Amendment No. 1 Overview

As discussed in Note 1, Basis of Presentation and Restatement, in the Notes to the condensed consolidated financial statements, we have restated our previously issued financial statements for the three and six months ended December 31, 2011; accordingly, Management's Discussion and Analysis of Financial Condition and Results of Operations have been revised for the effects of the restatement.

Forward-Looking Statements

This Quarterly Report and the documents that are incorporated by reference in this Quarterly Report contain certain forward-looking statements within the meaning of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements that do not relate solely to historical or current facts and may be identified by the use of words such as "may," "believe," "will," "expect," "project," "estimate," "anticipate," "plan" or "continue." These forward-looking statements are based on current plans and expectations and are subject to a number of risks, uncertainties and other factors which could significantly affect current plans and expectations and our future financial condition and results. These factors, which could cause actual results, performance and achievements to differ materially from those anticipated, include, but are not limited to:

General Business Conditions

• general economic and business conditions in the U.S., both nationwide and in the states in which we operate;

• increases in uninsured and/or underinsured patients due to unemployment or other conditions resulting in higher bad debt amounts;

• the competitive nature of the U.S. community hospital, nursing home, homecare and specialty pharmacy businesses;

• demographic changes in areas where we operate;

• the availability of new long-term financing to replace our existing credit facility;

• the availability of cash or borrowings to fund working capital, renovations, replacements, expansions and capital improvements at existing hospital facilities and for acquisitions and replacement hospital facilities;

• changes in accounting principles generally accepted in the U.S.; and,

• fluctuations in the market value of equity securities including SunLink common shares;

Operational Factors

• inability to operate profitability in one or more segments of the healthcare business;

• the availability of, and our ability to attract and retain, sufficient qualified staff physicians, management, nurses, pharmacists and staff personnel for our operations;

• timeliness and amount of reimbursement payments received under government programs;

• increases in interest rates under debt agreements

• the inability to refinance existing indebtedness and potential defaults under existing indebtedness;

• restrictions imposed by debt agreements;

• the cost and availability of insurance coverage including professional liability (e.g., medical malpractice) and general liability insurance;

• the efforts of insurers, healthcare providers, and others to contain healthcare costs;

• the impact on hospital services of the treatment of patients in lower acuity healthcare settings, whether with drug therapy or in alternative healthcare settings, such as surgery centers or urgent care centers;

• risks of changes in estimates of self insurance claims and reserves;

• increases in prices of materials and services utilized in our Healthcare Facilities and Specialty Pharmacy Segments;

• increases in wages as a result of inflation or competition for management, physician, nursing, pharmacy and staff positions;

• increases in the amount and risk of collectability of accounts receivable, including deductibles and co-pay amounts;

• the functionality or costs with respect to our information systems for our Healthcare Facilities and Specialty Pharmacy Segments and our corporate office, including both software and hardware; and

• the availability of and competition from alternative drugs or treatments provided by our Specialty Pharmacy Segment;

Liabilities, Claims, Obligations and Other Matters

• claims under leases, guarantees and other obligations relating to discontinued operations, including sold facilities, retained or acquired subsidiaries and former subsidiaries;

• potential adverse consequences of known and unknown government investigations;

• claims for product and environmental liabilities from continuing and discontinued operations;

• professional, general and other claims which may be asserted against us; and,

• natural disasters and weather-related events such as earthquakes, flooding, snow, ice and wind damage and population evacuations affecting areas in which we operate.

Regulation and Governmental Activity

• existing and proposed governmental budgetary constraints;

• the regulatory environment for our businesses, including state certificate of need laws and regulations, rules and judicial cases relating thereto;

• anticipated adverse changes in the levels and terms of government (including Medicare, Medicaid and other programs) and private reimbursement for SunLink's healthcare services including the payment arrangements and terms of managed care agreements;

• changes in or failure to comply with Federal, state or local laws and regulations affecting the healthcare industry including Federal healthcare reform legislation and,

• the possible enactment of Federal healthcare reform laws or reform laws in states where we operate hospital and pharmacy facilities (including Medicaid waivers and other reforms);

Acquisition Related Matters

• the availability and terms of capital to fund acquisitions;

• impairment or uncollectibility of certain acquired assets;

• assumed liabilities discovered subsequent to an acquisition;

• our ability to integrate acquired healthcare businesses and implement our business strategy; and,

• competition in the market for acquisitions of hospitals and healthcare businesses.

