking Statements | 1
|---------------------------------------------------------- | -
|                                                           |  
|Risk Factors                                               |  
|                                                           |  
|PART I                                                    
|                                                           |  
|ITEM 1:                                                    |  
|                                                           |  
|ITEM 1B:                                                   |  
|                                                           |  
|ITEM 2:                                                    |  
|                                                           |  
|ITEM 3:                                                    |  
|                                                           |  
|ITEM 4:                                                    |  
|                                                           |  
|ITEM 4A:                                                   |  
|                                                           |  
|PART II                                                   
|                                                           |  
|ITEM 5:                                                    |  
|                                                           |  
|ITEM 6:                                                    |  
|                                                           |  
|ITEM 7:                                                    |  
|                                                           |  
|ITEM 7A:                                                   |  
|                                                           |  
|ITEM 8:                                                    |  
|                                                           |  
|ITEM 9:                                                    |  
|                                                           |  
|ITEM 9A:                                                   |  
|                                                           |  
|ITEM 9B:                                                   |  
|                                                           |  
|PART III                                                  
|                                                           |  
|ITEM 10:                                                   |  
|                                                           |  
|ITEM 11:                                                   |  
|                                                           |  
|ITEM 12:                                                   |  
|                                                           |  
|ITEM 13:                                                   |  
|                                                           |  
|ITEM 14:                                                   |  
|                                                           |  
|PART IV                                                   
|                                                           |  
|ITEM 15:                                                   |  



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Cautionary Statements Regarding Forward-Looking Statements

As used herein, unless the context otherwise requires, all references to GHC, the Company, 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 SEC that warn of risks or uncertainties associated with future results, events or circumstances also identify factors that could cause actual results to differ materially from those expressed in or implied by the forward-looking statements.

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

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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. Risk factors, most notably those pertaining to our revenue sources, are updated in interim periods to reflect the reimbursement environment, which changes frequently, as of the reporting date. The risk factors described in this Amendment are as of the original filing date of our Annual Report on Form 10-K for the fiscal year ended September 30, 2005 and have not been updated. Accordingly, these risk factors should be read in conjunction with the revenue source update contained in managements discussion and analysis of financial condition and results of operations in our quarterly reports filed subsequent to December 14, 2005, the original
filing date of the Annual Report.

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 results of operations.

Our inpatient services business currently receives approximately 81% 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 impact our 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 revenues could 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.

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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 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 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.

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 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.

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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 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 and state 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 these programs 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 closure of 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 with or 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.

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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 payors. Certain of our centers have received notices that, as a result of alleged deficiencies, federal and/or state agencies were taking steps to impose remedies. Additionally, actions taken against one center or service site may subject other centers or service sites under common control or ownership to 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.

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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.

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.

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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.

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 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 outside contractors for these services at premium rates. Furthermore, the competitive 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 in skilled 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 in the 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 on expensive 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 and cash 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.

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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;
| | - | --------------------------

| |  | merge
        or consolidate; and
| | - | ---------------------------------

| |  | transfer
        or sell assets.
| | - | --------------------------------

Our ability to comply with these covenants is subject to various risks and uncertainties. In addition, events beyond our control could affect our ability to comply with and maintain the financial tests and ratios. Any failure by us to comply with and maintain all applicable financial tests and ratios and to comply with all applicable covenants could result in an event of default with respect to, and the acceleration of the maturity of, and the termination of the commitments to make further extension of credit under, a substantial portion of our debt. If we were unable to repay debt to our senior lenders, these lenders could proceed against the collateral securing that debt. Even if we are able to comply with all applicable covenants, the restrictions on our ability to operate our business in our sole discretion could harm our business by, among other things, limiting our 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 to generate 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.

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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 or new interpretations of existing accounting standards that sometimes require us to change our accounting policies and procedures. Future pronouncements or interpretations could require us to change our policies or procedures and have 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.

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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 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.

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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 and may be taxable to holders of NCI common stock who received shares of our common stock in the spin-off. In such case, we would be required to indemnify NCI against any taxes and related losses. 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.

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 the NASDAQ National Market System on December 2, 2003 under the symbol GHCI.

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.

Our business is comprised of two primary business segments: inpatient services and rehabilitation therapy services. These segments are supported by complementary service capabilities.

Approximately 90% of our net revenues are generated through inpatient services. Our inpatient services are offered through a network of skilled nursing 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 assisted living 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 other complementary healthcare services, the revenues for which are included in all other services revenues in our segment financial information.

Inpatient Services

Our eldercare centers are located 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 comprehensive approach to the complex needs facing the elderly, which we believe has resulted in 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.

We employ physicians, physician assistants and nurse practitioners who are primarily involved in providing medical direction and/or direct patient care at each center. The emphasis on physician leadership is a strength that differentiates us from many other long-term care companies. In addition to physician executives, nursing center medical directors are administratively and clinically accountable for clinical care and quality improvement. The nursing center medical directors are dually accountable to the administrator and the physician executive. This medical staff structure allows for significant involvement of physicians at all levels of 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. In addition to
clinical care, our centers provide our customers with dietary, housekeeping and laundry services, as well as social 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 elderly patients 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 hospital stay 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 care patient 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 a cost-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                            
|                                                                           |  | (Restated)                      
|Average
        Beds in Service:                                           |  |                                 
|Owned
        and Leased Facilities, including Consolidated VIEs          |  | 21,167                          
|Managed
        and Jointly-Owned Facilities, excluding Consolidated VIEs |  | 5,482                           
|Occupancy
        Based on Average Beds in Service:                        |  |                                 
|Owned
        and Leased Facilities, including Consolidated VIEs          |  | 90                              

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                    
|                              |  | (Restated)              
|Medicaid                      |  | 54                      
|Medicare                      |  | 27                      
|Private
        pay and other |  | 19                      
|                              |  | 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  Government Regulation.

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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 contract to healthcare facilities operated by others and through our 13 certified outpatient rehabilitation agencies. For the fiscal year ended September 30, 2005, approximately 61% 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 services provided 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.

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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.

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 rehabilitation 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.

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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.

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s elderly meet hospital and other healthcare costs. The Medicare program consists of four parts: (i) Medicare Part A, which covers, among other things, inpatient hospital, skilled long-term care, home healthcare and certain other types of healthcare services; (ii) Medicare Part B, which covers physicians services, outpatient services, certain prescription drugs, and certain items and services provided by medical suppliers; (iii) a managed care option for beneficiaries who are entitled to Medicare Part A and enrolled in Medicare Part B, known as Medicare Advantage or Medicare Part C and (iv) a new Medicare Part D
benefit that becomes effective January 1, 2006 covering prescription drugs.  Under Medicare Part B, we are entitled to payment for medically necessary therapy services and products that replace a bodily function (i.e., ostomy supplies), home medical equipment and supplies and a limited number of specifically designated prescription drugs. The Medicare program is administered by 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.

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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.

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.

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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.

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.

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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.

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.

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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. Recognition of the Pennsylvania provider assessment resulted 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 net income 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 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, 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 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 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 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 $11.1 million, $20.3 million and $21.0 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 expected to continue.

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

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

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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;
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| |  | the inability to operate the centers;
| | - | -------------------------------------

| |  | the inability to complete the acquisition, addition or other change; and
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| |  | the imposition of sanctions or adverse action on the centers license and adverse reimbursement action.
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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 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 a number 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 Health and Human Services, or DHHS, has issued a series of voluntary compliance guidelines. These compliance guidelines provide guidance on acceptable practices. Skilled nursing facility services and durable medical equipment, prosthetics, orthotics, supplies, and supplier performance practices have been among the services addressed in these publications. Our Corporate Integrity Program is working to assure that our practices conform to regulatory requirements. DHHS also issues fraud alerts and advisory opinions. For example, directives concerning double billing, home health services, the provision of medical supplies to nursing facilities, and most recently, contractual joint venture
relationships have been released. It is anticipated that areas addressed by these advisories may come under closer scrutiny by the government. While we have reviewed government guidance, we cannot predict accurately the impact of any such initiatives.

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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 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 a material 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.

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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 outside contractors for these services at premium rates. Furthermore, the competitive 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
created added pressure on our operating margins. Lastly, increased attention to the quality of care provided in skilled 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 and sites of service appropriately and maintain our standards of quality care, there can be no assurance that continued shortages will not affect our ability to attract and maintain an adequate staff of qualified healthcare personnel in the future. A lack of qualified personnel at a facility could result in significant increases in labor costs and an increased reliance on expensive temporary agencies at such facility or otherwise adversely affect operations at such facility. Any of these developments could adversely affect
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.

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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 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.

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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 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.

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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 after we electronically file such material with, or furnish it to, the Securities and Exchange 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 Corporation

101 East State Street

Kennett Square, PA 19348

Attention: Investor Relations

Telephone: (610) 925-2000

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

ITEM 1B: UNRESOLVED STAFF COMMENTS

None.

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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  | 
|Pennsylvania   |  | 32                   |  | 4,218          |  | 8                   |  | 941   | 
|New Jersey     |  | 20                   |  | 2,820          |  | 7                   |  | 1,356 | 
|Maryland       |  | 13                   |  | 1,593          |  | 6                   |  | 803   | 
|Massachusetts  |  | 16                   |  | 2,183          |  | 2                   |  | 250   | 
|West Virginia  |  | 14                   |  | 1,306          |  | 5                   |  | 394   | 
|Connecticut    |  | 9                    |  | 1,330          |  | -                   |  | -     | 
|New Hampshire  |  | 10                   |  | 972            |  | 2                   |  | 208   | 
|Delaware       |  | 5                    |  | 583            |  | -                   |  | -     | 
|Virginia       |  | 2                    |  | 210            |  | 1                   |  | 240   | 
|Rhode Island   |  | 3                    |  | 373            |  | -                   |  | -     | 
|North Carolina |  | -                    |  | -              |  | -                   |  | -     | 
|Vermont        |  | 3                    |  | 314            |  | -                   |  | -     | 
|Total          |  | 127                  |  | 15,902         |  | 31                  |  | 4,192 | 

|(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 effort to 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 million in subordinated debentures prior to the filing by NeighborCare, Inc. and substantially all of our subsidiaries of a Chapter 11 bankruptcy petition in 2000. The claim alleges fraud and grossly negligent misrepresentation by defendants NeighborCare, Inc., Goldman Sachs & Co., Mellon Bank, N.A., Highland Capital Management, LP, and George V. Hager, Jr., our Chief Executive Officer (and former Chief Financial Officer of NeighborCare, Inc. prior to the spin-off), in connection with the Bankruptcy Courts approval of the plan of reorganization confirmed by the Bankruptcy Court in 2001 which canceled the subordinated debentures. The plaintiffs
seek to recover $200.0 million plus interest costs and fees. The action was removed to the United States Bankruptcy Court for the District of Delaware. In July 2004, we received notice from NeighborCare, Inc. indicating that it believes we are responsible for 50% of the legal fees related to this matter. In addition, Mellon Bank, N.A. has asserted a claim against NeighborCare, Inc. for indemnification for expenses and damages related to the former investors claim. On March 28, 2005, the Bankruptcy Court ruled that NeighborCare, Inc. would be obligated to reimburse Mellon Bank, N.A. for expenses and damages relating to the claim, other than any expenses or damages determined by the Bankruptcy Court to have resulted from Mellon Banks gross negligence or willful misconduct. On April 27, 2005 the Bankruptcy Court dismissed the plaintiffs complaint against all named defendants. Plaintiff has appealed the Bankruptcy Courts decision. While we have advanced
NeighborCare, Inc. 50% of the deductible under the insurance policy related to the former investors claim, we have not made a determination with 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. McKeonhas 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 Reitzhas 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. Almquisthas 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. Blinnhas 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. Hauswaldhas 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 DiVittoriohas 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 common stock reported on the NASDAQ National Market System.



|Quarter Ended      |  | High |       | Low |  
|------------------ |  | ---- | ----- | --- | -
|                   |  |      |       |     |  
|December 31, 2004  |  | $    | 36.70 |     | $
|March 31, 2005     |  |      | 43.27 |     |  
|June 30, 2005      |  |      | 46.62 |     |  
|September 30, 2005 |  |      | 47.96 |     |  



|Quarter Ended      |  | High |       | Low |  
|------------------ |  | ---- | ----- | --- | -
|                   |  |      |       |     |  
|December 31, 2003  |  | $    | 24.40 |     | $
|March 31, 2004     |  |      | 28.47 |     |  
|June 30, 2004      |  |      | 29.04 |     |  
|September 30, 2004 |  |      | 31.09 |     |  

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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 Numberof SharesRepurchased |  | AveragePrice Paidper Share |       | Total Number ofShares Purchasedas Part of PubliclyAnnounced Plansor Programs (1) |         | Approximate DollarValue of Shares thatMay Yet BePurchased Under thePlans or Programs (1) |  
|---------------- |  | -------------------------------- |  | -------------------------- | ----- | -------------------------------------------------------------------------------- | ------- | ---------------------------------------------------------------------------------------- | -
|7/1/05 - 7/31/05 |  | -                                |  | $                          | -     |                                                                                  | -       |                                                                                          | $
|8/1/05 - 8/31/05 |  | 84,237                           |  |                            | 41.40 |                                                                                  | 84,237  |                                                                                          |  
|9/1/05 - 9/30/05 |  | 86,500                           |  |                            | 39.88 |                                                                                  | 86,500  |                                                                                          |  
|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, 2005. 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 |           |            | PredecessorCompany (3) |           
|--------------------------------------------------------------------------------------- |  | ------------------------- | --------- | ---------- | ---------------------- | ----------
|Year
        ended September 30,                                                        |  | 2005                      |           | 2004       |                        | 2003      
|Statement
        of Operations Data (1)(in thousands, except per share and ratio data) |  | (Restated)                |           | (Restated) |                        | (Restated)
|Net
        revenues                                                                    |  | $                         | 1,711,433 |            | $                      | 1,558,197 
|Income
        from continuing operations                                               |  |                           | 46,228    |            |                        | 30,449    
|Net
        income                                                                      |  | $                         | 46,068    |            | $                      | 28,242    
|Diluted
        earnings per share from continuing operations (2)                       |  | $                         | 2.31      |            | $                      | 1.51      
|Diluted
        earnings per share from net income (2)                                  |  | $                         | 2.30      |            | $                      | 1.40      
|Ratio
        of earnings to fixed charges                                              |  |                           | 2.85      | x          |                        | 2.35      
|Operating
        Data of Inpatient Services Segment:                                   |  |                           |           |            |                        |           
|Payor
        Mix:                                                                      |  |                           |           |            |                        |           
|Medicaid                                                                                |  |                           | 54        | %          |                        | 51        
|Medicare                                                                                |  |                           | 27        | %          |                        | 29        
|Private
        pay and other                                                           |  |                           | 19        | %          |                        | 20        
|Average
        owned/leased eldercare center beds, including consolidated VIEs         |  |                           | 21,167    |            |                        | 21,621    
|Occupancy
        percentage                                                            |  |                           | 90        | %          |                        | 91        
|Average
        managed eldercare center beds, excluding consolidated VIEs              |  |                           | 5,482     |            |                        | 4,870     



|At September 30,                               |  | 2005       |           | 2004       |   | 2003       |  | 2002       |           | 2001       |  
|---------------------------------------------- |  | ---------- | --------- | ---------- | - | ---------- |  | ---------- | --------- | ---------- | -
|Balance Sheet Data (in thousands)              |  | (Restated) |           | (Restated) |   | (Restated) |  | (Restated) |           | (Restated) |  
|Working capital                                |  | $          | 214,864   |            | $ | 199,144    |  | $          | 94,130    |            | $
|Total assets                                   |  |            | 1,412,700 |            |   | 1,372,848  |  |            | 1,150,525 |            |  
|Long-term debt, including current installments |  |            | 451,096   |            |   | 484,514    |  |            | 318,774   |            |  
|Shareholders' equity                           |  | $          | 650,813   |            | $ | 555,076    |  | $          | 563,447   |            | $

|(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 8 Financial Statements and Supplementary Data under note 3 Restatement of Consolidated Financial Statements. Also, 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 90% 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 72% 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 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.

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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

Restatement of Consolidated Financial Statements

Subsequent to filing our Annual Report on Form 10-K for the fiscal year ended September 30, 2005, certain accounting errors were identified requiring the restatement of our previously issued consolidated financial statements.

Our policy with respect to discounting self-insured outstanding losses and loss expenses for both general and professional liability and workers compensation liability claims was reassessed, and we determined that such discounting was not in accordance with U.S. generally accepted accounting principles. In connection with the evaluation of our accounting for self-insurance loss reserves, we also identified an accounting error that, upon correction, results in an increase to self-insurance loss reserves and related expenses of $2.2 million in fiscal 2004 and corresponding decreases in fiscal 2005.

We also reassessed whether certain of the transaction structures of our jointly owned and managed facilities create variable interest entities (VIEs) and whether we are the primary beneficiary of the VIEs, within the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin (ARB) 51(FIN 46). Upon re-examination of the interests at January 1, 2003 of all parties associated with all 12 of our previously unconsolidated jointly owned and managed facilities, we have concluded that nine of the transaction structures are or were VIEs, seven of which we are the primary beneficiary. Of these seven, we subsequently acquired 100% of the interests of one of the VIEs (the acquired VIE) and the conditions that caused one of the
facilities to be a VIE were extinguished in May 2004 (the former VIE). Consequently, we consolidated the financial statements of five previously unconsolidated VIEs beginning January 1, 2003, the acquired VIE from January 1, 2003 through December 31, 2004 and the former VIE from January 1, 2003 through May 31, 2004.

Also, as disclosed in our original Annual Report on Form 10-K for the fiscal year ended September 30, 2005, certain additional errors were identified and corrected by us in our previously issued fiscal 2005 consolidated financial statements. These errors involved accounting for operating lease expense on a straight-line basis, the classification of certain leases, accounting for our stock held in a deferred compensation plan, the useful lives assigned to certain fixed assets and unaccrued costs resulting from errors in purchasing cut-off. Based upon an evaluation conducted in fiscal 2005, we previously concluded that the errors were not material to our consolidated financial statements taken as a whole and adjusted for the errors in the period such errors were identified.

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Our previously issued consolidated financial statements as of September 30, 2005 and 2004 and for each of the years in the three-year period ended September 30, 2005 have been restated herein to correct all of the errors previously described. These corrections, along with certain other immaterial errors that were identified and corrected in the appropriate periods, are illustrated in more detail under Item 8  Financial Statements and Supplementary Data under note 3  Restatement of Consolidated Financial Statements, to the consolidated financial statements.

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.

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.

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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, 2005. 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 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 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.

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Purchase of Joint Venture Interests

Effective January 1, 2005, we acquired our joint venture partners interest in a Commonwealth of Massachusetts skilled nursing facility having 123 beds. Prior to that acquisition, we owned a 50% interest in the facility and consolidated its operations with ours upon adoption of FIN 46 effective January 1, 2003 as we determined we were the primary beneficiary of the partnership. See  Restatement of Consolidated Financial Statements included herein. Upon completion of the transaction, we owned 100% of the facility and adjusted the carrying value of the acquired interest in the assets and liabilities to fair value as of January 1, 2005. The aggregate consideration consisted of cash of $0.5 million to acquire the remaining partnership interests and the assumption of approximately $6.0 million of partnership 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 Amendments to NCI Agreements.

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.

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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 mutually recognized 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 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.

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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.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Five of the above described center lease transactions were classified as capital leases, which had the effect of increasing total assets and total liabilities (principally debt) approximately $34.0 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 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.

