10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended June 30, 2008

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File No. 1-12607

SunLink Health Systems, Inc.

(Exact name of registrant as specified in its charter)

Ohio	31-0621189
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

900 Circle 75 Parkway, Suite 1120, Atlanta, Georgia 30339

(Address of principal executive offices)

Registrant’s telephone number, including area code: (770) 933-7000

Securities Registered Pursuant to Section 12(b) of the Act:

Title of each Class	Name of each Exchange on which registered
Common Shares without par value	American Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K    Yes  ¨    No  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ¨	Accelerated filer  ¨
Non-accelerated filer  ¨	Smaller reporting company  x
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

At the close of business on September 24, 2008, there were 7,936,800 shares of the registrant’s common shares without par value outstanding. The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the closing price on December 31, 2007 of the registrant’s common shares as reported by the American Stock Exchange amounted to $29,700,000.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement to be filed under Regulation 14A in connection with the Annual Meeting of Shareholders of SunLink Health Systems, Inc., scheduled to be held on November 10, 2008, have been incorporated by reference into Part III of this Report. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after June 30, 2008.

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Certain Cautionary Statements

FORWARD-LOOKING STATEMENTS

This Annual Report and the documents that are incorporated by reference in this Annual 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;

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

• demographic changes in areas where we operate;

• the availability of cash or borrowings to fund working capital, renovations, replacement, expansion 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;

• 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 via alternative healthcare services, such as surgery centers or urgent care centers;

• changes in medical and other technology;

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

• increases in prices of materials and services utilized in our hospital and pharmacy operations;

• 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 collectibility of accounts receivable, including deductibles and co-pay amounts; and,

• the functionality or costs with respect to our management information system for our hospitals, including both software and hardware;

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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

• weather-related events such as flooding, and wind damage and population evacuations affecting areas we operate including Louisiana and South Georgia.

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; 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 additional acquisitions or replacement facilities;

• 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 Annual 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 Annual 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 revisions to any forward-looking statement to reflect any change in our expectations or any changes in events, conditions, circumstances or information on which the forward-looking statement is based. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing factors and the other risk factors set forth elsewhere in this report.

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PART I

Item 1. Business (all dollar amounts in thousands except share, per share and revenue per equivalent admission amounts)

Overview

We are SunLink Health Systems, Inc. Unless the context indicates otherwise, all references to “SunLink,” “we,” “our,” “ours,” “us” and the “Company” refer to SunLink Health Systems, Inc. and our consolidated subsidiaries. We are a provider of healthcare services in certain rural and exurban markets in the United States. References to our specific operations refers to operations conducted through our subsidiaries and references to “we,” “our,” “ours,” and “us” in such context refers to the operations of our subsidiaries. Our business is composed of two business segments, healthcare facilities and pharmacy operations. Through our subsidiaries, we operate a total of seven community hospitals in four states. Six of the community hospitals are owned and one is leased. Our community hospitals are acute care hospitals and have a total of 402 licensed beds. As part of our community hospital operations, we currently also operate (a) three nursing homes in two states, each of our current nursing homes is located adjacent to, or in close proximity with, certain of our community hospitals, and (b) four home healthcare agencies in three states, each of our current home health agencies is operated from certain of our community hospitals. Our nursing homes have a total of 261 licensed beds. Through a subsidiary acquired in April 2008, we also operate a specialty pharmacy business with four service lines. Our healthcare operations are conducted through our direct and indirect subsidiaries, including SunLink Healthcare LLC (“SHL”), HealthMont LLC (“HealthMont”) and SunLink ScriptsRx, LLC (“ScriptsRx”).

Our executive offices are located at 900 Circle 75 Parkway, Suite 1120, Atlanta, Georgia 30339, and our telephone number is (770) 933-7000. Our website address is “www.sunlinkhealth.com.” Information contained on our website does not constitute part of this report. Any materials we file with the Securities and Exchange Commission (“SEC”) may be read at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580 Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at (202) 551-8090. Certain materials we file with the SEC may also be read and copied at or through our website.

History

We are an Ohio corporation and were incorporated in June 1959. In fiscal 2001 we redirected our business strategy toward healthcare services in the United States. On February 1, 2001, we purchased five community hospitals, leasehold rights for a sixth hospital and the related businesses of all six hospitals for approximately $26,500. On October 3, 2003, we acquired two additional hospitals through our acquisition of HealthMont, Inc. In June 2004, we sold our Mountainside Medical Center (“Mountainside”) facility, a 35-bed hospital located in Jasper, GA for approximately $40,000. On April 23, 2008, we acquired Carmichael for approximately $24,000.

Business Strategy: Operations, Acquisitions and Strategic Alternatives

SunLink’s business strategy is to focus its efforts on internal growth of its existing healthcare facilities and its pharmacy business, supplemented by growth from selected rural and exurban healthcare acquisitions, including but not limited to hospitals, nursing homes, home care businesses, and pharmacy businesses. However, as was the case in 2004 with our Mountainside Medical Center hospital, we do consider disposition of one or more of our facilities based on a variety of factors including asset values, return on investments, competition from existing and potential facilities and capital improvement needs. We likewise evaluate our strategic alternatives on an on-going basis.

Operations

Our operational strategy is focused on efforts to increase internal growth. Our primary operational strategy for our community hospitals is to improve the profitability of such hospitals by reducing out-migration of patients, recruiting physicians, expanding services and implementing and maintaining effective cost controls. Our

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operational strategy for our nursing homes and home health agencies is similar to that for our community hospitals and is focused on expanding services and implementing and maintaining effective cost controls.

Finally, our operation strategy for our pharmacy operations is focused on integrating the recently acquired operations, increasing market share, increasing collection efforts, expanding services and implementing and maintaining effective cost controls.

Acquisitions

During the last fiscal year, we evaluated certain rural and exurban hospitals and healthcare businesses, which were for sale and monitored other selected rural and exurban healthcare acquisition targets which we believed might become available for sale.

On April 22, 2008, SunLink ScriptsRx, LLC acquired Carmichael’s Cashway Pharmacy, Inc. (“Carmichael”). The Carmichael acquisition purchase price was $24,000, consisting of $19,000 cash, seller subordinated debt of $3,000 and $2,000 in SunLink shares (334,448 shares). Carmichael had annual revenues of approximately $42,200 for its year ended December 31, 2007 and has been in business for over 35 years. Carmichael provides services to patients in rural communities in southwest Louisiana and eastern Texas. Carmichael is included in our Specialty Pharmacy Segment.

We continue to engage in similar evaluation and monitoring activities with respect to rural and exurban hospitals, nursing homes, home health businesses, pharmacy and other rural or exurban healthcare businesses, which are or may become available for acquisition.

Although we have no current plans to do so, from time to time we may consider the acquisition of other complementary rural and exurban based healthcare businesses, outside of our existing business segments, which are or may become available for acquisition.

Historically, we targeted the community hospital market because we believed it provided an attractive sector for investment in healthcare facilities. We continue to believe hospitals and other healthcare businesses in our rural and exurban markets generally experience (1) less direct competition, (2) lower managed care penetration, (3) more manageable inflationary pressure with respect to certain costs, (4) higher staff, employee and community loyalty, and (5), in certain cases, opportunity for future growth. The focus of acquisition activities will depend on our evaluation of relative opportunities for growth and profitability within the business segments and services lines of our existing operations, the capital needs of our existing and potential operations within such segments and services lines, current and potential changes in government regulation and reimbursement rules, competition for potential acquisitions and valuations of existing facilities and operations and other traditional factors.

Our primary market criteria for healthcare facility acquisitions continues to be community hospitals with net revenues of approximately $10,000 or more which are (1) the sole or primary hospital in market areas with a population of greater than 15,000 or (2) a principal healthcare provider with substantial market share in communities with a population of 50,000 to 150,000. We believe all of our seven existing hospitals meet at least one of the two market area criteria.

We face competition for healthcare facility acquisitions primarily from for-profit management companies and not-for-profit entities which may have greater financial and other resources than SunLink. Increased competition for the acquisition of non-urban acute-care hospitals and other healthcare facilities could have an adverse impact on our ability to acquire such hospitals and other healthcare facilities on favorable terms or at all,

We consider prices paid by others in recent years for certain hospital acquisitions to be higher than we would be willing to pay but we believe there may be opportunities for acquisitions of individual hospitals in the

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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 acquisitions of individual or groups of hospitals in the future from other for-profit hospital operators seeking to re-align the focus of their portfolios.

Opportunities to acquire not-for-profit hospitals may improve. However, in recent years, the legislatures and attorneys general of several states (including Georgia and other states which we believe may have suitable acquisition targets) have shown a heightened level of interest in reviewing transactions involving the sale of not-for-profit hospitals. The legal authority for such review is generally known as Conversion Legislation. Although the level of authority for, and interest in, such reviews varies from state to state, the trend is toward increased governmental review authority for, and, in some cases, imposing conditions prior to, the approval of transactions involving a not-for-profit corporation selling a healthcare facility. Accordingly, even where the costs of acquiring not-for-profit hospitals improve, governmental review may make it more difficult to complete any such acquisitions.

Our acquisition strategy for nursing homes and home health operations is to acquire businesses in areas which are complementary to either our existing hospitals or our new pharmacy business or which are located in rural or exurban markets. Although we are focused on the internal growth and integration of our recently acquired pharmacy operations into our existing operations, our acquisition strategy for pharmacy operations similarly would be to acquire pharmacy operations in areas which are complementary to either our existing healthcare facility operations or our new pharmacy operations or which are located in rural or exurban markets.

As noted above, from time to time we may consider the disposition of one or more of our healthcare facilities, service lines or business segments, including if we determine that the operating results or potential growth of such facility, service line or segment no longer meet our business objectives.

We also may, from time to time, consider the acquisition of other rural and exurban healthcare businesses which are not current part of our service lines or business segments.

Strategic Alternatives

On November 8, 2007, we announced that we had received an unsolicited conditional acquisition proposal from Resurgence Health Group, LLC which purported to offer a cash price of $7.50 per share for substantially all the outstanding shares of SunLink, subject to a number of conditions. On January 16, 2008, we announced that we had retained Stephens Inc. for the purpose of advising our Board of Directors in connection with an evaluation of the Company’s strategic alternatives, including, among others, the proposal by Resurgence Health Group, LLC. Since retaining Stephens, SunLink has explored a number of strategic alternatives, none of which to date has been judged by our Board to be superior in terms of price and execution risk to continuing as an independent company and pursuing SunLink’s existing business plans. To continue the evaluation on an on-going basis, the Board has formed a standing Strategic Alternatives Committee of the Board of Directors to, among other things, conduct periodic evaluations of the Company’s strategic alternatives. Investors are cautioned that no inference should be drawn from the existence of such committee and its charter with respect to the probability that the Company will engage in any transaction as a result of the periodic evaluation of strategic alternatives, including with respect to any proposal previously submitted or which in the future may be re-submitted or newly presented to the Company.

Healthcare Facilities Operations

SunLink’s healthcare facilities segment is composed of three operational areas:

• Our seven community hospitals;

• Our three nursing homes, each of which is located in adjacent to, or in close proximity with a corresponding SunLink community hospital; and

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• Our four hospital related home health agencies, each of which operates for a corresponding SunLink community hospital.

Through our subsidiaries, we operate a total of seven community hospitals in four states. Six of the community hospitals are owned and one is leased. SunLink’s community hospitals are acute care hospitals and have a total of 402 licensed beds. In connection with our community hospital operations in certain communities, we also operate (a) three nursing homes located in two states: each of our current nursing homes is located adjacent to our community hospitals, and (b) four home healthcare agencies in three states, each of these home health agencies is operated from one of our community hospitals. Our nursing homes have a total of 261 licensed beds.

Owned and Leased Hospitals

All of our hospitals are owned except Missouri Southern Healthcare, which is a leased hospital. The following sets forth certain information with respect to each of our seven community hospitals:

• Chestatee Regional Hospital (“Chestatee”), located in Dahlonega, Lumpkin County, Georgia, is a 49-licensed-bed, acute-care hospital accredited by the Joint Commission on Accreditation of Healthcare Organizations (“JCAHO”). It includes a 12-bed obstetric department, a four-bed intensive care unit (“ICU”) and a 33-bed medical/surgical/pediatrics unit. Chestatee is the only hospital in its primary service area of Lumpkin and Dawson Counties.

• North Georgia Medical Center (“North Georgia”), located in Ellijay, Gilmer County, Georgia, consists of a JCAHO accredited 50-licensed-bed, acute-care hospital and Gilmer Nursing Home, a 100-bed skilled nursing facility. North Georgia completed construction of a 6,755-square-foot emergency room addition in January 2003 for approximately $1,700. North Georgia is the only hospital in Gilmer County. The Company has a 28-bed CON to replace the existing hospital.

• Trace Regional Hospital (“Trace”), located in Houston, Chickasaw County, Mississippi, consists of a JCAHO accredited 84-licensed-bed, acute-care hospital and Floy Dyer Manor Nursing Home, a 66-bed nursing home. Trace is the only hospital in Houston, Mississippi, and the primary hospital in Chickasaw County.

• Chilton Medical Center (“Chilton”), located in Clanton, Chilton County, Alabama, is a 60-licensed-bed, JCAHO accredited, acute-care hospital. It operates a home-health agency. Chilton is the only hospital in Chilton County.

• Missouri Southern Healthcare (“Missouri Southern”), located in Dexter, Stoddard County, Missouri, is a 50-licensed-bed, acute-care hospital. It includes a four-bed ICU. It is the only hospital in Dexter, Missouri. The lease expires in 2019. It operates a home-health agency.

• Callaway Community Hospital (“Callaway”), located in Fulton, Callaway County, Missouri, is a 49-licensed-bed, JCAHO accredited, acute-care hospital. It operates a home-health agency. Callaway is the only hospital in Callaway County.

• Memorial Hospital of Adel (“Adel”), located in Adel, Cook County, Georgia, consists of a JCAHO accredited 60-licensed-bed, acute-care hospital and Memorial Convalescent Center, a 95-bed skilled nursing facility. It operates a home-health agency. Adel is the only hospital in Cook County.

Hospital Operations

Utilization of Local Hospital Management Teams

We believe that the long-term growth potential of our hospitals is dependent on their ability to offer appropriate healthcare services and effectively recruit and retain physicians. Each SunLink hospital has developed and continuously seeks to implement an operating plan designed to improve efficiency and increase revenue including by, but not limited to, the expansion of services offered by the hospital and the recruitment of physicians to the community.

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Each hospital management team is comprised of a chief executive officer, chief financial officer and chief nursing officer. The quality of the on-site hospital management team is critical to the success of our hospitals. The on-site management team is responsible for implementing the operating plan under the guidance of SunLink’s senior management team. Each hospital management team participates in a performance-based compensation program based upon the achievement of operational, clinical and financial goals set forth in the operating plan.

Each hospital management team is responsible for the day-to-day operations of its hospital. Our corporate staff provides support services, assistance, and advice to each hospital in certain areas, including physician recruiting, corporate compliance, reimbursement, information systems, human resources, accounting, cash management, finance, tax and insurance. Financial controls are maintained through the utilization of standardized policies and procedures and monitoring by corporate staff. Our hospitals have contracted with the HealthTrust Group Purchasing Organization, a purchasing group used by a large number of community hospitals, for certain supplies and equipment. We promote communication among our hospitals and management teams so that local expertise and improvements can be shared among all of our facilities.

Expansion of Services and Facilities; Maintenance of Emergency Room Operations

We seek to add services at our hospitals on an as-needed basis in order to improve access to quality healthcare services in the communities we serve, with the ultimate goal of reducing the out-migration of patients to other hospitals or alternate service providers. Additional and expanded services and programs, which may include specialty inpatient and outpatient services, are often dependent on recruiting physicians; therefore, physician recruiting goals are important to our ability to expand services. Capital investments in technology and facilities are often necessary to increase the quality and scope of services provided to the communities. Additional and expanded services and improvements add to each hospital’s quality of care and reputation in the community, reducing out-migration and increasing patient referrals and revenue. SunLink seeks to maintain, in each hospital, a quality, patient-friendly emergency department and provides emergency room services in each of our hospitals. We view the emergency room as the facility’s “window to the community” and a critical component of its local service offering.

Medical Staff

The number and quality of physicians affiliated with a hospital directly affects the quality and availability of patient care and the reputation of such hospital. Physicians generally may terminate their affiliation with a hospital at any time. We seek to retain physicians of varied specialties on the medical staffs of our hospitals and to attract other qualified physicians. SunLink believes physicians refer patients to a hospital primarily on the basis of the quality of services the hospital renders to patients and physicians, the quality of other physicians on the medical staff, the location of the hospital and the quality of the hospital’s facilities, equipment and employees. Accordingly, SunLink strives to provide quality facilities, equipment, employees and services for physicians and their patients.

Physician Recruiting

Each SunLink hospital management team is responsible for assessing the need for additional physicians, including the number and specialty of additional physicians needed by its community. Each of our local hospital management teams, with the assistance of outside recruiting firms, identifies and seeks to attract specific physicians to its hospital’s medical staff. The hospital generally guarantees a newly recruited physician a minimum level of gross receipts during an initial period, generally one year, and assists the physician’s transition into the community. The physician is required to repay some or all of the amounts paid under such guarantee if the physician leaves the community within a specified period. SunLink hospitals generally have not employed physicians but are currently considering the employment of certain physicians in markets where it believes it would enhance the hospital’s service offerings.

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Operating Statistics

The following table sets forth certain operating statistics for SunLink’s healthcare facilities as of June 30, 2008 for the periods indicated.

	Fiscal Years Ended June 30,
	2006			2007			2008
Hospitals owned or leased at end of period		7			7			7
Licensed hospital beds (at end of period)		402			402			402
Hospital beds in service (at end of period)		295			327			327
Nursing home beds in service (at end of period)		261			261			261
Admissions		9,970			9,908			8,865
Equivalent Admissions(1)		25,163			26,903			25,390
Average length of stay (days)(2)		3.63			3.59			3.54
Patient days		36,176			35,562			31,388
Adjusted patient days(3)		89,305			93,822			88,929
Occupancy rate (% of licensed beds)(4)		24.65	%		24.24	%		21.39	%
Occupancy rate (% of beds in service)(5)		33.51	%		29.71	%		26.23	%
Net patient service revenues (in thousands)	$	135,576		$	143,645		$	151,372
Net outpatient service revenues (in thousands)	$	59,760		$	68,234		$	81,059
Net revenue per equivalent admissions	$	5,388		$	5,339		$	5,962
Net outpatient service revenues (as a % of net patient service revenues)		44.08	%		47.50	%		53.55	%

(1) Equivalent admissions is a statistic used by management (and certain investors) as a general approximation of combined inpatient and outpatient volume. 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 resulting in a general approximation of combined inpatient and outpatient volume.

(2) Average length of stay is calculated based on the number of patient days divided by the number of admissions.

(3) Adjusted patient days have been calculated based on a revenue-based formula of multiplying actual patient days by the sum of gross inpatient revenues and gross outpatient revenues and dividing the result by gross inpatient revenues for each hospital. Adjusted patient days is a statistic (which is used generally in the industry) designed to communicate an approximate volume of service provided to inpatients and outpatients by converting total patient revenues to a number representing adjusted patient days.

(4) Percentages are calculated by dividing average daily census by the average number of licensed beds.

(5) Percentages are calculated by dividing average daily census by the average number of beds in service.

Sources of Revenue

Each SunLink hospital receives payments for patient care from Federal Medicare programs for older and disabled patients, state Medicaid programs, private insurance carriers, health maintenance organizations, preferred provider organizations, TriCare (formerly known as the Civilian Health and Medical Program of the Uniformed Services, or CHAMPUS), and from employers and patients directly. See “Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

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The following table sets forth the percentage of patient days from various payors in SunLink’s healthcare facilities for the periods indicated.

	Fiscal Years Ended June 30,
	2006		2007		2008
Source
Medicare	69.2	%	70.5	%	70.1	%
Medicaid	10.7	%	10.1	%	9.6	%
Private and Other Sources	20.1	%	19.4	%	20.3	%
Total	100.0	%	100.0	%	100.0	%

The following table sets forth the percentage of the net patient revenues from various payors in SunLink’s hospitals.

	Fiscal Years Ended June 30,
	2006		2007		2008
Source
Medicare	38.8	%	39.8	%	41.6	%
Medicaid	16.4	%	13.9	%	14.1	%
Private and Other Sources	44.8	%	46.3	%	44.3	%
Total	100.0	%	100.0	%	100.0	%

Hospital revenues depend upon inpatient occupancy levels, the extent to which ancillary services and therapy programs are ordered by physicians and provided to patients, and the volume of outpatient procedures. Reimbursement rates for routine inpatient services vary significantly depending on the type of service (e.g., acute care, intensive care or psychiatric care) and the geographic location of the hospital. The percentage of patient revenues attributable to outpatient services has increased in recent years, primarily as a result of medical technology advances that allow more services to be provided on an outpatient basis and from increased pressures from Medicare, Medicaid and private insurers to reduce hospital stays and provide services, where possible, on a less expensive outpatient basis. We believe that our experience with respect to increased outpatient levels mirrors the general trend occurring in the healthcare industry.

Patients generally are not responsible for any difference between established hospital charges and amounts reimbursed for such services under Medicare, Medicaid, some private insurer plans, health maintenance organizations (“HMOs”) or preferred provider organizations (“PPOs”), but are responsible to the extent of any exclusions, deductibles or co-insurance features of their coverage. The amount of such exclusions, deductibles and co-insurance has been increasing in recent years. Collection of amounts due from individuals typically is more difficult than from governmental or third-party payors.

Medicare is a Federal program that provides certain hospital and medical insurance benefits to persons age 65 and over, some disabled persons and persons with end-stage renal disease. Medicaid is a Federal-state program, administered by the states, that provides hospital and nursing home benefits to qualifying individuals who are unable to afford care. All of SunLink’s hospitals are certified as healthcare services providers for persons covered by Medicare and Medicaid programs. Amounts received under the Medicare and Medicaid programs generally are significantly less than the established charges of most hospitals, including our own, for the services provided. See “Item 1. Business—Government Reimbursement Programs—Medicare/Medicaid Reimbursement”.

Quality Assurance

Each SunLink hospital implements quality assurance procedures to monitor the level and quality of care provided to its patients. Each hospital has a medical director who supervises and is responsible for the quality of

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medical care provided and a medical advisory committee comprised of physicians who review the professional credentials of physicians applying for medical staff privileges at the hospital. The medical advisory committee also reviews and monitors surgical outcomes along with procedures performed and the quality of the logistical, medical and technological support provided to the physicians. Each hospital periodically conducts surveys of its patients, either during their stay at the hospital or subsequently by mail, to identify potential areas of improvement. Each SunLink hospital, except the leased hospital in Dexter, Missouri, is accredited by the Joint Commission of Accreditation of Healthcare Organizations, also known as JCAHO.

Competition

Among the factors which we believe influence patient selection among hospitals in our markets are:

• The appearance and functionality of the healthcare facilities;

• The quality and demeanor of professional staff and physicians; and

• The participation of the hospital in plans which pay a portion of the patient’s bill.

Such factors are influenced heavily by the quality and scope of medical services, strength of referral networks, hospital location and the price of hospital services. Although our hospitals may face less competition in their immediate patient service areas than would be expected in larger communities, since they are the primary provider of healthcare services in their respective communities, our hospitals nevertheless face competition from larger tertiary care centers and, in some cases, other rural, exurban, suburban or, in limited circumstances, urban hospitals, some of which (particularly large urban hospitals) offer more specialized services. The competing hospitals may be owned by governmental agencies or not-for-profit entities supported by endowments and charitable contributions and may be able to finance capital expenditures on a tax-exempt basis. Such governmental-owned and not-for-profit hospitals, as well as various for-profit hospitals operating in the broader service area, likely have greater access to financial resources than do SunLink hospitals.

Managed Care and Efforts to Control Healthcare Costs

Each SunLink hospital is affected by its ability to negotiate service contracts with purchasers of group healthcare services. Health maintenance organizations and preferred provider organizations attempt to direct and control the use of hospital services through managed care programs and to obtain discounts from hospitals’ established charges. In addition, employers and traditional health insurers increasingly are seeking to contain costs through negotiations with hospitals for managed care programs and discounts from established charges. Generally, hospitals compete for service contracts with group healthcare service purchasers on the basis of market reputation, geographic location, quality and range of services, quality of medical staff, convenience and price.

The importance of obtaining contracts with managed care organizations varies from market to market, depending on the market strength of such organizations. Management believes that, on an industry basis, managed care contracts generally are less important in rural and exurban markets than in urban and suburban markets where there is typically a higher level of managed care penetration. Nevertheless, a significant portion of hospital patients in rural and exurban communities are covered by managed care or other reimbursement programs, all of which generally pay less than established charges for hospital services.

The healthcare industry as a whole faces the challenge of continuing to provide quality patient care while managing rising costs, facing strong competition for patients, and adjusting to a general reduction of reimbursement rates by both private and government payors. Both private and government payors continually seek to reduce the nature and scope of services which may be reimbursed. Healthcare reform at both the Federal and state level generally is designed to reduce reimbursement rates. Changes in medical technology, existing and future legislation, regulations and interpretations, and competitive contracting for provider services by private and government payors, may require changes in our facilities, equipment, personnel, rates and/or services in the future.

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The hospital industry, including all of SunLink’s hospitals, continues to have significant unused capacity. Inpatient utilization, average lengths of stay and average inpatient occupancy rates continue to be affected negatively by payor-required pre-admission authorization, utilization review, and payment mechanisms designed to maximize outpatient and alternative healthcare delivery services for less acutely ill patients and to limit the cost of treating inpatients. Admissions constraints, payor pressures, and increased competition are likely to continue. Historically we have responded to such trends by adding and expanding outpatient services, upgrading facilities and equipment, offering new programs and adding or expanding certain inpatient and ancillary services. Currently we expect to continue to respond to such trends in a similar manner subject to the availability of capital resources, and our evaluation of the continued utility of such historical responses.

Government Reimbursement Programs

A significant portion of SunLink’s healthcare facilities net revenues is dependent upon reimbursement from Medicare and Medicaid. Although the Federal government generally reviews payment rates under its various programs annually, changes in reimbursement rates under such programs, including Medicare and Medicaid, generally occur based on the fiscal year of the Federal government which currently begins on October 1 and ends on September 30 of each year.

Medicare Inpatient Reimbursement

The Medicare program pays hospitals under the provisions of a prospective payment system for inpatient services. Under the inpatient prospective payment system, a hospital receives a fixed amount for inpatient hospital services based on the established fixed payment amount per discharge for categories of hospital treatment, known as diagnosis related group (“DRG”). Each patient admitted for care is assigned to a DRG based upon his or her primary admitting diagnosis. Every DRG is assigned a payment rate by the government based upon the estimated intensity of hospital resources necessary to treat the average patient with that particular diagnosis. DRG payments do not consider a specific hospital’s costs, but are national rates adjusted for area wage differentials and case-mix indices.

DRG rates are usually adjusted by an update factor each Federal fiscal year. The percentage increases to DRG payment rates for the last several years have been lower than the percentage increases in the related cost of goods and services provided by general hospitals. The index used to adjust the DRG payment rates is based on a price statistic, known as the CMS Market Basket Index, reduced by congressionally mandated reduction factors.

DRG rate increases were 3.4%, 3.3%, 3.7%, 3.4%, and 3.5% for Federal fiscal years 2004, 2005, 2006, 2007, and 2008 respectively. The Balanced Budget Act of 1997 originally set the increase in DRG payment rates for future Federal fiscal years at rates that are based on the market basket index, which in certain years have been, and in the future may be, subject to reduction factors. The Medicare, Medicaid and Health Benefits Improvement and Protection Act of 2000 (“BIPA”) amended the Balanced Budget Act of 1997 by giving hospitals a market basket increases minus 0.55% in fiscal year 2003. For Federal fiscal year 2004 and thereafter, hospitals received the full market basket rate increase. BIPA also made a number of changes to Medicare and Medicaid affecting payments to hospitals. All of our acute care hospitals qualify for some relief under BIPA. Some of the changes made by BIPA that affect our hospitals include:

• the lowering of the threshold by which hospitals qualify as rural disproportionate share hospitals;

• a decrease in reductions in payments to disproportionate share hospitals that had been mandated by the Balanced Budget Act of 1997 and other Congressional enactments;

• an increase in inpatient payments to hospitals;

• an increase in certain Medicare payments to certain psychiatric hospitals and units;

• an increase in Medicare reimbursement for bad debts;

• capping Medicare beneficiary ambulatory service co-payment amounts; and

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• an increase in the categories and items eligible for increased reimbursement to hospitals for certain outpatient services rendered on and after April 1, 2001 (which increase includes items such as current cancer therapy drugs, biologicals, and certain medical devices).

If the update factor does not adequately reflect increases in SunLink’s cost of providing inpatient services, our financial condition or results of operations could be negatively affected.

In November 2003, Congress enacted the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (“MMA”). MMA requires hospitals to report specified quality data in order to receive full market basket rate increase on DRGs. Hospitals that do not report this information will receive the market basket percentage increase less 0.4 percentage points. On February 8, 2006 the President signed into law the Deficit Reduction Act of 2005 (“DRA”). The DRA provides that, beginning with the payment update for the federal fiscal year beginning October 1, 2006 and each subsequent federal fiscal year, the annual percentage increase amount will be reduced by 2.0 percentage points for specified hospitals that do not submit certain quality data. In addition, the DRA required that CMS begin to expand the “starter set” of 10 quality measures that have been used since 2003. For the hospital inpatient prospective payment system (“IPPS”) for the federal fiscal year beginning and after October 1, 2006, CMS added new measures to the Reporting Hospital Quality Data for Annual Payment Update (“RHQDAPU”) program to bring the total to 21 measures for such federal fiscal year and 27 for the federal fiscal years beginning October 1, 2007. All of SunLink’s hospitals are currently reporting the quality data and therefore receiving the full market basket rate increase.

Section 5001(c) of the DRA required HHS to implement rules pursuant to which hospitals must report the secondary diagnoses that are present on the admission (“POA”) of patients. By October 1, 2007, HHS was required to select at least two conditions that are: (1) high cost or high volume or both; (2) assigned to a higher paying DRG when present as a secondary diagnosis; and (3) reasonably preventable through application of evidence-based guidelines. Beginning October 1, 2008, cases with the selected conditions would not be assigned to a higher paying DRG unless they were present on admission. Currently CMS has selected nine conditions which are subject to such provisions.

MMA made a number of significant changes to the Medicare program, including a number of provisions designed to help strengthen and preserve access to medical care in rural areas by providing higher Medicare payments to small rural hospitals. In addition to a highly publicized prescription drug benefit that is intended to provide direct relief to Medicare beneficiaries, MMA provides a number of direct benefits to hospitals, including, but not limited to:

• incorporation of the permanent single base payment—or standardized amount—for hospitals, resulting in increased payments for hospitals located in rural and small urban areas.

• a permanent increase in the base payment rate for rural and small urban hospitals of 1.6% up to the large urban payment rate;

• an increase in the cap on disproportionate share payments for rural and small urban hospitals, which, as of April 1, 2004, was increased to 12.0% of total inpatient payments;

• extended indefinitely the “hold harmless” provisions for small rural hospitals and sole community hospitals under the Outpatient Department reform provisions of the MMA (these payment provisions are intended to ensure that small rural hospitals are paid at least as much under the outpatient prospective payment system as they would have received under the cost-based payment methodology in effect before August 2000); and

• establishment of a physician incentive program for primary care and certain specialty physicians who provide services to individuals in areas having the fewest physicians available to serve Medicare beneficiaries, among others.

Each of SunLink’s hospitals is an eligible hospital under one or more provisions of MMA.

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Each year, on or about August 1, the Centers for Medicare & Medicaid Services (“CMS”) issue a final rule that implements changes to the hospital inpatient prospective payment system (IPPS) for subsequent federal fiscal years. The August 1, 2006 final rule expanded previously implemented changes that according to CMS take significant steps to improve the accuracy of Medicare’s payment for inpatient stays. The payment reforms, which are being phased in over time, align hospital payments more closely with the costs of a patient’s care by using hospital costs rather than charges, and by accounting more fully for the severity of the patient’s condition. The revised payments became effective for discharges on or after October 1, 2006.

The August 1, 2007 final rule adopted pursuant to MMA made further changes designed to continue to improve the accuracy of Medicare’s payment under the acute care IPPS. The IPPS payment reforms are designed to restructure the inpatient diagnosis-related groups (“DRGs”) to account more fully for the severity of each patient’s condition. In addition, the rule includes important provisions intended to ensure that Medicare no longer pays for the additional costs of certain preventable conditions (including certain infections) acquired in the hospital. The rule also reduces Medicare payments when a hospital replaces a device that is supplied to the hospital at no or reduced cost.

It is estimated that payments to all hospitals increased by an average of 3.5 percent for the federal fiscal year beginning October 1, 2007 when all provisions of the rule took effect, primarily as a result of a 3.3 percent market basket increase.

Payments to specific hospitals may increase more or less than the average depending on the patient mix of the specific hospital. For instance, urban hospitals generally treat more severely ill patients and are estimated to receive a 3.8 percent increase in payments. The rule created 745 new severity-adjusted DRGs to replace the previous 538 DRGs. Projected aggregate spending will not change as a result of the reforms. However, payments will increase for hospitals serving more severely ill patients and decrease for those serving patients who are less severely ill. The effect of the change in DRGs to our hospitals is unknown and depends on the acuity of services provided to future patients.

The rule also implemented a provision of the DRA that takes the first steps toward preventing Medicare from giving hospitals higher payment for the additional costs of treating a patient who acquires a condition (including an infection) during a hospital stay. Already the feature of many state health care programs, the DRA requires hospitals, effective as of October 1, 2007, to begin reporting secondary diagnoses that are present on the admission of patients, beginning with discharges on or after such date. Beginning on October 1, 2008, cases with these conditions are no longer paid at a higher rate unless these symptoms were present on admission. In order to improve the reliability of care in the nation’s hospitals, the rule identifies eight conditions, including three serious preventable events (sometimes called “never events”) that meet the statutory criteria. The effect of the future implementation of this DRA provision to our hospitals is not known.

Prior to July 1, 2005, long-term care psychiatric units within hospitals were exempt from the prospective payment system, and were reimbursed under the provisions of a cost-based system, subject to specific reimbursement caps. During a three year transition period beginning on July 1, 2005 such units were partially reimbursed based on a prospective payment system based on patient acuity with the remaining portion of the payment continuing to be reimbursed based on a cost based system. Under the transition period for the implementation of this new prospective system was 25% was reimbursed under the PPS system for the year ending June 30, 2006, and 50% was reimbursed under the PPS system for the year ending June 30, 2007 and 75% was reimbursed under the PPS system for the year ending June 30, 2008. Since July 1, 2008, long-term care psychiatric units are being reimbursed solely based on the federal inpatient psychiatric prospective payment rate. SunLink operates one psychiatric unit in one of its hospitals and believes this change will have a minimal effect on SunLink’s consolidated revenues.

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Medicare Outpatient Reimbursement

Most outpatient services provided by general hospitals are reimbursed by Medicare under the outpatient prospective payment system. This outpatient prospective payment system is based on a system of Ambulatory Payment Classifications (“APC”). Each APC is designed to represent a “bundle” of outpatient services, and each APC is assigned a fully prospective reimbursement rate. Medicare pays a set price or rate for each APC group, regardless of the actual cost incurred in providing care. Each APC rate generally is subject to adjustment each year by an “update factor” based on a market basket of services index. For calendar years 2004, 2005, 2006, 2007, and 2008 the update factor were 4.5%, 3.3%, 3.7%, 3.4%, and 3.8% respectively. If the update factor does not adequately reflect increases in SunLink’s cost of providing outpatient services, our financial condition or results of operations could be negatively affected.

On November 1, 2007 the Centers for Medicare & Medicaid Services (“CMS”) issued a final rule updating the hospital Outpatient Prospective Payment System (“OPPS”), effective for services furnished during calendar year (“CY”) 2008, which encourages higher quality and accessible health care through new payment policies and the reporting of quality measures. The final rule with comment period also updated the payment rates for the revised ambulatory surgical center (“ASC”) payment system, beginning in CY 2008.

According to CMS “The policies of the revised ASC payment system that are reflected in the 2008 payment rates further expand beneficiary choices by providing patients the flexibility to select, in consultation with their physicians, the most appropriate care setting for their particular surgical needs, the revised system takes a major step toward eliminating financial incentives for choosing one care setting over another, thereby placing patients’ needs first, increasing efficiencies, and leading to savings for both beneficiaries and the Medicare program.”

In this final rule, CMS also adopted the use of composite APCs to encourage efficiencies by providing one bundled payment for several major services. According to CMS “Composite APCs encourage even greater hospital efficiencies than expanding packaging by making a single payment for the totality of hospital outpatient care provided during an encounter.”

Medicare Disproportionate Share Payments

In addition to the standard DRG payment, the Social Security Act requires that additional Medicare payments be made to hospitals with a disproportionate share of low income patients. BIPA provisions, effective for services provided on and after April 1, 2001, stipulate that rural facilities with fewer than 100 beds with a disproportionate share percentage greater than 15% will be classified as a disproportionate share hospital entitled to receive a supplemental disproportionate share payment based on gross DRG payments. Since April 1, 2004, the effective rate has been 12.0% of DRG payments. All of our hospitals were classified as disproportionate share hospitals at June 30, 2008. We estimate that Medicare disproportionate share payments represented approximately 1% of our net patient service revenues for the years ended June 30, 2006, 2007 and 2008.

Recovery Audit Contractors

In 2005, CMS began using recovery audit contractors (“RACs”) to detect Medicare overpayments not identified through existing claims review mechanisms. The RAC program relies on private auditing firms to examine Medicare claims filed by healthcare providers. Fees to the RACs are paid on a contingency basis. The RAC program began as a demonstration project in three states (New York, California and Florida), but was made permanent by the Tax Relief and Health Care Act of 2006. CMS plans to expand the RAC program to additional states beginning in 2008 and to have RACs in place in all 50 states by 2010.

RACs perform post-discharge audits of medical records to identify Medicare overpayments resulting from incorrect payment amounts, non-covered services, incorrectly coded services, and duplicate services. CMS has given RACs the authority to look back at claims up to three years old, provided that the claim was paid on or after October 1, 2007. Claims identified as overpayments will be subject to the Medicare appeals process.

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RACs are paid a contingency fee based on the overpayments they identify and collect. We expect that the RACs will look closely at claims submitted by our facilities in an attempt to identify possible overpayments. Although we believe the claims for reimbursement submitted to the Medicare program are accurate, we cannot predict whether we will be subject to RAC audits in the future, or if audited, what the result of such audits might be.

Medicaid In-Patient and Out Patient Reimbursement

Each state operates a Medicaid program funded jointly by the state and the Federal government. Federal law governs the general management of the Medicaid program, but there is wide latitude for states to customize Medicaid programs to fit local needs and resources. As a result, each state Medicaid plan has its own payment formula and recipient eligibility criteria.

In the recent past the various states in which SunLink operates hospitals initiated increased efforts to reduce Medicaid assistance payments. These efforts and reductions have been triggered by an increased effort by CMS to decrease the federal share of payments for Medicaid beneficiaries as well as by the significant increases in program utilization resulting from increased enrollment and from budgetary cuts facing states where SunLink operates. In particular, Georgia, where SunLink operates three hospitals, has begun initiatives to decrease the Medicaid funds paid to providers.

Georgia — Historically, the state of Georgia has reimbursed Medicaid providers for inpatient services in a manner similar to the Medicare prospective payment system in that hospitals received a fixed fee for inpatient hospital services based on the established fixed payment amount per discharge for categories of hospital treatment, known as DRGs. These Medicaid DRG payments do not consider a specific hospital’s costs, but are statewide rates adjusted for each hospital’s capital cost allotment.

Medicaid outpatient services are reimbursed with interim rates based on a facility specific cost to charge ratio. These interim payments are then adjusted subsequent to the end of the cost reporting period to an amount equal to 85.6% of the costs associated with providing care to the Medicaid outpatient population. Beginning in Georgia’s fiscal year ended June 30, 2006, Georgia implemented a Medicaid HMO program and awarded contracts to private companies for the management and processing of certain Medicaid claims. The intent of the Medicaid HMO program is to curtail utilization and reduce rates paid by the State of Georgia. All of SunLink’s facilities that operate in the state of Georgia have secured contracts with all the HMO companies contracted by the state. Since the implementation of the Medicaid HMO program, all SunLink hospitals receive reimbursement from three different contractors instead of a single source prior to the implementation. While the amounts of the inpatient payments have not changed since the contractors utilize the same payment rates, the timing of the receipt of the payments has changed due to the multiple payors. For outpatient services, the SunLink hospitals have contracts the three HMO vendors and services are reimbursed 102% of the current interim rate determined by the Georgia Department of Community Health

Government Reimbursement Program Administration and Adjustments

The Medicare, Medicaid and CHAMPUS TriCare programs are subject to statutory and regulatory changes, administrative rulings, interpretations and determinations, requirements for utilization review and new governmental funding restrictions, all of which may materially increase or decrease program payments as well as affect the cost of providing services and the timing of payments to facilities.

All hospitals participating in the Medicare and Medicaid programs, whether paid on a reasonable cost basis or under a prospective payment system, are required to meet certain financial reporting requirements. Federal and, where applicable, state regulations require the submission of annual cost reports covering the revenue, costs and expenses associated with the services provided by each hospital to Medicare beneficiaries and Medicaid recipients.

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Annual cost reports required under the Medicare and Medicaid programs are subject to routine audits which may result in adjustments to the amounts ultimately determined to be due to SunLink under these reimbursement programs. These audits often require several years to reach the final determination of amounts due. Providers also have rights of appeal and it is common to contest issues raised in audits of prior years’ cost reports. Although the final outcome of these audits and the nature and amounts of any adjustments are difficult to predict, we believe that we have made adequate provisions in our financial statements for adjustments that may result from these audits and that final resolution of any contested issues should not have a material adverse effect upon our consolidated results of operations or financial position. Until final adjustment, however, significant issues may remain unresolved and previously determined allowances could become either inadequate or greater than ultimately required.

If SunLink or any of our facilities were found to be in violation of Federal or state laws relating to Medicare, Medicaid or similar programs, SunLink could be subject to substantial monetary fines, civil penalties and exclusion from future participation in the Medicare and Medicaid programs. Any such sanctions could have a material adverse effect on our financial position and results of operations.

SPECIALITY PHARMACY OPERATIONS

Our Specialty Pharmacy segment is operated through SunLink ScriptsRx, LLC (of which Carmichael’s Cashway Pharmacy, Inc. is currently the sole operating subsidiary) and is a pharmacy operations segment is composed of four material service lines:

1. Specialty Pharmacy Services, which services may overlap somewhat with our home health care services by virtue of common methods of delivery, generally in a non-hospital setting but which are not presently conducted in any of our healthcare facilities markets and ordinarily include one or more of the following elements:

• The provision of products relating to infusion therapy, enteral feeding services, oncology and chemotherapy drug administration, cardiac, diabetes, pain management, wound care, and psychiatric services.

• Pharmaceutical or biological products administered via non-oral means, which are frequently through injectable or infusion therapies;

• Products delivered to the patients via express package or hand delivery and requiring special handling such as constant refrigeration or having an extremely limited shelf life;

• Products that generally are administered in a non-hospital setting, including the physician office, specialty clinic or patients home.

• The provision of pharmaceuticals or biological not managed under the traditional outpatient prescription drug benefit; and

• Therapies that require complex care, patient education and continuous monitoring.

The major conditions these drugs treat include, but are not limited to: cancer, HIV/AIDS, hemophilia, hepatitis C, multiple sclerosis, infertility, Crohn’s disease, rheumatoid arthritis, and growth hormone deficiency.

2. Institutional Pharmacy Services, consisting of the provision of specialty and non-specialty pharmaceuticals and biological products to institutional clients or to patients in institutional settings such as nursing homes, hospices, and correctional facilities;

3. Durable Medical Equipment, consisting primarily of products for patient administered home care such as oxygen concentrators, liquid oxygen systems, continuous positive airway pressure or CPAP machines, nebulizers, diabetes management products and prosthetics;

4. Retail Pharmacy Products and Services, consisting primarily of walk-in sales at our three distribution facilities in Louisiana of complementary products including non-specialty pharmaceuticals, vitamins,

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supplements and nutritionals. We view our retail sales operations as a source of incremental revenue to us while providing value added service to our patients in the form of full service pharmacy offerings.

Government Reimbursement Programs

As previously noted, in 2003, Congress passed the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, also known as the Medicare Modernization Act (“MMA”). Regulations implementing the mandates under the MMA reduced the reimbursement for healthcare providers in urban areas for a number of products and services provided by our pharmacy operations and established a competitive bidding program for certain durable medical equipment provided under Medicare Part B in urban areas. Competitive bidding is intended to further reduce reimbursement for certain products and will likely decrease the number of companies permitted to serve Medicare beneficiaries in the competitive bidding areas (“CBAs”). The Centers for Medicare & Medicaid Services (“CMS”) had planned to implement the competitive biding program for Medicare durable medical equipment, prosthetics, orthotics, and supplies (“DMEPOS”) products and services with the goal of offering beneficiaries access to quality with lower out-of-pocket costs. The program has, however, been deferred indefinitely, and whether or not the program is implemented in the future is unknown.

We were exempted under the Deficit Reduction Act of 2005 from the proposed competitive acquisition program for DMEPOS, but we cannot be sure such exemption would continue to be available in the future or that the program will be implemented in the future as it was originally designed . Loss of the exemption could have an adverse effect on our results of operation.

The MMA also created a new Medicare prescription drug benefit (beginning in 2006) and, more immediately, a prescription drug card program. On January 21, 2005, the CMS issued final rules implementing the portions of the MMA relating to the new prescription drug benefit.

In addition to these new programs, the MMA also made changes affecting payments for drugs under Medicare’s existing benefits. Section 303(c) of the MMA revised the payment methodology for Part B covered drugs that are not paid on a cost or prospective payment basis. In particular, section 303(c) of the MMA amended Title XVIII of the Act by adding section 1847A, which moved from a system based on average wholesale price or (“AWP”) to one based on a new average sales price (“ASP”) drug payment system. Since January 1, 2005, drugs and biologicals not paid on a cost or prospective payment basis are paid based on the ASP methodology. Principal among these latter changes was a modification in the method of calculating reimbursements for certain oncology, renal dialysis, and other drugs. There are exceptions to this general rule which are listed in the latest ASP quarterly change request (“CR”) document. The ASP methodology uses quarterly drug pricing data submitted to the CMS by drug manufacturers. CMS will supply contractors with the ASP drug pricing files for Medicare Part B drugs on a quarterly basis.

Beginning in January 2008, CMS’s outpatient prospective payment system began paying for most separately payable Medicare Part B drugs administered in a hospital outpatient setting at a reimbursement level of ASP plus 5% and ASP plus 6% in other settings. Such outpatient price represented a decrease from ASP + 6% and is part of a CMS plan to transition to even lower reimbursement rates of ASP +3% in calendar year 2009.

Section 303(d) of the MMA also requires the implementation of a competitive acquisition program (the “Part B CAP”) for Medicare Part B drugs and biologicals not paid on a cost or prospective payment system basis. The Part B CAP is an alternative to the ASP methodology for acquiring certain Part B drugs which are administered incident to a physician’s services. Currently, the Part B CAP is a voluntary program that offers physicians the option to acquire many injectable and infused drugs they use in their practice from an approved Part B CAP vendor, thus reducing the time and cost of buying and billing for drugs. Currently, the CAP for Part B Drugs and Biologicals is only for injectable and infused drugs currently billed under Part B that are administered in a physician’s office, “incident to” a physician’s service.

In late 2005, CMS conducted the first round of bidding for approved Part B CAP vendors. The Part B CAP was implemented on July 1, 2006. The 2009-2011 CAP vendor bidding period concluded on February 15, 2008.

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Submitted applications are now being evaluated by CMS. A three year contract for 2009-2011 will be awarded to vendors for each program geographic area who have and maintain: 1) sufficient means to acquire and deliver competitively biddable drugs within the specified contract area; 2) arrangements in effect for shipping at least 5 days each week for the competitively biddable drugs under the contract and means to ship drugs in emergency situations; 3) quality, service, financial performance and solvency standards; and 4) a grievance and appeals process for dispute resolution. Up to five vendors may be selected, although only one vendor is currently approved. Approved Part B CAP vendors must also qualify for enrollment in Medicare. For 2009-2011, the Part B CAP will continue to have one geographic area which includes all 50 States, the District of Columbia, Puerto Rico, the United States Virgin Islands, American Samoa, Guam and the Northern Mariana Islands. Any Part B CAP Vendor must also be licensed in accordance with state and Federal requirements and in a manner that will allow the applicant to supply CAP drugs in the geographic area.

At least one Medicaid program has adopted, and other Medicaid programs, some states and some private payors may be expected to adopt, those aspects of the MMA that either result in or appear to result in price reductions for drugs covered by such programs. Adoption of ASP as the measure for determining reimbursement by Medicare and Medicaid programs for the drugs sold by our specialty pharmacy operations could reduce revenue and gross margins and could materially affect our current AWP based reimbursement structure with private payors.

We cannot assure you that the ASP reimbursement methodology will not be extended to the provision of all specialty pharmaceuticals or to the specialty pharmaceuticals most often sold by our specialty pharmacy operations or that we will continue to be able to operate our specialty pharmacy operations profitably at either existing or at lower reimbursement rates. Likewise, we cannot assure you that the Part B CAP program will not be extended to rural or exurban areas in general or to the areas in which we operate, or may seek to operate, in particular or that we would be able to meet the qualifications to become a Part B CAP vendor either now or at any time in the future.

Competition

There are many companies which provide one or more of the healthcare operations which comprise our pharmacy operations. Home healthcare business competitors range in size from small entrepreneurial operations to rapidly expanding businesses with strategies for national operations such as Amedisys, Inc., Apria Healthcare Group, Inc., Gentiva Health Services, Inc., and Walgreen Co. Specialty pharmacy operators range from local or regional pharmacies to large public companies such as Option Care, Inc., a subsidiary of Walgreen Co., CVS Caremark Corporation, Priority Healthcare Corporation and MIM Corporation.

Healthcare Regulation

Overview

The healthcare industry is one of the largest industries in the United States and continues to attract much legislative interest and public attention. There are many factors that are highly significant to the healthcare industry including Medicare, Medicaid, and other public and private hospital cost-containment programs, proposals to limit healthcare spending and proposals to limit prices and industry competition factors. The healthcare industry is governed by an extremely complex framework of Federal, state and local laws, rules and regulations.

There continue to be Federal and state proposals that would, and actions that do, impose limitations on government and private payments to providers, including community hospitals. In addition, there regularly are proposals to increase co-payments and deductibles from program and private patients. Hospital facilities also are affected by controls imposed by government and private payors designed to reduce admissions and lengths of stay. Such controls include what is commonly referred to as “utilization review”. Utilization review entails the review of a patient’s admission and course of treatment by a third party. Historically, utilization review has resulted in a decrease in certain treatments and procedures being performed. Utilization review is required in

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connection with the provision of care which is to be funded by Medicare and Medicaid and is also required under many managed care arrangements.

Many states have enacted, or are considering enacting, additional measures that are designed to reduce their Medicaid expenditures and to make changes to private healthcare insurance. Various states have applied, or are considering applying, for a waiver from current Medicaid regulations in order to allow them to serve some of their Medicaid participants through managed care providers. These proposals also may attempt to include coverage for some people who presently are uninsured, and generally could have the effect of reducing payments to hospitals, physicians and other providers for the same level of service provided under Medicaid.

Healthcare Facility Regulation

Certificate of Need Requirements

A number of states require approval for the purchase, construction and expansion of various healthcare facilities, including findings of need for additional or expanded healthcare facilities or services. Certificates of need (“CON”), which are issued by governmental agencies with jurisdiction over applicable healthcare facilities, are at times required for capital expenditures exceeding a prescribed amount, changes in bed capacity or the addition of services and certain other matters. All four states in which SunLink currently operates hospitals (Alabama, Georgia, Mississippi and Missouri) have CON laws that apply to such facilities. The two states (Georgia and Mississippi) in which SunLink currently operates nursing homes/skilled nursing facilities also have CON laws that apply to nursing homes and other skilled nursing facilities. States periodically review, modify and revise their CON laws and related regulations.

In addition, future healthcare facility acquisitions may occur in states that require certificates of need. SunLink is unable to predict whether its healthcare facilities will be able to obtain any certificates of need that may be necessary to accomplish their business objectives in any jurisdiction where such certificates of need are required. Violation of these state laws may result in the imposition of civil sanctions or the revocation of licenses for such facilities.

Future healthcare facility acquisitions may occur in states that do not require certificates of need or which have less stringent CON requirements than the states in which SunLink currently operates healthcare facilities. Any healthcare facility operated by SunLink in such states may face increased competition from new or expanding facilities operated by competitors.

Utilization Review Compliance and Hospital Governance

SunLink’s healthcare facilities are subject to, and comply with, various forms of utilization review. In addition, under the Medicare prospective payment system, each state must have a peer review organization to carry out a federally mandated system of review of Medicare patient admissions, treatments and discharges in hospitals. Medical and surgical services and physician practices are supervised by committees of staff doctors at each healthcare facility; are overseen by each healthcare facility’s local governing board, the primary voting members of which are physicians and community members; and are reviewed by SunLink’s quality assurance personnel. The local governing boards also help maintain standards for quality care, develop long-range plans, establish, review and enforce practices and procedures and approve the credentials and disciplining of medical staff members.

Emergency Medical Treatment and Active Labor Act

All of our facilities are subject to the Emergency Medical Treatment and Active Labor Act (“EMTALA”) This federal law requires any hospital that participates in the Medicare program to conduct an appropriate medical screening examination of every person who presents himself to the hospital’s emergency department for treatment and, if the patient is suffering from an emergency medical condition, to either stabilize that condition or make an appropriate transfer of the patient to a facility that can handle the condition. The obligation to screen and stabilize emergency medical conditions exists regardless of a patient’s ability to pay for treatment. There are

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severe penalties under EMTALA if a hospital fails to screen or appropriately stabilize or transfer a patient or if the hospital delays appropriate treatment in order to first inquire about the patient’s ability to pay. Penalties for violations of EMTALA include civil monetary penalties and exclusion from participation in the Medicare program. In addition, an injured patient, the patient’s family or a medical facility that suffers a financial loss as a direct result of another hospital’s violation of the law can bring a civil suit against the hospital.

In a final rule, effective November 10, 2003, CMS clarified when a patient is considered to be on a hospital’s property for purposes of treating the person pursuant to EMTALA. CMS stated that off-campus facilities such as specialty clinics, surgery centers and other facilities that lack emergency departments should not be subject to EMTALA, but that these locations must have a plan explaining how the location should proceed in an emergency situation such as transferring the patient to the closest hospital with an emergency department. CMS further clarified that hospital-owned ambulances could transport a patient to the closest emergency department instead of to the hospital that owns the ambulance.

CMS’ rules did not specify “on-call” physician requirements for an emergency department, but provided a subjective standard stating that “on-call” hospital schedules should meet the hospital’s and community’s needs. CMS also did not directly address a number of issues, including whether EMTALA applies to direct admissions, individuals who come to a hospital pursuant to a physician’s orders for a routine procedure, individuals who present themselves at a hospital’s psychiatric department or delivery/labor department, and whether screening requirements apply to patients transferred from other facilities. Although we believe that our hospitals comply with EMTALA, we cannot predict whether CMS will implement new requirements in the future and whether we will be able to comply with any new requirements.

Conversion Legislation

Many states, including some where we have hospitals and others where we may in the future acquire hospitals, have adopted legislation regarding the sale or other disposition of hospitals operated by not-for-profit entities. In other states that do not have specific legislation, state attorneys generally have demonstrated an interest in these transactions under their general obligations to protect charitable assets from waste. These legislative and administrative efforts primarily focus on the appropriate valuation of the assets divested and the use of the proceeds of the sale by the not-for-profit seller. These reviews and, in some instances, approval processes can add additional time to the closing of a hospital acquisition. There can be no assurance that future actions on the state level will not seriously delay or even prevent our ability to acquire hospitals. If these activities are widespread, they could limit our ability to acquire additional hospitals or increase our acquisition costs.

Pharmacy Operations Regulation

Overview

Much like our healthcare facility operations, our pharmacy operations are subject to various Federal and state statutes and regulations governing their operations including laws and regulations with respect to operation of pharmacies, repackaging of drug products, wholesale distribution, dispensing of controlled substances, cross jurisdictional sale and distribution of pharmacy products, medical waste disposal, clinical trials and non-discriminary access. Federal statutes and regulations govern the labeling, packaging, advertising and adulteration of prescription drugs and the dispensing of controlled substances. Federal controlled substance laws require us to register our pharmacies and repackaging facilities with the United States Drug Enforcement Administration and to comply with security, recordkeeping, inventory control and labeling standards in order to dispense controlled substances. Although we believe that our pharmacy operations have obtained or are obtaining the permits and/or licenses required to conduct our pharmacy operations, failure to have the necessary permits and licenses could have a material adverse effect on our pharmacy business, and our financial condition or results of operations.

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Mail Order Activities

Currently the activities of our hospital pharmacies are ancillary to the operations of the facilities they serve. In contrast, the operations of our pharmacy operations segment are stand-alone operations that, in addition to walk-in customers, distribute pharmaceuticals through a variety of delivery methods, including by mail and express delivery services. Many states in which we deliver or may seek to deliver pharmaceuticals have laws and regulations that require out-of-state mail service pharmacies to register with, or be licensed by, the boards of pharmacy or similar regulatory bodies in those states. These states generally permit the dispensing pharmacy to follow the laws of the state within which the dispensing pharmacy is located.

However, various state Medicaid programs have enacted laws and/or adopted rules or regulations directed at restricting or prohibiting the operation of out-of-state pharmacies by, among other things, requiring compliance with all laws of the states into which the out-of-state pharmacy dispenses medications, whether or not those laws conflict with the laws of the state in which the pharmacy is located, or requiring the pharmacist-in-charge to be licensed in that state. To the extent that such laws or regulations are found to be applicable to our operations, we believe our pharmacy operations comply with them in all material respects. To the extent that any of the foregoing laws or regulations prohibit or restrict the operation of mail service pharmacies and are found to be applicable to our pharmacy operations, they could have an adverse effect on our ability to expand our pharmacy operations, which currently are concentrated in Louisiana. A number of state Medicaid programs prohibit the participation in those states by out-of-state retail or mail service pharmacies, whether in-state or out-of-state.

Advertising and Marketing Regulations

There are also other statutes and regulations which may also affect advertising, marketing and distribution of pharmacy products by our pharmacy operations. The Federal Trade Commission requires mail order sellers of goods generally to engage in truthful advertising, to stock a reasonable supply of the products to be sold, to fill mail orders within 30 days, and to provide clients with refunds when appropriate.

Healthcare Regulations of General Application

Licensing Requirements

SunLink’s healthcare operations are subject to extensive federal, state and local licensing requirements. In order to maintain their operating licenses, our healthcare facility operations must comply with strict standards concerning medical care, equipment and hygiene. Various licenses and permits also are required in order to handle radioactive materials and operate certain equipment. All licenses, provider numbers, and other permits or approvals required to perform our business operations are held by individual subsidiaries of SunLink. Each of our hospital operating subsidiaries operates only a single hospital. All of SunLink’s hospitals, except the leased hospital in Dexter, Missouri, are fully accredited by JCAHO.

Drugs and Controlled Substances

Various licenses and permits are required by our healthcare facilities and pharmacy operations in order to dispense narcotics and operate pharmacies We are required to register our pharmacy operations for permits and/or licenses with, and comply with certain operating and security standards of, the United States Drug Enforcement Administration, or DEA, the Food and Drug Administration, or FDA, State Boards of Pharmacy, state health departments and other state agencies in states where we operate or may seek to operate.

State controlled substance laws require registration and compliance with state pharmacy licensure, registration or permit standards promulgated by the state’s pharmacy licensing authority. Such standards often address the qualification of an applicant’s personnel, the adequacy of its prescription fulfillment and inventory control practices and the adequacy of its facilities. In general, pharmacy licenses are renewed annually. Pharmacists and pharmacy technicians employed at each of our dispensing locations must also satisfy applicable state licensing requirements.

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Fraud and Abuse, Anti-Kickback and Self-Referral Regulations

Participation in the Medicare and/or Medicaid programs is heavily regulated by federal statutes and regulations. If a hospital fails to comply substantially with the numerous federal laws governing a facility’s activities, the hospital’s participation in the Medicare and/or Medicaid programs may be terminated and/or civil or criminal penalties may be imposed. For example, a hospital may lose its ability to participate in the Medicare and/or Medicaid programs if it performs any of the following acts:

• making claims to Medicare and/or Medicaid for services not provided or misrepresenting actual services provided in order to obtain higher payments;

• paying money to induce the referral of patients or purchase of items or services where such items or services are reimbursable under a federal or state health program; or

• failing to provide appropriate emergency medical screening services to any individual who comes to a hospital’s campus or otherwise failing to properly treat and transfer emergency patients.

Sections of the Anti-Fraud and Abuse Amendments to the Social Security Act, commonly known as the “anti-kickback” statute, prohibit certain business practices and relationships that might influence the provision and cost of healthcare services reimbursable under Medicaid, Medicare or other Federal healthcare programs, including the payment or receipt of remuneration for the referral of patients whose care will be funded by Medicare or other government programs. Sanctions for violating the anti-kickback statute include criminal penalties and civil sanctions, including fines and possible exclusion from future participation in government programs, such as Medicare and Medicaid. Pursuant to the Medicare and Medicaid Patient and Program Protection Act of 1987, the U.S. Department of Health and Human Services (“HHS”) issued regulations that create safe harbors under the anti-kickback statute. A given business arrangement that does not fall within an enumerated safe harbor is not per se illegal; however, business arrangements that fail to satisfy the applicable safe harbor criteria are subject to increased scrutiny by enforcement authorities. The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) broadened the scope of the fraud and abuse laws by adding several criminal statutes that are not related to receipt of payments from a federal healthcare program. HIPAA created civil penalties for proscribed conduct, including upcoding and billing for medically unnecessary goods or services. These new laws cover all health insurance programs, private as well as governmental. In addition, HIPAA broadened the scope of certain fraud and abuse laws, such as the anti-kickback statute, to include not just Medicare and Medicaid services, but all healthcare services reimbursed under a Federal or state healthcare program. Finally, HIPAA established new enforcement mechanisms to combat fraud and abuse. These new mechanisms include a bounty system where a portion of the payment recovered is returned to the government agencies, as well as a whistleblower program, where a portion of the payment received is paid to the whistleblower. HIPAA also expands the categories of persons that may be excluded from participation in federal and state healthcare programs.

There is increasing scrutiny by law enforcement authorities, the Office of Inspector General of the HHS, the courts and the U.S. Congress of arrangements between healthcare providers and potential referral sources to ensure that the arrangements are not designed as mechanisms to exchange remuneration for patient-care referrals and opportunities. Investigators also have demonstrated a willingness to look behind the formalities of a business transaction to determine the underlying purpose of payments between healthcare providers and potential referral sources. Enforcement actions have increased, as is evidenced by highly publicized enforcement investigations of certain hospital activities.

In addition, provisions of the Social Security Act, known as the Stark Act, also prohibit physicians from referring Medicare and Medicaid patients to providers of a broad range of designated health services with which the physicians or their immediate family members have ownership or certain other financial arrangements. Certain exceptions are available for employment agreements, leases, physician recruitment and certain other physician arrangements. A person making a referral, or seeking payment for services referred, in violation of the Stark Act is subject to civil monetary penalties of up to $15 for each service; restitution of any amounts received for illegally billed claims; and/or exclusion from future participation in the Medicare program, which can subject the person or entity to exclusion from future participation in state healthcare programs.

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Further, if any physician or entity enters into an arrangement or scheme that the physician or entity knows or should have known has the principal purpose of assuring referrals by the physician to a particular entity, and the physician directly makes referrals to such entity, then such physician or entity could be subject to a civil monetary penalty of up to $100. Many states have adopted or are considering similar legislative proposals, some of which extend beyond the Medicaid program, to prohibit the payment or receipt of remuneration for the referral of patients and physician self-referrals regardless of the source of the payment for the care.

The Federal False Claims Act and Similar State Laws

A significant factor affecting the healthcare industry today is the use of the Federal False Claims Act, 31 U.S.C. § § 3729 et. seq., and, in particular, actions brought by individuals on behalf of the United States under the “qui tam” or whistleblower provisions of the False Claims Act. Whistleblower provisions allow private individuals to bring actions on behalf of the United States alleging that the defendant has defrauded the Federal Government.

Violations of the False Claims Act are punishable by damages equal to three times the actual damages sustained by the government, plus mandatory civil penalties of between $6 and $11 for each separate false claim. Settlements entered prior to litigation usually involve a less severe damages methodology. There are many potential bases for liability under the False Claims Act. Liability often arises when an entity “knowingly” submits a false claim for reimbursement to the Federal Government. The False Claims Act defines the term “knowingly” broadly. Thus, although simple negligence will not give rise to liability under the False Claims Act, submitting a claim with reckless disregard for its truth or falsity constitutes a “knowing” submission under the False Claims Act and, therefore, will provide grounds for liability. In some cases whistleblowers or the Federal government have taken the position that providers who allegedly have violated other statutes, such as the anti-kickback statute and the Stark Act, likewise thereby have submitted false claims under the False Claims Act. A number of states have adopted their own false claims provisions as well as their own whistleblower provisions whereby a private party may file a civil lawsuit in state court on behalf of such state governments.

HIPAA Transaction, Privacy and Security Requirements

HIPAA and federal regulations issued pursuant to HIPAA contain, among other measures, provisions that require us to implement modified or new computer systems, employee training programs and business procedures. The federal regulations are intended to encourage electronic commerce in the healthcare industry, provide for the confidentiality and privacy of patient healthcare information and ensure the security of healthcare information.

