Irvine, Calif. (Aug. 1, 2006) - Sun Healthcare Group, Inc. (NASDAQ: SUNH) today announced results for the second quarter ended June 30, 2006.

Consolidated Earnings
     For the quarter ended June 30, 2006, Sun reported total net revenues of $288.1 million and net income of $7.9 million or $0.25 per fully-diluted share. For the comparable quarter ended June 30, 2005, total net revenues were $213.6 million with net income of $6.9 million or $0.45 per fully-diluted share. Net revenues for the quarter ended June 30, 2006, increased $74.5 million, or 34.9 percent, as compared to net revenues for the quarter ended June 30, 2005, primarily as a result of the Peak Medical Corporation acquisition in December 2005.
     For the quarter ended June 30, 2006, Sun reported income from continuing operations of $6.4 million or $0.21 per fully-diluted share, as compared to income from continuing operations of $1.8 million or $0.12 per fully-diluted share, for the same period in 2005. The 2006 second quarter EBITDAR from continuing operations was $34.3 million, or 11.9 percent of revenues, as compared to $17.5 million, or 8.2 percent of revenues, from continuing operations for the same period in 2005, an improvement of $16.8 million, or 95.6 percent. EBITDA from continuing operations for the second quarter of 2006 was $20.3 million, or 7.0 percent of revenues, as compared to $7.7 million, or 3.6 percent of revenues, for the same period in 2005, an improvement of $12.6 million, or 162.6 percent.
     The 2006 second quarter income from continuing operations included a reduction of reserves of $5.4 million for general and professional liability insurance related to incidents in prior periods in the inpatient services operations. The 2005 second quarter income from continuing operations included a reduction of $3.4 million of reserves for general and professional liability insurance, offset by a $2.8 million increase in reserves for workers’ compensation insurance related to incidents in prior periods. Excluding the insurance adjustments related to prior period activity, the 2006 second quarter EBITDAR from continuing operations was $28.9 million, or 10.0 percent of revenues, as compared to $17.0 million, or 8.0 percent of revenues, in the 2005 second quarter, and the 2006 second quarter EBITDA from continuing operations was $14.9 million, or 5.2 percent, as compared to $7.2 million, or 3.4 percent of revenues, in the 2005 second quarter.
          On a pro forma basis, including the historical operating results for Peak Medical Corporation, acquired in December 2005, and excluding the prior period insurance adjustments discussed above, total net revenues from continuing operations for the second quarter of 2005 would have been $274.8 million, income from continuing operations would have been $3.8 million or $0.16 per fully-diluted share, EBITDAR from continuing operations would have been $26.3 million, or 9.6 percent of revenues, and EBITDA from continuing operations would have been $12.8 million, or 4.7 percent of revenues. When compared to second quarter 2006 results from continuing operations, excluding the prior period insurance adjustments, revenue increased $13.4 million to $288.1 million or 4.9 percent; EBITDAR increased $2.6 million to $28.9 million or 10.0 percent; EBITDA increased $2.1 million to $14.9 million or 16.6 percent; and income from continuing operations decreased $0.6 million to $3.2 million or 15.9 percent, primarily as a result of a provision for income tax in the 2006 second quarter that was not required in the same quarter in 2005.  
     "Our 2006 initiatives focusing on improving consolidated margins, profitability and cash flow are producing results as evidenced by both the year over year comparisons as well as the strength of the quarter on a stand-alone basis," said Richard K. Matros, Sun’s chairman and chief executive officer.
     For the six months ended June 30, 2006, Sun reported total net revenues of $575.1 million and net income of $9.7 million or $0.31 per fully-diluted share. For the comparable six months ended June 30, 2005, total net revenues were $419.9 million with net income of $5.8 million or $0.38 per fully-diluted share. Net revenues for the six months ended June 30, 2006, increased $155.2 million, or 37.0 percent, as compared to net revenues for the six months ended June 30, 2005, primarily as a result of the Peak acquisition.
     For the six months ended June 30, 2006, Sun reported income from continuing operations of $8.4 million or $0.27 per fully-diluted share, as compared to income from continuing operations of $0.2 million or $0.01 per fully-diluted share, for the same period in 2005. EBITDAR from continuing operations for the six months ended June 30, 2006, was $57.0 million, or 9.9 percent of revenues, as compared to $30.4 million, or 7.2 percent of revenues, from continuing operations for the same period in 2005, an improvement of $26.6 million, or 87.5 percent. EBITDA from continuing operations for the six months ended June 30, 2006, was $29.4 million, or 5.1 percent of revenues, as compared to $10.8 million, or 2.6 percent of revenues, for the same period in 2005, an improvement of $18.6 million, or 171.5 percent.