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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       |  
|----------------------------------------------- |  | ---------- | ------ | ---------- | - | ---------- | -
|                                                |  | (Restated) |        | (Restated) |   | (Restated) |  
|Net revenues                                    |  | $          | 10,817 |            | $ | 43,496     |  
|Net operating loss of discontinued businesses   |  | $          | (183   | )          | $ | (3,442     | )
|Loss on discontinuation of businesses           |  |            | (86    | )          |   | (249       | )
|Income tax benefit                              |  |            | 109    |            |   | 1,484      |  
|Loss from discontinued operations, net of taxes |  | $          | (160   | )          | $ | (2,207     | )

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

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Subsequent
  Events

Subsequent to September 30, 2005, we:

| |  | Repurchased an additional 288,405 shares of our common stock at a cost of $10.7 million.
| | - | ----------------------------------------------------------------------------------------

| |  | Paid
        $4.1 million to acquire all of our joint venture partners interests
        in three partnerships that each own a skilled nursing facility located
        in the State of West Virginia having a combined 208 beds. We currently
        own a 50% interest in each partnership and manage the operations of each
        of the three facilities, but upon completion of the transaction will own
        100% of each partnership and will therefore consolidate the related revenues,
        expenses and net assets of each facility. In accordance with FIN 46, we
        already consolidate the financial statements of one of the partnerships
        and record minority interest to reflect our joint venture partners
        interests. Because we extended this partnership mortgage financing, we
        are the primary beneficiary of the partnership, as defined by FIN 46,
        and therefore consolidate it. The combined annual revenues and pre tax
        income of the two unconsolidated partnerships is approximately $10.0 million
        and $1.2 million, respectively. The transaction closed on June 1, 2006.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Repurchased $8.2 million of 8% senior subordinated notes resulting in prepayment premium charges and write-off of unamortized deferred financing fees and other fees of $0.8 million.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Authorized
        the repurchase of up to $150.0 million of our common stock, with such
        repurchases to take place at our managements discretion and/or under
        pre-established, non-discretionary programs from time to time, depending
        on market conditions, in the open market and in privately negotiated transactions,
        subject to any covenants or restrictions contained in agreements governing
        our indebtedness. Repurchases of common stock are restricted by our debt
        agreements, the most restrictive of which is our 8% senior subordinated
        notes. Such restrictions preclude repurchases of common stock above 50%
        of our net income since July 1, 2003. After considering common stock repurchases
        made to date and other repurchase provisions, our maximum common stock
        repurchasing capacity at March 31, 2006 is $14.5 million.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Announced that we signed an agreement to enter into lease and purchase option agreements with an unrelated provider of long-term care that operates 11 facilities with a combined total of approximately 970 skilled nursing and assisted living facility beds located in the state of Maine. The most significant terms of the transaction assume we will enter into 11 separate agreements to lease the facilities over a 10-year term, with two five-year renewal options. We will also assume an option to purchase all 11 properties in 2026 for $53.0 million. We expect to account for the transaction as a capital lease. We would pay approximately $16.0 million of cash consideration upon closing the transaction and the related capital lease obligation balance is expected to approximate $40.0 million. The 11 facilities currently generate approximately $65.0 million of annual revenue. The closing of the
transacti
on,
which is expected to occur in the last calendar quarter of 2006, is subject to receipt of regulatory approvals and various other customary conditions. Accordingly, no assurances can be given that the transaction will be consummated or, if it is, what the final terms will be or what its ultimate impact will be on our financial condition or results of operations.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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.

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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      
|                              |  | (Restated)                       | (Restated)
|Medicaid                      |  | 54                               | %         
|Medicare                      |  | 27                               | %         
|Private
        pay and other |  | 19                               | %         
|                              |  | 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 healthcare coverage plans to compete with Medicare initially on a pilot basis.

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.

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

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The plight of state governments has helped to elevate issues related to Medicaid onto the national agenda. 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 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. Recognition of the Pennsylvania provider assessment resulted 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 net income 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 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, 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 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 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 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 financial condition and results of operations.

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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.

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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 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 these financial measures are useful for trending, analyzing and benchmarking the performance and value of our business. By excluding certain expenses and other items that may not be indicative of our core business operating results, these non-GAAP financial measures:

| |  | allow investors to evaluate our performance from managements perspective, resulting in greater transparency with respect to supplemental information used by us in our financial and operational decision making;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | facilitate comparisons with prior periods and reflect the principal basis on which management monitors financial performance; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------

| |  | facilitate comparisons with the performance of others in the long-term care services industry.
| | - | ----------------------------------------------------------------------------------------------

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 the 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. The presentation of these non-GAAP financial measures is consistent with our past practice and we believe such measures further enable investors and analysts to compare current non-GAAP measures with non-GAAP measures presented in prior periods.

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.

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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.

Reconciliation of Net Income to EBITDA and Adjusted EBITDA

|                                                        |  | Year  ended September 30, |        
|------------------------------------------------------- |  | ------------------------- | -------
|(in thousands)                                          |  | 2005                      |        
|                                                        |  | (Restated)                |        
|                                                        |  |                           |        
|Net income                                              |  | $                         | 46,068 
|Add back:                                               |  |                           |        
|Cumulative effect of an accounting change, net of taxes |  |                           | -      
|Loss from discontinued operations, net of taxes         |  |                           | 160    
|Equity in net income of unconsolidated affiliates       |  |                           | (2,600 
|Minority interests                                      |  |                           | 1,494  
|Income tax expense                                      |  |                           | 28,644 
|Interest expense                                        |  |                           | 28,809 
|Depreciation and amortization expense                   |  |                           | 53,704 
|EBITDA                                                  |  | $                         | 156,279
|Gain on early extinguishment of debt (1)                |  |                           | -      
|Adjusted EBITDA                                         |  | $                         | 156,279

|(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 $1,711.4 million, an increase of $153.2 million, or 9.8%, over the prior year. Of this growth, inpatient services revenue increased by $141.1 million, external rehabilitation therapy services revenue increased by $10.4 million and external other businesses revenue increased by $1.7 million.

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The $141.1 million of revenue growth in our inpatient services segment is primarily attributed to increased payor rates and acquisitions. In aggregate, payor rates increased by $142.1 million versus the prior year with $116.1 million of such increase occurring in the Medicaid payor category, of which $74.4 million was due to provider tax assessments in 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 in New Jersey, Pennsylvania or Connecticut. Medicaid revenue settlements and adjustments increased by $2.0 million versus the prior year period. The $39.7 million balance of Medicaid rate increases, which equate to a 5.6% increase, resulted from both increased acuity levels and legislative increases. A 5.1% 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 $6.4 million of the overall revenue increase is due to the step acquisition of two 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 $4.6 million of increased revenues. Remaining net revenue increases of $3.4 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 $5.8 million revenue decline as the result of the deconsolidation of one eldercare center effective May 31, 2004
pursuant to FIN 46, a $3.8 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 a $5.8 million revenue decline resulting from a decline in overall occupancy. Overall occupancy declined to 90.2% in the current year period from 90.8% in the same period in the prior year. Total patient days decreased 52,230 patient days to 6,909,017 in the current year period compared to 6,961,247 in the same period of the prior year. A 27,896 patient day increase attributed to the step acquisitions of two eldercare centers was offset by a decline of 23,530 patient days as the result of the deconsolidation of one eldercare center effective May 31, 2004 pursuant to FIN 46, a decline of 19,020 patient days as the result of the current year having one less day than the prior year and a 37,576 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 $10.4 million (or 8.7%) increase in external rehabilitation therapy services revenue.

The $1.7 million increase in external other business revenue primarily resulted from $2.6 million of increased volume in our respiratory therapy business and $0.8 million of net increases primarily due to increased management fee revenues. The preceding was partially offset by $1.7 million of decreased external business volume in our non-core hospitality, physician services and staffing services businesses.

Fiscal 2005 net income increased to $46.1 million from $28.2 million in the same period in the prior year. Revenue increases of $153.2 million, as previously discussed, were partially offset by $51.2 million of increased salaries, wages and benefits and $73.9 million of higher other operating expenses. Of the $51.2 million of increased salaries, wages and benefits, $3.4 million is attributed to the step acquisitions of two eldercare centers, approximately $6.4 million is attributed to the replacement of higher cost temporary agency nurses with internally employed nurses, offset by a decline of $2.9 million as the result of the deconsolidation of one eldercare center effective May 31, 2004 pursuant to FIN 46. The balance of the remaining increase in salaries, wages and benefits is 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 $73.9 million of increased other operating expenses, $61.2 million is attributed to increased provider assessments primarily in 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, $1.4 million is attributed to step acquisitions of two eldercare centers and $1.7 million is attributed to increased training costs associated with employee safety programs. These increases in other operating expenses
were offset by approximately  $3.4 million of decreased general and professional liability insurance, $6.9 million of reduced costs attributed to the replacement of higher cost temporary agency nurses with internally employed nurses and $1.7 million of reduced costs as the result of the deconsolidation of one eldercare center effective May 31, 2004 pursuant to FIN 46. The balance of the increase in other operating expenses of approximately $12.7 million is largely attributed to normal inflationary increases in cost. General and administrative costs increased by $10.7 million with $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 and income tax expense as further discussed below. Net income increased due to lower lease expense, lower interest expense, higher investment income, lower after-tax losses of discontinued operations and higher earnings of less than 100% owned subsidiaries, each of which is further discussed below.

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For fiscal 2005, EBITDA increased $21.4 million to $156.3 million compared with $134.9 million in the same period of the prior year. Inpatient services EBITDA increased $41.3 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 $1.3 million of the increase is due to step acquisitions of two eldercare centers and $2.2 million is due to decreased lease expense, which is further described below, offset by reduced EBITDA of $1.1 million as the result of the deconsolidation of one eldercare center effective May 31, 2004 pursuant to FIN 46. The remaining $22.7 million increase in EBITDA resulted from the
previously discussed other increases 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 $6.8 million with $14.6 million of combined external and intersegment revenue increases being offset by $14.1 million of higher labor related costs, $5.6 million of increased utilization of temporary agencies and a $1.7 million impairment charge to write-off the investment related to an abandoned rehabilitation services application system. 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 $3.0 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, partially offset by $2.1 million of net cost reductions primarily resulting from a decrease in estimate of self-insurance
liability claims.

Capital Costs and Other

Lease expense decreased by $2.2 million to $22.1 million in fiscal 2005, compared to $24.3 million for the same period in the prior year, primarily due to the purchase of six previously leased facilities.

Depreciation and amortization expense increased by $2.4 million to $53.7 million in fiscal 2005 compared to $51.3 million for the same period in the prior year. The increase is principally attributed to additional depreciation expense on incremental capital additions.

Interest expense decreased by $3.8 million to $28.8 million in fiscal 2005 compared to $32.6 million for the same period in the prior year, primarily due to repurchases of our 8% senior subordinated notes and the restructuring of our debt portfolio in the March 2005 quarter resulting in a decline in our overall weighted average interest rate.

Investment income increased by $2.6 million to $8.8 million in fiscal 2005 from $6.2 million for the same period in the prior year, primarily due to higher levels of interest bearing assets and higher investment yields.

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Income
  tax expense in fiscal 2005 was 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 $0.2 million in fiscal 2005 and $2.2 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 fiscal 2005 improved compared to the same period in the prior year, resulting in a combined increase of $1.8 million in equity in net income of unconsolidated affiliates and minority interests.

Fiscal 2004 Compared to Fiscal 2003

Fiscal 2004 revenues were $1,558.2 million, an increase of $148.8 million, or 10.6%, over the prior year. Of this growth, inpatient services revenue increased by $157.0 million, external rehabilitation therapy services revenue grew $0.2 million and external other businesses revenue declined $8.4 million.

The $157.0 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, $51.3 million is due to step acquisitions of seven eldercare centers, which we previously managed. We purchased our joint venture partners ownership interests in these seven 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  fiscal 2004 results than in fiscal 2003. Approximately $11.9 million of the inpatient services segment revenue growth is attributed to the net impact of consolidating certain VIEs effective January 1, 2003 pursuant to FIN 46 and $3.8 million of the increase is attributed to fiscal 2004 having one more calendar day than fiscal 2003 due to a leap 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 $201 compared to $188 for the prior year. This increase in the average rate per patient day is principally driven by increased average Medicaid rates ($161 in 2004 versus $149 in 2003) and Medicare rates per patient day ($350 in 2004 versus $314 in 2003). Of the $56.5 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 336,820 to 6,961,247 in fiscal 2004 compared to 6,624,427 in fiscal 2003. Of this increase, 277,912 patient days are attributed to the step acquisition of seven eldercare centers discussed above,
68,787 patient days are attributed to the net impact of consolidating certain VIEs pursuant to FIN 46, and 19,020 patient days are attributed to the current year having one additional calendar day due to a leap year. The remaining decline of 28,899 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 $0.2 million, or 0.1%. 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 $2.3 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 $4.7 million decline in external other business revenue, with the $3.7 million balance of the decline in other business revenue primarily resulting from reduced management fee revenue due to the step acquisitions of the seven previously managed properties discussed above.

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Fiscal
  2004 net income increased to $28.2 million from $10.0 million in the same period
  in the prior year. Revenue increases of $148.8 million, as discussed above,
  were partially offset by $88.0 million of increased salaries, wages and benefits
  and $8.8 million of increased other operating expenses. Of the $88.0 million
  of increased salaries, wages and benefits, $27.4 million is attributed to the
  step acquisition of the seven eldercare centers, $6.0 million is attributed
  to the net impact of consolidating certain VIEs pursuant to FIN 46, 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 $8.8 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 seven eldercare centers and the consolidation
  of the VIEs pursuant to FIN 46. The $21.0 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 $0.7 million reduction in the provision
  for losses on accounts receivable and notes receivable. Net income was further
  reduced from a fiscal 2003 gain from the cumulative effect of an accounting
  change, increases in interest expense, depreciation and amortization expense,
  income tax expense, loss (gain) on early extinguishment of debt and lower earnings
  of less than 100% owned subsidiaries as further discussed below. Net income
  increased due to lower lease expense, higher investment income and lower after-tax
  losses of discontinued operations, each of which is further discussed below.

For fiscal 2004, Adjusted EBITDA was $134.9 million compared with $97.6 million in fiscal 2003. Increased Adjusted EBITDA in fiscal 2004 reflects a $54.7 million increase in the Adjusted 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, $3.8 million due to the step acquisition of seven eldercare centers, $2.1 million due to the consolidation of certain VIEs pursuant to FIN 46 and $5.9 million due to decreased lease expense, exclusive of the step acquisitions of three eldercare centers leases, primarily resulting from the conversion of five eldercare center leases from operating leases to capital leases in connection with the ElderTrust transactions. The remaining $35.0 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 $14.3 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, with the balance of the Adjusted EBITDA decline primarily due to 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 fiscal 2004 decreased Adjusted EBITDA by $1.7 million. The remaining decrease in Adjusted EBITDA of $1.4 million in fiscal
2004 is principally attributed to approximately $5.4 million of increased general and administrative costs driven by inflationary increases in cost and the incremental cost of operating independently of NCI, offset by approximately $4.0 million of net cost reductions primarily resulting from a decrease in the estimate of self-insurance liability claims.

Capital Costs and Other

Lease expense decreased by $3.5 million to $24.3 million in fiscal 2004 from $27.7 million in the prior year period primarily due to the conversion of five eldercare center leases from operating leases to capital leases in connection with the ElderTrust transactions, offset by the step acquisitions of three eldercare centers subject to leases.

Depreciation and amortization expense increased $10.1 million to $51.3 million in fiscal 2004 compared to $41.2 million for the same period in the prior year. The conversion of five eldercare center leases from operating leases to capital leases in connection with the ElderTrust transactions was responsible for $2.1 million of the increase.  The balance of 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 fiscal 2003 carve-out financial statements.

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Interest expense increased $12.8 million in fiscal 2004 to $32.6 million, compared to $19.8 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.

Investment income increased by $3.9 million to $6.2 million in fiscal 2004 from $2.3 million for the same period in the prior year, primarily due to our ability to hold and earn interest on our cash balances following the December 1, 2003 spin-off from NCI. Prior to the spin-off, any unrestricted cash accumulated by us was transferred to NCI.

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.

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 $2.2 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 fiscal 2003, including the sale of our discontinued Florida properties in the third quarter of fiscal 2003.

The $2.0 million gain reflected as a cumulative effect of an accounting change, net of taxes, was recognized in connection with our January 1, 2003 adoption of FIN 46. The gain represents the difference between the carrying value of our investments in certain of the VIEs and the underlying carrying values of the VIEs upon consolidation into our financial statements. These differences were principally caused by our establishment of collectibility reserves on amounts due to us from the VIEs prior to our adoption FIN 46.

Operating results of our less than 100% owned subsidiaries in fiscal 2004 declined compared to the same period in the prior year, resulting in a combined decrease of $0.3 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.

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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 $128.4 million and $144.3 million, respectively. The $15.8 million decline in cash flow from operations in fiscal 2005 primarily resulted from $30.5 million in accounts receivable growth and $31.6 million from the timing of payments to vendors and employees. Fiscal 2005 operating cash flow was $9.8 million higher than fiscal 2004 due to the non-recurring nature of advanced rent payments made in fiscal 2004 pursuant to the operating lease agreements entered into in
connection with the ElderTrust transactions. The remaining $36.5 million improvement in operating cash flow primarily resulted from growth in operations driven by increases in payor rates and the implementation of provider assessments in Pennsylvania and New Jersey.

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 $56.1 million, $32.1 million and $31.0 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, $38.9 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 five capital 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 $38.0 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 voluntary prepayment of the term loan portion of our senior credit facility, $5.2 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 had
  authorized the repurchase of up to $50.0 million of our common stock through
  December 31, 2005 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 288,405 shares of our common stock at
  a cost of $10.7 million.

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We believe that the net cash provided by our operating activities, supplemented as necessary with cash reserves and borrowings available under our 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 cash and investments in marketable securities of $103.5 million, which are held by LHC, our wholly owned captive insurance subsidiary incorporated under the laws of Bermuda. The restricted cash and 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 March 20, 2012. In July 2005, we registered with the SEC the resale of the convertible senior subordinated debentures and the relating guarantees 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 occurrence of 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 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.

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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.

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.

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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.

Contractual Obligations, Off-Balance Sheet Commitments and Commitments to Consolidated VIEs

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 |        
|------------------------------------------------- |  | ---------------------- | -------
|                                                  |  | (Restated)             |        
|Contractual Obligations                           |  | Total                  |        
|Long-term debt (including interest and rate swap) |  | $                      | 672,168
|Operating leases                                  |  |                        | 168,126
|Capital leases                                    |  |                        | 44,176 
|                                                  |  | $                      | 884,470

Long-term debt obligations include fixed and variable rate instruments, interest payments thereon, commitment fees payable to lenders for the unused portion of our revolving credit facility and payments under an interest rate swap agreement relative to one variable rate, non-recourse mortgage. Excluding rates fixed effectively by the aforementioned rate swap agreement, variable rate debt consists of two recourse mortgages having a combined principle balance of $8.0 million and two non-recourse mortgages having a combined principal balance of $18.3 million at September 30, 2005. The estimated interest payment obligation thereon is calculated using the effective rate for each mortgage at September 30, 2005. The weighted average effective rate of these four variable interest rate mortgages is 5.82%. The basis for determining the periodic interest rates for each of these variable instruments differs and
the actual rates paid in future periods could be significantly different than those estimated in the table above. For more information regarding the balances and terms of the components of our long-term debt obligations, see Item 8 - Financial Statements and Supplementary Data under note 10  Long-Term Debt in the notes to consolidated financial statements.