A violation of the HIPAA regulations could result in civil money penalties of $1 per incident, up to a maximum of $25 per person per year per standard. HIPAA also provides for criminal penalties of up to $50 and one year in prison for knowingly and improperly obtaining or disclosing protected health information, up to $100 and five years in prison for obtaining protected health information under false pretenses and up to $250 and ten years in prison for obtaining or disclosing protected health information with the intent to sell, transfer or use such information for commercial advantage, personal gain or malicious harm. Since there is no significant history of enforcement efforts by the federal government at this time, it is not possible to ascertain the likelihood of enforcement efforts in connection with the HIPAA regulations or the potential for fines and penalties, which may result from any violation of the regulations.

HIPAA Privacy Regulations

HIPAA provided that if Congress did not pass comprehensive health privacy legislation, the Secretary of HHS was required to issue regulations designed to protect the privacy of individually identifiable health information. Congress did not pass such legislation and HHS ultimately published final privacy regulations in 2000. The final privacy rule regulations contained technical corrections and additional clarifications designed to ensure that protections for patient privacy were implemented in a manner that maximizes privacy while not

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compromising either the availability or the quality of medical care. The regulations became effective in April 2001 and compliance was required by April 2003. In 2002, HHS published modifications to the privacy rule regulation. The regulations increased consumers’ control over their medical records, mandate substantial financial penalties for violation of a patient’s right to privacy and, with a few exceptions, require that an individual’s health information only be used for healthcare-related purposes. These privacy standards apply to all health plans, all healthcare clearinghouses and healthcare providers, such as our facilities, that transmit health information in an electronic form in connection with standard transactions, and apply to individually identifiable information held or disclosed by a covered entity in any form. These standards impose extensive administrative requirements on our facilities and require compliance with rules governing the use and disclosure of this health information, and they require our facilities to impose these rules, by contract, on any business associate to whom we disclose such information in order to perform functions on behalf of our facilities. In addition, our facilities will continue to remain subject to any state laws that are more restrictive than the privacy regulations issued under HIPAA. These laws vary by state and could impose stricter standards and additional penalties.

The HIPAA privacy regulations also require healthcare providers to implement and enforce privacy policies to ensure compliance with the regulations and standards. Under the direction of SunLink’s Vice President, Technical and Compliance Services, and in conjunction with a private HIPAA consultant and HIPAA coordinators at each facility, individually tailored policies and procedures were developed and implemented and HIPAA privacy educational programs were presented to all employees and physicians at each facility prior to the compliance deadline. We believe we are in compliance with current HIPAA privacy regulations.

HIPAA Electronic Data Standards

The Administrative Simplification Provisions of HIPAA require the use of uniform electronic data transmission standards for all healthcare related electronic data interchange. These provisions are intended to streamline and encourage electronic commerce in the healthcare industry. Among other things, these provisions require healthcare facilities to use standard data formats and code sets established by HHS when electronically transmitting information in connection with certain transactions, including health claims and equivalent encounter information, healthcare payment and remittance advice and health claim status.

In 2000, HHS published final regulations establishing electronic data transmission standards that all healthcare providers and payors must use when submitting and receiving certain electronic healthcare transactions. When fully implemented, the uniform data transmission standards are designed to enable healthcare providers to exchange billing and payment information directly with the many payors thereby eliminating data clearinghouses and simplifying the interface programs necessary to perform this function. Compliance with these standards was required by October 2003. We believe that SunLink was fully compliant with the regulations and standards by the compliance date. We have implemented a new management information system at our facilities and at our corporate headquarters over the last several years and we believe that such system complies with HIPAA electronic data regulations and standards.

HIPAA Security Standards

The Administrative Simplification Provisions of HIPAA also required the implementation of a series of security standards for the protection of electronic health information. The final rule adopting HIPAA standards for the security of electronic health information required compliance by April 20, 2005. This final rule specifies a series of administrative, technical and physical security procedures for covered entities to use to assure the confidentiality of electronic protected health information. The standards are delineated into either required or addressable implementation specifications.

Under the direction of SunLink’s Vice President, Technical and Compliance Services, and in conjunction with a consortium of rural hospitals, private HIPAA security consultants and HIPAA security officers at each facility, security assessments were performed, individually tailored plans to apply required or addressable solutions were implemented and a set of security policies and procedures were implemented. In addition, an

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individually tailored comprehensive disaster contingency plan was developed and adopted by each facility and a HIPAA security training program presented to all applicable personnel. SunLink believes it is in full compliance with all aspects of the HIPAA security regulations.

HIPAA National Provider Identifier

HIPAA also required HHS to issue regulations establishing standard unique health identifiers for individuals, employers, health plans and healthcare providers to be used in connection with standard electronic transactions. All healthcare providers, including our facilities, were required to obtain a new National Provider Identifier (“NPI”) to be used in standard transactions instead of other numerical identifiers by May 23, 2007. Our facilities have fully implemented use of a standard unique healthcare identifier by utilizing their employer identification number. HHS has not yet issued proposed rules that establish the standard for unique health identifiers for health plans or individuals. Once these regulations are issued in final form, we expect to have approximately one to two years to become fully compliant, but cannot predict the impact of such changes at this time. We cannot predict whether our facilities may experience payment delays during the transition to the new identifiers.

Environmental Regulations

Our operations, especially our healthcare facility operations, generate medical waste that must be disposed of in compliance with federal, state and local environmental laws, rules and regulations. Our operations also generally are subject to various other environmental laws, rules and regulations.

SUNLINK OPERATIONS

Regulatory Compliance Program

SunLink maintains a company-wide compliance program under the direction of Jerome Orth, Vice President, Technical and Compliance Services. Mr. Orth has over twenty-nine years experience in reimbursement in multi-hospital corporations, at both the facility and corporate level. SunLink’s compliance program is directed at all areas of regulatory compliance, including physician recruitment, reimbursement and cost reporting practices, and laboratory and home healthcare operations. Each hospital designates a compliance officer and develops plans to correct problems should they arise. In addition, all employees are provided with a copy of and given an introduction to SunLink’s Code of Conduct, which includes ethical and compliance guidelines and instructions about the proper resources to utilize in order to address any concerns that may arise. Each hospital conducts annual training to re-emphasize SunLink’s Code of Conduct. We monitor our corporate compliance program to respond to developments in healthcare regulations and the industry. SunLink also maintains a toll-free hotline to permit employees to report compliance concerns on an anonymous basis.

Professional Liability

As part of our business, we are subject to claims of liability for events occurring in the ordinary course of operations. To cover these claims, we maintain professional malpractice liability insurance and general liability insurance in amounts, which are commercially available, that we believe are sufficient for our operations, although some claims may exceed the scope or amount of the coverage in effect.

In connection with the acquisition of our initial six community hospitals, SunLink assumed responsibility for general and professional liability claims reported after February 1, 2001 (our acquisition date of such hospitals), and the previous owner retained responsibility for all known and filed claims. We have purchased claims-made commercial insurance (with a substantial self-insured retention) for coverage prior to and after the acquisition date. The recorded liability for general and professional liability risks includes an estimate of the liability for claims incurred prior to February 1, 2001, but reported after February 1, 2001 and for claims incurred after February 1, 2001. In connection with the acquisition of HealthMont and its two hospitals, SunLink assumed responsibility for all professional liability claims. HealthMont had purchased claims-made commercial insurance

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for claims made prior to the acquisition. The recorded liability for professional liability risks includes an estimate of liability for claims assumed at the acquisition and for claims incurred after the acquisition. These estimates are based on actuarially determined amounts. In June 2004, SunLink sold Mountainside Medical Center, one of our initial six hospitals, but retained all liabilities and obligations arising from Mountainside’s operations prior to the date of such sale and purchased a 7 year, claims-made, extended discovery period (tail) policy for potential professional liability claims relating to Mountainside.

Discontinued Operations and Related Contingent Obligations

Over the past 19 years we have discontinued operations carried on by our former Mountainside Medical Center and our former industrial and life sciences and engineering segments, and our former U.K. child safety, leisure marine, and housewares segments. SunLink’s reserves relating to discontinued operations of these segments represent management’s best estimate of our possible liability for property, product liability and other claims for which we may incur liability. These estimates are based on management’s judgments using currently available information as well as, in certain instances, consultation with our insurance carriers and legal counsel. While estimates have been based on the evaluation of available information, it is not possible to predict with certainty the ultimate outcome of many contingencies relating to discontinued operations. We intend to adjust our estimates of the reserves as additional information is developed and evaluated. However, management believes that the final resolution of these contingencies will not have a material adverse impact on the financial position, cash flows or results of operations of the Company.

Beldray Limited

SunLink sold its former U.K. manufacturing subsidiary, Beldray Limited (“Beldray”), to two of Beldray’s managers in October 2001. Beldray has since entered into administrative receivership. KRUG International U.K. Ltd. (“KRUG UK”), a U.K. subsidiary of SunLink, entered into a guarantee (“the Beldray Lease Guarantee”) at a time when it owned Beldray. The Beldray Lease Guarantee covers Beldray’s obligations under a lease of a portion of Beldray’s former manufacturing location. In October 2004, KRUG UK received correspondence from the landlord of such facility that the rent payment of 94,000 British pounds ($181) for the fourth quarter of 2004 had not been paid by Beldray and requesting payment of such amount pursuant to the Beldray Lease Guarantee. In January 2005, KRUG UK received further correspondence from the landlord demanding two quarterly rent payments totaling 188,000 British pounds ($362) under the Beldray Lease Guarantee. On January 7, 2005, the landlord filed a petition in the High Court of Justice Chancery Division to wind up KRUG UK under the provisions of the Insolvency Act of 1986 and KRUG UK was placed into involuntary liquidation by the High Court in February 2005. After that date, the court-appointed liquidator of KRUG UK made certain inquiries to SunLink and the subsidiary’s directors regarding the activities of KRUG UK prior to the liquidation to which SunLink has responded.

On August 6, 2007, the liquidator of KRUG UK made an application in the Birmingham County Court in Birmingham, England, in which the liquidator is seeking a declaration by the court that a transfer of certain funds in 2001 from KRUG UK to SunLink in connection with the purchase of certain preferred stock of another subsidiary of SunLink and the making of a loan to SunLink, and certain forgiveness of debt to SunLink by KRUG UK was improper, among other things, as KRUG UK was then effectively insolvent and that the approval of such transfers by the then directors of KRUG UK resulted in a breach of their fiduciary duties. The liquidator seeks to have the court order the former directors or, in the alternative, the Company, to account for, repay or restore such funds plus interest to the liquidator of KRUG UK. On December 4, 2007, the case went to mediation and the mediation was adjourned pending the liquidator’s investigations into the circumstances surrounding items raised by both parties. In connection with the allegations in the application of breach of fiduciary duty by the directors of KRUG UK in approving such transfer of funds, SunLink has indemnification obligations to the former directors of KRUG UK. SunLink denies any liability to KRUG UK other than to it in KRUG UK’s status as a preferred stockholder and for the unpaid balance on the promissory note. SunLink, through its United Kingdom counsel, intends to vigorously defend against the liquidator’s claims.

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Employee and Labor Relations

As of June 30, 2008, SunLink employed 1,370 full-time and 475 part-time persons in the U.S., none of whom are represented by a union. We believe our labor relations generally are satisfactory.

Environmental Law Compliance

We believe we are in substantial compliance with applicable federal, state and local environmental regulations. To date, compliance with federal, state and local laws regulating the discharge of material into the environment or otherwise relating to the protection of the environment have not had a material effect upon our consolidated results of operations, consolidated financial condition or competitive position. Similarly, we have not had to make material capital expenditures to comply with such regulations.

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EXECUTIVE OFFICERS OF THE REGISTRANT

Our executive officers, as of September 22, 2008, their positions with the Company or its subsidiaries and their ages are as follows:

Name	Offices	Age
Robert M. Thornton, Jr.	Director, Chairman of the Board of Directors, President and Chief Executive Officer	59
Mark J. Stockslager	Chief Financial Officer and Principal Accounting Officer	49
Harry R. Alvis	Chief Operating Officer	63
George D. Shaunnessy	President – SunLink ScriptsRx, LLC	60
Jerome D. Orth	Vice President, Technical and Compliance Services	60
Jack M. Spurr, Jr	Vice President, Hospital Financial Operations	62

All of our executive officers hold office for an indefinite term, subject to the discretion of the Board of Directors.

Robert M. Thornton, Jr. has been Chairman and Chief Executive Officer of SunLink Health Systems, Inc. since September 10, 1998, President since July 16, 1996 and was Chief Financial Officer from July 18, 1997 to August 31, 2002. From March 1995 to the present, Mr. Thornton has been a private investor in and Chairman and Chief Executive Officer of CareVest Capital, LLC, a private investment and management services firm. Mr. Thornton was President, Chief Operating Officer, Chief Financial Officer and a director of Hallmark Healthcare Corporation (“Hallmark”) from November 1993 until Hallmark’s merger with Community Health Systems, Inc. in October 1994. From October 1987 until November 1993, Mr. Thornton was Executive Vice President, Chief Financial Officer, Secretary, Treasurer and a director of Hallmark.

Mark J. Stockslager has been Chief Financial Officer of SunLink Health Systems, Inc. since July 1, 2007. He was interim Chief Financial Office from November 6, 2006 until June 30, 2007. He has been the Principal Accounting Officer since March 11, 1998 and was Corporate Controller from November 6, 1996 to June 4, 2007. He has been associated continuously with our accounting and finance operations since June 1988 and has held various positions, including Manager of U.S. Accounting, from June 1993 until November 1996. From June 1982 through May 1988, Mr. Stockslager was employed by Price Waterhouse & Co.

Harry R. Alvis has been Chief Operating Officer of SunLink Health Systems, Inc. since September 1, 2002 and Senior Vice President of Operations of SunLink Healthcare LLC since February 1, 2001. Mr. Alvis provided turn-around operational consulting services for New America Healthcare Corp. from March 2000 through January 2001. From August 1997 through August 1999, Mr. Alvis was Chief Executive Officer of River Region Health Systems in Vicksburg, Mississippi, a healthcare facility owned by Quorum Health Group, Inc. From August 1995 through August 1997, Mr. Alvis was the Chief Executive Officer of Greenview Hospital in Bowling Green, Kentucky, a healthcare facility owned by Hospital Corporation of America. From November 1987 through August 1995, Mr. Alvis was the Chief Executive Officer of Pinelake Medical Center in Mayfield, Kentucky; a facility owned by HealthTrust, Inc.

George D. Shaunnessy has been President of SunLink Homecare Services, LLC (which changed its name to SunLink ScriptsRx, LLC on August 26, 2008) since April 23, 2008. Mr. Shaunnessy was President and Chief Executive Officer of MedImagining, Inc, from 2002 to December 2007, Managing Partner and Chief Executive Officer of Affiliated Management Services, Inc., from 1997 to April 2008, and President, Chief Executive Officer and a director of Housecall Medical Resources, Inc. from 1991 to 1997. From 1978 to 1991, Mr. Shaunnessy has held executive positions with National Healthcare, Inc., Foster Medical Home Health Care, a division of Avon Products, Charter Medical Corporation and Hospital Affiliates International, Inc.

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Jerome D. Orth has been Vice President, Technical & Compliance Services for the Company since February 1, 2001. From January 1995 through January 2001, Mr. Orth was Vice President of Hospital Financial Operations for ValueMark Healthcare Systems, Inc., a privately-held owner-operator of psychiatric hospitals. From February 1987 through October 1994, Mr. Orth held various positions with Hallmark Healthcare Corporation, including Executive Director, Hospital Financial Management and Executive Director, Management Information Systems. Prior to 1987, Mr. Orth spent 12 years in various accounting, third party reimbursement and management positions with Hospital Corporation of America.

Jack M. Spurr, Jr. has been Vice President, Hospital Financial Operations for the Company since October 1, 2002. From February 1, 2001 until September 30, 2002, Mr. Spurr performed several interim financial roles for the Company. From 1978 to 2000, Mr. Spurr held financial positions with Hospital Corporation of America, Columbia Healthcare, Inc., Quorum Health Group, Inc., HealthTrust, Inc., and National Healthcare Inc.

Item 1A. Risk Factors

In addition to other information contained in this Annual Report, including certain cautionary and forward-looking statements, you should carefully consider the following factors in evaluating an investment in SunLink:

Consolidated Operations Risks

SunLink has a limited operating history in the community hospital business and a limited history of profitability.

Prior to February 1, 2001, SunLink operated in different business segments. SunLink had income from continuing operations of $2,009 for the fiscal year ended June 30, 2008; $1,577 for the fiscal year ended June 30, 2007; $4,181 for the fiscal year ended June 30, 2006; $4,383 for the fiscal year ended June 30, 2005; and $1,560 for the fiscal year ended June 30, 2003. Conversely, SunLink had losses from continuing operations of $1,267 for the fiscal year ended June 30, 2004; $2,080 for the fiscal year ended June 30, 2002; $319 for the three month transitional period ended June 30, 2001; and $881 for the fiscal year ended March 31, 2001; respectively. SunLink may experience operating losses from continuing operations in the future.

SunLink’s growth strategy depends in part on making successful acquisitions, via mergers, or otherwise, and on successfully integrating our recent acquisition of our pharmacy operations, which may expose SunLink to new liabilities.

As part of our growth strategy, SunLink will seek further growth through acquisitions, via mergers or otherwise, of rural and exurban healthcare businesses. We have sought to acquire and have acquired rural and exurban community hospitals, nursing homes and home health agencies, as well as other rural and exurban healthcare businesses. We may be subject to a variety of risks arising out of the acquisition of our new pharmacy business or other rural and exurban healthcare businesses. We intend, to the extent possible, to integrate the operations of acquired assets and entities with our existing organizational structure; although our pharmacy operations, like our community hospitals, will be conducted in one or more separate subsidiaries. In light of the diverse nature of our pharmacy operations and depending on the nature of other acquired entity or operations, integration of acquired operations into our present operations may present substantial difficulties. Even where material difficulties are not anticipated, there can be no assurance that we will not encounter such difficulties in integrating acquired operations with our operations, which may result in a delay or the failure to achieve anticipated synergies, increased costs and failures to achieve increases in earnings or cost savings. The difficulties of combining the operations of Carmichael’s or other acquired companies may include, among other things:

• unidentified liabilities of Carmichael’s or of other companies SunLink may acquire or merge with;

• the potential failure to achieve economies of scale or synergies sought in our new pharmacy business or in other new rural or exurban healthcare businesses;

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• the possible inability to successfully integrate and manage acquired operations and personnel especially where such business is other than a community hospital or nursing home;

• possible inconsistencies in standards, controls, procedures and policies, business cultures and compensation structures between us and an acquired entity;

• the inability to expand sales and marketing operations;

• the inability to retain existing customers and attract new customers;

• the loss of or inability to attract new key employees;

• the inability to achieve consolidation of corporate and administrative operations and infrastructures;

• the inability to achieve integration and management of the technologies and systems of the acquired entity, including the consolidation and integration of computer information systems;

• the failure to identify and eliminate redundant and underperforming operations and assets;

• unexpected costs associated with the termination of assumed contractual obligations and the timing thereof;

• diversion of management’s attention from ongoing business concerns;

• the possibility of unexpected tax costs or inefficiencies associated with the integration of the operations;

• the possible need and unexpected cost to modify internal controls over financial reporting in order to comply with the Foreign Corrupt Practices Act, the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated there under; and

• loss of customer goodwill.

For these reasons, we may fail to successfully complete the integration of Carmichael’s or any other acquired entity, or to realize the anticipated benefits of the acquisition of Carmichael’s or any other acquired entity. Actual cost savings and synergies which may be achieved from Carmichael’s or any other acquired entity may be lower than we expect and may take a longer time to achieve than we anticipate. Other acquisition related risks include risks associated with higher costs or unexpected difficulties or problems with acquired assets, outdated or incompatible technologies, labor difficulties, or an inability to realize anticipated synergies and efficiencies. Whether within anticipated timeframes or at all, one or more of such acquisition-related risks, if realized, could have an adverse impact on our business, financial condition, results of operations, or operations.

Acquired businesses may have unknown or contingent liabilities, including liabilities for failure to comply with healthcare laws and regulations. Although SunLink has policies which require acquired operations to implement SunLink compliance standards, and generally will seek indemnification from prospective sellers covering these matters, SunLink may become liable for past activities of acquired businesses. While SunLink received limited indemnification for certain potential liabilities in connection with its acquisition of Carmichael’s, there is no assurance such indemnification will be collectible or that any potential liabilities will not arise after expiration of such indemnification term.

Additional debt for significant capital investments may be required to achieve SunLink’s operational and growth plans, the inability to access capital may affect SunLink’s competitive position, reduce earnings, and negatively affect the value of your SunLink common stock.

SunLink’s growth plans require significant capital investments. Significant capital investments are required for on-going and planned capital improvements at existing hospitals and may be required in connection with future capital projects either in connection with existing properties or future acquired properties. SunLink’s ability to make capital investments depends on numerous factors such as the availability of funds from operations and its credit facility and access to additional debt and equity financing. No assurance can be given that the

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necessary funds will be available. Moreover, incurrence of additional debt financing, if available, may involve additional restrictive covenants that could negatively affect SunLink’s ability to operate its business in the desired manner, and raising additional equity may be dilutive to shareholders. The failure to obtain funds necessary for the realization of SunLink’s growth plans could prevent SunLink from realizing its growth strategy and, in particular, could force SunLink to forego acquisition opportunities that may arise in the future. This could, in turn, have a negative impact on SunLink’s competitive position.

In order to make future acquisitions SunLink may be required to incur or assume additional indebtedness. SunLink may not be able to obtain financing, if necessary, for any acquisitions that it might desire to make or it might be required to borrow at higher rates and on less favorable terms than its competitors.

Many states have enacted or are considering enacting laws affecting sales, leases or other transactions in which control of not-for-profit hospitals is acquired by for-profit corporations. These laws, in general, include provisions relating to state attorney general approval, advance notification and community involvement. In addition, state attorneys general in states without specific legislation governing these transactions may exercise authority based upon charitable trust and other existing law. The increased legal and regulatory review of transactions involving the change of control of not-for-profit entities may increase the costs required, or limit SunLink’s ability, to acquire not-for-profit hospitals.

SunLink’s revenues are heavily concentrated in Georgia which will make SunLink particularly sensitive to economic and other changes in the state of Georgia.

For the fiscal year ended June 30, 2008, our three Georgia hospitals generated approximately 45% of revenues for the year. Accordingly, any change in the current demographic, economic, competitive or regulatory conditions in the state of Georgia could have a material adverse effect on the business, financial condition, results of operations or prospects of SunLink.

SunLink depends heavily on its management personnel and the loss of the services of one or more of SunLink’s key senior management personnel could weaken SunLink’s management team.

SunLink has been, and will continue to be, dependent upon the services and management experience of its executive officers. If any of SunLink’s executive officers were to resign their positions or otherwise be unable to serve, SunLink’s management could be weakened and operating results could be adversely affected; however, to our knowledge, no key executive personnel intend to retire or terminate their employment with SunLink in the near future.

SunLink conducts business in a heavily regulated industry; changes in regulations or violations of regulations may result in increased costs or sanctions that could reduce revenue and profitability.

The healthcare industry is subject to extensive Federal, state and local laws and regulations relating to:

• licensure;

• conduct of operations;

• ownership of facilities;

• addition of facilities and services;

• confidentiality, maintenance, and security issues associated with medical records;

• billing for services; and

• prices for services.

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These laws and regulations are extremely complex and, in many instances, the industry does not have the benefit of significant regulatory or judicial interpretation of these laws and regulations, including in particular, Medicare and Medicaid anti-fraud and abuse amendments, codified in Section 1128B(b) of the Social Security Act and known as the “anti-kickback statute.” This law prohibits providers and others from soliciting, receiving, offering or paying, directly or indirectly, any remuneration with the intent to generate referrals of orders for services or items reimbursable under Medicare, Medicaid, and other Federal healthcare programs.

As authorized by Congress, the United States Department of Health and Human Services, or HHS, has issued regulations which describe some of the conduct and business relationships immune from prosecution under the anti-kickback statute. The fact that a given business arrangement does not fall within one of these “safe harbor” provisions does not render the arrangement illegal. However, business arrangements of healthcare service providers that fail to satisfy the applicable safe harbor criteria risk increased scrutiny by enforcement authorities.

We have a variety of financial relationships with physicians who refer patients to our hospitals. We have contracts with physicians providing services under a variety of financial arrangements such as employment contracts and professional service agreements. We also provide financial incentives, including loans and minimum revenue guarantees, to recruit physicians into the communities served by our hospitals.

HIPAA broadened the scope of the fraud and abuse laws to include all healthcare services, whether or not they are reimbursed under a Federal program. In addition, provisions of the Social Security Act, known as the Stark Act, also prohibit physicians from referring Medicare and Medicaid patients to providers of a broad range of designated health services in which the physicians or their immediate family members have an ownership interest or certain other financial arrangements.

In addition, SunLink’s facilities will continue to remain subject to any state laws that are more restrictive than the regulations issued under HIPAA, which vary by state and could impose additional penalties. In recent years, both Federal and state government agencies have announced plans for or implemented heightened and coordinated civil and criminal enforcement efforts.

Government officials charged with responsibility for enforcing healthcare laws could assert that SunLink or any of the transactions in which the company or its subsidiaries or their predecessors is or was involved, are in violation of these laws. It is also possible that these laws ultimately could be interpreted by the courts in a manner that is different from the interpretations made by each company. A determination that either SunLink or its subsidiaries or their predecessors is or was involved in a transaction that violated these laws, or the public announcement that SunLink or its subsidiaries or their predecessors is being investigated for possible violations of these laws, could have a material adverse effect on SunLink’s business, financial condition, results of operations or prospects and SunLink’s business reputation could suffer significantly.

The laws, rules, and regulations described above are complex and subject to interpretation. In the event of a determination that we are in violation of any of these laws, rules or regulations, or if further changes in the regulatory framework occur, our results of operations could be significantly harmed.

SunLink is and in the future could be subject to claims related to discontinued operations, hospitals sold by our HealthMont subsidiary prior to its acquisition, and claims related to the disposition of our former Mountainside Medical Center.

Over the past 19 years, SunLink has discontinued operations carried on by its former industrial and life sciences and engineering segments, and U.K. child safety segments, leisure marine, and housewares segments and its former Mountainside Medical Center (by virtue of the sale of such facility whose original facility was one of our original hospitals). Prior to our acquisition of our HealthMont subsidiaries, HealthMont had sold two hospitals and it also disposed of one additional hospital as a condition to our acquisition of HealthMont. SunLink’s reserves relating to discontinued operations represent management’s best estimate of possible liability

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for property, product liability, and other claims for which SunLink may incur liability. These estimates are based on management’s judgments using currently available information as well as, in certain instances, consultation with SunLink’s insurance carriers and legal counsel. SunLink currently does not purchase insurance policies to reduce product liability or other discontinued operations exposures and does not anticipate it will purchase such insurance in the future. While estimates have been based on the evaluation of available information, it is not possible to predict with certainty the ultimate outcome of many contingencies relating to discontinued operations. Furthermore, future events or evaluations could cause us to adjust existing reserves in connection with our operations. SunLink intends to adjust our estimates of required reserves from time to time as additional information is developed and evaluated. However, SunLink believes that the final resolution of known contingencies will not have a material adverse impact on its financial position, cash flows, or results of operations.

SunLink is subject to potential claims for professional liability, including claims based on the acts or omissions of third parties, which claims may not be covered by insurance.

SunLink is subject to potential claims for professional liability (medical malpractice), both in connection with our current operations, as well as acquired operations. To cover these claims, we maintain professional malpractice liability insurance and general liability insurance in amounts that we believe are sufficient for our operations, although some claims may exceed the scope or amount of the coverage in effect. The assertion of a significant number of claims, either within our self-insured retention (deductible) or individually or in the aggregate in excess of available insurance, could have a material adverse effect on our results of operations or financial condition. Premiums for professional liability insurance have historically been volatile and we can not assure you that professional liability insurance will continue to be available on terms acceptable to us, if at all. The operations of our hospitals also depend on the professional services of physicians and other trained healthcare providers and technicians in the conduct of their respective operations, including independent laboratories and physicians rendering diagnostic and medical services. There can be no assurance that any legal action stemming from the act or omission of a third party provider of healthcare services, would not be brought against one of our hospitals or SunLink, resulting in significant legal expenses in order to defend against such legal action or to obtain a financial contribution from the third-party whose acts or omissions occasioned the legal action.

Risks Related to Our Healthcare Facility Operations

SunLink’s success depends on its ability to maintain good relationships with the physicians at its hospitals and, if SunLink is unable to successfully maintain good relationships with physicians, admissions and outpatient revenues at SunLink hospitals may decrease and SunLink’s operating performance could decline.

Because physicians generally direct the majority of hospital admissions and outpatient services, SunLink’s success is, in part, dependent upon the number and quality of physicians on the medical staffs of its hospitals, the admissions and referrals practices of the physicians at its hospitals, and its ability to maintain good relations with its physicians. Physicians at SunLink hospitals are generally not employees of the hospitals at which they practice and, in many of the markets that SunLink serves, most physicians have admitting privileges at other hospitals in addition to SunLink’s hospitals. If SunLink is unable to successfully maintain good relationships with physicians, admissions at SunLink hospitals may decrease and SunLink’s operating performance could decline.

SunLink depends heavily on its healthcare facility management personnel and the loss of the services of one or more of SunLink’s key local management personnel could weaken SunLink’s management team and its ability to deliver healthcare services.

SunLink’s success depends on its ability to attract and retain managers at its hospitals and related health care facilities, on the ability of hospital-based officers and key employees to manage growth successfully, and on their ability to attract and retain skilled employees. SunLink has not had any material difficulties in attracting healthcare facility management; however, if SunLink is unable to attract and retain affective local management, the operating performance of our facilities could decline.

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SunLink’s success depends on its ability to attract and retain qualified healthcare professionals and a shortage of qualified healthcare professionals in certain markets could weaken our ability to deliver healthcare services.

In addition to the physicians and management personnel whom SunLink employs, SunLink’s operations are dependent on the efforts, ability, and experience of other healthcare professionals, such as nurses, pharmacists and lab technicians. Nurses, pharmacists, lab technicians and other healthcare professionals are generally employees of each individual SunLink hospital. SunLink’s success has been, and will continue to be, influenced by its ability to attract and retain these skilled employees. A shortage of healthcare professionals in certain markets, the loss of some or all of its key employees or the inability to attract or retain sufficient numbers of qualified healthcare professionals could cause SunLink’s operating performance to decline.

A significant portion of SunLink’s revenue is dependent on Medicare and Medicaid payments, and possible reductions in Medicare or Medicaid payments or the implementation of other measures to reduce reimbursements may reduce our revenues.

A significant portion of SunLink’s revenues are derived from the Medicare and Medicaid programs, which are highly regulated and subject to frequent and substantial changes. SunLink derived approximately 80% of its patient days and 56% of its net patient revenues from the Medicare and Medicaid programs for the year ended June 30, 2008. Previous legislative changes have resulted in, and future legislative changes may result in, limitations on and reduced levels of payment and reimbursement for a substantial portion of hospital procedures and costs.

Future healthcare legislation or other changes in the administration or interpretation of governmental healthcare programs may have a material adverse effect on SunLink’s business, financial condition, results of operations or prospects.

Revenue and profitability of our healthcare facility operations, especially our community hospital operations, may be constrained by future cost containment initiatives undertaken by purchasers of healthcare services if SunLink is unable to contain costs.

Our community hospital operations derived approximately 44% of its net patient revenues for the fiscal year ended June 30, 2008 from private payors and other non-governmental sources who contributed approximately 20% of SunLink’s patient days. Our hospitals have been affected by the increasing number of initiatives undertaken during the past several years by all major purchasers of healthcare, including (in addition to Federal and state governments) insurance companies and employers, to revise payment methodologies and monitor healthcare expenditures in order to contain healthcare costs. Initiatives such as managed care organizations offering prepaid and discounted medical services packages have adversely affected hospital revenue growth throughout the country and such packages represent an increasing portion of SunLink’s admissions and outpatient revenues and have resulted in reduced revenue growth at our hospitals. In addition, private payers increasingly are attempting to control healthcare costs through direct contracting with hospitals to provide services on a discounted basis, increased utilization review and greater enrollment in managed care programs such as health maintenance organizations and preferred provider organizations, referred to as PPOs. If we are unable to contain costs, especially in our hospital operations, through increased operational efficiencies and the trend toward declining reimbursements and payments continues, the results of healthcare facility segment operations and cash flow will be adversely affected and the results of our consolidated operations and our consolidated cash flow similarly likely would be adversely affected.

Our healthcare facilities, especially our community hospitals, face intense competition from other hospitals and healthcare providers which directly affect our segment and consolidated revenues and profitability.

Although each of our hospitals operates in communities where they are currently the only general, acute care hospital, they do face competition from other hospitals, including larger tertiary care centers. Although these competing hospitals may be as far as 30 to 50 miles away, patients in these markets may migrate to these competing facilities as a result of local physician referrals, managed care plan incentives or personal choice.

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The healthcare business is highly competitive and competition among hospitals and other healthcare providers for patients has intensified in recent years. Each of our hospitals operates in geographic areas where they compete with at least one other hospital that provides services comparable to those offered by our hospitals. Some of these competing facilities offer services, including extensive medical research and medical education programs, which are not offered by SunLink’s facilities. Some of the competing hospitals are owned or operated by tax-supported governmental bodies or by private not-for-profit entities supported by endowments and charitable contributions which can finance capital expenditures on a tax-exempt basis and are exempt from sales, property, and income taxes. In some of these markets, SunLink’s hospitals also face competition from other for-profit hospital companies, some of which have substantially greater resources, as well as other providers such as outpatient surgery and diagnostic centers.

The intense competition from other hospitals and other healthcare providers directly affects the market share of our community hospitals, as well as their and our revenues and profitability.

Changes in market demographics may increase competition for certain of our community hospitals.

Some of our hospitals are located in exurban areas which are becoming more suburban or metropolitan. Such markets are likely to attract additional competitors, including satellite operations of tertiary hospitals. We cannot assure you that we will have the financial resources to fund capital improvements to our existing facilities, which may face additional competition or that even if financial resources are available to us, projected operating results will justify such expenditures. An inability to fund or the infeasibility of funding capital improvements could directly or indirectly have an adverse impact on hospital revenues through lower patient utilization, increased difficulty in physician recruitment and otherwise as a result of increased competition.

SunLink’s hospitals are and our other healthcare facilities may be subject to, and depend on, certificate of need laws which could affect their ability to operate profitably.

All states in which SunLink currently operates hospitals and nursing homes have laws affecting acute care hospital facilities, nursing homes, ambulatory surgery centers and the provision of various services; such laws are known as “certificate of need” laws. Under such laws, prior state approval is required for the acquisition of major medical equipment or the purchase, lease, construction, expansion, sale or closure of covered healthcare facilities, based on a determination of need for additional or expanded facilities or services. The required approval is known generally as a certificate of need or CON. A CON may be required for capital expenditures exceeding a prescribed amount, changes in hospital and nursing home bed capacity or services, and certain other matters. The failure to obtain any required CON may impair SunLink’s ability to operate profitably.

In addition, the elimination or modification of CON laws in states in which SunLink operates or in the future may own hospitals and other covered healthcare facilities could subject our hospitals to greater competition making it more difficult to operate profitably.

Risk Relating to our Pharmacy Operations.

Our pharmacy operations, especially the specialty pharmacy service line of such operations, may be adversely affected by changes in government reimbursement regulations and payment levels.

Our initial pharmacy operations are expected to derive approximately 85% of their net revenues from government payors, principally Medicare and Medicaid. The Deficit Reduction Act of 2005 exempted rural providers of home care related services from the competitive acquisition program to which urban providers are subject.

We cannot assure you that the ASP reimbursement methodology will not be extended to the provision of all specialty pharmaceuticals or to the specialty pharmaceuticals most often sold by our specialty pharmacy operations or that we will continue to be able to operate our specialty pharmacy operations profitably at either

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existing or at lower reimbursement rates. Likewise, we cannot assure you that the Part B CAP program will not be extended to rural or exurban areas in general or to the areas in which we operate, or may seek to operate, in particular or that we would be able to meet the qualifications to become a Part B CAP vendor either now or at any time in the future.

Our pharmacy business could be harmed by further changes in government purchasing methodologies and reimbursement rates for Medicare or Medicaid.

In addition to the impact of MMA implemented or inspired changes, in order to deal with budget shortfalls, some states are attempting to create state administered prescription drug discount plans, to limit the number of prescriptions per person that are covered, and to raise Medicaid co-pays and deductibles, and are proposing more restrictive formularies and reductions in pharmacy reimbursement rates. Any reductions in amounts reimbursable by other government programs for our services or changes in regulations governing such reimbursements could materially and adversely affect our business, financial condition and results of operations.

Our durable medical equipment service line may be adversely affected by changes in government reimbursement regulations and payment levels, especially if our durable medical equipment service line becomes subject to competitive bidding procedures.

Although we are currently exempted under the Deficit Reduction Act of 2005 from the competitive acquisition program for DMEPOS, we cannot be sure such exemption will continue to be available in the future. Loss of such exemption could have an adverse effect on our results of operation.

Our pharmacy operations depend on a continuous supply of key products. Any shortages of key products could adversely affect our business.

Many of the biopharmaceutical products distributed by our specialty pharmacy operations are manufactured with ingredients that are susceptible to supply shortages. In addition, the manufacturers of these products may not have adequate manufacturing capability to meet rising demand. If any products we distribute are in short supply for long periods of time, this could result in a material adverse effect on our business and results of operations.

Our pharmacy operations are highly dependent on relationships with key suppliers and the loss of any of such key suppliers could adversely affect our business.

Any termination of, or adverse change in, our relationships with our key suppliers, or the loss of supply of one of our key products for any other reason, could have a material adverse effect on our business and results of operations. The largest supplier for our specialty pharmacy operations accounted for approximately 64% of Carmichael’s total net sales in 2007. Our specialty pharmacy operations have a single source of supply for many of our key products, including one product which accounted for approximately 22% of Carmichael’s total net sales in 2007. In addition, we have few long-term contracts with our suppliers. Our arrangements with most of our suppliers may be canceled by either party, without cause, on minimal notice. Many of these arrangements are not governed by written agreements.

The loss of one or more of our larger institutional pharmacy customers could hurt our business by reducing the revenues and profitability of our pharmacy operations.

As is customary in the institutional pharmacy industry, our pharmacy operations generally do not have long-term contracts with our institutional pharmacy customers. Significant declines in the level of purchases by one or more of our larger institutional pharmacy customers could have a material adverse effect on our business and results of operations.

Our failure to maintain eligibility as a Medicare and Medicaid supplier could materially adversely affect our competitive position. Likewise, our failure to maintain and expand relationships with private payors, who can effectively determine the pharmacy source for their members, could materially adversely affect our competitive position.

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Changes in average wholesale prices could reduce our pricing and margins.

Many government payors, including Medicare and Medicaid, have paid, or continue to pay, our pharmacy operations directly or indirectly at a percentage off a drug’s average wholesale price, or AWP. We also have contracted with some private payors to sell drugs at AWP or at a percentage off AWP. AWP for most drugs is compiled and published by several private companies, including First DataBank, Inc. Several states have filed lawsuits against pharmaceutical manufacturers for allegedly inflating reported AWP for prescription drugs. In addition, class action lawsuits have been brought by consumers against pharmaceutical manufacturers alleging overstatement of AWP. We are not responsible for such calculations, reports or payments; however, there can be no assurance that the ability of our pharmacy operations to negotiate discounts from drug manufacturers will not be materially adversely affected by such investigations or lawsuits.

The federal government has also entered into settlement agreements with several drug manufacturers relating to the calculation and reporting of AWP pursuant to which the drug manufacturers, among other things, have agreed to report new pricing information, the “average sales price”, to government healthcare programs. The average sales price is calculated differently than AWP.

We face numerous competitors and potential competitors in our pharmacy operations, many of whom are significantly larger and who have significantly greater financial resources.

Although we believe market penetration by large national companies into our existing market for our pharmacy operations has not been substantial, we cannot assure you that one of more of such companies or other healthcare companies will not seek to compete or intensify their level of competition in the rural and exurban areas in which we conduct or may seek to conduct one or more of the components of our pharmacy operations.

Our pharmacy operations, especially the specialty pharmacy component of such operations, may be adversely affected by industry trends in managed care contracting and consolidation.

A growing number of health plans are contracting with a single provider of specialty pharmacy services. Likewise, manufacturers may not be eager to contract with regional providers of specialty pharmacy services. If we are unable to obtain managed care contracts in the areas in which we provide specialty pharmacy services or are unable to obtain specialty pharmacy products at reasonable costs or at all, our business could be adversely affected.

The specialty pharmacy market may grow slower than expected which could adversely affect our revenues.

According to an analysis of IMS Health data, spending in the U.S. in 2006 for specialty drugs was $54,000,000 or 20% of overall prescription drug spending for that year. Sales of biotech products alone—a subset of specialty pharmaceuticals—are estimated by the same consultant to have reached $40,000,000 in 2006. Even more conservative estimates place the size of the specialty pharmacy market between $18,000,000 and $35,000,000. Such estimates place the administrative spending for this segment at in excess of 10% of the pure cost of drug and care. A healthcare consulting firm has estimated that 95% of the 101 unique biopharmaceuticals in late-stage development in the U.S. are infusible and injectables and that there are over 800 specialty medications in phase one, phase two or phase three development. As a result, the percentage of spending for specialty pharmaceuticals may increase to more than $100,000,000 by 2010 and grow to represent more than 25 percent of total drug spending. We cannot predict whether the rate of actual future growth in product availability and spending will match projections, the extent to which patient demand or spending for specialty drug services in rural or exurban areas will match national averages or whether government payors will provide reimbursement for new products under Medicare or Medicare on a timely basis or at all or at what rates. Adverse developments in any of these areas could have an adverse impact on our pharmacy business.

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Other Risks

SunLink may issue additional equity in the future which could dilute the value of shares of existing shareholders.

SunLink’s working capital is limited to cash generated from operations and borrowings available under our $47,000 credit facility (of which approximately $8,100 is available to borrow at June 30, 2008) and our additional debt capacity is limited. Management and the board of directors of SunLink periodically have discussed the need to raise equity in the future and periodically have considered certain transactions which might be available to SunLink to raise equity. However, SunLink has not engaged any underwriter or placement agent with respect to any potential equity offering, nor has SunLink’s management made any specific proposal or recommendation to the SunLink board of directors with respect to the type of securities to be offered or the price at which any securities might be offered. Such transactions might include, among others, the sale of common shares to outsiders or the offer to existing shareholders of the right to acquire additional shares. While the board of directors has not decided to effect any equity transaction at this time, it may do so in the future. Any equity transaction could result in dilution in the value of existing shares.

Forward-looking statements in this annual report may prove inaccurate.

This document contains forward-looking statements about SunLink that are not historical facts but, rather, are statements about future expectations. Forward-looking statements in this document are based on management’s current views and assumptions and may be influenced by factors that could cause actual results, performance or events to be materially different from those projected. These forward-looking statements are subject to numerous risks and uncertainties. Important factors, some of which are beyond the control of SunLink, could cause actual results, performance or events to differ materially from those in the forward-looking statements. These factors include those described above under “Risk Factors” and elsewhere in this report under “Forward-Looking Statements.”

Item 1B. Unresolved Staff Comments

SunLink has received a letter from the Staff of the SEC dated September 24, 2008 with respect to the Company’s Current Report on Form 8-K filed September 19, 2008. The Staff has inquired as to when the Company intends to file restated financials for Carmichael’s Cashway Pharmacy, Inc. The Company is currently preparing a response to the Staff.

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Item 2. Properties

Our principal properties as of the date of filing of this report are listed below:

Name or Function	Location City and State	Licensed Beds	Date of Acquisition/Lease Inception	Ownership Type
Healthcare Facilities
Chilton Medical Center	Clanton, AL	60	February 1, 2001	Owned
Chestatee Regional Hospital	Dahlonega, GA	49	February 1, 2001	Owned
North Georgia Medical Center & Gilmer Nursing Home	Ellijay, GA	50	February 1, 2001	Owned
Trace Regional Hospital & Floy Dyer Manor Nursing Home	Houston, MS	84	February 1, 2001	Owned
Callaway Community Hospital	Fulton, MO	49	October 3, 2003	Owned
Memorial Hospital of Adel & Memorial Convalescent Center	Adel, GA	60	October 3, 2003	Owned
Missouri Southern Healthcare(1)	Dexter, MO	50	February 1, 2001	Leased
Specialty Pharmacy Operations
Carmichael Cashway Pharmacy(2)	Crowley, LA	N/A	April 22, 2008	Leased
Carmichael Cashway Pharmacy(3)	Lafayette, LA	N/A	April 22, 2008	Leased
Carmichael Cashway Pharmacy(4)	Lake Charles, LA	N/A	April 22, 2008	Leased
Other
Corporate Offices(5)	Atlanta, GA	N/A	June 1, 1998	Leased
Medical Office Building	Jasper, GA	N/A	February 1, 2001	Owned

(1) The lease expires in March, 2019.

(2) Lease of approximately 25,000 square feet of store location, warehouse and office space. The lease expires in April 2013 and provides for a renewal of the lease for two five year terms.

(3) Lease of approximately 5,900 square feet of store location and warehouse space. The lease expires in October 2011.

(4) Lease of approximately 4,000 square feet of store location and warehouse space. The lease expires in October 2008.

(5) Lease of approximately 7,800 square feet of office space for corporate staff. The lease expires in September 2009.

Item 3. Legal Proceedings

On August 6, 2007 the liquidator in an insolvency proceeding in the United Kingdom involving SunLink’s former subsidiary KRUG International (UK) Limited (“KRUG UK”) made an application in The Birmingham County Court in Birmingham, England in which the liquidator is seeking a declaration by the court that a transfer of certain funds in 2001 from KRUG UK to SunLink in connection with the purchase of certain preferred stock of another subsidiary of SunLink, the making of a loan to SunLink, and certain forgiveness of debt to SunLink by KRUG UK Limited was improper as, among other things, KRUG UK was then effectively insolvent and that the approval of such transfers by the then directors of KRUG UK resulted in a breach of their fiduciary duties. The liquidator seeks to have the court order that the former directors or, in the alternative, SunLink , be required to account for, repay or restore such funds to the liquidator of KRUG UK. In connection with the allegations in the application of breach of fiduciary duty by the directors of KRUG UK in approving the transfer of such funds, SunLink has indemnification obligations to the former directors of KRUG UK. Each of the directors of KRUG UK and SunLink have now been served. SunLink denies any liability to KRUG UK other than to it in KRUG UK’s status as a preferred stockholder and for the unpaid balance on the promissory note. SunLink, through its United Kingdom counsel, intends to vigorously defend against the liquidator’s claims.

On July 13, 2006, Piedmont Healthcare, Inc. (“PHI”) and Piedmont Mountainside Hospital, Inc. (“PMH”) (collectively, “Plaintiffs” or “Piedmont”) filed a Complaint in the Superior Court of Cobb County, Georgia,

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alleging breach of the Asset Purchase Agreement (the “Agreement”) dated as of April 9, 2004 by and among PMH, Piedmont Medical Center, Inc. (n/k/a “PMI”), Southern Health Corporation of Jasper, Inc. (“SHJI”), SunLink Healthcare LLC (formerly SunLink Healthcare Corp.), and SunLink (collectively, “Defendants” or “SunLink”) pursuant to which the Mountainside Medical Center was sold to PMH in June 2004. Specifically, Piedmont seek to have SunLink reimburse Piedmont for certain costs associated with an alleged indigent and charity care shortfall of Piedmont Mountainside Hospital (formerly Mountainside Medical Center) for the fiscal year ended June 30, 2004 demanded by the Georgia Department of Community Health (“DCH”). In addition, Piedmont seeks reimbursement for funds allegedly recouped from PMH by DCH in respect of Medicaid Cost Report settlements and adjustments for the reporting periods ending June 30, 2002, June 30, 2003 and May 31, 2004. Piedmont also seek a declaratory judgment to the effect that Piedmont may retain certain payments it has received from the DCH’s Indigent Care Trust Fund for Disproportionate Share Hospitals. Piedmont also seeks recovery of costs and attorney’s fees under the Agreement and Georgia law.

On August 11, 2006, SunLink filed an answer to the complaint asserting factual and legal defenses, along with a counterclaim. In the counterclaim, SunLink alleges that Piedmont breached the Agreement by failing to reimburse SHJI for funds paid Piedmont from the DCH’s Indigent Care Trust Fund for Disproportionate Share Hospitals, which payments SunLink contend qualify as “excluded assets” not sold to Piedmont under the Agreement. SunLink also alleged that PMI breached its obligations to guaranty PMH’s payment and performance of its obligations under the Agreement. SunLink seeks a declaratory judgment regarding the parties’ rights in respect of the payments made from the Indigent Care Trust Fund. Finally, SunLink seeks to recover their costs and attorney’s fees under the Agreement and Georgia law. The Court has scheduled a hearing on all pending summary judgment and discovery motions for September 26, 2008.

SunLink denies that it has any liability to the Plaintiffs and intends to vigorously defend the claims asserted against SunLink in connection with the complaint and to vigorously pursue its counterclaim. While the ultimate outcome and materiality of the litigation cannot be determined, in management’s opinion the litigation will not have a material adverse effect on SunLink’s financial condition or results of operations.

Item 4. Submission of Matters to a Vote of Security Holders

Not applicable.

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PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

SunLink common stock is listed on the American Stock Exchange. SunLink’s ticker symbol is “SSY”. SunLink also has publicly traded warrants which trade in the over-the-counter market under the symbol “SSYMW”. The following table shows, for the calendar quarters indicated, based on published financial sources, the high and low sale prices of SunLink common shares as reported on the American Stock Exchange.

	Sale Prices of SunLink Common Shares
	High		Low
Fiscal 2008 (July 1, 2007—June 30, 2008)
Fourth Quarter	$	6.26	$	4.75
Third Quarter		6.70		5.41
Second Quarter		6.50		5.95
First Quarter		6.55		6.00
Fiscal 2007 (July 1, 2006—June 30, 2007)
Fourth Quarter	$	7.35	$	6.15
Third Quarter		7.30		6.65
Second Quarter		9.00		6.62
First Quarter		10.15		7.65

American Stock Transfer & Trust Company is the Transfer Agent and Registrar for our common shares. For all shareholder inquiries, call American Stock Transfer & Trust’s Shareholder Services Department at 1-888-937-5449.

Dividends

SunLink does not currently pay cash dividends. SunLink intends to retain its earnings for use in the operation and expansion of its business and, therefore, does not anticipate declaring or paying cash dividends in the foreseeable future. Any future determination to declare or pay cash dividends will be determined by SunLink’s board of directors and will depend on SunLink’s financial condition, results of operations, business, prospects, capital requirements, credit agreements and such other matters as the board of directors may consider relevant.

Holders

As of June 30, 2008 there were approximately 600 registered holders of SunLink common shares.

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Securities Authorized for Issuance under Equity Compensation Plans

The following provides tabular disclosure of the number of securities at June 30, 2008 to be issued upon the exercise of outstanding options, the weighted average exercise price of outstanding options and the number of securities remaining available for future issuance under equity compensation plans, reported by two categories- plans that have been approved by shareholders and plans that have not been so approved:

	(a)	(b)		(c)
Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders:
1995 Incentive Stock Option Plan	4,000	$	5.48	0
2001 Outside Directors’ Stock Ownership and Stock Option Plan	82,500	$	2.26	0
2001 Long-term Stock Option Plan	322,875	$	3.27	0
2005 Equity Incentive Plan	781,605	$	7.82	49,070
	1,190,980	$	6.20	49,070
Equity compensation plans not approved by security holders:
None	0		0	0
Total	1,190,980	$	6.20	49,070

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Performance Graph

The following graph presents a comparison of five years cumulative total return for SunLink, the American Stock Exchange Composite Index. Peer group consists of Amsurg Corp., Community Health Systems Inc., Dynacq Healthcare Inc., Health Management Associations Inc., Lifepoint Hospitals Inc., Magellan Health Services Inc., Medcath Corp., Prezzo PLC, Rehabcare Group Inc., Tenet Healthcare Corp., and Universal Health Services Inc.

	6/03	6/04	6/05	6/06	6/07	6/08
SunLink Health Systems, Inc.	100.00	230.29	326.97	410.79	262.24	199.59
AMEX Composite	100.00	128.79	165.82	204.19	253.70	243.41
Peer Group(1)	100.00	146.46	202.73	152.93	200.18	126.73

Item 6. Selected Financial Data

Selected historical financial data presented below as of and for the fiscal years ended June 30, 2004, 2005, 2006, 2007 and 2008 have been derived from the audited consolidated financial statements of SunLink. The following financial information reflects the acquisition of our two HealthMont hospitals and Carmichael and the disposition of Mountainside Medical Center. This data should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the Consolidated Financial Statements of SunLink and the notes thereto included in Item 8 of this Annual Report.

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SunLink Selected Historical Financial Data

(All amounts in thousands, except per share amounts)

	2004			2005		2006		2007		2008
Net revenues	$	112,436		$	128,732	$	135,576	$	143,645	$	158,431
Earnings (loss) from continuing operations		(1,267	)		4,383		4,181		1,577		2,009
Net earnings		13,425			4,540		3,909		1,396		1,616
Earnings (loss) per share from continuing operations:
Basic		(0.20	)		0.61		0.58		0.21		0.26
Diluted		(0.20	)		0.57		0.53		0.20		0.26
Net earnings per share:
Basic		2.15			0.63		0.54		0.19		0.21
Diluted		2.15			0.59		0.50		0.18		0.21
Total assets		63,152			70,113		74,303		77,843		111,624
Long-term debt, including current maturities		7,392			10,042		9,393		8,536		37,962
Shareholders’ equity	$	24,904		$	29,301	$	34,352	$	36,024	$	40,244

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (all dollar amounts in thousands, except per share and revenue per equivalent admissions amounts)

This Annual Report and the documents that are incorporated by reference in this Annual 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,” “seeks to”, “expect,” “project,” “estimate,” “anticipate,” “plan” or “continue.” These forward-looking statements are based on the 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. For a listing and a discussion of such factors, which could cause actual results, performance and achievements to differ materially from those anticipated, see Certain Cautionary Statements—Forward Looking Information and Item 1A included elsewhere in this Annual Report on Form 10-K.

Year in Review and Recent Developments

During the year ended June 30, 2008, we concentrated our efforts on the operations and improvement of our existing hospitals, the acquisition of Carmichael, which was completed in April 2008, and the evaluation of strategic alternatives.

On April 23, 2008, we acquired Carmichael’s Cashway Pharmacy, Inc. (“Carmichael”). The Carmichael acquisition purchase price was $24,000, consisting of $19,000 cash, seller subordinated debt of $3,000 and $2,000 in SunLink shares (334,448 shares). Carmichael had annual revenues of approximately $42,200 for its year ended December 31, 2007 and has been in business for over 35 years. Carmichael provides services to patients in rural communities in southwest Louisiana and eastern Texas. Carmichael is included in Specialty Pharmacy Segment.

Strategic Alternatives

On November 8, 2007, we announced that we had received an unsolicited conditional acquisition proposal from Resurgence Health Group, LLC which purported to offer a cash price of $7.50 per share for substantially all the outstanding shares of SunLink, subject to a number of conditions. On January 16, 2008, we announced that we had retained Stephens Inc. for the purpose of advising our Board of Directors in connection with an evaluation of the Company’s strategic alternatives, including, among others, the proposal by Resurgence Health Group, LLC. Since retaining Stephens, SunLink has explored a number of strategic alternatives, none of which to

46

date has been judged by our Board to be superior in terms of price and execution risk to continuing as an independent company and pursuing SunLink’s existing business plans. To continue the evaluation on an on-going basis, the Board has formed a standing Strategic Alternatives Committee of the Board of Directors to, among other things, conduct periodic evaluations of the Company’s strategic alternatives. Investors are cautioned that no inference should be drawn from the existence of such committee and its charter with respect to the probability that the Company will engage in any transaction as a result of the periodic evaluation of strategic alternatives, including with respect to any proposal previously submitted or which in the future may be re-submitted or newly presented to the Company.

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 statement of earnings or financial condition.

The table of critical accounting estimates that follows is not intended to be a comprehensive list of all of our accounting policies that require estimates. We believe that of our significant accounting policies, as discussed in Note 2 of our Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for the fiscal year ended June 30, 2008, the estimates discussed below involve a higher degree of judgment and complexity. We believe the current assumptions and other considerations used to estimate amounts reflected in our consolidated financial statements are appropriate. However, if actual experience differs from the assumptions and other considerations used in estimating amounts reflected in our consolidated financial statements, the resulting changes could have a material adverse effect on our consolidated results of operations and financial condition.

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The table that follows presents information about our critical accounting estimates, as well as the effects of hypothetical changes in the material assumptions used to develop each estimate:

Balance Sheet or Income Statement Caption/Nature of Critical Estimate Item (dollar amounts in thousands, except per share)	Assumption / Approach Used (dollar amounts in thousands, except per share)	Sensitivity Analysis (dollar amounts in thousands, except per share)
Receivables-net and Provision for Bad Debts
Receivables-net for our healthcare facilities segment primarily consists of amounts due from third-party payors and patients from providing healthcare services to hospital facility patients. Receivables-net for our specialty pharmacy segment primarily consists of amounts due from third-party payors; institutions such as nursing homes, home health, hospice, hospitals; pharmacy stores; Medicaid Part D program; and customers from providing pharmacy services and merchandise. Our ability to collect outstanding receivables is critical to our results of operations and cash flows. To provide for accounts receivable that could become uncollectible in the future, we establish an allowance for doubtful accounts to reduce the carrying value of such receivables to their estimated net realizable value. The primary uncertainty lies with accounts for which patients are responsible, which we refer to as patient responsibility accounts. These accounts include both amounts payable by uninsured patients and co-payments and deductibles payable by insured patients. Our allowance for doubtful accounts, included in our balance sheets as of June 30 was as follows: 2008—$14,138; and 2007—$10,197. Our provision for bad debts, included in our results of operations, was as follows : 2008—$22,013 2007—$19,580; and 2006—$14,987.	The largest component of bad debts in our patient accounts receivable for our healthcare facilities and specialty pharmacy segments relates to accounts for which patients are responsible, which we refer to as patient responsibility accounts. These accounts include both amounts payable by uninsured patients and co-payments and deductibles payable by insured patients. In general, we attempt to collect deductibles, co-payments and self-pay accounts prior to the time of service for non-emergency care. If we do not collect these patient responsibility accounts prior to the delivery of care, the accounts are handled through our billing and collections processes. We attempt to verify each patient’s insurance coverage as early as possible before a scheduled non-emergency admission or procedure, including with respect to eligibility, benefits and authorization/pre-certification requirements, in order to notify patients of the estimated amounts for which they will be responsible. We attempt to verify insurance coverage within a reasonable amount of time for all emergency room visits and non-emergency urgent admissions in compliance with the Emergency Medical Treatment and Active Labor Act.	A significant increase in our provision for doubtful accounts (as a percentage of revenues) would lower our earnings. This would adversely affect our results of operations, financial condition, liquidity and potentially our future access to capital. If net revenues during fiscal 2008 were changed by 1%, our 2008 after-tax income from continuing operations would change by approximately $1,028 or diluted earnings per share of $0.13. This is only one example of reasonably possible sensitivity scenarios. The process of determining the allowance requires us to estimate uncollectible patient accounts that are highly uncertain and requires a high degree of judgment. It is impacted by, among other things, changes in regional economic conditions, business office operations, payor mix and trends in private and federal or state governmental healthcare coverage.

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Balance Sheet or Income Statement Caption/Nature of Critical Estimate Item (dollar amounts in thousands, except per share)	Assumption / Approach Used (dollar amounts in thousands, except per share)	Sensitivity Analysis (dollar amounts in thousands, except per share)
Receivables-net and Provision for Bad Debts (continued)
	In general, we utilize the following steps in collecting accounts receivable: if possible, cash collection of all or a portion of deductibles, co-payments and self-pay accounts prior to or at the time service is provided; billing and follow-up with third party payors; collection calls; utilization of collection agencies; sue to collect if the patient has the means to pay and chooses not to pay; and if collection efforts are unsuccessful, write off the accounts. Our policy is to write off accounts after all collection efforts have failed, which is typically no longer than 120 days after the date of discharge of the patient or service to the patient. Patient responsibility accounts represent the majority of our write-offs. All of our hospitals retain third-party collection agencies for billing and collection of delinquent accounts. At most of our hospitals, more than one collection agency is used to promote competition and improved performance. The selection of collection agencies and the timing of the referral of an account to a collection agency vary among hospitals. Generally, we do not write off accounts prior to utilizing the services of a collection agency. Once collection efforts have proven unsuccessful, an account is written off from our patient accounting system against the allowance for doubtful accounts.

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Balance Sheet or Income Statement Caption/Nature of Critical Estimate Item (dollar amounts in thousands, except per share)	Assumption / Approach Used (dollar amounts in thousands, except per share)	Sensitivity Analysis (dollar amounts in thousands, except per share)
Receivables-net and Provision for Bad Debts (continued)
	We determine the adequacy of the allowance for doubtful accounts utilizing a number of analytical tools and benchmarks. No single statistic or measurement alone determines the adequacy of the allowance.
	We monitor the revenue trends by payor classification on a quarter-by-quarter basis along with the composition of our accounts receivable agings. This review is focused primarily on trends in self-pay revenues, accounts receivable, co-payment receivables and historic payment patterns.
	In addition, we analyze other factors such as days revenue in accounts receivable and we review admissions and charges by physicians, primarily focusing on recently recruited physicians.

	Days Outstanding 1
Payor Class	0-30		31-60		61-90		91-120		121-150		151-180		>180		Total
Medicare	$	4,466	$	643	$	371	$	187	$	181	$	83	$	178	$	6,109
Commercial		3,277		936		474		277		178		181		317	$	5,640
Medicaid		1,481		469		198		155		116		76		170	$	2,665
Self Pay		219		171		144		137		94		40		105	$	910
Total	$	9,443	$	2,219	$	1,187	$	756	$	569	$	380	$	770	$	15,324

¹ The above table shows net patient accounts receivable aged from patient billing date and are grouped by classification of verified insurance coverage. The receivables are net of contractual allowances and allowance for doubtful accounts. Contractual allowances and the allowance for doubtful accounts are calculated by payor class and are not calculated by the aging of the patient billing date; therefore, these allowances have been allocated within the aging of the various payor classes based upon gross patient receivable amounts.

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Balance Sheet or Income Statement Caption/Nature of Critical Estimate Item (dollar amounts in thousands, except per share)	Assumption / Approach Used (dollar amounts in thousands, except per share)	Sensitivity Analysis (dollar amounts in thousands, except per share)
Revenue recognition / Net Patient Service Revenues
For our healthcare facilities segment, we recognize revenues in the period in which services are provided. For our specialty pharmacy segment, we recognize revenues in the period in which services are provided and at the time the customer takes possession of merchandise. Patient receivables primarily consist of amounts due from third-party payors and patients. Amounts we receive for treatment of patients covered by governmental programs, such as Medicare and Medicaid, and other third-party payors, such as HMOs, PPOs and other private insurers, are determined pursuant to contracts or established government rates and are generally less than our established billing rates. Accordingly, our gross revenues and patient receivables are reduced to net amounts receivable pursuant to such contracts or government payment rates through an allowance for contractual discounts. Approximately 86.0% of our revenues during 2008 relate to discounted charges. The sources of these revenues were as follows (as a percentage of total revenues): Medicare—41.6%; Medicaid—14.1%; and Commercial insurance—30.3%.	Revenues are recorded at estimated amounts due from patients, third-party payors, institutions, pharmacies, and others for healthcare and pharmacy services and goods provided net of contractual discounts pursuant to contract or government payment rates. Estimates for contractual allowances are calculated using computerized and manual processes depending on the type of payor involved. In certain hospitals, the contractual allowances are calculated by a computerized system based on payment terms for each payor. In other hospitals, the contractual allowances are estimated manually using historical collections for each type of payor. For all hospitals, certain manual estimates are used in calculating contractual allowances based on historical collections from payors that are not significant or have not entered into a contract with us. All contractual adjustments regardless of type of payor or method of calculation are reviewed and compared to actual experience on a periodic basis.
	Accounts receivable primarily consist of amounts due from third party payors, institutions, pharmacies, and patients. Amounts we receive for the treatment of patients covered by HMOs, PPOs and other private insurers are generally less than our established billing rates. We include contractual allowances as a reduction to revenues in our financial statements based on payor specific identification and payor specific factors for rate increases and denials.

