Approximately one-third of all general acute care hospital patients require additional care following their discharge from the hospital. Some of these patients receive less intensive care in settings such as skilled nursing facilities, outpatient rehabilitation clinics or the home, while others receive continuing care in more intensive care settings such as inpatient rehabilitation facilities or long-term acute care hospitals that are either freestanding or co-located within general acute care facilities. It is estimated that Medicare spending totaled $12.8 billion in 2003 for the two primary post-acute sectors: home nursing and long-term acute care hospitals.

The Medicare Payment Advisory Committee estimates Medicare spending on home nursing services totaled $10.2 billion in 2003. According to the Centers for Medicare and Medicaid Services, or CMS, there are approximately 7,100 Medicare-certified home nursing agencies in the United States, the majority of which are operated by small local or regional providers. Approximately 32.0% of these agencies are hospital-based and approximately 34.0% are located in rural markets. CMS predicts that Medicare spending on home nursing will increase at an average annual growth rate of 7.6% between 2005 and 2009.

Rural areas have a higher percentage of residents over the age of 65, who account for 18.0% of the total population in rural markets compared to 15.0% in urban markets. Additionally, because rural areas typically do not offer the range of post-acute healthcare services that are available in urban or suburban markets, patients in rural markets face challenges in accessing healthcare in a convenient and appropriate setting. The economic characteristics and population dispersion of rural markets also make these markets less attractive to health maintenance organizations and other managed care payors. Government studies have shown rural residents also tend to have more health complications than urban residents. Additionally, residents in rural areas are less likely to use preventive screening services, and have a higher prevalence of disabilities, heart disease, cancer, diabetes, and other chronic conditions compared to urban residents.

The Company’s registered and licensed practical nurses provide a variety of medically necessary services to homebound patients who are suffering from acute or chronic illness, recovering from injury or surgery, or who otherwise require care or monitoring. These services include wound care and dressing changes, cardiac rehabilitation, infusion therapy, pain management, pharmaceutical administration, skilled observation and assessment, and patient education.

The Company’s physical, occupational and speech therapists provide therapy services to patients in their home. The Company’s therapists coordinate multi-disciplinary treatment plans with physicians, nurses and social workers to restore basic mobility skills such as getting out of bed, walking safely with crutches or a walker, and restoring range of motion to specific joints. As part of the treatment and rehabilitation process, a therapist will stretch and strengthen muscles, test balance and coordination abilities, and teach home exercise programs.

All of the Company’s home nursing agencies offer 24 hour personal emergency response and support services through LifeLine Systems, Inc. for patients who require close medical monitoring but who want to maintain an independent lifestyle. These services consist principally of a communicator that connects to the telephone line in the subscriber’s home and a personal help button that is worn or carried by the individual subscriber and that, when activated, initiates a telephone call from the subscriber’s communicator to Lifeline’s central monitoring facilities.

The Company’s Medicare-certified hospice operations provide a full range of hospice services designed to meet the individual physical, spiritual, and psychosocial needs of terminally ill patients and their families. The Company’s hospice services are primarily provided in a patient’s home but can also be provided in a nursing home, assisted living facility, or hospital.

The Company’s long-term acute care hospitals treat patients with severe medical conditions who require high-level care along with frequent monitoring by physicians and other clinical personnel. Patients who receive the Company’s services in a long-term acute care hospital are too medically unstable to be treated in a non-acute setting.

Cost of service revenue for the nine months ended September 30, 2004 was $45.8 million, an increase of $18.3 million, or 66.5%, from $27.5 million for the nine months ended September 30, 2003.

General and administrative expenses for the nine months ended September 30, 2004 were $26.8 million, an increase of $8.1 million, or 43.3%, from $18.7 million for the nine months ended September 30, 2003.

Equity-based compensation expense for the nine months ended September 30, 2004 was $1.3 million, an increase of approximately $1.1 million from $156,000 for the nine months ended September 30, 2003.

The minority interest and cooperative endeavor allocations expense for the nine months ended September 30, 2004 was $3.1 million, an increase of $1.0 million, compared to $2.1 million for the nine months ended September 30, 2003.