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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, including those with our joint venture partnerships determined to be VIEs and consolidated pursuant to FIN 46. These commitments as of September 30, 2005 are summarized as follows (in thousands):



|                              |  | Amount of Commitment Expiration Per Period |      
|----------------------------- |  | ------------------------------------------ | -----
|Off-Balance Sheet Commitments |  | Total                                      |      
|Lines of credit               |  | $                                          | 2,155
|Letters of credit             |  |                                            | 2,862
|Guarantees                    |  |                                            | 265  
|                              |  | $                                          | 5,282

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, including certain consolidated VIEs, 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.

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 certain of these partnerships using the equity method of accounting and, therefore, the assets, liabilities and operating results of these partnerships are not consolidated with ours. Certain other of our joint venture partnerships qualifying as VIEs, and where we are determined to be the primary beneficiary of such arrangements, are consolidated pursuant to FIN 46. The carrying value of our investment in unconsolidated joint venture partnerships is $6.1 million at September 30, 2005. Although we are not contractually obligated to fund operating losses of these partnerships in all cases, 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 consolidated VIE. The underlying loan commitments of our consolidated VIEs are non-recourse to us, with the exception of this guarantee. Credit risk represents the accounting loss that would be recognized at the reporting date if counter-parties failed to perform completely as contracted. The credit risk amounts are equal to the contractual amounts, assuming that the amounts are fully advanced and that no amounts could be recovered from other parties.

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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 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.

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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 $1.0 million per incident for workers compensation beginning May 1, 2005, and $0.5 million per incident prior to May 1, 2005. All claims above these per incident limits 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 outstanding losses for these liabilities is $106.6 million to $135.5 million ($92.8 million to $115.0 million net of amounts recoverable from third-party insurance carriers). Our recorded reserves for these liabilities were $98.9 million as of September 30, 2005, net of $14.9 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
cash and investments in marketable securities of $103.5 million at September 30, 2005 which are substantially restricted to securing the outstanding claim losses of LHC.

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.

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.

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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 care facilities.

Within our inpatient services segment, revenue and 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 established billing rates and the predetermined reimbursement rates, is deducted from gross revenue to determine net revenue. We recorded contractual adjustments from continuing operations of $330.8 million, $329.8 million and $341.5 million in fiscal year 2005, 2004 and 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 additional performance 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.

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 $51.0 million deferred tax asset and a corresponding increase to additional paid-in capital.

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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 in fiscal 2006, we  implemented 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  Financial Statements and Supplementary Data  note 2  Summary of Significant Accounting Policies  Stock Option Plan for information related to the pro forma effects of stock-based employee compensation on our reported results assuming application of the fair value recognition provisions of SFAS 123.

Other

We manage the operations of 42 independently and jointly owned eldercare centers, including consolidated VIEs, 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s Discussion and Analysis of Financial Condition and Results of Operations.

ITEM7A: 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 95% fixed and 5% variable, significantly reducing any exposure to rising rates of interest. We consolidate one VIE pursant to FIN 46 that entered into an interest rate swap agreement. The VIEs obligation under the interest rate swap agreement is non-recourse to us. The interest rate swap agreement effectively converts approximately $7.0 million of variable-rate debt (one month LIBOR) into fixed-rate debt (4.38%). The interest rate swap agreement matures on July 29, 2010.

At September 30, 2005, we have $119.3 million of cash and equivalents, including restricted 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 $1.2 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 FINANCIAL STATEMENTS



|                                                                                                      | Page
|----------------------------------------------------------------------------------------------------- | ----
|                                                                                                      |     
|Report of Independent Registered Public Accounting Firm                                               | 71  
|                                                                                                      |     
|Consolidated Balance Sheets as of September 30, 2005 and 2004                                         | 72  
|                                                                                                      |     
|Consolidated Statements of Operations for the years ended September 30, 2005, 2004 and 2003           | 73  
|                                                                                                      |     
|Consolidated Statements of Shareholders Equity for the years ended September 30, 2005, 2004 and 2003 | 74  
|                                                                                                      |     
|Consolidated Statements of Cash Flows for the years ended September 30, 2005, 2004, and 2003          | 75  
|                                                                                                      |     
|Notes to Consolidated Financial Statements                                                            | 76  
|                                                                                                      |     
|Schedule II  Valuation and Qualifying Accounts                                                       | 127 

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Report
  of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

Genesis HealthCare Corporation:

We have audited the accompanying consolidated balance sheets of Genesis HealthCare Corporation and subsidiaries (the Company) as of September 30, 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s management. Our responsibility is to express an opinion on these consolidated financial 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.

As disclosed in note 3 to the consolidated financial statements, the Company has restated the accompanying consolidated financial statements and related financial statement schedule.

We
  also have audited, in accordance with the standards of the Public Company Accounting
  Oversight Board (United States), the effectiveness of Genesis HealthCare 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 June 15, 2006expressed an
  unqualified opinion on managements assessment of, and an adverse opinion
  on the effective operation of, internal control over financial reporting.

/s/ KPMG LLP

Philadelphia, Pennsylvania

June
  15, 2006

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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 |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | --------- | ------------------ | -
|                                                                                                                                                                            |  | (Restated)         |           | (Restated)         |  
|Assets:                                                                                                                                                                     |  |                    |           |                    |  
|Current assets:                                                                                                                                                             |  |                    |           |                    |  
|Cash and equivalents                                                                                                                                                        |  | $                  | 107,350   |                    | $
|Current portion of restricted cash and investments in marketable securities                                                                                                 |  |                    | 39,875    |                    |  
|Accounts receivable, net of allowances for doubtful accounts of $22,982 and $29,632, at September 30, 2005 and 2004, respectively                                           |  |                    | 186,296   |                    |  
|Prepaid expenses and other current assets                                                                                                                                   |  |                    | 41,746    |                    |  
|Current portion of deferred income taxes                                                                                                                                    |  |                    | 43,148    |                    |  
|Current portion of assets held for sale                                                                                                                                     |  |                    | -         |                    |  
|Total current assets                                                                                                                                                        |  |                    | 418,415   |                    |  
|Property and equipment, net of accumulated depreciation of $173,714 and $129,864, at September 30, 2005 and 2004, respectively                                              |  |                    | 818,138   |                    |  
|Assets held for sale                                                                                                                                                        |  |                    | 3,911     |                    |  
|Restricted cash and investments in marketable securities                                                                                                                    |  |                    | 63,639    |                    |  
|Other long-term assets                                                                                                                                                      |  |                    | 85,094    |                    |  
|Deferred income taxes                                                                                                                                                       |  |                    | 13,789    |                    |  
|Identifiable intangible assets, net of accumulated amortization of $1,633 and $1,006, at September 30, 2005 and 2004, respectively                                          |  |                    | 1,095     |                    |  
|Goodwill                                                                                                                                                                    |  |                    | 8,619     |                    |  
|Total assets                                                                                                                                                                |  | $                  | 1,412,700 |                    | $
|Liabilities and Shareholders Equity:                                                                                                                                       |  |                    |           |                    |  
|Current liabilities:                                                                                                                                                        |  |                    |           |                    |  
|Current installments of long-term debt                                                                                                                                      |  | $                  | 5,419     |                    | $
|Accounts payable                                                                                                                                                            |  |                    | 56,266    |                    |  
|Accrued expenses                                                                                                                                                            |  |                    | 25,123    |                    |  
|Accrued compensation                                                                                                                                                        |  |                    | 68,032    |                    |  
|Accrued interest                                                                                                                                                            |  |                    | 7,794     |                    |  
|Current portion of self-insurance liability reserves                                                                                                                        |  |                    | 39,875    |                    |  
|Income taxes payable                                                                                                                                                        |  |                    | 1,042     |                    |  
|Total current liabilities                                                                                                                                                   |  |                    | 203,551   |                    |  
|Long-term debt                                                                                                                                                              |  |                    | 445,677   |                    |  
|Deferred income taxes                                                                                                                                                       |  |                    | -         |                    |  
|Self-insurance liability reserves                                                                                                                                           |  |                    | 73,952    |                    |  
|Other long-term liabilities                                                                                                                                                 |  |                    | 38,707    |                    |  
|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       |                    |  
|Additional paid-in capital                                                                                                                                                  |  |                    | 623,326   |                    |  
|Retained earnings                                                                                                                                                           |  |                    | 65,669    |                    |  
|Accumulated other comprehensive (loss) income                                                                                                                               |  |                    | (562      | )                  |  
|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    | )                  |  
|Total shareholders equity                                                                                                                                                  |  |                    | 650,813   |                    |  
|Total liabilities and shareholders equity                                                                                                                                  |  | $                  | 1,412,700 |                    | $

See accompanying notes to the consolidated financial statements.

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GENESIS
  HEALTHCARE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED SEPTEMBER 30, 2005, 2004 AND 2003

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

|                                                                                                                                                                                    |  | Year ended September 30, |           
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ----------
|                                                                                                                                                                                    |  | 2005                     |           
|                                                                                                                                                                                    |  | (Restated)               |           
|                                                                                                                                                                                    |  |                          |           
|Net revenues                                                                                                                                                                        |  | $                        | 1,711,433 
|Salaries, wages and benefits                                                                                                                                                        |  |                          | 1,030,282 
|Other operating expenses                                                                                                                                                            |  |                          | 388,551   
|General and administrative costs                                                                                                                                                    |  |                          | 100,215   
|Provision for losses on accounts receivable and notes receivable                                                                                                                    |  |                          | 11,054    
|Loss (gain) on early extinguishment of debt                                                                                                                                         |  |                          | 11,765    
|Lease expense                                                                                                                                                                       |  |                          | 22,102    
|Depreciation and amortization expense                                                                                                                                               |  |                          | 53,704    
|Interest expense                                                                                                                                                                    |  |                          | 28,809    
|Investment income                                                                                                                                                                   |  |                          | (8,815    
|Income before income tax expense, equity in net income of unconsolidated affiliates and minority interests                                                                          |  |                          | 73,766    
|Income tax expense                                                                                                                                                                  |  |                          | 28,644    
|Income before equity in net income of unconsolidated affiliates and minority interests                                                                                              |  |                          | 45,122    
|Equity in net income of unconsolidated affiliates                                                                                                                                   |  |                          | 2,600     
|Minority interests                                                                                                                                                                  |  |                          | (1,494    
|Income from continuing operations                                                                                                                                                   |  |                          | 46,228    
|Loss from discontinued operations, net of taxes                                                                                                                                     |  |                          | (160      
|Cumulative effect of an accounting change, net of taxes                                                                                                                             |  |                          | -         
|Net income                                                                                                                                                                          |  | $                        | 46,068    
|Per
        common share data in 2005 and pro forma per common share data in 2004
        (see note 2  Summary of Significant Accounting Policies -
        Earnings Per Share): | 
|Basic:                                                                                                                                                                              |  |                          |           
|Income from continuing operations                                                                                                                                                   |  | $                        | 2.34      
|Loss from discontinued operations                                                                                                                                                   |  |                          | (0.01     
|Net income                                                                                                                                                                          |  | $                        | 2.34      
|Weighted average shares                                                                                                                                                             |  |                          | 19,713,478
|                                                                                                                                                                                    |  |                          |           
|Diluted:                                                                                                                                                                            |  |                          |           
|Income from continuing operations                                                                                                                                                   |  | $                        | 2.31      
|Loss from discontinued operations                                                                                                                                                   |  |                          | (0.01     
|Net income                                                                                                                                                                          |  | $                        | 2.30      
|Weighted average shares                                                                                                                                                             |  |                          | 20,021,811

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 inGHC |          | Common
        stock |   | Additionalpaid-in capital |  | Retainedearnings |         | Accumulatedothercomprehensiveincome (loss) |   | Treasury
        stock |  | Common
        stockheld in deferredcompensationplan |      | Totalshareholdersequity |   | Totalcomprehensiveincome |  
|--------------------------------------------------------------------------------- |  | -------------------------- | -------- | -------------------- | - | ------------------------- |  | ---------------- | ------- | ------------------------------------------ | - | ---------------------- |  | ---------------------------------------------------- | ---- | ------------------------ | - | ------------------------ | -
|                                                                                  |  |                            |          |                      |   |                           |  |                  |         |                                            |   |                        |  |                                                      |      |                          |   |                          |  
|Balance
        at September 30, 2002 (Previously reported)                       |  | $                          | 601,925  |                      | $ | -                         |  | $                | -       |                                            | $ | -                      |  | $                                                    | 839  |                          | $ | -                        |  
|Restatement
        adjustments                                                   |  |                            | (12,798  | )                    |   | -                         |  |                  | -       |                                            |   | -                      |  |                                                      | -    |                          |   | -                        |  
|Balance
        at September 30, 2002 (Restated)                                  |  | $                          | 589,127  |                      | $ | -                         |  | $                | -       |                                            | $ | -                      |  | $                                                    | 839  |                          | $ | -                        |  
|Comprehensive
        income                                                      |  |                            |          |                      |   |                           |  |                  |         |                                            |   |                        |  |                                                      |      |                          |   |                          |  
|Net
        income (Restated)                                                     |  |                            | 10,036   |                      |   | -                         |  |                  | -       |                                            |   | -                      |  |                                                      | -    |                          |   | -                        |  
|Net
        unrealized gain on marketable securities                              |  |                            | -        |                      |   | -                         |  |                  | -       |                                            |   | -                      |  |                                                      | 262  |                          |   | -                        |  
|Unrealized
        loss on interest rate swap agreement (Restated)                |  |                            | -        |                      |   | -                         |  |                  | -       |                                            |   | -                      |  |                                                      | (338 | )                        |   | -                        |  
|Total
        comprehensive income (Restated)                                     |  |                            |          |                      |   |                           |  |                  |         |                                            |   |                        |  |                                                      |      |                          |   |                          |  
|Distributions
        to NCI, net of advances (Restated)                          |  |                            | (36,478  | )                    |   | -                         |  |                  | -       |                                            |   | -                      |  |                                                      | -    |                          |   | -                        |  
|Balance
        at September 30, 2003 (Restated)                                  |  | $                          | 562,685  |                      | $ | -                         |  | $                | -       |                                            | $ | -                      |  | $                                                    | 763  |                          | $ | -                        |  
|Comprehensive
        income                                                      |  |                            |          |                      |   |                           |  |                  |         |                                            |   |                        |  |                                                      |      |                          |   |                          |  
|Net
        income prior to the spin-off (Restated)                               |  |                            | 8,641    |                      |   | -                         |  |                  | -       |                                            |   | -                      |  |                                                      | -    |                          |   | -                        |  
|Net
        income subsequent to the spin-off (Restated)                          |  |                            | -        |                      |   | -                         |  |                  | -       |                                            |   | 19,601                 |  |                                                      | -    |                          |   | -                        |  
|Net
        unrealized loss on marketable securities                              |  |                            | -        |                      |   | -                         |  |                  | -       |                                            |   | -                      |  |                                                      | (880 | )                        |   | -                        |  
|Unrealized
        gain on interest rate swap agreement (Restated)                |  |                            | -        |                      |   | -                         |  |                  | -       |                                            |   | -                      |  |                                                      | 130  |                          |   | -                        |  
|Total
        comprehensive income (Restated)                                     |  |                            |          |                      |   |                           |  |                  |         |                                            |   |                        |  |                                                      |      |                          |   |                          |  
|Issuance
        of common stock in connection with the spin-off                  |  |                            | -        |                      |   | 199                       |  |                  | (199    | )                                          |   | -                      |  |                                                      | -    |                          |   | -                        |  
|Dividend
        and distributions to NCI, net of advances (Restated)             |  |                            | (571,326 | )                    |   | -                         |  |                  | 530,139 |                                            |   | -                      |  |                                                      | -    |                          |   | -                        |  
|Utilization
        of tax benefits under SOP 90-7                                |  |                            | -        |                      |   | -                         |  |                  | 6,593   |                                            |   | -                      |  |                                                      | -    |                          |   | -                        |  
|Issuance
        of common stock under stock option plan and stock incentive plan |  |                            | -        |                      |   | 1                         |  |                  | 2,522   |                                            |   | -                      |  |                                                      | -    |                          |   | -                        |  
|Purchases
        of common stock in deferred compensation plan                   |  |                            | -        |                      |   | -                         |  |                  | -       |                                            |   | -                      |  |                                                      | -    |                          |   | -                        |  
|Balance
        at September 30, 2004 (Restated)                                  |  | $                          | -        |                      | $ | 200                       |  | $                | 539,055 |                                            | $ | 19,601                 |  | $                                                    | 13   |                          | $ | -                        |  
|Comprehensive
        income                                                      |  |                            |          |                      |   |                           |  |                  |         |                                            |   |                        |  |                                                      |      |                          |   |                          |  
|Net
        income (Restated)                                                     |  |                            | -        |                      |   | -                         |  |                  | -       |                                            |   | 46,068                 |  |                                                      | -    |                          |   | -                        |  
|Net
        unrealized loss on marketable securities                              |  |                            | -        |                      |   | -                         |  |                  | -       |                                            |   | -                      |  |                                                      | (667 | )                        |   | -                        |  
|Net
        increase to minimum pension liability                                 |  |                            | -        |                      |   | -                         |  |                  | -       |                                            |   | -                      |  |                                                      | (157 | )                        |   | -                        |  
|Unrealized
        gain on interest rate swap agreement (Restated)                |  |                            | -        |                      |   | -                         |  |                  | -       |                                            |   | -                      |  |                                                      | 249  |                          |   | -                        |  
|Total
        comprehensive income (Restated)                                     |  |                            |          |                      |   |                           |  |                  |         |                                            |   |                        |  |                                                      |      |                          |   |                          |  
|Utilization
        of tax benefits under SOP 90-7                                |  |                            | -        |                      |   | -                         |  |                  | 20,893  |                                            |   | -                      |  |                                                      | -    |                          |   | -                        |  
|Pre
        emergence deferred tax valuation allowance adjustment (Restated)      |  |                            | -        |                      |   | -                         |  |                  | 50,979  |                                            |   | -                      |  |                                                      | -    |                          |   | -                        |  
|Issuance
        of common stock under stock option plan and stock incentive plan |  |                            | -        |                      |   | 4                         |  |                  | 10,489  |                                            |   | -                      |  |                                                      | -    |                          |   | -                        |  
|Purchases
        of common stock for treasury                                    |  |                            | -        |                      |   | -                         |  |                  | -       |                                            |   | -                      |  |                                                      | -    |                          |   | (32,096                  | )
|Purchases
        and sales of common stock in deferred compensation plan         |  |                            | -        |                      |   | -                         |  |                  | 1,910   |                                            |   | -                      |  |                                                      | -    |                          |   | -                        |  
|Balance
        at September 30, 2005 (Restated)                                  |  | $                          | -        |                      | $ | 204                       |  | $                | 623,326 |                                            | $ | 65,669                 |  | $                                                    | (562 | )                        | $ | (32,096                  | )

See accompanying notes to the consolidated financial statements.