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Balance Sheet or Income Statement Caption/Nature of Critical Estimate Item (dollar amounts in thousands, except per share)	Assumption / Approach Used (dollar amounts in thousands, except per share)	Sensitivity Analysis (dollar amounts in thousands, except per share)
Revenue recognition / Net Patient Service Revenues (continued)
	Governmental payors	Governmental payors
	The majority of services performed on Medicare and Medicaid patients are reimbursed at predetermined reimbursement rates. The differences between the established billing rates (i.e., gross charges) and the predetermined reimbursement rates are recorded as contractual discounts and deducted from gross charges. Under this prospective reimbursement system, there is no adjustment or settlement of the difference between the actual cost to provide the service and the predetermined reimbursement rates.	Because the laws and regulations governing the Medicare and Medicaid programs are complex and subject to change, the estimates of contractual discounts we record could change by material amounts. Adjustments related to final settlements for revenues retrospectively increased our revenues by the following amounts: 2008—$1,259; 2007—$266; and 2006—$312.
	Discounts for retrospectively cost-based revenues, which were more prevalent in periods before 2000, are estimated based on historical and current factors and are adjusted in future periods when settlements of filed cost reports are received. Final settlements under these programs are subject to adjustment based on administrative review and audit by third party intermediaries, which can take several years to resolve completely.
	Commercial Insurance	Commercial Insurance
	For most managed care plans, contractual allowances estimated at the time of service are adjusted to actual contractual allowances as cash is received and claims are reconciled. We evaluate the following criteria in developing the estimated contractual allowance percentages: historical contractual allowance trends based on actual claims paid by managed care payors; review of contractual allowance information reflecting	If our overall estimated contractual discount percentage on all of our commercial revenues during 2008 were changed by 1%, our 2008 after-tax income from continuing operations would change by approximately $298. This is only one example of reasonably possible sensitivity scenarios. The process of determining the allowance requires us to estimate the amount expected to

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Balance Sheet or Income Statement Caption/Nature of Critical Estimate Item (dollar amounts in thousands, except per share)	Assumption / Approach Used (dollar amounts in thousands, except per share)	Sensitivity Analysis (dollar amounts in thousands, except per share)
Revenue recognition / Net Patient Service Revenues (continued)
	current contract terms; consideration and analysis of changes in payor mix reimbursement levels; and other issues that may impact contractual allowances.	be received and requires a high degree of judgment. It is impacted by changes in managed care contracts and other related factors.
		A significant increase in our estimate of contractual discounts would lower our earnings. This would adversely affect our results of operations, financial condition, liquidity and future access to capital.
Goodwill and accounting for business combinations
Goodwill represents the excess of the purchase price over the fair value of the net assets (including separately identified intangible assets) of acquired companies. Our goodwill included in our consolidated balance sheets as of June30, for the following years was as follows: 2008—$9,453; and 2007—$2,944. The goodwill resulted from the 2004 acquisition of HealthMont, Inc. and the 2008 acquisition of Carmichael.	We follow the guidance in Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” and test goodwill for impairment using a fair value approach. We are required to test for impairment at least annually, absent some triggering event that would accelerate an impairment assessment. On an ongoing basis, absent any impairment indicators, we perform our goodwill impairment testing as of June 30 of each year. We determine fair value using widely accepted valuation techniques, including discounted cash flow and market multiple analyses. These types of analyses require us to make assumptions and estimates regarding future cash flows, industry economic factors and the profitability of future business strategies.	We performed our annual testing for goodwill impairment as of June 30, 2008 and 2007 using the methodology described here, and determined that no goodwill impairment existed. If actual future results are not consistent with our assumptions and estimates, we may be required to record goodwill impairment charges in the future.
	The purchase price of acquisitions is allocated to the assets acquired and liabilities assumed based upon their respective fair values and is subject to change during the

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Balance Sheet or Income Statement Caption/Nature of Critical Estimate Item (dollar amounts in thousands, except per share)	Assumption / Approach Used (dollar amounts in thousands, except per share)	Sensitivity Analysis (dollar amounts in thousands, except per share)
Goodwill and accounting for business combinations (continued)
	twelve month period subsequent to the acquisition date. We engage independent third-party valuation firms to assist us in determining the fair values of assets acquired and liabilities assumed at the time of acquisition. Such valuations require us to make significant estimates and assumptions, including projections of future events and operating performance.
	Fair value estimates are derived from independent appraisals, established market values of comparable assets, or internal calculations of estimated future net cash flows. Our estimate of future cash flows is based on assumptions and projections we believe to be currently reasonable and supportable. Our assumptions take into account revenue and expense growth rates, patient volumes, changes in payor mix, and changes in legislation and other payor payment patterns.
Professional and general liability claims
We are subject to potential medical malpractice lawsuits and other claims as part of providing healthcare services. To mitigate a portion of this risk, we have maintained insurance for individual malpractice claims exceeding a self-insured retention amount. For the period February 1, 2001 to February 20, 2002, the self-insured retention amount was $25 per individual claim. For the period February 21, 2002 to February 28, 2005, our self-insured retention level was $1,000 on individual malpractice claims. For the period March 1, 2005 to February 28, 2006, our self-insured retention level was $500 on	The reserve for professional and general liability claims is based upon independent actuarial calculations, which consider historical claims data, demographic considerations, severity factors and other actuarial assumptions in the determination of reserve estimates. The reserve for professional and general liability claims reflects the current estimate of all outstanding losses, including incurred but not reported losses, based upon actuarial calculations as of the balance sheet date. The loss	Actuarial calculations include a large number of variables that may significantly impact the estimate of ultimate losses recorded during a reporting period. In determining loss estimates, professional judgment is used by each actuary by selecting factors that are considered appropriate by the actuary for our specific circumstances. Changes in assumptions used by our independent actuary with respect to demographics and geography, industry trends, development patterns and

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Balance Sheet or Income Statement Caption/Nature of Critical Estimate Item (dollar amounts in thousands, except per share)	Assumption / Approach Used (dollar amounts in thousands, except per share)	Sensitivity Analysis (dollar amounts in thousands, except per share)
Professional and general liability claims (continued)
individual malpractice claims. For the periods, March 1, 2006 to February 28, 2007, March 1, 2007 to February 28, 2008, and March 1, 2008 to February 28, 2009 our self-insured retention level was or will be $1,000 on individual malpractice claims. Each year, we obtain quotes from various malpractice insurers with respect to the cost of obtaining medical malpractice insurance coverage. We compare these quotes to our most recent actuarially determined estimates of losses at various self-insured retention levels. Accordingly, changes in insurance costs affect the self-insurance retention level we choose each year. As insurance costs have increased in recent years, we have accepted a higher level of risk in self-insured retention levels. The reserve for professional and general liability claims included in our consolidated balance sheets as of June 30 was as follows: 2008—$2,918; and 2007—$2,762. The total expense for professional and general liability coverage, included in our consolidated results of operations, was as follows: 2008—$ 1,283; 2007—$ 127; and 2006—$782.	estimates included in the actuarial calculations may change in the future based upon updated facts and circumstances. We revise our reserve estimation process by obtaining independent actuarial calculations quarterly. Our estimated reserve for professional and general liability claims will be significantly affected if current and future claims differ from historical trends. While we monitor reported claims closely and consider potential outcomes as estimated by our independent actuaries when determining our professional and general liability reserves, the complexity of the claims, the extended period of time to settle the claims and the wide range of potential outcomes complicates the estimation process. In addition, certain states, including Georgia, have passed varying forms of tort reform which may attempt to limit the number and types of claims and the amount of some medical malpractice awards. If enacted limitations remain in place or if similar laws are passed in the states where our hospitals are located, our loss estimates could decrease. Conversely, liberalization of the number and type of claims and damage awards permitted under any such law applicable to our operations could cause our loss estimates to increase.	judgmental selection of other factors may impact our recorded reserve levels and our results of operations. Changes in our initial estimates of professional and general liability claims are non-cash charges and accordingly, there would be no material impact currently on our liquidity or capital resources.

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Balance Sheet or Income Statement Caption/Nature of Critical Estimate Item (dollar amounts in thousands, except per share)	Assumption / Approach Used (dollar amounts in thousands, except per share)	Sensitivity Analysis (dollar amounts in thousands, except per share)
Accounting for income taxes
Deferred tax assets generally represent items that will result in a tax deduction in future years for which we have already recorded the tax benefit in our income statement. We assess the likelihood that deferred tax assets will be recovered from future taxable income. To the extent we believe that recovery is not probable, a valuation allowance is established. To the extent we establish a valuation allowance or increase this allowance, we must include an expense as part of the income tax provision in our results of operations. Our net deferred tax asset balance (net of valuation allowance) in our consolidated balance sheets as of June 30 for the following years was as follows: 2008—$2,317; and 2007—$1,745. Our valuation allowances for deferred tax assets in our consolidated balance sheets as of June 30 for the following years were as follows: 2008—$2,810; and 2007—$2,898. In addition, significant judgment is required in determining and assessing the impact of certain tax-related contingencies. We establish accruals when, despite our belief that our tax return positions are fully supportable, it is probable that we have incurred a loss related to tax contingencies and the loss or range of loss can be reasonably estimated.	The first step in determining the deferred tax asset valuation allowance is identifying reporting jurisdictions where we have a history of tax and operating losses or are projected to have losses in future periods as a result of changes in operational performance. We then determine if a valuation allowance should be established against the deferred tax assets for that reporting jurisdiction. The second step is to determine the amount of the valuation allowance. We will generally establish a valuation allowance equal to the net deferred tax asset (deferred tax assets less deferred tax liabilities) related to the jurisdiction identified in the first step of the analysis. In certain cases, we may not reduce the valuation allowance by the amount of the deferred tax liabilities depending on the nature and timing of future taxable income attributable to deferred tax liabilities. In assessing tax contingencies, we identify tax issues that we believe may be challenged upon examination by the taxing authorities. We also assess the likelihood of sustaining tax benefits associated with tax planning strategies and reduce tax benefits based on management’s judgment regarding such likelihood. We compute the tax on each contingency. We then determine the amount of loss, or reduction in tax benefits based upon the foregoing and reflect such amount as a component of the provision for income taxes in the reporting period.	Our deferred tax assets exceeded our deferred tax liabilities by $2,317 as of June 30, 2008, excluding the impact of valuation allowances. We generated federal taxable income in fiscal years 2008, 2007 and 2006. Therefore, we believe that the likelihood of our not realizing the federal tax benefit of our net deferred tax assets is remote. The IRS may propose adjustments for items we have failed to identify as tax contingencies. If the IRS were to propose and sustain assessments equal to 10% of our taxable income for 2008, we would incur approximately $156 of additional tax payments for 2008 plus applicable penalties and interest.

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Balance Sheet or Income Statement Caption/Nature of Critical Estimate Item (dollar amounts in thousands, except per share)	Assumption / Approach Used (dollar amounts in thousands, except per share)	Sensitivity Analysis (dollar amounts in thousands, except per share)
Accounting for income taxes (continued)
We adjust the accruals related to tax contingencies as part of our provision for income taxes in our results of operations based upon changing facts and circumstances, such as the progress of a tax audit, development of industry related examination issues, as well as legislative, regulatory or judicial developments. A number of years may elapse before a particular matter, for which we have established an accrual, is audited and resolved.	During each reporting period, we assess the facts and circumstances related to recorded tax contingencies. If tax contingencies are no longer deemed probable based upon new facts and circumstances, the contingency is reflected as a reduction of the provision for income taxes in the current period.

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Financial Summary

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

	Years Ended June 30,
	2006			2007			2008
Net Revenues—Healthcare Facilities	$	135,576		$	143,645		$	151,372
Net Revenues—Specialty Pharmacy		—			—			7,059
Total Net Revenues		135,576			143,645			158,431
Costs and expenses		127,949			139,231			153,026
Operating Profit		7,627			4,414			5,405
Interest Expense		(1,146	)		(1,462	)		(2,114	)
Interest Income		75			69			72
Loss on early repayment of debt		—			—			(267	)
Earnings from Continuing Operations Before Income Taxes	$	6,556		$	3,021		$	3,096
Healthcare Facilities Segment:
Admissions		9,970			9,908			8,865
Equivalent Admissions		25,163			26,903			25,390
Surgeries		4,900			4,847			4,422
Revenue per Equivalent Admission	$	5,388		$	5,339		$	5,962

Equivalent admissions—Equivalent admissions is used by management (and certain investors) as a general approximation of combined inpatient and outpatient volume. 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).

Results of Operations

Our net revenues are from our two business segments, healthcare facilities and specialty pharmacy. The operations of SunLink’s former Mountainside Medical Center which was operated during these periods is reported in discontinued operations for all periods discussed.

Healthcare Facilities Segment

Net revenue for the year ended June 30, 2008 were $151,372 with a total of 25,390 equivalent admissions and revenues per equivalent admission of $5,962 compared to net revenues of $143,645, a total of 26,903 equivalent admissions and revenues per equivalent admission of $5,339 for the year ended June 30, 2007. The 5.3% increase in net revenues for the year ended June 30, 2008 was due primarily to increased Medicare, self pay and commercial and other revenues, increases in fees charged for services at most facilities, a 11.7% increase in net revenues per equivalent admission, and increased revenue from settlements and filings of prior year Medicare and Medicaid cost reports. Net revenues for the fiscal year ended June 30, 2008 included an increase of $992 for the settlements and filings of prior year Medicare and Medicaid cost reports compared to a net revenue decrease of $45 for the fiscal year ended June 30, 2007. Self-pay revenues increased due to fewer patients having insurance and increased deductibles and co-insurance for insured patients. Self-pay revenues increased 3.4% in the current fiscal year. Net revenue for the fiscal year ended June 30, 2008 and 2007, included net revenues of $3,049 and 3,481 respectively, from state indigent care programs. Net outpatient service revenues increased $12,825, an 18.8% increase from last year to $81,059 and increased to 53.6% of net revenues from 47.6% last year.

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Net revenue for the year ended June 30, 2007 were $143,645 with a total of 26,903 equivalent admissions and revenues per equivalent admission of $5,339 compared to net revenues of $135,576, a total of 25,163 equivalent admissions and revenues per equivalent admission of $5,388 for the year ended June 30, 2006. The 6.0% increase in net revenues for the year ended June 30, 2007 was primarily from a 6.9% increase in equivalent admissions and a 30.2% increase in self pay net revenues. Net outpatient service revenues increased $8,474, a 14.2% increase from last year to $68,234 and increased to 47.5% of net revenues from 44.1% last year. Net revenues for the years ended June 30, 2007 and 2006 included $3,481 and $3,156, respectively, from state indigent care programs.

The recruitment of new doctors and spending for capital improvements have contributed to the increase in net revenues in the years ended June 30, 2008, 2007 and 2006, respectively. We added nine net new doctors during the year ended June 30, 2008, seven net new doctors during the year ended June 30, 2007, and 13 net new doctors during the year ended June 30, 2006. During the year ended June 30, 2008, SunLink expensed $747 on physician guarantees and recruiting expenses compared to $1,098 last year. We also have expended approximately $17,374 for capital expenditures to upgrade services and facilities since July 1, 2006. We believe the upgraded services and facilities and the new doctors contributed to the increase in net revenues for the years ended June 30, 2008 and 2007, respectively, compared to the prior years. We continue to seek increased patient volume by attracting additional physicians to our hospitals, further upgrading the services offered by the hospitals and improving the hospitals’ physical facilities.

The following table sets forth the percentage of net patient revenues from various payors for the Healthcare Facilities segment for the periods indicated:

	Years Ended June 30,
	2006		2007		2008
Source
Medicare	38.8	%	39.8	%	41.6	%
Medicaid	16.4	%	13.9	%	14.1	%
Self pay	11.6	%	14.2	%	14.0	%
Commercial Insurance & Other	33.2	%	32.1	%	30.3	%
	100.0	%	100.0	%	100.0	%

During the fiscal year ended June 30, 2008, we experienced a decrease in Commercial Insurance and Other as a percentage of net revenues and an increase in Self-pay revenues. The changes were due primarily to increased patients without medical insurance and increasing deductibles and co-insurance required for insured patients. Medicare net revenues increased 9.3% in the fiscal year ended June 30, 2008 and increased 1.8% as a percentage of total net revenues in fiscal year 2008 compared to fiscal year 2007. During the fiscal year ended June 30, 2007, we experienced a decrease in Medicaid as a percentage of net revenues and an increase in Self-pay. In each case, the changes were due primarily to increased managed care patients and increased out-patient revenues.

Specialty Pharmacy Segment

On April 22, 2008 SunLink acquired Carmichael. Net revenue for the year ended June 30, 2008 increased $7,059 as a result of the acquisition.

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Cost and Expenses

Costs and expenses, including depreciation and amortization, were $153,026, $139,231, and $127,949, for the fiscal years ended June 30, 2008, 2007 and 2006, respectively.

	Cost and Expenses as a % of Net Revenue Years Ended June 30,
	2006		2007		2008
Cost of goods sold	0.0	%	0.0	%	2.89	%
Salaries, wages and benefits	49.4	%	49.1	%	46.6	%
Provision for bad debts	11.0	%	13.6	%	13.9	%
Supplies	10.5	%	10.8	%	9.2	%
Purchased services	6.4	%	6.3	%	6.3	%
Other operating expenses	12.6	%	12.1	%	12.5	%
Rent and lease expense	1.8	%	1.9	%	1.7	%

Cost of goods sold was approximately 64.7% of revenue for the Specialty Pharmacy segment.

Salaries, wages and benefits expense as a percentage of net revenues decreased in the year ended June 30, 2008 compared to the prior year due to a 10% increase in net revenues, the addition of specialty pharmacy business which has a lower percentage of labor cost to revenue than the hospital facilities businesses and as a result of our wages cost control strategy implemented in fiscal year 2008. Salaries, wages and benefits expense as a percentage of net revenues decreased in the year ended June 30, 2007 compared to the prior year due to lower cost of defined contribution employee 401-K plan and share option compensation expense.

Provision for bad debts increased as a percentage of net revenue in the year ended June 30, 2008 compared to the prior year due to increases in charg

es for services rendered that could not be collected, fewer people being eligible for Medicaid due to more stringent Medicaid requirements, increased coinsurance and deductible amounts that insured persons have to pay, overall decreased collections as a percentage of revenues and higher self-pay net revenues. The increase in self pay revenues also resulted in a higher provision for bad debts due to the lower collection percentages for self-pay revenues. Self-pay revenues increased $702 or 3.4% in the current fiscal year. Provision for bad debts increased as a percentage of net revenue in the year ended June 30, 2007 compared to the prior year due to increases in charges for services rendered that could not be collected, overall decreased collections as a percentage of net revenues and higher self-pay net revenues during the year. Self-pay net revenues increased $3,224 or 30.2% in the year ended June 30, 2007 compared to the prior year.

Supplies expense decreased as a percentage of net revenues in the year ended June 30, 2008 compared to the prior year due to decreased admissions and surgeries. Supplies expense increased as a percentage of net revenues in the year ended June 30, 2007 compared to the prior year due to higher costs of supply items.

Other operating expenses increased as a percentage of net revenues in the year ended June 30, 2008 compared to the prior year due to higher expense for professional liability which includes the cost of insurance and higher actuarially-determined liability amounts. Other operating expenses decreased as a percentage of net revenues in the year ended June 30, 2007 compared to the prior year due to lower expense for professional liability which includes the cost of insurance and lower actuarially-determined liability amounts.

Depreciation and amortization expense was $5,512, $4,400, and $3,400 for the years ended June 30, 2008, 2007 and, 2006, respectively. The increase in fiscal years 2008 and 2007 depreciation and amortization expense resulted from the $17,374 spent for new equipment for all hospitals and the renovation of one facility over the past two fiscal years.

Operating profit was $5,405, $4,414, and $7,627 for the years ended June 30, 2008, 2007 and, 2006, respectively. The increase in operating profit in the year ended June 30, 2008 compared to the prior year was due to settlements and filings of prior year Medicare and Medicaid cost reports and the reversal of a lease guarantee

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obligation recorded during the HealthMont acquisition for a facility the Company did not occupy . The decrease in operating profit in the year ended June 30, 2007 compared to the prior year was mainly due to significant increase in the bad debt provision and the increase in depreciation and amortization expense. The increase in operating profit in the year ended June 30, 2006 compared to the prior year was mainly due to the increase in net revenues and lower professional liability risks.

Interest expense was $2,114, $1,462, and $1,146 for the years ended June 30, 2008, 2007 and, 2006, respectively. The increase in fiscal years 2008 and 2007 interest expense resulted from higher outstanding debt amounts due to capital expenditures and the $19,000 paid in cash in April 2008 for Carmichael. In April 2008, we entered into a new $47,000 seven-year senior secured credit facility agreement. As of June 30, 2008, our outstanding balance on our new credit agreement is $38,754. As of June 30, 2007, our outstanding balance on our prior credit agreement was $12,922.

On April 23, 2008, SunLink repaid all outstanding balances and terminated the 2004 Credit Facility with a portion of the proceeds of a new $47,000 seven-year senior secured credit facility. The Company did not incur any early termination penalties in connection with the termination of the 2004 Credit Agreement. A loss on early repayment of debt of approximately $267 was recorded in April 2008 as a result of writing-off remaining unamortized prepaid debt cost of the 2004 credit facility. The additional borrowing capacity in the new credit facility was needed for funding the acquisition of Carmichael.

We recorded income tax expense of $1,087 ($1,053 federal and $34 state tax expense) for the year ended June 30, 2008 compared to income tax expense of $1,444 ($1,272 federal and $172 state tax expense) for the year ended June 30, 2007 and income tax expense of $2,375 ($2,120 federal and $255 state tax expense) for the year ended June 30, 2006. The $1,053 federal tax expense for the year ended June 30, 2008 included an $848 deferred tax benefit. The $1,272 federal tax expense for the year ended June 30, 2007 included a $185 deferred tax benefit. The $2,120 federal tax expense for the year ended June 30, 2006 included a $147 deferred tax benefit. We had an estimated net operating loss carry-forward for federal income tax purposes of approximately $6,633 at June 30, 2008. Use of this net operating loss carry-forward is subject to the limitations of the provisions of Internal Revenue Code Section 382. As a result, not all of the net operating loss carry-forward is available to offset federal taxable income in the current year. We have provided a valuation allowance for $2,810 of our $5,127 gross deferred tax asset (the majority of which is the net operating loss carry-forward for federal income tax purposes) as it is our assessment based upon the criteria identified in SFAS No. 109 that it is currently more likely than not that only $2,317 of the gross deferred tax asset will be realized through future taxable earnings or implementation of tax planning strategies.

Earnings from continuing operations were $2,009 ($.26 per fully diluted share) for the year ended June 30, 2008 compared to earnings from continuing operations of $1,577 ($0.20 per fully diluted share) for the year ended June 30, 2007 and $4,181 ($0.53 per fully diluted share) for the year ended June 30, 2006. Earnings from continuing operations in fiscal 2008 increased from fiscal 2007 due to increased operating profit which resulted from settlements and filings of prior year Medicare and Medicaid cost reports and the reversal of the lease guarantee obligation recorded during the Healthmont acquisition. Earnings from continuing operations in fiscal 2007 decreased from fiscal 2006 due to decreased operating profit which resulted from higher provision for bad debts and depreciation and amortization expense and a higher effective income tax rate in fiscal 2007. Earnings from continuing operations in fiscal 2006 decreased from fiscal 2005 due to a higher effective income tax rate in fiscal 2006 due to lower net operating tax loss carry-forwards available in fiscal 2006.

Loss from discontinued operations of $393 for the year ended June 30, 2008 primarily resulted from legal costs related to our discontinued operations. Loss from discontinued operations of $181 for the year ended June 30, 2007 resulted from $103 of losses after tax benefit from Mountainside, primarily due to legal expenses and $78 of after tax benefit losses resulting from domestic pension items. Loss from discontinued operations for the year ended June 30, 2006 of $272 resulted from $390 of losses after tax benefit from Mountainside, primarily due to $588 of unfavorable settlements of prior years Medicaid cost reports relating to periods prior to SunLink’s sale of Mountainside, reduced by $118 of earnings of domestic pension items.

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Net earnings for the year ended June 30, 2008 were $1,616 ($0.21 per fully diluted share) compared to net earnings of $1,396 ($0.18 per fully diluted share) for the year ended June 30, 2007 and $3,909 ($0.53 per fully diluted share) for the year ended June 30, 2006.

Earnings before income taxes, interest, depreciation and amortization

Earnings before income taxes, interest, depreciation and amortization (“Ebitda”) represent the sum of income before income taxes, interest, depreciation and amortization. We understand that certain industry analysts and investors generally consider Ebitda to be one measure of the liquidity of a company, and it is presented to assist analysts and investors in analyzing the ability of a company to generate cash, service debt and meet capital requirements. We believe increased Ebitda is an indicator of improved ability to service existing debt and to satisfy capital requirements. Ebitda, however, is not a measure of financial performance under accounting principles generally accepted in the United States of America and should not be considered an alternative to net income as a measure of operating performance or to cash liquidity. Because Ebitda is not a measure determined in accordance with accounting principles generally accepted in the United States of America and is thus susceptible to varying calculations, Ebitda, as presented, may not be comparable to other similarly titled measures of other corporations. Where we adjust EBITDA for non-cash charges we refer to such measurement as “Adjusted EBITDA”, which we report on a company wide basis. Non-cash adjustments in Adjusted EBITDA are not intended to be identified or characterized in any respect as “non-recurring, infrequent or unusual,” if we believe such charge is reasonably likely to recur within two years, or if there was a similar charge (or gain) within the prior two years. Where we report Adjusted EBITDA, we typically also report Hospital Facilities Segment Adjusted EBITDA and Specialty Pharmacy Segment Adjusted EBITDA which is the EBITDA for the applicable Segments without any allocation of corporate overhead, which we report as a separate line item, and without any allocation of the non-cash adjustments, which we also report as a separate line item in Adjusted EBITDA. Net cash provided by (used in) operations for the years ended June 30, 2008, 2007 and 2006, respectively, is shown below.

	Years ended June 30,
	2006			2007			2008
Healthcare Facilities Adjusted Ebitda	$	16,303		$	12,865		$	14,921
Specialty Pharmacy Adjusted Ebitda		—			—			821
Corporate overhead costs		(5,276	)		(4,051	)		(4,451	)
Taxes and net interest expense		(3,446	)		(2,837	)		(2,950	)
Other non-cash expenses and net changes in operating assets and liabilities		(3,075	)		(1,228	)		(6,661	)
Net cash provided by operations	$	4,506		$	4,749		$	1,680

Liquidity and Capital Resources

We generated $1,680 of cash from operations during the year ended June 30, 2008 compared to $4,749 from operations during the comparable period of the prior year. Cash was generated from net earnings, non-cash expenses of depreciation and amortization and stock-based compensation offset by decreased revolving debt, decreased third party payor settlements, increased prepaid and other current assets, cash used in discontinued operations and income taxes paid.

We generated $4,749 of cash from operations during the year ended June 30, 2007 compared to $4,506 from operations during the year ended June 30, 2006. Cash was generated from net earnings, non-cash expenses of depreciation and amortization and stock-based compensation and decreased net patient receivables offset by decreased accounts payable and accrued expenses, increased prepaid and other current assets, cash used in discontinued operations and income taxes paid.

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SunLink expended $8,337, $9,037 and $8,012 for capital expenditures at our hospitals (included in continuing operations) during the years ended June 30, 2008, 2007 and 2006, respectively. These capital expenditures were primarily for new and replacement equipment and the Dahlonega projects. We believe an attractive, up to date physical facility assists in recruiting quality staff and physicians, as well as attracting patients.

In August 2007, the Company received final approval of a Certificate of Need application with the State of Georgia to build a replacement hospital in Ellijay, Georgia. To date, SunLink has made no commitments related to the replacement hospital. However, SunLink exercised its option to purchase land, the seller failed to close, and SunLink and the seller of the land are currently in litigation and the outcome is uncertain. Cost for such property is approximately $3,300. Except for the Ellijay, Georgia land purchase, there are no other material future commitments for capital expenditures.

On October 15, 2004, SunLink entered into a $30,000 five-year senior secured credit facility (“2004 Credit Facility”) comprised of a revolving line of credit of up to $15,000 with an interest rate at LIBOR plus 2.91%, a $10,000 term loan (“SunLink Term Loan A”) with an interest rate at LIBOR plus 3.91% and a $5,000 term loan facility (“SunLink Term Loan B”) with an interest rate at LIBOR plus 3.91%.

On April 23, 2008, SunLink repaid all outstanding balances and terminated the 2004 Credit Facility with a portion of the proceeds of a new $47,000 seven-year senior secured credit facility. The Company did not incur any early termination penalties in connection with the termination of the 2004 Credit Agreement. A loss on early repayment of debt of approximately $267 was recorded in April 2008 as a result of writing-off remaining unamortized prepaid debt cost of the 2004 credit facility.

A new $47,000 seven-year senior secured credit facility (“2008 Credit Facility”) was entered into on April 23, 2008 and is comprised of a revolving line of credit of up to $12,000 with an interest rate at LIBOR plus 3.50% (6.25% at 6/30/08) (the “Revolving Loan”) and a $35,000 term loan with an interest rate at LIBOR plus 5.07% (7.82% at 6/30/08) (the “Term Loan”). The Revolving Loan and the Term Loan were immediately available to the Company for borrowing at April 23, 2008. The total availability of credit under all components of the credit facility is keyed to the level of SunLink’s earnings, which, based upon the Company’s estimates, provided for current borrowing capacity, before any draws, of approximately $47,000 on the closing date. At closing, the entire $35,000 term loan and $5,500 of the revolving loan were drawn. The Company used the initial proceeds of the loans in the amount of $40,500 to repay outstanding debt, including the 2004 Credit Agreement, to pay the cash portion of the purchase price for the Carmichael acquisition, to pay fees and expenses thereunder and for general corporate purposes. Costs and fees related to execution of the credit facility were $2,115. The Credit Facility is secured by a first priority security interest in substantially all real and personal property of the Company and its consolidated domestic subsidiaries, including a pledge of all of the equity interests in such subsidiaries.

If SunLink or its applicable subsidiaries experience a material adverse change in their business, assets, financial condition, management or operations, or if the value of the collateral securing the SunLink Credit Facility decreases, we may be unable to draw on the credit facility.

We believe we have adequate financing and liquidity to support our current level of operations through the next twelve months. Our primary sources of liquidity are cash generated from continuing operations and availability under the SunLink Credit Facility. The total availability of credit under all components of the SunLink Credit Facility is keyed to the level of SunLink’s earnings, which, based upon the Company’s estimates, would provide for current borrowing capacity of $47,000 at June 30, 2008, of which $34,854 was outstanding under a term loan and $3,900 was outstanding on a revolver loan. The current remaining availability of approximately $8,246 could be adversely affected by, among other things, the risk, uncertainties and other factors listed at the beginning of Item 7, as well as lower earnings due to lower demand for our services by patients, changes in patient mix and changes in terms and levels of government and private reimbursement for

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services. Cash generated from operations could be adversely affected by, among other things, the risks, uncertainties and other factors listed at the beginning of Item 7, as well as lower patient demand for our services, higher operating costs (including, but not limited to, salaries, wages and benefits, provisions for bad debts, general liability and other insurance costs, cost of pharmaceutical drugs and other operating expenses) or by changes in terms and levels of government and private reimbursement for services, and the regulatory environment of the community hospital segment.

Contractual Obligations, Commitments and Contingencies

Contractual obligations related to long-term debt, non-cancelable operating leases, physician guarantees and interest on outstanding debt from continuing operations at June 30, 2008 is shown in the following table. The interest on variable interest debt is calculated at the interest rate in effect at June 30, 2008.

Payments Due in:	Long-Term Debt		Subordinated Long-Term Debt		Operating Leases		Physician Guarantees		Interest on Long-Term Debt		Interest on Subordinated Long-Term Debt
1 year	$	1,844	$	150	$	2,502	$	139	$	2,671	$	234
2 years		1,764		300		2,048		0		2,521		216
3 years		1,750		300		1,128		0		2,383		192
4 years		1,750		300		589		0		2,247		168
5 years		1,750		300		315		0		2,110		144
More than 5 years		26,104		1,650		1,400		0		2,041		132
	$	34,962	$	3,000	$	7,982	$	139	$	13,973	$	1,086

At June 30, 2008 SunLink had a contract with one physician which contained guaranteed minimum gross receipts. Physician guarantee contracts entered into after January 1, 2006 are accounted for under the provisions of FSP FIN 45-3. See Note 2 – “Summary of Significant Accounting Policies—Recent Accounting Standards” for discussion of FSP FIN 45-3. For guarantee contracts entered into prior to the adoption of FSP FIN 45-3, SunLink expenses physician guarantees as they are determined to be due to the physician on an accrual basis. Each month the physician’s gross patient receipts are accumulated and the difference between the monthly guarantee and the physician’s actual gross receipts for the month is calculated. If the guarantee is greater than the receipts, the difference is accrued as a liability and an expense. The net guarantee amount is paid to the physician in the succeeding month. If the physician’s monthly receipts exceed the guarantee amount in subsequent months, then the overage is repaid to SunLink to the extent of any prior monthly guarantee payments and the liability and expense is reduced by the amount of the repayments. The physician with whom the guarantee agreement is made agrees to maintain his/her practice within the hospital geographic area for a specific period (normally three years) or he/she would be liable to repay all or a portion of the guarantee received. The physician’s liability for any guarantee repayment due to non-compliance with guarantee provisions will be collaterized by the physician’s patient accounts receivable and/or a promissory note from the physician. Included in Company’s consolidated balance sheet at June 30, 2008 is a liability of $130 for physician guarantees accounted for under the provisions of FSP FIN 45-3. SunLink expensed $747, $1,098, and $1,699, for the fiscal years ended June 30, 2008, 2007 and 2006, respectively.

At June 30, 2008, we had outstanding long-term debt of $34,962 of which $34,854 was incurred in connection with the SunLink Credit Facility and $108 was related to capital leases. At June 30, 2007, we had outstanding long-term debt of $8,536 of which $8,222 was incurred in connection with the SunLink Credit Facility and $314 was related to capital leases.

On July 13, 2006, Piedmont Healthcare, Inc. (“PHI”) and Piedmont Mountainside Hospital, Inc. (“PMH”) (collectively, “Plaintiffs” or “Piedmont”) filed a Complaint in the Superior Court of Cobb County, Georgia, alleging breach of the Asset Purchase Agreement (the “Agreement”) dated as of April 9, 2004 by and among PMH, Piedmont Medical Center, Inc. (n/k/a “PMI”), Southern Health Corporation of Jasper, Inc. (“SHJI”),

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SunLink Healthcare LLC (formerly SunLink Healthcare Corp.), and SunLink (collectively, “Defendants” or “SunLink”) pursuant to which the Mountainside Medical Center was sold to PMH in June 2004. Specifically, Piedmont seek to have SunLink reimburse Piedmont for certain costs associated with an alleged indigent and charity care shortfall of Piedmont Mountainside Hospital (formerly Mountainside Medical Center) for the fiscal year ended June 30, 2004 demanded by the Georgia Department of Community Health (“DCH”). In addition, Piedmont seeks reimbursement for funds allegedly recouped from PMH by DCH in respect of Medicaid Cost Report settlements and adjustments for the reporting periods ending June 30, 2002, June 30, 2003 and May 31, 2004. Piedmont also seeks a declaratory judgment to the effect that Piedmont may retain certain payments it has received from the DCH’s Indigent Care Trust Fund for Disproportionate Share Hospitals. Piedmont also seeks recovery of costs and attorney’s fees under the Agreement and Georgia law.

On August 11, 2006, SunLink filed an answer to the complaint asserting factual and legal defenses, along with a counterclaim. In the counterclaim, SunLink alleges that Piedmont breached the Agreement by failing to reimburse SHJI for funds paid Piedmont from the DCH’s Indigent Care Trust Fund for Disproportionate Share Hospitals, which payments SunLink contend qualify as “excluded assets” not sold to Piedmont under the Agreement. SunLink also alleged that PMI breached its obligations to guaranty PMH’s payment and performance of its obligations under the Agreement. SunLink seeks a declaratory judgment regarding the parties’ rights in respect of the payments made from the Indigent Care Trust Fund. Finally, SunLink seeks to recover their costs and attorney’s fees under the Agreement and Georgia law. The Court has scheduled a hearing on all pending summary judgment and discovery motions for September 26, 2008.

SunLink denies that it has any liability to the Plaintiffs and intends to vigorously defend the claims asserted against SunLink in connection with the complaint and to vigorously pursue its counterclaim. While the ultimate outcome and materiality of the litigation cannot be determined, in management’s opinion the litigation will not have a material adverse effect on SunLink’s financial condition or results of operations.

Discontinued Operations

SunLink sold its former U.K. housewares manufacturing subsidiary, Beldray Limited (“Beldray”), to two of its managers in October 2001. Beldray has since entered into administrative receivership and is under the administration of its primary lender. SunLink believes Beldray ceased to operate in October 2004.

On August 6, 2007 the liquidator in an insolvency proceeding in the United Kingdom involving SunLink’s former subsidiary KRUG International (UK) Limited (“KRUG UK”) made an application in The Birmingham County Court in Birmingham, England in which the liquidator is seeking a declaration by the court that a transfer of certain funds in 2001 from KRUG UK to SunLink in connection with the purchase of certain preferred stock of another subsidiary of SunLink, the making of a loan to SunLink, and certain forgiveness of debt to SunLink by KRUG UK Limited was improper as, among other things, KRUG UK was then effectively insolvent and that the approval of such transfers by the then directors of KRUG UK resulted in a breach of their fiduciary duties. The liquidator seeks to have the court order that the former directors or, in the alternative, SunLink, be required to account for, repay or restore such funds to the liquidator of KRUG UK. In connection with the allegations in the application of breach of fiduciary duty by the directors of KRUG UK in approving the transfer of such funds, SunLink has indemnification obligations to the former directors of KRUG UK. Each of the directors of KRUG UK and SunLink have now been served. SunLink denies any liability to KRUG UK other than to it in KRUG UK’s status as a preferred stockholder and for the unpaid balance on the promissory note. SunLink, through its United Kingdom counsel, intends to vigorously defend against the liquidator’s claims.

SunLink’s non-current liability reserves for discontinued operations at June 30, 2008, included a reserve for a portion of the Beldray Guarantee, which would be sought pursuant to the application made by the liquidator of KRUG UK. Such reserve was based upon management’s estimate, after consultation with its property consultants and legal counsel, of the cost to satisfy the Beldray Guarantee in light of KRUG UK’s limited assets and before taking into account any other claims against KRUG UK. The maximum potential obligation of KRUG UK for rent under the Beldray Guarantee is estimated to be approximately $8,400. SunLink expensed $306 in the fiscal

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year ended June 30, 2008 on legal costs to defend against the claim. As a result of this claim and the U.K. liquidation proceedings against KRUG UK, SunLink expects KRUG UK to be wound-up in liquidation in the UK and has fully reserved for any assets of KRUG UK.

Additional contingent obligations, other than with respect to our existing operations, include potential product liability claims for products manufactured and sold before the disposal of our discontinued industrial segment in fiscal year 1989 and for guarantees of certain obligations of former subsidiaries. We have provided an accrual at June 30, 2008 related to the Beldray Lease Guarantee, as discussed above. Based upon an evaluation of information currently available and consultation with legal counsel, management has not reserved any amounts for contingencies related to these liquidations.

Sarbanes-Oxley Section 404

We have completed the planning, documentation and testing phase of our efforts to comply with the provisions of Section 404 of the Sarbanes-Oxley Act of 2002 (“Sarbanes Oxley”) in order to permit our management to report on, as of June 30, 2008, and our independent auditors to attest to, as of June 30, 2010, our internal controls over financial reporting as required by Sarbanes-Oxley. See “Management’s Report on Internal Control Over Financial Reporting” on Item 9A of this Annual Report on Form 10-K for our assessment. After reviewing several proposals from outside consulting firms to help us implement Sarbanes-Oxley during the fiscal year ending June 30, 2008, management decided to use in-house personnel to implement Sarbanes-Oxley compliant internal controls.

Recent Accounting Pronouncements

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140,” which simplifies accounting for certain hybrid financial instruments by permitting fair value remeasurement for any hybrid instrument that contains an embedded derivative that otherwise would require bifurcation and eliminates a restriction on the passive derivative instruments that a qualifying special-purpose entity may hold. SFAS No. 155 is effective for all financial instruments acquired, issued or subject to a remeasurement (new basis) event occurring after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company adopted SFAS No. 155 at the beginning of the fiscal year ending June 30, 2008. There was no effect on the consolidated statement of earnings from the adoption of this statement.

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets—an amendment of FASB Statement No. 140,” which establishes, among other things, the accounting for all separately recognized servicing assets and servicing liabilities by requiring that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable, and permits the entity to choose either the amortization method or fair value method for subsequent measurement. SFAS No. 156 is effective as of the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company adopted SFAS No. 156 at the beginning of the fiscal year ending June 30, 2008. There was no effect on the consolidated statement of earnings from the adoption of this statement.

In June 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109”, which establishes that the financial statement effects of a tax position taken or expected to be taken in a tax return are to be recognized in the financial statements when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. This Interpretation is effective for fiscal years beginning after December 15, 2006.

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The Company adopted the provisions of “FIN 48” on July 1, 2007. It requires that a change in judgment related to prior years’ tax positions be recognized in the quarter of such change. As a result of the implementation of FIN 48, the Company recognized a liability for unrecognized tax benefits in the amount of $58 which was accounted for as the creation of a deferred tax asset as of July 1, 2007. A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:

Balance at July 1, 2007	$	58
Additions based on tax positions related to current year		23
Additions for tax positions of prior years		—
Reductions for tax positions of prior years		(23	)
Settlements		—
Balance at June 30, 2008	$	58

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. The Company is currently subject to a U.S. federal income tax examination for one tax year. Except for this examination, the Company is not subject to any current U.S. federal, state or local, or non-U.S. income tax examinations by tax authorities for any tax years. We believe that there is no tax jurisdiction in which the outcome of unresolved issues or claims is likely to be material to our financial position, cash flows or results of operations. We further believe that we have made adequate provision for all income tax uncertainties.

At July 1, 2007, our unrecognized tax benefits, the aggregate tax effect of differences between tax return positions and the benefits recognized in our financial statements as shown above, amounted to $58. This amount remained unchanged during the fiscal year ended June 30, 2008 to $58. If recognized, all of our unrecognized tax benefits would not reduce our income tax expense or effective tax rate except as such recognition related to the removal of the liability associated with interest classified as income tax expense. During 2008, certain factors could potentially reduce our unrecognized tax benefits, either because of the expiration of open statutes of limitation or modifications to our intercompany accounting policies and procedures. Of these tax positions, none relate to positions that would affect our total tax provision or effective tax rate (except as such recognition related to the removal of the liability associated with interest classified as income tax expense).

We classify interest on tax deficiencies as tax expense and also classify income tax penalties as tax expense. At July 1, 2007, before any tax benefits, our accrued interest on unrecognized tax benefits amounted to $6 and we had recorded no related accrued penalties. The amount of accrued interest increased by $4 during the fiscal year ended June 30, 2008 to $10.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”, which establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating the effect of adopting SFAS No. 157 on the Company’s consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”, which provides companies with an option to report selected financial assets and liabilities at fair value. It also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating the effect of adopting SFAS No. 159 on the Company’s consolidated financial statements.

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In March 2007, the FASB issued SFAS No. 141R, “Business Combinations”, which is intended to improve, simplify, and converge internationally the accounting for business combinations and the reporting of noncontrolling interests in consolidated financial statements. Under SFAS No. 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS No. 141R includes a substantial number of new disclosure requirements. SFAS No. 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company will comply with the new SFAS No. 141R requirements for any future business combination transactions.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an Amendment of ARB No. 51”, which establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 is intended to improve the relevance, comparability, and transparency of financial information provided to investors by requiring all entities to report noncontrolling (minority) interests in subsidiaries in the same way as equity in the consolidated financial statements. SFAS No. 160 includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company is currently evaluating the effect of adopting SFAS No. 160 on the Company’s consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161 “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133”, which requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting. SFAS No 161 is effective for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. This Statement encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The Company is currently evaluating the effect of adopting SFAS No. 161 on the Company’s consolidated financial statements.

In April 2008, the FASB issued FSP No. FAS 142-3, “Determination of the Useful Life of Intangible Assets”. This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets”. The Company is required to adopt FSP 142-3 on September 1, 2009, earlier adoption is prohibited. The guidance in FSP 142-3 for determining the useful life of a recognized intangible asset shall be applied prospectively to intangible assets acquired after adoption, and the disclosure requirements shall be applied prospectively to all intangible assets recognized as of, and subsequent to, adoption. The Company is currently evaluating the effect of FSP 142-3 on its consolidated statements

In May 2008, the FASB issued SFAS No. 162, “Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). This statement is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements of nongovernmental entities that are presented in conformity with GAAP. This statement will be effective 60 days following the U.S. Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendment to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” The adoption of this Statement is not expected to have a material impact on the Company’s consolidated financial statements.

Related Party Transactions

A director of the Company and the Company’s secretary (who was a director of SunLink until November 2003 and is now director emeritus) are members of two different law firms, each of which provides services to SunLink. We have paid an aggregate of $1,154, $624, and $564 to these law firms in the fiscal years ended June 30, 2008, 2007 and 2006, respectively.

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Inflation

During periods of inflation and labor shortages, employee wages increase and suppliers pass along rising costs to us in the form of higher prices for their supplies and services. We have not always been able to offset increases in operating costs by increasing prices for our services and products or by implementing cost control measures. We are unable to predict our ability to control future cost increases or offset future cost increases by passing along the increased cost to customers.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to interest rate changes, primarily as a result of borrowing under the SunLink Credit Facility completed in April 2008. Borrowings of $3,900 at June 30, 2008 were outstanding under the SunLink Credit Facility at interest rates based upon LIBOR. A one percent change in the LIBOR rate would result in a change in interest expense of $39 on an annual basis. No action has been taken to mitigate our exposure to interest rate market risk and we are not a party to any interest rate market risk management activities.

Item 8. Financial Statements and Supplementary Data

Index to Financial Statements and Supplementary Data

	Page
Report of Independent Registered Public Accounting Firm	F-1
Consolidated Balance Sheets—as of June 30, 2008 and 2007	F-2
Consolidated Statements of Earnings—for each of the three years ended June 30, 2008, 2007 and 2006	F-3
Consolidated Statements of Shareholders’ Equity—for each of the three years ended June  30, 2008, 2007 and 2006	F-4
Consolidated Statements of Cash Flows—for each of the three years ended June 30, 2008, 2007 and 2006	F-5
Notes to Consolidated Financial Statements—as of and for the years ended June 30, 2008, 2007 and 2006	F-6

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A(T). Controls and Procedures

Evaluation of disclosure controls and procedures—We maintain controls and procedures designed to ensure that we are able to collect the information we are required to disclose in the reports we file with the SEC, and to process, summarize and disclose this information within the time periods specified in the rules of the SEC. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”)). Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2008, our controls and procedures were effective to ensure that we are able to collect, process and disclose the information we are required to disclose in the reports we file with the SEC within the required time periods.

Management’s Annual Report on Internal Control over Financial Reporting—Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Our internal control over financial reporting is designed to provide reasonable assurance to management and the board of directors regarding the preparation and fair presentation of published financial statements.

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Because of its inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Management assessed the effectiveness of our internal control over financial reporting as of June 30, 2008. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on our assessment, management concluded that, as of June 30, 2008, our internal control over financial reporting was effective based on those criteria.

In accordance with the rules of the SEC, we did not assess the internal control over financial reporting of one of our subsidiaries—Carmichael’s Cashway Pharmacy, Inc. (“Carmichael”) that we acquired on April 23, 2008. Such subsidiary represented approximately 25% of our total consolidated assets at June 30, 2008. In our Report on Form 10-K for the year ended June 30, 2009, we will be required to provide an assessment of our compliance that takes into account an assessment of Carmichael and all of our other currently existing subsidiaries as of June 30, 2009.

Since the April 2008 acquisition of Carmichael, (see Note 3 to the financial statements included in this report), we have focused upon integrating the operations acquired into our disclosure controls and procedures and internal controls. On September 17, 2008, we announced that the financial statements of Carmichael for the periods June 1, 2006 through December 31, 2006, January 1, 2007 through December 31, 2007 and January 1, 2008 through April 22, 2008, should not be relied upon and that we expect the audited financial statements of Carmichael to be restated to adjust the pre-acquisition periods previously reported in our Current Report on Form 8-K filed on July 9, 2008.

As previously reported, we reached our conclusion based on information reviewed by SunLink’s Management, SunLink’s Audit Committee and SunLink’s independent registered public accounting firm that the Carmichael financial statements contain errors that include the amount of customer receivables and which relates to pre-acquisition collections, bad debts policies and Carmichael collection activities. Based on current information, we believe the receivables balance will be decreased by at least $1,300,000 and there will be an increase in the allowance for doubtful accounts and certain customer credit adjustments, which will result in an adjustment to our allocation of the acquisition purchase price.

Due to the need to integrate Carmichael into our system of disclosure and internal controls, we may not be able to calculate meaningful changes in bad debts or revenue until after the first anniversary of the acquisition. Furthermore, the pre-existing deficiencies in Carmichael financial systems, processes and related internal controls increase the risk that the historical financial statements of the Carmichael operations and cash flows which were provided to SunLink may not be accurate in additional ways or to an extent beyond the way preliminarily identified by us in our September Current Report on Form 8-K. Prior to the acquisition, we conducted extensive due diligence investigations with respect to the operations and cash flows of Carmichael; however, there is a risk due to material deficiencies in Carmichael internal controls that additional undetected errors may exist in the financial statements provided by Carmichael.

Our Chief Executive Officer and our Chief Financial Officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as such term is defined in the Securities Exchange Act of 1934, Rules 13a-15(e)and 15d-15(e) as of June 30, 2008 (the “Evaluation Date”), have concluded that as of the Evaluation Date, our disclosure controls and procedures were adequate and designed to ensure that material information relating to us and our consolidated subsidiaries would be made known to them by others within those entities.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this annual report.

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Changes in Internal Controls over Financial Reporting—There have been no changes in our internal controls during the quarter ended June 30, 2008, that materially affected, or were reasonably likely to materially affect, our internal controls over financial reporting.

Item 9B. Other Information

None.

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PART III

Item 10. Directors, Executive Officers and Corporate Governance

Audit Committee Financial Expert

We have a separately-designated standing audit committee established in accordance with section 3(a)(58) (A) of the Securities Exchange Act of 1934. The members of our Committee are Messrs. Ford (Chairman) and Hall and Ms. Brenner. All three members of the committee are independent as defined in Section 121 (A) of the American Stock Exchange’s listing standards. Our Board of Directors has determined that we have at least one “audit committee financial expert” as defined under Item 401(h) of Regulation S-K serving on our audit committee. Mr. Ford is an “audit committee financial expert” and is independent as defined under the applicable SEC and American Stock Exchange Rules.

Code of Ethics

We have adopted a Code of Ethics (SunLink Health Systems, Inc. Code of Conduct) within the meaning of Item 406(b) of Regulation S-K. The Code of Ethics applies to all employees including our principal executive officer, principal financial officer and principal accounting officer. The Code of Ethics is publicly available on our website at www.sunlinkhealth.com or upon request by writing to us. If we make substantial amendments to our Code of Ethics or grant any waiver for the three previously named individuals, including any implicit waivers, we will disclose the nature of such amendment or waiver on our website or in a report on Form 8-K within five days of such amendment or waiver.

Other Information

Certain information required by this Item 10 will be set forth in the Company’s Proxy Statement for its Annual Meeting of Shareholders scheduled to be held on November 10, 2008, except for certain information concerning the executive officers of the Company which is set forth in Part I of this Report.

Item 11. Executive Compensation

The information required by this Item 11 will be set forth in the Company’s Proxy Statement for its Annual Meeting of Shareholders scheduled to be held on November 10, 2008, and is incorporated herein by this reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this Item 12 will be set forth in the Company’s Proxy Statement for its Annual Meeting of Shareholders scheduled to be held on November 10, 2008, and is incorporated herein by this reference.

Item 13. Certain Relationships and Related Transactions and Director Independence

The information required by this Item 13 will be set forth in the Company’s Proxy Statement for its Annual Meeting of Shareholders scheduled to be held on November 10, 2008, and is incorporated herein by this reference.

Item 14. Principal Accounting Fees and Services

The information required by this Item 14 will be set forth in the Company’s Proxy Statement for its Annual Meeting of Shareholders scheduled to be held on November 10, 2008, and is incorporated herein by this reference.

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PART IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a) (1) Financial Statements

The following consolidated financial statements of the Company and its subsidiaries are set forth in Item 8 of this Annual Report on Form 10-K.

Report of Independent Registered Public Accounting Firm.

Consolidated Balance Sheets—June 30, 2008 and 2007.

Consolidated Statements of Earnings—For the Years Ended June 30, 2008, 2007 and 2006.

Consolidated Statements of Shareholders’ Equity—For the Years Ended June 30, 2008, 2007 and 2006.

Consolidated Statements of Cash Flows—For the Years Ended June 30, 2008, 2007 and 2006.

Notes to Consolidated Financial Statements—For the Years Ended June 30, 2008, 2007 and 2006.

(a) (2) Financial Statement Schedules

Report of Independent Registered Public Accounting Firm	At page 78 of this Report.
Schedule II Valuation and Qualifying Accounts	At page 79 of this Report.

The information required to be submitted in Schedules I, III, IV and V for SunLink Health Systems, Inc. and its consolidated subsidiaries has either been shown in the financial statements or notes, or is not applicable or not required under Regulation S-X and, therefore, has been omitted.

(b) Reports on Form 8-K

Date of Report	Subject of Report
April 29, 2008	Reporting acquisition of Carmichael’s Cashway Pharmacy, termination of credit facility with Residential Funding Corporation and entering into a new credit facility with Chatham Credit Management III, LLC.

(c) Exhibits

The following exhibits are filed with this Form 10-K or incorporated herein by reference from the document set forth next to the exhibit in the list below:

2.1	Asset Purchase Agreement, dated April 9, 2004, by and among Piedmont Mountainside Hospital, Inc., Piedmont Medical Center, Inc., Southern Health Corporation of Jasper, Inc., Southern Health Corporation, SunLink Healthcare Corp. and SunLink Health Systems, Inc. (incorporated by reference from Exhibit 2.1 of the Company’s Report on Form 8-K dated April 14, 2004).
3.1	Amended Articles of Incorporation of SunLink Health Systems, Inc. (incorporated by reference from Exhibit 3.1 of the Company’s Report on Form 10-Q for the quarter ended September 30, 2001).
3.2	Code of Regulations of SunLink Health Systems, Inc., as amended (incorporated by reference from Exhibit 3.2 of the Company’s Report on Form 10-Q for the quarter ended September 30, 2001).
3.3	Certificate of Amendment to Amend Article Fourth of the Amended Articles of Incorporation of SunLink Health Systems, Inc. dated February 13, 2004 (incorporated by reference from Exhibit 3.1 of the Company’s Report on Form 10-Q dated February 17, 2004).
4.1	Shareholder Rights Agreement dated as of February 8, 2004, between SunLink Health Systems, Inc. and Wachovia Bank, N.A., as Rights Agent (incorporated by reference from Exhibit 4.1 of the Company’s Report on Form 8-K dated February 10, 2004).

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10.1*		1995 Incentive Stock Option Plan (incorporated by reference from Exhibit 10.3 of the Company’s Report on Form 10-K for the year ended March 31, 1996).
10.2		Rent Review Memorandum between Rootmead Limited, Beldray Limited and KRUG International (UK) Limited dated August 30, 2000 (incorporated by reference from Exhibit 10.1 of the Company’s Report on Form 10-Q dated September 30, 2001).
10.3		Counterpart/Reversionary Lease between Rootmead Limited, Beldray Limited and KRUG International (UK) Limited dated August 30, 2000 (incorporated by reference from Exhibit 10.2 of the Company’s Report on Form 10-Q dated September 30, 2001).
10.4		Pre-emption Agreement between Rootmead Limited, Beldray Limited and KRUG International (UK) Limited dated August 30, 2000 (incorporated by reference from Exhibit 10.3 of the Company’s Report on Form 10-Q dated September 30, 2001).
10.5		Lease between Barton Industrial Park Limited, Beldray Limited and Butterfield-Harvey Limited dated June 8, 1979 (incorporated by reference from Exhibit 10.4 of the Company’s Report on Form 10-Q dated September 30, 2001).
10.6*		2001 Long-Term Stock Option Plan (incorporated by reference from Exhibit 10.5 of the Company’s Report on Form 10-Q dated September 30, 2001).
10.7*		2001 Outside Directors’ Stock Ownership and Stock Option Plan (incorporated by reference from Exhibit 10.6 of the Company’s Report on Form 10-Q dated September 30, 2001).
10.8		Agreement relating to the sale and purchase of the whole of the issued share capital of Beldray Limited dated August 30, 2001, between Bradley International Holdings Limited and Marshall Cooper and John Clegg (incorporated by reference from Exhibit 10.1 of the Company’s Report on Form 8-K dated October 15, 2001).
10.9		Variation relating to the sale and purchase of the whole of the issued share capital of Beldray Limited dated August 30, 2001, dated October 3, 2001, between Bradley International Holdings Limited and Marshall Cooper and John Clegg (incorporated by reference from Exhibit 10.2 of the Company’s Report on Form 8-K dated October 15, 2001).
10.10	*	Employment Agreement, dated May 13, 2008, between SunLink Homecare Services, LLC and George D. Shaunnessy (incorporated by reference from Exhibit 10.30 of SunLink’s Form 8-K dated May 19, 2008).
10.11	*	Employment Letter, dated April 30, 2001, by and between SunLink Health Systems, Inc. and Mark Stockslager (incorporated by reference from Exhibit 10.29 of SunLink’s Form 10-Q for the quarter ended September 30, 2005).
10.12	*	Employment Letter, dated February 1, 2001, by and between SunLink Healthcare Corp. and Jerome Orth (incorporated by reference from Exhibit 10.30 of SunLink’s Form 10-Q for the quarter ended September 30, 2005).
10.13		Credit Agreement between SunLink Health Systems, Inc., SunLink Healthcare LLC, Dexter Hospital, LLC, Clanton Hospital, LLC, Southern Healthcare Corporation of Ellijay, Inc., Southern Health Corporation of Dahlonega, Inc., Southern Health Corporation of Houston, Inc., HealthMont, Inc., HealthMont of Georgia, Inc., HealthMont of Missouri, Inc., HealthMont, LLC, HealthMont of Missouri, LLC, SunLink Services, Inc., Optima Healthcare Corporation, and KRUG Properties, Inc., and Residential Funding Corporation dated October 15, 2004 (incorporated by reference from Exhibit 10.73 of the Company’s Report on Form 8-K dated October 21, 2004).

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10.14		Form of Revolving Note between SunLink Health Systems, Inc., SunLink Healthcare LLC, Dexter Hospital, LLC, Clanton Hospital, LLC, Southern Healthcare Corporation of Ellijay, Inc., Southern Health Corporation of Dahlonega, Inc., Southern Health Corporation of Houston, Inc., HealthMont, Inc., HealthMont of Georgia, Inc., HealthMont of Missouri, Inc., HealthMont, LLC, HealthMont of Missouri, LLC, SunLink Services, Inc., Optima Healthcare Corporation, and KRUG Properties, Inc., and Residential Funding Corporation dated October 15, 2004 (incorporated by reference from Exhibit 10.74 of the Company’s Report on Form 8-K dated October 21, 2004).
10.15		Form of Term Loan A Note between SunLink Health Systems, Inc., SunLink Healthcare LLC, Dexter Hospital, LLC, Clanton Hospital, LLC, Southern Healthcare Corporation of Ellijay, Inc., Southern Health Corporation of Dahlonega, Inc., Southern Health Corporation of Houston, Inc., HealthMont, Inc., HealthMont of Georgia, Inc., HealthMont of Missouri, Inc., HealthMont, LLC, HealthMont of Missouri, LLC, SunLink Services, Inc., Optima Healthcare Corporation, and KRUG Properties, Inc., and Residential Funding Corporation dated October 15, 2004 (incorporated by reference from Exhibit 10.75 of the Company’s Report on Form 8-K dated October 21, 2004).
10.16		Form of Term Loan B Note between SunLink Health Systems, Inc., SunLink Healthcare LLC, Dexter Hospital, LLC, Clanton Hospital, LLC, Southern Healthcare Corporation of Ellijay, Inc., Southern Health Corporation of Dahlonega, Inc., Southern Health Corporation of Houston, Inc., HealthMont, Inc., HealthMont of Georgia, Inc., HealthMont of Missouri, Inc., HealthMont, LLC, HealthMont of Missouri, LLC, SunLink Services, Inc., Optima Healthcare Corporation, and KRUG Properties, Inc., and Residential Funding Corporation dated October 15, 2004 (incorporated by reference from Exhibit 10.76 of the Company’s Report on Form 8-K dated October 21, 2004).
10.17		Form of Security Agreement between SunLink Health Systems, Inc., SunLink Healthcare LLC, Dexter Hospital, LLC, Clanton Hospital, LLC, Southern Healthcare Corporation of Ellijay, Inc., Southern Health Corporation of Dahlonega, Inc., Southern Health Corporation of Houston, Inc., HealthMont, Inc., HealthMont of Georgia, Inc., HealthMont of Missouri, Inc., HealthMont, LLC, HealthMont of Missouri, LLC, SunLink Services, Inc., Optima Healthcare Corporation, and KRUG Properties, Inc., and Residential Funding Corporation dated October 15, 2004 (incorporated by reference from Exhibit 10.77 of the Company’s Report on Form 8-K dated October 21, 2004).
10.18		Form of Pledge Agreement between SunLink Health Systems, Inc., SunLink Healthcare LLC, Dexter Hospital, LLC, Clanton Hospital, LLC, Southern Healthcare Corporation of Ellijay, Inc., Southern Health Corporation of Dahlonega, Inc., Southern Health Corporation of Houston, Inc., HealthMont, Inc., HealthMont of Georgia, Inc., HealthMont of Missouri, Inc., HealthMont, LLC, HealthMont of Missouri, LLC, SunLink Services, Inc., Optima Healthcare Corporation, and KRUG Properties, Inc., and Residential Funding Corporation dated October 15, 2004 (incorporated by reference from Exhibit 10.78 of the Company’s Report on Form 8-K dated October 21, 2004).
10.19		Stock Purchase Agreement among SunLink Homecare Services, LLC, Carmichael’s Cashway Pharmacy, Inc., Theodore S. Carmichael and Judy Chiasson Carmichael dated April 22, 2008 (incorporated by reference from Exhibit 10.28 of the Company’s Report on Form 8-K dated April 29, 2008).
10.20	*	Amended and Restated Employment Agreement, dated July 1, 2005, between Harry R. Alvis and SunLink Health Systems, Inc. (incorporated by reference from Exhibit 99.1 of the Company’s Report on Form 8-K dated December 8, 2005).
10.21	*	Amended and Restated Employment Agreement, dated July 1, 2005, between Robert M. Thornton, Jr. and SunLink Health Systems, Inc. (incorporated by reference from Exhibit 99.1 of the Company’s Report on Form 8-K dated December 23, 2005).

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10.22		Credit Agreement between SunLink Health Systems, Inc., SunLink Healthcare LLC, Dexter Hospital LLC, Clanton Hospital LLC, Southern Health Corporation of Ellijay, Inc., Southern Health Corporation of Dahlonega, LLC, Southern Health Corporation of Houston, Inc., Southern Health Corporation of Jasper, Inc., HealthMont of Georgia, Inc., HealthMont, LLC, HealthMont of Missouri, LLC, SunLink Services, Inc., SunLink Homecare Services, LLC, KRUG Properties, Inc., Central Alabama Medical Associates, LLC, Dahlonega Clinic, LLC, Carmichael’s Cashway Pharmacy, Inc., Carmichael’s Nutritional Distributor, Inc., Breath of Life Home Health Equipment, Inc. and Chatham Credit Management III, LLC dated April 23, 2008 (incorporated by reference from Exhibit 10.29 of the Company’s Report on Form 8-K dated April 29, 2008).
10.23		2005 Equity Incentive Plan (incorporated by reference from Exhibit 99.1 of the Company’s Report on Form S-8 dated September 20, 2006).
10.24		Agreement of Understanding, dated June 28, 2007, between Christopher H. B. Mills and SunLink Health Systems, Inc. (incorporated by reference from Exhibit 99.2 of the Company’s Report on Form 8-K dated July 16, 2007).
10.25		Form of Limited Consent Agreement, dated May 3, 2007, between SunLink Health Systems, Inc., SunLink Healthcare LLC, Dexter Hospital, LLC, Clanton Hospital, LLC, Southern Healthcare Corporation of Ellijay, Inc., Southern Health Corporation of Dahlonega, Inc., Southern Health Corporation of Houston, Inc., HealthMont, Inc., HealthMont of Georgia, Inc., HealthMont of Missouri, Inc., HealthMont, LLC, HealthMont of Missouri, LLC, SunLink Services, Inc., Optima Healthcare Corporation, and KRUG Properties, Inc., and Residential Funding Corporation, LLC. (incorporated by reference from Exhibit 10.26 of the Company’s Report on Form 10-K dated September 24, 2007).
10.26	*	Employment Letter, dated September 30, 2002, by and between SunLink Healthcare Corp. and Jack M. Spurr, Jr. (incorporated by reference from Exhibit 10.27 of the Company’s Report on Form 10-K dated September 24, 2007).
10.27		Credit Agreement between SunLink Health Systems, Inc., SunLink Healthcare LLC, Dexter Hospital LLC, Clanton Hospital LLC, Southern Health Corporation of Ellijay, Inc., Southern Health Corporation of Dahlonega, LLC, Southern Health Corporation of Houston, Inc., Southern Health Corporation of Jasper, Inc., HealthMont of Georgia, Inc., HealthMont, LLC, HealthMont of Missouri, LLC, SunLink Services, Inc., SunLink Homecare Services, LLC, KRUG Properties, Inc., Central Alabama Medical Associates, LLC, Dahlonega Clinic, LLC, Carmichael’s Cashway Pharmacy, Inc., Carmichael’s Nutritional Distributor, Inc., Breath of Life Home Health Equipment, Inc. and Chatham Credit Management III, LLC and Union Bank of California, N.A. dated August 1, 2008.
10.28	*	Amended and Restated Employment Agreement, dated August 29, 2008, between Harry R. Alvis and SunLink Health Systems, Inc.
21.1		List of Subsidiaries.
23.1		Consent of Cherry, Bekaert & Holland, L.L.P.
31.1		Chief Executive Officer’s Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
31.2		Chief Financial Officer’s Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
32.1		Chief Executive Officer’s Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Chief Financial Officer’s Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Management contract or compensatory plan or arrangement.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, SunLink Health Systems, Inc. has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 25th day of September, 2008.

