[ X ]     Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2004

or

[    ]     Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 0-49663

Delaware                                                                85-0410612
        (State of Incorporation)                             (I.R.S. Employer Identification No.)

18831 Von Karman, Suite 400
Irvine, CA 92612
(949) 255-7100
(Address and telephone number of Registrant)

     As of May 4, 2004, there were 15,319,818 shares of the Registrant's $.01 par value Common Stock outstanding.

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See accompanying notes.

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See accompanying notes.

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See accompanying notes.

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     References throughout this document to the Company include Sun Healthcare Group, Inc. and our consolidated subsidiaries. In accordance with the Securities and Exchange Commission's "Plain English" guidelines, this Quarterly Report on Form 10-Q has been written in the first person. In this document, the words "we," "our," "ours" and "us" refer to Sun Healthcare Group, Inc. and its direct and indirect consolidated subsidiaries and not any other person.

     We are a provider of long-term, subacute and related specialty healthcare services in the United States. We operate through five principal business segments: (i) inpatient services, (ii) rehabilitation therapy services, (iii) medical staffing services, (iv) home health services and (v) laboratory and radiology services. Inpatient services represent the most significant portion of our business. As of March 31, 2004, we operated 108 long-term care facilities in 14 states.

     The accompanying unaudited consolidated financial statements have been prepared in accordance with our customary accounting practices and accounting principles generally accepted in the United States. In our opinion, the accompanying interim consolidated financial statements present fairly our financial position at March 31, 2004 and December 31, 2003, the consolidated results of our operations and the consolidated cash flows for the three months ended March 31, 2004 and 2003, respectively. We believe that all adjustments are of a normal and recurring nature. These statements are unaudited, and certain information and footnote disclosures normally included in our annual consolidated financial statements have been condensed or omitted, as permitted under the applicable rules and regulations. Readers of these statements should refer to our audited consolidated financial statements and notes thereto for the year ended December 31, 2003, which are included in ou r Annual Report on Form 10-K for the year ended December 31, 2003. The results of operations presented in the accompanying consolidated financial statements are not necessarily representative of operations for an entire year.

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include determination of third-party payor settlements, allowances for doubtful accounts, self-insurance obligations and loss accruals. Actual results could differ from those estimates.

Reclassification

     Certain reclassifications have been made to the prior period financial statements to confirm to the 2004 financial statement presentation.

     For the three months ended and as of March 31, 2004, our net loss was $10.4 million and our working capital deficit was $17.7 million. Our working capital position was significantly improved in February 2004 as a result of the net proceeds of $52.3 million received from our private placement of our common stock and warrants and paying off the outstanding loan balance under our revolving senior loan agreement. In May 2004, our working capital position was further improved upon the restructuring of $21.2 million of mortgage debt that was previously classified in current portion of long-term debt. The mortgage debt was restructured as follows: $14.5 million was refinanced, $3.0 million was paid off, and $3.7 million was forgiven. As of March 31, 2004, the $14.5 million was reclassified into long-term debt, net of current portion, and the $3.7 million to be forgiven continues to be classified as a current obligation and will be recognized in the consolidate d financial statements for the second quarter of 2004. See "Note 13 - Subsequent Events."

     As of March 31, 2004, we had cash and cash equivalents of approximately $38.0 million, no outstanding balance under our revolving loan agreement and approximately $22.3 million of funds available for borrowing under our Revolving Loan Agreement. We believe that our existing cash reserves and availability for borrowing under our loan agreement will provide sufficient funds for our operations, capital expenditures and regularly scheduled debt service payments through the next twelve months.

