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     Irvine, Calif. (Oct. 31, 2006) - Sun Healthcare Group, Inc. (NASDAQ: SUNH) today announced results for the third quarter ended Sept. 30, 2006.

Consolidated Earnings
     For the quarter ended Sept. 30, 2006, Sun reported total net revenues of $273.9 million and a net loss of $0.5 million or a loss of $0.02 per fully-diluted share. For the comparable quarter ended Sept. 30, 2005, total net revenues were $200.6 million, which included $0.9 million in retroactive rate increases, and net income was $7.3 million or $0.48 per fully-diluted share. The 2005 net income included a $7.7 million gain from receipt of the Omnicare holdback related to the sale of Sun’s pharmaceutical operations in 2003. Net revenues for the quarter ended Sept. 30, 2006, increased $73.3 million as compared to net revenues for the quarter ended Sept. 30, 2005, primarily as a result of the Peak Medical Corporation acquisition in December 2005.
     From continuing operations for the quarter ended Sept. 30, 2006, Sun reported a loss of $0.6 million or a loss of $0.02 per fully-diluted share, as compared to a loss from continuing operations of $1.7 million or a loss of $0.11 per fully-diluted share, for the same period in 2005. The 2006 third-quarter EBITDAR from continuing operations was $23.8 million, or 8.7 percent of revenues, as compared to $12.9 million, or 6.4 percent of revenues, from continuing operations for the same period in 2005, an improvement of $10.9 million. EBITDA from continuing operations for the third quarter of 2006 was $10.0 million, or 3.6 percent of revenues, as compared to $3.5 million, or 1.7 percent of revenues, for the same period in 2005, an improvement of $6.5 million.
     During the quarter ended Sept. 30, 2006, Sun announced the acquisition of Preferred Hospice of Oklahoma and the pending sale of its home health services segment, SunPlus Home Health Services, and Sun substantially completed, as required by GAAP, the formal valuation of the assets acquired and liabilities assumed in connection with the acquisition of Peak in December 2005. Simultaneous with the acquisition of Preferred Hospice, the management agreement for the five hospice programs owned by Sun were terminated, resulting in a charge of $1.0 million. After the announcement of the sale of SunPlus, the home health services segment was reclassified as a discontinued operation for all periods reported, including periods in 2005.
     The 2006 third-quarter loss from continuing operations of $0.6 million included the following pre-tax adjustments:
     (i) a $1.0 million cumulative charge to depreciation and amortization expense, related to prior periods, as a result of the finalization of the owned property, plant and equipment valuation related to the Peak acquisition;
     (ii) a $1.0 million charge as a result of the termination of a management fee contract associated with the acquisition of hospice operations during the quarter; and
     (iii) a $0.2 million charge for the retroactive wage increases related to prior period rate increases in California, which also impacted EBITDAR and EBITDA;
     offset by
     (iv) a $0.8 million credit to workers’ compensation expense, related to prior periods, as a result of the finalization of the insurance reserves related to the Peak acquisition, which also impacted EBITDAR and EBITDA.
     Excluding the adjustments discussed above, the 2006 third-quarter EBITDAR from continuing operations was $23.2 million, or 8.5 percent of revenues, as compared to $12.0 million, or 6.0 percent of revenues, in the 2005 third quarter, and the 2006 third-quarter EBITDA from continuing operations was $9.4 million, or 3.4 percent, as compared to $2.6 million, or 1.3 percent of revenues, in the 2005 third quarter.
     On a pro forma basis, including the historical operating results for Peak, which was acquired in December 2005, and excluding the adjustments discussed above in the first paragraph, total net revenues from continuing operations for the third quarter of 2005 would have been $262.1 million, the loss from continuing operations would have been $0.4 million or a loss of $0.02 per fully-diluted share, EBITDAR from continuing operations would have been $21.3 million, or 8.1 percent of revenues, and EBITDA from continuing operations would have been $8.1 million, or 3.1 percent of revenues. When compared to third-quarter 2006 results from continuing operations, excluding the adjustments discussed above, revenue increased $11.9 million or 4.5 percent; EBITDAR increased $1.9 million or 8.9 percent; EBITDA increased $1.3 million or 16.2 percent; and income from continuing operations increased $0.6 million to $0.2 million or 156.3 percent.
     "We continue to show comparable period margin improvement. We are well positioned for the remainder of the year," said Richard K. Matros, Sun’s chairman and chief executive officer. "The purchase accounting adjustments on the Peak-owned assets further validate the long-term value created by that transaction," Matros continued.
     For the nine months ended Sept. 30, 2006, Sun reported total net revenues of $818.3 million and net income of $9.1 million or $0.29 per fully-diluted share. For the comparable nine months ended Sept. 30, 2005, total net revenues were $590.7 million with net income of $13.1 million or $0.85 per fully-diluted share. Net revenues for the nine months ended Sept. 30, 2006, increased $227.6 million as compared to net revenues for the nine months ended Sept. 30, 2005, primarily as a result of the Peak acquisition.
     From continuing operations for the nine months ended Sept. 30, 2006, Sun reported income of $7.2 million or $0.23 per fully-diluted share, as compared to a loss from continuing operations of $2.9 million or a loss of $0.19 per fully-diluted share, for the same period in 2005. EBITDAR from continuing operations for the nine months ended Sept. 30, 2006, was $78.4 million, or 9.6 percent of revenues, as compared to $40.6 million, or 6.9 percent of revenues, from continuing operations for the same period in 2005, an improvement of $37.8 million. EBITDA from continuing operations for the nine months ended Sept. 30, 2006, was $38.0 million, or 4.6 percent of revenues, as compared to $12.5 million, or 2.1 percent of revenues, for the same period in 2005, an improvement of $25.5 million.
     During the nine months ended Sept. 30, 2006, Sun released net prior year’s self-insurance obligations of $5.4 million. During the comparable nine months ended Sept. 30, 2005, Sun released net prior year’s self-insurance obligations of $0.6 million and recognized revenue of $0.3 million related to prior periods for retroactive rate increases. Excluding the adjustments discussed above, EBITDAR from continuing operations for the nine months ended Sept. 30, 2006, was $72.4 million, or 8.8 percent of revenues, as compared to $40.3 million, or 6.8 percent of revenues, for the nine months ended Sept 30, 2005, and the EBITDA from continuing operations for the nine months ended Sept. 30, 2006, was $32.1 million, or 3.9 percent of revenues, as compared to $11.6 million, or 2.0 percent of revenues, for the nine months ended Sept 30, 2005.
     On a pro forma basis, including the historical operating results for Peak, and excluding the adjustments discussed above, total net revenues from continuing operations for the nine months ended Sept. 30, 2005, would have been $774.6 million, income from continuing operations would have been $2.5 million or $0.10 per fully-diluted share, EBITDAR from continuing operations would have been $67.5 million, or 8.7 percent of revenues, and EBITDA from continuing operations would have been $27.7 million, or 3.6 percent of revenues. When compared to the nine-month results from continuing operations ended Sept. 30, 2006, excluding the adjustments discussed above, revenue increased $43.7 million or 5.6 percent; EBITDAR increased $4.9 million or 7.3 percent; EBITDA increased $4.4 million or 15.9 percent; and income from continuing operations increased $1.6 million to $4.2 million or 65.4 percent.