SUNLINK HEALTH SYSTEMS, INC.
By:	/s/    ROBERT M. THORNTON, JR.
	Robert M. Thornton, Jr. Chairman and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of SunLink Health Systems, Inc. and in the capacities and on the dates indicated:

Name	Title	Date
/s/    ROBERT M. THORNTON, JR.         Robert M. Thornton, Jr.	Director, Chairman, President and Chief Executive Officer (principal executive officer)	September 25, 2008
/s/    MARK J. STOCKSLAGER         Mark J. Stockslager	Chief Financial Officer and Principal Accounting Officer (principal accounting officer)	September 25, 2008
/s/    STEVEN J. BAILEYS, D.D.S.         Steven J. Baileys, D.D.S.	Director	September 25, 2008
/s/    KAREN B. BRENNER         Karen B. Brenner	Director	September 25, 2008
/s/    GENE E. BURLESON         Gene E. Burleson	Director	September 25, 2008
/s/    C. MICHAEL FORD         C. Michael Ford	Director	September 25, 2008
/s/    MICHAEL HALL         Michael Hall	Director	September 25, 2008
/s/    CHRISTOPHER H. B. MILLS         Christopher H. B. Mills	Director	September 25, 2008
/s/    HOWARD E. TURNER         Howard E. Turner	Director	September 25, 2008

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders of

SunLink Health Systems, Inc.

We have audited the consolidated financial statements of SunLink Health Systems, Inc. and subsidiaries (the “Company”) as of June 30, 2008 and 2007 and for each of the three years in the period ended June 30, 2008 and have issued our report thereon dated September 25, 2008; such financial statements and report are included elsewhere in this Form 10-K. Our audits also included the consolidated financial statement schedules of the Company, listed in Item 15 for each of the three years in the period ended June 30, 2008. These consolidated financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.

/s/ Cherry, Bekaert & Holland, L.L.P.

Atlanta, Georgia

September 25, 2008

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SUNLINK HEALTH SYSTEMS, INC. AND SUBSIDIARIES

SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS

(amounts in thousands)

Column A	Column B		Column C					Column D			Column E
Allowance for Doubtful Accounts	Balance at Beginning of Year		Charged to Cost and Expenses			Currency Translation/ Acquisition/ (Disposition)		Deductions from Reserves			Balance at End of Year
Year Ended June 30, 2008	$	10,197	$	22,001		$	1,986	$	20,046		$	14,138
Year Ended June 30, 2007	$	8,931	$	19,580		$	0	$	18,314		$	10,197
Year Ended June 30, 2006	$	7,348	$	14,987		$	0	$	13,404		$	8,931
Deferred Income Tax Asset Valuation Allowance	Balance at Beginning of Year		Charged to Cost and Expenses			Currency Translation/ Acquisition/ (Disposition)		Deductions from Reserves			Balance at End of Year
Year Ended June 30, 2008	$	2,898	$	(848	)	$	0	$	760		$	2,810
Year Ended June 30, 2007	$	2,958	$	(185	)	$	0	$	125		$	2,898
Year Ended June 30, 2006	$	3,094	$	(153	)	$	0	$	(17	)	$	2,958

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INDEX TO EXHIBITS

2.1	Asset Purchase Agreement, dated April 9, 2004, by and among Piedmont Mountainside Hospital, Inc., Piedmont Medical Center, Inc., Southern Health Corporation of Jasper, Inc., Southern Health Corporation, SunLink Healthcare Corp. and SunLink Health Systems, Inc. (incorporated by reference from Exhibit 2.1 of the Company’s Report on Form 8-K dated April 14, 2004).
3.1	Amended Articles of Incorporation of SunLink Health Systems, Inc. (incorporated by reference from Exhibit 3.1 of the Company’s Report on Form 10-Q for the quarter ended September 30, 2001).
3.2	Code of Regulations of SunLink Health Systems, Inc., as amended (incorporated by reference from Exhibit 3.2 of the Company’s Report on Form 10-Q for the quarter ended September 30, 2001).
3.3	Certificate of Amendment to Amend Article Fourth of the Amended Articles of Incorporation of SunLink Health Systems, Inc. dated February 13, 2004 (incorporated by reference from Exhibit 3.1 of the Company’s Report on Form 10-Q dated February 17, 2004).
4.1	Shareholder Rights Agreement dated as of February 8, 2004, between SunLink Health Systems, Inc. and Wachovia Bank, N.A., as Rights Agent (incorporated by reference from Exhibit 4.1 of the Company’s Report on Form 8-K dated February 10, 2004).
10.1*	1995 Incentive Stock Option Plan (incorporated by reference from Exhibit 10.3 of the Company’s Report on Form 10-K for the year ended March 31, 1996).
10.2	Rent Review Memorandum between Rootmead Limited, Beldray Limited and KRUG International (UK) Limited dated August 30, 2000 (incorporated by reference from Exhibit 10.1 of the Company’s Report on Form 10-Q dated September 30, 2001).
10.3	Counterpart/Reversionary Lease between Rootmead Limited, Beldray Limited and KRUG International (UK) Limited dated August 30, 2000 (incorporated by reference from Exhibit 10.2 of the Company’s Report on Form 10-Q dated September 30, 2001).
10.4	Pre-emption Agreement between Rootmead Limited, Beldray Limited and KRUG International (UK) Limited dated August 30, 2000 (incorporated by reference from Exhibit 10.3 of the Company’s Report on Form 10-Q dated September 30, 2001).
10.5	Lease between Barton Industrial Park Limited, Beldray Limited and Butterfield-Harvey Limited dated June 8, 1979 (incorporated by reference from Exhibit 10.4 of the Company’s Report on Form 10-Q dated September 30, 2001).
10.6*	2001 Long-Term Stock Option Plan (incorporated by reference from Exhibit 10.5 of the Company’s Report on Form 10-Q dated September 30, 2001).
10.7*	2001 Outside Directors’ Stock Ownership and Stock Option Plan (incorporated by reference from Exhibit 10.6 of the Company’s Report on Form 10-Q dated September 30, 2001).
10.8	Agreement relating to the sale and purchase of the whole of the issued share capital of Beldray Limited dated 30 August, 2001, between Bradley International Holdings Limited and Marshall Cooper and John Clegg (incorporated by reference from Exhibit 10.1 of the Company’s Report on Form 8-K dated October 15, 2001).
10.9	Variation relating to the sale and purchase of the whole of the issued share capital of Beldray Limited dated 30 August, 2001, dated 3 October, 2001, between Bradley International Holdings Limited and Marshall Cooper and John Clegg (incorporated by reference from Exhibit 10.2 of the Company’s Report on Form 8-K dated October 15, 2001).
10.10*	Employment Agreement, dated May 13, 2008, between SunLink Homecare Services, LLC and George D. Shaunnessy (incorporated by reference from Exhibit 10.30 of SunLink’s Form 8-K dated May 19, 2008).

80

10.11*	Employment Letter, dated April 30, 2001, by and between SunLink Health Systems, Inc. and Mark Stockslager (incorporated by reference from Exhibit 10.29 of SunLink’s Form 10-Q for the quarter ended September 30, 2005).
10.12*	Employment Letter, dated February 1, 2001, by and between SunLink Healthcare Corp. and Jerome Orth (incorporated by reference from Exhibit 10.30 of SunLink’s Form 10-Q for the quarter ended September 30, 2005).
10.13	Credit Agreement between SunLink Health Systems, Inc., SunLink Healthcare LLC, Dexter Hospital, LLC, Clanton Hospital, LLC, Southern Healthcare Corporation of Ellijay, Inc., Southern Health Corporation of Dahlonega, Inc., Southern Health Corporation of Houston, Inc., HealthMont, Inc., HealthMont of Georgia, Inc., HealthMont of Missouri, Inc., HealthMont, LLC, HealthMont of Missouri, LLC, SunLink Services, Inc., Optima Healthcare Corporation, and KRUG Properties, Inc., and Residential Funding Corporation dated October 15, 2004 (incorporated by reference from Exhibit 10.73 of the Company’s Report on Form 8-K dated October 21, 2004).
10.14	Form of Revolving Note between SunLink Health Systems, Inc., SunLink Healthcare LLC, Dexter Hospital, LLC, Clanton Hospital, LLC, Southern Healthcare Corporation of Ellijay, Inc., Southern Health Corporation of Dahlonega, Inc., Southern Health Corporation of Houston, Inc., HealthMont, Inc., HealthMont of Georgia, Inc., HealthMont of Missouri, Inc., HealthMont, LLC, HealthMont of Missouri, LLC, SunLink Services, Inc., Optima Healthcare Corporation, and KRUG Properties, Inc., and Residential Funding Corporation dated October 15, 2004 (incorporated by reference from Exhibit 10.74 of the Company’s Report on Form 8-K dated October 21, 2004).
10.15	Form of Term Loan A Note between SunLink Health Systems, Inc., SunLink Healthcare LLC, Dexter Hospital, LLC, Clanton Hospital, LLC, Southern Healthcare Corporation of Ellijay, Inc., Southern Health Corporation of Dahlonega, Inc., Southern Health Corporation of Houston, Inc., HealthMont, Inc., HealthMont of Georgia, Inc., HealthMont of Missouri, Inc., HealthMont, LLC, HealthMont of Missouri, LLC, SunLink Services, Inc., Optima Healthcare Corporation, and KRUG Properties, Inc., and Residential Funding Corporation dated October 15, 2004 (incorporated by reference from Exhibit 10.75 of the Company’s Report on Form 8-K dated October 21, 2004).
10.16	Form of Term Loan B Note between SunLink Health Systems, Inc., SunLink Healthcare LLC, Dexter Hospital, LLC, Clanton Hospital, LLC, Southern Healthcare Corporation of Ellijay, Inc., Southern Health Corporation of Dahlonega, Inc., Southern Health Corporation of Houston, Inc., HealthMont, Inc., HealthMont of Georgia, Inc., HealthMont of Missouri, Inc., HealthMont, LLC, HealthMont of Missouri, LLC, SunLink Services, Inc., Optima Healthcare Corporation, and KRUG Properties, Inc., and Residential Funding Corporation dated October 15, 2004 (incorporated by reference from Exhibit 10.76 of the Company’s Report on Form 8-K dated October 21, 2004).
10.17	Form of Security Agreement between SunLink Health Systems, Inc., SunLink Healthcare LLC, Dexter Hospital, LLC, Clanton Hospital, LLC, Southern Healthcare Corporation of Ellijay, Inc., Southern Health Corporation of Dahlonega, Inc., Southern Health Corporation of Houston, Inc., HealthMont, Inc., HealthMont of Georgia, Inc., HealthMont of Missouri, Inc., HealthMont, LLC, HealthMont of Missouri, LLC, SunLink Services, Inc., Optima Healthcare Corporation, and KRUG Properties, Inc., and Residential Funding Corporation dated October 15, 2004 (incorporated by reference from Exhibit 10.77 of the Company’s Report on Form 8-K dated October 21, 2004).
10.18	Form of Pledge Agreement between SunLink Health Systems, Inc., SunLink Healthcare LLC, Dexter Hospital, LLC, Clanton Hospital, LLC, Southern Healthcare Corporation of Ellijay, Inc., Southern Health Corporation of Dahlonega, Inc., Southern Health Corporation of Houston, Inc., HealthMont, Inc., HealthMont of Georgia, Inc., HealthMont of Missouri, Inc., HealthMont, LLC, HealthMont of Missouri, LLC, SunLink Services, Inc., Optima Healthcare Corporation, and KRUG Properties, Inc., and Residential Funding Corporation dated October 15, 2004 (incorporated by reference from Exhibit 10.78 of the Company’s Report on Form 8-K dated October 21, 2004).

81

10.19	Stock Purchase Agreement among SunLink Homecare Services, LLC, Carmichael’s Cashway Pharmacy, Inc., Theodore S. Carmichael and Judy Chiasson Carmichael dated April 22, 2008 (incorporated by reference from Exhibit 10.28 of the Company’s Report on Form 8-K dated April 29, 2008).
10.20*	Amended and Restated Employment Agreement, dated July 1, 2005, between Harry R. Alvis and SunLink Health Systems, Inc. (incorporated by reference from Exhibit 99.1 of the Company’s Report on Form 8-K dated December 8, 2005).
10.21*	Amended and Restated Employment Agreement, dated July 1, 2005, between Robert M. Thornton, Jr. and SunLink Health Systems, Inc. (incorporated by reference from Exhibit 99.1 of the Company’s Report on Form 8-K dated December 23, 2005).
10.22	Credit Agreement between SunLink Health Systems, Inc., SunLink Healthcare LLC, Dexter Hospital LLC, Clanton Hospital LLC, Southern Health Corporation of Ellijay, Inc., Southern Health Corporation of Dahlonega, LLC, Southern Health Corporation of Houston, Inc., Southern Health Corporation of Jasper, Inc., HealthMont of Georgia, Inc., HealthMont, LLC, HealthMont of Missouri, LLC, SunLink Services, Inc., SunLink Homecare Services, LLC, KRUG Properties, Inc., Central Alabama Medical Associates, LLC, Dahlonega Clinic, LLC, Carmichael’s Cashway Pharmacy, Inc., Carmichael’s Nutritional Distributor, Inc., Breath of Life Home Health Equipment, Inc. and Chatham Credit Management III, LLC dated April 23, 2008 (incorporated by reference from Exhibit 10.29 of the Company’s Report on Form 8-K dated April 29, 2008).
10.23	2005 Equity Incentive Plan (incorporated by reference from Exhibit 99.1 of the Company’s Report on Form S-8 dated September 20, 2006).
10.24	Agreement of Understanding, dated June 28, 2007, between Christopher H. B. Mills and SunLink Health Systems, Inc. (incorporated by reference from Exhibit 99.2 of the Company’s Report on Form 8-K dated July 16, 2007).
10.25	Form of Limited Consent Agreement, dated May 3, 2007, between SunLink Health Systems, Inc., SunLink Healthcare LLC, Dexter Hospital, LLC, Clanton Hospital, LLC, Southern Healthcare Corporation of Ellijay, Inc., Southern Health Corporation of Dahlonega, Inc., Southern Health Corporation of Houston, Inc., HealthMont, Inc., HealthMont of Georgia, Inc., HealthMont of Missouri, Inc., HealthMont, LLC, HealthMont of Missouri, LLC, SunLink Services, Inc., Optima Healthcare Corporation, and KRUG Properties, Inc., and Residential Funding Corporation, LLC. (incorporated by reference from Exhibit 10.26 of the Company’s Report on Form 10-K dated September 24, 2007).
10.26*	Employment Letter, dated September 30, 2002, by and between SunLink Healthcare Corp. and Jack M. Spurr, Jr. (incorporated by reference from Exhibit 10.27 of the Company’s Report on Form 10-K dated September 24, 2007).
10.27	Credit Agreement between SunLink Health Systems, Inc., SunLink Healthcare LLC, Dexter Hospital LLC, Clanton Hospital LLC, Southern Health Corporation of Ellijay, Inc., Southern Health Corporation of Dahlonega, LLC, Southern Health Corporation of Houston, Inc., Southern Health Corporation of Jasper, Inc., HealthMont of Georgia, Inc., HealthMont, LLC, HealthMont of Missouri, LLC, SunLink Services, Inc., SunLink Homecare Services, LLC, KRUG Properties, Inc., Central Alabama Medical Associates, LLC, Dahlonega Clinic, LLC, Carmichael’s Cashway Pharmacy, Inc., Carmichael’s Nutritional Distributor, Inc., Breath of Life Home Health Equipment, Inc. and Chatham Credit Management III, LLC and Union Bank of California, N.A. dated August 1, 2008.
10.28*	Amended and Restated Employment Agreement, dated August 29, 2008, between Harry R. Alvis and SunLink Health Systems, Inc.
21.1	List of Subsidiaries.
23.1	Consent of Cherry, Bekaert & Holland, L.L.P.

82

31.1	Chief Executive Officer’s Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
31.2	Chief Financial Officer’s Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
32.1	Chief Executive Officer’s Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Chief Financial Officer’s Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Management contract or compensatory plan or arrangement.

83

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders of

SunLink Health Systems, Inc.

We have audited the accompanying consolidated balance sheets of SunLink Health Systems, Inc. and subsidiaries (the “Company”) as of June 30, 2008 and 2007 and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended June 30, 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company and subsidiaries as of June 30, 2008 and 2007, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 2008, in conformity with accounting principles generally accepted in the United States of America.

/s/ Cherry, Bekaert & Holland, L.L.P.

Atlanta, Georgia

September 25, 2008

F-1

SUNLINK HEALTH SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS

JUNE 30, 2008 AND 2007

(All amounts in thousands)

	2008			2007
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	1,716		$	814
Receivables—net		20,052			14,537
Inventory		4,711			2,826
Deferred income tax asset		5,449			4,672
Prepaid expenses and other		3,244			2,930
Total current assets		35,172			25,779
PROPERTY, PLANT, AND EQUIPMENT—At cost
Land		2,256			2,256
Buildings and improvements		32,322			28,813
Equipment and fixtures		36,627			31,108
		71,205			62,177
Less accumulated depreciation		19,985			14,854
Property, plant, and equipment—net		51,220			47,323
NONCURRENT ASSETS:
Intangible assets—net		13,427			863
Goodwill		9,453			2,944
Pension asset		136			216
Other noncurrent assets		2,216			718
Total noncurrent assets		25,232			4,741
TOTAL ASSETS	$	111,624		$	77,843
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	8,691		$	8,512
Revolving advances		3,900			4,700
Third-party payor settlements		1,664			3,668
Current maturities of long-term debt		1,844			875
Current maturities of subordinated long-term debt		150			—
Accrued payroll and related taxes		6,012			4,748
Income taxes		555			82
Current liabilities of Mountainside Medical Center		600			599
Accrued employee medical claims		643			596
Other accrued expenses		3,010			2,875
Total current liabilities		27,069			26,655
LONG-TERM LIABILITIES:
Long-term debt		33,118			7,661
Subordinated long-term debt		2,850			—
Noncurrent deferred income tax liabilities		3,132			2,927
Noncurrent liability for professional liability risks		2,506			2,415
Other noncurrent liabilities		2,090			2,161
Total long-term liabilities		43,696			15,164
COMMITMENTS AND CONTINGENCIES
Minority Interest		615			—
SHAREHOLDERS’ EQUITY:
Preferred Shares, authorized and unissued, 2,000 shares
Common Shares, no par value; authorized, 12,000 shares; issued and outstanding, 7,850, shares at June 30, 2008 and 7,510 shares at June 30, 2007		3,966			3,755
Additional paid-in capital		11,310			8,904
Retained earnings		25,551			23,941
Accumulated other comprehensive loss		(583	)		(576	)
Total shareholders’ equity		40,244			36,024
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	111,624		$	77,843

See notes to consolidated financial statements.

F-2

SUNLINK HEALTH SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF EARNINGS

FOR THE YEARS ENDED JUNE 30, 2008, 2007 AND 2006

(All amounts in thousands, except per share amounts)

	Years Ended
	June 30, 2008			June 30, 2007			June 30, 2006
Net revenues	$	158,431		$	143,645		$	135,576
Costs and Expenses:
Cost of goods sold		4,571			—			—
Salaries, wages and benefits		73,852			70,475			67,037
Provision for bad debts		22,013			19,580			14,987
Supplies		14,615			15,479			14,275
Purchased services		9,961			9,081			8,687
Other operating expenses		19,872			17,424			17,111
Rents and leases expense		2,630			2,792			2,452
Depreciation and amortization		5,512			4,400			3,400
		153,026			139,231			127,949
Operating profit		5,405			4,414			7,627
Other income (expense):
Interest expense		(2,114	)		(1,462	)		(1,146	)
Interest income		72			69			75
Loss on early repayment of debt		(267	)		—			—
Earnings from continuing operations before income taxes		3,096			3,021			6,556
Income tax expense		1,087			1,444			2,375
Earnings from continuing operations		2,009			1,577			4,181
Loss from discontinued operations, net of income taxes		(393	)		(181	)		(272	)
Net earnings	$	1,616		$	1,396		$	3,909
Earnings per share:
Continuing operations:
Basic	$	0.26		$	0.21		$	0.58
Diluted	$	0.26		$	0.20		$	0.53
Discontinued operations:
Basic	$	(0.05	)	$	(0.02	)	$	(0.04	)
Diluted	$	(0.05	)	$	(0.02	)	$	(0.03	)
Net earnings:
Basic	$	0.21		$	0.19		$	0.54
Diluted	$	0.21		$	0.18		$	0.50
Weighted-average common shares outstanding:
Basic		7,605			7,397			7,258
Diluted		7,855			7,810			7,858

See notes to consolidated financial statements.

F-3

SUNLINK HEALTH SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

FOR THE YEARS ENDED JUNE 30, 2008, 2007 AND 2006

(All amounts in thousands)

	Common Shares			Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
	Shares	Amount
JUNE 30, 2005	7,198		3,599		7,589		18,636			(523	)		29,301
Net earnings							3,909						3,909
Foreign currency translation adjustment										(59	)		(59	)
Minimum pension liability adjustment, net of tax of $174										338			338
Total comprehensive income													4,188
Share-based compensation					577								577
Common shares issued	117		59		227								286
JUNE 30, 2006	7,315		3,658		8,393		22,545			(244	)		34,352
Net earnings							1,396						1,396
Foreign currency translation adjustment										(95	)		(95	)
Minimum pension liability adjustment, net of tax of $143										(237	)		(237	)
Total comprehensive income													1,064
Share-based compensation					353								353
Common shares issued including tax benefits	195		97		158								255
JUNE 30, 2007	7,510		3,755		8,904		23,941			(576	)		36,024
Net earnings							1,616						1,616
Cumulative effect of FIN 48 implementation							(6	)					(6	)
Foreign currency translation adjustment										12			12
Minimum pension liability adjustment, net of tax of $12										(19	)		(19	)
Total comprehensive income													1,603
Share-based compensation					477								477
Common shares issued	422		211		1,929								2,140
JUNE 30, 2008	7,932	$	3,966	$	11,310	$	25,551		$	(583	)	$	40,244

See notes to consolidated financial statements.

F-4

SUNLINK HEALTH SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED JUNE 30, 2008, 2007 AND 2006

(All amounts in thousands)

	Years Ended
	June 30, 2008			June 30, 2007			June 30, 2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings	$	1,616		$	1,396		$	3,909
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		5,512			4,400			3,400
Stock-based compensation		477			362			633
Deferred income taxes		(572	)		(379	)		(155	)
Non cash loss on early repayment of debt		267			—			—
Change in assets and liabilities:
Receivables		(464	)		1,958			(1,946	)
Inventory		(17	)		(249	)		(227	)
Prepaid expenses and other assets		307			(498	)		(1,136	)
Accounts payable and accrued expenses		(2,899	)		(1,267	)		350
Income taxes		(472	)		(178	)		(885	)
Third-party payor settlements		(2,004	)		148			(68	)
Net cash provided by (used in) discontinued operations		(71	)		(944	)		631
Net cash provided by operating activities		1,680			4,749			4,506
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition, less cash acquired		(18,811	)		—			—
Expenditures for property, plant, and equipment		(8,337	)		(9,037	)		(8,012	)
Proceeds from sale of minority interest		615			—			—
Net cash used in investing activities		(26,533	)		(9,037	)		(8,012	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common shares		139			246			231
New long term debt		35,000			—			—
Payment of long-term debt—continuing operations		(8,584	)		(928	)		(922	)
Revolving advances, net		(800	)		4,700			—
Net cash provided by (used in) financing activities		25,755			4,018			(691	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		902			(270	)		(4,197	)
CASH AND CASH EQUIVALENTS:
Beginning of year		814			1,084			5,281
End of year	$	1,716		$	814		$	1,084
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Income taxes	$	904		$	1,725		$	3,273
Interest, net of amounts capitalized	$	1,978		$	1,423		$	1,136
Noncash investing and financing activities—
Assets acquired under capital lease obligations	$	—		$	72		$	272
Subordinated debt issued for acquisition	$	3,000		$	—		$	—
Common shares issued for acquisition	$	2,000		$	—		$	—
Property, plant and equipment acquired but not yet paid	$	—		$	1,382		$	—

See notes to consolidated financial statements.

F-5

SUNLINK HEALTH SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE YEARS ENDED JUNE 30, 2008, 2007 AND 2006

(All amounts in thousands, except share and per share amounts)

1. BUSINESS OPERATIONS AND CORPORATE STRATEGY

Business Operations

SunLink Health Systems, Inc. (“SunLink”, “we”, “our”, “ours”, “us” or the “Company”) is a provider of healthcare services in certain rural and exurban markets in the United States. SunLink’s business is composed of two business segments:

• Healthcare Facilities, which consists of

– Our seven community hospitals which have a total of 402 licensed beds;

– Our three nursing homes, each of which is located in adjacent to a corresponding SunLink community hospital which have a total of 261 licensed beds; and

– Our four home health agencies each of which operates for a corresponding SunLink community hospital.

• Specialty Pharmacy, which consists of

– Specialty pharmacy services;

– Durable medical equipment;

– Institutional pharmacy services; and

– Retail pharmacy products and services, all of which are conducted in rural markets.

SunLink has conducted its healthcare facilities business since 2001 and its specialty pharmacy operations since April 2008. Our Specialty Pharmacy Segment is operated through SunLink ScriptsRx, LLC and is composed of a specialty pharmacy business acquired in April 2008 with four service lines.

Strategy

SunLink’s business strategy for our healthcare facilities is to focus our efforts on internal growth of our seven hospitals and three nursing homes, supplemented by growth from selected rural and exurban healthcare facility acquisitions, including but not limited to hospitals, nursing homes and home health agencies. During the year ended June 30, 2008, we concentrated our healthcare facilities efforts on the operations and improvement of our existing hospitals. During the current fiscal year, we have evaluated certain rural and exurban hospitals and healthcare facilities, which were for sale and monitored other selected rural and exurban healthcare acquisition targets we believed might become available for sale. We continue to engage in similar evaluation and monitoring activities with respect to rural and exurban hospitals and healthcare facilities, which are or may become available for acquisition.

Our hospital facilities operations efforts are focused on internal growth, with our primary operational strategy being to improve the profitability of our hospitals by reducing out-migration of patients, recruiting physicians, expanding services and implementing and maintaining effective cost controls.

Our acquisition strategy for our pharmacy business is to acquire such business in rural or exurban markets where the acquisition is complementary to our existing pharmacy services and in new rural and exurban markets where the scale of the acquisition is sufficient to provide a foundation to grow Specialty Pharmacy in that area.

F-6

SUNLINK HEALTH SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Strategic Alternatives

On November 8, 2007, we announced that we had received an unsolicited conditional acquisition proposal from Resurgence Health Group, LLC which purported to offer a cash price of $7.50 per share for substantially all the outstanding shares of SunLink, subject to a number of conditions. On January 16, 2008, we announced that we had retained Stephens Inc. for the purpose of advising our Board of Directors in connection with an evaluation of the Company’s strategic alternatives, including, among others, the proposal by Resurgence Health Group, LLC. Since retaining Stephens, SunLink has explored a number of strategic alternatives, none of which to date has been judged by our Board to be superior in terms of price and execution risk to continuing as an independent company and pursuing SunLink’s existing business plans. To continue the evaluation on an on-going basis, the Board has formed a standing Strategic Alternatives Committee of the Board of Directors to, among other things, conduct periodic evaluations of the Company’s strategic alternatives. Investors are cautioned that no inference should be drawn from the existence of such committee and its charter with respect to the probability that the Company will engage in any transaction as a result of the periodic evaluation of strategic alternatives, including with respect to any proposal previously submitted or which in the future may be re-submitted or newly presented to the Company.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation—The consolidated financial statements include the accounts of SunLink and its domestic and foreign subsidiaries, all of which are 100% owned except for one hospital that is 83% owned. All significant intercompany transactions and balances have been eliminated.

Management Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Some of the more significant estimates made by management involve reserves for adjustments to net patient service revenues, evaluation of the recoverability of assets, including accounts receivable, and the assessment of litigation and contingencies, including income taxes and related tax asset valuation allowances, all as discussed in more detail in the remainder of these notes to the consolidated financial statements. Actual results could differ materially from these estimates.

Net Patient Service Revenue—SunLink has agreements with third-party payors that provide for payments at amounts different from established charges. Payment arrangements vary and include prospectively determined rates per discharge, reimbursed costs, discounted charges and per diem payments. Patient service revenues are reported as services are rendered at the estimated net realizable amounts from patients, third-party payors, and others. Estimated net realizable amounts are estimated based upon contracts with third-party payors, published reimbursement rates, and historical reimbursement percentages pertaining to each payor type. Estimated reductions in revenues to reflect agreements with third-party payors and estimated retroactive adjustments under such reimbursement agreements are accrued during the period the related services are rendered and are adjusted in future periods as interim and final settlements are determined. Significant changes in reimbursement levels for services under government and private programs could significantly impact the estimates used to accrue such revenue deductions. At June 30, 2008, there were no material claims or disputes with third-party payors.

Charity Care—SunLink provides care to patients who meet certain criteria under its charity care policy without charge or at amounts less than its established rates. Because SunLink does not pursue collection of

F-7

SUNLINK HEALTH SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

amounts determined to qualify as charity, they are not reported as revenue. SunLink provided $5,699, $5,062, and $2,992, of charity care in the fiscal years ended June 30, 2008, 2007 and 2006, respectively.

Concentrations of Credit Risk—SunLink grants unsecured credit to its patients, most of who reside in the service area of SunLink’s facilities and are insured under third-party agreements. Because of the geographic diversity of SunLink’s facilities and nongovernmental third-party payors, Medicare and Medicaid accounts represent SunLink’s only significant concentrations of credit risk. For SunLink’s healthcare facilities segment, Medicare net revenues were approximately 42%, 40%, and 39% of net revenues for the years ended June 30, 2008, 2007, and 2006, respectively. For SunLink’s healthcare facilities segment, Medicaid was approximately 14%, 14%, and 16% of net revenues for the years ended June 30, 2008, 2007, and 2006, respectively. For SunLink’s healthcare facilities segment, Medicare receivables were approximately 40% of receivable—net at June 30, 2008 while Medicaid receivables were approximately 17% of receivable—net at the same date.

Cash and Cash Equivalents—Cash and cash equivalents consist of highly liquid financial instruments, which have original maturities of three months or less. Cash is deposited with commercial banks and may have deposits totaling amounts in excess of the Federally insured limits from time to time.

Inventory—Inventory consists of medical and pharmacy supplies. Medical supplies are valued at the lower of cost or market, using the first-in, first-out method. Pharmacy supplies are stated at the lower of cost (standard cost method), or market. Use of this method does not result in a material difference from the methods required by generally accepted accounting principles in the United States of America.

Allowance for Doubtful Accounts—Substantially all of SunLink’s receivables result from providing healthcare services to hospital facility patients and from providing pharmacy services and products to clients. Accounts receivable are reduced by an allowance for doubtful accounts estimated to become uncollectible in the future. For its Healthcare Facilities, the Company calculates an allowance percentage based generally upon its historical collection experience for each type of payor. The allowance amount is computed by applying allowance percentages to receivable amounts included in specific payor categories. Significant changes in reimbursement levels for services under government and private programs could significantly impact the estimates used to determine the allowance for doubtful accounts. Accounts receivable are written off after all collection efforts have failed, normally within six months of billing. For its Pharmacy Operations, the Company calculates an allowance percentage based on past credit history with customers and their current financial condition. Accounts receivable are written off against the allowance for doubtful accounts when they are deemed uncollectible.

Property, Plant, and Equipment—Property, plant, and equipment, including capital leases, are recorded at cost. Depreciation is recognized over the estimated useful lives of the assets, which range from 5 to 45 years, on a straight-line basis. Generally, furniture and fixtures are depreciated over 5 to 10 years, machinery and equipment over 10 years, and buildings over 25 to 45 years. Leasehold improvements and leased machinery and equipment are depreciated over the lease term or estimated useful life, whichever is shorter, of the asset and range from 5 to 15 years. Expenditures for major renewals and replacements are capitalized. Expenditures for maintenance and repairs are charged to operating expense as incurred. When property items are retired or otherwise disposed of, amounts applicable to such items are removed from the related asset and accumulated depreciation accounts and any resulting gain or loss is credited or charged to income. Depreciation expense totaled $5,202, $4,279, and $3,373, for the years ended June 30, 2008, 2007 and 2006, respectively.

Risk Management—SunLink is exposed to various risks of loss from medical malpractice and other claims and casualties; theft of, damage to, and destruction of assets; business interruption; errors and omissions;

F-8

SUNLINK HEALTH SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

employee injuries and illnesses; natural disasters (including earthquakes and hurricanes); and employee health, dental and accident benefits. Commercial insurance coverage is purchased for a portion of claims arising from such matters. When, in management’s judgment, claims are sufficiently identified, a liability is accrued for estimated costs and losses under such claims, net of estimated insurance recoveries.

By virtue of the acquisition of its initial six hospitals, SunLink assumed responsibility for professional liability claims reported after the February 1, 2001 acquisition date and the previous owner retained responsibility for all known and filed claims prior to the acquisition date. SunLink purchased claims-made commercial insurance for acts prior to and after the acquisition date. The recorded liability for professional liability risks includes an estimate of the liability for claims incurred prior to February 1, 2001, but reported after February 1, 2001, and for claims incurred after February 1, 2001. These amounts are based on actuarially determined amounts.

In connection with the acquisition of HealthMont and its two hospitals, SunLink assumed responsibility for all professional liability claims. HealthMont had purchased claims-made commercial insurance for claims made prior to the acquisition and SunLink purchased claims-made commercial insurance for claims made after the acquisition. The recorded liability for professional liability risks includes an estimate of liability for claims assumed at the acquisition and for claims incurred after the acquisition. These amounts are based on actuarially determined amounts.

The Company self-insures for workers’ compensation risk. The estimated liability for workers’ compensation risk includes estimates of the ultimate costs for both reported claims and claims incurred but not reported. The Company was self-insured for employee health risks until October 1, 2005 when a fully-insured employee health insurance plan was entered into.

The Company accrues an estimate of losses resulting from workers’ compensation and professional liability claims to the extent they are not covered by insurance. These accruals are estimated quarterly based upon management’s review of claims reported and historical loss data.

The Company records a liability pertaining to pending litigation if it is probable a loss has been incurred and accrues the most likely amount of loss based on the information available. If no amount within the range of losses estimated from the information available is more likely than any other amount in the range of loss, the minimum amount in the range of loss is accrued. Because of uncertainties surrounding the nature of litigation and the ultimate liability to SunLink, if any, we revise estimated losses as additional facts become known.

Long-lived Assets—SunLink periodically assesses the recoverability of assets based on its expectations of future profitability and the undiscounted cash flows of the related operations and, when circumstances dictate, adjusts the carrying value of the asset to estimated fair value. These factors, along with management’s plans with respect to the operations, are considered in assessing the recoverability of long-lived assets.

Goodwill—SunLink accounts for goodwill from business combinations in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.” Goodwill represents the cost of acquired businesses in excess of fair value of identifiable tangible and intangible net assets purchased. SFAS No. 142 recognizes that goodwill has an indefinite life and is not subject to periodic amortization. However, goodwill is tested at least annually for impairment, using a fair value methodology, in lieu of amortization. Definite-life intangible assets are amortized on a straight-line basis over their estimated useful lives, generally for periods ranging from 2 to 30 years. SunLink evaluates the reasonableness of the useful lives of intangible assets and they are tested for impairment as conditions warrant according to SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”

F-9

SUNLINK HEALTH SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Income Taxes—SunLink accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes”. SFAS No. 109 requires an asset and liability approach and the recognition of deferred tax assets and liabilities for expected future tax consequences. SFAS No. 109 generally requires consideration of all expected future events other than proposed enactments of changes in the income tax law or rates. When management determines, using factors identified in SFAS No. 109, that it is more likely than not that a portion of or none of the net deferred tax asset will be realized through future taxable earnings or implementation of tax planning strategies, management provides a valuation allowance for the portion not expected to be realized.

Share-Based Compensation—The Company issues common share options to key employees and directors under various shareholder-approved plans. Prior to July 1, 2005, the Company accounted for its share-based employee compensation under the measurement and recognition provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and related Interpretations, as permitted by SFAS No. 123 “Accounting for Stock-Based Compensation”. The Company did not record any share-based employee compensation expense for options granted under its option plans prior to July 1, 2005, as all options granted under these plans had exercise prices equal to the fair market value of the Company’s common shares on the date of grant. Effective July 1, 2005, the Company adopted SFAS No. 123 (R) “Share-Based Payment”, using the modified prospective transition method. Under that transition method, compensation expense that the Company recognizes beginning on July 1, 2005, includes: (i) compensation expense for all share options granted prior to, but not yet vested as of, July 1, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123; and (ii) compensation expense for share options granted on or after July 1, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R). Results for prior periods are not required nor have they been restated for the adoption of SFAS No. 123(R). Share-based compensation expense of $477 and $353 for the fiscal years ended June 30, 2008 and 2007, respectively, was recorded in salaries, wages and benefits expense for share options issued to employees and directors of the Company in accordance with SFAS No. 123(R). The fair value of the share options was estimated using the Black-Scholes option pricing model. The historical volatility is used to calculate the estimated volatility in this model.

Fair Value of Financial Instruments—The recorded values of cash, receivables, and payables approximate their fair values because of the relatively short maturity of these instruments. Similarly, the fair value of SunLink’s long-term debt is estimated to approximate its recorded values due to its relatively short maturity period—seven years.

Earnings (Loss) per Share—Earnings (loss) per common share is based on the weighted-average number of common shares and dilutive common share equivalents outstanding for each period presented, including vested and unvested shares issued under SunLink’s 1995 Incentive Stock Option Plan, 2001 Long-Term Stock Option Plan, 2001 Outside Directors’ Stock Ownership and Stock Option Plan, 2005 Equity Incentive Plan and any outstanding share purchase warrants issued by SunLink. Common share equivalents represent the dilutive effect of the assumed exercise of the outstanding stock options and warrants.

Recent Accounting Standards—In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140,” which simplifies accounting for certain hybrid financial instruments by permitting fair value remeasurement for any hybrid instrument that contains an embedded derivative that otherwise would require bifurcation and eliminates a restriction on the passive derivative instruments that a qualifying special-purpose entity may hold. SFAS No. 155 is effective for all financial instruments acquired, issued or subject to a remeasurement (new basis) event occurring after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company adopted SFAS No. 155 at the beginning of the fiscal year ending June 30, 2008. There was no effect on the consolidated statement of earnings from the adoption of this statement.

F-10

SUNLINK HEALTH SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets—an amendment of FASB Statement No. 140”, which establishes, among other things, the accounting for all separately recognized servicing assets and servicing liabilities by requiring that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable, and permits the entity to choose either the amortization method or fair value method for subsequent measurement. SFAS No. 156 is effective as of the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company adopted SFAS No. 156 at the beginning of the fiscal year ending June 30, 2008. There was no effect on the consolidated statement of earnings from the adoption of this statement.

In June 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109”, which establishes that the financial statement effects of a tax position taken or expected to be taken in a tax return are to be recognized in the financial statements when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. This Interpretation is effective for fiscal years beginning after December 15, 2006.

The Company adopted the provisions of FIN 48 on July 1, 2007. It requires that a change in judgment related to prior years’ tax positions be recognized in the quarter of such change. As a result of the implementation of FIN 48, the Company recognized a liability for unrecognized tax benefits in the amount of $58 which was accounted for as the creation of a deferred tax asset as of July 1, 2007. A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:

Balance at July 1, 2007	$	58
Additions based on tax positions related to current year		23
Additions for tax positions of prior years		—
Reductions for tax positions of prior years		(23	)
Settlements		—
Balance at June 30, 2008	$	58

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. The Company is currently subject to a U.S. federal income tax examination for one tax year. Except for this examination, the Company is not subject to any current U.S. federal, state or local, or non-U.S. income tax examinations by tax authorities for any tax years. We believe that there is no tax jurisdiction in which the outcome of unresolved issues or claims is likely to be material to our financial position, cash flows or results of operations. We further believe that we have made adequate provision for all income tax uncertainties.

At July 1, 2007, our unrecognized tax benefits, the aggregate tax effect of differences between tax return positions and the benefits recognized in our financial statements as shown above, amounted to $58. This amount remained unchanged during the fiscal year ended June 30, 2008 at $58. If recognized, all of our unrecognized tax benefits would not reduce our income tax expense or effective tax rate except as such recognition related to the removal of the liability associated with interest classified as income tax expense. During 2008, certain factors could potentially reduce our unrecognized tax benefits, either because of the expiration of open statutes of limitation or modifications to our intercompany accounting policies and procedures. Of these tax positions, none relate to positions that would affect our total tax provision or effective tax rate (except as such recognition related to the removal of the liability associated with interest classified as income tax expense).

We classify interest on tax deficiencies as tax expense and also classify income tax penalties as tax expense. At July 1, 2007, before any tax benefits, our accrued interest on unrecognized tax benefits amounted to $6 and

F-11

SUNLINK HEALTH SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

we had recorded no related accrued penalties. The amount of accrued interest increased by $4 during the fiscal year ended June 30, 2008 to $10.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”, which establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating the effect of adopting SFAS No. 157 on the Company’s consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”, which provides companies with an option to report selected financial assets and liabilities at fair value. It also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating the effect of adopting SFAS No. 159 on the Company’s consolidated financial statements.

In March 2007, the FASB issued SFAS No. 141R, “Business Combinations”, which is intended to improve, simplify, and converge internationally the accounting for business combinations and the reporting of noncontrolling interests in consolidated financial statements. Under SFAS No. 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS No. 141R includes a substantial number of new disclosure requirements. SFAS No. 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company will comply with the new SFAS No. 141R requirements for any future business combination transactions.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an Amendment of ARB No. 51”, which establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 is intended to improve the relevance, comparability, and transparency of financial information provided to investors by requiring all entities to report noncontrolling (minority) interests in subsidiaries in the same way as equity in the consolidated financial statements. SFAS No. 160 includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company is currently evaluating the effect of adopting SFAS No. 160 on the Company’s consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161 “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133”, which requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting. SFAS No 161 is effective for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. This Statement encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The Company is currently evaluating the effect of adopting SFAS No. 161 on the Company’s consolidated financial statements.

F-12

SUNLINK HEALTH SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In April 2008, the FASB issued FSP No. FAS 142-3, “Determination of the Useful Life of Intangible Assets”. This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets”. The Company is required to adopt FSP 142-3 on September 1, 2009, earlier adoption is prohibited. The guidance in FSP 142-3 for determining the useful life of a recognized intangible asset shall be applied prospectively to intangible assets acquired after adoption, and the disclosure requirements shall be applied prospectively to all intangible assets recognized as of, and subsequent to, adoption. The Company is currently evaluating the effect of FSP 142-3 on its consolidated statements.

In May 2008, the FASB issued SFAS No. 162, “Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). This statement is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements of nongovernmental entities that are presented in conformity with GAAP. This statement will be effective 60 days following the U.S. Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendment to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” The adoption of this Statement is not expected to have a material impact on the Company’s consolidated financial statements.

Reclassifications—Certain amounts in prior periods’ consolidated financial statements have been reclassified to conform to the current period’s presentation.

3. CARMICHAEL’S CASHWAY PHARMACY ACQUISITION

On April 22, 2008, SunLink acquired Carmichael’s Cashway Pharmacy, Inc. (“Carmichael”). The Carmichael acquisition purchase price was $24,000, consisting of $19,000 cash, seller subordinated debt of $3,000 and $2,000 in SunLink shares (334 shares). Carmichael had annual revenues of approximately $42,200 for its year ended December 31, 2007 and has been in business for over 35 years. Carmichael provides services to patients in rural communities in southwest Louisiana and eastern Texas. The operating results of Carmichael are included in our Specialty Pharmacy segment. A summary of the preliminary purchase price allocation for this acquisition is as follows:

	April 22, 2008
Current assets	$	7,119
Property, plant and equipment		2,159
Goodwill		6,509
Intangible assets		12,859
Other non-current assets		3
Total assets acquired		28,649
Current liabilities		3,633
Net assets acquired		25,016
Less:
Acquisition costs		1,016
Debt		3,000
Stock		2,000
Cash consideration	$	19,000

F-13

SUNLINK HEALTH SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Carmichael Acquisition agreement includes the following provision: If the SunLink shares given as part of the purchase price are sold by Carmichael’s former owner (“Seller”) on or prior to the first anniversary of the Acquisition closing date and the selling price per share is more than $1.00 per share below the value fixed at the closing, SunLink shall pay to Seller the amount necessary to cover the deficiency less $1.00 per share. This provision created a put option derivative for SunLink valued at $35 at the Acquisition date. The derivative value was $58 at June 30, 2008. The increase in value during the fiscal year was charged to interest expense.

Finite-lived identifiable assets are amortized on a straight-line basis. The following are the intangible assets acquired and their respective amortizable lives:

	Amount		Amortizable Life
Trade Name	$	5,400	0 years
Customer Relationships		6,400	12 years
Medicare License		769	15 years
Noncompetition Agreement		290	2 years
	$	12,859

Pro Forma Financial Information

The following table presents selected unaudited financial information of our company, as if the acquisition of Carmichael had occurred on July 1, 2006. The pro forma results are derived from the historical financial results of Carmichael for all periods presented and are not necessarily indicative of the results that would have occurred had the acquisitions been consummated on July 1, 2006.

	Unaudited Fiscal years ended June 30,
	2008		2007
Revenues	$	194,929	$	179,641
Earnings (loss) from Continuing Operations		1,426		(378	)
Earnings (loss) per share from Continuing Operations, diluted	$	0.18	$	(0.05	)

4. DISCONTINUED OPERATIONS

All of the businesses discussed below are reported as discontinued operations and the condensed consolidated financial statements for all prior periods have been adjusted to reflect this presentation.

Housewares Segment—Beldray Limited (“Beldray”), SunLink’s U.K. housewares manufacturing subsidiary, was sold on October 5, 2001 to two of its managers for nominal consideration. KRUG International U.K. Ltd. (“KRUG UK”), an inactive U.K. subsidiary of SunLink, entered into a guarantee (“the Beldray Guarantee”), at a time when it owned Beldray. The Beldray Guarantee covers Beldray’s obligations under a lease of a portion of Beldray’s former manufacturing location. In October 2004, KRUG UK received correspondence from the landlord of such facility stating that the rent payment of 94,000 British pounds ($181) for the fourth quarter of 2004 had not been paid by Beldray and requesting payment of such amount pursuant to the Beldray Guarantee. In January 2005, KRUG UK received further correspondence from the landlord demanding two quarterly rent payments totaling 188,000 British pounds ($362) under the Beldray Guarantee. In January 2005, the landlord filed a petition in the High Court of Justice Chancery Division to wind up KRUG UK under the provisions of the Insolvency Act of 1986 and KRUG UK was placed into involuntary liquidation by the High

F-14

SUNLINK HEALTH SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Court in February 2005. After that date, the court-appointed liquidator of KRUG UK has made certain inquiries to SunLink regarding the activities of KRUG UK prior to the liquidation to which SunLink responded.

On August 6, 2007, the liquidator of KRUG UK made an application in the Birmingham County Court in Birmingham, England, in which the liquidator is seeking a declaration by the court that a transfer of certain funds in 2001 from KRUG UK to SunLink in connection with the purchase of certain preferred stock of another subsidiary of SunLink and the making of a loan to SunLink, and certain forgiveness of debt to SunLink by KRUG UK was improper, among other things, as KRUG UK was then effectively insolvent and that the approval of such transfers by the then directors of KRUG UK resulted in a breach of their fiduciary duties. The liquidator seeks to have the court order the former directors or, in the alternative, the Company, to account for, repay or restore such funds plus interest to the liquidator of KRUG UK. On December 4, 2007, the case went to mediation and the mediation was adjourned pending the liquidator’s investigations into the circumstances surrounding items raised by both parties. In connection with the allegations in the application of breach of fiduciary duty by the directors of KRUG UK in approving such transfer of funds, SunLink has indemnification obligations to the former directors of KRUG UK. SunLink denies any liability to KRUG UK other than to it in Krug UK’s status as a preferred stockholder and for the unpaid balance on the promissory note. SunLink, through its United Kingdom counsel, intends to vigorously defend against the liquidator’s claims. See the “Legal Proceedings” subsection in Note 12 “Commitments and Contingencies” which follows for additional disclosure of the application.

SunLink’s non-current liability reserves for discontinued operations at June 30, 2008, included a reserve for a portion of the Beldray Guarantee, which would include certain amounts sought pursuant to the application made by the liquidator of KRUG UK. Such reserve was based upon management’s estimate, after consultation with its property consultants and legal counsel, of the cost to satisfy the Beldray Guarantee in light of KRUG UK’s limited assets and before taking into account any other claims against KRUG UK. The maximum potential obligation of KRUG UK for rent under the Beldray Guarantee is estimated to be approximately $8,400. SunLink expensed $306 in the fiscal year ended June 30, 2008 on legal costs to defend against the claim. As a result of this claim and the U.K. liquidation proceedings against KRUG UK, SunLink expects KRUG UK to be wound-up in liquidation in the UK and has fully reserved for any assets of KRUG UK.

Mountainside Medical Center—On June 1, 2004, SunLink completed the sale of its Mountainside Medical Center (“Mountainside”) hospital in Jasper, Georgia, for approximately $40,000 pursuant to the terms of an asset sale agreement. Under the terms of the agreement, SunLink sold the operations of Mountainside, which included substantially all the property, plant and equipment and the supplies inventory. SunLink retained Mountainside’s working capital except for supplies inventory. The retained liabilities of Mountainside are shown in current liabilities of Mountainside Medical Center on the consolidated balance sheet. The pre-tax losses in the fiscal year ended June 30, 2008 with respect to the former Mountainside operations resulted primarily from legal expenses related to a claim made by the buyer of Mountainside and a counterclaim made by SunLink. See the “Legal Proceedings” subsection in Note 14 “Commitments and Contingencies” which follows for additional disclosure of the claims.

Life Sciences and Engineering Segment—SunLink retained a defined benefit retirement plan which covered substantially all of the employees of this segment when it was sold in fiscal 1998. Effective February 28, 1997, the plan was amended to freeze participant benefits and close the plan to new participants. Pension expense and related tax benefit or expense is reflected in the results of operations for this segment for the fiscal years ended June 30, 2008, 2007 and 2006.

Industrial Segment—In fiscal 1989, SunLink discontinued the operations of its industrial segment and subsequently disposed of substantially all related net assets. However, obligations may remain relating to product liability claims for products sold prior to the disposal.

F-15

SUNLINK HEALTH SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Discontinued Operations Reserves—Over the past 19 years SunLink has discontinued operations carried on by its former Mountainside Medical Center and its former industrial, U.K. leisure marine, life sciences and engineering, and European child safety segments, as well as the U.K. housewares segment. SunLink’s reserves relating to discontinued operations of these segments represent management’s best estimate of SunLink’s possible liability for property, product liability and other claims for which SunLink may incur liability. These estimates are based on management’s judgments, using currently available information, as well as, in certain instances, consultation with its insurance carriers, third party advisors and legal counsel. While estimates have been based on the evaluation of available information, it is not possible to predict with certainty the ultimate outcome of many contingencies relating to discontinued operations. SunLink intends to continue to adjust its estimates of the reserves as additional information is developed and evaluated. However, management believes that the final resolution of these contingencies will not have a material adverse impact on the financial position, cash flows or results of operations of SunLink.

The following is a summary of the loss reserves for discontinued operations:

	Years Ended June 30,
	2008			2007			2006
Beginning balance	$	1,396		$	1,301		$	1,298
Usage		(181	)		(17	)		(32	)
Exchange differences		111			112			35
	$	1,326		$	1,396		$	1,301

Results of discontinued operations were as follows:

Discontinued Operations—Summary Statement of Earnings Information

	Years Ended June 30,
	2008			2007			2006
Earnings (loss) from discontinued operations:
Housewares Segment:
Loss from operations	$	(306	)	$	(76	)	$	—
Income tax benefit		(96	)		(30	)		—
Loss from Housewares Segment after taxes		(210	)		(46	)		—
Mountainside Medical
Loss from operations		(216	)		(171	)		(564	)
Income tax benefit		(67	)		(68	)		(174	)
Loss from Mountainside Medical Center after taxes		(149	)		(103	)		(390	)
Life sciences and engineering segment:
Loss from operations		(49	)		(53	)		(56	)
Income tax benefit		(15	)		(21	)		(174	)
Earnings (loss) from life sciences and engineering segment after income taxes		(34	)		(32	)		118
Earnings (loss) from discontinued operations	$	(393	)	$	(181	)	$	(272	)

F-16

SUNLINK HEALTH SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

5. NET REVENUES AND RECEIVABLES

SunLink has agreements with third-party payors that provide for payments at amounts different from its established rates. A summary of the payment arrangements with major third-party payors follows:

Medicare—Inpatient acute care services rendered to Medicare program beneficiaries are paid at prospectively determined rates per Diagnosis Related Group. These rates vary according to a patient classification system that is based on clinical, diagnostic, and other factors. Inpatient nonacute services, certain outpatient services, and defined capital and medical education costs related to Medicare beneficiaries are paid based on a cost reimbursement methodology. Cost reimbursable items are paid at a tentative rate, with final settlement determined after submission of annual cost reports and audits thereof by the Medicare fiscal intermediary.

Medicaid—Inpatient and outpatient services rendered to Medicaid program beneficiaries are reimbursed either under contracted rates or reimbursed for cost reimbursable items at a tentative rate, with final settlement determined after submission of annual cost reports and audits thereof by the Medicaid fiscal intermediary.

SunLink also has entered into payment agreements with certain commercial insurance carriers, health maintenance organizations, and preferred provider organizations. The basis for payment under these agreements includes prospectively determined rates per discharge, discounts from established charges, and prospectively determined daily rates.

Summary information for receivables is as follows:

	June 30,
	2008			2007
Patient accounts receivable (net of contractual allowances)	$	34,190		$	24,734
Less allowance for doubtful accounts		(14,138	)		(10,197	)
Patient accounts receivable (net of allowances)	$	20,052		$	14,537

Net revenues included $1,259, $266, and $312, for the years ended June 30, 2008, 2007 and 2006, respectively, for the settlements and filings of prior year Medicare and Medicaid cost reports.

6. INVENTORY

Consisted of the following:

	June 30,
	2008		2007
Healthcare Facilities Segment Supplies Inventory	$	2,865	$	2,826
Specialty Pharmacy Segment Goods Held For Sale		1,846		—
	$	4,711	$	2,826

7. GOODWILL AND INTANGIBLE ASSETS

SunLink has goodwill related to its Healthmont and Carmichael acquisitions. We have intangible assets related to these acquisitions, as well. We also have intangible assets related to three Healthcare Facilities Segment Clinic purchases.

F-17

SUNLINK HEALTH SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Intangible assets consist of the following, net of amortization:

	June 30,
	2008		2007
Healthcare Facilities Segment	$	706	$	863
Specialty Pharmacy Segment		12,721		—
	$	13,427	$	863

Amortization expense was $310, $121, and $27, for the fiscal years ended June 30, 2008, 2007 and 2006, respectively.

Goodwill consists of the following:

	June 30,
	2008		2007
Healthcare Facilities Segment	$	2,944	$	2,944
Specialty Pharmacy Segment		6,509		—
	$	9,453	$	2,944

Annual amortization for the next five years and thereafter is as follows:

2009		896
2010		789
2011		615
2012		613
2013		612
2014 and thereafter		4,502
Total	$	8,027

8. LONG-TERM DEBT

Long-term debt consisted of the following:

	June 30,
	2008			2007
Term Loan	$	34,854		$	—
SunLink Term Loan A		—			8,222
Capital lease obligations		108			314
Total		34,962			8,536
Less current maturities		(1,844	)		(875	)
	$	33,118		$	7,661

SunLink Credit Facilities—On October 15, 2004, SunLink entered into a $30,000 five-year senior secured credit facility (“2004 Credit Facility”) comprised of a revolving line of credit of up to $15,000 with an interest

F-18

SUNLINK HEALTH SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

rate at LIBOR plus 2.91%, a $10,000 term loan (“SunLink Term Loan A”) with an interest rate at LIBOR plus 3.91% and a $5,000 term loan facility (“SunLink Term Loan B”) with an interest rate at LIBOR plus 3.91%.

On April 23, 2008, SunLink repaid all outstanding balances and terminated the 2004 Credit Facility with a portion of the proceeds of a new $47,000 seven-year senior secured credit facility. The Company did not incur any early termination penalties in connection with the termination of the 2004 Credit Agreement. A loss on early repayment of debt of approximately $267 was recorded in April 2008 as a result of writing-off remaining unamortized prepaid debt cost of the 2004 credit facility.

A new $47,000 seven-year senior secured credit facility (“2008 Credit Facility”) was entered into on April 23, 2008 and is comprised of a revolving line of credit of up to $12,000 with an interest rate at LIBOR plus 3.50% (6.25% at June 30, 2008) (the “Revolving Loan”) and a $35,000 term loan with an interest rate at LIBOR plus 5.07% (7.82% at June 30, 2008) (the “Term Loan”). In the 2008 Credit Facility, LIBOR is defined as the Thirty-Day published rate, not to be less than 2.75%, however it may not exceed 5.50%. The Revolving Loan and the Term Loan were immediately available to the Company for borrowing at April 23, 2008. The total availability of credit under all components of the credit facility is keyed to the level of SunLink’s earnings, which, based upon the Company’s estimates, provided for current borrowing capacity, before any draws, of approximately $47,000 on the closing date. At closing, the entire $35,000 term loan and $5,500 of the revolving loan were drawn. The Company used the initial proceeds of the loans in the amount of $40,500 to repay outstanding debt, including the 2004 Credit Agreement, to pay the cash portion of the purchase price for the Carmichael acquisition, to pay fees and expenses thereunder and for general corporate purposes. Costs and fees related to execution of the credit facility were $2,115. The fees will be amortized over seven years at approximately $300 a year and are recorded in other assets and other non-current assets. Amortization expense and accumulated amortization was approximately $61 for the fiscal year ended June 30., 2008. The Credit Facility is secured by a first priority security interest in substantially all real and personal property of the Company and its consolidated domestic subsidiaries, including a pledge of all of the equity interests in such subsidiaries.

Annual required payments of debt for the next five years and thereafter are as follows:

2009		1,844
2010		1,764
2011		1,750
2012		1,750
2013		1,750
2014 and thereafter		26,104
Total	$	34,962

The contractual commitments for interest on long-term debt are shown in the following table. The interest rate on variable interest debt is calculated at the interest rate at June 30, 2008.

2009		2,671
2010		2,521
2011		2,383
2012		2,247
2013		2,110
2014 and thereafter		2,041
Total	$	13,973

F-19

SUNLINK HEALTH SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

9. SUBORDINATED LONG-TERM DEBT

Subordinated long-term debt consisted of the following:

	June 30,
	2008			2007
Carmicheal	$	3,000		$	—
Total		3,000			—
Less current maturities		(150	)		—
	$	2,850		$	—

Carmichael’s Loan—On April 22, 2008, SunLink Scripts Rx, LLC (formerly know as SunLink Homecare Services LLC) entered into a $3,000 promissory note agreement with an interest rate of 8% with the former owners of Carmichael as part of the acquisition purchase price. The note is payable in semi-annual installments of $150 beginning on April 22, 2009 with the remaining balance of $1,200 due April 22, 2015. Interest is payable in arrears semi-annually on the six-month anniversary of the issuance of the note. The note is guaranteed by SunLink Health Systems, Inc. for the payment of the note and accrued interest. The note is subordinate to the 2008 Credit Facility.

Annual required payments of debt for the next five years and thereafter are as follows:

2009		150
2010		300
2011		300
2012		300
2013		300
2014 and thereafter		1,650
Total	$	3,000

The contractual commitments for interest on the subordinated long-term debt are shown in the following table.

2009		234
2010		216
2011		192
2012		168
2013		144
2014 and thereafter		132
Total	$	1,086

10. SHAREHOLDERS’ EQUITY

Employee and Directors Stock Option Plans—On November 7, 2005, the 2005 Equity Incentive Plan was approved by SunLink’s shareholders at the Annual Meeting of Shareholders. This Plan permits the grant of options to employees, non-employee directors and service providers of SunLink for the purchase of up to 800,000 common shares plus the number of unused shares under the 2001 Plans, which is 30,675, by November

F-20

SUNLINK HEALTH SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2015. This Plan restricts the number of Incentive Stock Options to 700,000 shares and Restricted Stock Awards to 200,000 shares. The combination of Incentive Stock Options and Restricted Stock Awards cannot exceed 800,000 shares plus the number of unused shares under the 2001 Plans. Each award of Restricted Shares reduces the number of share options to be granted by four option shares for each Restricted Share awarded. No options have been exercised under this plan. Options outstanding under this Plan were 781,605, 241,906 and 237,200 at June 30, 2008, 2007 and 2006, respectively.

On August 20, 2001, the 2001 Outside Directors’ Stock Ownership and Stock Option Plan was approved by SunLink’s shareholders at the Annual Meeting of Shareholders. This Plan permitted the grant of options to outside directors of SunLink for the purchase of up to 90,000 common shares through March 2006. Options for 90,000 shares were granted by March 2006. Options for 7,500 shares have been exercised under this plan. Options outstanding under this Plan were 82,500 at June 30, 2008, 2007 and 2006, respectively.

On February 28, 2001, the 2001 Long-Term Stock Option Plan was approved by the Board of Directors of SunLink. The 2001 Long-Term Stock Option Plan permitted the grant of options to officers and other key employees for the purchase of up to 810,000 common shares through February 2006. Options totaling 299,734 shares under this plan have been exercised. Options outstanding under this Plan were 322,875, 413,625, and 634,150 at June 30, 2008, 2007 and 2006, respectively.

SunLink’s 1995 Incentive Stock Option Plan permitted the grant of options to officers and key employees to purchase up to 250,000 common shares through May 2005. Vesting and option expiration periods for options granted are determined by the Board of Directors but may not exceed 10 years. Options for 246,000 shares have been exercised and options for 4,000 shares were outstanding at June 30, 2008. Options outstanding under this Plan were 4,000, 4,000 and 10,000 at June 30, 2008, 2007 and 2006, respectively.

The activity of Company’s shares options is shown in the following table:

	Number of Shares		Weighted- Average Exercise Price		Range of Exercise Prices
Options outstanding June 30, 2005	836,900		$	2.44	$	1.50—8.95
Granted	254,500			9.64		8.15—10.24
Exercised	(117,625	)		1.97		1.50—5.50
Forfeited	(15,925	)		8.45		3.00—9.63
Options outstanding June 30, 2006	957,850			4.31		1.50—8.95
Granted	55,000			6.79		6.55—7.15
Exercised	(213,234	)		1.75		1.50—6.57
Forfeited	(57,585	)		8.93		2.80—9.63
Options outstanding June 30, 2007	742,031			4.82		1.50—10.24
Granted	563,999			7.30		5.86—8.00
Exercised	(86,500	)		1.61		1.50—3.00
Forfeited	(28,550	)		7.49		3.82—9.63
Options outstanding June 30, 2008	1,190,980		$	6.20	$	1.50—$10.24
Options exercisable, June 30, 2006	623,618		$	2.05	$	1.50—$6.57
Options exercisable, June 30, 2007	569,227		$	3.67	$	1.50—$10.24
Options exercisable, June 30, 2008	663,071		$	4.95	$	1.50—$10.24

F-21

SUNLINK HEALTH SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The weighted-average fair value of each option granted during the years ended June 30, 2008, 2007, and 2006 was $1.86, $2.14, and $4.01, respectively. The fair value of each stock option grant was estimated using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants during the years ended June 30, 2008, 2007 and 2006, respectively: estimated volatility of 33%, 28%, and 46%; risk-free interest rate of 3.9%, 4.7%, and 4.5%; dividend yield of 0% for all years; and an expected life of 5.2 years, 4.5 years, and 4.0 years. The historical volatility is used to calculate the estimated volatility. The expected lives of the stock option grants were determined to be the midpoint between the vesting period and the contractual term of the grants. The estimate of the forfeited options in the compensation expense calculation was determined as the weighted-average forfeitures for the last three years. For the years ended June 30, 2008 and 2007, the Company recognized $477 and $353, respectively, of compensation expense for share options issued. Prior to the July 1, 2005 adoption of SFAS No. 123 (R), no compensation expense was recognized for the share option plans under the intrinsic value method of accounting for share option costs since the exercise price of the options was not less than the fair value of SunLink’s common shares at the grant date. As of June 30, 2008, there was $698 of unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plans. That cost is expected to be recognized over a weighted average period of 1.98 years. See Note 2—“Summary of Significant Accounting Policies Recent Accounting Standards” for further discussion of SFAS No. 123 (R).

Information with respect to stock options outstanding and exercisable at June 30, 2008 is as follows:

Exercise Prices	Number Outstanding	Weighted-Average Remaining Contractual Life (in years)	Number Exercisable
$  1.50	197,500	1.46	197,500
$  2.50	25,000	2.48	25,000
$  2.65	12,000	2.69	12,000
$  2.80	2,000	3.86	2,000
$  2.90	37,500	5.45	37,500
$  2.91	21,000	1.86	21,000
$  3.00	14,625	1.66	14,625
$  4.00	5,000	2.59	5,000
$  5.48	5,750	1.98	4,313
$  5.86	160,000	6.81	70,000
$  6.25	21,000	9.24	—
$  6.39	6,000	1.72	6,000
$  6.55	33,000	8.88	33,000
$  6.57	77,000	1.64	77,000
$  7.15	14,000	3.64	3,500
$  8.00	369,999	8.25	33,999
$  9.63	183,606	3.26	117,634
$  9.95	4,000	2.35	2,000
$10.24	2,000	2.45	1,000
	1,190,980	5.13	663,071

The total intrinsic value of options exercised during the years ended June 30, 2008, 2007 and 2006 were $277, $976, and $933, respectively. As of June 30, 2008, the aggregate intrinsic value of options outstanding and shares exercisable were $883 and $883, respectively. As of June 30, 2007, the aggregate intrinsic value of options outstanding and shares exercisable were $1,773 and $1,754, respectively.

F-22

SUNLINK HEALTH SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Warrants—SunLink issued 999,487 warrants to shareholders of record on December 23, 1995. For each five common shares held, SunLink distributed one warrant for the purchase of one common share. The warrants entitled the holders to purchase common shares for $8.625 per share through their extended expiration date of January 31, 2007. SunLink had the ability to reduce the purchase price at any time. On November 19, 2003, the Company reduced the warrant exercise price to $2.50 per share from November 20, 2003 to April 20, 2004. The reduced warrant exercise price of $2.50 was approximately 90% of the average closing price of common shares for the ten trading days prior to November 19, 2003. Common shares totaling 753,031 were purchased by warrant exercises through January 31, 2007 when the remaining outstanding warrants expired.