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     We have reached agreement with substantially all of our landlords regarding the disposition of past due rent on our divested or to be divested facilities. On March 1, 2004, we entered into an Amended and Restated Master Lease Agreement with Omega Healthcare Investors, Inc. and various of its affiliates ("Omega"). Prior to our portfolio restructuring, we leased 51 facilities from Omega. Pursuant to the new Master Lease, we will continue to operate 30 facilities (including 23 long-term care facilities, two rehabilitation hospitals, and five behavioral facilities). The new master lease also effects the settlement of a combination of (i) accrued past due rent and (ii) future rent obligations that would otherwise have become due under the previously existing master leases as of March 1, 2004 by combining a compromised portion of those amounts into "deferred base rent" that is not currently due or payable. Such deferred base rent accrues interest (annually compounded) at a floating rate of 375 basis points of the applicable LIBOR rate (subject to a floor rate of 6.0%) through January 2008, at which time interest becomes payable monthly. However, in April 2004, Omega exercised its right to convert the deferred base rent and accrued interest into 760,000 shares of our common stock and $0.5 million in cash, resulting in a $3.3 million charge recorded in loss on disposal of discontinued operations. See "Note 13 - Subsequent Events."

     We have a Loan and Security Agreement with CapitalSource Finance LLC, as collateral agent, and certain other lenders (the "Revolving Loan Agreement"). The Revolving Loan Agreement is a $75.0 million two-year revolving line of credit that is secured by our accounts receivable, inventory, equipment and other assets, and the stock of our subsidiaries. Pursuant to the Revolving Loan Agreement, we are paying interest (i) for Base Rate Loans at the greater of (a) prime plus 1.0% or (b) 5.25%, and (ii) for LIBOR Loans at the greater of (a) the London Interbank Offered Rate plus 3.75% or (b) 5.25%. The effective interest rate as of March 31, 2004 on borrowings under the Revolving Loan Agreement was approximately 5.25%.  The weighted average borrowing interest rate for the period from January 1, 2004 through March 31, 2004 was 5.25%. Our borrowing availability under the Revolving Loan Agreement is generally limited to up to eighty-five percent (85%) of the value of Eligible Receivables plus eighty-five percent (85%) of the value of Eligible Divested Company Receivables, but not to exceed $75.0 million. The defined borrowing base as of March 31, 2004 was $47.2 million, net of specified reserves of $15.0 million. The availability of amounts under our Revolving Loan Agreement is also subject to our compliance with certain financial ratios. As of March 31, 2004, we were in compliance with these ratios. As of March 31, 2004, we had issued approximately $24.9 million in letters of credit, which includes $4.6 million of overlapping letters of credit, leaving approximately $22.3 million available to us for additional borrowing. In connection with entering into the Revolving Loan Agreement, we incurred deferred financing costs of $2.6 million, which are amortized using the effective interest method over the life of the loan agreement.

(4)  Long-Term Debt

     Long-term debt consisted of the following as of the periods indicated (in thousands):

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     The scheduled or expected maturities of long-term debt as of March 31, 2004, which reflects the May 2004 refinanced terms of certain debt, were as follows (in thousands):

     In accordance with the provisions of SFAS No. 144, the results of operations of the disposed assets for the three months ended March 31, 2004 have been reported as discontinued operations for all periods presented in the accompanying consolidated statements of operations.

     Inpatient Services: During the three months ended March 31, 2004, we divested two skilled nursing facilities in accordance with our restructuring plan.     

     Pharmaceutical Services: In July 2003, we sold the assets of our pharmaceutical services operations, including the assets of SunScript Pharmacy Corporation, to Omnicare, Inc. We received cash proceeds of $75.0 million and the right to receive up to $15.0 million in additional purchase price holdback, which is to be paid to us on or before July 15, 2005 subject to fulfillment of certain conditions.

     Other Operations: On November 7, 2003, Shared Healthcare Systems, Inc. ("SHS"), a majority owned subsidiary, sold substantially all of its software development assets to Accu-Med Services of Washington LLC, a wholly-owned subsidiary of Omnicare, Inc., for approximately $5.0 million in proceeds at closing and up to $0.5 million to be paid in cash in December 2004. In addition, we sold the Washington and Oregon mobile radiology operations for $0.2 million in October 2003.

     The following tables set forth a summary of the discontinued operations for the three months ended March 31, (in thousands):

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     As of March 31, 2004, assets held for sale consisted of three undeveloped parcels of land and a vacant office building valued at $2.4 million and artwork valued at $0.7 million, each of which is reflected in our Corporate segment within our consolidated financial statements, and each of which we expect to sell during 2004.