The foregoing are significant factors we think could cause our actual results to differ materially from expected results. However, there could be additional factors besides those listed herein that also could affect SunLink in an adverse manner.

You should read this Quarterly Report completely and with the understanding that actual future results may be materially different from what we expect. You are cautioned not to unduly rely on forward-looking statements when evaluating the information presented in this Quarterly Report or our other disclosures because current plans, anticipated actions, and future financial conditions and results may differ from those expressed in any forward-looking statements made by or on behalf of SunLink.

We have not undertaken any obligation to publicly update or revise any forward-looking statements. All of our forward-looking statements speak only as of the date of the document in which they are made or, if a date is specified, as of such date. We disclaim any obligation or undertaking to provide any updates or

Corporate Business Strategy

SunLink's Board and management has determined to focus the Company's strategic efforts on enhancing its existing hospital portfolio, including the selective disposal of underperforming and non-strategic facilities, and on pursuing selected potential hospital acquisitions. SunLink is committed to enhancing shareholder value while maintaining high standards of responsibility to its patients, employees and the communities it serves and will continue to pursue strategic alternatives consistent with that commitment.

Operations

Our operational strategy is focused on efforts to improve operations and generate internal growth. Our primary operational strategy for our community hospitals is to improve the operations and profitability of such hospitals by reducing out-migration of patients, recruiting physicians, improving quality and safety of services, expanding services and implementing and maintaining effective cost controls. Our operational strategy for our nursing homes and home health agency is similar to that for our community hospitals and is focused on quality patient care, expanding services and implementing and maintaining effective cost controls. Our operational strategy for our Specialty Pharmacy Segment is focused on increasing market share, expanding services, and implementing and maintaining effective cost controls.

Acquisitions and Dispositions Strategy

The Company continues to evaluate certain rural and exurban hospitals and healthcare businesses, which may be for sale, and monitor other selected rural and exurban healthcare acquisition targets which it believes might become available for sale or lease.

We believe there may be renewed opportunities for acquisitions or dispositions of individual hospitals in the future due to, among other things, continued negative trends in certain government reimbursement programs and other factors. We also believe there may be opportunities for the acquisition or disposition of individual or groups of hospitals in the future as other for-profit and not-for-profit hospital operators seeking to re-align the focus of their portfolios.

We also may consider the disposition of one or more of our healthcare facilities, Specialty Pharmacy Segment service lines or business segments, particularly if we determine that the operating results or potential growth of such facility, service line or segment no longer meet our business objectives.

Critical Accounting Estimates

The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect reported amounts and related disclosures. We consider an accounting estimate to be critical if:

• it requires assumptions to be made that were uncertain at the time the estimate was made; and

• changes in the estimate or different estimates that could have been made could have a material impact on our consolidated results of operations or financial condition.

Our critical accounting estimates are more fully described in our 2011 Annual Report on Form 10-K/A and continue to include the following areas:

• Receivables - net and provision for doubtful accounts;

• Goodwill, intangible assets and accounting for business combinations;

• Professional and general liability claims; and

• Accounting for income taxes; and

• Electronic Health Record incentives

Financial Summary

The results of continuing operations shown in the financial summary below are
for our two business segments, Healthcare Facilities and Specialty Pharmacy.