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GENESIS
  HEALTHCARE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED SEPTEMBER 30, 2005, 2004 AND 2003

(IN THOUSANDS)



|                                                                                 |  | Year
        ended September 30, |         
|-------------------------------------------------------------------------------- |  | -------------------------------- | --------
|                                                                                 |  | 2005                             |         
|                                                                                 |  | (Restated)                       |         
|Cash
        flows from operating activities:                                    |  |                                  |         
|Net
        income                                                               |  | $                                | 46,068  
|Net
        charges included in operations not requiring funds:                  |  |                                  |         
|Non-cash
        compensation expenses                                           |  |                                  | 6,657   
|Loss
        on impairment of assets and other charges                           |  |                                  | 13,153  
|Depreciation
        and amortization                                            |  |                                  | 53,704  
|Provision
        for losses on accounts receivable and notes receivable         |  |                                  | 11,054  
|Equity
        in net income of unconsolidated affiliates and minority interests |  |                                  | (1,106  
|Provision
        (benefit) for deferred taxes                                   |  |                                  | 24,944  
|Amortization
        of deferred rents                                           |  |                                  | 943     
|Cumulative
        effect of accounting change                                   |  |                                  | -       
|Advanced
        rent payments on operating leases                               |  |                                  | -       
|Changes
        in assets and liabilities:                                       |  |                                  |         
|Accounts
        receivable                                                      |  |                                  | (24,591 
|Accounts
        payable and other accrued expenses                              |  |                                  | (1,708  
|Other,
        net                                                               |  |                                  | (673    
|Total
        adjustments                                                        |  |                                  | 82,377  
|Net
        cash provided by operating activities                                |  |                                  | 128,445 
|Cash
        flows from investing activities:                                    |  |                                  |         
|Capital
        expenditures                                                     |  |                                  | (56,100 
|Purchases
        of restricted marketable securities                            |  |                                  | (148,863
|Proceeds
        on maturity or sale of restricted marketable securities         |  |                                  | 146,893 
|Net
        change in restricted cash and equivalents                            |  |                                  | (3,310  
|Purchases
        of eldercare centers and lease amendments                      |  |                                  | (7,208  
|Purchase
        of rehabilitation services business                             |  |                                  | -       
|Proceeds
        from sales of eldercare assets                                  |  |                                  | 6,664   
|Consolidation
        of variable interest entities                              |  |                                  | (1,690  
|Other,
        net                                                               |  |                                  | 607     
|Net
        cash (used in) provided by investing activities                      |  |                                  | (63,007 
|Cash
        flows from financing activities:                                    |  |                                  |         
|Proceeds
        from issuance of long-term debt                                 |  |                                  | 180,000 
|Repayment
        of long-term debt                                              |  |                                  | (226,615
|Debt
        issuance costs and debt prepayment premium                          |  |                                  | (14,303 
|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                         |  |                                  | -       
|Other,
        net                                                               |  |                                  | (263    
|Net
        cash (used in) provided by financing activities                      |  |                                  | (86,038 
|Net
        (decrease) increase in cash and equivalents                          |  | $                                | (20,600 
|Cash
        and equivalents:                                                    |  |                                  |         
|Beginning
        of period                                                      |  |                                  | 127,950 
|End
        of period                                                            |  | $                                | 107,350 
|Supplemental
        disclosure of cash flow information:                        |  |                                  |         
|Interest
        paid                                                            |  | $                                | 28,457  
|Taxes
        paid                                                               |  |                                  | 4,562   
|Non-cash
        financing activities:                                           |  |                                  |         
|Capital
        leases                                                           |  | $                                | 3,951   
|Assumption
        of debt                                                       |  |                                  | 15,533  

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, leased and otherwise consolidated centers constitute approximately 90% of its revenues in fiscal 2005, and are presented in GHCs segment information as inpatient services revenues. Management fees earned from unconsolidated 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 21  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 10  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                           |          
|                                                                |  | (Restated)                            |          
|                                                                |  |                                       |          
|Net
        revenues                                            |  | $                                     | 1,558,197
|Income
        from continuing operations                       |  |                                       | 30,449   
|Diluted
        earnings per share  from continuing operations |  |                                       | 1.51     
|                                                                |  |                                       |          

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 $575.9 million.

Principles of Consolidation and Variable Interest Entities

The accompanying consolidated financial statements include the accounts of GHC, its wholly owned subsidiaries and its consolidated variable interest entities, as discussed further below. All significant intercompany accounts and transactions have been eliminated in consolidation for all periods presented.

In
  January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation
  No. 46, Consolidation of Variable Interest Entities,
  an interpretation of Accounting Research Bulletin (ARB) 51
  (FIN 46). FIN 46 provides guidance with respect to the consolidation of certain
  entities referred to as variable interest entities (VIEs). Under FIN 46, a VIE
  is created when (i) the equity investment at risk is not sufficient to permit
  the entity to finance its activities without additional subordinated financial
  support from other parties or (ii) equity holders either (a) lack direct or
  indirect ability to make decisions about the entity through voting or similar
  rights, (b) are not obligated to absorb expected losses of the entity or (c)
  do not have the right to receive expected residual returns of the entity if
  they occur. If an entity is deemed to be a VIE , pursuant to FIN 46, an enterprise
  that absorbs a majority of the expected losses or residual returns of the VIE
  is considered the primary beneficiary and must consolidate the VIE. FIN 46 also
  provides guidance with respect to the disclosure of VIEs for which an investor
  is not required to consolidate because the investor is not the primary beneficiary.



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GHC
  adopted FIN 46 effective January 1, 2003. In December 2003, the FASB issued
  a revision to this pronouncement, FIN 46R, which clarified certain provisions
  of FIN 46. GHC adopted the provisions of FIN 46R effective December 31, 2003.
  References herein to FIN 46 refer to FIN 46 or FIN 46R as these interpretations
  are applicable to the respective periods. In previously issued consolidated
  financial statements, GHC had identified two jointly owned and managed VIEs
  subject to consolidation under FIN 46 and FIN 46R, one of which was subsequently
  sold. Subequent to the filing of its Annual Report on Form 10-K on December
  14, 2005, GHC reassessed whether, due to certain of the transaction structures
  of its other jointly owned and managed facilities, these entities are VIEs and
  whether GHC is the primary beneficiary of the VIEs. Upon re-examination of the
  interests at January 1, 2003 of all parties associated with all 1 2 of GHCs
  previously unconsolidated jointly owned and managed facilities, GHC has concluded
  that nine of the transaction structures are, or were, VIEs, seven of which GHC
  is the primary beneficiary. Of these seven, GHC subsequently acquired 100% of
  the interests of one of the VIEs (the acquired VIE) and the conditions that
  caused one of the facilities to be a VIE were extinguished in May 2004 (the
  former VIE). Consequently, GHC must consolidate the financial statements of
  five previously unconsolidated VIEs beginning January 1, 2003, the acquired
  VIE from January 1, 2003 through December 31, 2004 and the former VIE from January
  1, 2003 through May 31, 2004. See note 3  Restatement of Consolidated
  Financial Statements below.

As restated, upon adoption of FIN 46 on January 1, 2003, GHC recorded an after-tax gain of $2.0 million reflecting the difference between the carrying value of GHCs investments in certain of the VIEs and the underlying carrying values of the VIEs upon consolidation into GHCs consolidated financial statements. The after-tax gain was recorded as a cumulative effect of an accounting change in the consolidated statement of operations for the year ended September 30, 2003.

In accordance with FIN 46, GHCs investments in variable interest entities in which it is the primary beneficiary are consolidated, while investments in variable interest entities in which it is not the primary beneficiary are accounted for under other accounting principles. Investments in and the operating results of 20% to 50% owned companies which are not variable interest entities are included in the consolidated financial statements using the equity method of accounting. Prior to the January 1, 2003 adoption of FIN 46, all investments in and the operating results of 20% to 50% owned companies were included in the consolidated financial statements using the equity method of accounting.

In
  total, at September 30, 2005 GHC has consolidated six VIEs, five in connection
  with the restatement and one previously consolidated. At September 30, 2005,
  total assets and debt of the consolidated VIEs are $50.8 million and $40.9 million,
  respectively; and at September 30, 2004, total assets and debt of the consolidated
  VIEs are $57.5 million and $47.8 million, respectively. The total assets of
  the VIEs principally consist of property and equipment which serves as collateral
  for the VIEs non-recourse debt and is not available to satisfy any of
  GHCs other obligations. Creditors of the VIEs, including senior lenders,
  have no recourse against the general credit of GHC. The consolidated VIEs own
  and operate skilled nursing and assisted living facilities having approximately
  700 beds. GHCs ownership interests in the consolidated VIEs range from
  25% to 50% and GHC manages the day-to-day operations of the consolidated VIEs
  under management agreements. GHCs involvement with the VIEs began in years
  prior to 2000.

In
  the case of two VIEs, GHC is not the primary beneficiary and, therefore, the
  VIE is not consolidated into its financial statements. At September 30, 2005,
  total assets and debt of the unconsolidated VIEs are $18.0 million and $15.0
  million, respectively; and at September 30, 2004, total assets and debt of the
  unconsolidated VIEs are $17.7 million and $15.3 million, respectively. The unconsolidated
  VIEs own and operate two skilled nursing facilities having approximately 300
  beds combined. GHCs ownership interests in the unconsolidated VIEs is
  33.3% and 50% and GHC manages the day-to-day operations of the unconsolidated
  VIEs under management agreements. GHCs involvement with the unconsolidated
  VIEs began in years prior to 1991. At September 30, 2005, GHCs maximum
  exposure to loss associated with these two unconsolidated VIEs approximates
  the aggregate carrying-value of its equity method investments of $0.7 million.





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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.

|(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 $330.8 million, $329.8 million and $341.5 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.



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Restricted Cash and Investments in Marketable Securities

Restricted cash includes cash and money market funds 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 $11.9 million and $19.7 million, respectively.

Restricted investments in marketable securities, comprised of fixed interest rate securities and equity securities, 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 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.





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Total depreciation expense from continuing operations for the years ended September 30, 2005, 2004 and 2003 was $51.3 million, $48.5 million and $37.3 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 8  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. 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 changes in estimates are recorded in the period
in which they are determined. See note 13  Loss Reserves for Certain Self-Insured Programs.





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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 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 22  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 11  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                             |       
|                                                                                              |  | (Restated)                       |       
|                                                                                              |  |                                  |       
|Net
        income, as reported                                                               |  | $                                | 46,068
|Adjustments:                                                                                  |  |                                  |       
|Stock-based
        compensation included in net income, net of tax effects                   |  |                                  | 3,994 
|Stock-based
        compensation determined under fair value based method, net of tax effects |  |                                  | (6,177
|Pro
        forma net income                                                                  |  | $                                | 43,885
|Per
        common share data in 2005 and pro forma per common share data in 2004:            |  |                                  |       
|Basic:                                                                                        |  |                                  |       
|Net
        income as reported                                                                |  | $                                | 2.34  
|Net
        income as adjusted                                                                |  |                                  | 2.23  
|Diluted:                                                                                      |  |                                  |       
|Net
        income as reported                                                                |  | $                                | 2.30  
|Net
        income as adjusted                                                                |  |                                  | 2.19  

The Company revised pro forma net income for the year ended September 30, 2004 to reflect 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 fiscal 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, including consolidated VIEs, 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, 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s unvested restricted stock yielded 110,789 potentially dilutive securities.





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Derivative Financial Instruments

The Company consolidates one VIE pursant to FIN 46 that entered into an interest rate swap agreement. The VIE is exposed to the impact of interest rate changes because its long-term debt bears interest at a variable rate. The VIEs objective in managing exposure to interest rate changes is to limit the impact of such changes on its earnings and cash flows and to lower its overall borrowing costs. The VIEs debt and obligation under the interest rate swap agreement are non-recourse to GHC.  The Company and the VIE follow the provisions of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended.  The Company and the VIE do not enter into such arrangements for trading puposes. Such instruments are recognized on the consolidated balance sheet at fair value. Changes in the fair
value of a derivative that is designated as and meets all of the required criteria for a cash flow hedge are recorded in accumulated other comprehensive (loss) income and reclassified as an adjustment to interest expense as the underlying hedged item affects earnings.

New Accounting Pronouncements

The Meaning of Other-Than-Temporary Impairment and 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 Comprehensive Income 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.





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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.

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.





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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.

The Company currently determines the fair value of stock-based compensation using a Black-Scholes option-pricing model. In connection with adopting SFAS 123R in fiscal 2006, the Company implemented 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) | Restatement of Consolidated Financial Statements
|--- | ------------------------------------------------

Subsequent to filing its Annual Report on Form 10-K for the fiscal year ended September 30, 2005, certain accounting errors were identified requiring the restatement of GHCs previously issued consolidated financial statements.

GHCs policy with respect to discounting self-insured outstanding losses and loss expenses for both general and professional liability and workers compensation liability claims was reassessed, and GHC determined that such discounting was not in accordance with U.S. generally accepted accounting principles. In connection with the evaluation of its accounting for self-insurance loss reserves, GHC also identified an accounting error that, upon correction, results in an increase to self-insurance loss reserves and related expenses of $2.4 million in fiscal 2004 and a corresponding decrease to self-insurance loss reserves and related expenses in fiscal 2005.

As discussed under note 1  Organization and Basis of Presentation  Principles of Consolidation and Variable Interest Entities, upon re-examination of the interests at January 1, 2003 of all parties associated with all 12 of GHCs previously unconsolidated jointly owned and managed facilities, GHC concluded that it is the primary beneficiary of seven previously unconsolidated VIEs.

Also, as disclosed in GHCs original Annual Report on Form 10-K for the fiscal year ended September 30, 2005, certain errors were identified and corrected by GHC in its previously issued fiscal 2005 consolidated financial statements. These errors involved accounting for operating lease expense on a straight-line basis, the classification of certain leases, accounting for GHC stock held in a deferred compensation plan, the useful lives assigned to certain fixed assets and unaccrued costs resulting from errors in purchasing cut-off. Based upon an evaluation conducted in fiscal 2005, GHC previously concluded that the errors were not material to GHCs consolidated financial statements taken as a whole and adjusted for the errors in the period such errors were identified.

GHCs
  previously issued consolidated financial statements (i) as of September 30,
  2005 and September 30, 2004, and (ii) for each of the years in the three years
  ended September 30, 2005 have been restated herein to correct all of the errors
  described in the previous three paragraphs. The discounting of self-insurance
  loss reserves correction, along with certain other immaterial errors that were
  identified and corrected in the appropriate periods, are presented in the tables
  below under the column entitled Adjustments. The consolidation of
  the joint ventures under FIN 46 is presented in the tables below under the column
  entitled Consolidation of VIEs. In addition, presented in the tables
  below under the column entitled Reclassifications, GHC has made
  changes in certain account classifications to conform with U.S. generally accepted
  accounting principles. The tables below are followed by footnote disclosures
  that facilitate the referencing of adjustments and reclassifications between
  previously reported and restated amounts.





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Consolidated Statements of Operations Data:

|                                                                                                           |  | Year ended September 30, 2005 |           
|---------------------------------------------------------------------------------------------------------- |  | ----------------------------- | ----------
|                                                                                                           |  | PreviouslyReported            |           
|                                                                                                           |  |                               |           
|Net revenues                                                                                               |  | $                             | 1,683,350 
|Salaries, wages and benefits                                                                               |  |                               | 1,013,139 
|Other operating expenses                                                                                   |  |                               | 384,760   
|General and administrative costs                                                                           |  |                               | 95,706    
|Provision for losses on accounts receivable and notes receivable                                           |  |                               | 10,859    
|Loss on early extinguishment of debt                                                                       |  |                               | 11,765    
|Lease expense                                                                                              |  |                               | 18,367    
|Depreciation and amortization expense                                                                      |  |                               | 55,087    
|Interest expense                                                                                           |  |                               | 27,879    
|Investment income                                                                                          |  |                               | -         
|Income before income tax expense, equity in net income of unconsolidated affiliates and minority interests |  |                               | 65,788    
|Income tax expense                                                                                         |  |                               | 26,032    
|Income before equity in net income of unconsolidated affiliates and minority interests                     |  |                               | 39,756    
|Equity in net income of unconsolidated affiliates                                                          |  |                               | 3,105     
|Minority interests                                                                                         |  |                               | (441      
|Income from continuing operations                                                                          |  |                               | 42,420    
|Loss from discontinued operations, net of taxes                                                            |  |                               | (251      
|Net income                                                                                                 |  | $                             | 42,169    
|                                                                                                           |  |                               |           
|Per common share data:                                                                                     |  |                               |           
|Basic:                                                                                                     |  |                               |           
|Income from continuing operations                                                                          |  | $                             | 2.15      
|Loss from discontinued operations                                                                          |  |                               | (0.01     
|Net income                                                                                                 |  | $                             | 2.14      
|Weighted average shares                                                                                    |  |                               | 19,713,478
|                                                                                                           |  |                               |           
|Diluted:                                                                                                   |  |                               |           
|Income from continuing operations                                                                          |  | $                             | 2.12      
|Loss from discontinued operations                                                                          |  |                               | (0.01     
|Net income                                                                                                 |  | $                             | 2.11      
|Weighted average shares                                                                                    |  |                               | 20,021,811





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|                                                                                                           |  | Year ended September 30, 2004 |           
|---------------------------------------------------------------------------------------------------------- |  | ----------------------------- | ----------
|                                                                                                           |  | Previously Reported           |           
|                                                                                                           |  |                               |           
|Net revenues                                                                                               |  | $                             | 1,517,553 
|Salaries, wages and benefits                                                                               |  |                               | 962,138   
|Other operating expenses                                                                                   |  |                               | 299,752   
|General and administrative costs                                                                           |  |                               | 81,684    
|Provision for losses on accounts receivable and notes receivable                                           |  |                               | 20,157    
|Loss on early extinguishment of debt                                                                       |  |                               | 1,692     
|Lease expense                                                                                              |  |                               | 28,073    
|Depreciation and amortization expense                                                                      |  |                               | 46,306    
|Interest expense                                                                                           |  |                               | 26,985    
|Investment income                                                                                          |  |                               | -         
|Income before income tax expense, equity in net income of unconsolidated affiliates and minority interests |  |                               | 50,766    
|Income tax expense                                                                                         |  |                               | 20,791    
|Income before equity in net income of unconsolidated affiliates and minority interests                     |  |                               | 29,975    
|Equity in net income of unconsolidated affiliates                                                          |  |                               | 2,235     
|Minority interests                                                                                         |  |                               | (462      
|Income from continuing operations                                                                          |  |                               | 31,748    
|Loss from discontinued operations, net of taxes                                                            |  |                               | (2,675    
|Net income                                                                                                 |  | $                             | 29,073    
|                                                                                                           |  |                               |           
|Per common share data:                                                                                     |  |                               |           
|Basic:                                                                                                     |  |                               |           
|Income from continuing operations                                                                          |  | $                             | 1.59      
|Loss from discontinued operations                                                                          |  |                               | (0.13     
|Net income                                                                                                 |  | $                             | 1.46      
|Weighted average shares                                                                                    |  |                               | 19,947,177
|                                                                                                           |  |                               |           
|Diluted:                                                                                                   |  |                               |           
|Income from continuing operations                                                                          |  | $                             | 1.58      
|Loss from discontinued operations                                                                          |  |                               | (0.13     
|Net income                                                                                                 |  | $                             | 1.45      
|Weighted average shares                                                                                    |  |                               | 20,118,292





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|                                                                                                           |  | Year ended September 30, 2003 |          
|---------------------------------------------------------------------------------------------------------- |  | ----------------------------- | ---------
|                                                                                                           |  | PreviouslyReported            |          
|                                                                                                           |  |                               |          
|Net revenues                                                                                               |  | $                             | 1,375,466
|Salaries, wages and benefits                                                                               |  |                               | 867,970  
|Other operating expenses                                                                                   |  |                               | 294,200  
|General and administrative costs                                                                           |  |                               | 67,069   
|Provision for losses on accounts receivable and notes receivable                                           |  |                               | 20,529   
|Gain on early extinguishment of debt                                                                       |  |                               | (1,123   
|Lease expense                                                                                              |  |                               | 27,555   
|Depreciation and amortization expense                                                                      |  |                               | 38,863   
|Interest expense                                                                                           |  |                               | 17,014   
|Investment income                                                                                          |  |                               | -        
|Income before income tax expense, equity in net income of unconsolidated affiliates and minority interests |  |                               | 43,389   
|Income tax expense                                                                                         |  |                               | 12,479   
|Income before equity in net income of unconsolidated affiliates and minority interests                     |  |                               | 30,910   
|Equity in net income of unconsolidated affiliates                                                          |  |                               | 794      
|Minority interests                                                                                         |  |                               | (307     
|Income from continuing operations                                                                          |  |                               | 31,397   
|Loss from discontinued operations, net of taxes                                                            |  |                               | (19,509  
|Cumulative effect of an accounting change                                                                  |  |                               | -        
|Net income                                                                                                 |  | $                             | 11,888   