     As of March 31, 2004, liabilities held for sale consisted of $1.3 million related to the mortgage on a skilled nursing facility, reflected in our Inpatient Services segment within our consolidated financial statements, which we expect to sell during 2004.

(a) Insurance

     We self-insure for certain insurable risks, including general and professional liability, workers' compensation liability and employee health insurance liability, through the use of self-insurance or retrospective and self-funded insurance policies and other hybrid policies, which vary by the states in which we operate. There is a risk that the amounts funded to our programs of self-insurance may not be sufficient to respond to all claims asserted under those programs. In addition, in certain states in which we operate, state law prohibits insurance coverage for punitive damages arising from general and professional liability litigation, and we could be held liable for punitive damages in those states. Although we believe the companies we have purchased insurance from are solvent, in light of the dramatic changes occurring in the insurance industry in recent years, we cannot be assured that they will remain solvent and able to fulfill their obligations . Provisions for estimated reserves, including incurred but not reported losses, are provided in the period of the related coverage. These provisions are based on actuarial analyses, internal evaluations of the merits of individual claims, and industry loss development factors or lag analyses. The methods of making such estimates and establishing the resulting reserves are reviewed periodically, and any resulting adjustments are reflected in current earnings. Claims are paid over varying periods, and future payments may be different than the estimated reserves.

     Prior to January 1, 2000, the maximum loss exposure with respect to the third-party insurance policies was $100,000 per claim for general and professional liability. Since January 2000, we have relied upon self-funded insurance programs for general and professional liability claims up to a base amount per claim and an aggregate per location, which amounts we are responsible for funding, and we obtained excess insurance policies for claims above those amounts. The programs had the following coverages that we were responsible for self-funding: (i) for events occurring from January 1, 2000 to December 31, 2002, $1.0 million per claim, and $3.0 million aggregate per location, (ii) for claims made in 2003, $10.0 million per claim with excess coverage above this level; and (iii) for claims made in 2004, $5.0 million per claim with excess coverage of $5.0 million above this level. An independent actuarial analysis is prepared twice a year to determine the ex pected losses and reserves for estimated settlements for general and professional liability under the per claim retention level, including incurred but not reported losses. For the years 2001 through 2004, these reserves are provided on an undiscounted basis. We estimate our range of exposure at March 31, 2004 is $110.9 million to $135.5 million and we anticipate that the range will decline over time as risks associated with facilities we no longer operate age past the applicable statute of limitations.

     The majority of our workers' compensation risks are insured through insurance policies with third parties. Our reserves are estimated by independent actuaries beginning with the 2000 policy year and by company analysis using industry development factors for prior years. Effective with the policy period beginning January 1, 2002, we discount our workers' compensation reserves based on a 4% discount rate. At March 31, 2004, the discounting of these policy periods resulted in a reduction to our reserves of $5.4 million. We estimate our range of exposure at March 31, 2004 is $62.8 million to $76.8 million.

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     The provision for loss for insurance risks for the three months ended March 31 were as indicated (in thousands):

     A summary of the assets and liabilities related to insurance risks at March 31, 2004 and December 31, 2003 were as indicated (in thousands):

(b) Restricted Cash

     Restricted cash, included in current assets, as of March 31, 2004 and December 31, 2003, was $30.8 million and $33.7 million, respectively, related to our funding of self insurance obligations and various escrow and bond commitments. Of the $30.8 million restricted as of March 31, 2004, $22.4 million was held for workers' compensation claim payments, $4.2 million was held for the payment of patient care liability claims and settlements and $4.2 million was held for bank collateral, various mortgages and bond payments. Of the $33.7 million restricted as of December 31, 2003, $22.4 million was held for workers' compensation claim payments, $5.0 million was held for the payment of patient care liability claims and settlements and $6.3 million was held for bank collateral, various mortgages and bond payments.