                                                December 31,                                  December 31,
                                     2011           2010         % Change         2011           2010          % Change
Net Revenues - Healthcare
Facilities                         $  26,366      $  29,058           -9.3 %    $  54,128      $  56,952            -5.0 %
Net Revenues - Specialty
Pharmacy                              10,672         11,483           -7.1 %       18,427         20,385            -9.6 %

Total Net Revenues                    37,038         40,541           -8.6 %       72,555         77,337            -6.2 %
Costs and expenses                   (37,607 )      (40,363 )         -6.8 %      (73,840 )      (78,928 )          -6.4 %

Operating profit                        (569 )          178          419.7 %       (1,285 )       (1,591 )          19.2 %
Interest expense                      (1,029 )       (3,229 )        -68.1 %       (2,335 )       (4,077 )         -42.7 %
Interest income                           -               1         -100.0 %            2              2             0.0 %

Loss from continuing operations
before income taxes                $  (1,598 )    $  (3,050 )         47.6 %    $  (3,618 )    $  (5,666 )          36.1 %


Healthcare Facilities Segment:
Admissions                             1,173          1,236             -5 %        2,354          2,502              -6 %
Equivalent admissions                  4,102          3,893              5 %        8,237          8,067               2 %
Surgeries                                533            628            -15 %        1,086          1,296             -16 %
Revenue per equivalent admission   $   6,401      $   7,464            -14 %    $   6,544      $   7,060              -7 %

Equivalent admissions - Equivalent admissions is used by management (and certain investors) as a general measure of combined inpatient and outpatient volume for our hospital operations. Equivalent admissions are computed by multiplying admissions (inpatient volume) by the sum of gross inpatient revenues and gross outpatient revenues and dividing the result by gross inpatient revenues. The equivalent admissions computation is intended to relate outpatient revenues to the volume measure (admissions) used to measure inpatient volume to result in a general approximation of combined inpatient and outpatient volume (equivalent admissions).

Our net revenues are from our two business segments, healthcare facilities and specialty pharmacy.

Healthcare Facilities Segment

Net revenues for the three months ended December 31, 2011 were $26,366 with a total of 4,102 equivalent admissions and revenue per equivalent admission of $6,401 compared to net revenues of $29,058 with a total of 3,893 equivalent admissions and revenue per equivalent admission of $7,464 for the quarter ended December 31, 2010. Net revenues for the six months ended December 31, 2011 were $54,128 with a total of 8,237 equivalent admissions and revenue per equivalent admission of $6,544 compared to net revenues of $56,952 with a total of 8,067 equivalent admissions and revenue per equivalent admission of $7,060 for the six months ended December 31, 2010.

The following table sets forth the percentage of net patient revenues from major payor sources for the Company's six hospitals during the periods indicated:

                                        Three Months Ended           Six Months Ended
                                           December 31,                December 31,
                                        2011           2010          2011         2010
     Source:
     Medicare                              42.1 %        40.2 %        40.6 %       40.4 %
     Medicaid                              11.5 %        17.6 %        13.8 %       14.5 %
     Self-pay                              11.6 %        11.5 %        14.4 %       13.9 %
     Managed Care Insurance & Other        34.8 %        30.7 %        31.2 %       31.2 %

                                          100.0 %       100.0 %       100.0 %      100.0 %

Medicaid as a percentage of total revenues decreased in the three and six months ended December 31, 2011 compared to the comparable prior year period as a result of declining volumes. The increase in self-pay and managed care insurance and other net revenues as a percentage of total revenues in the current year's quarter compared to the comparable prior year quarter was due to a shift in payor mix from Medicaid net revenues.

Specialty Pharmacy Segment

Specialty Pharmacy net revenues for the three months ended December 31, 2011 was $10,672, a decrease of $811, or 7.1%, from $11,483 for the three months ended December 31, 2010. Specialty Pharmacy net revenues for the six months ended December 31, 2011 was $18,427, a decrease of $1,958, or 9.6%, from $20,385 for the six months ended December 31, 2010. The decrease was due to the conversion of numerous institutional pharmacy direct-servicing contracts to a pharmacy management contract, the loss of certain other institutional contracts and a decrease in the sale of the seasonal infusion therapy drug from the same period of the prior year, offset somewhat by the realization of net revenues related to a new component of the institutional pharmacy business.