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Consolidated
  Balance Sheet Data:

|                                                                                    |  | September
        30, 2005 |          
|----------------------------------------------------------------------------------- |  | -------------------------- | ---------
|                                                                                    |  | PreviouslyReported         |          
|                                                                                    |  |                            |          
|Assets:                                                                             |  |                            |          
|Current
        assets:                                                             |  |                            |          
|Cash
        and equivalents                                                        |  | $                          | 109,041  
|Current
        portion of restricted cash and investments in marketable securities |  |                            | 39,875   
|Accounts
        receivable, net of allowances for doubtful accounts                |  |                            | 184,616  
|Prepaid
        expenses and other current assets                                   |  |                            | 37,185   
|Current
        portion of deferred income taxes                                    |  |                            | 43,148   
|Total
        current assets                                                        |  |                            | 413,865  
|Property
        and equipment, net of accumulated depreciation                     |  |                            | 783,359  
|Assets
        held for sale                                                        |  |                            | 3,911    
|Restricted
        cash and investments in marketable securities                    |  |                            | 56,197   
|Other
        long-term assets                                                      |  |                            | 85,892   
|Deferred
        income taxes                                                       |  |                            | 7,972    
|Identifiable
        intangible assets, net of accumulated amortization             |  |                            | 1,095    
|Goodwill                                                                            |  |                            | 7,863    
|Total
        assets                                                                |  | $                          | 1,360,154
|Liabilities
        and Shareholders Equity:                                       |  |                            |          
|Current
        liabilities:                                                        |  |                            |          
|Current
        installments of long-term debt                                      |  | $                          | 4,537    
|Accounts
        payable                                                            |  |                            | 56,711   
|Accrued
        expenses                                                            |  |                            | 23,059   
|Accrued
        compensation                                                        |  |                            | 67,845   
|Accrued
        interest                                                            |  |                            | 6,260    
|Current
        portion of self-insurance liability reserves                        |  |                            | 39,875   
|Income
        taxes payable                                                        |  |                            | 1,042    
|Total
        current liabilities                                                   |  |                            | 199,329  
|Long-term
        debt                                                              |  |                            | 405,633  
|Self-insurance
        liability reserves                                           |  |                            | 58,995   
|Other
        long-term liabilities                                                 |  |                            | 39,548   
|Commitments
        and contingencies                                               |  |                            |          
|Shareholders
        equity:                                                       |  |                            |          
|Common
        stock - par $0.01                                                    |  |                            | 204      
|Additional
        paid-in capital                                                  |  |                            | 632,199  
|Retained
        earnings                                                           |  |                            | 62,673   
|Accumulated
        other comprehensive loss                                        |  |                            | (603     
|Treasury
        stock at cost                                                      |  |                            | (32,096  
|Common
        stock held in deferred compensation plan at cost                     |  |                            | (5,728   
|Total
        shareholders equity                                                  |  |                            | 656,649  
|Total
        liabilities and shareholders equity                                  |  | $                          | 1,360,154

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|                                                                                    |  | September
        30, 2004 |          
|----------------------------------------------------------------------------------- |  | -------------------------- | ---------
|                                                                                    |  | PreviouslyReported         |          
|                                                                                    |  |                            |          
|Assets:                                                                             |  |                            |          
|Current
        assets:                                                             |  |                            |          
|Cash
        and equivalents                                                        |  | $                          | 126,071  
|Current
        portion of restricted cash and investments in marketable securities |  |                            | 29,887   
|Accounts
        receivable, net of allowances for doubtful accounts                |  |                            | 175,292  
|Prepaid
        expenses and other current assets                                   |  |                            | 33,526   
|Current
        portion of deferred income taxes                                    |  |                            | 32,916   
|Current
        portion of assets held for sale                                     |  |                            | 6,267    
|Total
        current assets                                                        |  |                            | 403,959  
|Property
        and equipment, net of accumulated depreciation                     |  |                            | 695,511  
|Assets
        held for sale                                                        |  |                            | 2,511    
|Restricted
        cash and investments in marketable securities                    |  |                            | 65,121   
|Other
        long-term assets                                                      |  |                            | 101,816  
|Identifiable
        intangible assets, net of accumulated amortization             |  |                            | 1,722    
|Goodwill                                                                            |  |                            | 7,220    
|Total
        assets                                                                |  | $                          | 1,277,860
|Liabilities
        and Shareholders Equity:                                       |  |                            |          
|Current
        liabilities:                                                        |  |                            |          
|Current
        installments of long-term debt                                      |  | $                          | 27,230   
|Accounts
        payable                                                            |  |                            | 34,848   
|Accrued
        expenses                                                            |  |                            | 22,311   
|Accrued
        compensation                                                        |  |                            | 87,442   
|Accrued
        interest                                                            |  |                            | 8,673    
|Current
        portion of self-insurance liability reserves                        |  |                            | 29,887   
|Income
        taxes payable                                                        |  |                            | 3,732    
|Total
        current liabilities                                                   |  |                            | 214,123  
|Long-term
        debt                                                              |  |                            | 375,841  
|Deferred
        income taxes                                                       |  |                            | 31,145   
|Self-insurance
        liability reserves                                           |  |                            | 62,920   
|Other
        long-term liabilities                                                 |  |                            | 28,858   
|Commitments
        and contingencies                                               |  |                            |          
|Shareholders
        equity:                                                       |  |                            |          
|Common
        stock - par $0.01                                                    |  |                            | 200      
|Additional
        paid-in capital                                                  |  |                            | 547,841  
|Retained
        earnings                                                           |  |                            | 20,504   
|Accumulated
        other comprehensive income                                      |  |                            | 221      
|Common
        stock held in deferred compensation plan at cost                     |  |                            | (3,793   
|Total
        shareholders equity                                                  |  |                            | 564,973  
|Total
        liabilities and shareholders equity                                  |  | $                          | 1,277,860

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Consolidated Statements of Cash Flows Data:



|                                                                                 |  | Year
        ended September 30, 2005 |         
|-------------------------------------------------------------------------------- |  | ------------------------------------- | --------
|                                                                                 |  | PreviouslyReported                    |         
|                                                                                 |  |                                       |         
|Cash
        flows from operating activities:                                    |  |                                       |         
|Net
        income                                                               |  | $                                     | 42,169  
|Net
        charges included in operations not requiring funds:                  |  |                                       |         
|Non-cash
        compensation expenses                                           |  |                                       | 6,657   
|Loss
        on impairment of assets and other charges                           |  |                                       | 13,153  
|Depreciation
        and amortization                                            |  |                                       | 55,087  
|Non-cash
        lease and interest adjustments                                  |  |                                       | (3,312  
|Provision
        for losses on accounts receivable and notes receivable         |  |                                       | 10,859  
|Equity
        in net income of unconsolidated affiliates and minority interests |  |                                       | (2,664  
|Provision
        for deferred taxes                                             |  |                                       | 22,332  
|Amortization
        of deferred rents                                           |  |                                       | 2,788   
|Changes
        in assets and liabilities:                                       |  |                                       |         
|Accounts
        receivable                                                      |  |                                       | (24,135 
|Accounts
        payable and other accrued expenses                              |  |                                       | 2,644   
|Other,
        net                                                               |  |                                       | (600    
|Total
        adjustments                                                        |  |                                       | 82,809  
|Net
        cash provided by operating activities                                |  |                                       | 124,978 
|Cash
        flows from investing activities:                                    |  |                                       |         
|Capital
        expenditures                                                     |  |                                       | (55,227 
|Purchases
        of restricted marketable securities                            |  |                                       | (148,863
|Proceeds
        on maturity or sale of restricted marketable securities         |  |                                       | 146,893 
|Net
        change in restricted cash and equivalents                            |  |                                       | -       
|Purchases
        of eldercare centers and lease amendments                      |  |                                       | (7,208  
|Proceeds
        from sales of eldercare assets                                  |  |                                       | 6,664   
|Consolidation
        of variable interest entities                              |  |                                       | -       
|Other,
        net                                                               |  |                                       | 607     
|Net
        cash used in investing activities                                    |  |                                       | (57,134 
|Cash
        flows from financing activities:                                    |  |                                       |         
|Proceeds
        from issuance of long-term debt                                 |  |                                       | 180,000 
|Repayment
        of long-term debt                                              |  |                                       | (225,714
|Debt
        issuance costs and debt prepayment premium                          |  |                                       | (14,303 
|Purchase
        of common stock for treasury                                    |  |                                       | (32,096 
|Proceeds
        from exercise of stock options                                  |  |                                       | 7,239   
|Other,
        net                                                               |  |                                       | -       
|Net
        cash used in financing activities                                    |  |                                       | (84,874 
|Net
        decrease in cash and equivalents                                     |  | $                                     | (17,030 
|Cash
        and equivalents:                                                    |  |                                       |         
|Beginning
        of period                                                      |  |                                       | 126,071 
|End
        of period                                                            |  | $                                     | 109,041 
|Supplemental
        disclosure of cash flow information:                        |  |                                       |         
|Interest
        paid                                                            |  | $                                     | 25,466  
|Taxes
        paid                                                               |  |                                       | 4,562   
|Non-cash
        financing activities:                                           |  |                                       |         
|Capital
        leases                                                           |  | $                                     | 3,951   
|Assumption
        of debt                                                       |  |                                       | 15,533  

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|                                                                                 |  | Year
        ended September 30, 2004 |         
|-------------------------------------------------------------------------------- |  | ------------------------------------- | --------
|                                                                                 |  | Previously
        Reported           |         
|Cash
        flows from operating activities:                                    |  |                                       |         
|Net
        income                                                               |  | $                                     | 29,073  
|Net
        charges included in operations not requiring funds:                  |  |                                       |         
|Non-cash
        compensation expenses                                           |  |                                       | 2,867   
|Loss
        on impairment of assets and other charges                           |  |                                       | 2,275   
|Depreciation
        and amortization                                            |  |                                       | 46,546  
|Provision
        for losses on accounts receivable and notes receivable         |  |                                       | 21,059  
|Equity
        in net income of unconsolidated affiliates and minority interests |  |                                       | (1,773  
|Provision
        for deferred taxes                                             |  |                                       | 16,202  
|Amortization
        of deferred rents                                           |  |                                       | 2,259   
|Advanced
        rent payments on operating leases                               |  |                                       | -       
|Changes
        in assets and liabilities:                                       |  |                                       |         
|Accounts
        receivable                                                      |  |                                       | 4,477   
|Accounts
        payable and other accrued expenses                              |  |                                       | 29,292  
|Other,
        net                                                               |  |                                       | (3,881  
|Total
        adjustments                                                        |  |                                       | 119,323 
|Net
        cash provided by operating activities                                |  |                                       | 148,396 
|Cash
        flows from investing activities:                                    |  |                                       |         
|Capital
        expenditures                                                     |  |                                       | (31,183 
|Purchases
        of restricted marketable securities                            |  |                                       | (209,769
|Proceeds
        on maturity or sale of restricted marketable securities         |  |                                       | 204,472 
|Net
        change in restricted cash and equivalents                            |  |                                       | -       
|Purchases
        of eldercare centers and lease amendments                      |  |                                       | (48,641 
|Proceeds
        from sales of eldercare assets                                  |  |                                       | 17,956  
|Consolidation
        of variable interest entities                              |  |                                       | -       
|Other,
        net                                                               |  |                                       | (2,535  
|Net
        cash used in investing activities                                    |  |                                       | (69,700 
|Cash
        flows from financing activities:                                    |  |                                       |         
|Proceeds
        from issuance of long-term debt                                 |  |                                       | 410,000 
|Repayment
        of long-term debt                                              |  |                                       | (306,531
|Debt
        issuance costs and debt prepayment premium                          |  |                                       | (9,337  
|Net
        transactions with NCI, prior to the spin-off                         |  |                                       | (55,548 
|Net
        cash used in financing activities                                    |  |                                       | 38,584  
|Net
        increase in cash and equivalents                                     |  | $                                     | 117,280 
|Cash
        and equivalents:                                                    |  |                                       |         
|Beginning
        of period                                                      |  |                                       | 8,791   
|End
        of period                                                            |  | $                                     | 126,071 
|Supplemental
        disclosure of cash flow information:                        |  |                                       |         
|Interest
        paid                                                            |  | $                                     | 19,537  
|Taxes
        paid                                                               |  |                                       | 3,272   
|Non-cash
        financing activities:                                           |  |                                       |         
|Capital leases                                                                   |  | $                                     | -       
|Assumption
        of debt                                                       |  |                                       | 34,014  

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|                                                                                 |  | Year
        ended September 30, 2003
|-------------------------------------------------------------------------------- |  | -------------------------------------
|                                                                                 |  | PreviouslyReported                   
|Cash
        flows from operating activities:                                    |  |                                      
|Net
        income                                                               |  | $                                    
|Net
        charges included in operations not requiring funds:                  |  |                                      
|Non-cash
        compensation expenses                                           |  |                                      
|Loss
        on impairment of assets and other charges                           |  |                                      
|Depreciation
        and amortization                                            |  |                                      
|Provision
        for losses on accounts receivable and notes receivable         |  |                                      
|Equity
        in net income of unconsolidated affiliates and minority interests |  |                                      
|Benefit
        for deferred taxes                                               |  |                                      
|Amortization
        of deferred rents                                           |  |                                      
|Cumulative
        affect of accounting change                                   |  |                                      
|Advanced
        rent payments on operating leases                               |  |                                      
|Changes
        in assets and liabilities:                                       |  |                                      
|Accounts
        receivable                                                      |  |                                      
|Accounts
        payable and other accrued expenses                              |  |                                      
|Other,
        net                                                               |  |                                      
|Total
        adjustments                                                        |  |                                      
|Net
        cash provided by operating activities                                |  |                                      
|Cash
        flows from investing activities:                                    |  |                                      
|Capital
        expenditures                                                     |  |                                      
|Purchases
        of restricted marketable securities                            |  |                                      
|Proceeds
        on maturity or sale of restricted marketable securities         |  |                                      
|Net
        change in restricted cash and equivalents                            |  |                                      
|Purchases
        of eldercare centers and lease amendments                      |  |                                      
|Purchase
        of rehabilitation services business                             |  |                                      
|Proceeds
        from sales of eldercare assets                                  |  |                                      
|Consolidation
        of variable interest entities                              |  |                                      
|Other,
        net                                                               |  |                                      
|Net
        cash provided by investing activities                                |  |                                      
|Cash
        flows from financing activities:                                    |  |                                      
|Repayment
        of long-term debt                                              |  |                                      
|Net
        transactions with NCI, prior to the spin-off                         |  |                                      
|Other,
        net                                                               |  |                                      
|Net
        cash used in financing activities                                    |  |                                      
|Net
        increase in cash and equivalents                                     |  | $                                    
|Cash
        and equivalents:                                                    |  |                                      
|Beginning
        of period                                                      |  |                                      
|End
        of period                                                            |  | $                                    
|Supplemental
        disclosure of cash flow information:                        |  |                                      
|Interest
        paid                                                            |  | $                                    

Consolidated Statements of Operations Adjustments

|(1) | Adjustments to revenue of $1.0 million and ($1.0) million in fiscal 2005 and fiscal 2004, respectively, for previously recognized changes in the market value of GHC common stock held in a rabbi trust. The accounting treatment for assets invested in a rabbi trust under 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 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. Under EITF 97-14, GHCs deferred compensation plan type requires that GHC common stock held in its rabbi trust be classified as a component of shareholders equity at cost, with no subsequent adjustment for
market value changes.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Fiscal 2004 also includes a $0.7 million increase to revenue representing miscellaneous accrual adjustments.

|(2) | Fiscal 2005 - $2.8 million represents the reversal of an increase in operating expenses recognized to reflect an estimate of previously unaccrued costs resulting from errors in GHCs purchasing cut-off, $2.3 million represents a reduction to accruals for self-insurance loss reserves and $0.5 million represents other miscellaneous accrual adjustments.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Fiscal 2004 - $2.0 million represents an increase to accruals for self-insurance loss reserves and $0.6 million represents other miscellaneous accrual adjustments.

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Fiscal 2003 - $0.7 million represents a decrease in self-insurance loss reserves.

|(3) | Adjustments to general and administrative costs represent corrections to self-insurance loss reserves to reflect such balances on an undiscounted basis. Adjustments to (loss) income from discontinued operations represent similar corrections to reflect self-insurance loss reserves associated with GHCs discontinued Florida operations on an undiscounted basis.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Adjustments to lease, interest and depreciation and amortization expense include the correction to GHCs accounting for five nursing center leases previously classified as operating leases beginning in fiscal 2004 that should have been classified as capital leases, as well as adjustments to increase lease expense to properly recognize operating lease expense on a straight-line basis.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Depreciation expense was also reduced $1.2 million, increased $0.4 million and increased $0.4 million in fiscal 2005, 2004 and 2003, respectively, to reflect adjustments in the proper period associated with a correction to the useful lives assigned to certain fixed assets.

|(5) | Represents
        the tax impact of the previously noted adjustments with the exception
        of adjustments to (loss) income from discontinued operations.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Represents the following reclassifications:
|--- | -------------------------------------------

| | (i) | Net revenues were reduced to classify investment income as a separate line item on the statements of operations in the amounts of $8.7 million, $6.1 million and $2.3 million in fiscal 2005, 2004 and 2003, respectively.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (ii) | Net revenues were increased to reflect certain zero-margin reimbursements from NCI, GHCs former parent company, under the transitional services agreement in the amounts of $1.4 million and $2.6 million in fiscal 2005 and 2004, respectively. These amounts were previously classified as an offset to general and administrative costs.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (iii) | Certain reclassifications were made between salaries, wages and benefits in the amounts of $10.0 million, $2.5 million and $5.7 million in fiscal 2005, 2004 and 2003, respectively; other operating expenses in the amounts of $1.2 million, $1.2 million and $2.6 million in fiscal 2005, 2004 and 2003, respectively; and general and administrative expenses in the amounts of ($11.1) million, ($3.7) million and ($8.3) million in fiscal 2005, 2004 and 2003, respectively, to better align changes in estimates of self-insurance loss reserves with functional expense categories. Specifically, changes in estimates associated with workers compensation claims are reclassified as a component of salaries, wages and benefits, while changes in estimates associated with general and professional liability claims are reclassified as a component of other operating expenses.
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (iv) | Certain reclassifications were made between salaries, wages and benefits and general and administrative expenses in the amounts of $12.1 million, $10.1 million and $3.0 million in fiscal 2005, 2004 and 2003, respectively, to better align cash-based incentive compensation and non-cash stock-based compensation expenses to the appropriate account captions that reflect the base wages of the individuals earning such compensation.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Consolidated Balance Sheet Adjustments

|(7) | Represents the impact to deferred income taxes from the cumulative accounting adjustments.
|--- | ------------------------------------------------------------------------------------------

|(8) | At September 30, 2005 and 2004 - Represents an increase to the estimated accrual for incurred but not reported general and professional liability claims to reflect such amounts on an undiscounted basis.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) | Adjustments
        to increase self-insurance liability reserves reflect such amounts on
        an undiscounted basis and, at September 30, 2004, include a $2.4 million
        adjustment to otherwise increase the self-insurance liability reserves.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10) | Adjustments
        to additional paid-in-capital represent the cumulative after tax impact
        of the accounting corrections recognized prior to GHCs December
        1, 2003 spin-off. Approximately $12.8 million of the after tax corrections
        relate to periods prior to October 1, 2002 including $4.5 million to reflect
        self-insurance liability reserves on an undiscounted basis, $1.7 million
        to reflect an estimate of previously unaccrued costs resulting from errors
        in GHCs purchasing procedures, $1.4 million to reflect miscellaneous
        accrual adjustments, and $5.2 million to reflect the tax impact of the
        previously noted adjustments as a component of NCIs equity in GHC
        as GHC was not a separate tax payer prior to the spin-off.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | Adjustments to retained earnings represent the cumulative after tax impact
        of the accounting corrections recognized after GHCs December 1,
        2003 spin-off.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

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|(11) | Adjustments to property and equipment, net of accumulated depreciation at September 30, 2004 consist of a $41.4 million increase following the capitalization of five leases in connection with the ElderTrust transactions, offset by a reduction of ($1.2) million from an increase to accumulated depreciation in connection with a correction to the useful lives assigned to certain fixed assets.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(12) | Adjustment to other long-term assets at September 30, 2005 represents an increase to the amount of estimated insurance claims recoverable from excess insurance carriers.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Adjustments
  to other long-term assets at September 30, 2004 consist of a ($7.7) million
  decrease to advanced rent balances to reflect such amounts as a component of
  property and equipment following the capitalization of five leases in connection
  with the ElderTrust transactions, a ($1.0) million decrease in connection with
  a correction to the accounting treatment for assets invested in a rabbi trust
  under EITF Issue No. 97-14, a ($0.4) million decrease from miscellaneous cost
  report receivable adjustments, offset by a $1.2 million increase to the amount
  of estimated insurance claims recoverable from excess insurance carriers.

|(13) | Adjustments to increase current installments of long-term debt and long-term debt at September 30, 2004 represent the capitalization of five leases in connection with the ElderTrust transactions.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(14) | The increase to accounts payable at September 30, 2004 consists of a $2.8 million adjustment to reflect an estimate of previously unaccrued costs resulting from errors in GHCs purchasing cut-off and $0.2 million represents other miscellaneous accrual adjustments.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(15) | The increase to other long-term liabilities at September 30, 2004 consists of a $0.7 million adjustment to unfavorable lease balances in connection with the ElderTrust transaction, offset by ($0.2) million of other miscellaneous accrual adjustments.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(16) | The $7.4 million and $4.1 million reclassification of cash and equivalents at September 30, 2005 and September 30, 2004, respectively, to long-term restricted cash and investments in marketable securities properly classifies restricted cash that was previously reflected in cash and equivalents.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
  $1.4 million reclassification between property and equipment, net of accumulated
  depreciation and other long-term liabilities at September 30, 2005 represents
  the reclassification of certain unfavorable rent balances that should have been
  applied to capital lease asset balances.