     Non-current restricted cash as of March 31, 2004 and December 31, 2003 was $34.0 million and $33.9 million, respectively. Of the $34.0 million restricted as of March 31, 2004, $31.1 million was related to our funding of future workers' compensation self-insurance obligations and $2.9 million was maintained to repay a mortgage. Of the $33.9 million restricted as of December 31, 2003, $31.0 million was related to our funding of self-insurance obligations and $2.9 million was maintained to repay a mortgage.

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     As of March 31, 2004, we had issued approximately 9,894,586 shares of our common stock in connection with our emergence from proceedings under chapter 11 of title 11 of the United States Code, 240,000 shares of our common stock pursuant to the 2002 Management Equity Incentive Plan and 4,425,232 shares of our common stock in a private placement in February 2004. As of March 31, 2004, we expect to issue up to an additional 105,414 shares of our common stock to general unsecured creditors with claims of more than $50,000 in accordance with our emergence from bankruptcy, which was effective February 28, 2002. The fair value of the additional common stock to be issued is approximately $2.8 million valued at $27.00 per share by our reorganization plan and is recorded in other long-term liabilities in the March 31, 2004 consolidated balance sheet. On May 4, 2004, the closing price of our common stock on Nasdaq was $8.90 per share.

     In April 2002, we issued warrants to purchase approximately 500,000 shares of our common stock to the holders of our senior subordinated notes prior to emergence from bankruptcy. The warrants have a strike price of $76 per share and are exercisable over a three-year period. The fair value of the warrants was estimated to be $1.8 million and is recorded in additional paid in capital in the March 31, 2004 consolidated balance sheet.

     In February 2004, in conjunction with our private equity offering, we issued warrants to purchase 2,017,897 shares of our common stock, of which 1,707,924 shares have a strike price of $12.65, 62,160 shares have a strike price of $12.82, and 247,813 shares have a strike price of $15.87. The warrants have an exercise period of five years.

     In April 2004, we issued 760,000 shares of our common stock and $0.5 million in cash to Omega Healthcare Investors, Inc. ("Omega") upon Omega's exercise of its right to convert approximately $7.8 million of deferred base rent into our common stock.

     In February 2002, we adopted the 2002 Management Equity Incentive Plan, which allows for the issuance of up to 900,000 shares of our common stock. As of March 31, 2004, our officers held options to purchase 660,000 shares under this plan and we had issued 240,000 shares of common stock awards.

     In March 2002, we adopted the 2002 Non-employee Director Equity Incentive Plan, which, as amended in August 2002, allows for the issuance of up to 160,000 options to purchase shares of our common stock. As of March 31, 2004, our directors held options to purchase 80,000 shares under this plan.

     As of March 31, 2004, we had outstanding options covering an aggregate of 740,000 shares of our common stock to our officers and directors, of which, 700,000 shares were issued at a strike price of $27.00 per share and expire in 2009 and 40,000 shares were issued at a strike price of $11.25 per share and expire in 2011. The strike prices were equal to or greater than the estimated market value at date of issuance. Of those options, 450,000 vest over a four-year period, with 20% vesting upon issuance and the remaining portion vesting ratably over the first four anniversary dates. The remaining 290,000 options vest 25% per year on the first four anniversary dates.

     In March 2004, our Board of Directors approved the amended and restated 2004 Equity Incentive Plan (the "2004 Plan") (formerly known as the 2002 Management Equity Incentive Plan), subject to stockholder approval at the Annual Meeting of stockholders to be held on May 19, 2004. Under the 2004 Plan, an additional 1.2 million shares are authorized for issuance as awards.

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     We account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB No. 25"), and related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of our stock at the date of grant over the amount an employee must pay to acquire the stock.

     Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure ("SFAS No. 148"), issued on December 31, 2002, provides companies alternative methods to transitioning to Statement of Financial Accounting Standards No. 123, Stock-Based Compensation ("SFAS No. 123"), fair value method of accounting for stock-based employee compensation and amends certain disclosure requirements. SFAS No. 148 does not mandate fair value accounting for stock-based employee compensation but does require all companies to meet the disclosure provisions. We currently do not recognize compensation expense for our stock option grants, which are issued at fair market value on the date of grant and accounted for under the intrinsic value method, APB No. 25.