Inpatient Business
     Net revenues from inpatient services operations increased $69.6 million, or 45.7 percent, to $221.8 million for the quarter ended June 30, 2006, from $152.2 million for the same period in 2005. The revenue gain was primarily due to the $63.1 million revenue attributable to Peak’s operations and $6.5 million improvement in Sun’s same store inpatient operations. Net segment income increased $9.6 million, or 91.2 percent, to $20.2 million for the quarter ended June 30, 2006, from $10.5 million for the quarter ended June 30, 2005. Net segment EBITDAR increased $17.3 million, or 76.1 percent, to $40.1 million for the quarter ended June 30, 2006, from $22.8 million for the same period in 2005, and net segment EBITDA increased $13.1 million, or 95.3 percent, to $26.9 million for the quarter ended June 30, 2006, from $13.8 million for the same period in 2005. Net segment EBITDAR margin increased to 18.1 percent for the quarter ended June 30, 2006, from 15.0 percent for the same period in 2005. Net segment EBITDA margin increased to 12.1 percent for the quarter ended June 30, 2006, from 9.0 percent for the same period in 2005.
     Substantially all of the insurance adjustments related to prior periods discussed above were related to the inpatient business. Accordingly, excluding the insurance adjustments related to prior period activity, the 2006 second quarter net segment income for inpatient services from continuing operations was $14.8 million, or 6.7 percent of revenues, as compared to $10.0 million, or 6.6 percent of revenues in the second quarter of 2005; the 2006 second quarter net segment EBITDAR for inpatient services from continuing operations was $34.7 million, or 15.7 percent of revenues, as compared to $22.2 million, or 14.6 percent of revenues, in the second quarter of 2005; and the 2006 second quarter net segment EBITDA for inpatient services from continuing operations was $21.5 million, or 9.7 percent, as compared to $13.2 million, or 8.7 percent of revenues, in the second quarter of 2005.
     On a pro forma basis with historical Peak results included for the second quarter of 2005, net revenues from inpatient services operations would have been $213.3 million and the increase in net revenues in the second quarter of 2006 would have been $8.5 million, or 4.0 percent. The revenue gain of $8.5 million was primarily attributable to:
          (i) an 80 basis point improvement in Medicare patient mix going from 13.6 percent in second quarter 2005 to 14.4 percent in second quarter 2006, or $3.0 million in revenues;  
          (ii) a 3.7 percent increase in our LTC Part A Medicare rates from $324.09 in second quarter 2005 to $336.13 in second quarter 2006, or $1.9 million in revenues;
          (iii) a 4.2 percent increase in our Medicaid rates from $135.65 in second quarter 2005 to $141.39 in second quarter 2006, or $4.1 million in revenues; and
          (iv) an increase in revenues from commercial insurance of $1.6 million; offset by:
          (v) a decrease in Medicaid occupancy driven by the increase in Medicare mix that reduced revenues by $1.9 million; and
          (vi) a decrease in Medicare Part B revenue of $0.2 million.
     On a pro forma basis with Peak results included for the second quarter of 2005 and excluding the prior period insurance adjustments discussed above, net segment income in the second quarter of 2005 would have been $14.0 million, net segment EBITDAR would have been $32.8 million and net segment EBITDA would have been $20.1 million. When compared to net segment income, net segment EBITDAR and net segment EBITDA for the quarter ended June 30, 2006, excluding the prior period insurance adjustments: net segment income increased $0.8 million, or 5.8 percent; Net segment EBITDAR increased $1.9 million, or 5.7 percent; and net segment EBITDA increased $1.4 million, or 6.9 percent. Pro forma net segment EBITDAR and EBITDA margins for the quarter ended June 30, 2005, would have been 15.4 percent and 9.4 percent, respectively.
        "We are pleased with our inpatient segment results in growing EBITDAR margin to 15.7 percent through expansion of our Medicare business. Our focus on attracting and retaining higher acuity patients is evidenced in our migration of 29.9 percent of our total Medicare patients and 38.5 percent of our Medicare rehab patients into one of the nine new RUGs categories. This positive shift has driven our LTC Medicare Part A rates up 3.7 percent when compared to the prior year quarter, from $324.09 to $336.13 on a pro forma basis," said Matros.