Healthcare Facilities Segment Cost and Expenses

Costs and expenses for our Healthcare Facilities, including depreciation and amortization, were $25,718 and $27,225 for the three months ended December 31, 2011 and 2010, respectively. Costs and expenses for our Healthcare Facilities, including depreciation and amortization, were $52,690 and $55,414 for the six months ended December 31, 2011 and 2010, respectively.

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                                                         Cost and Expenses
                                                       as a % of Net Revenues
                                           Three Months Ended           Six Months Ended
                                              December 31,                December 31,
                                           2011            2010         2011          2010
 Salaries, wages and benefits                 51.4 %        45.7 %        50.0 %       46.7 %
 Provision for bad debts                      11.6 %        12.1 %        14.0 %       14.0 %
 Supplies                                      9.0 %         9.6 %         9.2 %       10.0 %
 Purchased services                            7.1 %         7.3 %         7.4 %        7.4 %
 Medicaid EHR incentives                      -2.3 %         0.0 %        -3.0 %        0.0 %
 Other operating expenses                     15.6 %        13.8 %        15.9 %       14.8 %
 Rent and lease expense                        2.2 %         2.1 %         2.2 %        2.0 %
 Depreciation and amortization expense         2.7 %         3.2 %         3.0 %        3.2 %

Salaries, wages and benefits increased as a percentage of net revenue in the three and six months ended December 31, 2011 due to increased employee medical claims expense and the overall decrease in net patient revenues for the three and six months ended December 31, 2011. For the three and six months ended December 31, 2011, employee medical claims expense increased $529 and $786, respectively, as compared to the three and six months ended December 31, 2010.

Provision for bad debts decreased as a percentage of net revenue in the three months ended December 31, 2011 due to concentration on upfront collection efforts as well as increased indigent care write offs in the current year period compared to the comparable prior year period.

Supplies decreased as a percentage of net revenue in the six months ended December 31, 2011 due to a decrease in the number of surgeries performed as compared to the six months ended December 31, 2010. Surgeries for the six months ended December 31, 2011 were 1,210 compared to 1,389 for the comparable prior year period.

Medicaid EHR incentives as a percentage of net revenue is a negative 2.3% and 3.0% for the three and six months ended December 31, 2011. This is related to the $614 and $1,627 of Medicaid EHR incentive payments recognized in the three and six months ended December 31, 2011, respectively. There were no Medicaid EHR incentive payments recognized in the three and six months ended December 31, 2010.

Other operating expenses decreased slightly from the comparable prior year quarter but increased as percentage of net revenue in the three months ended December 31, 2011 due to the overall decrease in net revenues for the three months ended December 31, 2011.

Depreciation and amortization expense for the three months ended December 31, 2011 and 2010 were $826 and $916, respectively. Depreciation and amortization expense for the six months ended December 31, 2011 and 2010 were $1,640 and $1,836, respectively. The decrease in the six months ended December 31, 2011 compared to the six months ended December 31, 2010 is due to assets being fully depreciated in the current six month period as compared to the prior year period.

Specialty Pharmacy Segment Cost and Expenses

Cost and expenses for our Specialty Pharmacy Segment, including depreciation and amortization, were $10,621 and $11,491 for the three months ended December 31, 2011 and 2010, respectively. For the six months ended December 31, 2011 and 2010, cost and expenses for our Specialty Pharmacy Segment, including depreciation and amortization, were $18,650 and $20,597, respectively.

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                                                         Cost and Expenses
                                                       as a % of Net Revenues
                                           Three Months Ended           Six Months Ended
                                              December 31,                December 31,
                                           2011            2010         2011          2010
 Cost of goods sold                           73.2 %        73.5 %        69.1 %       69.9 %
 Salaries, wages and benefits                 16.4 %        14.4 %        19.1 %       16.9 %
 Provision for bad debts                       0.4 %         0.9 %         1.7 %        1.8 %
 Supplies                                      0.6 %         0.4 %         0.6 %        0.5 %
 Purchased services                            3.1 %         3.6 %         3.6 %        4.0 %
 Other operating expenses                      3.0 %         3.2 %         3.6 %        3.4 %
 Rent and lease expense                        0.8 %         0.6 %         0.9 %        0.7 %
 Depreciation and amortization expense         2.2 %         3.4 %         3.4 %        3.8 %

Cost of goods sold as a percent of net revenues decreased in the three and six month periods ended December 31, 2011 as compared to the comparable periods of the prior year due the current periods' decreases in sales of certain infusion therapy products, which have a higher cost of sales as a percentage of net revenues, favorable purchasing contracts negotiations, and improved margins for the institutional pharmacy business.