     Basic net loss per share is based upon the weighted average number of common shares outstanding during the period. The weighted average number of common shares in the three months ended March 31, 2004 include the common shares issued in connection with emergence from bankruptcy, 105,414 common shares outstanding to be issued once the prepetition claims are finalized, the common shares issued in connection with our private placement in February 2004 and the common shares issued as common stock awards. See "Note 7 - Capital Stock."

     Diluted net loss per share is based upon the weighted average number of common shares outstanding during the period plus the number of incremental shares of common stock contingently issuable upon exercise of stock options and, if dilutive, includes the assumption that our restricted common stock was converted as of the beginning of the period. In periods of losses, diluted net loss per share is based upon the weighted average number of common shares outstanding during the period. As we had a net loss for the three months ended March 31, 2004 and 2003, our stock options were anti-dilutive.

     The provision for income taxes is based upon management's estimate of taxable income or loss for each respective accounting period. We recognized an asset or liability for the deferred tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. These temporary differences would result in taxable or deductible amounts in future years when the reported amounts of the assets are recovered or liabilities are settled. We also recognized as deferred tax assets the future tax benefits from net operating loss ("NOL"), capital loss, and tax credit carryforwards. A valuation allowance was provided for deferred tax assets as it is more likely than not that some portion or all of the net deferred tax assets will not be realized in the near future.

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     The current benefit for income taxes of $1.3 million for the three months ended March 31, 2004 consisted of $1.4 million of IRS refunds received due to NOL carrybacks less $0.1 million of estimated state income tax liability for this period. The current provision for income taxes of $0.3 million for the three months ended March 31, 2003 was based on estimated state income tax liability for that period. These estimated state income tax liabilities resulted from the operations of profitable subsidiaries in states that do not allow combined, consolidated or unitary tax return filings. No overall tax benefits other than for refunds received were recorded for these periods for federal income tax purposes since the realization of NOL carryforwards is uncertain.

     In connection with our emergence from bankruptcy, we realized a gain on the extinguishment of debt of approximately $1.5 billion. This gain was not taxable since the gain resulted from our reorganization under the Bankruptcy Code. However, pursuant to Section 108 of the Internal Revenue Code, we were required as of the beginning of our 2003 taxable year to reduce certain tax attributes, including (a) NOL and capital loss carryforwards, (b) certain tax credits, and (c) tax bases in assets, in an amount equal to such gain on extinguishment.

     After considering the reduction in tax attributes discussed above, we have federal NOL carryforwards of $1.0 billion with expiration dates from 2004 through 2023. Various subsidiaries have state NOL carryforwards totaling $967.3 million with expiration dates through the year 2023. In addition, we have capital loss carryforwards of $272.6 million, of which $10.1 million, $260.4 million and $2.1 million will expire in 2004, 2006, and 2007, respectively. Our alternative minimum tax credit carryforward of $4.3 million has no expiration date. Our $7.2 million of other tax credit carryforwards will expire in years 2004 through 2022.

      Internal Revenue Code Section 382 imposes a limitation on the use of a company's NOL carryforwards and other losses when the company has an ownership change. In general, an ownership change occurs when shareholders owning 5% or more of a "loss corporation" (a corporation entitled to use NOL or other loss carryovers) have increased their ownership of stock in such corporation by more than 50 percentage points during any 3-year testing period beginning on the first day following the change date for an earlier ownership change. The annual base Section 382 limitation is calculated by multiplying the loss corporation's value at the time of the ownership change times the greater of the long-term tax-exempt rate determined by the IRS in the month of the ownership change or the two preceding months.

     Our reorganization under the Bankruptcy Code effective February 28, 2002, constituted an ownership change under Section 382 of the Internal Revenue Code. Therefore, the use of any of our losses and tax credits generated prior to that date which remain after attribute reduction are subject to the limitations described in Section 382. Our application of the rules under Section 382 and Section 108 is subject to challenge upon IRS review. A successful challenge could significantly impact our ability to utilize deductions, losses and tax credits generated prior to 2003.