Ancillary Business
     Net revenues from Sun’s ancillary business operations, which include SunDance Rehabilitation Corporation, CareerStaff Unlimited, Inc. and SunPlus Home Health Services, Inc., net of affiliated revenues, increased $4.8 million, or 8.0 percent, to $66.3 million for the quarter ended June 30, 2006, from $61.5 million for the same period in 2005. Net segment income increased $0.5 million, or 11.8 percent, to $4.9 million for 2006 from $4.4 million for 2005. Net segment EBITDA increased $0.7 million, or 13.6 percent, to $5.6 million for the quarter ended June 30, 2006, from $4.9 million for the same period in 2005.
     "Our staffing segment, CareerStaff, continues to produce robust results with second quarter 2006 net segment revenues increasing 28 percent over the prior year quarter and EBITDA margin improving 40 basis points from 9.1 percent to 9.5 percent. We are particularly pleased with the significant improvement in SunDance, our rehab segment. EBITDA margins had been declining through the first quarter 2006. Primarily as a result of the restructuring initiative that we discussed in the first quarter, we reported net segment EBITDA of $2.5 million or 7.0 percent of net segment revenues for the quarter ended June 30, 2006, a $2.9 million improvement over the prior quarter," Matros reported. "As a result of the restructuring of our rehab segment, we expect our revenues will be approximately $15 million less than our previous guidance. Accordingly we are revising our 2006 annual revenue guidance downward to $1.155 billion from $1.165 billion. We continue to be comfortable with the EBITDA, EBITDAR and earnings guidance that we provided in our February 27, 2006 earnings release," continued Matros.

Corporate General
     General and administrative expenses not directly attributed to operating segments improved in the second quarter 2006 as a percent of revenue to 4.2 percent from 5.1 percent on year over year basis. On an as reported basis, general and administrative expenses increased $1.2 million, or 11.7 percent, to $12.1 million for the quarter ended June 30, 2006, compared to $10.9 million for the same period in 2005. On a pro forma basis with Peak results included in the second quarter of 2005, general and administrative expenses not directly attributed to operating segments were $12.1 million, effectively no change year over year, and 4.4 percent of revenues compared to 4.2 percent of revenues for the same period in 2006.
     "Our management of our corporate general and administrative expenses proves our ability to leverage acquisitions. These expenses remained flat year over year on a pro forma basis while our general and administrative expenses as a percent of revenues continue to improve. As our process improvement initiatives continue to ramp up, we expect continued improvement in this area," said Matros.

Conference Call
     Sun’s senior management will hold a conference call to discuss the Company’s second- quarter operating results on Wednesday, Aug. 2, 2006, at 1 p.m. EDT / 10 a.m. PDT. To listen to the conference call, dial (877) 516-8526 and refer to Sun Healthcare Group. A recording of the call will be available from 4 p.m. EDT on Aug. 2 until midnight EDT on Aug. 9 by calling (800) 642-1687 and using access code 2829519.

About Sun Healthcare Group, Inc.
     Sun Healthcare Group, Inc., with executive offices located in Irvine, California, owns SunBridge Healthcare Corporation and other affiliated companies that operate long-term and postacute care facilities in many states. In addition, the Sun Healthcare Group family of companies provides therapy through SunDance Rehabilitation Corporation, medical staffing through CareerStaff Unlimited, Inc. and home care through SunPlus Home Health Services, Inc.
      Statements made in this release that are not historical facts are "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 containing words such as "anticipate," "believe," "plan," "estimate," "expect," "hope," "intend," and similar expressions. Factors that could cause actual results to differ are identified in the public filings made by Sun with the Securities and Exchange Commission and include changes in Medicare and Medicaid reimbursements, including the impact of the Deficit Reduction Act and regulations implementing it; potential liability for losses not covered by, or in excess of, our insurance; the effects of government regulations and investigations; our ability to generate cash flow sufficient to operate our business; our ability to identify, complete and integrate future acquisitions; increasing labor costs and the shortage of qualified healthcare personnel; and loss of key management personnel. More information on factors that could affect our business and financial results are included in our public filings made with the Securities and Exchange Commission, including our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q, a copy of which is available on Sun’s web site, www.sunh.com.
      The forward-looking statements involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond our control. We caution investors that any forward-looking statements made by us are not guarantees of future performance. We disclaim any obligation to update any such factors or to announce publicly the results of any revisions to any of the forward-looking statements to reflect future events or developments.
     EBITDA and EBITDAR as used in this press release, and EBITDAM and EBITDARM as used in the accompanying tables, which are non-GAAP financial measures, are each reconciled to net income (loss) in the accompanying tables. The accompanying tables also set forth the non-GAAP pro forma information referenced in this press release for the three and six months ended June 30, 2005.
      Any documents filed by Sun with the SEC may be obtained free of charge at the SEC’s web site at www.sec.gov. In addition, investors and stockholders of Sun may obtain free copies of the documents filed with the SEC by contacting Sun’s investor relations department at (505) 468-2341 (TDD users, please call (505) 468-4458) or by sending a written request to Investor Relations, Sun Healthcare Group, Inc., 101 Sun Avenue N.E., Albuquerque, N.M. 87109. You may also read and copy any reports, statements and other information filed by Sun with the SEC at the SEC public reference room at Room 1580, 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at (800) SEC-0330 or visit the SEC’s web site for further information on its public reference room.