Salaries, wages and benefits as a percent of net revenues increased in the three and six month periods ended December 31, 2011 as compared to the comparable periods of the prior year due to the increased staffing requirements related to a new component of the institutional pharmacy business.

Provision for bad debts as a percent of net revenues decreased in the three and six month periods ended December 31, 2011 as compared to the comparable periods of the prior year due primarily to the implementation of additional business office and intake policies and procedures, offset somewhat by the continued decline of economic conditions in the region.

Purchased services as a percent of net revenues decreased in the three and six month periods ended December 31, 2011 as compared to the comparable periods of the prior year due to the impact of cost-cutting measures.

Other operating expenses as a percent of net revenues increased in the three and six month periods ended December 31, 2011 as compared to the comparable periods of the prior year due to increased utilities and fuel cost and expenses, offset somewhat by the impact of cost-cutting measures.

Depreciation and amortization expense decreased due to impairment of certain intangible assets during fiscal year 2011 which decreased the amount of annual amortization on the remaining intangible assets. Amortization expense for three months ended December 31, 2011 was $36 compared to $146 for the comparable prior year period. Amortization expense for six months ended December 31, 2011 was $71 compared to $292 for the comparable prior year period.

Corporate Overhead Costs and Expenses

Cost and expenses for Corporate Overhead including depreciation and amortization, was $1,268 and $1,646 for the three months ended December 31, 2011 and 2010, respectively. For the six months ended December 31, 2011 and 2010, cost and expenses for Corporate Overhead including depreciation and amortization, was $2,500 and $2,917, respectively. Corporate Overhead decreased in the three and six months ending December 31, 2011 due to $484 of severance expense incurred in the comparable prior year periods that was not incurred during the current year periods, partially offset by in increases in stock option expense during the current year periods.

SunLink had an operating loss of $569 for the three months ended December 31, 2011 and an operating profit of $178 for the three months ended December 31, 2010. SunLink had an operating loss of $1,285 and $1,591 for the six months ended December 31, 2011 and December 31, 2010, respectively. The operating losses for the three and six months ended December 31, 2011 compared to the prior year periods resulted from decreases in net revenues partially offset by decreases in cost and expenses as a result of the decrease in net revenues and effective cost control measures implemented at the facilities.

Interest Expense

Interest expense was $1,029 and $3,229 for the three months ended December 31, 2011 and 2010, respectively and $2,335 and $4,077 for the six months ended December 31, 2011 and 2010, respectively. Interest expense for the three and six months ended December 31, 2011 decreased from the same periods last year due to an $8,000 prepayment on the term loan resulting in reduced interest expense which was partially offset by an increase in interest rates. The decrease also resulted from decreased waiver fees and non-cash amortization of costs and fees in the current year periods. Non-cash amortization expense of costs and fees was $42 and $84 for the three and six months ended December 31, 2011, respectively, compared to $995 and $1,102 for the three and six months ended December 31, 2010, respectively. Waiver fees and costs were $0 and $131 for the three and six months ended December 31, 2011, respectively, compared to $984 for both the three and six months ended December 31, 2010.

Income Taxes

Income tax benefit of $505 ($411 federal tax benefit and $94 state tax benefit) and income tax benefit of $961 ($965 federal tax benefit and $4 state tax expense) was recorded for the three months ended December 31, 2011 and 2010, respectively.

Income tax benefit of $1,274 ($949 federal tax benefit and $325 state tax benefit) and income tax benefit of $1,526 ($1,722 federal tax benefit and $196 state tax expense) was recorded for the six months ended December 31, 2011 and 2010, respectively.

We had an estimated net operating loss carry-forward for federal income tax . . .