Consolidated Statements of Cash Flows Adjustments

|(17) | Adjustments to the consolidated statements of cash flows in fiscal 2005, 2004 and 2003 reflect the aftermentioned adjustments, which have no impact on net cash provided by operating activites.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(18) | Represents the following reclassifications:
|---- | -------------------------------------------

| | (i) | The
        ($3.3) million, $0.5 million and $0.8 million net change in restricted
        cash and equivalents in fiscal 2005, 2004, and 2003, respectively, represents
        the change in restricted cash previously reflected as a component of cash
        and equivalents. The change in restricted cash is reflected as an investing
        activity in the statements of cash flows.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (ii) | The change in beginning of period and end of period cash in fiscal 2005, 2004 and 2003 represents the reclassification of the balance of restricted cash to non-current assets.
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (iii) | In
        fiscal 2004 and fiscal 2003, the $9.8 million and $2.5 million reduction,
        respectively, to cash used in investing activities and corresponding decrease
        to cash flows provided by operating activities represents the reclassification
        of advanced rent payments associated with operating leases entered into
        in the ElderTrust transactions.
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Other
  Adjustments

|(19) | Represents the impact of consolidating VIEs, after giving effect to related eliminations, for which GHC is deemed to be the primary beneficiary pursuant to FIN 46.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

As
  a result of the various adjustments and reclassifications noted above, modifications
  were required to all previously filed footnotes except notes 14 and 16.

|(4) | 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                             |  
|                              |  | (Restated)                       |  
|Medicaid                      |  | 54                               | %
|Medicare                      |  | 27                               | %
|Private
        pay and other |  | 19                               | %
|                              |  | 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.

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|(5) | 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 as of December 1, 2003 (the pharmacy services agreement), as amended on May 7, 2004 (the 2004 pharmacy services amendment). A summary of the amendments is 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 borrowing capacity of the revolving credit portion.

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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.

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, 2005. 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 joint venture partners interest in a Commonwealth of Massachusetts skilled nursing facility having 123 beds. Prior to that acquisition, the Company owned a 50% interest in the facility and consolidated its operations upon adoption of FIN 46 effective January 1, 2003 as GHC determined it was the primary beneficiary of the partnership. See note 3  Restatement of Consolidated Financial Statements.  Upon completion of the transaction, GHC owned 100% of the facility and adjusted the carrying value of the acquired interest in the assets and liabilities to fair value as of January 1, 2005. The aggregate consideration consisted of cash of $0.5 million to acquire the remaining partnership interests and the assumption of approximately $6.0 million of partnership debt, all of which was repaid at the closing of the transaction.

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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.

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 center were 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.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Five of the above described center lease transactions were classified as capital leases, which had the effect of increasing total assets and total liabilities (principally debt) approximately $34.0 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 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 over the 10-year lease term.

|(6) | Restricted
        Cash and 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 cash and investments in marketable securities represents an estimate of the level of outstanding losses the Company expects to pay in the succeeding year.

Restricted cash and equivalents and investments in marketable securities at September 30, 2005 consist of the following (in thousands):



|                                                         |  | (Restated)    |        
|-------------------------------------------------------- |  | ------------- | -------
|                                                         |  | Amortizedcost |        
|Restricted
        cash and equivalents:                 |  |               |        
|Cash                                                     |  | $             | 7,442  
|Money
        market funds                               |  |               | 4,482  
|Restricted
        investments in marketable securities: |  |               |        
|U.S.
        mortgage backed securities                  |  |               | 24,006 
|Corporate
        bonds                                  |  |               | 48,739 
|Government
        bonds                                 |  |               | 19,531 
|                                                         |  | $             | 104,200
|Less:
        Current portion of restricted investments  |  |               |        
|Long-term
        restricted investments                 |  |               |        

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Restricted cash and equivalents and investments in marketable securities at September 30, 2004 consist of the following (in thousands):



|                                                         |  | (Restated)    |       
|-------------------------------------------------------- |  | ------------- | ------
|                                                         |  | Amortizedcost |       
|Restricted
        cash and equivalents:                 |  |               |       
|Cash                                                     |  | $             | 4,132 
|Money
        market funds                               |  |               | 15,527
|Restricted
        investments in marketable securities: |  |               |       
|U.S.
        mortgage backed securities                  |  |               | 25,187
|Corporate
        bonds                                  |  |               | 33,934
|Government
        bonds                                 |  |               | 20,020
|                                                         |  | $             | 98,800
|Less:
        Current portion of restricted investments  |  |               |       
|Long-term
        restricted investments                 |  |               |       

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 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 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 to realize any significant losses on such investments.

Restricted investments in marketable securities held at September 30, 2005 mature as follows (in thousands):



|                                           |  | Amortizedcost |        | Fairvalue |  
|------------------------------------------ |  | ------------- | ------ | --------- | -
|Due
        in one year or less            |  | $             | 2,001  |           | $
|Due
        after 1 year through 5 years   |  |               | 67,201 |           |  
|Due
        after 5 years through 10 years |  |               | 17,466 |           |  
|Due
        after 10 years                 |  |               | 5,608  |           |  
|                                           |  | $             | 92,276 |           | $

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 for these letters of credit as of September 30, 2005.

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|(7) | Property and Equipment
|--- | ----------------------

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

|                                          |  | 2005       |          | 2004       |  
|----------------------------------------- |  | ---------- | -------- | ---------- | -
|                                          |  | (Restated) |          | (Restated) |  
|Land                                      |  | $          | 80,105   |            | $
|Buildings
        and improvements        |  |            | 705,454  |            |  
|Equipment,
        furniture and fixtures |  |            | 204,776  |            |  
|Construction
        in progress          |  |            | 1,517    |            |  
|Gross
        property and equipment      |  |            | 991,852  |            |  
|Less:
        accumulated depreciation    |  |            | (173,714 | )          |  
|Net
        property and equipment        |  | $          | 818,138  |            | $

Assets held under capital leases, which are principally carried in building and improvements above, were $51.4 million and $43.5 million at September 30, 2005 and 2004, respectively. Accumulated depreciation on assets held under capital leases was $4.9 million and $2.1 million at September 30, 2005 and 2004, respectively.

|(8) | Other
        Long-Term Assets
|--- | ------------------------------

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

|                                                   |  | 2005       |        | 2004       |  
|-------------------------------------------------- |  | ---------- | ------ | ---------- | -
|                                                   |  | (Restated) |        | (Restated) |  
|Notes
        receivable, net                      |  | $          | 16,493 |            | $
|Assets
        held in Rabbi Trust                 |  |            | 14,119 |            |  
|Insurance
        claims recoverable               |  |            | 14,938 |            |  
|Deferred
        financing fees, net               |  |            | 13,473 |            |  
|Property
        deposits and funds held in escrow |  |            | 10,008 |            |  
|Advanced
        rents                             |  |            | 9,608  |            |  
|Investments
        in unconsolidated affiliates   |  |            | 6,062  |            |  
|Cost
        report receivables, net               |  |            |       |            |  
|Other,
        net                                 |  |            | 393    |            |  
|Other
        long-term assets                     |  | $          | 85,094 |            | $

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 $3.2 million
  and $2.6 million at September 30, 2005 and 2004, respectively.

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|(9) | Goodwill and Identifiable Intangible 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       |  
|-------------------------------------------------------- |  | ---------- | ------ | ---------- | -
|                                                         |  | (Restated) |        | (Restated) |  
|Balance at beginning of period                           |  | $          | 10,293 |            | $
|Goodwill related to contingent consideration adjustments |  |            | 643    |            |  
|Goodwill related to current year acquisitions            |  |            | -      |            |  
|Goodwill adjustment due to step-acquisition              |  |            | (2,317 | )          |  
|Balance at end of period                                 |  | $          | 8,619  |            | $

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                
|Non-Competition agreements           |  |      | 1,123  |      |   | 1,123                
|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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|(10) | Long-Term Debt
|---- | --------------

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



|                                                |  | 2005       |         | 2004       |  
|----------------------------------------------- |  | ---------- | ------- | ---------- | -
|                                                |  | (Restated) |         | (Restated) |  
|Senior credit facility  term loan              |  | $          | -       |            | $
|Senior subordinated notes                       |  |            | 154,150 |            |  
|Convertible senior subordinated debentures      |  |            | 180,000 |            |  
|Mortgages and other secured debt (recourse)     |  |            | 39,600  |            |  
|Capital lease obligations                       |  |            | 36,420  |            |  
|Mortgages and other secured debt (non recourse) |  |            | 40,926  |            |  
|                                                |  |            | 451,096 |            |  
|Less:                                           |  |            |         |            |  
|Current installments of long-term debt          |  |            | (5,419  | )          |  
|Long-term debt                                  |  | $          | 445,677 |            | $

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 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.

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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 amount of 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 subordinated notes 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, merge or 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 extinguishment of 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 common stock.

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)
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 GHC 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 occurrence of 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 debt (recourse).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.

Capital lease obligations.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 11  Leases and Lease Commitments.

Mortgages and other secured debt (non-recourse).These loans are carried by certain of GHCs less than 51% owned joint ventures consolidated pursuant to FIN 46. The loans consist principally of revenue bonds and secured bank loans. 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 2.8% to 8.7% at September 30, 2005, with maturity dates ranging from 2009 to 2038. These loans are labeled non-recourse because neither GHC nor a wholly owned subsidiary is obligated to perform under the respective loan agreements.

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The Company consolidates one VIE pursant to FIN 46 that entered into an interest rate swap agreement. The VIEs obligation under the interest rate swap agreement is non-recourse to GHC. The interest rate swap agreement effectively converts approximately $7.0 million and $7.1 million at September 30, 2005 and 2004, respectively, of variable-rate debt (one month LIBOR) into fixed-rate debt (4.38%). The interest rate swap agreement matures on July 29, 2010. The counterparty to the interest rate swap agreement is a major instituional bank.

The maturity of total debt, excluding capital lease obligations, of $414.7 million at September 30, 2005 is as follows: $3.9 million in fiscal 2006, $4.2 million in fiscal 2007, $13.4 million in fiscal 2008, $2.1 million in fiscal 2009, $11.5 million in fiscal 2010 and $379.6 million thereafter.

|(11) | 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 |  
|--------------------------------------------------- |  | ---------------------- | ------ | - | ------------------------ | -
|                                                    |  |                        |        |   | (Restated)               |  
|2006                                                |  | $                      | 4,102  |   |                          | $
|2007                                                |  |                        | 4,979  |   |                          |  
|2008                                                |  |                        | 3,184  |   |                          |  
|2009                                                |  |                        | 30,353 |   |                          |  
|2010                                                |  |                        | 492    |   |                          |  
|Thereafter                                          |  |                        | 1,066  |   |                          |  
|Total
        future minimum lease payments         |  | $                      | 44,176 |   |                          | $
|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.

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 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.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

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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. 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 over the remaining lease terms, which have a weighted average term of 4.9 years.

|(12) | 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       |  
|--------------------------------------------------- |  | ---------- | ------ | ---------- | - | ---------- | -
|                                                    |  | (Restated) |        | (Restated) |   | (Restated) |  
|                                                    |  |            |        |            |   |            |  
|From
        continuing operations                  |  | $          | 28,644 |            | $ | 19,897     |  
|From
        cumulative effect of accounting change |  |            | -      |            |   | -          |  
|From
        discontinued operations                |  |            | (109   | )          |   | (1,484     | )
|Total                                               |  | $          | 28,535 |            | $ | 18,413     |  

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       | 
|--------- |  | ---------- | ------ | ---------- | - | ---------- | 
|          |  | (Restated) |        | (Restated) |   | (Restated) | 
|Current:  |  |            |        |            |   |            | 
|Federal   |  | $          | 2,839  |            | $ | 274        | 
|State     |  |            | 690    |            |   | 2,831      | 
|          |  |            | 3,529  |            |   | 3,105      | 
|Deferred: |  |            |        |            |   |            | 
|Federal   |  |            | 19,610 |            |   | 15,707     | 
|State     |  |            | 5,505  |            |   | 1,085      | 
|          |  |            | 25,115 |            |   | 16,792     | 
|Total     |  | $          | 28,644 |            | $ | 19,897     | 

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       |  
|----------------------------------------------------------------- |  | ---------- | ------ | ---------- | - | ---------- | -
|                                                                  |  | (Restated) |        | (Restated) |   | (Restated) |  
|                                                                  |  |            |        |            |   |            |  
|Computed
        expected tax                                   |  | $          | 25,818 |            | $ | 17,855     |  
|Increase
        (reduction) in income taxes resulting from:      |  |            |        |            |   |            |  
|State
        and local income taxes, net of federal tax benefits |  |            | 4,026  |            |   | 2,544      |  
|Targeted
        jobs tax credit                                  |  |            | (1,247 | )          |   | (560       | )
|Carryback
        of losses allowed under Job Creation and        |  |            |        |            |   |            |  
|Worker
        Assistance Act of 2002                             |  |            | (669   | )          |   | -          |  
|Other,
        net                                                |  |            | 716    |            |   | 58         |  
|Total
        income tax expense                                  |  | $          | 28,644 |            | $ | 19,897     |  

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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       |  
|------------------------------------------------------- |  | ---------- | ------- | ---------- | -
|                                                        |  | (Restated) |         | (Restated) |  
|Deferred
        Tax Assets:                            |  |            |         |            |  
|Accounts
        receivable                             |  | $          | 20,877  |            | $
|Accrued
        liabilities and reserves                |  |            | 38,737  |            |  
|Net
        operating loss carryforwards                |  |            | 50,786  |            |  
|Net
        unfavorable leases                          |  |            | 2,844   |            |  
|Other                                                   |  |            | 6,990   |            |  
|Total
        deferred tax assets                       |  |            | 120,234 |            |  
|Valuation
        allowance                             |  |            | -       |            |  
|Deferred
        tax assets, net of valuation allowance |  |            | 120,234 |            |  
|Deferred
        Tax Liabilities:                       |  |            |         |            |  
|Accrued
        liabilities and reserves                |  |            | (3,441  | )          |  
|Depreciation                                            |  |            | (59,856 | )          |  
|Total
        deferred tax liabilities                  |  |            | (63,297 | )          |  
|Net
        deferred tax assets                         |  | $          | 56,937  |            | $

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.

For
  the years ended September 2005, 2004 and 2003, GHC provided $28.6 million, $19.9
  million, and $9.8 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 $51.0 million
  served to further increase shareholders equity in fiscal 2005.

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|(13) | Loss
        Reserves For Certain Self-Insured Programs
|---- | -------------------------------------------------------

General and Professional 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 $1.0 million per incident for workers compensation beginning May 1, 2005, and $0.5 million per incident prior to May 1, 2005. All claims above these per incident limits 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 outstanding losses for these liabilities is $106.6 million to $135.5 million ($92.8 million to $115.0 million net of amounts recoverable from third-party insurance carriers). GHC recorded reserves for these liabilities were $98.9 million as of September 30, 2005, net of $14.9 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 cash and investments in marketable securities of $103.5 million at September 30, 2005, which are substantially restricted to securing the outstanding claim losses of LHC.

GHC believes, based upon its valuation and discussions with 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 GHC will revise its estimates significantly in the near term. Any subsequent differences arising are recorded in the period in which they are determined.

Health Insurance

GHC offers 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. GHC maintains 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.

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GHC charges its employees a portion of the cost of its self-insured and non self-insured health plans, and it determines 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 GHCs projections and its actual experience are borne by it. A one percent variance between GHCs projections and the actual medical utilization or inflationary increases in cost would result in a $0.4 million change in its expense, which would be reflected in salaries, wages and benefits in its consolidated statements of operations.

|(14) | Related Party Transactions
|---- | --------------------------

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

Certain GHC officers and directors owned shares of NCI common stock and options to acquire additional shares of NCI common stock at the time of the spin-off. Additionally, GHCs lead director was an executive officer of NCI at the time GHC entered into the spin-off agreements with NCI. Ownership of NCI common stock, including options to acquire NCI common stock could have created or appeared to create conflicts of interest for such directors and officers when faced with decisions that could have disparate implications for GHC.

Prior to the spin-off, cash collected by GHC in excess of operating needs was transferred to NCI, and GHCs cash requirements were funded by NCI. NCI provided certain general and administrative services to GHC, including finance, legal, treasury, information systems and human resources. The cost for these services were 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 revenues, 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. Following the spin-off, GHC performed these general and administrative services using its own resources. GHC and NCI have agreed contractually to continue certain amended transitional arrangements
and practices for a limited time after the spin-off.

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 leased four eldercare centers. GHC owned the 90% limited partnership interest in the partnership. The principal of the seller of the general partnership became a director of GHC subsequent to the transaction. Simultaneously with the purchase of the general partnership interest, GHC made a lease termination payment to ElderTrust and sold the leasehold rights to an unrelated third party.

|(15) | Shareholders Equity
|---- | --------------------

The Companys authorized capital stock 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. The Companys board of directors may from time to time authorize the issuance of one or more classes or series of preferred stock without shareholder approval.