On March 23, 2003, in connection with a loan under which SunLink borrowed $700, SunLink issued a warrant exercisable for 17,500 common shares for a nominal exercise price of $0.01 per share. On October 3, 2003, in connection with the HealthMont Term Note under which SunLink borrowed $2,300 from the same lender, SunLink issued a warrant exercisable for 57,500 common shares for a nominal exercise price of $0.01 per share. Both warrants were exercised in December 2004 and 75,000 common shares were issued. On October 3, 2003, in connection with the HealthMont acquisition and assumption of certain HealthMont debt, SunLink issued a warrant exercisable for 26,723 common shares for a nominal exercise price of $0.01 per share. This warrant was repurchased by the Company in October 2004 for $100.

Shareholder Rights Plan—On February 8, 2004, the Board of Directors of the Company declared a dividend of one Series A Voting Preferred Purchase Price Right (a “Right”) for each outstanding common share of the Company to record owners of common shares at the close of business on February 10, 2004. Rights outstanding were 6,517,000 at the close of business on February 10, 2004. The Board of Directors declared these Rights to protect shareholders from coercive or otherwise unfair takeover tactics. The Rights should not interfere with any merger or other business combinations approved by the Board of Directors. The Rights expire on February 8, 2014 unless the Company redeems them at an earlier date. The Company may redeem the Rights in whole, but not in part, at a price of $0.001 per Right, at any time prior to a public announcement that a person has become an Acquiring Person.

Accumulated Other Comprehensive Income (Loss)—Information with respect to the balances of each classification within accumulated other comprehensive income (loss) is as follows:

	Foreign Currency Translation Adjustment			Minimum Pension Liability Adjustment			Accumulated Other Comprehensive Income (Loss)
June 30, 2005	$	(185	)	$	(338	)	$	(523	)
Current period change		(59	)		338			279
June 30, 2006		(244	)		—			(244	)
Current period change		(95	)		(237	)		(332	)
June 30, 2007		(339	)		(237	)		(576	)
Current period change		12			(19	)		(7	)
June 30, 2008	$	(327	)	$	(256	)	$	(583	)

F-23

SUNLINK HEALTH SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

11. INCOME TAXES

The provisions (benefits) for income taxes on continuing operations are as follows:

	Year ended June 30,
	2008			2007			2006
Domestic:
Current	$	1,935		$	1,629		$	2,522
Deferred		(848	)		(185	)		(147	)
Total income tax expense	$	1,087		$	1,444		$	2,375

Deferred tax assets recorded in the balance sheets are as follows:

	June 30,
	2008			2007
Domestic:
Net operating loss carryforward	$	2,561		$	2,690
Provision for loss on discontinued operations		61			61
Depreciation expense		(4,282	)		(4,164	)
Allowances for receivables		2,940			2,208
Accrued expenses		2,449			2,504
Pension liabilities		(63	)		(81	)
Other		173			137
		3,839			3,355
Less valuation allowance		(1,522	)		(1,610	)
Total domestic deferred tax assets		2,317			1,745
Foreign:
Net operating loss carryforwards		111			111
Tax prepayments not currently utilized		840			840
Restructuring		337			337
		1,288			1,288
Less valuation allowance		(1,288	)		(1,288	)
Total foreign deferred tax assets		0			0
Net deferred tax assets	$	2,317		$	1,745

The differences between income taxes at the Federal statutory rate and the effective tax rate were as follows:

	Years Ended June 30,
	2008			2007			2006
Income taxes at Federal statutory rate	$	1,053		$	1,027		$	2,229
Changes in valuation allowance—continuing operations		(79	)		(54	)		(136	)
U.S. state income taxes		(88	)		172			255
Share option expense		207			120			196
Other		(6	)		179			(169	)
Total income tax expense (benefit)—continuing operations	$	1,087		$	1,444		$	2,375

F-24

SUNLINK HEALTH SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company provided a $1,522 deferred tax valuation allowance for domestic assets as of June 30, 2008 so that the net domestic deferred tax assets were $2,317 as June 30, 2008. Based upon management’s assessment, it is more likely than not that a portion of its domestic deferred tax asset, primarily its domestic net operating losses subject to limitation, would not be recovered. Accordingly, the Company adjusted its valuation allowance to $1,522 representing that portion of the net domestic tax asset which may not be utilized. The Company provided a $1,610 deferred tax valuation allowance for domestic assets as of June 30, 2007 so that the net domestic deferred tax assets were $1,745 as June 30, 2007. The domestic net operating loss carryforwards expire in 2021.

The Company provided a deferred tax valuation allowance for foreign tax assets as of June 30, 2008 and 2007, respectively, so that the net foreign deferred tax assets are $0. Based upon management’s assessment, it is more likely than not that none of its foreign deferred tax asset will be realized thorough future taxable earning or implementation of tax planning strategies. Usage of the foreign tax assets are considered less likely than not due to the current non-operating status of the Company’s foreign subsidiaries.

12. MINORITY INTEREST

On February 1, 2008, SunLink sold 17% of the Chilton Medical Center in Clanton, Alabama, to individual physicians practicing at that facility. The minority interest reported reflects these physicians ownership interest at June 30, 2008. The results of operations for the period from February 1, 2008 to June 30, 2008 did not impact the physicians’ ownership interest.

13. EMPLOYEE BENEFITS

Defined Benefit Plans—Prior to SunLink’s acquisition of its initial hospitals, it historically maintained defined benefit retirement plans covering substantially all of its employees. No defined benefit plan is maintained for the community hospital segment employees. Benefits are based on years of service and level of earnings. SunLink funds the domestic plan, which is noncontributory, at a rate that meets or exceeds the minimum amounts required by the Employee Retirement Income Security Act of 1974.

Effective February 28, 1997, SunLink amended its domestic retirement plan to freeze participant benefits and close the plan to new participants. With the sale of SunLink’s life sciences and engineering segment businesses in the fiscal year ended March 31, 1999, net domestic pension expense is now classified as an expense of discontinued operations. During the years ended June 30, 2008 and 2007, SunLink recognized curtailment losses of $0 and $76, respectively, for partial plan settlement of pension obligations to vested former employees.

At June 30, 2008, the plan’s assets are invested 81% in cash and short term investments, 11% in equity investments and 8% in fixed income investments. The plan’s current investment policy of primarily investing in cash and short term investments is in response to the poor returns on investment of the past 5 years in the equity markets, the returns available in the fixed income markets and the possible need for immediate liquidity as participants retire or withdraw from the plan. The expected return on investment of 4.0% is based upon the plan’s historical return on assets. The plan expects to pay $54, $50, $61, $58 and $66 in pension benefits in the years ended June 30, 2009 though 2013, respectively. The plan expects to pay $374 in pension benefits for the years June 30, 2014 through 2018, in the aggregate. This assumes the plan participants elect to take monthly pension benefits as opposed to a lump sum payout when they reach age 65. The Company expects to make no contributions to the plan in the year ending June 30, 2009.

F-25

SUNLINK HEALTH SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The components of net pension expense for all plans (comprised solely of a domestic plan), excluding the curtailment losses above, were as follows:

	Years Ended June 30,
	2008			2007			2006
Service cost	$	0		$	0		$	0
Interest cost		70			80			74
Expected return on assets		(52	)		(54	)		(49	)
Amortization of prior service cost		31			27			31
Net pension expense	$	49		$	53		$	56
Weighted-average assumptions:
Discount rate		6.50	%		6.50	%		5.75	%
Expected return on plan assets		4.00	%		4.00	%		4.00	%
Rate of compensation increase		0.00	%		0.00	%		0.00	%

Summary information for the plans (comprised solely of a domestic plan) is as follows:

	2008			2007
Change in Benefit Obligation
Benefit obligation at the beginning of year	$	1,108		$	1,249
Interest cost		70			80
Actuarial (gain) loss		7			5
Benefits paid		(64	)		(258	)
Adjustment in cost of settlement		—			32
Benefit obligation at end of year	$	1,121		$	1,108
Change in Plan Assets
Fair value of plan assets at beginning of year	$	1,323		$	1,297
Actual return on plan assets		(2	)		64
Company contributions		—			220
Benefits paid		(64	)		(258	)
Fair value of plan assets at end of year	$	1,257		$	1,323
Funded status of the plans		136			215
Unrecognized actuarial loss		411			380
Prepaid benefit cost	$	547		$	595
Amounts Recognized in Consolidated Balance Sheets
Prepaid benefit cost	$	136		$	215
Accumulated other comprehensive income*		411			380
Net amount recognized	$	547		$	595

* Accumulated other comprehensive income represents pretax minimum pension liability adjustments.

F-26

SUNLINK HEALTH SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Defined Contribution Plan—In April 2001, SunLink adopted a defined contribution plan pursuant to IRS Section 401(k) covering substantially all domestic employees except for the employees of the two HealthMont hospitals. HealthMont had an existing 401(k) plan at the acquisition date which covered substantially all of the employees of the HealthMont hospitals. The HealthMont plan was merged into the SunLink plan in January 2005. SunLink matches a specified percentage of the employee’s contribution as determined periodically by its management. No matching of HealthMont employees’ contribution was made prior to the merger of the HealthMont plan into the SunLink plan. Plan expense was $280, $106, and $462, for the years ended June 30, 2008, 2007 and 2006, respectively.

14. COMMITMENTS AND CONTINGENCIES

Leases—The Company leases various land, buildings, and equipment under operating lease obligations having noncancelable terms ranging from one to 14 years. Rent expense was $2,630, $2,792, and $2,452, for the years ended June 30, 2008, 2007 and 2006, respectively. Minimum lease commitments as of June 30, 2008 are as follows:

Fiscal year ending June 30:
2009	$	2,502
2010		2,048
2011		1,128
2012		589
2013		315
Thereafter		1,400
Total minimum lease payments	$	7,982

Lease Guarantee Obligation—In the 2004 Healthmont acquisition, SunLink assumed a lease guarantee obligation of $500 for a facility the Company did not occupy. During the fiscal year ended June 30, 2008, we learned that the guarantee had been extinguished through an agreement between the leasor and the current leasee of the property. As a result, SunLink reversed the recorded liability for the guarantee of $500.

Physician Guarantees—At June 30, 2008 SunLink had a contract with one physician which contained guaranteed minimum gross receipts. Physician guarantee contracts entered into after January 1, 2006 will be accounted for under the provisions of FSP FIN 45-3. See Note 2—“Summary of Significant Accounting Policies—Recent Accounting Standards” for discussion of FSP FIN 45-3. For guarantee contracts entered into prior to the adoption of FSP FIN 45-3, SunLink expenses physician guarantees as they are determined to be due to the physician on an accrual basis. Each month the physician’s gross patient receipts are accumulated and the difference between the monthly guarantee and the physician’s actual gross receipts for the month is calculated. If the guarantee is greater than the receipts, the difference is accrued as a liability and an expense. The net guarantee amount is paid to the physician in the succeeding month. If the physician’s monthly receipts exceed the guarantee amount in subsequent months, then the overage is repaid to SunLink to the extent of any prior monthly guarantee payments and the liability and expense is reduced by the amount of the repayments. The physician with whom the guarantee agreement is made agrees to maintain his/her practice within the hospital geographic area for a specific period (normally three years) or he/she would be liable to repay all or a portion of the guarantee received. The physician’s liability for any guarantee repayment due to non-compliance with guarantee provisions will be collaterized by the physician’s patient accounts receivable and/or a promissory note from the physician. Included in Company’s consolidated balance sheet at June 30, 2008 is a liability of $130 for physician guarantees accounted for under the provisions of FSP FIN 45-3. SunLink expensed $747, $1,098, and $1,699, for

F-27

SUNLINK HEALTH SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

the fiscal years ended June 30, 2008, 2007 and 2006, respectively. Noncancelable commitments under these contracts as of June 30, 2008 are as follows:

Fiscal year ending June 30:
2009	$	139
2010		—
2011		—
2012		—
2013		—
Total	$	139

Capital Commitments—In August 2007, the Company received final approval of a Certificate of Need application with the State of Georgia to build a replacement hospital in Ellijay, Georgia. To date, SunLink has made no commitments related to the replacement hospital. However, SunLink exercised its option to purchase land, the seller failed to close, and SunLink and the seller of the land are currently in litigation and the outcome is uncertain. Cost for such property is approximately $3,300. Except for the Ellijay, Georgia land purchase, there are no other material future commitments for capital expenditures.

Other—SunLink’s business strategy is to focus its efforts on internal growth of its existing healthcare facilities and its pharmacy business, supplemented by growth from selected rural healthcare acquisitions, including but not limited to hospitals, nursing homes, home care businesses, and pharmacy businesses. Subject to the availability of debt and/or equity capital, SunLink’s internal growth may include replacement or expansion of its existing healthcare facilities and pharmacy business operations involving substantial capital expenditures, as well as the expenditure of significant amounts of capital for selected acquisitions.

Litigation—The Company is a party to claims and litigation incidental to its business, for which it is not currently possible to determine the ultimate liability, if any. Based on an evaluation of information currently available and consultation with legal counsel, management believes that resolution of such claims and litigation is not likely to have a material effect on the financial position, cash flows, or results of operations of the Company. The Company expenses legal costs as they are incurred.

On July 13, 2006, Piedmont Healthcare, Inc. (“PHI”) and Piedmont Mountainside Hospital, Inc. (“PMH”) (collectively, “Plaintiffs” or “Piedmont”) filed a Complaint in the Superior Court of Cobb County, Georgia, alleging breach of the Asset Purchase Agreement (the “Agreement”) dated as of April 9, 2004 by and among PMH, Piedmont Medical Center, Inc. (n/k/a ‘PMI”), Southern Health Corporation of Jasper, Inc. (“SHJI”), SunLink Healthcare LLC (formerly SunLink Healthcare Corp.), and SunLink (collectively, “Defendants” or “SunLink”) pursuant to which the Mountainside Medical Center was sold to PMH in June 2004. Specifically, Piedmont seek to have SunLink reimburse Piedmont for certain costs associated with an alleged indigent and charity care shortfall of Piedmont Mountainside Hospital (formerly Mountainside Medical Center) for the fiscal year ended June 30, 2004 demanded by the Georgia Department of Community Health (“DCH”). In addition, Piedmont seeks reimbursement for funds allegedly recouped from PMH by DCH in respect of Medicaid Cost Report settlements and adjustments for the reporting periods ending June 30, 2002, June 30, 2003 and May 31, 2004. Piedmont also seek a declaratory judgment to the effect that Piedmont may retain certain payments it has received from the DCH’s Indigent Care Trust Fund for Disproportionate Share Hospitals. Piedmont also seeks recovery of costs and attorney’s fees under the Agreement and Georgia law.

On August 11, 2006, SunLink filed an answer to the complaint asserting factual and legal defenses, along with a counterclaim. In the counterclaim, SunLink alleges that Piedmont breached the Agreement by failing to

F-28

SUNLINK HEALTH SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

reimburse SHJI for funds paid Piedmont from the DCH’s Indigent Care Trust Fund for Disproportionate Share Hospitals, which payments SunLink contend qualify as “excluded assets” not sold to Piedmont under the Agreement. SunLink also alleged that PMI breached its obligations to guaranty PMH’s payment and performance of its obligations under the Agreement. SunLink seeks a declaratory judgment regarding the parties’ rights in respect of the payments made from the Indigent Care Trust Fund. Finally, SunLink seeks to recover their costs and attorney’s fees under the Agreement and Georgia law. The Court has scheduled a hearing on all pending summary judgment and discovery motions for September 26, 2008.

SunLink denies that it has any liability to the Plaintiffs and intends to vigorously defend the claims asserted against SunLink in connection with the complaint and to vigorously pursue its counterclaim. While the ultimate outcome and materiality of the litigation cannot be determined, in management’s opinion the litigation will not have a material adverse effect on SunLink’s financial condition or results of operations.

As discussed in Note 4.—“Discontinued Operations”, SunLink sold its former U.K. housewares manufacturing subsidiary, Beldray Limited (“Beldray”), to two of its managers in October 2001. Beldray has since entered into administrative receivership and is under the administration of its primary lender. SunLink believes Beldray ceased to operate in October 2004.

On August 6, 2007 the liquidator in an insolvency proceeding in the United Kingdom involving SunLink’s former subsidiary KRUG International (UK) Limited (“KRUG UK”) made an application in The Birmingham County Court in Birmingham, England in which the liquidator is seeking a declaration by the court that a transfer of certain funds in 2001 from KRUG UK to SunLink in connection with the purchase of certain preferred stock of another subsidiary of SunLink, the making of a loan to SunLink, and certain forgiveness of debt to SunLink by KRUG UK Limited was improper as, among other things, KRUG UK was then effectively insolvent and that the approval of such transfers by the then directors of KRUG UK resulted in a breach of their fiduciary duties. The liquidator seeks to have the court order that the former directors or, in the alternative, SunLink , be required to account for, repay or restore such funds to the liquidator of KRUG UK. In connection with the allegations in the application of breach of fiduciary duty by the directors of KRUG UK in approving the transfer of such funds, SunLink has indemnification obligations to the former directors of KRUG UK. Each of the directors of KRUG UK and SunLink have now been served. SunLink denies any liability to KRUG UK other than to it in KRUG UK’s status as a preferred stockholder and for the unpaid balance on the promissory note. SunLink, through its United Kingdom counsel, intends to vigorously defend against the liquidator’s claims.

SunLink’s non-current liability reserves for discontinued operations at June 30, 2008, included a reserve for a portion of the Beldray Guarantee, which would be sought pursuant to the application made by the liquidator of KRUG UK. Such reserve was based upon management’s estimate, after consultation with its property consultants and legal counsel, of the cost to satisfy the Beldray Guarantee in light of KRUG UK’s limited assets and before taking into account any other claims against KRUG UK. The maximum potential obligation of KRUG UK for rent under the Beldray Guarantee is estimated to be approximately $8,400. SunLink expensed $306 in the fiscal year ended June 30, 2008 on legal costs to defend against the claim. As a result of this claim and the U.K. liquidation proceedings against KRUG UK, SunLink expects KRUG UK to be wound-up in liquidation in the UK and has fully reserved for any assets of KRUG UK.

Additional contingent obligations, other than with respect to our existing operations, include potential product liability claims for products manufactured and sold before the disposal of our discontinued industrial segment in fiscal year 1989 and for guarantees of certain obligations of former subsidiaries. We have provided an accrual at June 30, 2008 related to the Beldray Lease Guarantee, as discussed above. Based upon an evaluation of information currently available and consultation with legal counsel, management has not reserved any amounts for contingencies related to these liquidations.

F-29

SUNLINK HEALTH SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

SunLink is a party to claims and litigation incidental to its business, for which it is not currently possible to determine the ultimate liability, if any. Based on an evaluation of information currently available and consultation with legal counsel, management believes that resolution of such claims and litigation is not likely to have a material effect on the financial position, cash flows, or results of operations of the Company. The Company expenses legal costs as they are incurred.

The health care industry is subject to numerous laws and regulations of Federal, state, and local governments. Compliance with these laws and regulations, specifically those relating to the Medicare and Medicaid programs, can be subject to government review and interpretation, as well as regulatory actions unknown and unasserted at this time. Recently, Government activity has increased with respect to investigations and allegations concerning possible violations of regulations by health care providers, which could result in the imposition of significant fines and penalties, as well as significant repayments of previously billed and collected revenues from patient services. Management believes that the Company is in substantial compliance with current laws and regulations.

The Health Insurance Portability and Accountability Act (“HIPAA”) was enacted on August 21, 1996 to assure health insurance portability, reduce healthcare fraud and abuse, guarantee security and privacy of health information and enforce standards for health information. Organizations are required to be in compliance with HIPAA provisions which have compliance dates beginning in April 2003 and ending in May 2007. Organizations are subject to significant fines and penalties if found not to be in compliance with HIPAA.

15. RELATED PARTIES

A director of the Company and the Company’s secretary (who was a director of SunLink until November 2003 and is now director emeritus) are members of two different law firms, each of which provides services to SunLink. We have paid an aggregate of $1,154, $624, and $564 to these law firms in the fiscal years ended June 30, 2008, 2007 and 2006, respectively.

16. FINANCIAL INFORMATION BY SEGMENTS

Prior to the acquisition of Carmichael in April 2008, we operated as a single business segment. Under SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision-making group is composed of the chief executive officer and members of senior management. Our two reportable operating segments are Healthcare Facilities and Specialty Pharmacy.

We evaluate performance of our operating segments based on revenue and operating income (loss). Segment information for the fiscal year ended June 30, 2008 is as follows:

2008	Healthcare Facilities		Specialty Pharmacy		Corporate and Other			Total
Net Revenues from external customers	$	151,372	$	7,059	$	—		$	158,431
Operating income (loss)		9,641		558		(4,794	)		5,405
Depreciation and amortization		4,751		291		470			5,512
Assets		48,506		28,398		34,720			111,624
Expenditures for property, plant and equipment		7,943		110		284			8,337

F-30

SUNLINK HEALTH SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

17. EARNINGS PER SHARE

(Share Amounts in Thousands)

	Years Ended June 30,
	2008						2007						2006
	Amount			Per Share Amount			Amount			Per Share Amount			Amount			Per Share Amount
Earnings from continuing operations	$	2,009					$	1,577					$	4,181
Basic:
Weighted-average shares outstanding		7,605		$	0.26			7,397		$	0.21			7,258		$	0.58
Diluted:
Weighted-average shares outstanding		7,855		$	0.26			7,810		$	0.20			7,858		$	0.53
Earnings (loss) from discontinued operations	$	(393	)				$	(181	)				$	(272	)
Basic:
Weighted-average shares outstanding		7,605		$	(0.05	)		7,397		$	(0.02	)		7,258		$	(0.04	)
Diluted:
Weighted-average shares outstanding		7,855		$	(0.05	)		7,810		$	(0.02	)		7,858		$	(0.03	)
Net Earnings	$	1,616					$	1,396					$	3,909
Basic:
Weighted-average shares outstanding		7,605		$	0.21			7,397		$	0.19			7,258		$	0.54
Diluted:
Weighted-average shares outstanding		7,855		$	0.21			7,810		$	0.18			7,858		$	0.50
Weighted-average number of shares outstanding—basic		7,605						7,397						7,258
Effect of dilutive director, employee and guarantor options and outstanding common share warrants		250						413						600
Weighted-average number of shares outstanding—diluted		7,855						7,810						7,858

Share options of 886 for the year ended June 30, 2008 are not included in the computation of diluted earnings per share because their effect would be antidilutive. Share options of 197 for the year ended June 30, 2007 are not included in the computation of diluted earnings per share because their effect would be antidilutive. Share options of 25 for the year ended June 30, 2006 are not included in the computation of diluted earnings per share because their effect would be antidilutive.

F-31

SUNLINK HEALTH SYSTEMS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

18. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

(Share Amounts in Thousands)

The following selected quarterly data for the years ended June 30, 2008 and 2007, respectively, are unaudited.

		Fourth Quarter		Third Quarter		Second Quarter			First Quarter
NET REVENUE	Year Ended June 30, 2008	$	43,819	$	39,407	$	36,969		$	38,236
	Year Ended June 30, 2007	$	37,596	$	37,490	$	34,076		$	34,483
EARNINGS (LOSS) FROM CONTINUING OPERATIONS	Year Ended June 30, 2008		579		936		51			443
	Year Ended June 30, 2007		960		612		(463	)		468
NET EARNINGS (LOSS)	Year Ended June 30, 2008		427		829		(33	)		393
	Year Ended June 30, 2007		881		459		(494	)		550
EARNINGS (LOSS) PER SHARE:
Continuing operations
Basic	Year Ended June 30, 2008		0.07		0.12		0.01			0.06
	Year Ended June 30, 2007		0.13		0.08		(0.06	)		0.06
Diluted	Year Ended June 30, 2008		0.07		0.12		0.01			0.06
	Year Ended June 30, 2007		0.12		0.08		(0.06	)		0.06
Net earnings (loss):
Basic	Year Ended June 30, 2008		0.05		0.11		(0.00	)		0.05
	Year Ended June 30, 2007		0.12		0.06		(0.07	)		0.08
Diluted	Year Ended June 30, 2008		0.05		0.11		(0.00	)		0.05
	Year Ended June 30, 2007		0.12		0.06		(0.07	)		0.07
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING:
Basic	Year Ended June 30, 2008		7,850		7,544		7,515			7,513
	Year Ended June 30, 2007		7,509		7,403		7,346			7,328
Diluted	Year Ended June 30, 2008		8,049		7,796		7,789			7,789
	Year Ended June 30, 2007		7,804		7,790		7,346			7,830

F-32

EX-10.27

Exhibit 10.27

EXECUTION VERSION

AMENDED AND RESTATED CREDIT AGREEMENT

Between

SUNLINK HEALTH SYSTEMS, INC.,

SUNLINK HEALTHCARE, LLC,

DEXTER HOSPITAL, LLC,

CLANTON HOSPITAL, LLC,

SOUTHERN HEALTH CORPORATION OF ELLIJAY, INC.,

SOUTHERN HEALTH CORPORATION OF DAHLONEGA, INC.,

SOUTHERN HEALTH CORPORATION OF HOUSTON, INC.,

SOUTHERN HEALTH CORPORATION OF JASPER, INC.,

HEALTHMONT OF GEORGIA, INC.,

HEALTHMONT, LLC,

HEALTHMONT OF MISSOURI, LLC,

SUNLINK SERVICES, INC.,

SUNLINK HOMECARE SERVICES, LLC.,

KRUG PROPERTIES, INC.,

CENTRAL ALABAMA MEDICAL ASSOCIATES, LLC

DAHLONEGA CLINIC, LLC

CARMICHAEL’S CASHWAY PHARMACY, INC.,

CARMICHAEL’S NUTRITIONAL DISTRIBUTOR, INC., and

BREATH OF LIFE HOME HEALTH EQUIPMENT, INC.

(“Borrowers”)

And

THE OTHER PERSONS PARTY HERETO THAT

ARE DESIGNATED AS CREDIT PARTIES,

And

CHATHAM CREDIT MANAGEMENT III, LLC,

as Agent

UNION BANK OF CALIFORNIA, N.A.,

as Funding Agent

And

THE OTHER FINANCIAL INSTITUTIONS PARTY HERETO,

as Lenders

TABLE OF CONTENTS

ARTICLE I DEFINITIONS AND ACCOUNTING TERMS		1
Section 1.1	Defined Terms	1
Section 1.2	Accounting Terms and Calculations	27
Section 1.3	Computation of Time Periods	27
Section 1.4	Other Definitional Terms	27
ARTICLE II TERMS OF THE CREDIT FACILITIES		28
Section 2.1	Loans	28
Section 2.2	Procedure for Revolving Loans	29
Section 2.3	Records	29
Section 2.4	Interest Rates, Interest Payments and Default Interest	30
Section 2.5	Repayment	31
Section 2.6	Prepayments	31
Section 2.7	Mandatory Prepayment of Term Loan from Excess Cash Flow	32
Section 2.8	Optional Reduction of Revolving Commitment Amount or Termination of Revolving Commitment	33
Section 2.9	Revolving Commitment Fee	33
Section 2.10	Prepayment Fee	33
Section 2.11	Fee Letter	34
Section 2.12	Computation	34
Section 2.13	Payments	34
Section 2.14	Use of Loan Proceeds	35
Section 2.15	Adjustment of NCV	35
Section 2.16	Taxes	35
Section 2.17	Appraisals	36
Section 2.18	Wire Transfer Fee	36
Section 2.19	Application and Allocation of Payments	36
Section 2.20	Yield Protection	37
ARTICLE III CONDITIONS PRECEDENT		37
Section 3.1	Conditions Precedent to Effectiveness	37
Section 3.2	Conditions Precedent to the Term Loan and all Advances	39
ARTICLE IV REPRESENTATIONS AND WARRANTIES		39
Section 4.1	Organization, Standing, Etc.	40
Section 4.2	Authorization and Validity	40
Section 4.3	No Conflict; No Default	40
Section 4.4	Government Consent	40
Section 4.5	Financial Statements and Condition	41
Section 4.6	Litigation	41
Section 4.7	Conduct of Business; Permits	41
Section 4.8	Environmental, Health and Safety Laws	42

i

Section 4.9	Compliance With Health Care Laws	42
Section 4.10	Compliance with Health Plans	43
Section 4.11	Physician Agreements	43
Section 4.12	Funds from Restricted Grants	43
Section 4.13	HIPAA Compliance	44
Section 4.14	ERISA	44
Section 4.15	Federal Reserve Regulations	44
Section 4.16	Title to Property; Leases; Liens; Subordination	45
Section 4.17	Taxes	45
Section 4.18	Trademarks, Patents	45
Section 4.19	Existing Foreign Subsidiaries	45
Section 4.20	Force Majeure	45
Section 4.21	Investment Company Act	45
Section 4.22	[Intentionally Omitted]	45
Section 4.23	Retirement Benefits	45
Section 4.24	Full Disclosure	46
Section 4.25	Subsidiaries	46
Section 4.26	Restrictions on Subsidiaries	46
Section 4.27	Labor Matters	46
Section 4.28	Deposit and Other Accounts	46
Section 4.29	Offsets	46
Section 4.30	Solvency	47
Section 4.31	Management Procedures	47
Section 4.32	For-Profit Entities	47
Section 4.33	Carmichael’s Acquisition	47
Section 4.34	Insurance	47
Section 4.35	Anti-Terrorism Law	48
ARTICLE V AFFIRMATIVE COVENANTS		48
Section 5.1	Financial Statements and Reports	49
Section 5.2	Existence	52
Section 5.3	Insurance	52
Section 5.4	Payment of Taxes and Claims	53
Section 5.5	Inspection; Collateral Audits	53
Section 5.6	Maintenance of Properties	53
Section 5.7	Books and Records	54
Section 5.8	Compliance; Permits	54
Section 5.9	ERISA	54
Section 5.10	Environmental Matters; Reporting	54
Section 5.11	Accreditation; Compliance Program	55
Section 5.12	Further Assurances	55
Section 5.13	Compliance with Terms of Material Contracts	56
Section 5.14	Joinder of Domestic Subsidiaries	56
Section 5.15	Collection of Receivables; Control Agreements	56
Section 5.16	Post-Closing Deliveries	57

ii

ARTICLE VI NEGATIVE COVENANTS		57
Section 6.1	Merger	57
Section 6.2	Disposition of Assets	57
Section 6.3	Plans	58
Section 6.4	Change in Nature of Business; Organization Documents	58
Section 6.5	Negative Pledges; Subsidiary Restrictions	58
Section 6.6	Restricted Payments	59
Section 6.7	Transactions with Affiliates	59
Section 6.8	Accounting Changes	59
Section 6.9	Deposit and Other Accounts	59
Section 6.10	Capital Expenditures	60
Section 6.11	Subordinated Debt	60
Section 6.12	Investments	60
Section 6.13	Indebtedness	61
Section 6.14	Liens	62
Section 6.15	Contingent Liabilities	63
Section 6.16	Leverage Ratio	63
Section 6.17	Senior Leverage Ratio	64
Section 6.18	Minimum Liquidity	65
Section 6.19	Collateral Coverage Ratio	65
Section 6.20	Fixed Charge Coverage Ratio	65
Section 6.21	Minimum EBITDA	66
Section 6.22	Executive Compensation	67
Section 6.23	Restrictions on Leases, etc.	67
Section 6.24	Loan Proceeds	67
Section 6.25	Sale and Leaseback Transactions	68
Section 6.26	Hedging Agreements	68
ARTICLE VII EVENTS OF DEFAULT AND REMEDIES		68
Section 7.1	Events of Default	68
Section 7.2	Remedies	70
Section 7.3	Lockbox; Rights Under Control Agreements	71
Section 7.4	Offset	71
ARTICLE VIII MISCELLANEOUS		72
Section 8.1	Amendments and Waivers	72
Section 8.2	Expenses	73
Section 8.3	Waivers, etc.	74
Section 8.4	Notices	74
Section 8.5	Taxes	74
Section 8.6	Successors and Assigns	75
Section 8.7	Confidentiality of Information	75
Section 8.8	Governing Law and Construction	75
Section 8.9	Consent to Jurisdiction	76

iii

Section 8.10	Waiver of Jury Trial	76
Section 8.11	Survival of Agreement	76
Section 8.12	Indemnification	76
Section 8.13	Captions	77
Section 8.14	Entire Agreement	77
Section 8.15	Counterparts	77
Section 8.16	Borrower Acknowledgements	77
Section 8.17	Appointment of and Acceptance by Borrowers’ Agent	78
Section 8.18	Relationship Among Borrowers	78
Section 8.19	Interest Rate Limitation	81
Section 8.20	Deposit on Termination of Revolving Commitments	81
Section 8.21	Replacement of Lenders	81
Section 8.22	Lenders’ Obligations Several; Independent Nature of Lenders’ Rights	83
Section 8.23	Patriot Act Notice	83
ARTICLE IX ASSIGNMENT AND PARTICIPATION		83
Section 9.1	Assignment and Participations	83
Section 9.2	Agent and Funding Agent	85
Section 9.3	Set Off and Sharing of Payments	92
Section 9.4	Disbursement of Funds	92
Section 9.5	Disbursements of Advances; Payment	93
ARTICLE X Amendment and Restatement		94
Section 10.1	Amendment and Restatement; No Novation	94
Section 10.2	Effect on Original Credit Agreement and on the Obligations	94
Section 10.3	No Implied Waivers	95
Section 10.4	Reaffirmation of Liens and obligations	95

iv

EXHIBITS
Exhibit A	Form of Revolving Note
Exhibit B	Form of Term Note
Exhibit C	Form of Subordination Agreement
Exhibit D	Form of Security Agreement
Exhibit E	Form of Pledge Agreement
Exhibit F	Form of Borrowing Base Certificate
Exhibit G	Form of Compliance Certificate
Exhibit H	NCV Calculation
Exhibit I-1	Matters to be Covered in Opinion of Counsel
Exhibit 1-2	Matters to be Covered in Supplemental Opinion of Counsel
Exhibit J	Business Associate Agreement
Exhibit J-1	Covered Entities
Exhibit K-1	Wire Instructions (Funding Agent)
Exhibit K-2	Wire Instructions (Agent)
Exhibit L	Form of Assignment and Assumption
Exhibit M	Form of Guaranty
Exhibit N	Form of Local Bank Account Agreement
SCHEDULES
Schedule 1.1(a)	Encumbered Real Estate
Schedule 1.1(b)	Required Control Agreements
Schedule 3.1	Leased Locations/Locations of Inventory
Schedule 4.6	Litigation
Schedule 4.8	Environmental Matters
Schedule 4.9	Health Care Laws Compliance Matters
Schedule 4.12	Restricted Grants
Schedule 4.14	ERISA
Schedule 4.16	List of Real Properties
Schedule 4.25	Subsidiaries
Schedule 4.28	Deposit Accounts
Schedule 4.29	Offsets
Schedule 4.34	Insurance
Schedule 5.15	Local Bank Accounts
Schedule 5.16	Post-Closing Deliveries
Schedule 6.2	Intercompany Conveyances Property
Schedule 6.12	Existing Investments
Schedule 6.13	Existing Indebtedness
Schedule 6.14	Existing Liens
Schedule 6.15	Contingent Obligations
Schedule 6.23	Leases

v

ANNEXES
Annex A	Pro Rata Shares and Loan Amounts
Annex B	Closing Checklist

vi

AMENDED AND RESTATED CREDIT AGREEMENT

THIS AMENDED AND RESTATED CREDIT AGREEMENT, dated as of August 1, 2008, is by and between SUNLINK HEALTH SYSTEMS, INC., a corporation organized under the laws of the State of Ohio, SUNLINK HEALTHCARE LLC, a limited liability company organized under the laws of the State of Georgia, DEXTER HOSPITAL, LLC, a limited liability company organized under the laws of the State of Georgia, CLANTON HOSPITAL, LLC, a limited liability company organized under the laws of the State of Georgia, SOUTHERN HEALTH CORPORATION OF ELLIJAY, INC., a corporation organized under the laws of the State of Georgia, SOUTHERN HEALTH CORPORATION OF DAHLONEGA, INC., a corporation organized under the laws of the State of Georgia, SOUTHERN HEALTH CORPORATION OF HOUSTON, INC., a corporation organized under the laws of the State of Georgia, SOUTHERN HEALTH CORPORATION OF JASPER, INC., a corporation organized under the laws of the State of Georgia, HEALTHMONT OF GEORGIA, INC., a corporation organized under the laws of the State of Tennessee, HEALTHMONT, LLC, a limited liability company organized under the laws of the State of Georgia, HEALTHMONT OF MISSOURI, LLC, a limited liability company organized under the laws of the State of Georgia, SUNLINK SERVICES, INC., a corporation organized under the laws of the State of Georgia, SUNLINK HOMECARE SERVICES, LLC, a limited liability company organized under the laws of the State of Georgia, KRUG PROPERTIES, INC., a corporation organized under the laws of the State of Ohio, CENTRAL ALABAMA MEDICAL ASSOCIATES, LLC, a limited liability company organized under the laws of the State of Georgia, DAHLONEGA CLINIC, LLC, a limited liability company organized under the laws of the State of Georgia, CARMICHAEL’S CASHWAY PHARMACY, INC., a corporation organized under the laws of Louisiana, CARMICHAEL’S NUTRITIONAL DISTRIBUTOR, INC., a corporation organized under the laws of Louisiana, and BREATH OF LIFE HOME HEALTH EQUIPMENT, INC., a corporation organized under the laws of Louisiana (each individually, a “Borrower” and, collectively, the “Borrowers”), the other persons designated as “Credit Parties” on the signature pages hereof, the financial institutions who are or hereafter become parties to this Agreement as Lenders, CHATHAM CREDIT MANAGEMENT III, LLC, a Georgia limited liability company (in its individual capacity “Chatham”), as Agent, and UNION BANK OF CALIFORNIA, N.A. (in its individual capacity “UBOC”), as Funding Agent, amends and restates in its entirety the Credit Agreement (as amended to the date hereof, without giving effect to the amendments and restatements set forth herein, the “Original Credit Agreement”), dated as of April 23, 2008, among the Borrowers, the other persons designated as “Credit Parties” on the signature pages thereof, the financial institutions parties to the Original Credit Agreement as lenders, and Chatham, as agent for such lenders.

ARTICLE I

DEFINITIONS AND ACCOUNTING TERMS

Section 1.1 Defined Terms. As used in this Agreement the following terms shall have the following respective meanings (and such meanings shall be equally applicable to both the singular and plural form of the terms defined, as the context may require):

“Acquisition”: The purchase or other acquisition by one or more Borrowers or any Subsidiary of assets constituting a business, division, or product line of any Person or of the Equity Interest of any Person.

“Adjusted Consolidated Net Income”: For any period the Consolidated Net Income for such period and without giving effect to any extraordinary gains or losses from sales of assets plus, without duplication, (i) the sum of the amount of all non cash charges (including, without limitation, depreciation, amortization, depletion, deferred tax expense and non cash interest expense) and non cash losses which were included in arriving at Consolidated Net Income for such period less (ii) all non cash gains included in arriving at Consolidated Net Income for such period.

“Adjusted Consolidated Working Capital”: At any time shall mean Consolidated Current Assets (but excluding therefrom all cash and Cash Equivalents) less Consolidated Current Liabilities (but excluding therefrom any unpaid principal balance of the Revolving Loan and the current maturities of the Term Loan).

“Advance”: As defined in Section 2.1(a).

“Advance Date”: The date of the making of any Advance hereunder.

“Affiliate”: When used with reference to any Person, (a) each Person that, directly or indirectly, controls, is controlled by or is under common control with, the Person referred to, (b) each Person which beneficially owns or holds, directly or indirectly, twenty (20%) percent or more of any class of voting Equity Interests of the Person referred to, (c) each Person, twenty (20%) percent or more of the voting Equity Interests (or if such Person is not a corporation, twenty (20%) percent or more of the equity interest) of which is beneficially owned or held, directly or indirectly, by the Person referred to, and (d) each of such Person’s officers, directors, joint venturers and partners. The term control (including the terms “controlled by” and “under common control with”) means the possession, directly, of the power to direct or cause the direction of the management and policies of the Person in question.

“Applicable Insolvency Laws”: As defined in Section 8.18(j).

“Applicable Revolving Margin”: 3.50%.

“Applicable Percentage”: As defined in Section 2.10.

“Applicable Term Loan Margin”: 5.07%

“Assessments”: As defined in Section 4.13.

“Availability”: As of any date of calculation, the amount equal to (i) the lesser of (a) the Revolving Commitment Amount then in effect and (b) the Borrowing Base, less (ii) the unpaid principal balance of the Revolving Loan.

“Beneficiaries”: Agent, Funding Agent and each Lender.

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“Board”: The Board of Governors of the Federal Reserve System or any successor thereto.

“Borrower” and “Borrowers”: As defined in the opening paragraph hereof.

“Borrowers’ Agent”: SunLink Health Systems, Inc., a corporation organized under the laws of the State of Ohio.

“Borrowing Base”: As of any date of calculation, a dollar amount equal to the lesser of:

(A) 85% of the Net Collectible Value of Borrowers’ Eligible Accounts at such time less reserves established from time to time by Agent in its reasonable credit judgment. and

(B) (x) the product of (X)(i) Consolidated EBITDA of the Borrowers, as determined as of the end of the most recent fiscal month of the Borrowers for the twelve months ending thereon for which Financial Statements have been furnished to Agent (such twelve month being the “Relevant Period” for the purposes of this definition) plus (ii) with respect to each Person and any of its Subsidiaries acquired in a Permitted Acquisition during such Relevant Period, the Consolidated Pro Forma EBITDA of such Person and any of its Subsidiaries for all times during such Relevant Period prior to the acquisition of such Person and any of its Subsidiaries, multiplied by (Y) 3.5 less (y) the unpaid principal balance of the Term Loan;

“Borrowing Base Certificate”: A certificate in the form of Exhibit F hereto.

“Business Day”: Any day which is not a day on which banking institutions in any of the cities of Atlanta, Georgia and New York, New York are authorized or obligated by law or executive order to close.

“Capital Expenditures”: For any period, for the Borrowers, the sum of (a) all amounts that would be included as additions to property, plant and equipment set forth in the consolidated statement of cash flows in the section entitled Cash Flows from Investing Activities and (b) the amount for Assets Acquired under Capital Lease Obligations set forth in the consolidated statement of cash flows in the section entitled Non-cash Investing and Financing Activities, as prepared in accordance with GAAP, in respect of (a) the acquisition, construction, improvement, replacement or betterment of land, buildings, machinery, equipment or of any other fixed assets or leaseholds, (b) to the extent related to and not included in (a) above, materials, contract labor (excluding expenditures properly chargeable to repairs or maintenance in accordance with GAAP), and (c) other capital expenditures and other uses recorded as capital expenditures or similar terms having substantially the same effect.

“Capitalized Lease”: A lease of (or other agreement conveying the right to use) real or personal property with respect to which at least a portion of the rent or other amounts thereon constitute Capitalized Lease Obligations.

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“Capitalized Lease Obligations”: As to any Person, the obligations of such Person to pay rent or other amounts under a lease of (or other agreement conveying the right to use) real or personal property which obligations are required to be classified and accounted for as a capital lease on a balance sheet of such Person under GAAP (including Statement of Financial Accounting Standards No. 13 of the Financial Accounting Standards Board), and, for purposes of this Agreement, the amount of such obligations shall be the capitalized amount thereof, determined in accordance with GAAP (including such Statement No. 13).

“Captive Insurance Subsidiary”: CastleLink Assurance, Ltd., an exempted company organized under the law of Cayman Islands, which is a company solely engaged in the business of providing insurance coverage to the Borrowers and their Subsidiaries and, to the extent the insurance coverage provided covers risks that (i) would be covered by a standard general malpractice liability policy and (ii) arise solely from providing services and products in the ordinary course of business of the Borrowers and their Subsidiaries.

“Carmichael’s”: Carmichael’s Cashway Pharmacy, Inc., a corporation organized under the laws of Louisiana.

“Carmichael’s Acquisition”: the acquisition of all of the issued and outstanding Equity Interest in Carmichael’s pursuant to the Carmichael’s Acquisition Agreement.

“Carmichael’s Acquisition Agreement”: that certain Stock Purchase Agreement, dated as of April 23, 2008, by and among Sellers, Carmichael’s and SunLink Homecare Services, LLC, a Georgia limited liability company, as the same may be amended, restated or otherwise modified from time to time prior to the Original Closing Date.

“Carmichael’s Acquisition Documents” means the Carmichael’s Acquisition Agreement and all other agreements, instruments, documents and certificates entered into in connection with the Carmichael’s Acquisition Agreement.

“Carmichael’s Entity” means Carmichael’s and each of its Subsidiaries which are consolidated with Carmichael’s in accordance with GAAP.

“Cash Equivalents”: As to any Person, (i) securities issued or directly and fully guaranteed or insured by the United States or any agency or instrumentality thereof (provided that the full faith and credit of the United States is pledged in support thereof) having maturities of not more than one year from the date of acquisition, (ii) time deposits and certificates of deposit of any commercial bank having, or which is the principal banking subsidiary of a bank holding company organized under the laws of the United States, any State thereof or the District of Columbia having capital, surplus and undivided profits aggregating in excess of $100,000,000, with maturities of not more than one year from the date of acquisition by such Person, (iii) repurchase obligations with a term of not more than 90 days for underlying securities of the types described in clause

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(i) above entered into with any bank meeting the qualifications specified in clause (ii) above, (iv) commercial paper issued by any Person incorporated in the United States rated at least A2 or the equivalent thereof by Standard & Poor’s Corporation or at least P2 or the equivalent thereof by Moody’s Investors Service, Inc. and in each case maturing not more than one year after the date of acquisition by such Person, and (v) investments in money market funds substantially all of whose assets are comprised of securities of the types described in clauses (i) through (iv) above.

“CHAMPVA”: Collectively, the Civilian Health and Medical Program of the Department of Veteran Affairs, a program of medical benefits covering retirees and dependents of former members of the armed services administered by the United States Department of Veteran Affairs, and all laws, rules, regulations, manuals, orders, guidelines or requirements pertaining to such program including (a) all federal statutes (whether set forth in 38 U.S.C. §1713 or elsewhere) affecting such program or, to the extent applicable to CHAMPVA, and (b) all rules, regulations (including 38 C.F.R. § 17.54), manuals, orders and administrative, reimbursement and other guidelines of all governmental authorities promulgated in connection with such program (whether or not having the force of law), in each case as the same may be amended, supplemented or otherwise modified from time to time.

“Chatham Fee Letter”: As defined in Section 2.11.

“Change of Control”: The occurrence, after the Original Closing Date, of any of the following circumstances: (a) any Person or two or more Persons acting in concert acquiring beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934), directly or indirectly, of Equity Interests of any Borrower representing forty (40%) percent or more of the combined voting power of all Equity Interests of such Borrower entitled to vote in the election of directors; or (b) during any period of up to twelve consecutive months, whether commencing before or after the Original Closing Date, individuals who at the beginning of such twelve-month period were directors of any Borrower ceasing for any reason to constitute a majority of the Board of Directors of any Borrower (other than by reason of death, disability or scheduled retirement); provided, however, that, notwithstanding anything to the contrary herein, Agent and Lenders acknowledge and agree that SHSI shall be permitted to reduce the number of directors on its Board of Directors to five (5) members during the term hereof; or (c) any Person or two or more Persons acting in concert acquiring by contract or otherwise, or entering into a contract or arrangement which upon consummation will result in its or their acquisition of, control over Equity Interests of any Borrower representing forty (40%) percent or more of the combined voting power of all Equity Interests of any Borrower entitled to vote in the election of directors.

“Charges”: As defined in Section 8.19.

“Code”: The Internal Revenue Code of 1986, as amended.

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“Collateral”: The property of the Credit Parties described in the Security Documents as “Collateral” and Encumbered Real Estate.

“Collateral Account”: As defined in Section 7.3.

“Collateral Coverage Ratio”: The ratio as of the last day of any fiscal quarter or other date of determination of (i) the sum of (A) Receivables Collateral Coverage, (B) Real Estate Collateral Coverage, (C) Equipment Collateral Coverage, and (D) Inventory Collateral Coverage, to (ii) Total Outstandings.

“Collections”: Means all funds received from or on behalf of Obligors in payment of any amount owed with respect to Receivables.

“Compliance Certificate”: A certificate in the form of Exhibit G hereto.

“Concentration Account”: Means, (i) Account No. 129544 maintained in the name of SunLink Health Systems, Inc. at the Bank of North Georgia, (ii) Account No. 130351 maintained in the name of Healthmont, LLC at the Bank of North Georgia, (iii) Account No. 0099002 maintained in the name of SunLink Healthcare, LLC at the Bank of North Georgia, (iv) Account No. 5510206409 maintained in the name of Carmichael’s Cashway Pharmacy, Inc. at the Bank of Commerce, and (v) Accounts Nos. 330152269, 330161527 and 161527 maintained in the name of Carmichael’s Cashway Pharmacy, Inc. at the First National Bank of Louisiana, or any other account which the Agent may designate as a “Concentration Account” in writing from time to time, each of which shall be subject to a Control Agreement in favor of the Agent, in form and substance satisfactory to the Agent.

“Consolidated” or “consolidated”: Except as otherwise provided herein, with reference to any term defined herein, that term as applied to the accounts of the Borrowers and their Subsidiaries, consolidated in accordance with GAAP.

“Consolidated Current Assets”: As of any date, the consolidated current assets of the Borrowers, determined in accordance with GAAP.

“Consolidated Current Liabilities”: As of any date, the consolidated current liabilities of the Borrowers, determined in accordance with GAAP.

“Consolidated EBITDA”: With respect to the Borrowers and their Subsidiaries determined in accordance with GAAP for any fiscal period, without duplication, an amount equal to:

(a) Consolidated Net Income of the Borrowers and their Subsidiaries for such period determined in accordance with GAAP, minus

(b) on a consolidated basis, the sum of (i) income tax credits, (ii) interest income, (iii) gain from extraordinary items for such period, (iv) any aggregate net gain (but not any aggregate net loss) during such period arising from the sale, exchange or other disposition of capital assets by the Borrowers and

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their Subsidiaries (including any fixed assets, whether tangible or intangible, all inventory sold in conjunction with the disposition of fixed assets and all securities), and (v) any other non-cash gains that have been added in determining Consolidated Net Income, in each case to the extent included in the calculation of Consolidated Net Income of the Borrowers and their Subsidiaries for such period in accordance with GAAP, but without duplication, plus

(c) on a consolidated basis, the sum of (i) any provision for income taxes, (ii) Consolidated Interest Expense, (iii) loss from extraordinary items for such period, (iv) the amount of non-cash charges (including depreciation, amortization, depletion, deferred tax expense, and non-cash interest expense) for such period, (v) the amount, if any, of non-recurring costs or expenses related to any refinancing, acquisition, or merger transaction, including, without limitation, accounting, legal, consulting and other professional fees in connection therewith, for such period, (vi) amortized debt discount for such period, and (vii) the amount of any deduction to Consolidated Net Income as the result of any grant to any members of the management of the Borrowers and their Subsidiaries of any Equity Interests (in each case, as determined in accordance with GAAP), in each case to the extent included in the calculation of Consolidated Net Income of the Borrowers and their Subsidiaries for such period in accordance with GAAP, but without duplication.

Notwithstanding the foregoing, it is agreed that, for purposes of determining compliance with the financial covenants set forth in Section 6.16{Leverage Ratio}, Section 6.17{Senior Leverage Ratio} and Section 6.21{Minimum EBITDA} and for the purpose of determining the Borrowing Base on each date of determination occurring on or prior to April 30, 2009, Consolidated EBITDA of the Borrowers and their Subsidiaries (and, in the case of determining the Borrowing Base, the Consolidated EBITDA of the Borrowers) shall be equal to the sum of (A) actual Consolidated EBITDA of the Consolidated SunLink Entity for the twelve (12) consecutive months ending on such date of determination plus (B) Consolidated EBITDA of the Carmichael’s Entity for the twelve (12) consecutive months ending on such date of determination; provided, however, that, in the case of determining the Consolidated EBITDA of the Carmichael’s Entity for any 12-consecutive month measuring period that includes any month ending prior to May 1, 2008, the Consolidated EBITDA of the Carmichael’s Entity for each such month shall be deemed to be $316,667.

“Consolidated Excess Cash Flow”: For any period, the remainder of (a) the sum of (i) Adjusted Consolidated Net Income for such period, and (ii) the decrease, if any, in Adjusted Consolidated Working Capital from the first day to the last day of such period, minus (b) the sum of (i) the amount of Capital Expenditures made by the Borrowers and its Subsidiaries on a consolidated basis during such period in accordance with Section 6.10 funded from cash flow that is generated by the operations of the Borrowers and, in any event, other than any such Capital Expenditure to the extent financed through the incurrence of Capitalized Lease Obligations or any other Indebtedness (including Revolving Loans), (ii) the aggregate amount of permanent principal payments of Indebtedness for borrowed money of the Borrowers and their Subsidiaries and the

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permanent repayment of the principal component of Capitalized Lease Obligations of the Borrowers and their Subsidiaries (excluding (A) payments as a result of a Prepayment Event hereunder with proceeds of asset sales and Net Insurance/Condemnation Proceeds other than the portion thereof which resulted in a gain on conversion of assets under GAAP and (B) payments with the proceeds of other Indebtedness or equity or equity contributions (but in the case of a voluntary prepayment of the Revolving Loans, only to the extent accompanied by a voluntary reduction to the Revolving Commitments, and in the case of any other Indebtedness which may be reborrowed, to the extent such payment results in a permanent reduction in commitments thereof)) during such period, (iii) the increase, if any, in Adjusted Consolidated Working Capital from the first day to the last day of such period and (iv) the aggregate amount of cash consideration paid from cash flow that is generated by the operations of the Borrowers to make Permitted Acquisitions during such period.

“Consolidated Interest Expense”: For any period of determination, the aggregate consolidated amount, without duplication, of interest (whether cash or non-cash) paid, accrued or scheduled to be paid in respect of any Indebtedness of the Borrowers and its Subsidiaries, including (a) all but the principal component of payments in respect of conditional sale contracts, Capitalized Leases and other title retention agreements, (b) commissions, discounts and other fees and charges with respect to letters of credit and bankers’ acceptance financings and (c) net costs under interest rate protection agreements, in each case determined in accordance with GAAP.

“Consolidated Net Income”: For any period, the consolidated net after tax income of the Borrowers and their Subsidiaries determined in accordance with GAAP; provided that the following items shall be excluded in computing Consolidated Net Income (without duplication): (i) the net income (or loss) of any Person which is not a Subsidiary of the Borrower, except to the extent of the amount of any dividends or other distributions actually paid to the Borrowers or any of their Subsidiaries during such period, (ii) except for determinations expressly required to be made on a pro forma basis, the net income (or loss) of any Person accrued prior to the date it becomes a Subsidiary or all or substantially all of the property or assets of such Person are acquired by a Subsidiary, (iii) the net income of any Subsidiary to the extent that the declaration or payment of dividends or similar distributions by such Subsidiary of such net income is not at the time permitted by the operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to such Subsidiary, (iv) fees, expenses and charges incurred in connection with the consummation of the Carmichael’s Acquisition, (v) all amounts charged to expense by the Borrowers related to unsolicited takeover offer from Resurgence Health Group LLC, Berggruen Holdings Ltd and related parties as long as such amounts are charged to expense during the period through December 31, 2008, (vi) all amounts charged to expense by the Borrowers, including for consulting, legal and related expenses and committee meeting fees, for the Special Committee of the SunLink Board of Directors formed to review strategic alternatives in November 2007 as long as such amounts are charged to expense and excluded in computing Consolidated Net Income for any period ending on or prior to December 31, 2008; (vii) all amounts (other than legal fees and expenses) charged to expense by the Borrowers for the

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litigation between Piedmont Heathcare Inc. and Piedmont Mountainside Hospital Inc. (Piedmont) and SunLink Health Systems, Inc. SunLink Healthcare LLC and Southern Health Corporation of Jasper, Inc. (SunLink) for breach of agreement in the asset sale agreement in June 2004 in which Piedmont purchased Mountainside Medical Center from SunLink as long as such amounts are charged to expense and excluded in computing Consolidated Net Income for any period ending on or prior to the Original Closing Date, (vii) legal fees and expenses relating to the litigation described in the preceding clause (vi), (viii) all amounts (other than legal fees and expenses) charged to expense by the Borrowers for the settlement of the UK Obligations as long as such amounts are charged to expense and excluded in computing Consolidated Net Income for any period ending on or prior to the Original Closing Date, and (ix) legal fees and expenses relating to the settlement of the UK Obligations.

“Consolidated Pro Forma EBITDA”: Consolidated EBITDA of any Person and any of its Subsidiaries acquired in a Permitted Acquisition calculated in a manner satisfactory to the Agent (and agreed to in writing by the Agent), adjusted by verifiable expense reductions, if any, which are reasonably expected to be realized, in each case calculated by the Borrowers’ Agent and approved by the Agent in its reasonable discretion based on Agent’s customary underwriting policy.

“Consolidated SunLink Entity”: SHSI and each of its Subsidiaries (other than Carmichael’s Entity) which are consolidated with SHSI in accordance with GAAP.

“Contingent Obligations”: With respect to any Person at the time of any determination, without duplication, any obligation, contingent or otherwise, of such Person guaranteeing or having the economic effect of guaranteeing any Indebtedness of any other Person (the “primary obligor”) in any manner, whether directly or otherwise: (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or to purchase (or to advance or supply funds for the purchase of) any direct or indirect security therefor, (b) to purchase property, securities, Equity Interests or services for the purpose of assuring the owner of such Indebtedness of the payment of such Indebtedness, (c) to maintain working capital, equity capital or other financial statement condition of the primary obligor so as to enable the primary obligor to pay such Indebtedness or otherwise to protect the owner thereof against loss in respect thereof, or (d) entered into for the purpose of assuring in any manner the owner of such Indebtedness of the payment of such Indebtedness or to protect the owner against loss in respect thereof; provided, that the term “Contingent Obligations” shall not include endorsements for collection or deposit, in each case in the ordinary course of business.

“Control Agreement”: An agreement which satisfies the requirements of “control” in favor of the Agent over a Deposit Account, investment property, electronic chattel paper or letter-of-credit rights, within the meaning of the UCC.

“Credit Party”: Any Borrower or any Guarantor and “Credit Parties” means, collectively, Borrowers and Guarantors.

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“Cut-off Period”: 150 days after the original invoice date for the applicable Receivable.

“Default”: Any event which, with the giving of notice (whether such notice is required under Section 7.1, or under some other provision of this Agreement, or otherwise) or lapse of time, or both, would constitute an Event of Default.

“Deposit Account”: Any demand, lockbox, time, savings, passbook or similar account now or hereafter maintained by or for the benefit of a Credit Party, with an organization that is engaged in the business of banking (including, without limitation, banks, savings banks, savings and loan associations, credit unions and trust companies), and all funds and amounts therein, whether or not restricted or designated for a particular purpose, including without limitation, all Collateral Accounts, and all “deposit accounts” as defined in the UCC.

“Domestic Subsidiary”: Any Subsidiary incorporated in any of the states of the United States or in the District of Columbia.

“Effective Date”: August 1, 2008.

“Eligible Inventory”: Inventory owned by a Borrower which at all times continues to be acceptable to the Agent in its reasonable credit judgment exercised in good faith. In general, Inventory shall be Eligible Inventory if it meets all of the criteria set forth below:

(a) Such Inventory is not obsolete or unreasonably aged, as determined by the Agent in its reasonable credit judgment;

(b) Such Inventory is subject to a valid, first priority perfected security interest in favor of the Agent, for the benefit of the Beneficiaries, subject only to Permitted Liens; and

(c) Such Inventory is not held by a Borrower as a consignee or pursuant to a similar title retention arrangement with a vendor of such Inventory.

The criteria for Eligible Inventory set forth above may be changed and the Agent may establish any new criteria for Eligible Inventory from time to time in the Agent’s reasonable credit judgment exercised in good faith.

“Eligible Receivables”: Receivables created by a Borrower that continue to be acceptable to the Agent based on the Agent’s criteria of eligibility set forth below. In general, Receivables shall be Eligible Receivables if they meet all of the criteria set forth below:

(a) Such Receivables arise from the actual and bona fide sale and delivery of goods or rendition of services by a Borrower in the ordinary course of its business to a Person which is not an Affiliate of such Borrower, for which an invoice has been issued in accordance with such Borrower’s customary billing procedures;

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(b) Such Receivables are not unpaid more than the Cut-off Period;

(c) Such Receivables do not arise from sales on consignment, guaranteed sale, sale and return, sale on approval, or other terms under which payment by the Obligor may be conditional or contingent;

(d) The chief executive office of the Obligor with respect to such Receivables is located in the United States;

(e) The Obligor with respect to such Receivables has not asserted or threatened to assert a counterclaim, defense or dispute and does not have any right of setoff or recoupment against such Receivables (but the portion of the Receivables of such Obligor in excess of the amount at any time and from time to time subject to setoff or counterclaim may be deemed Eligible Receivables);

(f) There are no facts, events or occurrences which would impair the validity, enforceability or collectability of such Receivables or reduce the amount payable or delay payment thereunder;

(g) Such Receivables are subject to the first priority, valid and perfected security interest of the Agent, for the benefit of the Beneficiaries;

(h) There are no proceedings or actions (including, without limitation, Insolvency Proceedings) which are threatened or pending against the Obligor with respect to such Receivables which would reasonably be expected to result in any material adverse change in any such Obligor’s financial condition;

(i) Such Receivables are not evidenced by or arising under any instrument or chattel paper (as such terms are defined in the UCC);

(j) Such Receivables for a single Obligor do not constitute more than 50% of the total aged beyond the Cut-off Period;

(k) Such Receivables are owed by Obligors deemed creditworthy at all times by the Agent in good faith;

(l) The Obligor obligated upon such Receivable has not suspended business, made a general assignment for the benefit of creditors or failed to pay its debts generally as they come due;

(m) A petition is not filed by or against any Obligor obligated upon such Receivable under any bankruptcy law or any other federal, state or foreign (including any provincial) receivership, insolvency relief or other law or laws for the relief of debtors;

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(n) Such Receivables are not owed by Obligors who are individual patients and do not constitute self-pay accounts;

(o) Such Receivables are not owed by any Credit Party or director, officer, other employee or Affiliate of any Credit Party, or any entity that has any common officer or director with any Credit Party; and

(p) Any other Receivables which the Agent, in its sole discretion, deems Eligible Receivables.

The criteria for Eligible Receivables set forth above may be changed and the Agent may establish any new criteria for Eligible Receivables from time to time in the Agent’s reasonable credit judgment exercised in good faith.

“Encumbered Equipment”: All equipment of Credit Parties subject to the first priority, valid and perfected security interest of the Agent, for the benefit of the Beneficiaries.

“Encumbered Real Estate”: All real property listed in Schedule 1.1(a) attached hereto and such additional real property as the Agent may request be mortgaged to it pursuant to Section 5.14, which real property is subject to the first priority, valid and perfected Lien of the Agent, for the benefit of the Beneficiaries.

“Equipment Collateral Coverage”: The amount equal to the net book value of the Encumbered Equipment, unless there exists a Qualifying Appraisal for such property issued no more than one year prior to any date of determination, in which case the applicable amount shall be the appraised value.

“Equity Interests”: All shares, interests, participation or other equivalents, however designated, of or in a corporation or limited liability company, whether or not voting, including but not limited to common stock, member interests, warrants, preferred stock, convertible debentures, and all agreements, instruments and documents convertible, in whole or in part, into any one or more or all of the foregoing.

“ERISA”: The Employee Retirement Income Security Act of 1974, as amended.

“ERISA Affiliate”: Any trade or business (whether or not incorporated) that is a member of a group of which a Borrower is a member and which is treated as a single employer under Section 414 of the Code.

“Event of Default”: Any event described in Section 7.1.

“Existing Foreign Subsidiaries”: The UK Subsidiaries and Klippan S.A.R.L., a company organized under the laws of France, and Klippan GmbH, a company organized under the laws of Germany.

“Fees”: Revolving Commitment Fees, Prepayment Fees, fees specified in the Chatham Fee Letter and any other fees due pursuant to the Loan Documents.

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“Financial Statements”: The consolidated financial statements, including, without limitation, income statements, statements of cash flows and balance sheets of SunLink Health Systems, Inc., Borrowers and their Subsidiaries, to be delivered in accordance with Section 5.1.

“Fixed Charge Coverage Ratio”: For any period of determination, the ratio of

(a) (i) Consolidated EBITDA less (ii) (A) Capital Expenditures other than Capital Expenditures to the extent financed through the incurrence of Capitalized Lease Obligations or any other Indebtedness (other than Revolving Loans) unless such Capital Expenditures constitute a portion of the purchase price for a Permitted Acquisition and (B) taxes paid in cash (other than taxes with respect to non-recurring capital gains),

to

(b) the sum of (i) Consolidated Interest Expense and (ii) all scheduled or otherwise required principal payments (excluding mandatory prepayments of the Term Loan under this Agreement) with respect to Total Liabilities (including but not limited to all payments with respect to Capitalized Lease Obligations of the Borrowers and the Subsidiaries), in each case determined for said period on a consolidated basis.