Inpatient Business
     Net revenues from inpatient services operations increased $70.8 million, or 46.1 percent, to $224.3 million for the quarter ended Sept. 30, 2006, from $153.5 million for the same period in 2005. The revenue gain was primarily due to the $64.5 million of revenue attributable to Peak’s operations and a $7.9 million improvement in Sun’s same store inpatient operations, offset by a $1.6 million decrease due to disposed facilities. Net segment income increased $3.0 million to $11.3 million for the quarter ended Sept. 30, 2006, from $8.3 million for the quarter ended Sept. 30, 2005. Net segment EBITDAR increased $11.5 million to $32.2 million for the quarter ended Sept. 30, 2006, from $20.7 million for the same period in 2005, and net segment EBITDA increased $7.2 million to $18.8 million for the quarter ended Sept. 30, 2006, from $11.6 million for the same period in 2005. Net segment EBITDAR margin increased to 14.4 percent for the quarter ended Sept. 30, 2006, from 13.5 percent for the same period in 2005. Net segment EBITDA margin increased to 8.4 percent for the quarter ended Sept. 30, 2006, from 7.6 percent for the same period in 2005.
     Substantially all of the adjustments discussed above were related to the inpatient business. Excluding such adjustments with the exception of the $1.0 million charge for the termination of the hospice management contract, the 2006 third-quarter net segment income for inpatient services from continuing operations was $11.8 million, or 5.3 percent of revenues, as compared to $7.4 million, or 4.8 percent of revenues in the third quarter of 2005; the 2006 third-quarter net segment EBITDAR for inpatient services from continuing operations was $31.7 million, or 14.1 percent of revenues, as compared to $19.8 million, or 13.0 percent of revenues, in the third quarter of 2005; and the 2006 third-quarter net segment EBITDA for inpatient services from continuing operations was $18.3 million, or 8.1 percent, as compared to $10.7 million, or 7.0 percent of revenues, in the third quarter of 2005.
     On a pro forma basis with historical Peak results included for the third quarter of 2005, net revenues from inpatient services operations would have been $215.8 million and the increase in net revenues in the third quarter of 2006 would have been $8.5 million, or 3.9 percent. Excluding the $0.9 million retroactive rate increase, net revenues from inpatient services would have been $214.9 million and the increase in net revenues in the third quarter of 2006 would have been $9.4 million, or 4.3 percent. The revenue gain of $9.4 million was primarily attributable to:
     (i) a 50 basis point improvement in Medicare patient mix going from 12.9 percent in third-quarter 2005 to 13.4 percent in third quarter 2006, or $2.2 million in revenues;  
     (ii) a 5.9 percent increase in our LTC Part A Medicare rates from $324.99 in third-quarter 2005 to $344.06 in third-quarter 2006, or $2.8 million in revenues;
     (iii) a 3.8 percent increase in our Medicaid rates from $139.29 in third-quarter 2005 to $144.63 in third-quarter 2006, or $3.9 million in revenues; and
     (iv) an increase in revenues from commercial insurance of $1.5 million;
     offset by:
     (v) a decrease in Medicaid occupancy driven by the increase in Medicare mix that reduced revenues by $1.3 million; and
     (vi) a decrease in Medicare Part B revenue of $0.4 million.
     On a pro forma basis, with Peak results included for the third quarter of 2005 and excluding the adjustments discussed above, net segment income in the third quarter of 2005 would have been $10.7 million, net segment EBITDAR would have been $29.9 million and net segment EBITDA would have been $17.1 million. When compared to net segment income, net segment EBITDAR and net segment EBITDA for the quarter ended Sept. 30, 2006, excluding the adjustments discussed above, with the exception of the $1.0 million charge for the termination of the hospice management contract, net segment income increased $1.1 million, or 9.6 percent; net segment EBITDAR increased $1.8 million, or 5.9 percent; and net segment EBITDA increased $1.2 million, or 7.0 percent. Pro forma net segment EBITDAR and EBITDA margins for the quarter ended Sept. 30, 2005, would have been 13.9 percent and 7.9 percent, respectively.
     "Our critical operating metrics continue to show marked improvement," Matros said. "We have established a strong base with which to integrate the Harborside Healthcare acquisition that we announced on Oct.19, 2006," Matros continued.