Common Stock

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

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Treasury Stock

On November 16, 2004, GHCs board of directors authorized the repurchase of up to $25.0 million of GHCs common stock commencing in December 2004. On February 23, 2005, GHCs board of directors authorized an increase to its previously established share repurchase program from $25.0 million to $50.0 million of GHCs common stock through December 31, 2005. Under this program, there were 787,337 shares of common stock repurchased at a cost of $32.1 million through September 30, 2005. The Company accounted 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 are able 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 the amounts deferred by the participants. A rabbi trust is a funding vehicle used to protect deferred compensation benefits from various events, excluding bankruptcy or insolvency. To satisfy a portion of the Companys obligation under the plan, GHC held 163,135 and 158,394 shares of its common stock in the rabbi trust at September 30, 2005 and 2004, respectively. In accordance with the provisions of EITF Issue No. 97-14, Accounting for Deferred Compensation Arrangements Where Amounts earned Are Held in a Rabbi Trust and Invested, (EITF 97-14), the
Company has recorded the $5.7 million and $3.8 million cost of the shares of common stock as a reduction of shareholders equity as of September 30, 2005 and 2004, respectively. Also, as prescribed by EITF 97-14, the Company is required to recognize future changes in the fair value of the common stock held in the rabbi trust as periodic charges or credits to compensation cost. During fiscal 2005, the Company sold 82,267 shares 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 consists of 5,000,000 shares, $0.01 par value, including 1,000,000 shares that have been designated Series A Junior Participating Preferred Shares, none of which are issued or outstanding at September 30, 2005.

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.

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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.

|(16) | 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 options for officers, key employees and non-employee directors. A total of 1,500,000 shares of GHC common stock were reserved for issuance under the stock option plan, of which 600,000 are available for grant at September 30, 2005. The exercise price of each stock option equals 100% of the market price of GHCs common stock on the date of grant and generally has a maximum term of 10 years. Stock options are generally subject to vesting, which means the optionee earns the right to exercise an increasing number of the shares underlying the option over a specific period of time only if he or she continues to provide services 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   |   | WeightedAverageExercisePrice |      
|Outstanding
        at beginning of fiscal year |  | 879,929  |   | $                            | 23.67
|Granted                                         |  | -        |   |                              | -    
|Exercised                                       |  | (302,953 | ) |                              | 23.57
|Outstanding
        at end of fiscal year       |  | 576,976  |   | $                            | 23.72
|Exercisable
        at end of fiscal year       |  | 195,713  |   | $                            | 23.43

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



|                         |  | Stock Options Outstanding |  | Stock Options Exercisable               | 
|------------------------ |  | ------------------------- |  | --------------------------------------- | 
|Range of Exercise Prices |  | Number                    |  | WeightedAverageRemainingContractualLife | 
|$21.37 - $25.87          |  | 576,976                   |  | 8.38                                    | 
|                         |  |                           |  |                                         | 

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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.

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, wages and 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-employee directors, 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 connection with the quarterly vesting under the stock incentive plan.

|(17) | 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 and guarantee loss.

The Company has extended $4.1 million in working capital lines of credit to certain jointly owned and managed companies, including certain consolidated VIEs, 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 having fixed 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 approximates the amount of outstanding letters of credit.

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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 certain of 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. Certain other of the Companys joint venture partnerships qualifying as VIEs, and where the Company is determined to be the primary beneficiary of such arrangements, are consolidated pursuant to FIN 46. The carrying value of the Companys investment in unconsolidated joint venture partnerships is $6.1 million and $4.4 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 consolidated VIE. The underlying debt obligations of the Companys consolidated VIEs are non-recourse to it, with the exception of this guarantee. 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.

Legal Proceedings

GHC is a party to litigation and regulatory investigations arising in the ordinary course of business. Management does not believe the results of such litigation and regulatory investigations, even if the outcome is unfavorable, would have a material adverse effect on the results of operations, financial position or cash flows 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;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | 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.
| | - | ---------------------------------

|(18) | Fair Value of Financial Instruments
|---- | -----------------------------------

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

|                                                         |  | 2005           |         | 2004       |  
|-------------------------------------------------------- |  | -------------- | ------- | ---------- | -
|                                                         |  | CarryingAmount |         | Fair Value |  
|                                                         |  | (Restated)     |         | (Restated) |  
|Cash and equivalents                                     |  | $              | 107,350 |            | $
|Restricted cash and investments in marketable securities |  |                | 103,514 |            |  
|Accounts receivable, net                                 |  |                | 186,296 |            |  
|Accounts payable                                         |  |                | 56,266  |            |  
|Debt, excluding capital leases                           |  |                | 414,676 |            |  
|Pay fixed/receive variable interest rate swap            |  |                | 41      |            |  

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 at the end of each fiscal period presented. The fair value of the interest rate swap agreement was determined using confirmations from a third-party financial institution.

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.

|(19) | Investment
        Income
|---- | -------------------------

Investment income isearned principally on short-term investments of cash on hand, restricted cash and investments of marketable securities held by LHC, GHCs wholly owned insurance captive, and assets held in a rabbi trust of GHCs deferred compensation plan. GHC includes investment income in the EBITDA, as defined herein, of its other services and corporate costs segment category (see note 21  Segment Information).

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The following table sets forth the components of investment income (in thousands):



|                                          |  | 2005       |       | 2004       |   | 2003       | 
|----------------------------------------- |  | ---------- | ----- | ---------- | - | ---------- | 
|                                          |  | (Restated) |       | (Restated) |   | (Restated) | 
|Income on cash and short-term investments |  | $          | 2,888 |            | $ | 1,249      | 
|Income on restricted investments          |  |            | 2,808 |            |   | 3,564      | 
|Income on assets held in rabbi trust      |  |            | 2,615 |            |   | 882        | 
|Interest income on notes receivable       |  |            | 504   |            |   | 543        | 
|Total investment income                   |  | $          | 8,815 |            | $ | 6,238      | 

|(20) | 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.

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       |  
|----------------------------------------------- |  | ---------- | ------ | ---------- | - | ---------- | -
|                                                |  | (Restated) |        | (Restated) |   | (Restated) |  
|Net revenues                                    |  | $          | 10,817 |            | $ | 43,496     |  
|Net operating loss of discontinued businesses   |  | $          | (183   | )          | $ | (3,442     | )
|Loss on discontinuation of businesses           |  |            | (86    | )          |   | (249       | )
|Income tax benefit                              |  |            | 109    |            |   | 1,484      |  
|Loss from discontinued operations, net of taxes |  | $          | (160   | )          | $ | (2,207     | )

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

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|(21) | Segment Information
|---- | -------------------

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 the Companys 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 the Companys reportable and non-reportable segments.

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|                                                                |  | Year ended September 30, |          
|--------------------------------------------------------------- |  | ------------------------ | ---------
|(in thousands)                                                  |  | 2005                     |          
|                                                                |  | (Restated)               |          
|Revenues:                                                       |  |                          |          
|Inpatient services - external                                   |  | $                        | 1,543,628
|Rehabilitation services:                                        |  |                          |          
|External                                                        |  |                          | 129,256  
|Intersegment                                                    |  |                          | 82,469   
|All other services:                                             |  |                          |          
|External                                                        |  |                          | 38,549   
|Intersegment                                                    |  |                          | 59,333   
|Elimination of intersegment revenues                            |  |                          | (141,802 
|Total net revenues                                              |  |                          | 1,711,433
|EBITDA (1):                                                     |  |                          |          
|Inpatient services                                              |  |                          | 218,376  
|Rehabilitation services                                         |  |                          | 9,662    
|All other services and corporate costs                          |  |                          | (59,994  
|(Loss) gain on early extinguishment of debt                     |  |                          | (11,765  
|Total EBITDA                                                    |  |                          | 156,279  
|Capital and other:                                              |  |                          |          
|Depreciation and amortization expense                           |  |                          | (53,704  
|Interest expense                                                |  |                          | (28,809  
|Income tax expense                                              |  |                          | (28,644  
|Equity in net income of unconsolidated affiliates               |  |                          | 2,600    
|Minority interests                                              |  |                          | (1,494   
|Income from continuing operations                               |  |                          | 46,228   
|Loss from discontinued operations, net of taxes                 |  |                          | (160     
|Cumulative
        effect of an accounting change, net of taxes |  |                          | -        
|Net income                                                      |  | $                        | 46,068   

|(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, 2005 and 2004 were as follows (in thousands):



|                                |  | 2005       |           | 2004       |  
|------------------------------- |  | ---------- | --------- | ---------- | -
|                                |  | (Restated) |           | (Restated) |  
|Inpatient services              |  | $          | 996,263   |            | $
|Rehabilitation therapy services |  |            | 38,689    |            |  
|All other                       |  |            | 377,748   |            |  
|Total assets                    |  | $          | 1,412,700 |            | $

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 $4.9 million and $3.7 million of the $8.6 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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|(22) | Comprehensive Income
|---- | --------------------

The following table sets forth the computation of comprehensive income for the years ended September 30, 2005, 2004 and 2003 (in thousands):

|                                                                                      |  | 2005       |        | 2004       |   | 2003       |  
|------------------------------------------------------------------------------------- |  | ---------- | ------ | ---------- | - | ---------- | -
|                                                                                      |  | (Restated) |        | (Restated) |   | (Restated) |  
|Net
        income                                                                    |  | $          | 46,068 |            | $ | 28,242     |  
|Net
        unrealized (loss) gain on restricted investments in marketable securities |  |            | (667   | )          |   | (880       | )
|Net
        increase to minimum pension liability                                     |  |            | (157   | )          |   | -          |  
|Unrealized
        gain (loss) on interest rate swap agreement                        |  |            | 249    |            |   | 130        |  
|Total
        comprehensive income                                                    |  | $          | 45,493 |            | $ | 27,492     |  

The unrealized (loss) gain on restricted investments in marketable securities is 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 September 30, 2005.

The unrealized gain (loss) on the interest rate swap agreement represents the change in the fair value of the underlying variable to fixed interest rate swap agreement held by a VIE consolidated by GHC pursuant to FIN 46. The VIE is a limited liability corporation and does not record income taxes at the limited liability corporation level. Therefore, the net unrealized gain (loss) on the interest rate swap agreement has not been tax effected. Obligations under the interest rate swap agreement are non-recourse to GHC.

|(23) | Condensed Consolidating and Combining Financial Statements 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 10  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, certain separately mortgaged centers and VIEs consolidated by GHC pursuant to FIN 46 (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)

|                                           |  | (Restated) |          
|------------------------------------------ |  | ---------- | ---------
|                                           |  | Parent     |          
|Assets:                                    |  |            |          
|Current assets                             |  | $          | 150,087  
|Property and equipment, net                |  |            | 25,048   
|Other long-term assets                     |  |            | 111,869  
|Investments in subsidiaries                |  |            | 423,262  
|Intercompany receivables                   |  |            | 388,093  
|Total assets                               |  | $          | 1,098,359
|                                           |  |            |          
|Liabilities and shareholders' equity:      |  |            |          
|Current liabilities                        |  | $          | 56,057   
|Intercompany payables                      |  |            | -        
|Long-term debt                             |  |            | 338,780  
|Other long-term liabilities                |  |            | 52,709   
|Shareholders' equity                       |  |            | 650,813  
|Total liabilities and shareholders' equity |  | $          | 1,098,359

GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEETS

SEPTEMBER 30, 2004

(IN THOUSANDS)



|                                                   |  | (Restated) |          
|-------------------------------------------------- |  | ---------- | ---------
|                                                   |  | Parent     |          
|Assets:                                            |  |            |          
|Current
        assets                             |  | $          | 168,971  
|Property
        and equipment, net                |  |            | 21,489   
|Other
        long-term assets                     |  |            | 87,928   
|Investments
        in subsidiaries                |  |            | 250,469  
|Intercompany
        receivables                   |  |            | 547,964  
|Total
        assets                               |  | $          | 1,076,821
|                                                   |  |            |          
|Liabilities
        and shareholders' equity:      |  |            |          
|Current
        liabilities                        |  | $          | 93,997   
|Intercompany
        payables                      |  |            | -        
|Long-term
        debt                             |  |            | 341,596  
|Other
        long-term liabilities                |  |            | 86,152   
|Shareholders'
        equity                       |  |            | 555,076  
|Total
        liabilities and shareholders' equity |  | $          | 1,076,821

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GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

YEAR ENDED SEPTEMBER 30, 2005

(IN THOUSANDS)

|                                                                                                                                            |  | (Restated)
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------
|                                                                                                                                            |  | Parent    
|Net
        revenues                                                                                                                        |  | $         
|Equity
        in net income of subsidiaries                                                                                                |  |           
|Operating
        expenses                                                                                                                  |  |           
|Lease
        expense                                                                                                                       |  |           
|Depreciation
        and amortization expense                                                                                               |  |           
|Interest
        expense                                                                                                                    |  |           
|Investment
        income                                                                                                                   |  |           
|Income
        (loss) before income tax (benefit) expense, equity in net income of unconsolidated
        affiliates and minority interests |  |           
|Income
        tax (benefit) expense                                                                                                        |  |           
|Income
        (loss) before equity in net income of unconsolidated affiliates and minority
        interests                               |  |           
|Equity
        in net income of unconsolidated affiliates                                                                                   |  |           
|Minority
        interests                                                                                                                  |  |           
|Income
        (loss) from continuing operations                                                                                            |  |           
|Income
        (loss) from discontinued operations, net of taxes                                                                            |  |           
|Net
        income (loss)                                                                                                                   |  | $         

GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

YEAR ENDED SEPTEMBER 30, 2004

(IN THOUSANDS)

|                                                                                                                                            |  | (Restated)
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------
|                                                                                                                                            |  | Parent    
|Net
        revenues                                                                                                                        |  | $         
|Equity
        in net income of subsidiaries                                                                                                |  |           
|Operating
        expenses                                                                                                                  |  |           
|Lease
        expense                                                                                                                       |  |           
|Depreciation
        and amortization expense                                                                                               |  |           
|Interest
        expense                                                                                                                    |  |           
|Investment
        income                                                                                                                   |  |           
|Income
        (loss) before income tax (benefit) expense, equity in net income of unconsolidated
        affiliates and minority interests |  |           
|Income
        tax (benefit) expense                                                                                                        |  |           
|Income
        before equity in net income of unconsolidated affiliates and minority
        interests                                      |  |           
|Equity
        in net income of unconsolidated affiliates                                                                                   |  |           
|Minority
        interests                                                                                                                  |  |           
|Income
        from continuing operations                                                                                                   |  |           
|Loss
        from discontinued operations, net of taxes                                                                                     |  |           
|Net
        income                                                                                                                          |  | $         





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GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES

CONDENSED COMBINING STATEMENTS OF OPERATIONS

YEAR ENDED SEPTEMBER 30, 2003

(IN THOUSANDS)

|                                                                                                                                            |  | (Restated)
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------
|                                                                                                                                            |  | Parent    
|Net
        revenues                                                                                                                        |  | $         
|Equity
        in net income of subsidiaries                                                                                                |  |           
|Operating
        expenses                                                                                                                  |  |           
|Lease
        expense                                                                                                                       |  |           
|Depreciation
        and amortization expense                                                                                               |  |           
|Interest
        expense                                                                                                                    |  |           
|Investment
        income                                                                                                                   |  |           
|Income
        (loss) before income tax (benefit) expense, equity in net income of unconsolidated
        affiliates and minority interests |  |           
|Income
        tax (benefit) expense                                                                                                        |  |           
|Income
        (loss) before equity in net income of unconsolidated affiliates and minority
        interests                               |  |           
|Equity
        in net income of unconsolidated affiliates                                                                                   |  |           
|Minority
        interests                                                                                                                  |  |           
|Income
        (loss) from continuing operations                                                                                            |  |           
|Loss
        from discontinued operations, net of taxes                                                                                     |  |           
|Cumulative
        effect of accounting change                                                                                              |  |           
|Net
        income (loss)                                                                                                                   |  | $         

GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

YEAR ENDED SEPTEMBER 30, 2005

(IN THOUSANDS)

|                                                    |  | (Restated) |         
|--------------------------------------------------- |  | ---------- | --------
|                                                    |  | Parent     |         
|                                                    |  |            |         
|Net cash (used in) provided by operating activities |  | $          | (127,314
|Net cash used in investing activities               |  |            | (4,287  
|Net cash provided by (used in) financing activities |  |            | 83,749  
|Net (decrease) increase in cash and equivalents     |  | $          | (47,852 

GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

YEAR ENDED SEPTEMBER 30, 2004

(IN THOUSANDS)

|                                                            |  | (Restated) |        
|----------------------------------------------------------- |  | ---------- | -------
|                                                            |  | Parent     |        
|                                                            |  |            |        
|Net
        cash (used in) provided by operating activities |  | $          | (85,812
|Net
        cash used in investing activities               |  |            | (24,755
|Net
        cash provided by (used in) financing activities |  |            | 231,500
|Net
        increase (decrease) in cash and equivalents     |  | $          | 120,933





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GENESIS HEALTHCARE CORPORATION AND SUBSIDIARIES

CONDENSED COMBINING STATEMENTS OF CASH FLOWS

YEAR ENDED SEPTEMBER 30, 2003

(IN THOUSANDS)

|                                                            |  | (Restated) |         
|----------------------------------------------------------- |  | ---------- | --------
|                                                            |  | Parent     |         
|                                                            |  |            |         
|Net
        cash (used in) provided by operating activities |  | $          | (102,254
|Net
        cash (used in) provided by investing activities |  |            | (1,877  
|Net
        cash provided by (used in) financing activities |  |            | 1,789   
|Net
        (decrease) increase in cash and equivalents     |  | $          | (102,342

|(24) | Subsequent
        Events
|---- | -------------------------

Subsequent to September 30, 2005, the Company:

| |  | Repurchased an additional 288,405 shares of its common stock at a cost of $10.7 million.
| | - | ----------------------------------------------------------------------------------------

| |  | Paid
        $4.1 million to acquire all of its joint venture partners interests
        in three partnerships that each own a skilled nursing facility located
        in the State of West Virginia having a combined 208 beds. GHC currently
        owns a 50% interest in each partnership and manages the operations of
        each of the three facilities, but upon completion of the transaction will
        own 100% of each facility and will therefore consolidate the related revenues,
        expenses and net assets of each facility. In accordance with FIN 46, GHC
        already consolidates the financial statements of one of the partnerships
        and records minority interest to reflect its joint venture partners
        interests. Because GHC extended this partnership mortgage financing, GHC
        is the primary beneficiary of the partnership, as defined by FIN 46, and
        therefore consolidates it. The combined annual revenues and pre tax income
        of the two unconsolidated partnerships is approximately $10.0 million
        and $1.2 million, respectively. The transaction closed on June 1, 2006.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Repurchased
        $8.2 million of 8% senior subordinated notes resulting in prepayment premium
        charges and write-off of unamortized deferred financing fees and other
        fees of $0.8 million.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Authorized
        the repurchase of up to $150.0 million of GHCs common stock, with
        such repurchases to take place at GHC managements discretion and/or
        under pre-established, non-discretionary programs from time to time, depending
        on market conditions, in the open market and in privately negotiated transactions,
        subject to any covenants or restrictions contained in agreements governing
        GHCs indebtedness. Repurchases of common stock are restricted by
        GHCs debt agreements, the most restrictive of which is its 8% senior
        subordinated notes. Such restrictions preclude repurchases of common stock
        above 50% of GHCs net income since July 1, 2003. After considering
        common stock repurchases made to date and other repurchase provisions,
        GHCs maximum common stock repurchasing capacity at March 31, 2006
        is $14.5 million.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (Unaudited)
        Announced that it signed an agreement to enter into lease and purchase
        option agreements with an unrelated provider of long-term care that operates
        11 facilities with a combined total of approximately 970 skilled nursing
        and assisted living facility beds located in the State of Maine. The most
        significant terms of the transaction assume GHC will enter into 11 separate
        agreements to lease the facilities over a 10 year term, with two five
        year renewal options. GHC will also assume an option to purchase all 11
        properties in 2026 for $53.0 million. GHC expects to account for the transaction
        as a capital lease. GHC would pay approximately $16.0 million of cash
        consideration upon closing of the transaction and the related capital
        lease obligation balance is expected to approximate $40.0 million. The
        11 facilities currently generate approximately $65.0 million of annual
        revenue. The closing of the transaction, which is expected to occur in
        the last calendar quarter of 2006, is subject to receipt of regulatory
        approvals and various other customary conditions. Accordingly, no assurances
        can be given that the transaction will be consummated or, if it is, what
        the final terms will be or what its ultimate impact will be on GHCs
        financial condition or results of operations.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|(25) | Quarterly
        Financial Data (Unaudited)
|---- | --------------------------------------------