“Funded Debt”: As of each date of determination, without duplication (a) all Indebtedness for borrowed money of the Borrowers and their consolidated Subsidiaries on that date (including without limitation all obligations under Capitalized Lease Obligations) and other interest bearing Indebtedness of the Borrowers and their consolidated Subsidiaries maturing more than one year from the date of original issuance (including current maturities), (b) the aggregate amount available for drawing under all letters of credit outstanding on that date (net of the amount of any related certificate of deposit posted as security therefor) for which the Borrowers or a consolidated Subsidiary of the Borrowers is the account party (excluding, however, the aggregate amount available for drawing under letters of credit issued to lenders and lessors of Indebtedness of the type described in clause (a) in support of such Indebtedness), (c) the aggregate amount drawn under all letters of credit (net of the amount of any related certificate of deposit posted as security therefor) for which the Borrowers or a consolidated Subsidiary of the Borrowers is the account party and for which the issuer of such letters of credit has not been reimbursed on that date, (d) all Indebtedness for borrowed money of the Borrowers and their consolidated Subsidiaries on that date owed to any bank or financial institution, and (e) all Indebtedness secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien upon or in property (including accounts and contracts rights) owned by the Borrowers or a consolidated Subsidiary of the Borrowers, even though the Borrowers or such consolidated Subsidiary has not assumed or become liable for the payment of such Indebtedness.

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“GAAP”: Generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession, which are applicable to the circumstances as of any date of determination.

“Governmental Authority”: Any federal, state, local or other governmental department, commission, board, bureau, agency, central bank, court, tribunal or other instrumentality or authority or subdivision thereof, domestic or foreign, exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government.

“Guarantor”: Any Person who or which executes a Guaranty or similar agreement in favor of Agent, for the benefit of the Beneficiaries.

“Guaranty”: Guaranty dated as of the Original Closing Date made by the Credit Parties party thereto for the benefit of the Agent, on behalf of the Beneficiaries, substantially in the form attached thereto as Exhibit M and any other guaranty executed by any Person in favor of Agent, for the benefit of the Beneficiaries, with respect to the Obligations, in form and substance satisfactory to Agent.

“Health Care Laws”: Means (i) any and all federal, state and local healthcare fraud and abuse laws, including, without limitation, the federal Anti–Kickback Statute (42 U.S.C. § 1320a–7(b)), the Stark Law (42 U.S.C. § 1395nn and §1395(q)), the civil False Claims Act (31 U.S.C. § 3729 et seq.), Sections 1320a–7 and 1320a–7a of Title 42 of the United States Code and the regulations promulgated pursuant to such statutes; (ii) the federal Food, Drug & Cosmetic Act (21 U.S.C. §§ 301 et seq.) and the regulations promulgated thereunder; (iii) the Health Insurance Portability and Accountability Act of 1996 (Pub. L. No. 104–191) and the regulations promulgated thereunder; (iv) Medicare (Title XVIII of the Social Security Act) and the regulations promulgated thereunder; (v) Medicaid (Title XIX of the Social Security Act) and the regulations promulgated thereunder; (vi) the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (Pub. L. No. 108–173) and the regulations promulgated thereunder; (vi) quality, safety and accreditation standards and requirements of all applicable state laws or regulatory bodies; (vii) federal, state and local laws regulating the ownership or operation of a health care facility or business, or assets used in connection therewith; (viii) federal, state and local laws relating to the billing or submission of claims, collection of accounts receivable, underwriting the cost of, or provision of management or administrative services in connection with, any and all of the foregoing, by any Credit Party and its Subsidiaries, including, but not limited to, laws and regulations relating to practice of medicine and other health care professions, professional fee splitting, tax–exempt organization and charitable trust law applicable to health care organizations, certificates of need, certificates of operations and authority; and (ix) any and all other applicable health care laws, regulations, manual provisions, policies and material administrative guidance, each of (i) through (ix) as may be amended from time to time.

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“HIPAA”: Means the Health Insurance Portability and Accountability Act of 1996, as the same may be amended, modified or supplemented from time to time, and any successor statute thereto, and any and all rules or regulations promulgated from time to time thereunder.

“HIPAA Compliance Plan”: As defined in Section 4.13.

“HIPAA Compliant”: Means that to the extent applicable, the applicable Credit Party or Subsidiary (A) is, or on or before any applicable compliance date will be, in material compliance with any and all of the applicable requirements of HIPAA, including all requirements of the Transactions Rule and the Privacy and Security Rules and (B) is not subject to, and would not reasonably be expected to become subject to, any civil or criminal penalty or any investigation, claim or process that would reasonably be expected to cause a Material Adverse Occurrence in connection with any violation by a Credit Party or Subsidiary of a Credit Party of the then effective requirements of HIPAA.

“Immediately Available Funds”: Funds with good value on the day and in the city in which payment is received.

“Immaterial Subsidiary”: Each Subsidiary of SHSI (other than Borrowers (except for KRUG Properties, Inc. and Dahlonega Clinic LLC) with respect to which each of the following is satisfied (a) the aggregate revenues of such Subsidiary do not exceed $5,000,000 in any calendar year and during the period of twelve consecutive months most recently ended prior to such Subsidiary being designated as an Immaterial Subsidiary, and (b) the book value of the tangible assets of such Subsidiary does not exceed $5,000,000, in each case that has been designated as an Immaterial Subsidiary by the Borrowers’ Agent in a written notice delivered to the Agent but other than any such Subsidiary as to which the Borrowers’ Agent has revoked such designation by written notice to the Agent. On the Original Closing Date, KRUG Properties, Inc., Dahlonega Clinic LLC, KRUG International (UK) Limited, Bradley International Holdings Limited, Klippan S.A.R.L. and Klippan GmbH are Immaterial Subsidiaries.

“Indebtedness”: With respect to any Person at the time of any determination, without duplication, all obligations, contingent or otherwise, of such Person which in accordance with GAAP should be classified upon the balance sheet of such Person as liabilities, but in any event including: (a) all obligations of such Person for borrowed money (including non-recourse obligations), (b) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (c) all obligations of such Person upon which interest charges are customarily paid or accrued, (d) all obligations of such Person under conditional sale or other title retention agreements relating to property purchased by such Person, (e) all obligations of such Person issued or assumed as the deferred purchase price of property or services, (f) all obligations of others secured by any Lien on property owned or acquired by such Person, whether or not the obligations secured thereby have been assumed, (g) all Capitalized Lease Obligations of such Person,

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(h) all obligations of such Person in respect of interest rate swap agreements, cap or collar agreements, interest rate futures or option contracts, currency swap agreements, currency futures or option agreements and other similar contracts (i) all obligations of such Person, actual or contingent, as an account party in respect of letters of credit or bankers’ acceptances, (j) all obligations of any partnership or joint venture as to which such Person is or may become personally liable, (k) all obligations of such Person under any Equity Interests issue by such Person, and (l) all Contingent Obligations of such Person.

“Indemnitee” and “Indemnitees”: As defined in Section 8.12.

“Insolvency Proceeding”: Any proceeding commenced by or against any Person, under any provision of any bankruptcy, insolvency or receivership law, including, but not limited to, assignments for the benefit of creditors, formal or informal moratoriums, compositions, receiverships, readjustments of debt, dissolutions, liquidations, or extensions with some or all creditors.

“Inventory”: Goods, other than farm products, which are leased by a Person as lessor, are held by a person for sale or lease or to be furnished under a contract of service, are furnished by a Person under a contract of service, or consist of raw materials, work in process, or materials used or consumed in a business or incorporated or consumed in the production of any of the foregoing and supplies, in each case wherever the same shall be located, whether in transit, on consignment, in retail outlets, warehouses, terminals or otherwise, and all property the sale, lease or other disposition of which has given rise to an Account and which has been returned to a Borrower or repossessed by a Borrower or stopped in transit.

“Inventory Collateral Coverage”: The amount equal to the net book value of all Eligible Inventory of the Borrowers, unless there exists a Qualifying Appraisal for all Eligible Inventory issued no more than three months prior to any date of determination, in which case the applicable amount shall be the appraised value.

“Investment”: The acquisition, purchase, making or holding of any Equity Interests or other security, any loan, advance, contribution to capital, extension of credit (except for trade and customer accounts receivable for inventory sold or services rendered in the ordinary course of business and payable in accordance with customary trade terms), any acquisitions of real or personal property (other than real and personal property acquired in the ordinary course of business) and any purchase or commitment or option to purchase Equity Interests, securities or other debt of or any interest in another Person or any integral part of any business or the assets comprising such business or part thereof and the formation of, or entry into, any partnership as a limited or general partner or the entry into any joint venture. The amount of any Investment shall be the original cost of such Investment plus the cost of all additions thereto, without any adjustments for increases or decreases in value, or write-ups, write-downs or write-offs with respect to such Investment.

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“Keyman Life Insurance”: a keyman life insurance policy on the life of Robert M. Thornton, Jr. in an amount of at least $5,000,000 and on other terms and conditions and from an insurance company acceptable to the Agent.

“KRUG Pension Plan”: The defined benefit pension plan of SHSI, formerly known as KRUG International Corp., an Ohio corporation, which is entitled the “KRUG International Corp. Retirement Plan.”

“Leverage Ratio”: For any period of determination, the ratio of (i) Total Debt as of the end of such period to (ii) the sum of (A) Consolidated EBITDA for such period plus (B) with respect to each Person and any of its Subsidiaries acquired in a Permitted Acquisition during such period, the Consolidated Pro Forma EBITDA of such Person and any of its Subsidiaries for all times during such period prior to the acquisition of such Person and any of its Subsidiaries.

“LIBOR Rate”: The greater of (a) 2.75% per annum or (b) the Thirty-Day LIBOR rate, as published in the Bloomberg Professional Service page BBAM 1 for the last Business Day of the month immediately preceding the month for which interest is being calculated or if such published rate ceases to be available, such other published “LIBOR Rate” as the Agent may reasonably select; provided, however, that in no event shall “LIBOR Rate” exceed 5.5% per annum. For purposes of clarity, the Borrowers, Agent, Funding Agent and Lenders agree that it is their intention to utilize the Thirty-Day LIBOR rate described above for each one-month period with the applicable LIBOR Rate being reset for each successive one-month period as described above, including with respect to outstanding Advances.

“Lien”: With respect to any Person, any security interest, mortgage, pledge, lien, charge, encumbrance, title retention agreement or analogous instrument or device (including the interest of each lessor under any Capitalized Lease), in, of or on any assets or properties of such Person, now owned or hereafter acquired, whether arising by agreement or operation of law.

“Loan”: The Revolving Loan or Term Loan.

“Loan Documents”: This Agreement, the Security Documents, the Notes and all other documents, instruments and agreements, including lockbox agreements, control agreements, servicing agreements, financing statements, and deeds of trust or mortgages, executed in connection herewith or therewith.

“Local Bank Account”: As defined in Section 5.15(a).

“Local Bank Account Agreement”: As defined in Section 5.15(a).

“Material Adverse Occurrence”: Any occurrence of whatsoever nature (including, without limitation, any adverse determination in any litigation, arbitration, or governmental investigation or proceeding) which would reasonably be expected to materially and adversely affect (a) the financial condition or operations of the Credit Parties and their Subsidiaries taken as a whole, (b) impair the ability of the Credit Parties

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and their Subsidiaries, taken as a whole, to perform their obligations under any Loan Document, (c) the validity or enforceability of the material obligations of any Credit Party or any Subsidiary other than an Immaterial Subsidiary under any Loan Document, (d) the rights and remedies of the Agent or any Lender against any Credit Party or any Subsidiary other than an Immaterial Subsidiary, (e) the timely payment of the principal of and interest on the Loans or other amounts payable by the Credit Parties hereunder, or (f) the validity of the joint and several nature of the obligations of the Borrowers with respect to all of the Obligations.

“Maximum Rate”: As defined in Section 8.19.

“Medicaid”: Collectively, the healthcare assistance program established by Title XIX of the Social Security Act (42 U.S.C. §§1396 et seq.) and any statutes succeeding thereto, and all laws, rules, regulations, manuals, orders, guidelines or requirements pertaining to such program, including (a) all federal statutes (whether set forth in Title XIX of the Social Security Act or elsewhere) affecting such program, (b) all state statutes and plans for medical assistance enacted in connection with such program and federal rules and regulations promulgated in connection with such program, and (c) all applicable provisions of all rules, regulations, manuals, orders and administrative, reimbursement, guidelines and requirements of all government authorities promulgated in connection with such program (whether or not having the force of law), in each case as the same may be amended, supplemented or otherwise modified from time to time.

“Medicare”: Collectively, the health insurance program for the aged and disabled established by Title XVIII of the Social Security Act (42 U.S.C. §§1395 et seq.) and any statutes succeeding thereto, and all laws, rules, regulations, manuals, orders or guidelines pertaining to such program, including (a) all federal statutes (whether set forth in Title XVIII of the Social Security Act or elsewhere) affecting such program, and (b) all applicable provisions of all rules, regulations, manuals, orders and administrative, reimbursement, guidelines and requirements of all governmental authorities promulgated in connected with such program (whether or not having the force of law), in each case as the same may be amended, supplemented or otherwise modified from time to time.

“Mortgages”: Each of the mortgages, deeds of trust, leasehold mortgages, leasehold deeds of trust, collateral assignments of leases or other real estate security documents with respect to the Encumbered Real Estate.

“Multiemployer Plan”: A multiemployer plan, as such term is defined in Section 4001(a)(3) of ERISA, which is maintained (on the Original Closing Date, within the five years preceding the Original Closing Date, or at any time after the Original Closing Date) for employees of a Credit Party or any ERISA Affiliate.

“Net Collectible Value” or “NCV”: With respect to any Type of Eligible Receivables, the percentage determined by the Agent, in its reasonable credit judgment, by which the gross amount of such Eligible Receivables is multiplied to determine the net collectible value of such Receivables. Net Collectible Value is generally calculated in the manner described in Exhibit H. The initial Net Collectible Value for each Obligor Type shall be as set forth on Exhibit H. The Agent may adjust Net Collectible Value for any Type of Receivables as provided in Section 2.15.

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“Net Insurance/Condemnation Proceeds”: Any cash payments or proceeds received by any of the Credit Parties (i) under any casualty insurance policy in respect of a covered loss thereunder or (ii) as a result of the taking of any assets of the Credit Parties by any Person pursuant to the power of eminent domain, condemnation or otherwise, or pursuant to a sale of any such assets to a purchaser with such power under threat of such a taking, in each case net of any actual and documented fees, expenses and costs incurred by the Credit Parties in connection with the adjustment or settlement of any claims of the Credit Parties in respect thereof, including (i) income taxes reasonably estimated to be actually payable within two years of the date of receipt of such payments or proceeds as a result of any gain recognized in connection with the receipt of such payment or proceeds and (ii) payment of the outstanding amount of principal, premium or penalty, if any, and interest of any Indebtedness (other than the Loans) that is secured by a Lien on the stock or assets in question and that is repaid as a result of receipt of such payments or proceeds.

“Note”: Each Term Note or the Revolving Note (collectively, the “Notes”).

“Obligations”: All loans, advances, debts, liabilities and obligations for the performance of covenants, tasks or duties or for payment of monetary amounts (whether or not such performance is then required or contingent, or such amounts are liquidated or determinable) owing by any Credit Party to Agent, Funding Agent or any Lender, and all covenants and duties regarding such amounts, of any kind or nature, present or future, whether or not evidenced by any note, agreement, letter of credit agreement or other instrument, arising under the Agreement or any of the other Loan Documents. This term includes all principal, interest (including all interest that accrues after the commencement of any case or proceeding by or against any Credit Party in bankruptcy, whether or not allowed in such case or proceeding), Fees, expenses, attorneys’ fees and any other sum chargeable to any Credit Party under the Agreement or any of the other Loan Documents.

“Obligor”: Any Person that is obligated to make payment with respect to any Receivables.

“Offset”: Any amount, including any overpayment made to any Borrower or any of its Affiliates, with respect to any Obligor that is to be repaid by offset against amounts then due to such Borrower by such Obligor. Offsets shall include any amounts constituting penalties or assessments due to any state or federal tax authorities, amounts deemed by any Obligor to be recoupments, inter-agency or inter-creditor offsets and recoupments and any other amounts withheld or paid to any person or entity other than the Agent and the Lender to offset against any purported liability of the Borrowers.

“Original Closing Date”: April 23, 2008.

“Original Credit Agreement”: As defined in the opening paragraph hereof.

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“Original Lenders” means, collectively, all “Lenders” (as defined in the Original Credit Agreement on the date hereof) under the Original Credit Agreement on the Effective Date.

“Original Loans” means collectively, all “Loans” (as defined in the Original Credit Agreement on the date hereof) under the Original Credit Agreement on the Effective Date.

“Original Obligations” collectively, all “Obligations” (as defined in the Original Credit Agreement on the date hereof) under the Original Credit Agreement on the Effective Date.

“Other Taxes”: As defined in Section 2.16(b).

“PBGC”: The Pension Benefit Guaranty Corporation, established pursuant to Subtitle A of Title IV of ERISA, and any successor thereto or to the functions thereof.

“Permitted Acquisitions”: (i) Any Acquisition by any Borrower where (a) the business or division acquired is for use, or the Person acquired is engaged, in a business similar to that engaged in by the Borrowers on the Original Closing Date, (b) immediately before and after giving effect to such Acquisition, no Default or Event of Default shall exist, (c) not less than ten (10) Business Days prior to the consummation of such Acquisition, Agent shall have received pro forma financial statements, certified by the chief financial officer of SHSI as to the matters described in Section 4.5(b), giving effect to the Acquisition showing that the Borrowers are, and are reasonably anticipated to remain in pro forma compliance with all the financial ratios and restrictions set forth in Section 6.16, Section 6.17, Section 6.18, Section 6.19, Section 6.20 and Section 6.21, (d) reasonably prior to such Acquisition, the Agent shall have received drafts of each material document, instrument and agreement to be executed in connection with such Acquisition together with all lien search reports and lien release letters and other documents as the Agent may require to evidence the termination of Liens on the assets or business to be acquired and including subordination agreement in form and substance satisfactory to the Agent with respect to Indebtedness permitted to be incurred, if any, under Section 6.13(f), (e) no less than ten Business Days prior the consummation of such Acquisition, the Agent shall have received the financial statements of the Person or business to be acquired for the lesser time period of the prior three years or the period from the inception of such Person or business, in form and substance satisfactory to the Agent, (f) the provisions of Section 5.14 have been satisfied with respect to any Subsidiary to be formed or acquired in connection with such Acquisition and (g) the Agent has consented to such Acquisition in advance in writing; or (ii) any other Acquisition consented to in advance in writing by the Agent and Lenders.

“Permitted Encumbrances”: As defined in Section 6.14.

“Permitted Investments”: As defined in Section 6.12.

“Permitted Refinancing Indebtedness”: Any Indebtedness of the Borrowers issued or given in exchange for, or the proceeds of which are used to, extend, refinance,

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renew, replace, substitute or refund Indebtedness incurred pursuant to Section 6.13(b), Section 6.13(c), Section 6.13(d), Section 6.13(e), or Section 6.13(f) or any Indebtedness issued to so extend, refinance, renew, replace, substitute or refund any such Indebtedness, so long as (a) such Indebtedness has a weighted average life to maturity greater than or equal to the weighted average life to maturity of the Indebtedness being refinanced, (b) such refinancing or renewal does not add any Borrower as guarantor, obligor or grantor of security from that which applied to such Indebtedness being refinanced or renewed, (c) the principal amount (or accreted value, if applicable) of such Permitted Refinancing Indebtedness does not exceed the principal amount (or accreted value, if applicable) of the Indebtedness so extended, refinanced, renewed, replaced, substituted or refunded (plus all accrued interest thereon and the amount of all fees, commissions, discounts, costs, expenses and premiums incurred in connection therewith), and (d) such refinancing or renewal Indebtedness has substantially the same (or, from the perspective of Lender, more favorable) subordination provisions, if any, as applied to the Indebtedness being renewed or refinanced.

“Person”: Any natural person, corporation, partnership, limited partnership, limited liability company, joint venture, firm, association, trust, unincorporated organization, government or governmental agency or political subdivision or any other entity, whether acting in an individual, fiduciary or other capacity.

“Plan”: Each employee benefit plan (whether in existence on the Original Closing Date or thereafter instituted), as such term is defined in Section 3 of ERISA, maintained for the benefit of employees, officers or directors of a Credit Party or of any ERISA Affiliate.

“Pledge Agreement”: Pledge Agreement dated as of the Original Closing Date made by the Credit Parties for the benefit of the Agent, on behalf of the Beneficiaries, substantially in the form attached thereto as Exhibit E.

“Prepayment Event”: Means:

(a) any sale, transfer or other disposition (including pursuant to a sale and leaseback transaction) of any property or asset of any Credit Party other than dispositions described in Section 6.2(a), Section 6.2(b), Section 6.2(c) and Section 6.2(d); provided, however, that in the case of dispositions permitted only pursuant to Section 6.2(d) that result in net proceeds in excess of $5,000,000 in the aggregate for the term of this Agreement such excess amount shall be subject to prepayment pursuant to Section 2.6(a); provided, further, however, that notwithstanding the foregoing, as long as no Default or Event of Default has occurred and is continuing, no Prepayment Event arising from the dispositions described in this clause (a) shall occur to the extent net proceeds of such dispositions have been reinvested, or committed pursuant to a written agreement (including any purchase orders) to be reinvested, in productive assets (other than Inventory) of a kind then used or usable in the business of a Credit Party within 180 days after the date of such disposition and subsequently such reinvestment is made;

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(b) any casualty or other insured damage to, or any taking under power of eminent domain or by condemnation or similar proceeding of, any property or asset of any Credit Party, but only to the extent that the Net Insurance/Condemnation Proceeds therefrom have not been applied, or committed pursuant to a written agreement (including any purchase orders) to be applied, to repair, restore or replace such property or asset within 180 days after such event, or within such longer period as agreed to by the Agent with respect to the repair, restoration, or replacement of any real property;

(c) any receipt by any Credit Party of any indemnity payments under the Carmichael’s Acquisition Agreement from any of the Sellers or under any purchase agreement relating to any Permitted Acquisition from any sellers thereof which exceed (A) $100,000 individually or (B) when added to all other such indemnity payments received after the Original Closing Date, $500,000 in the aggregate (the “Indemnity Payment Deductibles”); provided, however, that (i) any indemnity payments that relate to the reimbursement of, or payment by, any Credit Party of any out-of-pocket costs in connection with the Carmichael’s Acquisition or a Permitted Acquisition and (ii) any indemnity amounts that are offset against the principal amounts of any promissory notes issued to any of the Sellers in connection with the Carmichael’s Acquisition or any of the sellers in connection with a Permitted Acquisition shall be excluded from the determination of the foregoing Indemnity Payment Deductibles; and

(d) any issuance of (i) Equity Interest in any Credit Party (other than pursuant to stock options issued in accordance with stock option plans or other benefit plans for management or employees of any Credit Party) or (ii) Indebtedness of any Credit Party.

“Prepayment Fees”: As defined in Section 2.10.

“Privacy and Security Rules”: As defined in Section 4.13.

“Pro Rata Share”: With respect to all matters relating to any Lender (a) with respect to the Revolving Loan, the percentage obtained by dividing (i) the Revolving Commitment of that Lender by (ii) the aggregate Revolving Commitments of all Lenders, (b) with respect to any Term Loan, the percentage obtained by dividing (i) the applicable Term Loan of that Lender by (ii) the aggregate applicable Term Loan of all Lenders, (c) with respect to all Loans, the percentage obtained by dividing (i) the aggregate Revolving Commitments and Term Loan of that Lender by (ii) the aggregate Revolving Commitments and Term Loans of all Lenders, and (d) with respect to all Loans on and after the Termination Date, the percentage obtained by dividing (i) the aggregate outstanding principal balance of the Loans held by that Lender, by (ii) the outstanding principal balance of the Loans held by all Lenders, as any such percentages may be adjusted by assignments pursuant to Section 9.1.

“Prohibited Transaction”: The respective meanings assigned to such term in Section 4975 of the Code and Section 406 of ERISA.

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“Qualifying Appraisal”: As defined in Section 2.17.

“Qualified Transferee”: (a) Any Lender or any Affiliate of any Lender that extends or invests in commercial loans, and (b) any commercial bank, savings and loan association or savings bank or any other entity having total assets in excess of $500,000,000, which extends credit or buys loans as one of its businesses, and which, through its applicable lending office, is capable of lending to Borrowers without the imposition of any withholding or similar taxes; provided that no Person proposed to become a Lender after the Original Closing Date and reasonably determined by the Borrowers’ Agent to be acting in the capacity of a vulture fund or distressed debt purchaser shall be a Qualified Transferee.

“Rate Protection Agreement”: Any interest rate swap, cap or option agreement, or any other agreement pursuant to which any Borrower hedges interest rate risk with respect to a portion of the Obligations.

“Real Estate Collateral Coverage”: The amount equal to the net book value of the Encumbered Real Estate, unless there exists a Qualifying Appraisal for such property issued no more than three (3) years prior to any date of determination, in which case the applicable amount shall be the appraised value.

“Receivables”: Any right to payment, whether constituting an account, chattel paper, instrument, general intangible, payment intangible, healthcare insurance receivable, contract or otherwise, arising from the sale, rental or lease of healthcare goods or equipment, or the provision of services and any ancillary sales, including all rights and remedies to payment relating thereto, together with any and all proceeds in any way derived, directly or indirectly therefrom. The term “Receivables” shall include amounts due under capitation and similar agreements, amounts due the Borrowers for cost adjustments or undercharges for prior services, amounts due as any part of a disproportionate share or risk share payment, workmen’s compensation claims, or other right to payment for any work, service, work in progress or other thing of value performed by the Borrowers whether billed or not by the Borrowers, and any other claims to payment held by the Borrowers.

“Receivables Collateral Coverage”: The amount equal to the Net Collectible Value of all Eligible Receivables.

“Remittance Account”: As defined in Section 2.2.

“Reportable Event”: A reportable event as defined in Section 4043 of ERISA and the regulations issued under such Section, with respect to a Plan, excluding, however, such events as to which the PBGC by regulation has waived the requirement of Section 4043(a) of ERISA that it be notified within 30 days of the occurrence of such event, provided that a failure to meet the minimum funding standard of Section 412 of the Code and of Section 302 of ERISA shall be a Reportable Event regardless of the issuance of any waiver in accordance with Section 412(d) of the Code.

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“Required Control Agreements”: The Control Agreements described on Schedule 1.1(b) hereto by and among the Agent and each Borrower, bank, issuer or securities intermediary listed thereon.

“Required Lenders”: means Lenders having (a) 51% or more of the sum of the Revolving Commitments of all Lenders plus the Term Loans held by all Lenders, or (b) if the Revolving Commitments have been terminated, 51% or more of the aggregate outstanding amount of the Loans.

“Required Revolving Lenders” means Revolving Lenders having (a) 51% or more of the Revolving Commitments of all Revolving Lenders, or (b) if the Revolving Commitments have been terminated, 51% or more of the aggregate outstanding amount of the Revolving Loan.

“Restricted Payments”: With respect to any Borrower and its Subsidiaries, collectively, (i) all dividends or other distributions of any nature (cash, Equity Interests other than common stock of such Borrower, assets or otherwise), (ii) all payments on any class of Equity Interests (including warrants, options or rights therefor) issued by such Borrower, whether such Equity Interests are authorized or outstanding on the Original Closing Date or at any time thereafter and any redemption or purchase of, or distribution in respect of, any of the foregoing, whether directly or indirectly, and (iii) all payments or prepayments of interest on, principal of, premium, if any, fees, redemptions, conversions, exchanges, purchases, retirements, defeasances, sinking fund or similar payments with respect to, any Indebtedness subordinated in right of payment to the Obligations.

“Revolving Commitment”: (a) As to any Lender, the obligation of such Lender to make its Pro Rata Share of Advances to the Borrowers, which commitment shall be as set forth on Annex A or in the most recent Assignment Agreement, if any, executed by such Lender and (b) as to all Lenders, the obligations of all Lenders to make the Advances, which aggregate commitment shall be equal to the Revolving Commitment Amount on the Effective Date, as such amount may be adjusted, if at all, from time to time in accordance with this Agreement.

“Revolving Commitment Amount”: Initially $12,000,000 but as the same may be reduced from time to time, if at all, in accordance with this Agreement, including pursuant to Section 2.8.

“Revolving Commitment Fees”: As defined in Section 2.9.

“Revolving Lenders”: Those Lenders having a Revolving Commitment or holding a Revolving Loan.

“Revolving Loan” and “Revolving Loans”: As defined in Section 2.1(a).

“Revolving Note”: As defined in Section 2.1(a); one or more promissory notes of the Borrowers evidencing the obligation of the Borrowers to repay the Revolving Loan.

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“Security Agreement”: Security Agreement dated as of the Original Closing Date made by the Credit Parties for the benefit of the Agent, on behalf of the Beneficiaries, substantially in the form attached thereto as Exhibit D.

“Security Documents”: The Security Agreement, the Required Control Agreements and any other Control Agreements, the Pledge Agreement, the Guaranty, the Mortgages and any other security agreements, pledge agreements, control agreements, mortgages, financing statements and other security documents entered into by the parties hereto or any other Persons or authorized to be filed or recorded pursuant to or in connection with this Agreement.

“Senior Officer”: As to any Person, the Chief Executive Officer, President, Executive Vice President, Vice President, Chief Financial Officer, or Controller, of such Person.

“Senior Leverage Ratio”: For any period of determination, the ratio of (i) Total Debt as of the end of such period less Subordinated Debt as of the end of such period to (ii) the sum of (A) Consolidated EBITDA for such period plus (B) with respect to each Person and any of its Subsidiaries acquired in a Permitted Acquisition during such period, the Consolidated Pro Forma EBITDA of such Person and any of its Subsidiaries for all times during such period prior to the acquisition of such Person and any of its Subsidiaries.

“Sellers” means Theodore S. Carmichael and Judy Chiasson Carmichael.

“SHSI”: SunLink Health Systems, Inc., an Ohio corporation.

“Specified Lien”: As defined in Section 8.18(j).

“Subordinated Debt”: Any Indebtedness of any Borrower, now existing or hereafter created, incurred or arising, which is subordinated in right of payment to the payment of the Obligations in a manner and to an extent (a) that the Agent have approved in writing prior to the creation of such Indebtedness, or (b) as to any Indebtedness of any Borrower existing on the date of this Agreement, that the Agent have approved as Subordinated Debt in a writing delivered by the Agent to the Borrowers’ Agent on or prior to the Original Closing Date.

“Subordinated Intercompany Note” Master Subordinated Intercompany Note, executed by each Credit Party in favor of each other Credit Party, which is subordinated to the payment of the Obligations in a manner satisfactory to Agent and having other terms reasonably satisfactory to Agent, and which is pledged and delivered to Agent, for the benefit of the Beneficiaries, as security for the Obligations.

“Subsidiary”: Any corporation or other entity of which Equity Interests having ordinary voting power for the election of a majority of the board of directors or other Persons performing similar functions are owned by any Credit Party either directly or through one or more Subsidiaries, excluding Existing Foreign Subsidiaries.

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“Taxes”: As defined in Section 2.16(a).

“Termination Date”: The earliest of (a) the seventh anniversary of the Original Closing Date, (b) the date on which the Revolving Commitment is terminated pursuant to Section 7.2 hereof or (c) the date on which the Revolving Commitment Amount is reduced to zero pursuant to Section 2.8 hereof.

“Term Loan”: As defined in Section 2.1(b).

“Term Loan Lenders” Those Lenders holding the Term Loan.

“Term Notes”: One or more Notes described in Section 2.1(b)(iii), evidencing the obligation of the Borrowers to repay the Term Loan.

“Total Liabilities”: At the time of any determination, the amount, on a consolidated basis, of all items of Indebtedness of the Borrowers and their Subsidiaries that would constitute “liabilities” for balance sheet purposes in accordance with GAAP.

“Total Debt”: At the time of any determination, the aggregate stated balance sheet amount of the Funded Debt of the Borrowers and their Subsidiaries determined on a consolidated basis.

“Total Outstandings”: At the time of any determination, the sum of the unpaid principal balance of the Revolving Loan and the unpaid principal balance of the Term Loan and all interest, cost or expenses due to the Agent and Lenders under this Agreement and the other Loan Documents.

“Transactions Rule”: As defined in Section 4.13.

“TRICARE”: Collectively, a program of medical benefits covering former and active members of the uniformed services and certain of their dependents, financed and administered by the United States Departments of Defense, Health and Human Services and Transportation, which program was formerly known as CHAMPUS (Civilian Health and Medical Program of the Uniformed Services), and all laws, rules, regulations, manuals, orders and administrative, reimbursement and other guidelines of all governmental authorities promulgated in connection with such program (whether or not having the force of law), in each case as the same may be amended, supplemented or otherwise modified from time to time.

“Type”: Relative to any Receivables, each applicable aging category (e.g., 0-30 days, 31-60 days, 61-90 days, etc.) up to and exceeding the Cut-off Period, Obligor type (e.g., Medicare, Medicaid, MediCal, institutional payors, commercial insurance payors, or individual/self pay (if applicable)), and/or other category or subset of Receivables used by the Agent to calculate the Net Collectible Value applicable to Receivables pursuant to the Agent’s NCV calculation methodology described in Exhibit H.

“UCC”: The Uniform Commercial Code, as adopted in the State of Georgia, as amended or supplemented from time to time.

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“UK Subsidiaries”: KRUG International (“U.K.”), Ltd., a company organized under the laws of the United Kingdom, and Bradley International Holdings, Ltd., a company organized under the laws of the United Kingdom.

“UK Obligations”: The inter-company payables and other obligations, including, without limitation, any contingent obligations (including those arising under certain preferred stock issued and outstanding to KRUG International (“U.K.”), Ltd. by SunLink Healthcare Investments, Inc.) due from the Borrowers or any of them to, or on behalf of, the UK Subsidiaries, as set forth on Schedule 6.15 hereto.

“Unused Revolving Commitment”: As of any date of determination, the amount by which the Revolving Commitment Amount exceeds the principal amount of unpaid Advances on such date.

“United States”: Shall have the meanings specified in Section 7701 of the Internal Revenue Code.

“U.S. Taxes”: As defined in Section 2.16(e).

“Working Capital”: The amount of the excess, if any, of the Consolidated Current Assets over the Consolidated Current Liabilities of the Borrowers.

Section 1.2 Accounting Terms and Calculations. Except as may be expressly provided to the contrary herein, all accounting terms used herein shall be interpreted and all accounting determinations hereunder shall be made in accordance with GAAP. To the extent any change in GAAP affects any computation or determination required to be made pursuant to this Agreement, such computation or determination shall be made as if such change in GAAP had not occurred unless the Borrowers and the Agent agree in writing on an adjustment to such computation or determination to account for such change in GAAP.

Section 1.3 Computation of Time Periods. In this Agreement, in the computation of a period of time from a specified date to a later specified date, unless otherwise stated the word “from” means “from and including” and the word “to” or “until” each means “to but excluding”.

Section 1.4 Other Definitional Terms. The words “hereof,” “herein” and “hereunder” and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. References to Sections, Exhibits, Schedules and like references are to this Agreement unless otherwise expressly provided. The words “include,” “includes” and “including” shall be deemed to be followed by the phrase “without limitation.” Unless the context in which used herein otherwise clearly requires, “or” has the inclusive meaning represented by the phrase “and/or.” All incorporation by reference of covenants, terms, definitions or other provisions from other agreements are incorporated into this Agreement as if such provisions were fully set forth herein, and such incorporation shall include all necessary definitions and related provisions from such other agreements but including only amendments thereto agreed to by the Lenders required pursuant to Section 8.1 hereof, and shall survive any termination of such other agreements until the obligations of the Borrowers under this Agreement and the Notes are irrevocably paid in full, and the commitments of the Lenders to advance funds to any Borrower are terminated. Whenever the word “knowledge” or a word of

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similar import relating to the knowledge or awareness of the Borrowers is used in this Agreement or the other Loan Documents, such phrase shall mean or refer to the actual knowledge of a Senior Officer of Borrower having responsibility for such matters and assumes that each Borrower maintains and applies appropriate policies and procedures to ensure that each Senior Officer is advised of all material matters and occurrences within the responsibility of such Senior Officer.

ARTICLE II

TERMS OF THE CREDIT FACILITIES

Section 2.1 Loans. On the terms and subject to the conditions hereof:

(a) Revolving Credit.

(i) Each Revolving Lender agrees, severally and not jointly, to make available to the Borrowers jointly and severally its Pro Rata Share of advances (each, an “Advance”) as part of a revolving loan facility (each a “Revolving Loan” and, collectively, the “Revolving Loans”) on a revolving basis at any time and from time to time from the Original Closing Date to the Termination Date, during which period the Borrowers may borrow, repay and reborrow in accordance with the provisions hereof as long as the amount of each such requested Advance does not exceed Availability then in effect and each of the other conditions precedent in Section 3.2 are satisfied; provided, however, that Borrowers shall not be entitled to request more than one (1) Advance during any period of 7 consecutive days without the consent of the Agent (it being understood and agreed that the Revolving Loans made pursuant to Section 2.5(c) shall be disregarded for the purposes of determining compliance with the foregoing limitation on requests) . No Revolving Lender shall have any obligation to make, and the Borrowers shall have no right to obtain or to permit to remain outstanding, any Advance or Advances that would cause such Revolving Lender’s Pro Rata Share of the total outstanding Advances to exceed its separate Revolving Commitment.

(ii) At the request of Agent on behalf of any Revolving Lender, the Borrowers shall jointly and severally execute and deliver to Agent for delivery to such Revolving Lender a note to evidence the Revolving Loans. The note shall be in the principal amount of the Revolving Commitment of such Revolving Lender, substantially in the form of Exhibit A (the “Revolving Note”).

(iii) The aggregate principal amount of Revolving Loan advanced to each Borrower shall be the primary obligation of that Borrower (but shall also be guaranteed, jointly and severally, by all other Borrowers pursuant to Section 8.18).

(b) Term Loan. On the Original Closing Date, each Term Loan Lender (as defined in the Original Credit Agreement on such date), severally and not jointly, made to Borrowers, jointly and severally, in one draw, its Pro Rata Share (as defined in the Original Credit Agreement) of a term loan in an aggregate amount of $35,000,000 (the “Term Loan”). The aggregate principal amount of Term Loan outstanding on the Effective Date is $34,708,333.34.

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(i) The Borrowers, jointly and severally, shall repay the Term Loan through periodic payments as indicated in Section 2.5(b) below.

(ii) The final installment of the Term Loan shall in all events equal the entire remaining principal balance of the Term Loan and shall be due and payable in full on the Termination Date. Amounts borrowed under this Section 2.1(b) and repaid may not be reborrowed.

(iii) At the request of Agent on behalf of any Term Loan Lender, the Borrowers shall jointly and severally execute and deliver to Agent for delivery to such Term Loan Lender a promissory note substantially in the form of Exhibit B (“Term Note”), to evidence the Term Loan in the amount of such Term Loan Lender’s Pro Rata Share of the Term Loan. Each Term Note shall represent the joint and several obligation of each Borrower to pay Term Loan, together with interest thereon.

(iv) The aggregate principal amount of Term Loan advanced to each Borrower shall be the primary obligation of that Borrower (but shall also be guaranteed, jointly and severally, by all other Borrowers pursuant to Section 8.18).

Section 2.2 Procedure for Revolving Loans. Any request by the Borrowers’ Agent for an Advance hereunder shall be in writing, or by telephone and in writing, and must be given so as to be received by the Funding Agent (with a copy to the Agent when in writing) not later than noon (New York time) two (2) Business Days prior to the requested Advance Date. Each request for an Advance hereunder shall be irrevocable and shall be deemed a representation by each Borrower that on the requested Advance Date and after giving effect to the requested Advance the applicable conditions specified in Article III have been and will be satisfied, except for those conditions waived in writing by the Required Revolving Lenders with respect to such request. Each request for an Advance hereunder shall specify (i) the requested Advance Date and (ii) the amount of the Advance to be made on such date which shall be in a minimum amount of $100,000 or, if more, integral multiples of $100,000 in excess thereof. The Funding Agent may rely on any telephone request by a Senior Officer of the Borrowers’ Agent for an Advance hereunder which it believes in good faith to be genuine (provided that the Borrowers’ Agent shall also be required to promptly confirm to the Funding Agent each telephone request in writing, with a copy to the Agent); and each Borrower hereby waives the right to dispute the Funding Agent’s record of the terms of such telephone request. Unless the Required Revolving Lenders or the Agent determine that any applicable condition specified in Article III has not been satisfied, the Funding Agent will make available to the Borrowers’ Agent by remittance to the deposit account designated by the Borrowers’ Agent from time to time in writing to the Funding Agent, provided that such deposit account is subject to a security interest in favor of the Agent, for the benefit of the Beneficiaries, (the “Remittance Account”) in Immediately Available Funds not later than 4:00 p.m. (New York time) on the requested Advance Date the amount of the requested Advance.

Section 2.3 Records. The Funding Agent shall enter in its ledgers and records (the “Funding Agent Loan Account”) the amount of the Term Loan and the Advances made or distributed by the Funding Agent and the repayments thereon made to or distributed by the Funding Agent, and the Agent shall enter in its ledgers and records (the “Agent Loan Account”;

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and together with the Funding Agent Loan Account, the “Loan Accounts”) all other the amount of the Term Loan and the Advances made and the repayments made thereon. All entries in the Loan Accounts shall be made in accordance with the customary accounting practices of the Funding Agent as in effect from time to time. The balance in the Loan Accounts, as recorded on the most recent printout or other written statement of the Funding Agent and the Agent, as the case may be, shall, absent manifest error, be presumptive evidence of the amounts due and owing to the Funding Agent, the Agent and Lenders by the Borrowers; provided that any failure to so record or any error in so recording shall not limit or otherwise affect Borrowers’ duty to pay the Obligations. Each Lender is authorized by each Borrower to enter on a schedule attached to a Term Note or the Revolving Note, as appropriate, a record of the Term Loan, Advances and repayments; provided, however that the failure by any Lender to make any such entry or any error in making such entry shall not limit or otherwise affect the obligation of the Borrowers hereunder and on the Notes, and, in all events, the principal amounts owing by the Borrowers in respect of the Revolving Note shall be the aggregate amount of all Revolving Loans made by Lenders less all payments of principal thereof made by the Borrowers and the principal amount owing by the Borrowers in respect of the Term Notes shall be the aggregate amount of the Term Loan less all payments of principal thereof made by the Borrowers.

Section 2.4 Interest Rates, Interest Payments and Default Interest.

(a) The Advances. Interest shall accrue and be payable on the Revolving Loans as follows:

(i) Subject to subsection (a)(ii) below, each Advance shall bear interest on the unpaid principal amount thereof at a varying rate per annum equal to the sum of (A) the LIBOR Rate, plus (B) the Applicable Revolving Margin.

(ii) Upon the occurrence and during the continuation of an Event of Default, each Advance shall, at the option of the Agent or Required Lenders, bear interest at a rate per annum equal to the sum of (A) the LIBOR Rate, plus (B) the Applicable Revolving Margin, plus (C) 2.0%.

(iii) Interest shall be payable (A) on the first Business Day of each month in respect of the immediately preceding month, (B) upon any permitted prepayment (on the amount prepaid) made in connection with a reduction of the Revolving Commitment Amount, and (C) on the Termination Date; provided that interest under subsection (a)(ii) of this Section shall be payable on demand.

(b) The Term Loan. Interest shall accrue and be payable on the Term Loan as follows:

(i) Subject to subsection (b)(ii) below, the Term Loan shall bear interest on the unpaid principal balance thereof at a varying rate per annum equal to the sum of (A) the LIBOR Rate, plus (B) the Applicable Term Loan Margin.

(ii) Upon the occurrence and during the continuation of an Event of Default, Term Loan shall, at the option of the Agent or Required Lenders, bear interest at a rate per annum equal to the sum of (A) the LIBOR Rate, plus (B) the Applicable Term Loan Margin, plus (C) 2.0%.

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(iii) Interest shall be payable (A) on the first Business Day of each month in respect of the immediately preceding month; (B) upon any permitted prepayment (on the amount prepaid); and (C) on the scheduled maturity date of the Term Notes; provided that interest under subsection (b)(ii) of this Section shall be payable on demand.

Section 2.5 Repayment.

(a) The unpaid principal balance of the Revolving Loan, together with all accrued and unpaid interest thereon, shall be due and payable on the Termination Date.

(b) The principal of the Term Loan shall be payable in (i) equal installments of One Hundred Forty-Five Thousand Eight Hundred Thirty-Three Dollars and 33/100 cents ($145,833.33) on the first Business Day of each month and (ii) one balloon payment on the Termination Date equal to any unpaid principal balance, together with all accrued and unpaid interest.

(c) Each of the Borrowers hereby authorizes the Funding Agent and each Lender to make a Revolving Loan to pay interest and principal and Revolving Commitment Fees, in each instance, on the date due, and each of the Borrowers hereby authorizes the Agent and each Lender to make a Revolving Loan to pay agent fees on the date due and other fees, costs or expenses payable by any Borrower or any of its Subsidiaries hereunder or under the other Loan Documents.

(d) All of the Obligations shall become due and payable as otherwise set forth herein, but in any event all of the remaining Obligations shall become due and payable upon the Termination Date. Until all Obligations have been fully paid and satisfied (other than contingent indemnification obligations to the extent no unsatisfied claim has been asserted) and the Revolving Commitment has been terminated, Agent shall be entitled to retain the security interests in the Collateral granted under the Security Documents and otherwise and the ability to exercise all rights and remedies available to them under the Loan Documents and applicable laws.

Section 2.6 Prepayments.

(a) Mandatory Prepayments for a Prepayment Event. If at any time a Prepayment Event occurs, the Borrowers shall immediately repay the Loans in the amount of (i) 100% of the net cash proceeds realized by a Prepayment Event described in clause (a), clause (b) or clause (c) of the definition of the term “Prepayment Event” and (ii) 50% of the net cash proceeds realized by a Prepayment Event described in clause (d) of the definition of the term “Prepayment Event”. Any such prepayments shall be applied to the Loans in accordance with Section 2.6(e).

(b) Prepayments from Proceeds of Keyman Life Insurance. Any and all proceeds of Keyman Life Insurance (whether such proceeds arise by reason of death benefit, at

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maturity, surrendering the policy and receiving the surrender value thereof or otherwise) shall be immediately used to prepay the Obligations in an amount equal to such proceeds, which shall be applied in accordance with Section 2.6(e).

(c) Other Mandatory Prepayments.

(i) If at any time Availability is less than zero Dollars ($0), the Borrowers shall immediately pay to the Funding Agent, for the ratable benefit of the Revolving Lenders, the amount of such deficiency to the extent of Revolving Loan then outstanding.

(ii) If at any time a Change of Control shall occur (other than, so long as no Event of Default has occurred and is continuing, a Change of Control resulting from an acquisition of Borrowers by any one or more of Resurgence Health Group, LLC and/or its affiliates, Berggruen Holdings North America Ltd. and/or its affiliates) or Health Management Associates, Inc., the Borrowers shall immediately prepay the Loans in full and terminate all Revolving Commitments hereunder.

(d) Optional Prepayments. The Borrowers may prepay Advances or the Term Loan, in whole or in part, at any time, subject to the payment of the fees specified in Section 2.10, if applicable, upon prior written notice given by Borrowers’ Agent and received by Funding Agent, with a copy to Agent, not later than 11 a.m. (New York time) two Business Days prior to the date of the prepayment. Any such prepayment of the Term Loan and any prepayments in full of all Advances and termination of the Revolving Commitment shall be made to the Funding Agent, for the ratable benefit of the applicable Lenders, and must be accompanied by accrued and unpaid interest on the amount prepaid. Each partial prepayment on the Term Loan shall be in a minimum amount of $100,000 or an integral multiple thereof. Amounts paid (unless following an acceleration or upon termination of the Revolving Commitment in whole) or prepaid on the Revolving Loan under this subsection (d) may be reborrowed upon the terms and subject to the conditions and limitations of this Agreement. Amounts prepaid on the Term Loan may not be reborrowed.

(e) Application of Proceeds. With respect to any prepayments made by any Borrower pursuant to Section 2.6(d), the Borrowers’ Agent may elect to have any such prepayment applied to the Advances or the Term Loan. With respect to any prepayments made by any Borrower pursuant to Section 2.6(c)(i), such prepayments shall be applied to reduce the outstanding principal balance of the Advances (without any reduction of the Revolving Commitment Amount). With respect to any prepayments made by any Borrower pursuant to Section 2.6(a) or Section 2.6(b), such prepayments shall first be applied in payment of the Term Loan, and, in each instance, against remaining payments thereon in the inverse order of maturity (starting with the balloon payment thereon due on the Termination Date) and, at any time after Term Loan shall have been prepaid in full, such prepayments shall, second, be applied to reduce the outstanding principal balance of the Advances if applicable (without any reduction of the Revolving Commitment Amount).

Section 2.7 Mandatory Prepayment of Term Loan from Excess Cash Flow. Within one hundred twenty (120) days after the end of each fiscal year commencing with the fiscal year

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ended June 30, 2009, Borrowers, jointly and severally, shall prepay the outstanding principal of the Term Loan in an amount equal to twenty-five percent (25%) of the Consolidated Excess Cash Flow for such fiscal year, which prepayment shall be made to Funding Agent, for the ratable benefit of Lenders, and shall be applied in payment of the Term Loan, and, in each instance, against remaining payments thereon in the inverse order of maturity (starting with the balloon payment thereon due on the Termination Date) until the Term Loan shall have been prepaid in full. The calculation shall be based on the consolidated audited Financial Statements for the Borrowers and their Subsidiaries. Such prepaid amounts may not be reborrowed.

Section 2.8 Optional Reduction of Revolving Commitment Amount or Termination of Revolving Commitment. The Borrowers may, at any time, upon not less than three (3) Business Days prior written notice from the Borrowers’ Agent to the Funding Agent, with a copy to the Agent, reduce the Revolving Commitment Amount with any such reduction in a minimum amount of $500,000, or, if more, in integral multiples of $100,000 in excess thereof; provided, however, that the Borrowers may not at any time reduce the Revolving Commitment Amount below the unpaid principal balance of the Revolving Loan. The Borrowers’ Agent may, at any time, upon not less than three (3) Business Days prior written notice from the Borrowers’ Agent to the Funding Agent, with a copy to the Agent, terminate the Revolving Commitment in its entirety. Upon termination of the Revolving Commitment pursuant to this Section, the Borrowers shall pay to the Funding Agent the full amount of all outstanding Advances, all accrued and unpaid interest thereon, all unpaid Revolving Commitment Fees accrued to the date of such termination, all Prepayment Fees, if applicable, and all other unpaid Obligations of the Borrowers to the Agent, Funding Agent and Lenders hereunder.

Section 2.9 Revolving Commitment Fee. From the Original Closing Date until all Advances have been paid in full and the Revolving Commitments have expired or been terminated, the Borrowers shall pay, without duplication of any such fee paid pursuant to the Original Credit Agreement, to the Funding Agent for the account of the Revolving Lenders fees (the “Revolving Commitment Fees”) in an amount determined by applying a rate of 0.30% per annum to the average daily Unused Revolving Commitment during the period for which such fee is due. Such Revolving Commitment Fees are payable in arrears monthly on the first Business Day of each month in respect of the immediately preceding month and on the Termination Date.

Section 2.10 Prepayment Fee. If any Borrower pays after acceleration or prepays all or any portion of the Term Loan or prepays the Revolving Loan and terminates or reduces the Revolving Commitment, whether voluntarily or involuntarily and whether before or after acceleration of the Obligations or if any of the Revolving Commitments are terminated as a result of the occurrence of an Event of Default or otherwise, Borrower shall pay to Funding Agent, for the benefit of Lenders, as liquidated damages and compensation for the costs of being prepared to make funds available hereunder a fee (the “Prepayment Fee”) in an amount equal to the Applicable Percentage (as defined below) multiplied by the sum of (i) the principal amount of the Term Loan paid after acceleration or prepaid, and (ii) the amount of the Revolving Commitment terminated or reduced. As used herein, the term “Applicable Percentage” shall mean (w) two percent (2.0%), in the case of a prepayment on or prior to the first anniversary of the Original Closing Date, (x) one and a half percent (1.5%), in the case of a prepayment after the first anniversary of the Original Closing Date but prior to the second anniversary thereof, (y) one percent (1.0%), in the case of a prepayment after the second anniversary of the Original

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Closing Date but prior to the third anniversary thereof and (z) thereafter no prepayment fee shall be payable. The Credit Parties agree that the Applicable Percentages are a reasonable calculation of Lenders’ lost profits in view of the difficulties and impracticality of determining actual damages resulting from an early termination of the Revolving Commitments and the related loan facility provided hereunder. Notwithstanding the foregoing, no Prepayment Fee shall be payable by Borrowers upon a repayment made pursuant to Section 2.5(b), a mandatory prepayment made pursuant to Section 2.6(a), 2.6(b), 2.6(c)(i) or 2.7 or a repayment of Advances without a simultaneous reduction in or termination of the Revolving Commitment, provided that Borrowers do not terminate the Revolving Commitment upon any such prepayment and, in the case of prepayments made pursuant Section 2.6(a), the transaction giving rise to the applicable prepayment is expressly permitted under Section 6.2.

Section 2.11 Fee Letter. Borrowers shall pay to Chatham, for the account of Chatham, the fees specified in that certain fee and syndication letter dated on or about the Original Closing Date among Borrowers and Chatham (the “Chatham Fee Letter”), at the times specified for payment therein; it being acknowledged by Chatham that those fees that were payable pursuant thereto on the Original Closing Date have been paid by the Borrowers on the Original Closing Date.

Section 2.12 Computation. The Fees and interest on the Loans shall be computed on the basis of actual days elapsed and a year of 360 days.

Section 2.13 Payments.

(a) Payments and prepayments of principal of, and interest on, the Loans under Sections 2.4(a), 2.4(b), 2.5(a), 2.5(b), 2.6(c)(i), 2.6(d), and 2.7, all Revolving Commitment Fees under Section 2.9 and all Prepayment Fees under Section 2.10 payable to the Funding Agent and/or Lenders shall be made without setoff or counterclaim in Immediately Available Funds not later than 1:00 p.m. (New York time) on the dates called for under this Agreement to the Funding Agent for the benefit of the Funding Agent, Agent and/or Lenders, as applicable, in accordance with the wire instructions set forth on the attached Exhibit K-1 or to such other account as the Funding Agent may from time to time designate in writing. Funds received after such time shall be deemed to have been received on the next Business Day. Whenever any payment to be made hereunder shall be stated to be due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day and such extension of time, in the case of a payment of principal, shall be included in the computation of any interest on such principal payment.

(b) All other payments and other obligations under this Agreement and the other Loan Documents payable to the Agent and/or Lenders shall be made without setoff or counterclaim in Immediately Available Funds not later than 1:00 p.m. (New York time) on the dates called for under this Agreement to the Agent for the benefit of the Agent, Funding Agent and/or Lenders, as applicable, in accordance with the wire instructions set forth on the attached Exhibit K-2 or to such other account as the Agent may from time to time designate in writing. Funds received after such time shall be deemed to have been received on the next Business Day. Whenever any payment to be made hereunder shall be stated to be due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day and such extension of time, in the case of a payment of principal, shall be included in the computation of any interest on such principal payment.

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Section 2.14 Use of Loan Proceeds. The proceeds of Term Loan shall be used for refinancing the Borrower’s existing Indebtedness, funding the payment of the purchase price for the Carmichael’s Acquisition (and any related transaction expenses), funding the payment of fees and expenses hereunder and for general business purposes in a manner not in conflict with any of the Borrowers’ covenants in this Agreement, but excluding funding of Permitted Acquisitions. The proceeds of the Advances shall be used for refinancing the Borrower’s existing indebtedness, funding the payment of fees and expenses hereunder, funding the payment of expenses relating to Carmichael’s Acquisition and general business purposes in a manner not in conflict with any of the Borrowers’ covenants in this Agreement, but excluding funding of Permitted Acquisitions.

Section 2.15 Adjustment of NCV. Until notice of a change has been delivered to Borrowers’ Agent by the Agent, the applicable NCV of Eligible Receivables by Obligor Type shall be as set forth in Exhibit H. The Agent has the right, in its reasonable credit judgment, to adjust any applicable NCV Percentage at any time, based upon the criteria, and in accordance with the Agent’s methodology of calculating such NCV, as set forth in Exhibit H. Each change in any NCV shall be effective immediately upon receipt by the Borrowers’ Agent of the Agent’s notification of such change.

Section 2.16 Taxes.

(a) Any and all payments by the Borrowers hereunder or under the Notes shall be made free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of the Agent, the Funding Agent and Lenders, taxes imposed on its overall net income and franchise taxes imposed on it in lieu of net income taxes (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities in respect of payments hereunder or under the Notes being hereinafter referred to as “Taxes”).

(b) The Borrowers agree to pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies that arise from any payment made hereunder or under the Notes or from the execution, delivery or registration of, performing under, or otherwise with respect to, this Agreement or the Notes (hereinafter referred to as “Other Taxes”).

(c) The Borrowers shall indemnify the Agent, the Funding Agent and Lenders for the full amount of Taxes or Other Taxes imposed on or paid by the Agent, the Funding Agent or any Lender and any penalties, interest and expenses with respect thereto. Payments on this indemnification shall be made within 30 days from the date the Agent, the Funding Agent and such Lender makes written demand therefor.

(d) The Borrowers shall furnish to the Agent, upon the Agent’s request, at the Agent’s address referred to on the signature page hereof a certified copies of receipts evidencing payment of Taxes.

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(e) If any Borrower shall be required by law or regulation to make any deduction, withholding or backup withholding of any taxes, levies, imposts, duties, fees, liabilities or similar charges of the United States, any possession or territory of the United States (including the Commonwealth of Puerto Rico) or any area subject to the jurisdiction of the United States (“U.S. Taxes”) from any payments to the Agent, the Funding Agent or any Lender pursuant to any Loan Document in respect of the Obligations payable to the Agent, the Funding Agent or any Lender then or thereafter outstanding, such Borrower shall make such withholdings or deductions and pay the full amount withheld or deducted to the relevant taxation authority or other authority in accordance with applicable law, unless such payments are being diligently contested and such Borrower has established adequate reserves with respect to such amounts, but in any event, the sum payable hereunder shall be increased as may be necessary so that, after making all required withholdings or deductions, such Lender or Agent receives an amount equal to the sum it would have received had no such withholding or deductions been made.

Section 2.17 Appraisals. The Agent, in its reasonable credit judgment, may, and upon the written request of the Borrowers’ Agent will, obtain an appraisal of any Encumbered Real Estate, Encumbered Equipment or Eligible Inventory from an AMI certified appraiser reasonably satisfactory to the Agent and the Borrowers’ Agent in case of the Encumbered Real Estate and any experienced equipment or inventory appraiser reasonably satisfactory to the Agent and the Borrowers’ Agent in case of the Encumbered Equipment or Eligible Inventory, each of which shall be conducted on a “going concern” basis in the case of assets of any Borrower that is a going concern and otherwise on an orderly liquidation value basis (a “Qualifying Appraisal”). Upon obtaining any such Qualifying Appraisal, the Agent shall notify the Borrowers’ Agent of the appraised value of the property that is the subject thereof and upon such notification such appraised value shall be used to determine the Collateral Coverage Ratio for one year after the date of the issuance of the appraisal in the case of Encumbered Real Estate and Encumbered Equipment, and three months in the case of Eligible Inventory, except as otherwise provided herein. Unless an Event of Default has occurred and is continuing, (a) the Borrowers shall be responsible only for the payment of costs and expenses for a Qualified Appraisal requested by it and (b) no more than one appraisal shall be conducted for any particular item of Collateral during each calendar year in the case of Encumbered Real Estate and Encumbered Equipment, and each calendar quarter in the case of Eligible Inventory. If an Event of Default has occurred and is continuing the Borrowers shall be responsible for the payment of costs and expenses for a Qualified Appraisal.

Section 2.18 Wire Transfer Fee. The Borrowers shall pay to the Agent and the Funding Agent, as the case may be, $20.00 for each wire transfer initiated by the Agent and the Funding Agent, as the case may be, in connection with this Agreement.

Section 2.19 Application and Allocation of Payments. So long as no Event of Default has occurred and is continuing, (i) payments matching specific scheduled payments then due shall be applied to those scheduled payments; (ii) voluntary prepayments shall be applied in accordance with the provisions of Section 2.6(d) and (iii) mandatory prepayments shall be applied as set forth in Section 2.6(e). All payments and prepayments applied to a particular Loan shall be applied ratably to the portion thereof held by each Lender as determined by its Pro Rata Share. As to any other payment, and as to all payments made when an Event of Default has occurred and is continuing or following the Termination Date, Borrowers hereby irrevocably

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waives the right to direct the application of any and all payments received from or on behalf of any Borrower, and Borrowers hereby irrevocably agrees that Agent shall have the continuing exclusive right to apply any and all such payments against the Obligations as Agent may deem advisable. In all circumstances, after acceleration or maturity of the Obligations, all payments and proceeds of Collateral shall be applied to amounts then due and payable in the following order: (1) to Fees and Agent’s expenses reimbursable hereunder; (2) to interest on the Loans, ratably in proportion to the interest accrued as to each Loan; (3) to principal payments on the Loans, ratably to the aggregate, combined principal balance of the Loans and (4) to all other Obligations including expenses of Lenders to the extent reimbursable hereunder.

Section 2.20 Yield Protection. In the event that any Lender shall have determined that the adoption after the Effective Date of any law, treaty, governmental (or quasi-governmental) rule, regulation, guideline or order regarding capital adequacy, reserve requirements or similar requirements or compliance by any Lender or any corporation controlling such Lender with any request or directive regarding capital adequacy, reserve requirements or similar requirements (whether or not having the force of law and whether or not failure to comply therewith would be unlawful) from any central bank or governmental agency or body having jurisdiction does or shall have the effect of increasing the amount of capital, reserves or other funds required to be maintained by such Lender or any corporation controlling such Lender and thereby reducing the rate of return on such Lender’s or such corporation’s capital as a consequence of its obligations hereunder, then Borrowers shall from time to time within fifteen (15) days after notice and demand from such Lender (together with the certificate referred to in the next sentence and with a copy to the Agent and the Funding Agent) pay to the Funding Agent, for the account of such Lender, additional amounts sufficient to compensate such Lender for such reduction. A certificate as to the amount of such cost and showing the basis of the computation of such cost submitted by such Lender to Borrowers’ Agent and the Funding Agent shall, absent manifest error, be final, conclusive and binding for all purposes.

ARTICLE III

CONDITIONS PRECEDENT

Section 3.1 Conditions Precedent to Effectiveness. The effectiveness of this Agreement, including the making of any Advance on the Revolving Loan on the Effective Date, shall be subject to the prior or simultaneous fulfillment of the following conditions, unless waived in writing by the Agent and Lenders:

(a) Documents. The Agent shall have received the following:

(i) Counterparts to this Agreement, duly executed by Borrowers, each other Credit Party, Funding Agent, Agent and Lenders;

(ii) The Revolving Notes and Term Notes, as requested by Lenders, executed by a duly authorized officer (or officers) of the Borrowers.

(iii) A certificate of the Secretary or Assistant Secretary (or other appropriate officer), of the Borrower’s Agent, on behalf of each Credit Party dated as of the Effective Date and certifying to the following:

(A) A true and accurate copy of the corporate (or other) resolutions of each Credit Party authorizing the execution, delivery and performance of the Loan Documents to which such Credit Party is a party contemplated hereby and thereby;

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(B) The incumbency, names, titles and signatures of the officers of each Credit Party authorized to execute the Loan Documents to which such Credit Party is a party and, in the case of the Borrowers’ Agent to request Advances (or a certification that there has been no change to such incumbency name, title and signature of the respective officers from the date such incumbency was last delivered to Agent and certified to be correct and complete);

(C) A true and accurate copy of the Articles of Incorporation or Certificate of Incorporation (or the equivalent) of each Credit Party with all amendments thereto, certified by the appropriate governmental official of the jurisdiction of organization as of a date not more than thirty (30) days prior to the Effective Date (or a certification that there have been no changes to such Articles of Incorporation or Certificate of Incorporation (or the equivalent) from the date such Articles of Incorporation or Certificate of Incorporation (or the equivalent) (or a copy thereof) was last delivered to the Agent and certified to be complete and correct); and

(D) A true and accurate copy of the bylaws (or other constitutive documents) for each Credit Party (or a certification that there have been no changes to such bylaws (or other constitutive documents) from the date such bylaws (or other constitutive documents) (or a copy thereof) was last delivered to the Agent and certified to be complete and correct).

(iv) A certificate dated the Effective Date of the chief executive officer or chief financial officer (or other appropriate officer) of the Borrower’s Agent on behalf of each Credit Party, certifying that (x) with respect to each Credit Party (other than the Carmichael’s Entity) there has been no Material Adverse Occurrence since June 30, 2007, (y) with respect to each Carmichael Entity that there has been no Material Adverse Occurrence since December 31, 2007, and (z) the conditions set forth in Section 3.2(a) and Section 3.2(b) below have been satisfied.

(b) Compliance. Each Credit Party shall have performed and complied with all agreements, terms and conditions contained in this Agreement required to be performed or complied with by such Credit Party prior to or simultaneously with the Effective Date.

(c) Other Matters. All corporate and legal proceedings relating to the Credit Parties and all instruments and agreements in connection with the transactions contemplated by this Agreement shall be satisfactory in scope, form and substance to the Agent and its counsel, and the Agent shall have received all information and copies of all documents, including records of corporate proceedings, as the Agent or its counsel may reasonably have requested in connection therewith, such documents where appropriate to be certified by proper corporate or governmental authorities.

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(d) Assignment of Original Loans. All Lenders on the Effective Date that are not Original Lenders shall have purchased, for a purchase price equal to the principal amount thereof, from the Original Lenders their Pro Rata Share of the Original Loans and other Original Obligations. Upon such purchase, such Original Loans shall be assigned to such Lenders. The purchase price shall be allocated among such Original Lenders according to their “Pro Rata Share” thereof, under and as defined in the Original Credit Agreement.