     We have had significant changes in the ownership of our stock since our emergence from bankruptcy as a result of our private placement of common stock and accompanying warrants, and changes in the holdings of our 5% or more shareholders. A second ownership change has not yet occurred, and at this time we are not aware of any events that would result in a second ownership change. However, future acquisitions and/or capital needs may necessitate the issuance of additional shares which could trigger such a change. In addition, subsequent changes in the holdings of current or future 5% or more shareholders could result in a second ownership change. The resulting base Section 382 limitation that would be imposed on us upon a second ownership change to limit the use of our tax attributes for federal income tax purposes would depend on our value at that time as calculated under the applicable Treasury Regulations.

(a)  Litigation

     In January 2004, 11 current and one former employee of SunBridge Care and Rehab for Escondido-East were arraigned on charges brought by the California Attorney General, through the California Department of Justice, alleging that the defendants permitted an elderly woman under their care to be placed in a situation in which her health was endangered in circumstances likely to produce great bodily harm or death. Ten of the twelve defendants were also charged with a misdemeanor count of falsifying paperwork with fraudulent intent. SunBridge Care and Rehab for Escondido-East is a skilled nursing facility in Escondido, California that is operated by Care Enterprises West, an indirect subsidiary of Sun Healthcare Group, Inc. Neither Sun Healthcare Group, Inc. nor Care Enterprises West has been charged with any wrongdoing. We continue our ongoing efforts to work in cooperation with the California Department of Justice during the course of their investigation.

     We do not know whether the BMFEA will ultimately assert that the Company is in violation of the PIFJ and, if so, what actions the BMFEA may take. There can be no assurance that there will not be an adverse outcome in these matters, or that additional charges will not be filed against the 12 employees, other employees, Care Enterprises West or any of its affiliates, or any officers and directors. We are unable to estimate any amount that the BMFEA may ultimately seek from us, or the cost to us resulting from an adverse outcome in this matter, although an adverse outcome in these matters could have a material adverse effect on our financial position, results of operations and cash flows.

     We are a party to various other legal actions and administrative proceedings and are subject to various claims arising in the ordinary course of our business, including claims that our services have resulted in injury or death to the residents of our facilities, claims relating to employment and commercial matters. We have experienced an increasing trend in the number and severity of litigation claims asserted against us. We believe that this trend is endemic to the long-term care industry and is a result of the increasing number of large judgments, including large punitive damage awards, against long-term care providers in recent years resulting in an increased aggressiveness due to the heightened awareness by plaintiff's lawyers of potentially large recoveries. In certain states in which we have significant operations, including California, insurance coverage for the risk of punitive damages arising from general and professional liabil ity litigation is generally not available due to state law public policy prohibitions. There can be no assurance that we will not be liable for punitive damages awarded in litigation arising in states for which punitive damage insurance coverage is not available.

     We operate in industries that are extensively regulated. As such, in the ordinary course of business, we are continuously subject to state and federal regulatory scrutiny, supervision and control. Such regulatory scrutiny often includes inquiries, investigations, examinations, audits, site visits and surveys, some of which are or have been and/or may in the future be non-routine. In addition to being subject to direct regulatory oversight of state and federal regulatory agencies, these industries are frequently subject to the regulatory supervision of fiscal intermediaries. If a provider is ever found by a court of competent jurisdiction to have engaged in improper practices, it could be subject to civil, administrative or criminal fines, penalties or restitutionary relief, and reimbursement authorities could also seek the suspension or exclusion of the provider or individual from participation in their program. We believe that there has been, and will co ntinue to be, an increase in governmental investigations of long-term care providers, particularly in the area of Medicare/Medicaid false claims, as well as an increase in enforcement actions resulting from these investigations. Adverse determinations in legal proceedings or governmental investigations, whether currently asserted or arising in the future, could have a material adverse effect on our financial position, results of operations and cash flows.