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

As previously reported:



|                      |  | Total NetRevenue |         | IncomefromContinuingOperations |   | Net Income |  | Net Income Per Share |       
|--------------------- |  | ---------------- | ------- | ------------------------------ | - | ---------- |  | -------------------- | ------
|Basic                 |  | Diluted          |        
|Quarter ended:        |  |                  |         |                                |   |            |  |                      |       
|December 31, 2004     |  | $                | 399,027 |                                | $ | 10,325     |  | $                    | 10,848
|March 31, 2005        |  |                  | 454,566 |                                |   | 13,631     |  |                      | 13,467
|June 30, 2005         |  |                  | 408,971 |                                |   | 8,991      |  |                      | 7,641 
|September 30, 2005    |  |                  | 420,786 |                                |   | 9,473      |  |                      | 10,213
|Quarter ended:        |  |                  |         |                                |   |            |  |                      |       
|December 31, 2003 (1) |  | $                | 366,310 |                                | $ | 7,431      |  | $                    | 6,006 
|March 31, 2004        |  |                  | 378,681 |                                |   | 6,151      |  |                      | 5,574 
|June 30, 2004         |  |                  | 375,273 |                                |   | 7,641      |  |                      | 6,722 
|September 30, 2004    |  |                  | 397,289 |                                |   | 10,525     |  |                      | 10,771

|(1) | 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."
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

As restated:



|                      |  | Total NetRevenue |            | IncomefromContinuingOperations |   | Net Income |  | Net Income Per Share |           
|--------------------- |  | ---------------- | ---------- | ------------------------------ | - | ---------- |  | -------------------- | ----------
|Basic                 |  | Diluted          |           
|                      |  |                  | (Restated) |                                |   | (Restated) |  |                      | (Restated)
|Quarter ended:        |  |                  |            |                                |   |            |  |                      |           
|December 31, 2004     |  | $                | 407,491    |                                | $ | 12,544     |  | $                    | 13,151    
|March 31, 2005        |  |                  | 459,271    |                                |   | 13,285     |  |                      | 13,189    
|June 30, 2005         |  |                  | 417,494    |                                |   | 10,045     |  |                      | 8,776     
|September 30, 2005    |  |                  | 427,177    |                                |   | 10,354     |  |                      | 10,952    
|Quarter ended:        |  |                  |            |                                |   |            |  |                      |           
|December 31, 2003 (1) |  | $                | 377,526    |                                | $ | 7,353      |  | $                    | 5,968     
|March 31, 2004        |  |                  | 388,792    |                                |   | 5,507      |  |                      | 5,017     
|June 30, 2004         |  |                  | 384,869    |                                |   | 7,340      |  |                      | 6,538     
|September 30, 2004    |  |                  | 407,010    |                                |   | 10,249     |  |                      | 10,719    

|(1) | 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 HEALTHCARE CORPORATION AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS

FOR THE YEARS ENDED SEPTEMBER 30, 2005, 2004 AND 2003

(IN THOUSANDS)

|Description                            |  | Balance atBeginning ofPeriod |         | Charged toOperations |        | Deductions (1) (2) |        | Balance atEnd ofPeriod |  
|-------------------------------------- |  | ---------------------------- | ------- | -------------------- | ------ | ------------------ | ------ | ---------------------- | -
|                                       |  | (Restated)                   |         | (Restated)           |        | (Restated)         |        | (Restated)             |  
|Year Ended September 30, 2005          |  |                              |         |                      |        |                    |        |                        |  
|Allowance for Doubtful Accounts        |  | $                            | 29,632  |                      | 12,909 |                    | 19,559 |                        | $
|Deferred Tax Asset Valuation Allowance |  |                              | 77,748  |                      | -      |                    | 77,748 |                        |  
|Year Ended September 30, 2004          |  |                              |         |                      |        |                    |        |                        |  
|Allowance for Doubtful Accounts        |  | $                            | 32,562  |                      | 18,859 |                    | 21,789 |                        | $
|Deferred Tax Asset Valuation Allowance |  |                              | 127,573 |                      | -      |                    | 49,825 |                        |  
|Year Ended September 30, 2003          |  |                              |         |                      |        |                    |        |                        |  
|Allowance for Doubtful Accounts        |  | $                            | 36,566  |                      | 21,575 |                    | 25,579 |                        | $
|Deferred Tax Asset Valuation Allowance |  |                              | 130,797 |                      | -      |                    | 3,224  |                        |  

|(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$51.0million 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 predating 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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|ITEM9: | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|------ | ------------------------------------------------------------------------------------

None.

|ITEM9A: | CONTROLS AND PROCEDURES
|------- | -----------------------

(a)
  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 Amendment No. 1 to our Annual Report on Form 10-K/A, is recorded,
  processed, summarized and reported, within the time periods specified in the
  Securities and Exchange Commissions rules and forms. Disclosure controls
  and procedures include, without limitation, controls and procedures designed
  to ensure that information required to be disclosed by us in the reports that
  we file or submit under the Exchange Act is accumulated and communicated to
  our management, including our chief executive officer and chief financial officer,
  as appropriate to allow timely decisions regarding required disclosures. 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 disclosure controls and procedures
  performed in connection with the preparation of this Amendment No. 1 to our
  Annual Report on Form 10-K/A, our chief executive officer and chief financial
  officer concluded that, as of September 30, 2005, our disclosure controls and
  procedures were not effective because of the material weaknesses in internal control
  over financial reporting described below.
  In addition, our chief executive officer and chief financial officer have reevaluated
  the conclusions regarding our disclosure controls and procedures for prior periods
  and have concluded that our disclosure controls and procedures were not effective
  as of September 30, 2003 and 2004 and as of the ends of the interim
  periods in fiscal 2004 and 2005.

(b)
  Managements Annual Report on Internal Control over Financial Reporting (Restated)

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). In Managements Annual Report on
  Internal Control Over Financial Reporting originally included in our Annual
  Report on Form 10-K filed on December 14, 2005, management concluded that our
  internal control over financial reporting was effective. Subsequent to filing our
  Annual Report on Form 10-K on December 14, 2005, we identified material
  misstatements in previously issued consolidated financial statements and have restated
  our 2003, 2004, and 2005 annual consolidated financial statements and our interim
  consolidated financial statements in fiscal 2004 and 2005.  As a result of these
  material misstatements, we reevaluated the effectiveness of our
  internal control over financial reporting as of September 30, 2005.

A
  material weakness is a control deficiency, or a combination of control deficiencies,
  that results in more than a remote likelihood that a material misstatement of
  the annual or interim financial statements will not be prevented or detected.
  As a result of our reevaluation, we have identified the following material weaknesses
  as of September 30, 2005:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Ineffective   controls  over  the  selection  and
application of generally accepted accounting principles affecting self-insurance
reserves.  As a result,  we did not  properly  interpret  SEC  Staff  Accounting
Bulletin No. 62, “Discounting     by     Property-Casualty      Insurance
Companies,”  as it applies to our captive insurance  subsidiary,  and
we  inappropriately  discounted  liabilities for self-insured  reserves.
This material weakness resulted in material  accounting errors in self-insurance
liability reserves,  salaries, wages, and benefits, and other operating expenses
that  required  restatement  of the 2003,  2004,  and 2005  annual  consolidated
financial statements and the interim consolidated financial statements in fiscal
2004 and 2005.                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | Insufficient   policies  and  procedures  and
technical expertise to identify,  and account for the consolidation of, variable
interest entities in accordance with FIN 46, “Consolidation of Variable
Interest  Entities.”  Specifically,  our policies and  procedures  for
evaluating  potential variable interest entities were not designed  sufficiently
to identify certain joint ventures as variable  interest  entities that required
consolidation,  and we did not have personnel  possessing  sufficient  technical
expertise  related to the application of the provisions of FIN 46. This material
weakness resulted in material accounting errors that required restatement of the
2003, 2004, and 2005 annual  consolidated  financial  statements and the interim
consolidated financial statements in fiscal 2004 and 2005.

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Based
  on managements reevaluation, under the COSO framework of our internal control
  over financial reporting, we concluded that our internal control over
  financial reporting was not effective as of September 30, 2005 as a result of
  the material weaknesses described above.

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. generally
  accepted accounting principles.

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 in Item 9A
  (c) below.

(c)
  Report of Independent Registered Public Accounting Firm

The
  Board of Directors and Shareholders

Genesis
  HealthCare Corporation:

We
  have audited management's assessment, included in the accompanying Managements
  Annual Report on Internal Control over Financial Reporting (Restated), that
  Genesis HealthCare Corporation (the Company) did not maintain effective internal
  control over financial
  reporting as of September 30, 2005, because of the effect of material weaknesses
  identified in managements assessment, based on criteria established in
  Internal ControlIntegrated Framework issued by the Committee of
  Sponsoring Organizations 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s internal 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 process designed to
  provide reasonable assurance regarding the reliability of financial reporting
  and the preparation of financial statements for external purposes in accordance
  with generally accepted accounting principles. A company's internal control
  over financial reporting includes those policies and procedures that (1) pertain
  to the maintenance of records that, in reasonable detail, accurately and fairly
  reflect the transactions and dispositions of the assets of the company; (2)
  provide reasonable assurance that transactions are recorded as necessary to
  permit preparation of financial statements in accordance with generally accepted
  accounting principles, and that receipts and expenditures of the company are
  being made only in accordance with authorizations of management and directors
  of the company; and (3) provide reasonable assurance regarding prevention or
  timely detection of unauthorized acquisition, use, or disposition of the companys
  assets 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.

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A
  material weakness is a control deficiency, or a combination of control deficiencies,
  that results in more than a remote likelihood that a material misstatement of
  the annual or interim financial statements will not be prevented or detected.
  Management has identified, and included in its assessment, the following material
  weaknesses in its internal control over financial reporting as of September
  30, 2005:

| |  | Ineffective
controls over the selection and application of generally accepted accounting principles affecting self-insurance reserves.
As a result, the Company did not properly interpret SEC Staff Accounting Bulletin No. 62, “Discounting by
Property-Casualty Insurance Companies,” as it applies to its captive insurance subsidiary, and
the Company inappropriately discounted liabilities for self-insured reserves.  This material weakness resulted in
material accounting errors in self-insurance liability reserves, salaries, wages, and benefits, and other operating
expenses that required restatement of the 2003, 2004, and 2005 annual consolidated financial statements and the
interim consolidated financial statements in fiscal 2004 and
2005.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Insufficient policies and procedures and technical expertise to identify, and account for the consolidation of, variable interest entities in accordance with FIN 46, “Consolidation of Variable Interest Entities.”  Specifically, the Company’s policies and procedures for evaluating potential variable interest entities were not designed sufficiently to identify certain joint ventures as variable interest entities that required consolidation, and it did not have personnel possessing sufficient technical expertise related to the application of the provisions of FIN 46.  This material weakness resulted in material accounting errors that required restatement of the 2003, 2004, and 2005 annual consolidated financial statements and the interim consolidated financial statements in fiscal 2004 and 2005.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As
stated in the first through third paragraphs of Managements Annual Report on Internal Control over Financial Reporting
(Restated), managements assessment of the effectiveness of the Companys internal control over financial
reporting as of September 30, 2005 has been restated to reflect the impact of the aforementioned material weaknesses in internal
control over financial reporting.

We
  also have audited, in accordance with the standards of the Public Company Accounting
  Oversight Board (United States), the restated consolidated balance sheets of Genesis
  HealthCare Corporation and subsidiaries as of September 30, 2005 and 2004, and
  the related restated consolidated statements of operations, shareholders equity
  and cash flows for each of the years in the three-year period ended September
  30, 2005. The aforementioned material
  weaknesses were considered in determining the nature, timing, and extent of
  audit tests applied in our audit of the restated 2005 consolidated financial statements,
  and this report does not affect our report dated June 15, 2006, which expressed
  an unqualified opinion on those consolidated financial statements.

In
  our opinion, management's restated assessment that Genesis HealthCare Corporation did
  not maintain effective internal control over financial reporting as of September
  30, 2005, is fairly stated, in all material respects, based on criteria established
  in Internal ControlIntegrated Framework issued by the Committee
  of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our
  opinion, because of the effect of the material weaknesses described above on
  the achievement of the objectives of the control criteria, Genesis HealthCare
  Corporation has not maintained effective 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).

/s/
  KPMG LLP

Philadelphia,
  Pennsylvania

June
  15, 2006

(d)
  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
  changes in the Companys internal control over financial reporting identified
  in connection with the evaluation required by Exchange Act Rule 13a-15(d) that
  occurred during the Companys last quarter of its fiscal year 2005 that
  have materially affected, or are reasonably likely to affect materially, the
  Companys internal control over financial reporting.

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Subsequent
  to September 30, 2005, we have commenced implementation of the following remediation
  steps to address the material weaknesses described above under Managements
  Annual Report on Internal Control over Financial Reporting (Restated) in order to
  ensure proper accounting for self-insured reserves and the proper application
  of FIN 46 under U.S. generally accepted accounting principles:

| |  | Changes
        to our procedures to ensure proper accounting for self-insured reserves
        on an undiscounted basis and engaging third-party subject matter experts
        in the course of forming judgments regarding accounting standards which
        do not include detailed implementation guidance.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Providing
        additional training for personnel responsible for the accounting for the
        consolidation of variable interest entities, implementing changes to our
        procedures to ensure the proper identification of variable interest entities
        and the overall application of FIN 46, and engaging third-party subject
        matter experts in the course of implementing complex accounting standards.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Although
  our remediation efforts are underway, control weaknesses will not be considered
  remediated until new internal controls over financial reporting are fully implemented
  and operational for a period of time and are operating effectively.

|ITEM
        9B: | OTHER INFORMATION
|---------------- | -----------------

None.

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.

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|ITEM
        12: | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTAND 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:



|                                                           |  | (a)                                                                                     |  | (b)                                                                     |       | (c)                                                                                                                                    |          
|---------------------------------------------------------- |  | --------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------- | ----- | -------------------------------------------------------------------------------------------------------------------------------------- | ---------
|Plan Category                                              |  | Number of securitiesto be issued uponexercise ofoutstanding options,warrants and rights |  | Weighted-averageexercise price ofoutstandingoptions, warrantsand rights |       | Number of securitiesremaining available forfuture issuance under equitycompensation plans(excluding securitiesreflected in column (a)) |          
|                                                           |  |                                                                                         |  |                                                                         |       |                                                                                                                                        |          
|Equity compensation plans approvedby 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 Option Plan there were options currently exercisable to purchase 195,713 shares of common stock, options granted but not yet exercisable to purchase 576,976 shares of common stock and 600,000 shares of common stock eligible for future grant of options. At September 30, 2005, under the 2003 Stock Incentive Plan there were 274,436 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/A 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 herein. 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 HealthCare Corporation.                                                                                                                                                                                                                                                                                                                                                                                           
|                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|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(1)               | 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(6)    | 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(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 therein and The Bank of New York, as trustee,
        dated March 16, 2005.           
|          |                                                                                                                                                                                                                                                                                                               
|4.7(7)    | 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(8)+  | Employment
        Agreement by and between Genesis HealthCare Corporation and George V.
        Hager, Jr., dated as of November 25, 2003.                                                                                                                                                                   
|          |                                                                                                                                                                                                                                                                                                               
|10.9(1)+  | 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(1)   | 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(1)+  | 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(1)+  | 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(1)+  | 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(1)+  | 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(8)+  | Employment
        Agreement by and between Genesis HealthCare Corporation and David C. Almquist
        dated as of December 1, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|10.18(8)+  | Employment
        Agreement by and between Genesis HealthCare Corporation and Richard P.
        Blinn dated as of December 1, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|10.19(8)+  | Employment
        Agreement by and between Genesis HealthCare Corporation and James McKeon
        dated as of December 1, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|10.20(8)+  | Employment
        Agreement by and between Genesis HealthCare Corporation and Robert A.
        Reitz dated as of December 1, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|10.21(7)   | 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(9)   | 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(10)+ | Form
        of Restricted Stock Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|10.24(7)   | 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(7)  | 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(11) | 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(11) | 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(11) | 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.                                            
|          |                                                                                                                                                                                                                                                                                                                                                                        
|10.30(*)+ | Summary
        Sheet regarding Director and Executive Officer Compensation.                                                                                                                                                                                                                                                                                           
|          |                                                                                                                                                                                                                                                                                                                                                                        
|12.1(*)   | Statement
        Re: Computation of Earnings to Fixed Charges Ratio.                                                                                                                                                                                                                                                                                                  
|          |                                                                                                                                                                                                                                                                                                                                                                        
|14.1(12)  | 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      | Certification
        of George V. Hager, Jr., Chief Executive Officer of Genesis HealthCare
        Corporation, pursuant to Rule 13a-14(a) of the Securities and Exchange
        Act of 1934, as amended.                                                                                                                                                           
|          |                                                                                                                                                                                                                                                                                                                                                                        
|31.2      | Certification
        of James V. McKeon, Chief Financial Officer of Genesis HealthCare Corporation,
        pursuant to Rule 13a-14(a) of the Securities and Exchange Act of 1934,
        as amended.                                                                                                                                                                
|          |                                                                                                                                                                                                                                                                                                                                                                        
|32.1      | Certification
        of George V. Hager, Jr., Chief Executive Officer of Genesis HealthCare
        Corporation, pursuant to 18 U.S.C. Section 1350.                                                                                                                                                                                                                  
|          |                                                                                                                                                                                                                                                                                                                                                                        
|32.2      | Certification
        of James V. McKeon, Chief Financial Officer of Genesis HealthCare Corporation,
        pursuant to 18 U.S.C. Section 1350.                                                                                                                                                                                                                       
|          |                                                                                                                                                                                                                                                                                                                                                                        

---

* Previously filed.

+ Management contract or compensatory plan.

|(1) | Incorporated by reference to Genesis HealthCare Corporations Registration Statement on Form 10 filed on November 6, 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.
|--- | ----------------------------------------------------------------------------------------------------------------------------

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|(6) | Incorporated by reference to Genesis HealthCare Corporations Registration Statement on Form S-4 filed April 5, 2004 (as amended).
|--- | ----------------------------------------------------------------------------------------------------------------------------------

|(7) | 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.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) | 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.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) | 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.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10) | Incorporated by reference to Genesis HealthCare Corporations Current Report on Form 8-K filed on November 22, 2004.
|---- | --------------------------------------------------------------------------------------------------------------------

|(11) | Incorporated by reference to Genesis HealthCare Corporations Form 8-K filed on June 14, 2005.
|---- | ----------------------------------------------------------------------------------------------

|(12) | Incorporated by reference to Genesis HealthCare Corporations Current Report on Form 8-K filed on June 30, 2004.
|---- | ----------------------------------------------------------------------------------------------------------------

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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 June 19, 2006 by the undersigned thereunto duly authorized.



Genesis HealthCare CorporationBy:

      /s/ James V. McKeonJames V. McKeonChief 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 June 19, 2006.



|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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