Any one or more of the conditions set forth above which have not been satisfied by the Borrowers on or prior to the Effective Date shall not be deemed permanently waived by the Agent and Lenders unless the Agent and Lenders shall waive the same in a writing which expressly states that the waiver is permanent, and in all cases in which the waiver is not stated to be permanent the Agent and Lenders may at any time subsequent thereto insist upon compliance and satisfaction of any such condition as a condition to any subsequent Loan hereunder and failure by the Borrowers to comply with any such condition within five (5) Business Day’s written notice from the Agent to the Borrowers’ Agent shall constitute an Event of Default under this Agreement.

Section 3.2 Conditions Precedent to the Term Loan and all Advances. The obligation of the Lenders to make any Advances hereunder are further conditioned upon the satisfaction of the following, except those conditions waived by the Agent and Lenders (with respect to conditions to be satisfied on the Effective Date) and by the Agent and Required Revolving Lenders (with respect to conditions to be satisfied on the date of each Advance) in writing:

(a) Representations and Warranties. The representations and warranties contained in Article IV shall be true and correct in all material respects (except with respect to those representations and warranties which are qualified as to materiality in which case such specific materiality qualifiers shall apply) on and as of the Original Closing Date, Effective Date and on the date of each Advance, as the case may be, with the same force and effect as if made on such date, unless such representation and warranty expressly applies to an earlier date, in which case such representation and warranty shall be deemed made as of such earlier date.

(b) No Default. No Default or Event of Default shall have occurred and be continuing on the Effective Date and on the date of each Advance, as the case may be, or will exist after giving effect to the Loans made on such date.

(c) Notices and Requests; Borrowing Base Certificate. The Funding Agent (with a copy to the Agent) shall have received the Borrowers’ Agent’s request for Advance as required under Section 2.2, accompanied by a Borrowing Base Certificate and a certificate of the chief financial officer of SHSI certifying that after giving effect to such requested Advance, the outstanding amount of the Revolving Loan would not exceed the remaining Availability.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES

To induce the Agent and Lenders to enter into this Agreement and the Lenders to make Term Loan and Advances hereunder, each Borrower and each other Credit Party executing this Agreement, jointly and severally, represents and warrants to the Agent and each Lender for itself and each other Borrower and Credit Party that as of the Original Closing Date:

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Section 4.1 Organization, Standing, Etc. Each Credit Party is a duly organized and validly existing and in good standing under the laws of the jurisdiction of its organization. Each Credit Party has all requisite power and authority to carry on its business as now conducted, to enter into this Agreement and to perform its obligations under the Loan Documents, and each Borrower has all requisite power and authority to issue the Notes. Each Subsidiary is duly organized and validly existing and in good standing under the laws of the jurisdiction of its organization and has all requisite power and authority to carry on its business as now conducted. Each of the Credit Parties and Subsidiaries is duly qualified and in good standing as a foreign corporation (or other organization) in each jurisdiction in which the character of the properties owned, leased or operated by it or the business conducted by it makes such qualification necessary and the failure so to qualify would reasonably be expected to result in or be a Material Adverse Occurrence.

Section 4.2 Authorization and Validity. The execution, delivery and performance by each Credit Party of the Loan Documents to which it is a party have been duly authorized by all necessary corporate action by such Credit Party. This Agreement constitutes, and the Notes and other Loan Documents when executed will constitute, the legal, valid and binding obligations of each Credit Party executing the same, enforceable against each Borrower in accordance with their respective terms, subject to limitations as to enforceability which might result from bankruptcy, insolvency, moratorium and other similar laws affecting creditors’ rights generally and subject to limitations on the availability of equitable remedies.

Section 4.3 No Conflict; No Default. The execution, delivery and performance by each Credit Party of the Loan Documents will not (a) violate any provision of any law, statute, rule or regulation or any order, writ, judgment, injunction, decree, determination or award of any court, governmental agency or arbitrator presently in effect having applicability to such Borrower, (b) violate or contravene any provision of the Articles or Certificates of Incorporation, bylaws or partnership agreement of such Credit Party, or (c) result in a breach of or constitute a default under any indenture, loan or credit agreement or any other agreement, lease or instrument to which such Credit Party is a party or by which it or any of its properties may be bound or result in the creation of any Lien thereunder. No Credit Party nor any Subsidiary is in default under or in violation of any such law, statute, rule or regulation, order, writ, judgment, injunction, decree, determination or award or any such indenture, loan or credit agreement or other agreement, lease or instrument in any case in which the consequences of such default or violation would reasonably be expected to constitute a Material Adverse Occurrence.

Section 4.4 Government Consent. No order, consent, approval, license, authorization or validation of, or filing, recording or registration with, or exemption by, any governmental or public body or authority is required on the part of any Credit Party to authorize, or is required in connection with the execution, delivery and performance of, or the legality, validity, binding effect or enforceability of, the Loan Documents, except for any necessary filing or recordation of or with respect to any of the Security Documents. No order, consent, approval, license, authorization or validation of, or filing, recording or registration with, or exemption by, any governmental or public body or authority is required on the part of any Subsidiary to authorize,

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or is required in connection with the execution, delivery and performance of, or the legality, validity, binding effect or enforceability of, the Loan Documents to which it is a party, except for any necessary filing or recordation of or with respect to any of the Security Documents.

Section 4.5 Financial Statements and Condition.

(a) All annual and quarterly financial statements delivered by the Credit Parties to the Agent or any Lender (including, without limitation, all such financial statements delivered in connection with the Agent’s or Lenders’ due diligence and underwriting with respect to this transaction), have been prepared in accordance with GAAP on a consistent basis (except for the absence of footnotes and subject to year-end audit adjustments as to the interim statements) and fairly present the financial condition of the Credit Parties and their Subsidiaries as at such dates and the results of their operations and changes in financial position for the respective periods then ended. All monthly financial statements delivered by the Credit Parties to the Agent or any Lender (including, without limitation, all such financial statements delivered in connection with the Agent’s or Lenders’ due diligence and underwriting with respect to this transaction) fairly present the financial condition of the Credit Parties and their Subsidiaries as at such dates and the results of their operations for the respective periods then ended. As of the dates of such financial statements, no Credit Party or any Subsidiary had any material obligation, contingent liability, liability for taxes or long-term lease obligation which is not reflected in such financial statements or in the notes thereto. With respect to the Credit Parties, other than the Carmichael’s Entity, since June 30, 2007, there has been no Material Adverse Occurrence and with respect to the Carmichael’s Entity, since December 31, 2007, there has been no Material Adverse Occurrence.

(b) All financial projections and certificates delivered by the Credit Parties to the Agent or any Lender (including, without limitation, all such financial information delivered in connection with the Agent’s or Lenders’ due diligence and underwriting with respect to this transaction) have been prepared in good faith, based on assumptions which, in the reasonable opinion of the Credit Parties, were reasonable when made and reflect, in the reasonable opinion of the Credit Parties, reasonable estimates of the results of operation and other information projected therein. To the knowledge of the Credit Parties, no facts exist that (individually or in the aggregate) would result in any material change in any of such projections.

Section 4.6 Litigation. Except as set forth on Schedule 4.6, there are no actions, suits or proceedings pending or, to the knowledge of any Credit Party, threatened against or affecting any Credit Party or any Subsidiary or any of their properties before any court or arbitrator, or any governmental department, board, agency or other instrumentality which, if determined adversely to any Credit Party or any Subsidiary, would constitute a Material Adverse Occurrence, and there are no unsatisfied judgments against any Credit Party or Subsidiary, the satisfaction or payment of which would constitute a Material Adverse Occurrence.

Section 4.7 Conduct of Business; Permits. The primary business of the Credit Parties is, and will at all times continue to be, the provision of healthcare services, healthcare products, ancillary healthcare support and/or healthcare goods and equipment. The Credit Parties have all necessary permits, licenses, agreements, accreditations, certifications, contracts and governmental consents necessary to operate and conduct their business as it is presently being conducted, subject to minor exceptions and deficiencies which would not reasonably be expected to result in a Material Adverse Occurrence.

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Section 4.8 Environmental, Health and Safety Laws. There does not exist any violation by any Credit Party or any Subsidiary of any applicable federal, state or local law, rule or regulation or order of any government, governmental department, board, agency or other instrumentality relating to environmental, pollution, health or safety matters which has, will or threatens to impose a material liability on a Credit Party or a Subsidiary or which has required or would require a material expenditure by a Credit Party or a Subsidiary to cure. No Credit Party nor any Subsidiary has received any notice to the effect that any part of its operations or properties is not in material compliance with any such law, rule, regulation or order or notice that it or its property is the subject of any governmental investigation evaluating whether any remedial action is needed to respond to any release of any toxic or hazardous waste or substance into the environment, which non-compliance or remedial action would reasonably be expected to constitute a Material Adverse Occurrence. Except as set out on Schedule 4.8 attached hereto, no Credit Party has knowledge that it or its property or any Subsidiary or the property of any Subsidiary will become subject to environmental laws or regulations during the term of this Agreement, compliance with which would reasonably be expected to require Capital Expenditures which would constitute a Material Adverse Occurrence.

Section 4.9 Compliance With Health Care Laws.

(a) Except as set forth on Schedule 4.9, each Credit Party, and to the knowledge of each Credit Party, its officers, directors and employees and each of its respective Subsidiaries has complied in all material respects during the past six years and presently complies in all material respects with all applicable statutes, laws, ordinances, rules and regulations of all applicable governmental authorities affecting the conduct of each Credit Party and its respective Subsidiaries with respect to its health care businesses (including, without limitation, all applicable Health Care Laws).

(b) Each Credit Party and each of its respective Subsidiaries has maintained in all material respects all records required to be maintained by the Joint Commission on Accreditation of Health Care Organizations (if necessary for the services provided by any Borrower or for any program in which any of them participate), the Food and Drug Administration, Drug Enforcement Agency, State Boards of Pharmacy and the Medicare, Medicaid and other governmental health care programs as and as to the extent required by the Health Care Laws. Each Credit Party and each of its respective Subsidiaries has all applicable permits, approvals, accreditations and other authorizations of Governmental Authorities and other Persons (including, without limitation, such permits, approvals, accreditations and other authorizations as are required under Health Care Laws) to participate in and receive reimbursement under Medicare, Medicaid and other governmental health care programs.

(c) None of the Credit Parties nor any of their respective Subsidiaries is or, to the best knowledge of each Credit Party and each of its respective Subsidiaries, is likely to become the subject of audits outside of the ordinary course, investigations, restrictions, deficiencies, required plans of corrective action, corporate integrity agreements or other such remedial measures with respect to Medicare and/or Medicaid certifications, licensure or the

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Health Care Laws. None of the Credit Parties nor any of their respective Subsidiaries, officers and/or directors has been convicted of, charged with or investigated for any material Medicare, Medicaid or other governmental health program-related offense, or have been debarred, excluded or suspended from participation in Medicare, Medicaid or any other governmental health care program, or has been subject to any order or consent decree of, or material criminal or civil fine or penalty imposed by, any court or governmental authority related to the Health Care Laws. Each Credit Party and each of its respective Subsidiaries is in compliance with Medicare Conditions of Participation, is a participating provider in good standing with Medicare and Medicaid, and has no knowledge of any material overpayments from Medicare or another governmental health care program other than those for which appropriate reserves have been taken on the books and records of the Credit Parties. None of the Credit Parties nor any of their respective Subsidiaries have arranged or contracted with (by employment or otherwise) any individual or entity that any Credit Party or any of its Subsidiaries knows or should know is excluded from participation in a federal health care program, as defined in 42 U.S.C. § 1320a-7b(f), for the provision of items or services for which payment may be made under such federal health care program. To the best knowledge of each Credit Party and each of its respective Subsidiaries, there is no basis upon which any of the Credit Parties or any of their respective Subsidiaries may be subject to permissive exclusion from participation in a federal health care program pursuant to 42 C.F.R. 1001.1001.

(d) Compliance Program. The Credit Parties and each of their respective Subsidiaries have in place compliance policies and procedures designed to ensure compliance with the Health Care Laws.

Section 4.10 Compliance with Health Plans. None of the Credit Parties nor any of their respective Subsidiaries are in material default or breach under any agreement or arrangement with any nongovernmental health plan, insurance company, employer or third party payor that is currently doing business with a Credit Party or its respective Subsidiaries (collectively, “Third Party Payors” and individually, “Third Party Payor”). Each Credit Party and each of its respective Subsidiaries has provided services and billed all Third Party Payors for such services in material compliance with its agreement and arrangement with such Third Party Payors, as well as any applicable rules and regulations of such Third Party Payors. None of the Credit Parties nor any of their respective Subsidiaries have received notice that any Third Party Payor intends to terminate, limit or restrict its relationship with any of the Credit Parties or their respective Subsidiaries.

Section 4.11 Physician Agreements. None of the Credit Parties nor any of their respective Subsidiaries have in place any agreement, contract or other arrangement with any physician or physician group other than those in writing that are in substantial compliance with the form agreements provided to the Agent prior to the Original Closing Date.

Section 4.12 Funds from Restricted Grants. Except as described on Schedule 4.12, none of the Collateral is subject to, and each of the Credit Parties shall indemnify and hold the Agent and Lenders harmless from and against, any liability in respect of amounts received by any Credit Party, any of their respective Subsidiaries or others for the purchase or improvement of the Collateral or any part thereof under restricted or conditioned grants or donations, including, without limitation, monies received under the Public Health Service Act, 42 U.S.C. Section 291 et seq.

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Section 4.13 HIPAA Compliance. To the extent applicable to a Credit Party and for so long as (a) any of the Credit Parties or any of their respective Subsidiaries is a “covered entity” as defined in 45 C.F.R. § 160.103, (b) any Credit Party, any Subsidiary of any Credit Party and/or any of their respective businesses or operations are subject to or covered by the HIPAA Administrative Requirements codified at 45 C.F.R. Parts 160 & 162 (the “Transactions Rule”) and/or the HIPAA Security and Privacy Requirements codified at 45 C.F.R. Parts 160 & 164 (the “Privacy and Security Rules”), and/or (c) any Credit Party or any Subsidiary of a Credit Party sponsors any “group health plans” as defined in 45 C.F.R. § 160.103, the applicable Credit Party or Subsidiary of a Borrower, as the case may be has: (i) completed, or will complete on or before any applicable compliance date, thorough and detailed surveys, audits, inventories, reviews, analyses and/or assessments, including risk assessments, (collectively “Assessments”) of all material areas of its business and operations subject to HIPAA and/or that would reasonably be expected to be materially and adversely affected by the failure of a Credit Party or Subsidiary of a Credit Party, as the case may be, to be HIPAA Compliant to the extent these Assessments are appropriate or required for a Borrower or Subsidiary of a Credit Party, as the case may be, to be HIPAA Compliant; (ii) developed, or will develop on or before any applicable compliance date, a detailed plan and time line for becoming HIPAA Compliant (a “HIPAA Compliance Plan”); and (iii) implemented, or will implement on or before any applicable compliance date, those provisions of its HIPAA Compliance Plan necessary to ensure that such Credit Party or Subsidiary of a Credit Party, as the case may be, is HIPAA Compliant.

Section 4.14 ERISA. Each Plan is in substantial compliance with all applicable requirements of ERISA and the Code and with all material applicable rulings and regulations issued under the provisions of ERISA and the Code setting forth those requirements. No Reportable Event has occurred and is continuing with respect to any Plan. All of the minimum funding standards applicable to such Plans have been satisfied and there exists no event or condition which would reasonably be expected to result in the institution of proceedings to terminate any Plan under Section 4042 of ERISA. With respect to each Plan subject to Title IV of ERISA (other than the KRUG Pension Plan), as of the most recent valuation date for such Plan, the present value (determined on the basis of reasonable assumptions employed by the independent actuary for such Plan and previously furnished in writing to the Agent) of such Plan’s projected benefit obligations did not exceed the fair market value of such Plan’s assets. With respect to the KRUG Pension Plan, the amount by which the present value of such Plan’s benefit obligations (determined as of March 31, 2008 on a plan termination basis using GATT assumptions) exceeds the fair market value of the Plan’s assets, is set forth on Schedule 4.14 (hereinafter, the “KRUG Pension Plan Deficiency”).

Section 4.15 Federal Reserve Regulations. No Credit Party nor any Subsidiary is engaged principally or as one of its important activities in the business of extending credit for the purpose of purchasing or carrying margin stock (as defined in Regulation U of the Board). The value of all margin stock owned by each Credit Party does not constitute more than 25% of the value of the assets of such Credit Party.

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Section 4.16 Title to Property; Leases; Liens; Subordination. Each Credit Party and each Subsidiary has (a) good and marketable fee simple title or leasehold estate in and to the Encumbered Real Estate and (b) good and sufficient title to the Collateral other than Encumbered Real Estate. Schedule 4.16 is a list of all real properties owned or leased by the Credit Party and their Subsidiaries as of the Original Closing Date. None of the Encumbered Real Estate is subject to a Lien, except for Permitted Encumbrances. No Credit Party has subordinated any of its rights in and to that portion of the Collateral constituting an obligation owing to it to the rights of any other Person.

Section 4.17 Taxes. Each Credit Party and each Subsidiary has filed all federal, state and local tax returns required to be filed and has paid or made provision for the payment of all taxes due and payable pursuant to such returns and pursuant to any assessments made against it or any of its property and all other taxes, fees and other charges imposed on it or any of its property by any governmental authority (other than taxes, fees or charges the amount or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which reserves in accordance with GAAP have been provided on the books of such Credit Party). No tax Liens have been filed and no material claims are being asserted with respect to any such taxes, fees or charges. The charges, accruals and reserves on the books of the Credit Parties in respect of taxes and other governmental charges are adequate and the Credit Parties know of no proposed material tax assessment against it or any Subsidiary or any basis therefor.

Section 4.18 Trademarks, Patents. Each Credit Party and each Subsidiary possesses or has the right to use all of the patents, trademarks, trade names, service marks and copyrights, and applications therefor, and all technology, know-how, processes, methods and designs used in or necessary for the conduct of its business, without known conflict with the rights of others.

Section 4.19 Existing Foreign Subsidiaries. Except for the UK Obligations, no Credit Party has any obligations to, or liabilities to any Person on account of, the Existing Foreign Subsidiaries, in excess of $100,000 in the aggregate for all Credit Parties.

Section 4.20 Force Majeure. Since the date of the most recent financial statement referred to in Section 5.1 hereof, the business, properties and other assets of the Credit Parties and the Subsidiaries have not been materially and adversely affected in any way as the result of any fire or other casualty, strike, lockout, or other labor trouble, embargo, sabotage, confiscation, condemnation, riot, civil disturbance, activity of armed forces or act of God.

Section 4.21 Investment Company Act. No Credit Party nor any Subsidiary is an “investment company” or a company “controlled” by an investment company within the meaning of the Investment Company Act of 1940, as amended.

Section 4.22 [Intentionally Omitted].

Section 4.23 Retirement Benefits. Except as required under Section 4980B of the Code, Section 601 of ERISA or applicable state law, no Credit Party nor any Subsidiary is obligated to provide post-retirement medical or insurance benefits with respect to employees or former employees.

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Section 4.24 Full Disclosure. Neither the financial statements referred to in Section 5.1 hereof nor any other certificate, written statement, exhibit or report furnished by or on behalf of the Credit Parties in connection with or pursuant to this Agreement contains any untrue statement of a material fact or omits to state any material fact necessary in order to make the statements contained therein not misleading.

Section 4.25 Subsidiaries. Schedule 4.25 sets forth as of the date of this Agreement a list of all Subsidiaries and Existing Foreign Subsidiaries and the number and percentage of the shares of each class of Equity Interests owned beneficially or of record by the Credit Parties or any Subsidiary or Existing Foreign Subsidiary therein, and the jurisdiction of incorporation of each Subsidiary and Existing Foreign Subsidiary.

Section 4.26 Restrictions on Subsidiaries. Except as set forth on Schedule 4.26 hereof and for restrictions contained in this Agreement or any other agreement with respect to Indebtedness of the Credit Parties permitted hereunder as in effect on the Original Closing Date, there are no contractual or consensual restrictions on the Credit Parties or any of their Subsidiaries which prohibit or otherwise restrict (i) the transfer of cash or other assets (A) between the Credit Parties and any of their Subsidiaries or (B) between any Subsidiaries of the Credit Parties, or (ii) the ability of the Credit Parties or Subsidiaries to incur Indebtedness or grant Liens to the Agent, for the benefit of the Benficiaries, in the Collateral.

Section 4.27 Labor Matters. There are no pending or, to the knowledge of the Credit Parties, any threatened strikes, lockouts or slowdowns against the Credit Parties or any Subsidiary. No Credit Party nor any Subsidiary has been or is in violation in any material respect of the Fair Labor Standards Act or any other applicable Federal, state, local or foreign law dealing with such matters. All payments due from any Credit Party or any Subsidiary on account of wages and employee health and welfare insurance and other benefits (in each case, except for de minimus amounts), have been paid or accrued as a liability on the books of such Credit Party or such Subsidiary. The consummation of the transactions contemplated under the Loan Documents will not give rise to any right of termination or right of renegotiation on the part of any union under any collective bargaining agreement to which any Credit Party or any Subsidiary is bound.

Section 4.28 Deposit and Other Accounts. A complete list of all of Credit Parties’ Deposit Accounts, Lockboxes, Lockbox Accounts, investment accounts and securities accounts (including account numbers and addresses for each Deposit Account bank and each bank or other entity holding each investment account and securities account as of the Original Closing Date) is set forth on Schedule 4.28.

Section 4.29 Offsets. Except as set forth on Schedule 4.29 attached hereto, there is no basis for (a) any Offsets asserted or, to the knowledge of the Credit Parties, threatened to be asserted against any Credit Party or any of its Subsidiaries by any Obligor (including but not limited to amounts due to Medicare or the IRS), or (b) any overdue or delinquent liabilities or Indebtedness which would reasonably be expected to give rise to a right of a federal Governmental Authority or any other Person to offset or levy with respect to such liabilities or Indebtedness against any Receivables, or payments due thereon.

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Section 4.30 Solvency. After the making of any Loan and after giving effect thereto, (a) the fair value of the assets of each Credit Party, at a fair valuation, will exceed its debts and liabilities, subordinated, contingent or otherwise; (b) the present fair saleable value of the property of each Credit Party will be greater than the amount that will be required to pay the probable liability of its debts and other liabilities, subordinated, contingent or otherwise, as such debts and other liabilities become absolute and matured; (c) each Credit Party will be able to pay its debts and liabilities, subordinated, contingent or otherwise, as such debts and liabilities become absolute and matured; and (d) no Credit Party will have unreasonably small capital with which to conduct the business in which it is engaged as such business is proposed to be conducted following the Original Closing Date.

Section 4.31 Management Procedures. The Credit Parties have (and will continue to have and maintain) such appropriate and customary risk management and information sharing procedures and policies so as to allow the Senior Officers to be and remain informed about the material aspects of the operations of the Credit Parties’ businesses for which each is primarily responsible.

Section 4.32 For-Profit Entities. Each Credit Party conducts its business as a for profit enterprise, and is not and has not filed to be qualified under Section 501(c)(3) of the Code.

Section 4.33 Carmichael’s Acquisition. As of the Original Closing Date, Credit Parties have delivered to Agent a complete and correct copy of the Carmichael’s Acquisition Agreement (including all schedules, exhibits, amendments, supplements, modifications, assignments and all other documents delivered pursuant thereto or in connection therewith). No Credit Party and, to the best of each Credit Parties’ knowledge, no other Person party thereto is in default in the performance or compliance with any provisions thereof. The Carmichael’s Acquisition Agreement complies with, and the Carmichael’s Acquisition has been consummated in accordance with, all applicable laws. The Carmichael’s Acquisition Agreement is in full force and effect as of the Original Closing Date and has not been terminated, rescinded or withdrawn. All requisite approvals by Governmental Authorities having jurisdiction over Sellers, any Credit Party and other Persons referenced therein, with respect to the transactions contemplated by the Carmichael’s Acquisition Agreement, have been obtained, and no such approvals impose any conditions to the consummation of the transactions contemplated by the Carmichael’s Acquisition Agreement or to the conduct by any Credit Party of its business thereafter. To the best of each Credit Party’ knowledge, none of the Sellers’ representations or warranties in the Carmichael’s Acquisition Agreement contain any untrue statement of a material fact or omit any fact necessary to make the statements therein not misleading. Notwithstanding anything contained in the Carmichael’s Acquisition Agreement to the contrary, such representations and warranties of the Credit Parties are incorporated into this Agreement by this Section 4.33 as of the Original Closing Date and shall, solely for purposes of this Agreement and the benefit of Agent and Lenders, survive the consummation of the Carmichael’s Acquisition.

Section 4.34 Insurance. Schedule 4.34 lists all insurance policies of any nature maintained, as of the Original Closing Date, for current occurrences by each Credit Party, as well as a summary of the key business terms of each such policy such as deductibles, coverage limits and term of policy.

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Section 4.35 Anti-Terrorism Law.

(a) No Credit Party and, to the knowledge of the Credit Parties, none of its Affiliates is in violation of any laws relating to terrorism or money laundering (“Anti-Terrorism Laws”), including Executive Order No. 13224 on Terrorist Financing, effective September 24, 2001 (the “Executive Order”), and the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, Public Law 107-56.

(b) No Credit Party and to the knowledge of the Credit Parties, no Affiliate or other agent of any Credit Party acting or benefiting in any capacity in connection with the Loans is any of the following:

(i) a person that is listed in the annex to, or is otherwise subject to the provisions of, the Executive Order;

(ii) a person owned or controlled by, or acting for or on behalf of, any person that is listed in the annex to, or is otherwise subject to the provisions of, the Executive Order;

(iii) a person with which any Lender is prohibited from dealing or otherwise engaging in any transaction by any Anti-Terrorism Law;

(iv) a person that commits, threatens or conspires to commit or support “terrorism” as defined in the Executive Order; or

(v) a person that is named as a “specialty designated national and blocked person” on the most current list published by the U.S. Treasury Department Office of Foreign Assets Control (“OFAC”) at its official website or any replacement website or other replacement official publication of such list.

(c) No Credit Party and, to the knowledge of the Credit parties, no other agent of any Credit Party acting in any capacity in connection with the Loans (i) conducts any business or engages in making or receiving any contribution of funds, goods or services to or for the benefit of any person described in paragraph (b) above, (ii) deals in, or otherwise engages in any transaction relating to, any property or interests in property blocked pursuant to the Executive Order, or (iii) engages in or conspires to engage in any transaction that evades or avoids, or has the purpose of evading or avoiding, or attempts to violate, any of the prohibitions set forth in any Anti-Terrorism Law.

ARTICLE V

AFFIRMATIVE COVENANTS

Until all obligations of the Lenders hereunder to make the Term Loan and Advances shall have expired or been terminated and the Notes and all of the other Obligations have been paid in full, unless the Agent and Required Lender shall otherwise consent in writing:

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Section 5.1 Financial Statements and Reports. The Borrowers’ Agent will furnish to the Agent (with, in the case of the items described in subsections (a), (c), (d), (e), (f) and (h) below, a copy to Funding Agent):

(a) As soon as available and in any event within one hundred twenty (120) days after the end of each fiscal year of the Borrowers, the consolidated financial statements of the Borrowers and the Subsidiaries consisting of at least statements of income, cash flow and changes in stockholders’ equity, and a consolidated balance sheet as at the end of such year, setting forth in each case in comparative form corresponding figures from the previous annual audit, certified without qualification by Cherry Bekaert & Holland or any other independent certified public accountants of recognized national or regional standing selected by the Borrowers and acceptable to the Agent, together with any management letters, management reports or other supplementary comments or reports addressed to or furnished to SHSI or its board of directors by such accountants.

(b) [Reserved]

(c) As soon as available and in any event within 45 days after the end of each fiscal quarter, unaudited consolidated statements of income, cash flow and changes in stockholders’ equity for the Borrowers and the Subsidiaries for such quarter and for the period from the beginning of such fiscal year to the end of such quarter, and a consolidated balance sheet of the Borrowers as at the end of such quarter, setting forth, in accordance with requirements of the Securities and Exchange Commission or any successor or similar Governmental Authority, comparative form figures for the corresponding period for the preceding fiscal year, accompanied by a certificate signed by the chief financial officer of the SHSI stating that such financial statements present fairly the financial condition of the Borrowers and the Subsidiaries and that the same have been prepared in accordance with GAAP (except for the absence of footnotes and subject to year-end audit adjustments as to the interim statements).

(d) As soon as available and in any event within 30 days after the end of each fiscal month, unaudited consolidated statements of income, for the Borrowers and the Subsidiaries for such month, and a consolidated balance sheet of the Borrowers as at the end of such month, setting forth in comparative form figures for the corresponding period for the preceding fiscal year presenting fairly the financial condition of the Borrowers and the Subsidiaries and prepared in accordance with GAAP (except for the absence of footnotes and subject to year-end audit adjustments as to the interim statements).

(e) As soon as available and in any event within 30 days after the end of each fiscal month, unaudited operating reports for each SunLink facility operated by a Credit Party or a Subsidiary.

(f) (i) No less frequently than noon (New York time) on Wednesday of each week in respect of the immediately preceding week, aging reports for all Receivables and a Borrowing Base Certificate setting forth Availability based on the updated Net Collectible Value of Eligible Accounts of (A) Borrowers that are members of the Consolidated SunLink Entity and (B) as soon as systems are such that will enable weekly reporting for the Carmichael’s Entity and in any event within 180 days following the Original Closing Date, Borrowers that are members

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of the Carmichael’s Entity, and (ii) within 30 days after the end of each fiscal month, a report of Consolidated EBITDA of SHSI and its Subsidiaries and Consolidated Pro Forma EBITDA for twelve (12) consecutive months ending on the last day of each fiscal month for which the most recent financial are available, in each case accompanied by a Borrowing Base Certificate and a certificate of the chief financial officer of SHSI that such reports present fairly and accurately the financial information that is the subject thereof. Upon the occurrence and during the continuance of an Event of Default, upon request by the Agent, Borrowing Base Certificates and reports set forth in this clause (f) shall be delivered more frequently as the Agent may elect.

(g) Upon request by the Agent, copies of (A) Credit Parties’ annual federal income tax returns as filed with the Internal Revenue Service, (B) Credit Parties’ payroll tax return as filed with the Internal Revenue Service on Form 941 for any calendar quarter requested, together with documentation of payment of any sums due in respect of payroll taxes, and (C) any applicable sale tax filings, together with documentation of payment of any sums due in respect of sales taxes.

(h) As soon as practicable and in any event within forty-five (45) days after the end of each fiscal quarter, a Compliance Certificate in the form attached hereto as Exhibit G signed by the chief financial officer of SHSI demonstrating in reasonable detail compliance (or noncompliance, as the case may be) with Section 6.10, Section 6.16, Section 6.17, Section 6.18, Section 6.19, Section 6.20 and Section 6.21, as at the end of such quarter and stating that as at the end of such quarter there did not exist any Default or Event of Default or, if such Default or Event of Default existed, specifying the nature and period of existence thereof and what action the Borrowers proposes to take with respect thereto.

(i) As soon as practicable and in any event within forty five (45) days after the beginning of each fiscal year of the Borrowers, statements of forecasted consolidated income for the Borrowers and the Subsidiaries for each fiscal quarter in such fiscal year and a forecasted consolidated balance sheet of the Borrowers and the Subsidiaries, together with supporting assumptions, as at the end of each fiscal quarter, all in reasonable detail and reasonably satisfactory in scope to the Agent.

(j) Immediately upon any Senior Officer of any Credit Party becoming aware of any Default or Event of Default, a notice describing the nature thereof and what action Borrowers propose to take with respect thereto.

(k) Within three (3) Business Days after any Senior Officer of any Credit Party becoming aware of the occurrence, with respect to any Plan, of any Reportable Event or any Prohibited Transaction, a notice specifying the nature thereof and what action the Borrowers propose to take with respect thereto, and, when received, copies of any notice from PBGC of intention to terminate or have a trustee appointed for any Plan.

(l) Immediately upon any Senior Officer of any Credit Party becoming aware of any matter that has resulted or is reasonably likely to result in a Material Adverse Occurrence, Default or an Event of Default a notice from the Borrowers’ Agent describing the nature thereof and what action Borrowers propose to take with respect thereto.

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(m) Within three (3) Business Days after any Senior Officer of any Credit Party becoming aware of the commencement of any action, suit, investigation, proceeding or arbitration before any court or arbitrator or any governmental department, board, agency or other instrumentality, including without limitation, any agency of the Department of Health and Human Services or its Office of Inspector General, affecting a Credit Party or any Subsidiary or any property of such Person, or to which a Credit Party or any Subsidiary is a party (other than litigation where the insurance insures against the damages claimed and the insurer has assumed defense of the litigation without reservation) and in which an adverse determination or result would constitute a Material Adverse Occurrence; or (ii) any adverse development which occurs in any litigation, arbitration or governmental investigation or proceeding previously disclosed by a Credit Party or any Subsidiary which, if determined adversely to a Credit Party or a Subsidiary would constitute a Material Adverse Occurrence, a notice from the Borrowers’ Agent describing the nature and status thereof and what action the Credit Parties propose to take with respect thereto.

(n) Promptly upon the mailing or filing thereof, copies of all financial statements, reports and proxy statements mailed to any Credit Party’s shareholders, and copies of all registration statements, periodic reports and other documents filed with the Securities and Exchange Commission (or any successor thereto) or any national securities exchange.

(o) Within three (3) Business Days after a Senior Officer of any Credit Party becoming aware of any of the following for which an adverse determination or result would reasonably be expected to constitute or result in a Material Adverse Occurrence:

(i) Notice of any investigation or audit outside of ordinary course, or pending or threatened proceedings relating to any violation by any Credit Party, any of its Subsidiaries, or any health care facility to which a Credit Party or any of its Subsidiaries provides services, of any Health Care Laws (including, without limitation, any investigation or audit or proceeding involving violation of any of the Medicare and/or Medicaid fraud and abuse provisions);

(ii) Copies of any written recommendation from any Governmental Authority or other regulatory body that a Credit Party or any Subsidiary should have its licensure or accreditation revoked, have its eligibility to participate in, or to accept assignments or rights to reimbursement revoked under any governmental health care program, including, without limitation, CHAMPVA, TRICARE, Medicare and Medicaid;

(iii) Notice of any claim to recover any alleged material overpayments with respect to any Receivables, except with respect to those for which an appropriate reserve has been established, including, without limitation, payments received from any private insurance carrier and from any governmental health care program, including, without limitation, CHAMPVA, TRICARE, Medicare and Medicaid;

(iv) Notice of termination of eligibility of a Credit Party, any Subsidiary, or any health care facility to which a Credit Party provides services to participate in any reimbursement program of any private insurance carrier or other Obligor applicable to it;

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(v) Notice of any material reduction in the level of reimbursement expected to be received with respect to any Receivables;

(vi) Notice of any reimbursement payment contract or process that results or may result in any claim against a Credit Party or any Subsidiary (including on account of overpayments, settlement payments, appeals, repayment plan requests); and

(vii) Copies of any report or communication from any Governmental Authority in connection with any inspection of any facility of a Credit Party or any Subsidiary.

(p) Prior notice of any proposed replacement of the Borrowers’ accountants and such information that Agent may reasonably request in connection therewith, including, without limitation, the reasons for such replacement.

(q) From time to time, such other information regarding the business, operation and financial condition of any Credit Party and the Subsidiaries as the Agent may reasonably request.

Section 5.2 Existence. Each Credit Party will maintain, and cause each Subsidiary to maintain, its legal existence in good standing under the laws of its jurisdiction of organization and its qualification to transact business in each jurisdiction where failure so to qualify would permanently preclude such Credit Party or such Subsidiary from enforcing its rights with respect to any material asset or would reasonably be expected to result in or be a Material Adverse Occurrence; provided, however, that nothing herein shall prohibit the merger or liquidation of any Subsidiary allowed under Section 6.1.

Section 5.3 Insurance. The Credit Parties will keep the Collateral insured with financially sound and reputable insurers against loss or damage by fire, theft, explosion, sprinklers, and all other hazards and risks, and in such amounts, as are ordinarily insured against by other owners in similar businesses. The Credit Parties shall maintain business interruption, public liability, and other property damage insurance relating to the Credit Parties’ ownership and use of the Collateral, as well as insurance against larceny, embezzlement, and criminal misappropriation and the Keyman Life Insurance. All policies or insurance shall be in such form, with such companies, and in such amounts as may be reasonably satisfactory to the Agent. Contemporaneously with the execution of this Agreement, and within fifteen (15) days of any date when any additional or replacement insurance coverage is obtained or any such policy is renewed (and in any event no less frequently than annually), the Credit Parties shall deliver to the Agent true copies of certificates of insurance with respect to such policies or additional insurance or replacement policies, which certificates (i) in the case of property and casualty policies, shall contain an endorsement or rider satisfactory to the Agent showing the Agent, on behalf of the Beneficiaries, as loss payee and additional insured thereof, and (ii) in the case of general liability policies, shall contain an endorsement or rider showing the Agent, on behalf of the Beneficiaries, as an additional insured. Every policy of insurance referred to in this Section 5.3 shall contain an agreement by the insurer that it will not cancel such policy except after thirty (30) days prior written notice to the Agent and that any loss payable thereunder shall be payable notwithstanding any act or negligence of the Credit Parties, or any of them, or the Agent or any

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Lender that might, absent such agreement, result in a forfeiture of all or a part of such insurance payment and notwithstanding occupancy or use of the real property for purposes more hazardous than permitted by the terms of such policy. The Borrowers shall deliver to the Agent, within five (5) Business Days of any request by the Agent, copies of such policies of insurance and evidence of the payment of all premiums therefor.

Section 5.4 Payment of Taxes and Claims. Each Credit Party shall file, and cause each Subsidiary to file, all tax returns and reports which are required by law to be filed by it and will pay, and cause each Subsidiary to pay, before they become delinquent all taxes, assessments and governmental charges and levies imposed upon it or its property and all claims or demands of any kind (including but not limited to those of suppliers, mechanics, carriers, warehouses, landlords and other like Persons) which, if unpaid, would reasonably be expected to result in the creation of a Lien upon its property; provided that the foregoing items need not be paid if they are being contested in good faith by appropriate proceedings, and as long as such Credit Party’s or such Subsidiary’s title to its property is not materially adversely affected, its use of such property in the ordinary course of its business is not materially interfered with and adequate reserves with respect thereto have been set aside on Credit Parties’ or such Subsidiary’s books in accordance with GAAP.

Section 5.5 Inspection; Collateral Audits. Each Credit Party shall permit any Person designated by the Agent to, in the absence of an Event of Default upon 48 hours prior written notice (which may be given by e-mail), visit and inspect during normal business hours any of the properties, books and financial records of such Credit Party and the Subsidiaries, to examine and to make copies of the books of accounts and other financial records of such Credit Party and the Subsidiaries, and to discuss the affairs, finances and accounts of such Credit Party and the Subsidiaries with, and to be advised as to the same by, its officers at such times and intervals as the Agent may designate, but no more often than once per fiscal quarter so long as no Event of Default exists. The Agent (or its designee) may conduct Collateral audits no more frequently than once each quarter unless any Event of Default exists and the Credit Parties shall pay to the Agent (or its designee) a fee of $1,000 for each day of any such Collateral audit, which, so long as no Event of Default has occurred and is continuing, shall not exceed $40,000 per annum. Notwithstanding the foregoing, unless an Event of Default has occurred and is continuing, the Credit Parties shall be responsible for the payment of costs and expenses for an inspection and examination of the properties, books and financial records of the Credit Parties only two times each calendar year. Without limiting the foregoing, the aforementioned limitations on the frequency of and payments of costs and expenses and audit fees associated with visits, inspections and/or audits and any notice requirements shall cease to be applicable when any Event of Default exists.

Section 5.6 Maintenance of Properties. Each Credit Party will maintain, and cause each Subsidiary to maintain its properties used or useful in the conduct of its business in good condition, repair and working order, and supplied with all necessary equipment, and make all necessary repairs, renewals, replacements, betterments and improvements thereto, all as may be necessary so that the business carried on in connection therewith may be properly conducted at all times.

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Section 5.7 Books and Records. Each Credit Party will keep, and will cause each Subsidiary to keep, adequate and proper records and books of account in which full and correct entries will be made of its dealings, business and affairs.

Section 5.8 Compliance; Permits. Each Credit Party will comply, and will cause each Subsidiary to comply, in all material respects with all laws, rules, regulations, orders, writs, judgments, injunctions, decrees or awards to which it may be subject, including, without limitation, all Health Care Laws; provided, however, that failure so to comply shall not be a breach of this covenant if such failure does not constitute a Material Adverse Occurrence and such Credit Party or such Subsidiary is acting in good faith and with reasonable dispatch to cure such noncompliance. The Credit Parties shall maintain all necessary permits, licenses, agreements, accreditations, certifications, contracts and governmental consents necessary to operate and conduct their business as it is being conducted, subject to minor exceptions and deficiencies which would not reasonably be expected to have a Material Adverse Occurrence.

Section 5.9 ERISA. Each Credit Party will (a) maintain, and cause each Subsidiary to maintain, each Plan in compliance with all material applicable requirements of ERISA and of the Code and with all material applicable rulings and regulations issued under the provisions of ERISA and of the Code; provided, however, that the Credit Parties shall be permitted to terminate the KRUG Pension Plan in accordance with the provisions and requirements of ERISA, the Code and the KRUG Pension Plan, and (b) will not permit any of the ERISA Affiliates to (i) engage in any transaction in connection with which such Credit Party or any of the ERISA Affiliates would be subject to either a civil penalty assessed pursuant to Section 502(i) of ERISA or a tax imposed by Section 4975 of the Code, in either case in an amount exceeding $50,000, (ii) fail to make full payment when due of all amounts which, under the provisions of any Plan, such Borrower or any ERISA Affiliate is required to pay as contributions thereto, or permit to exist any accumulated funding deficiency (as such term is defined in Section 302 of ERISA and Section 412 of the Code), whether or not waived, with respect to any Plan in an aggregate amount exceeding $50,000 or (iii) fail to make any payments in an aggregate amount exceeding $50,000 to any Multiemployer Plan that such Borrower or any of the ERISA Affiliates may be required to make under any agreement relating to such Multiemployer Plan or any law pertaining thereto.

Section 5.10 Environmental Matters; Reporting. Each Credit Party will observe and comply with, and cause each Subsidiary to observe and comply with, all laws, rules, regulations and orders of any government or government agency relating to health, safety, pollution, hazardous materials or other environmental matters to the extent non-compliance would reasonably be expected to result in a material liability or otherwise constitute a Material Adverse Occurrence. The Borrowers’ Agent will give the Agent prompt written notice of any violation as to any environmental matter by any Credit Party or any Subsidiary and of the commencement of any judicial or administrative proceeding relating to health, safety or environmental matters (a) in which an adverse determination or result would reasonably be expected to result in the revocation of or have a material adverse effect on any operating permits, air emission permits, water discharge permits, hazardous waste permits or other permits held by any Credit Party or any Subsidiary which are material to the operations of such Credit Party or such Subsidiary, or (b) which will or threatens to impose a material liability on such Credit Party or such Subsidiary to any Person or which will require a material expenditure by such Credit Party or such Subsidiary to cure any alleged problem or violation.

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Section 5.11 Accreditation; Compliance Program.

(a) To the extent applicable to a Credit Party in the conduct of its business, such Credit Party shall maintain its qualification for participation in, and payment under, third party payors and government health care programs, including, without limitation, Medicare, Medicaid, TRICARE, and CHAMPVA that provide for payment or reimbursement for services, except to the extent such loss or relinquishment would not reasonably be expected to have a material adverse effect on the business, operations, condition (financial or otherwise), prospects or properties of the Borrowers taken as a whole. If required, Medicaid/Medicare cost reports will be properly filed by each Credit Party. In addition, to the extent each Credit Party or its respective Subsidiary is qualified as a Critical Access Hospital pursuant to 42 C.F.R. Part 485, Subpart F, et. seq. (Conditions of Participation: Critical Access Hospitals), each Credit Party and its respective Subsidiaries as applicable shall file such information with the appropriate authorities to maintain its status as a Critical Access Hospital, except to the extent such loss or relinquishment would not reasonably be expected to have a material adverse effect on the business, operations, condition (financial or otherwise), prospects or properties of the Credit Parties taken as a whole. Each Credit Party will promptly furnish or cause to be furnished to the Agent copies of all reports and correspondence, if any, it sends or receives relating to any material loss or revocation (or material threatened loss or revocation) of any qualification described in this Section 5.11.

(b) Each Credit Party shall, and shall cause each of its Subsidiaries to, regularly review and revise their policies and procedures to ensure continuing compliance by such Credit Party and such Subsidiary, their officers, directors and employees and all healthcare providers under contract with such Credit Party and such Subsidiary with all applicable Health Care Laws and maintain appropriate programs and procedures for communicating such policies and procedures to all officers, directors and employees of such Credit Party and such Subsidiary and for making sure that all officers, directors and employees of such Credit Party and such Subsidiary are able to report violations of any Health Care Laws and have such reports adequately addressed and corrected as soon as practicable.

Section 5.12 Further Assurances. Each Credit Party shall promptly correct any defect or error that may be discovered in any Loan Document by it, or if when discovered by the Agent, by the Agent or in the execution, acknowledgment or recordation thereof. Promptly upon request by the Agent, each Credit Party also shall, and shall cause each Subsidiary to do, execute, acknowledge, deliver, record, re-record, file, re-file, register and re-register, any and all deeds, conveyances, mortgages, deeds of trust, trust deeds, assignments, estoppel certificates, financing statements and continuations thereof, notices of assignment, transfers, certificates, assurances and other instruments as the Agent may reasonable require from time to time in order: (a) to carry out more effectively the purposes of the Loan Documents; (b) to perfect and maintain the validity, effectiveness and priority of any security interests intended to be created by the Loan Documents including, without limitation, the delivery of a landlord waiver from any landlord required by the Agent; and (c) to better assure, convey, grant, assign, transfer, preserve, protect and confirm unto the Agent and Lenders the rights granted now or hereafter intended to be

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granted to the Agent and Lenders under any Loan Document or under any other instrument executed in connection with any Loan Document or that any Credit Party may be or become bound to convey, mortgage or assign to the Agent, for the benefit of the Beneficiaries, in order to carry out the intention or facilitate the performance of the provisions of any Loan Document. The Borrowers’ Agent shall furnish to the Agent evidence satisfactory to the Agent of every such recording, filing or registration.

Section 5.13 Compliance with Terms of Material Contracts. Each Credit Party shall, and shall cause each Subsidiary to, make all payments and otherwise perform all obligations in respect of all material contracts to which such Credit Party or any Subsidiary is a party unless such payments or obligations are being properly and diligently contested and an appropriate reserve with respect thereto is made in the accounting records of the Credit Parties.

Section 5.14 Joinder of Domestic Subsidiaries. The Borrowers’ Agent shall promptly notify the Agent at any time that any Person becomes a Subsidiary and provide to the Agent such information about the Subsidiary as the Agent may reasonably request. The Credit Parties shall promptly cause each Domestic Subsidiary (other than any Domestic Subsidiary qualified as a non-profit enterprise under Section 501(c)(3) of the Code) (a) to become a Borrower by executing and delivering to the Agent a signature page hereto and to each Note and/or a joinder agreement as the Agent may require, and (b) to execute and deliver to the Agent (i) signature pages to the Security Agreement, Pledge Agreement and such other Loan Documents and/or joinder agreements as the Agent may require and (ii) any Mortgages requested by Agent on real property interests held by such Domestic Subsidiary. Such Domestic Subsidiary shall also deliver to the Agent such other documents of the types described in Section 3.1(a)(iv), (v), (vi), (vii) (if such Domestic Subsidiary is a Borrower) and (viii) and Section 3.1(b) of the Original Credit Agreement. All signature pages, joinder and other agreements, documents and instruments delivered to the Agent pursuant hereto shall be in form, content and scope reasonably satisfactory to the Agent.

Section 5.15 Collection of Receivables; Control Agreements. (a) On or prior to the Original Closing Date, the Credit Parties have established and shall maintain one or more local bank accounts with one or more financial institutions acceptable to the Agent in its discretion (each, a “Bank”) which are set forth on Schedule 5.15 hereto (each, together with such local accounts listed and identified on Part B of Schedule 1.1(b) and together with any other local bank account of similar nature opened in the future, a “Local Bank Account” and collectively the “Local Bank Accounts”), which shall at all times be subject to an agreements in favor of the Agent, for the benefit of the Beneficiaries, substantially in the form of Exhibit N hereto (“Local Bank Account Agreement”). All amounts in any Local Bank Account shall be automatically transmitted for deposit on each Business Day of the applicable Bank into the appropriate Concentration Account or any other account subject to a Control Agreement in favor of the Agent as the Agent may designate in writing from time to time.

(b) From and after the Original Closing Date, Credit Parties shall direct each Obligor to make payments of Collections directly to a Local Bank Account that is subject to a Local Bank Account Agreement. Further, Credit Parties shall at all times cause (i) all Local Bank Accounts to be subject to a Local Bank Account Agreement pursuant to which, inter alia, the relevant Bank and/or Credit Party agree to provide prior written notice to the Agent of any

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proposed change of the standing instructions of such Credit Party to transfer all funds deposited into such Local Bank Account each Business Day to the appropriate Concentration Account and (ii) all amounts in any Local Bank Account to be transmitted for deposit on each Business Day of the applicable Bank into the appropriate Concentration Account. No such direction given by Credit Parties to any Obligor shall be changed, modified or superseded without the express prior written consent of the Agent.

(c) Each Credit Party shall, and shall cause each of its Subsidiaries to, promptly deliver to the Agent duly executed (i) Control Agreements with respect to any new Deposit Accounts (other than with respect to any new Local Bank Accounts), investment accounts and securities account and (ii) Local Bank Account Agreements in the case of any new Local Bank Accounts, in each case in form and substance acceptable to the Agent.

(d) After the occurrence and during the continuance of an Event of Default, Agent shall be entitled to exercise its rights in respect of the Control Agreement as described in Section 7.3 hereof.

Section 5.16 Post-Closing Deliveries. Credit Parties shall (a) deliver (or cause the delivery of) to the Agent each item set forth on Schedule 5.16 in form and substance reasonably satisfactory to the Agent and (b) perform each action set forth in Schedule 5.16 in a manner reasonably satisfactory to the Agent, each within the time periods set forth opposite each such item or action on such Schedule or such later date as shall be acceptable to the Agent in its sole discretion.

ARTICLE VI

NEGATIVE COVENANTS

Until any obligation of the Lenders hereunder to make the Term Loan and Advances shall have expired or been terminated and the Notes and all of the other Obligations have been paid in full, unless the Agent and Required Lenders shall otherwise consent in writing:

Section 6.1 Merger. No Credit Party will merge or consolidate or enter into any similar reorganization or transaction with any Person other than another Credit Party (provided, that if a Borrower is a party to such merger, consolidation or reorganization, such Borrower shall be the surviving corporation) or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution) or permit any Subsidiary to do any of the foregoing; provided, however, any Subsidiary may be merged with or liquidated into a Borrower or any wholly-owned Subsidiary (if such Borrower or such wholly-owned Subsidiary is the surviving corporation).

Section 6.2 Disposition of Assets. No Credit Party will, nor permit any Subsidiary to, directly or indirectly, sell, assign, lease, convey, transfer or otherwise dispose of (whether in one transaction or a series of transactions) any property (including accounts and notes receivable, with or without recourse) or enter into any agreement to do any of the foregoing, except dispositions listed below so long as no Default or Event of Default has occurred and is continuing or would be caused by such disposition:

(a) dispositions of inventory, or used, worn-out or surplus equipment all in the ordinary course of business;

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(b) the sale of equipment to the extent that such equipment is exchanged for credit against the purchase price of similar replacement equipment, or the proceeds of such sale are applied within one hundred eighty (180) days thereof to the purchase price of such replacement equipment;

(c) dispositions to another Credit Party that is a Borrower hereunder, subject to Liens (if any) in favor of the Agent, for the benefit of the Beneficiaries, which shall continue in favor of the Agent, which dispositions may include, but shall not be limited to, the conveyance by Clanton Hospital, LLC to Central Alabama Medical Associates, LLC of certain real property located in Clanton, Chilton County, Alabama, and being more particularly described on Schedule 6.2 attached hereto and incorporated herein by this reference (or such other legal description as may be reasonably approved by Agent) and the conveyance by Southern Health Corporation of Dahlonega, Inc. to SunLink Services, Inc. of certain real property located in Dahlonega, Lumpkin County, Georgia, and being more particularly described on Schedule 6.2 (or such other legal description as may be reasonably approved by Agent); and

(d) other dispositions of property during the term of this Agreement whose net book value in the aggregate for all such dispositions of property does not exceed $5,000,000.

Section 6.3 Plans. (a) No Credit Party will permit, nor allow any Subsidiary to permit, any event to occur or condition to exist which would permit any Plan to terminate under any circumstances which would cause the Lien provided for in Section 4068 of ERISA to attach to any assets of any Credit Party or any Subsidiary; and (b) except with respect to the KRUG Pension Plan Deficiency disclosed on Schedule 4.14, no Credit Party will permit, as of the most recent valuation date for any Plan subject to Title IV of ERISA, the present value (determined on the basis of reasonable assumptions employed by the independent actuary for such Plan and previously furnished in writing to the Agent) of such Plan’s projected benefit obligations to exceed the fair market value of such Plan’s assets.

Section 6.4 Change in Nature of Business; Organization Documents. No Credit Party will, nor permit any Subsidiary to, make any material change in the nature of the business of such Credit Party or such Subsidiary, as carried on at the Original Closing Date, or amend any of its Articles or Certificates of Incorporation, bylaws or partnership agreement or other organization documents in any material respect or in any respect adverse to the Agent or Lenders, except that any Credit Party that is a corporation may be converted into a limited liability company so long as such Credit Party gives Agent twenty (20) days prior written notice thereof and all steps to maintain the perfection of the Liens of the Agent as the Agent may reasonably request have been taken prior to such conversion.

Section 6.5 Negative Pledges; Subsidiary Restrictions. No Credit Party will, nor permit any Subsidiary to, enter into any agreement, bond, note or other instrument with or for the benefit of any Person other than the Agent and Lenders which would (i) prohibit such Credit Party or such Subsidiary from granting, or otherwise limit the ability of the such Credit Party or such Subsidiary to grant, to the Agent, for the benefit of the Beneficiaries, any Lien on any assets or properties of such Credit Party or such Subsidiary, or (ii) require such Credit Party or such Subsidiary to grant a Lien to any other Person if such Credit Party or such Subsidiary grants any Lien to the Agent, for the benefit of the beneficiaries. No Credit Party will permit any

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Subsidiary to place or allow any restriction, directly or indirectly, on the ability of such Subsidiary to (a) pay dividends or any distributions on or with respect to such Subsidiary’s capital stock or (b) make loans or other cash payments to such Credit Party.

Section 6.6 Restricted Payments. Except as otherwise expressly permitted under the terms of this Agreement, no Credit Party will make any Restricted Payments; provided, however that, so long as no Default or Event of Default has occurred and continues to exist, or would result from any of the following, the Credit Parties shall be permitted to (i) distribute cash (by loan, dividend or distribution) to SHSI, (ii) make payments to the KRUG Pension Plan sufficient to fund the KRUG Pension Plan Deficiency therein relating to the excess of the benefit obligations over the plan assets in an amount not to exceed $900,000 in the aggregate (the “KRUG Pension Plan Deficiency Payments”); (iii) make annual payments sufficient to fund the Credit Parties’ Self Insured Retention Fund insurance program (A) during the first year of this Agreement, in an amount up to the actuarially determined unpaid liability (the “Estimated Insurance Liability”) and (B) in each year of this Agreement thereafter, in an amount equal to the increase in the Estimated Insurance Liability, in each case as set forth in an actuarial report issued by an independent actuary selected by the Credit Parties and reasonably satisfactory to the Agent; provided that prior to such funding the Borrowers deliver to the Agent the actuarial report evidencing the amount of the Estimated Insurance Liability for such period, (iv) make payments satisfying the UK Obligations not to exceed $3,000,000 in the aggregate during the term of this Agreement; provided that after giving effect to each such payment, the Borrowers shall be in pro forma compliance with all the financial ratios and restrictions set forth in Section 6.16, Section 6.17, Section 6.18, Section 6.19, Section 6.20 and Section 6.21,, and (v) make payments or prepayments with respect to Indebtedness subordinated in right of payment to the Obligations solely to the extent such payments or prepayments are expressly permitted pursuant to the terms of a related Subordination Agreement.

Section 6.7 Transactions with Affiliates. No Credit Party will, nor permit any Subsidiary to, enter into any transaction with any Affiliate of such Credit Party except upon fair and reasonable terms no less favorable than such Credit Party, or such Subsidiary, would obtain in a comparable arm’s-length transaction with a Person not an Affiliate; provided, however, the Credit Parties shall be permitted to (i) make the transfers, distributions, payments or prepayments permitted under Section 6.6 hereof to its Subsidiaries and Affiliates and (ii) make loans to other Borrowers provided such loans are evidenced by the Subordinated Intercompany Note.

Section 6.8 Accounting Changes. No Credit Party will, nor permit any Subsidiary to, make any significant change in accounting treatment or reporting practices, except as required by GAAP, or change its fiscal year or the fiscal year of any Subsidiary.

Section 6.9 Deposit and Other Accounts. No Credit Party will, nor permit any Subsidiary to (a) establish any Deposit Accounts investment accounts or securities accounts other than those described on Schedule 4.28, except for Deposit Accounts, investment accounts or securities accounts as to which the applicable Credit Party or Subsidiary(ies), as applicable, shall have delivered to the Agent a Control Agreement in form and substance satisfactory to the Agent (except in the case of any Local Bank Account as to which the applicable Credit Party shall have delivered to the Agent a Local Bank Account Agreement in form and substance satisfactory to the Agent), (b) violate directly or indirectly any bank agency agreement, Control

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Agreement, Local Bank Account Agreement or other agreement in favor of the Agent or (c) revoke or attempt to revoke any instructions or directions given by it under any Control Agreement, Local Bank Account Agreement or other agreement with respect to or altering the rights of the Agent and Lenders thereunder, including, without limitation, attempting to make any withdrawal from or requesting the reduction of funds on deposit in any Local Bank Account without the prior written consent of the Agent; provided, however, that Healthmont of Georgia, Inc. may maintain account #20354 with Park Avenue Bank that is not subject to a Control Agreement as long as the aggregate amount of funds on deposit in such account does not exceed $6,000 at any time.

Section 6.10 Capital Expenditures. The Credit Parties will not make, or permit any Subsidiary to make, Capital Expenditures in an amount exceeding (a) $6,000,000 on a consolidated basis during the period from the Original Closing Date through the last day of each calendar month occurring on or prior to the first anniversary of the Original Closing Date and (b) during any twelve consecutive month period thereafter, $6,000,000 on a consolidated basis, not including any Permitted Investments.

Section 6.11 Subordinated Debt. No Credit Party will, nor permit any Subsidiary to, make any scheduled payment of the principal of or interest on any Subordinated Debt which would be prohibited by the terms of such Subordinated Debt and any related subordination agreement; (b) directly or indirectly make any prepayment on or purchase, redeem or defease any Subordinated Debt or offer to do so (whether such prepayment, purchase or redemption, or offer with respect thereto, is voluntary or mandatory, unless expressly permitted pursuant to an intercreditor or subordination agreement entered into between the holder of any such Subordinated Debt and the Agent); (c) amend or cancel the subordination provisions applicable to any Subordinated Debt; (d) take or omit to take any action if as a result of such action or omission the subordination of such Subordinated Debt, or any part thereof, to the Obligations might be terminated, impaired or adversely affected; or (e) omit to give the Agent prompt notice of any notice received from any holder of Subordinated Debt, or any trustee therefor, or of any default under any agreement or instrument relating to any Subordinated Debt by reason whereof such Subordinated Debt might become or be declared to be due or payable.

Section 6.12 Investments. No Credit Party will, nor permit any Subsidiary to, acquire for value, make, have or hold any Investments, except for (collectively, “Permitted Investments”):

(a) Investments existing on the date of this Agreement and disclosed on Schedule 6.12 hereto.

(b) Travel advances to management personnel and employees in the ordinary course of business.

(c) Investments in readily marketable direct obligations issued or guaranteed by the United States or any agency thereof and supported by the full faith and credit of the United States.

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(d) Certificates of deposit or bankers’ acceptances issued by any commercial bank organized under the laws of the United States or any State thereof which has (i) combined capital and surplus of at least $100,000,000, and (ii) a credit rating with respect to its unsecured indebtedness from a nationally recognized rating service that is satisfactory to the Agent.

(e) Commercial paper given the highest rating by a nationally recognized rating service.

(f) Repurchase agreements relating to securities issued or guaranteed as to principal and interest by the United States with a term of not more than ninety (90) days; provided, however, that all such agreements shall require physical delivery of the securities securing such repurchase agreement, except those delivered through the Federal Reserve Book Entry System.

(g) Other readily marketable Investments in debt securities which are reasonably acceptable to the Agent.

(h) Investments by SHSI in a Captive Insurance Subsidiary not to exceed at any time $1,000,000 in the aggregate outstanding.

(i) Permitted Acquisitions.

(j) Any other Investment if the aggregate consideration therefor does not exceed $500,000.

Any Investments under clauses (c), (d), (e) or (f) above must mature within one year of the acquisition thereof by a Credit Party or a Subsidiary.

Section 6.13 Indebtedness. No Credit Party will, nor permit any Subsidiary to, incur, create, issue, assume or suffer to exist any Indebtedness, except:

(a) The Obligations.

(b) Consolidated Current Liabilities, other than for borrowed money, incurred in the ordinary course of business.

(c) Indebtedness existing on the date of this Agreement and disclosed on Schedule 6.13 hereto.

(d) Indebtedness secured by Liens permitted under Section 6.14 hereof provided, that with respect to Capitalized Lease Obligations and Indebtedness secured by purchase money Liens, such Indebtedness shall not exceed $500,000 in the aggregate at any time.

(e) Indebtedness owed by a Borrower to another Borrower.

(f) Indebtedness that may be incurred in connection with a Permitted Acquisition, to the extent expressly approved by the Agent and Lenders in writing.

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(g) Permitted Refinancing Indebtedness, so long as no Default or Event of Default is in existence at the time of the incurrence of such Permitted Refinancing Indebtedness and immediately after giving effect thereto.

(h) Subordinated Debt owing by one or more Credit Parties to the Sellers in an aggregate principal amount not to exceed $3,000,000.

Section 6.14 Liens. No Credit Party will, nor permit any Subsidiary to, create, incur, assume or suffer to exist any Lien, or enter into, or make any commitment to enter into, any arrangement for the acquisition of any property through conditional sale, lease-purchase or other title retention agreements, with respect to any property now owned or hereafter acquired by a Credit Party or a Subsidiary (collectively, “Permitted Encumbrances”), except:

(a) Liens granted to the Agent, for the benefit of the Beneficiaries, under the Security Documents to secure the Obligations.

(b) Liens existing on the date of this Agreement and disclosed on Schedule 6.14 hereto.

(c) Deposits or pledges to secure payment of workers’ compensation, unemployment insurance, old age pensions or other social security or similar statutory public liability obligations, in the ordinary course of business of a Credit Party or a Subsidiary.

(d) Liens for taxes, fees, assessments and governmental charges not delinquent or to the extent that payment therefor shall not at the time be required to be made in accordance with the provisions of Section 5.4.

(e) Liens of carriers, warehousemen, mechanics and materialmen, and other like Liens arising in the ordinary course of business, for sums not due or to the extent that payment therefor shall not at the time be required to be made in accordance with the provisions of Section 5.4.

(f) Liens incurred or deposits or pledges made or given in connection with, or to secure payment of, indemnity, performance or other similar bonds.

(g) Liens arising solely by virtue of any statutory or common law provision relating to banker’s liens, rights of set-off or similar rights and remedies as to deposit accounts or other funds maintained with a creditor depository institution; provided that (i) such deposit account is not a dedicated cash collateral account and is not subject to restriction against access by a Credit Party or a Subsidiary in excess of those set forth by regulations promulgated by the Board, and (ii) such deposit account is not intended by a Credit Party or any Subsidiary to provide collateral to the depository institution.

(h) Encumbrances in the nature of zoning restrictions, easements and rights or restrictions of record on the use of real property and landlord’s Liens under leases on the premises rented, which do not materially detract from the value of such property or impair the use thereof in the business of a Credit Party or a Subsidiary, the Liens and encumbrances, if any, described in the loan policies of title insurance covering the Encumbered Real Estate delivered to and accepted by Agent in connection with the Mortgages and leases entered into by a Credit Party or a Subsidiary in the ordinary course of business.

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(i) The interest of any lessor under any Capitalized Lease entered into after the Original Closing Date or purchase money Liens on property acquired after the Original Closing Date; provided, that, (i) the Indebtedness secured thereby is otherwise permitted by Section 6.13(d) and (ii) such Liens are limited to the property acquired and do not secure Indebtedness other than the related Capitalized Lease or the purchase price of such property.

(j) Liens securing Indebtedness permitted by Section 6.13(f) to the extent such Liens are expressly approved by the Agent and Lenders in writing.

(k) Liens on the property securing the Permitted Refinancing of any Indebtedness to the extent Indebtedness being extended, refinanced, renewed, replaced, substituted or refunded is secured by such Liens and without any change in the property subject to such Liens.

Section 6.15 Contingent Liabilities. No Credit Party will, nor permit any Subsidiary to, be or become liable on any Contingent Obligations except Contingent Obligations existing on the date of this Agreement and disclosed on Schedule 6.15 and Contingent Obligations for the benefit of the Agent and Lenders.