Ancillary Business
     Net revenues from Sun’s ancillary business operations, which include SunDance Rehabilitation Corporation and CareerStaff Unlimited, Inc., net of affiliated revenues, increased $2.6 million, or 5.4 percent, to $49.7 million for the quarter ended Sept. 30, 2006, from $47.1 million for the same period in 2005. Net segment income increased $0.9 million, or 34.1 percent, to $3.4 million for 2006 from $2.5 million for 2005. Net segment EBITDA increased $1.1 million, or 33.6 percent, to $4.2 million for the quarter ended Sept. 30, 2006, from $3.1 million for the same period in 2005.
     "Our consolidated ancillary results show improvement in key metrics in all segments for the first time, driven by the as expected improvement of our rehabilitation segment along with the continued strong performance of our staffing segment," Matros said.

Guidance Update
     Sun’s previously announced guidance for 2006 included the home health services segment.  As a result of the pending sale of SunPlus, the home health services segment was reclassified as a discontinued operation. The following results from operations of the home health services segment for the nine months ended Sept. 30, 2006, were reclassified to discontinued operations:
Revenues -- $46.2 million;
EBITDAR -- $3.5 million;
EBITDA -- $2.1 million; and
Segment Income -- $1.4 million.
     In addition, as a result of the completion of the purchase accounting adjustments for Peak’s owned property, annualized depreciation on the purchased assets will be $3.8 million. As a result of these changes, Sun’s revised guidance for 2006, excluding the home health services segment, is as follows:  
Revenues -- $1,095.0 to $1,105.0 million;
EBITDAR -- $99.5 to $102.0 million (unchanged);
EBITDA -- $42.5 million to $45.0 million (unchanged);
Pre-Tax Earnings -- $11.0 million to $13.0 million; and
Income from Continuing Operations -- $6.9 to $7.8 million.
     "Our third-quarter performance continues to be in line with the previously issued guidance. That said, the revised guidance shows stronger EBITDAR and EBITDA operating margins effectively resulting in raised guidance in continuing operations, despite the anticipated sale of our home health operating segment. The earnings revision was impacted by both that segment moving to discontinued operations and the change in depreciation," Matros continued.

Conference Call
     Sun’s senior management will hold a conference call to discuss the Company’s third-quarter operating results on Wednesday, Nov. 1, 2006, at 1 p.m. EST / 10 a.m. PST. 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. EST on Nov. 1 until midnight EST on Nov. 8 by calling (800) 642-1687 and using access code 7839652.

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 hospice services through Preferred Hospice.  

Third Quarter 2006 Earnings Tables