(b)  Reimbursement Matters

     In the ordinary course of business, fiscal intermediaries and Medicaid agencies examine cost reports filed by our skilled nursing facilities. If, as a result of any such examination, it is concluded that overpayments were made, we would be held financially responsible for such overpayments. At this time we are unable to predict the outcome of any existing or future examinations.

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     During a routine compliance audit of a division of SunAlliance, our laboratory and radiology services subsidiary that has estimated annual revenues of approximately $45.0 million, we discovered billing problems related to a 2003 billing system conversion. Based upon our preliminary findings, a revenue adjustment for one laboratory in the division of $3.3 million for the prior year was recorded in March 2004. The billing system problems that we identified were isolated to the one laboratory, have now been fully corrected and no other operations were impacted.

     We operate predominantly in the long-term care segment of the healthcare industry. We are a provider of long-term, sub-acute and related ancillary care services to nursing home patients.

     As of December 31, 2003, we had changed the composition of our segments, and therefore, we restated the previously reported segment information for the three months ended March 31, 2003 to be consistent with the year-end reporting structure. The change includes new segments for Medical Staffing, Home Health, and Laboratory and Radiology, which previously were categorized in the Other segment, and removal of the Pharmaceutical Services as they were sold in July of 2003.

     The following summarizes the services provided by our reportable and other segments:

Inpatient Services: This segment provides, through SunBridge Healthcare Corporation and other of our direct and indirect subsidiaries (collectively "SunBridge"), inpatient skilled nursing and custodial services as well as rehabilitative, restorative and transitional medical services. We provide 24-hour nursing care in these facilities by registered nurses, licensed practical nurses and certified nursing aids. At March 31, 2004, we operated 108 long-term care facilities (consisting of 91 skilled nursing facilities, six mental health facilities, eight assisted living facilities and three specialty acute care hospitals) with 10,991 licensed beds as compared with 217 facilities with 24,274 licensed beds at March 31, 2003.

Rehabilitation Therapy Services: This segment provides, through SunDance Rehabilitation Corporation ("SunDance"), physical, occupational and speech therapy services to affiliated and nonaffiliated skilled nursing facilities. At March 31, 2004, this segment provided services to 428 facilities, of which 335 were nonaffiliated and 93 were affiliated, as compared to 550 facilities at March 31, 2003, of which 335 were nonaffiliated and 215 were affiliated.

Medical Staffing Services: This segment provides temporary medical staffing, primarily through CareerStaff Unlimited, Inc. ("CareerStaff"). For the three months ended March 31, 2004, CareerStaff derived approximately 17.8% of its revenues from schools and governmental agencies, 51.1% from hospitals and other providers and 31.1% from skilled nursing facilities. CareerStaff provides (i) licensed therapists skilled in the areas of physical, occupational and speech therapy, (ii) nurses, (iii) pharmacists, pharmacist technicians and medical imaging technicians and (iv) related medical personnel. As of March 31, 2004, CareerStaff had 36 division offices, which provided temporary therapy and nursing staffing services in major metropolitan areas and one division office, which specialized in the placement of temporary traveling therapists and nurses in smaller cities and rural areas.

Home Health Services: This segment provides skilled nursing care, rehabilitation therapy and home infusion services to adult and pediatric patients in California and Ohio through SunPlus Home Health Services, Inc. ("SunPlus"). SunPlus also operates three licensed pharmacies in California.

Laboratory and Radiology Services: This segment provides mobile radiology and medical laboratory services in Arizona, California, Colorado and Massachusetts to skilled nursing facilities, primarily through SunAlliance Healthcare Services, Inc. ("SunAlliance").

     Corporate assets primarily consist of cash and cash equivalents, receivables from subsidiary segments, notes receivable and property and equipment.

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     Our reportable segments are strategic business units that provide different products and services. They are managed separately, among other reasons, because each business has different marketing strategies due to differences in types of customers, different distribution channels and different capital resource needs.

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     The following tables summarize, for the periods indicated, operating results and other financial information, by business segment:

Segment Information (in thousands):