Section 6.16 Leverage Ratio. The Credit Parties will not permit the Leverage Ratio, for the twelve (12) consecutive months ending on the last day of each fiscal quarter set forth below, to exceed the maximum ratio set forth opposite such fiscal quarter:

FISCAL QUARTER ENDING	MAXIMUM LEVERAGE RATIO
June 30, 2008	3.60 to 1.00
September 30, 2008	3.60 to 1.00
December 31, 2008	3.50 to 1.00
March 31, 2009	3.40 to 1.00
June 30, 2009	2.90 to 1.00
September 30, 2009	2.60 to 1.00
December 31, 2009	2.60 to 1.00
March 31, 2010	2.40 to 1.00
June 30, 2010	2.20 to 1.00
September 30, 2010	2.10 to 1.00
December 31, 2010	2.10 to 1.00
March 31, 2011	2.00 to 1.00
June 30, 2011	2.00 to 1.00
September 30, 2011	2.00 to 1.00

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FISCAL QUARTER ENDING	MAXIMUM LEVERAGE RATIO
December 31, 2011	1.90 to 1.00
March 31, 2012	1.90 to 1.00
June 30, 2012	1.90 to 1.00
September 30, 2012	1.80 to 1.00
December 31, 2012	1.80 to 1.00
March 31, 2013	1.70 to 1.00
June 30, 2013	1.70 to 1.00
September 30, 2013	1.70 to 1.00
December 31, 2013	1.60 to 1.00
March 31, 2014	1.60 to 1.00
June 30, 2014	1.60 to 1.00
September 30, 2014	1.50 to 1.00
December 31, 2014	1.50 to 1.00
March 31, 2015	1.50 to 1.00
June 30, 2015 and each fiscal quarter thereafter	1.40 to 1.00

Section 6.17 Senior Leverage Ratio. The Credit Parties will not permit the Senior Leverage Ratio, for the twelve (12) consecutive months ending on the last day of each fiscal quarter set forth below, to exceed the maximum ratio set forth opposite such fiscal quarter:

FISCAL QUARTER ENDING	MAXIMUM SENIOR LEVERAGE RATIO
June 30, 2008	3.30 to 1.00
September 30, 2008	3.40 to 1.00
December 31, 2008	3.30 to 1.00
March 31, 2009	3.10 to 1.00
June 30, 2009	2.70 to 1.00
September 30, 2009	2.50 to 1.00
December 31, 2009	2.40 to 1.00
March 31, 2010	2.30 to 1.00
June 30, 2010	2.00 to 1.00
September 30, 2010	2.00 to 1.00
December 31, 2010	1.90 to 1.00

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FISCAL QUARTER ENDING	MAXIMUM SENIOR LEVERAGE RATIO
March 31, 2011	1.90 to 1.00
June 30, 2011	1.90 to 1.00
September 30, 2011	1.90 to 1.00
December 31, 2011	1.80 to 1.00
March 31, 2012	1.80 to 1.00
June 30, 2012	1.80 to 1.00
September 30, 2012	1.80 to 1.00
December 31, 2012	1.70 to 1.00
March 31, 2013	1.70 to 1.00
June 30, 2013	1.70 to 1.00
September 30, 2013	1.60 to 1.00
December 31, 2013	1.60 to 1.00
March 31, 2014	1.60 to 1.00
June 30, 2014	1.60 to 1.00
September 30, 2014	1.50 to 1.00
December 31, 2014	1.50 to 1.00
March 31, 2015	1.50 to 1.00
June 30, 2015 and each fiscal quarter thereafter	1.40 to 1.00

Section 6.18 Minimum Liquidity. The Credit Parties (on a consolidated basis) will not permit at any time the sum of their (i) actual cash and Cash Equivalents and (ii) Availability to be less than $2,500,000.

Section 6.19 Collateral Coverage Ratio. The Borrowers will not permit the Collateral Coverage Ratio to be less than (i) 1.4 to 1.0 at any time on or prior to December 31, 2008 and (ii) 1.5 to 1.0 at any thereafter.

Section 6.20 Fixed Charge Coverage Ratio. The Credit Parties will not permit the Fixed Charge Coverage Ratio for the twelve (12) consecutive months ending on the last day of for each fiscal quarter set forth below (or with respect to the fiscal quarters ending on or before April 30, 2009, the period commencing on May 1, 2008, and ending on the last day of such fiscal month) to be less than the minimum ratio set forth opposite such fiscal quarters:

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FISCAL QUARTER ENDING	MINIMUM FIXED CHARGE COVERAGE RATIO
June 30, 2008	1.40 to 1.00
September 30, 2008	1.40 to 1.00
December 31, 2008	1.40 to 1.00
March 31, 2009	1.50 to 1.00
June 30, 2009	1.50 to 1.00
September 30, 2009	1.60 to 1.00
December 31, 2009	1.70 to 1.00
March 31, 2010	1.70 to 1.00
June 30, 2010	1.70 to 1.00
September 30, 2010	1.80 to 1.00
December 31, 2010	1.90 to 1.00
March 31, 2011	2.00 to 1.00
June 30, 2011	2.10 to 1.00
September 30, 2011	2.10 to 1.00
December 31, 2011	2.10 to 1.00
March 31, 2012	2.10 to 1.00
June 30, 2012	2.20 to 1.00
September 30, 2012	2.30 to 1.00
December 31, 2012	2.40 to 1.00
March 31, 2013	2.60 to 1.00
June 30, 2013	2.70 to 1.00
September 30, 2013	2.70 to 1.00
December 31, 2013	2.70 to 1.00
March 31, 2014	2.70 to 1.00
June 30, 2014	2.70 to 1.00
September 30, 2014	2.90 to 1.00
December 31, 2014	3.00 to 1.00
March 31, 2015	3.30 to 1.00
June 30, 2015 and each fiscal quarter thereafter	3.40 to 1.00

Section 6.21 Minimum EBITDA. The Credit Parties will not permit the sum of (i) the Consolidated EBITDA plus (ii) with respect to each Person and any of its Subsidiaries acquired in a Permitted Acquisition during the relevant period of determination, the Consolidated Pro Forma EBITDA of such Person and any of its Subsidiaries for all times during such relevant period prior to the acquisition of such Person and any of its Subsidiaries, for the twelve (12) consecutive months ending on the last day of each fiscal quarter set forth below to be less than the minimum amount set forth opposite such fiscal quarter:

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FISCAL QUARTER ENDING	MINIMUM CONSOLIDATED EBITDA
June 30, 2008	$12,000,000
September 30, 2008	$12,000,000
December 31, 2008	$12,500,000
March 31, 2009	$13,000,000
June 30, 2009	$13,500,000
September 30, 2009	$14,300,000
December 31, 2009	$15,000,000
March 31, 2010 and each fiscal quarter thereafter	$15,500,000

Section 6.22 Executive Compensation. No Credit Party will, nor permit any Subsidiary to, make any payments of management, consulting or other fees for management or similar services, or any payment on account of any Indebtedness owing to any officer, employee, shareholder, director or other Affiliate of such Credit Party, except reasonable compensation to officers, employees and directors of such Credit Party for services rendered to such Borrower in the ordinary course of business. Without limiting the foregoing, no Credit Party shall not pay or commit to pay cash compensation to any member of such Credit Party’s senior management in an amount in any fiscal year in excess of 110% of the aggregate cash compensation paid during the prior fiscal year except as may be approved by the Compensation Committee of the Board of Directors so long as the common stock of SHSI continues to be publicly traded on the American Stock Exchange, the New York Stock Exchange or the NASDAQ National Market.

Section 6.23 Restrictions on Leases, etc. No Credit Party will, nor permit any Subsidiary to, create, incur, assume, or suffer to exist, any obligation as a lessee for the rental or hire of any real or personal property, other than: (a) leases described on Schedule 6.23 attached hereto; (b) renewals of existing operating leases, provided that the periodic payments thereunder shall not exceed 110% of the periodic payments required under the original term thereof; and (c) additional operating leases requiring payments (including taxes, insurance, maintenance, and similar expenses) in an aggregate amount not to exceed $1,000,000 at any time.

Section 6.24 Loan Proceeds. No Borrower will, nor permit any Subsidiary to, use any part of the proceeds of the Loans or Advances directly or indirectly, and whether immediately, incidentally or ultimately, (a) to purchase or carry margin stock (as defined in Regulation U of the Board) or to extend credit to others for the purpose of purchasing or carrying margin stock or to refund Indebtedness originally incurred for such purpose or (b) for any purpose which entails a violation of, or which is inconsistent with, the provisions of Regulations U or X of the Board.

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Section 6.25 Sale and Leaseback Transactions. No Credit Party will, nor permit any Subsidiary to, enter into any arrangement, directly or indirectly, whereby it shall sell or transfer any property, real or personal, and thereafter lease such property for the same or a substantially similar purpose or purposes as the property sold or transferred.

Section 6.26 Hedging Agreements. No Credit Party will, nor permit any Subsidiary to, enter into any hedging arrangements, other than any Rate Protection Agreements that are approved by the Agent.

ARTICLE VII

EVENTS OF DEFAULT AND REMEDIES

Section 7.1 Events of Default. The occurrence of any one or more of the following events shall constitute an Event of Default:

(a) The Borrowers shall fail to make when due, whether by acceleration or otherwise, any payment of principal of or interest on any of the Loans or any other Obligation required to be made pursuant to this Agreement and not corrected within 3 days.

(b) Any representation or warranty made by or on behalf of any Credit Party or any Subsidiary in this Agreement or any other Loan Document or by or on behalf of any Credit Party or any Subsidiary in any certificate, statement, report or document herewith or hereafter furnished to the Agent or any Lender pursuant to this Agreement or any other Loan Document shall prove to have been false or misleading in any material respect on the date as of which the facts set forth are stated or certified.

(c) Any Credit Party or any of its respective Subsidiaries shall fail to comply with Sections 2.14, 5.1(f), 5.2, 5.3, 5.5, 5.12, 5.15 or 5.16 hereof or any Section of Article VI hereof.

(d) (A) Any Credit Party or any of its respective Subsidiaries shall fail to comply with Section 5.1 (other than Section 5.1(f)) and such failure to comply shall continue unremedied for fifteen (15) calendar days or (B) any Credit Party shall fail to comply with any other agreement, covenant, condition, provision or term contained in this Agreement (other than those hereinabove set forth in this Section 7.1) and such failure to comply shall continue for thirty (30) calendar days after whichever of the following dates is the earliest: (i) the date any Credit Party or the Borrowers’ Agent gives notice of such failure to the Agent, (ii) the date any Credit Party should have given notice of such failure to the Agent pursuant to Section 5.1, or (iii) the date the Agent gives notice of such failure to the Borrowers’ Agent.

(e) Any default (however denominated or defined) shall occur under any Security Document and any applicable grace period thereunder shall have lapsed.

(f) Any Credit Party or any Subsidiary other than any Immaterial Subsidiary, shall become insolvent or shall generally not pay its debts as they mature or shall apply for, shall consent to, or shall acquiesce in the appointment of a custodian, trustee or receiver of such Credit Party or such Subsidiary or for a substantial part of the property thereof or, in the absence of such application, consent or acquiescence, a custodian, trustee or receiver shall be appointed for

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any such Credit Party or any such Subsidiary or for a substantial part of the property thereof and shall not be discharged within sixty (60) days, or any Borrower or any Subsidiary other than any Immaterial Subsidiary, shall make an assignment for the benefit of creditors.

(g) Any bankruptcy, reorganization, debt arrangement or other proceedings under any bankruptcy or insolvency law shall be instituted by or against any Credit Party or any Subsidiary other than any Immaterial Subsidiary, and, if instituted against any such Credit Party or any such Subsidiary, shall have been consented to or acquiesced in by such Credit Party or such Subsidiary, or shall remain undismissed for sixty (60) days, or an order for relief shall have been entered against such Credit Party or such Subsidiary.

(h) Any dissolution or liquidation proceeding not permitted by Section 6.1 shall be instituted by or against any Credit Party or a Subsidiary other than any Immaterial Subsidiary, and, if instituted against any such Credit Party or any such Subsidiary, shall be consented to or acquiesced in by such Credit Party or such Subsidiary or shall remain for sixty (60) days undismissed.

(i) A judgment or judgments for the payment of money in excess of the sum of $750,000 in the aggregate shall be rendered against any Credit Party or a Subsidiary and either (i) the judgment creditor executes on such judgment (to the extent not covered by independent third-party insurance as to which the insurer does not dispute coverage) or (ii) such judgment remains unpaid or undischarged for more than 60 days from the date of entry thereof or such longer period during which execution of such judgment shall be stayed during an appeal from such judgment.

(j) The maturity of any material Indebtedness of any Credit Party (other than Indebtedness under this Agreement) or a Subsidiary shall be accelerated, or any Credit Party or a Subsidiary shall fail to pay any such material Indebtedness when due (after the lapse of any applicable grace period) or, in the case of such Indebtedness payable on demand, when demanded (after the lapse of any applicable grace period), or any event shall occur or condition shall exist and shall continue for more than the period of grace, if any, applicable thereto and shall have the effect of causing, or permitting the holder of any such Indebtedness or any trustee or other Person acting on behalf of such holder to cause, such material Indebtedness to become due prior to its stated maturity or to realize upon any collateral given as security therefor. For purposes of this Section, Indebtedness of any Credit Party or a Subsidiary shall be deemed “material” if it exceeds $750,000 as to any item of Indebtedness or in the aggregate for all items of Indebtedness with respect to which any of the events described in this Section 7.1(j) has occurred.

(k) Any execution or attachment shall be issued whereby any material part of the property of any Credit Party or any Subsidiary shall be taken or attempted to be taken and the same shall not have been vacated or stayed within 30 days after the issuance thereof.

(l) Any Security Document shall, at any time, cease to be in full force and effect or shall be judicially declared null and void, or the validity or enforceability thereof shall be contested by any Credit Party, or the Agent shall cease to have a valid and perfected security interest having the priority contemplated thereunder in all of the collateral described therein,

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other than by action or inaction of the Agent if (i) the aggregate value of the collateral affected by any of the foregoing exceeds $750,000 and (ii) any of the foregoing shall remain unremedied for ten (10) days or more after receipt of notice thereof by the Borrowers’ Agent from the Agent.

(m) The indictment by any Governmental Authority of a Credit Party or Affiliate of any Credit Party as to which there is a reasonable probability of an adverse determination under any criminal statute, or commencement of criminal or civil proceedings against any Credit Party or Affiliate of any Credit Party, pursuant to which statute or proceeding the penalties or remedies sought or available include forfeiture of any material portion of the Collateral or any other assets of any Credit Party which are necessary or material to the conduct of its business; or the indictment by any Governmental Authority of a Credit Party regarding any matter that may serve as the basis for the exclusion under 42 C.F.R. Part 1001, Subparts B and C, of any Credit Party, a Subsidiary or Affiliate of a Credit Party from a federal health care program, as defined in 42 C.F.R. § 1001.2; or the initiation or, as Agent may reasonably and in good faith determine the threatened initiation, by the United States Department of Health and Human Services Office of Inspector General of or, the occurrence of any event which could reasonably be likely to give rise to, an action to exclude any Credit Party under 42 C.F.R. Part 1001, Subparts B and C.

(n) The loss, suspension or revocation of, or failure to renew, any license, permit, approval, accreditation or other authorization of any Governmental Authority or other Person now held or hereafter acquired by any Credit Party or any of their Subsidiaries if such loss, suspension, revocation or failure to renew would have a Material Adverse Occurrence.

(o) Any occurrence, after the Original Closing Date, of whatsoever nature (including, without limitation, any adverse determination in any litigation, arbitration, or governmental investigation or proceeding) which would reasonably be expected to materially and adversely affect (a) the financial condition or operations of the Credit Parties and their Subsidiaries taken as a whole, (b) impair the ability of the Credit Parties and their Subsidiaries, taken as a whole, to perform their obligations under any Loan Document, or any writing executed pursuant thereto, (c) the validity or enforceability of the material obligations of any Credit Party other than an Immaterial Subsidiaries under any Loan Document, or (d) the rights and remedies of the Agent or any Lender against any Credit Party or any Subsidiary, (e) the timely payment of the principal of and interest on the Loans or other amounts payable by the Credit Parties hereunder, or (f) the validity of the joint and several nature of the obligations of the Borrowers with respect to all of the Obligations.

Section 7.2 Remedies. If (a) any Event of Default described in Sections 7.1(f), (g) or (h) shall occur with respect to any Credit Party , the Revolving Commitments shall automatically terminate and the Loans and all other Obligations shall automatically become immediately due and payable; or (b) any other Event of Default shall occur and be continuing, then, the Agent may, and at the request of the Required Lenders shall, (i) declare the Revolving Commitments terminated, whereupon the Revolving Commitments shall terminate, (ii) declare the outstanding unpaid principal balance of the Loans, the accrued and unpaid interest thereon and all other Obligations to be forthwith due and payable, whereupon the Loans, all accrued and unpaid interest thereon and all such Obligations shall immediately become due and payable, in each case without presentment, demand, protest or other notice of any kind, all of which are hereby

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expressly waived, anything in this Agreement or in the Notes to the contrary notwithstanding, and/or (iii) exercise on behalf of itself and the Beneficiaries all rights and remedies available to it and the Lenders under the Loan Documents or applicable law.

Section 7.3 Lockbox; Rights Under Control Agreements. After the occurrence and during the continuance of an Event of Default, the Agent shall be entitled to send notice to any financial institutions party to a Control Agreement to assert exclusive control over all funds held in the Concentration Account or any other Deposit Accounts (other than any Local Bank Account), investment accounts and/or securities accounts subject to a Control Agreement. After an Event of Default has occurred and is continuing, except as otherwise may be required by Section 2.19, the Agent may apply all Collections and other payments against the Obligations in such order as the Agent deems appropriate. Any application of any Collection to the payment of any Obligation is conditioned upon final payment of any check or other instrument. In addition, the Agent, at any time after the occurrence of an Event of Default, whether or not any such Event of Default continues to exist, may require that each Borrower instruct all or, if so elected by the Agent, certain of its current and future account debtors and obligors on other Collateral to make all payments directly to one or more lockboxes (each a “Lockbox”) controlled by the Agent or to the extent not permitted by applicable law, shall make such other arrangements as the Agent may require to cause transfer of Collateral proceeds to a Collateral Account and the Agent may exercise its rights under Control Agreements. All payments received in a Lockbox shall be transferred to one or more special bank accounts (each a “Collateral Account”) controlled by the Agent subject to withdrawal by the Agent only. After the Agent’s exercise of its rights to direct account debtors or other obligors on any Collateral to make payments directly to the Agent or to require a Borrower to establish a Lockbox, each Borrower shall immediately deliver all full and partial payments on any Collateral received by such Borrower to the Agent in their original form, except for endorsements where necessary. Until such payments are so delivered to the Agent, such payments shall be held in trust by the Borrowers for and as the Agent’s property, and shall not be commingled with any funds of any of the Borrowers.

Section 7.4 Offset. In addition to the remedies set forth in Section 7.3, upon the occurrence of any Event of Default and thereafter while the same be continuing, each Credit Parties hereby irrevocably authorizes the Agent and Lenders to set off any Obligations against all deposits and credits of such Credit Party with, and any and all claims of such Credit Party against, Agent or any Lender. Such right shall exist whether or not the Agent or Lenders shall have made any demand hereunder or under any other Loan Document, whether or not the Obligations, or any part thereof, or deposits and credits held for the account of the Credit Parties is or are matured or unmatured, and regardless of the existence or adequacy of any collateral, guaranty or any other security, right or remedy available to the Agent or any Lender. The Agent and Lenders agree that, as promptly as is reasonably possible after the exercise of any such setoff right, it shall notify the Borrowers’ Agent of its exercise of such setoff right; provided, however, that the failure of the Agent or any Lender to provide such notice shall not affect the validity of the exercise of such setoff rights. Nothing in this Agreement shall be deemed a waiver or prohibition of or restriction on the Agent or any Lender to all rights of banker’s Lien, setoff and counterclaim available pursuant to law.

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ARTICLE VIII

MISCELLANEOUS

Section 8.1 Amendments and Waivers.

(a) Except for actions expressly permitted to be taken by Agent, no amendment, modification, termination or waiver of any provision of this Agreement or any other Loan Document, or any consent to any departure by any Credit Party therefrom, shall in any event be effective unless the same shall be in writing and signed by Borrowers, the Agent and by Required Lenders, Required Revolving Lenders or all affected Lenders, as applicable. Except as set forth in subsections (b) and (c) below, all such amendments, modifications, terminations or waivers requiring the consent of any Lenders shall require the written consent of Required Lenders.

(b) No amendment, modification, termination or waiver of or consent with respect to any provision of this Agreement that increases the percentage advance rates above the percentage advance rates set forth in the definition of terms “Borrowing Base” and “Availability” as of the Original Closing Date shall be effective unless the same shall be in writing and signed by Agent, Required Revolving Lenders and Borrowers. No amendment, modification, termination or waiver of or consent with respect to any provision of this Agreement that waives compliance with the conditions precedent set forth in Section 3.2 to the making of any Revolving Loan shall be effective unless the same shall be in writing and signed by Agent, Required Revolving Lenders and Borrowers. Notwithstanding anything contained in this Agreement to the contrary, no waiver or consent with respect to any Default or any Event of Default shall be effective for purposes of the conditions precedent to the making of Revolving Loans set forth in Section 3.2 unless the same shall be in writing and signed by Agent, Required Revolving Lenders and Borrowers.

(c) No amendment, modification, termination or waiver shall, unless in writing and signed by Agent and each Lender directly affected thereby: (i) increase the principal amount, or postpone or extend the scheduled date of expiration, of any Lender’s Revolving Commitment or Term Loan (which action shall be deemed to directly affect all Lenders); (ii) reduce the principal of, rate of interest on (other than any determination or waiver to charge or not charge interest at the Default Rate) or Fees payable with respect to any Loan of any affected Lender; (iii) extend any scheduled payment date or final maturity date of the principal amount of any Loan of any affected Lender; (iv) waive, forgive, defer, extend or postpone any payment of interest or Fees as to any affected Lender (which action shall be deemed only to affect those Lenders to whom such payments are made); (v) release any Guaranty or release all or substantially all of the Collateral, except as otherwise provided in this Credit Agreement or the other Loan Documents; (vi) change the percentage of the Revolving Commitments or of the aggregate unpaid principal amount of the Loans that shall be required for Lenders or any of them to take any action hereunder (which action shall be deemed to directly affect all Lenders); and (vii) amend or waive this Section 8.1 or the definitions of the terms “Required Lenders”, or “Required Revolving Lenders” insofar as such definitions affect the substance of this Section 8.1 or the term “Pro Rata Share” (which action shall be deemed to directly affect all Lenders). Furthermore, no amendment, modification, termination or waiver affecting the respective rights or duties of Agent or Funding Agent under this Agreement or any other Loan Document shall be

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effective unless in writing and signed by Agent or Funding Agent, as applicable, in addition to Lenders required hereinabove to take such action. Each amendment, modification, termination or waiver shall be effective only in the specific instance and for the specific purpose for which it was given. No amendment, modification, termination or waiver shall be required for Agent to take additional Collateral pursuant to any Loan Document. No amendment, modification, termination or waiver of any provision of any Note shall be effective without the written concurrence of the holder of that Note. No notice to or demand on any Credit Party in any case shall entitle such Credit Party or any other Credit Party to any other or further notice or demand in similar or other circumstances. Any amendment, modification, termination, waiver or consent effected in accordance with this Section 8.1 shall be binding upon each holder of the Notes at the time outstanding and each future holder of the Notes.

Section 8.2 Expenses. Whether or not the transactions contemplated hereby are consummated, the Credit Parties agree to pay to the Agent upon demand: (a) the reasonable costs of producing this Agreement, the other Loan Documents and other agreements and instruments mentioned herein; (b) the reasonable costs and expenses of the Agent incurred in connection with the administration, including electronic interfaces fees and periodic auditing, Collateral monitoring, modification and amendment of this Agreement; (c) any taxes (including interest and penalties in respect thereto) payable by the Agent, Funding Agent or any Lender (other than taxes based upon the Agent’s, Funding Agent’s or Lenders’ net income or profits) on or with respect to the transactions contemplated by this Agreement; (d) the reasonable fees, expenses and disbursements of the Agent’s counsel and any local counsel to the Agent incurred in connection with the preparation, administration or interpretation of the Loan Documents and other instruments mentioned herein, the closing of the transactions contemplated hereby, and amendments, modifications, approvals, consents or waivers hereto or hereunder; (e) the reasonable fees, expenses and disbursements of the Agent incurred by the Agent in connection with the preparation, administration or interpretation of the Loan Documents and other instruments mentioned herein, including all title insurance premiums and surveyor, engineering and appraisal charges and all expenses related to Phase I environmental assessments; (f) the reasonable fees, costs, expenses and bank charges, including bank charges for returned checks, incurred by the Agent in establishing, maintaining or handling the Lockbox or that Collateral Account and any other accounts for the disbursement of the Loans and/or the collection of any of the Collateral; (g) all reasonable out-of-pocket expenses (including without limitation reasonable attorneys’ fees and costs, which attorneys may be employees of the Agent, Funding Agent and Lenders, and reasonable consulting, accounting, appraisal, investment banking and similar professional fees and charges) incurred by the Agent, Funding Agent and Lenders in connection with (i) the enforcement of or preservation of rights under any of the Loan Documents against Credit Parties or the administration thereof, and (ii) any litigation, proceeding or dispute whether arising hereunder or otherwise, in any way related to the Agent’s or any Lender’s relationship with Credit Parties or any of its Affiliates; and (h) all reasonable fees, expenses and disbursements of the Agent incurred in connection with UCC or title searches, UCC filings or mortgage recordings. In addition, the Credit Parties agree to pay to the Funding Agent upon demand the reasonable fees, expenses and disbursements of the Funding Agent, without duplication as to fees, expenses and disbursements of the Agent that have been paid to the Agent by the Credit Parties pursuant to this Section 8.2, incurred by the Funding Agent in connection with administration or interpretation of the Loan Documents and other instruments mentioned herein, and amendments, modifications, approvals, consents or waivers hereto or hereunder, in

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each case solely as the same relates to or affects the performance by the Funding Agent of its functions in its capacity as the Funding Agent under the Loan Documents. All such costs and expenses shall constitute Obligations hereunder secured by the Agent’s Liens in the Collateral. The covenants of this Section 8.2 shall survive payment and satisfaction of the Obligations. Anything herein to the contrary notwithstanding, the Credit Parties shall not be required to pay any costs of drafting, negotiating and producing this Agreement incurred by the Agent, Funding Agent or any Lender.

Section 8.3 Waivers, etc. No failure on the part of the Agent or any Lender or the holder of a Note to exercise and no delay in exercising any power or right hereunder or under any other Loan Document shall operate as a waiver thereof; nor shall any single or partial exercise of any power or right preclude any other or further exercise thereof or the exercise of any other power or right. The remedies herein and in the other Loan Documents provided are cumulative and not exclusive of any remedies provided by law.

Section 8.4 Notices.

(a) Except when telephonic notice is expressly authorized by this Agreement, any notice or other communication to any party in connection with this Agreement shall be in writing and shall be sent by manual delivery, facsimile transmission, overnight courier or United States mail (postage prepaid) addressed to such party at the address specified on the signature page hereof, or at such other address as such party shall have specified to the other party hereto in writing. All periods of notice shall be measured from the date of delivery thereof if manually delivered, from the date of sending thereof if sent by facsimile transmission, from the first Business Day after the date of sending if sent by overnight courier, or from four days after the date of mailing if mailed; provided, however, that any notice to the Agent and/or Funding Agent under Article II hereof shall be deemed to have been given only when received by the Agent.

(b) Notices and other communications to the Agent hereunder may be delivered or furnished by e-mail pursuant to procedures approved by the Agent, and/or Funding Agent, as applicable provided that the foregoing shall not apply to notices to the Agent and/or Funding Agent pursuant to Article II. The Agent, Funding Agent or the Credit Parties may, in its discretion, agree to accept notices and other communications to it hereunder by e-mail pursuant to procedures approved by it, provided that approval of such procedures may be limited to particular notices or communications. Unless the Agent and/or Funding Agent otherwise prescribes, notices and other communications sent to an e-mail address shall be deemed received upon the sender’s receipt of an acknowledgement from the intended recipient (such as by the “return receipt requested” function, as available, return e-mail or other written acknowledgement), provided that if such notice or other communication is not sent during the normal business hours of the recipient, such notice or communication shall be deemed to have been sent at the opening of business on the next business day for the recipient.

Section 8.5 Taxes. The Credit Parties agree to pay, and save the Agent and Lenders harmless from all liability for, any stamp or other taxes which may be payable with respect to the execution or delivery of this Agreement or the issuance of the Notes, which obligation of the Credit Parties shall survive the termination of this Agreement.

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Section 8.6 Successors and Assigns. Subject to Section 10.1 hereof, this Agreement shall be binding upon and inure to the benefit of the Credit Parties, Agent, Funding Agent, Lenders, all future holders of the Notes, and their respective successors and assigns, except that the Credit Parties may not assign or transfer any of their rights or obligations under this Agreement without the prior written consent of the Lenders.

Section 8.7 Confidentiality of Information. The Agent, Funding Agent and Lenders shall use the same level of efforts and care as it uses with respect to its own confidential information to ensure that information about the Credit Parties and their operations, affairs and financial condition, not generally disclosed to the public or to trade and other creditors, which is furnished to the Agent, Funding Agent and Lenders pursuant to the provisions hereof is used only for the purposes of this Agreement and any other relationship between the Agent, Funding Agent, Lenders and the Credit Parties and shall not be divulged to any Person other than the Agent and Lenders, their Affiliates and their respective officers, directors, employees and agents (each a “Representative”) (it being understood that the Representatives to whom such disclosure is made will be informed of the confidential nature of such information and instructed to keep such information confidential), except: (a) to their attorneys and accountants, (b) in connection with the enforcement of the rights of the Agent, Funding Agent or any Lender hereunder and under the Loan Documents or otherwise in connection with applicable litigation, (c) in connection with assignments and participations and the solicitation of prospective assignees and participants referred to in Section 9.1, (d) if such information is generally available to the public other than as a result of disclosure by the Agent, Funding Agent or a Lender, (e) to any direct or indirect contractual counterparty in any hedging arrangement or such contractual counterparty’s professional advisor, (f) to any nationally recognized rating agency that requires information about the Agent’s, Funding Agent’s or any Lender’s investment portfolio in connection with ratings issued with respect to the Agent, Funding Agent or any Lender, and (g) as may otherwise be required or requested by any regulatory authority having jurisdiction over the Agent, Funding Agent or any Lender or by any applicable law, rule, regulation or judicial process, the opinion of the Agent’s, Funding Agent’s or any Lender’s counsel concerning the making of such disclosure to be binding on the parties hereto; provided, however, that in case of a required disclosure pursuant to the preceding clause (g), the Agent shall notify Borrowers’ Agent of such required or requested disclosure to the extent practicable, unless prohibited by law, and reasonably cooperate with the Borrowers, at the Credit Parties’ sole expense, to enjoin, stay or limit such disclosure. None of the Agent, Funding Agent nor any Lender shall incur any liability to the Borrowers by reason of any disclosure permitted by this Section.

Section 8.8 Governing Law and Construction. THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF GEORGIA, WITHOUT GIVING EFFECT TO CONFLICT OF LAWS PRINCIPLES THEREOF. Whenever possible, each provision of this Agreement and the other Loan Documents and any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto shall be interpreted in such manner as to be effective and valid under such applicable law, but, if any provision of this Agreement, the other Loan Documents or any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto shall be held to be prohibited or invalid under such applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement, the other Loan Documents or any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto.

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Section 8.9 Consent to Jurisdiction. AT THE OPTION OF THE AGENT, THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS MAY BE ENFORCED IN ANY STATE COURT LOCATED WITHIN COBB COUNTY, STATE OF GEORGIA, OR OF THE UNITED STATES FOR THE NORTHERN DISTRICT OF GEORGIA; AND EACH CREDIT PARTY CONSENTS TO THE JURISDICTION AND VENUE OF ANY SUCH COURT AND WAIVES ANY ARGUMENT THAT VENUE IN SUCH FORUMS IS NOT CONVENIENT. IN THE EVENT ANY CREDIT PARTY COMMENCES ANY ACTION IN ANOTHER JURISDICTION OR VENUE UNDER ANY TORT OR CONTRACT THEORY ARISING DIRECTLY OR INDIRECTLY FROM THE RELATIONSHIP CREATED BY THIS AGREEMENT, THE AGENT AT ITS OPTION SHALL BE ENTITLED TO HAVE THE CASE TRANSFERRED TO ONE OF THE JURISDICTIONS AND VENUES ABOVE-DESCRIBED, OR IF SUCH TRANSFER CANNOT BE ACCOMPLISHED UNDER APPLICABLE LAW, TO HAVE SUCH CASE DISMISSED WITHOUT PREJUDICE.

Section 8.10 Waiver of Jury Trial. EACH CREDIT PARTY, AGENT, FUNDING AGENT AND EACH LENDER IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY.

Section 8.11 Survival of Agreement. All representations, warranties, covenants and agreement made by each Credit Party herein or in the other Loan Documents and in the certificates or other instruments prepared or delivered in connection with or pursuant to this Agreement or any other Loan Document shall be deemed to have been relied upon by the Agent and Lenders and shall survive the making of the Loan by the Lenders and the execution and delivery to the Agent and Lenders by the Borrowers of the Notes, regardless of any investigation made by or on behalf of the Agent or any Lender, and shall continue in full force and effect as long as any Obligation is outstanding and unpaid and so long as the Revolving Commitment has not been terminated; provided, however, that the Credit Parties’ obligations under Sections 2.16, 8.2, 8.5 and 8.12 shall survive payment in full of the Obligations and the termination of the Revolving Commitment.

Section 8.12 Indemnification. The Credit Parties hereby agree to defend, protect, indemnify and hold harmless the Agent, the Funding Agent, Lenders and their Affiliates and the directors, officers, employees, attorneys and agents of the Agent, the Funding Agent, Lenders and their Affiliates (each of the foregoing being an “Indemnitee” and all of the foregoing being collectively the “Indemnitees”) from and against any and all claims, actions, damages, liabilities, judgments, costs and expenses (including all reasonable fees and disbursements of counsel which may be incurred in the investigation or defense of any matter) imposed upon, incurred by or asserted against any Indemnitee, whether direct, indirect or consequential and whether based on any federal, state, local or foreign laws or regulations (including securities laws, environmental laws, commercial laws and regulations), under common law or on equitable cause, or on contract or otherwise:

(a) by reason of, relating to or in connection with the execution, delivery, performance or enforcement of any Loan Document, any commitments relating thereto, or any transaction contemplated by any Loan Document; or

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(b) by reason of, relating to or in connection with any credit extended or used under the Loan Documents or any act done or omitted by any Person, or the exercise of any rights or remedies thereunder, including the acquisition of any collateral by the Agent or any Lender by way of foreclosure of the Lien thereon, deed or bill of sale in lieu of such foreclosure or otherwise;

provided, however, that the Credit Parties shall not be liable to any Indemnitee for any portion of such claims, damages, liabilities and expenses resulting from such Indemnitee’s gross negligence or willful misconduct. In the event this indemnity is unenforceable as a matter of law as to a particular matter or consequence referred to herein, it shall be enforceable to the full extent permitted by law.

This indemnification applies, without limitation, to any act, omission, event or circumstance existing or occurring on or prior to the later of the Termination Date or the date of payment in full of the Obligations, including specifically Obligations arising under clause (b) of this Section. The indemnification provisions set forth above shall be in addition to any liability the Credit Parties may otherwise have. Without prejudice to the survival of any other obligation of the Credit Parties hereunder the indemnities and obligations of the Credit Parties contained in this Section shall survive the payment in full of the other Obligations.

Section 8.13 Captions. The captions or headings herein and any table of contents hereto are for convenience only and in no way define, limit or describe the scope or intent of any provision of this Agreement.

Section 8.14 Entire Agreement. This Agreement and the other Loan Documents embody the entire agreement and understanding between the Credit Parties, the Agents, the Funding Agent and the Lenders with respect to the subject matter hereof and thereof. This Agreement supersedes all prior agreements and understandings relating to the subject matter hereof. Nothing contained in this Agreement or in any other Loan Document, expressed or implied, is intended to confer upon any Persons other than the parties hereto any rights, remedies, obligations or liabilities hereunder or thereunder.

Section 8.15 Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any of the parties hereto may execute this Agreement by signing any such counterpart.

Section 8.16 Borrower Acknowledgements. Each Credit Party hereby acknowledges that (a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Loan Documents, (b) None of the Agent, the Funding Agent nor any Lender has any fiduciary relationship to such Credit Party, the relationship being solely that of debtor and creditor, (c) no joint venture exists between such Credit Party and the Agent, the Funding Agent or any Lender, and (d) the Agent, the Funding Agent and Lenders undertake no responsibility to such Credit Party to review or inform such Credit Party of any matter in

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connection with any phase of the business or operations of such Credit Party and such Credit Party shall rely entirely upon its own judgment with respect to its business, and any review, inspection or supervision of, or information supplied to, the Credit Parties by the Agent, the Funding Agent or any Lender is for the protection of the Agent, the Funding Agent and such Lender and neither such Credit Party nor any third party is entitled to rely thereon.

Section 8.17 Appointment of and Acceptance by Borrowers’ Agent. Each Credit Party other than SunLink Health Systems Inc. hereby appoints and authorizes the Borrowers’ Agent as its representative and agent on its behalf for the purposes of issuing borrowing requests, notices of conversion, giving instructions with respect to the disbursement of the proceeds of the Loans, selecting interest rate options, giving and receiving all other notices and consents hereunder or under any of the other Loan Documents and taking all other actions (including in respect of compliance with covenants) on behalf of any Credit Party or Credit Parties under the Loan Documents and to exercise such powers under the Loan Documents as are delegated to the Borrowers’ Agent by the terms thereof, together with such power that are reasonably incidental thereto. SunLink Health Systems, Inc. hereby accepts such appointment. Agent and each Lender may regard any request, notice or other communication pursuant to any Loan Document from Borrowers’ Agent as a request, notice or communication from all Credit Parties. Each warranty, covenant, agreement and undertaking made on its behalf by Borrowers’ Agent shall be deemed for all purposes to have been made by such Credit Party and shall be binding upon and enforceable against such Credit Party to the same extent as it if the same had been made directly by such Credit Party.

Section 8.18 Relationship Among Borrowers.

(a) Joint and Several Liability. EACH BORROWER AGREES THAT IT IS LIABLE, JOINTLY AND SEVERALLY WITH EACH OTHER BORROWER, FOR THE PAYMENT OF ALL OBLIGATIONS OF THE BORROWERS UNDER THIS AGREEMENT, AND THAT THE AGENT CAN ENFORCE SUCH OBLIGATIONS AGAINST ANY OR ALL BORROWERS, IN THE AGENT’S SOLE AND UNLIMITED DISCRETION.

(b) Waivers of Defenses. The obligations of the Borrowers hereunder shall not be released, in whole or in part, by any action or thing which might, but for this provision of this Agreement, be deemed a legal or equitable discharge of a surety or guarantor, other than irrevocable payment and performance in full of the Obligations (except for contingent indemnity and other contingent Obligations not yet due and payable) at a time after any obligation of the Lenders hereunder to make the Term Loan and Revolving Loan shall have expired or been terminated. The purpose and intent of this Agreement is that the Obligations constitute the direct and primary obligations of each Borrower and that the covenants, agreements and all obligations of each Borrower hereunder be absolute, unconditional and irrevocable. Each Borrower shall be and remain liable for any deficiency remaining after foreclosure of any mortgage, deed of trust or security agreement securing all or any part of the Obligations, whether or not the liability of any other Person for such deficiency is discharged pursuant to statute, judicial decision or otherwise.

(c) Other Transactions. The Agent and Lenders are expressly authorized to exchange, surrender or release with or without consideration any or all collateral and security which may at any time be placed with it by the Borrowers or by any other Person on behalf of

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the Borrowers, or to forward or deliver any or all such collateral and security directly to the Borrowers for collection and remittance or for credit. No invalidity, irregularity or unenforceability of any security for the Obligations or other recourse with respect thereto shall affect, impair or be a defense to the Borrowers’ obligations under this Agreement. The liabilities of each Borrower hereunder shall not be affected or impaired by any failure, delay, neglect or omission on the part of the Agent or any Lender to realize upon any of the Obligations of any other Borrower to the Agent and Lenders, or upon any collateral or security for any or all of the Obligations, nor by the taking by the Agent or any Lender of (or the failure to take) any guaranty or guaranties to secure the Obligations, nor by the taking by the Agent or any Lender of (or the failure to take or the failure to perfect its security interest in or other lien on) collateral or security of any kind. No act or omission of the Agent or any Lender, whether or not such action or failure to act varies or increases the risk of, or affects the rights or remedies of a Borrower, shall affect or impair the obligations of the Borrowers hereunder.

(d) Actions Not Required. Each Borrower, to the extent permitted by applicable law, hereby waives any and all right to cause a marshaling of the assets of any other Borrower or any other action by any court or other governmental body with respect thereto or to cause the Agent or any Lender to proceed against any security for the Obligations or any other recourse which the Agent or any Lender may have with respect thereto and further waives any and all requirements that the Agent or any Lender institute any action or proceeding at law or in equity, or obtain any judgment, against any other Borrower or any other Person, or with respect to any collateral security for the Obligations, as a condition precedent to making demand on or bringing an action or obtaining and/or enforcing a judgment against, such Borrower under this Agreement.

(e) No Subrogation. Notwithstanding any payment or payments made by any Borrower hereunder or any setoff or application of funds of any Borrower by the Agent or any Lender, such Borrower shall not be entitled to be subrogated to any of the rights of the Agent or Lender against any other Borrower or any other guarantor or any collateral security or guaranty or right of offset held by the Agent or any Lender for the payment of the Obligations, nor shall such Borrower seek or be entitled to seek any contribution or reimbursement from any other Borrower or any other guarantor in respect of payments made by such Borrower hereunder, until all amounts owing to the Agent and Lenders by the Borrowers on account of the Obligations are irrevocably paid in full. If any amount shall be paid to a Borrower on account of such subrogation rights at any time when all of the Obligations shall not have been irrevocably paid in full, such amount shall be held by that Borrower in trust for the Agent and Lenders, segregated from other funds of that Borrower, and shall, forthwith upon receipt by the Borrower, be turned over to the Agent in the exact form received by such Borrower (duly indorsed by the Borrower to the Agent, if required), to be applied against the Obligations, whether matured or unmatured, in such order as the Agent may determine.

(f) Application of Payments. Except as provided in Section 2.19 or as otherwise required by the Required Lenders, any and all payments upon the Obligations made by the Borrowers or by any other Person, and/or the proceeds of any or all collateral or security for any of the Obligations, may be applied by the Agent on such items of the Obligations as the Agent may elect.

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(g) Recovery of Payment. If any payment received by the Agent, the Funding Agent or any Lender and applied to the Obligations is subsequently set aside, recovered, rescinded or required to be returned for any reason (including, without limitation, the bankruptcy, insolvency or reorganization of a Borrower or any other obligor), the Obligations to which such payment was applied shall, to the extent permitted by applicable law, be deemed to have continued in existence, notwithstanding such application, and each Borrower shall be jointly and severally liable for such Obligations as fully as if such application had never been made. References in this Agreement to amounts “irrevocably paid” or to “irrevocable payment” refer to payments that cannot be set aside, recovered, rescinded or required to be returned for any reason.

(h) Borrowers’ Financial Condition. Each Borrower is familiar with the financial condition of the other Borrowers, and each Borrower has executed and delivered this Agreement based on that Borrower’s own judgment and not in reliance upon any statement or representation of the Agent or any Lender. None of the Agent, the Funding Agent nor any Lender shall have any obligation to provide any Borrower with any advice whatsoever or to inform any Borrower at any time of the Agent’s, the Funding Agent’s or any Lender’s actions, evaluations or conclusions on the financial condition or any other matter concerning the Borrowers.

(i) Bankruptcy of the Borrowers. Each Borrower expressly agrees that, to the extent permitted by applicable law, the liabilities and obligations of that Borrower under this Agreement shall not in any way be impaired or otherwise affected by the institution by or against any other Borrower or any other Person of any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings, or any other similar proceedings for relief under any bankruptcy law or similar law for the relief of debtors and that any discharge of any of the Obligations pursuant to any such bankruptcy or similar law or other law shall not diminish, discharge or otherwise affect in any way the obligations of that Borrower under this Agreement, and that upon the institution of any of the above actions, such obligations shall be enforceable against that Borrower.

(j) Limitation; Insolvency Laws. As used in this Section 8.18(j): (a) the term “Applicable Insolvency Laws” means the laws of the United States or of any State, province, nation or other governmental unit relating to bankruptcy, reorganization, arrangement, adjustment of debts, relief of debtors, dissolution, insolvency, fraudulent transfers or conveyances or other similar laws (including, without limitation, 11 U. S. C. §547, §548, §550 and other “avoidance” provisions of Title 11 of the United States Code) as applicable in any proceeding in which the validity and/or enforceability of this Agreement against any Borrower, or any Specified Lien is in issue; and (b) “Specified Lien” means any security interest, mortgage, lien or encumbrance granted by any Borrower securing the Obligations, in whole or in part. Notwithstanding any other provision of this Agreement, if, in any proceeding, a court of competent jurisdiction determines that with respect to any Borrower, this Agreement or any Specified Lien would, but for the operation of this Section, be subject to avoidance and/or recovery or be unenforceable by reason of Applicable Insolvency Laws, this Agreement and each such Specified Lien shall be valid and enforceable against such Borrower, only to the maximum extent that would not cause this Agreement or such Specified Lien to be subject to avoidance, recovery or unenforceability. To the extent that any payment to, or realization by, the Agent, the

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Funding Agent and Lenders on the Obligations exceeds the limitations of this Section and is otherwise subject to avoidance and recovery in any such proceeding, the amount subject to avoidance shall in all events be limited to the amount by which such actual payment or realization exceeds such limitation, and this Agreement as limited shall in all events remain in full force and effect and be fully enforceable against such Borrower. This Section is intended solely to reserve the rights of the Agent, the Funding Agent and Lenders hereunder against each Borrower, in such proceeding to the maximum extent permitted by Applicable Insolvency Laws and neither the Borrowers, any guarantor of the Obligations nor any other Person shall have any right, claim or defense under this Section that would not otherwise be available under Applicable Insolvency Laws in such proceeding.

Section 8.19 Interest Rate Limitation. Notwithstanding anything herein to the contrary, if at any time the interest rate applicable to any Loan, together with all fees, charges and other amounts that are treated as interest on such Loan under applicable law (collectively, the “Charges”), shall exceed the maximum lawful rate (the “Maximum Rate”) that may be contracted for, charged, taken, received or reserved by the Agent or any Lender in accordance with applicable law, the rate of interest payable in respect of such Loan hereunder, together with all Charges payable in respect thereof, shall be limited to the Maximum Rate and, to the extent lawful, the interest and Charges that would have been payable in respect of such Loan but were not payable as a result of the operation of this Section shall be cumulated and the interest and Charges payable to the Agent and Lenders in respect of other Loans or periods shall be increased (but not above the Maximum Rate therefor) until such cumulated amount, together with interest thereon at the Federal Funds Effective Rate to the date of repayment, shall have been received by the Agent and Lenders.

Section 8.20 Deposit on Termination of Revolving Commitments. In the event of the payment in full of the Obligations and termination by the Borrowers of the Revolving Commitments established hereunder, the Agent may, in its discretion, require Borrowers to deposit with the Agent a reasonable amount, not to exceed $10,000, to cover any and all reasonable costs and expenses which may be incurred by the Agent in connection with terminating the Revolving Commitments and Agent’s Liens on the Collateral. Upon the final payment in full of the Obligations and termination of the Revolving Commitments hereunder, the Agent shall take all actions and execute all documents reasonably required to terminate this Agreement and any and all Liens of the Agent on the Collateral, and all reasonable costs and expenses incurred by the Agent may be deducted from such deposit, with any remaining balance to be returned by the Agent to the Borrowers’ Agent no later than sixty (60) days after the final payment in full of the Obligations.

Section 8.21 Replacement of Lenders.

(a) Within fifteen (15) days after receipt by Borrowers’ Agent of written notice and demand from any Lender for payment pursuant to Section 2.16(e) or 2.20 or, as provided in this Section 8.21(c), in the case of certain refusals by any Lender to consent to certain proposed amendments, modifications, terminations or waivers with respect to this Agreement that have been approved by Required Lenders, Required Revolving Lenders or all affected Lenders, as applicable (any such Lender demanding such payment or refusing to so consent being referred to herein as an “Affected Lender”), Borrowers may, at their option, notify Agent and such Affected Lender of its intention to do one of the following:

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(i) Borrowers may obtain, at Borrowers’ expense, a replacement Lender (“Replacement Lender”) for such Affected Lender, which Replacement Lender shall be reasonably satisfactory to Agent. In the event Borrowers obtain a Replacement Lender that will purchase all outstanding Obligations owed to such Affected Lender and assume its Revolving Commitments hereunder within ninety (90) days following notice of Borrowers’ intention to do so, the Affected Lender shall sell and assign all of its rights and delegate all of its obligations under this Agreement to such Replacement Lender in accordance with the provisions of Section 9.1, provided that Borrowers have reimbursed such Affected Lender for any administrative fee payable pursuant to Section 9.1, and, in any case where such replacement occurs as the result of a demand for payment pursuant to Section 2.16(c) or 2.20, paid all amounts required to be paid to such Affected Lender pursuant to Section 2.16(c) or 2.20 through the date of such sale and assignment; or

(ii) Borrowers may, with Agent’s consent, prepay in full all outstanding Obligations owed to such Affected Lender and terminate such Affected Lender’s Pro Rata Share of the Revolving Commitment in which case the Revolving Commitment will be reduced by the amount of such Pro Rata Share. Borrowers shall, within ninety (90) days following notice of their intention to do so, prepay in full all outstanding Obligations owed to such Affected Lender (including, in any case where such prepayment occurs as the result of a demand for payment for increased costs, such Affected Lender’s increased costs for which it is entitled to reimbursement under this Agreement through the date of such prepayment), and terminate such Affected Lender’s obligations under the Revolving Commitment.

(b) In the case of a Non-Funding Lender pursuant to Section 9.5(a), at Borrowers’ Agent’s request, Agent or a Person acceptable to Agent shall have the right with Agent’s consent and in Agent’s sole discretion (but shall have no obligation) to purchase from any Non-Funding Lender, and each Non-Funding Lender agrees that it shall, at Agent’s request, sell and assign to Agent or such Person, all of the Loans and Revolving Commitments of that Non-Funding Lender for an amount equal to the principal balance of all Loans held by such Non-Funding Lender and all accrued interest and Fees with respect thereto through the date of sale, such purchase and sale to be consummated pursuant to an executed Assignment Agreement.

(c) If, in connection with any proposed amendment, modification, waiver or termination pursuant to Section 8.1 (a “Proposed Change”): requiring the consent of all affected Lenders, the consent of Required Lenders is obtained, but the consent of other Lenders whose consent is required is not obtained (any such Lender whose consent is not obtained as described above being referred to as a “Non-Consenting Lender”) then, so long as Agent is not a Non-Consenting Lender, at Borrowers Agent’s request Agent, or a Person reasonably acceptable to Agent, shall have the right with Agent’s consent and in Agent’s sole discretion (but shall have no obligation) to purchase from such Non-Consenting Lenders, and such Non-Consenting Lenders agree that they shall, upon Agent’s request, sell and assign to Agent or such Person, all of the Loans and Revolving Commitments of such Non-Consenting Lenders for an amount equal to the principal balance of all Loans held by the Non-Consenting Lenders and all accrued interest and Fees and other Obligations owing with respect thereto through the date of sale, such purchase and sale to be consummated pursuant to an executed Assignment Agreement.

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Section 8.22 Lenders’ Obligations Several; Independent Nature of Lenders’ Rights. The obligation of each Lender hereunder is several and not joint and no Lender shall be responsible for the obligation or commitment of any other Lender hereunder. In the event that any Lender at any time should fail to make a Loan as herein provided, the Lenders, or any of them, at their sole option, may make the Loan that was to have been made by the Lender so failing to make such Loan. Nothing contained in any Loan Document and no action taken by Agent or any Lender pursuant hereto or thereto shall be deemed to constitute Lenders to be a partnership, an association, a joint venture or any other kind of entity. The amounts payable at any time hereunder to each Lender shall be a separate and independent debt.

Section 8.23 Patriot Act Notice. Each Lender and the Agent (for itself and not on behalf of any other party) hereby notifies the Borrower that, pursuant to the requirements of the USA PATRIOT Act, Title III of Pub. L. 107-56, signed into law October 26, 2001 (the “Patriot Act”), it is required to obtain, verify and record information that identifies the Borrower, which information includes the name and address of the Borrower and other information that will allow such Lender or the Administrative Agent, as applicable, to identify the Borrower in accordance with the Patriot Act.

ARTICLE IX

ASSIGNMENT AND PARTICIPATION

Section 9.1 Assignment and Participations.

(a) Subject to the terms of this Section 9.1, any Lender may make an assignment to a Qualified Transferee of, or sale of participations in, at any time or times, the Loan Documents, Loans and any Revolving Commitment or any portion thereof or interest therein, including any Lender’s rights, title, interests, remedies, powers or duties thereunder. Any assignment by a Lender shall: (i) require the consent of Agent (which consent shall not be unreasonably withheld or delayed with respect to a Qualified Transferee) and the execution of an assignment agreement (an “Assignment Agreement” substantially in the form attached hereto as Exhibit L and otherwise in form and substance reasonably satisfactory to, and acknowledged by, Agent); (ii) be conditioned on such assignee Lender representing to the assigning Lender and Agent that it is purchasing the applicable Loans to be assigned to it for its own account, for investment purposes and not with a view to the distribution thereof; (iii) (except with respect to any assignment by a Lender to an Affiliate of such Lender) after giving effect to any such partial assignment, the assignee Lender shall have Revolving Commitments in an aggregate principal amount at least equal to $5,000,000 and the assigning Lender shall have retained Revolving Commitments and/or Term Loans in an aggregate principal amount at least equal to $3,000,000; and (iv) require a payment to Agent of an assignment fee of $3,500. Notwithstanding the above, Agent may, in its sole and absolute discretion, permit any assignment by a Lender to a Person or Persons that are not Qualified Transferee; provided, that, so long as no Event of Default has occurred and is continuing, Borrower’s Agent has consented to such assignment, which consent shall not be unreasonably withheld or delayed. In the case of an assignment by a Lender under this Section 9.1, the assignee shall have, to the extent of such assignment, the same rights,

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benefits and obligations as all other Lenders hereunder. The assigning Lender shall be relieved of its obligations hereunder with respect to its Revolving Commitments or assigned portion thereof and the Loans and other interests assigned by it from and after the date of such assignment. Borrowers hereby acknowledge and agree that any assignment shall give rise to a direct obligation of Borrowers to the assignee and that the assignee shall be considered to be a “Lender.” In all instances, each Lender’s liability to make Loans hereunder shall be several and not joint and shall be limited to such Lender’s Pro Rata Share of the applicable Revolving Commitment. In the event Agent or any Lender assigns or otherwise transfers all or any part of the Obligations, Agent or any such Lender shall so notify Borrowers and Borrowers shall, upon the request of Agent or such Lender, execute new Notes in exchange for the Notes, if any, being assigned. Notwithstanding the foregoing provisions of this Section 9.1(a), (A) any Lender may at any time pledge the Obligations held by it and such Lender’s rights under this Agreement and the other Loan Documents to a Federal Reserve Bank or to any Person providing funding to such Lender, (B) any Lender that is an investment fund may assign the Obligations held by it and such Lender’s rights under this Agreement and the other Loan Documents to another investment fund managed by the same investment advisor or pledge such Obligations and rights to trustee for the benefit of its investors and (C) any Lender may assign the Obligations to an Affiliate of such Lender or to a Person that is a Lender prior to the date of such assignment.

(b) Any participation by a Lender of all or any part of its Revolving Commitments and/or Term Loans shall be made with the understanding that all amounts payable by Borrowers hereunder shall be determined as if that Lender had not sold such participation, and that the holder of any such participation shall not be entitled to require such Lender to take or omit to take any action hereunder except actions directly affecting (i) any reduction in the principal amount of, or interest rate or Fees payable with respect to, any Loan in which such holder participates, (ii) any extension of the scheduled amortization of the principal amount of any Loan in which such holder participates or the final maturity date thereof, and (iii) any release of all or substantially all of the Collateral (other than in accordance with the terms of this Agreement, the Collateral Documents or the other Loan Documents). Solely for purposes of Sections 2.16, 2.19, 8.12 and 9.3, Borrowers acknowledge and agree that a participation shall give rise to a direct obligation of Borrowers to the participant and the participant shall be considered to be a “Lender.” Except as set forth in the preceding sentence no Borrower or any other Credit Party shall have any obligation or duty to any participant. Neither Agent nor any Lender (other than the Lender selling a participation) shall have any duty to any participant and may continue to deal solely with the Lender selling a participation as if no such sale had occurred.

(c) Except as expressly provided in this Section 9.1, no Lender shall, as between Borrowers and that Lender, or Agent and that Lender, be relieved of any of its obligations hereunder as a result of any sale, assignment, transfer or negotiation of, or granting of participation in, all or any part of the Loans, the Notes or other Obligations owed to such Lender.

(d) Each Credit Party shall assist each Lender permitted to sell assignments or participations under this Section 9.1 as required to enable the assigning or selling Lender to effect any such assignment or participation, including the execution and delivery of any and all agreements, notes and other documents and instruments as shall be requested and the prompt preparation of informational materials for, and the participation of management in meetings with,

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potential assignees or participants, all on a timetable reasonably established by Agent. Each Credit Party executing this Agreement shall certify, to the same extent and on the same basis as certified in this Agreement, the correctness, completeness and accuracy of all descriptions of the Credit Parties and their respective affairs contained in any selling materials provided by it and all other information provided by it and included in such materials, except that any projections or statements of forecasted consolidated income and statements of forecasted consolidated balance sheets delivered by Borrowers shall only be certified by Borrowers as having been prepared by Borrowers in compliance with the representations contained in Section 4.5. Agent shall maintain, on behalf of Borrowers, in its offices located at 400 Galleria Parkway, Suite 1950, Atlanta, Georgia 30339 a “register” for recording the name, address, commitment and Loans owing to each Lender. The entries in each such register shall be presumptive evidence of the amounts due and owing to each Lender in the absence of manifest error. Borrowers, Agent and each Lender may treat each Person whose name is recorded in such register pursuant to the terms hereof as a Lender for all purposes of this Agreement. Each such register described herein shall be available for inspection by Borrower and any Lender, at any reasonable time upon reasonable prior notice.

(e) A Lender may furnish any information concerning Credit Parties in the possession of such Lender from time to time to assignees and participants (including prospective assignees and participants); provided that such Lender shall obtain from assignees or participants confidentiality covenants substantially equivalent to those contained in Section 8.7.

(f) Each Lender agrees to and shall be bound by the same restrictions, terms and conditions that apply to Agent under any Business Associate Agreement that may be entered into from time to time by and among Agent and any Credit Party. The requirements of this Section 9.1(f) shall apply to each Lender who is a party to this Agreement as the date first written above and to any individual or entity who becomes a Lender at any time thereafter.

Section 9.2 Agent and Funding Agent.

(a) Appointment.

(i) Each Lender and Funding Agent hereby designates and appoints Chatham, and reaffirms and confirms its designation and appointment of Chatham under the Original Credit Agreement, as its Agent under this Agreement and the other Loan Documents, and each Lender and Funding Agent hereby irrevocably authorizes Agent, and reaffirms and confirm their authorization of the Agent under the Original Credit Agreement, to execute and deliver the Security Documents and to take such action or to refrain from taking such action on its behalf under the provisions of this Agreement and the other Loan Documents and to exercise such powers as are set forth herein or therein, together with such other powers as are reasonably incidental thereto. Agent is authorized and empowered to amend, modify, or waive any provisions of this Agreement or the other Loan Documents on behalf of Lenders subject to the requirement that certain of Lenders’ consent be obtained in certain instances as provided in this Section 9.2 and Section 8.1. In performing its functions and duties under this Agreement, Agent shall act solely as agent of the applicable Lenders and Funding Agent, and Agent does not assume and shall not be deemed to have assumed any obligation toward or relationship of agency or trust with or for Borrowers or any other Credit Party. Agent may perform any of its duties hereunder, or under the Loan Documents, by or through its agents or employees.

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(ii) Each Lender and Agent hereby designates and appoints UBOC as its Funding Agent under this Agreement and the other Loan Documents, and each Lender and Agent hereby irrevocably authorizes Funding Agent to take such action or to refrain from taking such action on its behalf under the provisions of this Agreement and the other Loan Documents and to exercise such powers as are set forth herein or therein, together with such other powers as are reasonably incidental thereto. In performing its functions and duties under this Agreement, Funding Agent shall act solely as agent of the applicable Lenders and Agent, and Funding Agent does not assume and shall not be deemed to have assumed any obligation toward or relationship of agency or trust with or for Borrowers or any other Credit Party. Funding Agent may perform any of its duties hereunder, or under the Loan Documents, by or through its agents or employees.

(iii) The provisions of this Section 9.2 are solely for the benefit of Agent, Funding Agent and Lenders and neither Borrowers nor any other Credit Party shall have any rights as a third party beneficiary of any of the provisions hereof.

(b) Nature of Duties. The duties of Agent and Funding Agent shall be mechanical and administrative in nature. Neither Agent nor Funding Agent shall have by reason of this Agreement any fiduciary relationship in respect of any Lender. Nothing in this Agreement or any of the Loan Documents, express or implied, is intended to or shall be construed to impose upon Agent or Funding Agent any obligations in respect of this Agreement or any of the Loan Documents except as expressly set forth herein or therein. Each Lender shall make its own independent investigation of the financial condition and affairs of each Credit Party in connection with the extension of credit hereunder and shall make its own appraisal of the creditworthiness of each Credit Party and neither Agent nor Funding Agent shall have any duty or responsibility, either initially or on a continuing basis, to provide any Lender with any credit or other information with respect thereto (other than as expressly required herein). If Agent or Funding Agent seeks the consent or approval of any Lenders to the taking or refraining from taking any action hereunder, then Agent and Funding Agent, as the case may be, shall send notice thereof to each applicable Lender. Agent and Funding Agent shall promptly notify each applicable Lender any time that the Required Lenders, and/or Required Revolving Lenders have instructed Agent or Funding Agent, as the case may be, to act or refrain from acting pursuant hereto.

(c) Rights, Exculpation, Etc. Neither Agent, Funding Agent nor any of their respective officers, directors, employees or agents shall be liable to any Lender for any action taken or omitted by them hereunder or under any of the Loan Documents, or in connection herewith or therewith, except that Agent and Funding Agent shall be liable to the extent of their own gross negligence or willful misconduct as determined by a final non-appealable order by a court of competent jurisdiction. Neither Agent nor Funding Agent shall be liable for any apportionment or distribution of payments made by it in good faith and if any such apportionment or distribution is subsequently determined to have been made in error the sole recourse of any Lender to whom payment was due but not made, shall be to recover from other Lenders any payment in excess of the amount to which they are determined to be entitled (and

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such other Lenders hereby agree to return to such Lender any such erroneous payments received by them). In no event shall Agent or Funding Agent be liable for punitive, special, consequential, incidental, exemplary or other similar damages. In performing its respective functions and duties hereunder, each of Agent and Funding Agent shall exercise the same care which it would in dealing with loans for its own account, but neither Agent, Funding Agent nor any of their respective agents or representatives shall be responsible to any Lender for any recitals, statements, representations or warranties herein or for the execution, effectiveness, genuineness, validity, enforceability, collectibility, or sufficiency of this Agreement or any of the Loan Documents or the transactions contemplated thereby, or for the financial condition of any Credit Party. Neither Agent nor Funding Agent shall be required to make any inquiry concerning either the performance or observance of any of the terms, provisions or conditions of this Agreement or any of the Loan Documents or the financial condition of any Credit Party, or the existence or possible existence of any Default or Event of Default. Agent and Funding Agent, as the case may be, may at any time request instructions from Required Lenders, and/or Required Revolving Lenders or all affected Lenders with respect to any actions or approvals which by the terms of this Agreement or of any of the Loan Documents, Agent and Funding Agent, as applicable, is permitted or required to take or to grant. If such instructions are promptly requested, Agent and Funding Agent, as the case may be, shall be absolutely entitled to refrain from taking any action or to withhold any approval and shall not be under any liability whatsoever to any Person for refraining from any action or withholding any approval under any of the Loan Documents until it shall have received such instructions from the Required Lenders, and/or Required Revolving Lenders or such other portion of the Lenders as shall be prescribed by this Agreement. Without limiting the foregoing, no Lender shall have any right of action whatsoever against Agent or Funding Agent as a result of Agent or Funding Agent, as the case may be, acting or refraining from acting under this Agreement or any of the other Loan Documents in accordance with the instructions of Required Lenders, and/or Required Revolving Lenders or all affected Lenders, as applicable; and, notwithstanding the instructions of Required Lenders and/or Required Revolving Lenders or all affected Lenders, as applicable, neither Agent nor Funding Agent shall have any obligation to take any action if it believes, in good faith, that such action is deemed to be illegal by Agent or Funding Agent, as applicable, or exposes Agent or Funding Agent, as applicable, to any liability for which it has not received satisfactory indemnification in accordance with Section 9.2(e).

(d) Reliance. Agent and Funding Agent shall be entitled to rely, and shall be fully protected in relying, upon any written or oral notices, statements, certificates, orders or other documents or any telephone message or other communication (including any writing, telex, fax or telegram) believed by Agent or Funding Agent, as the case may be, in good faith to be genuine and correct and to have been signed, sent or made by the proper Person, and with respect to all matters pertaining to this Agreement or any of the Loan Documents and its duties hereunder or thereunder. Agent and Funding Agent shall be entitled to rely upon the advice of legal counsel, independent accountants, and other experts selected by Agent or Funding Agent, as the case may be, in its sole discretion.

(e) Indemnification. Lenders will reimburse and indemnify Agent and Funding Agent for and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses (including, without limitation, attorneys’ fees and expenses), advances or disbursements of any kind or nature whatsoever (collectively, “Lender

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Indemnified Liabilities”) which may be imposed on, incurred by, or asserted against Agent in its capacity as such and Funding Agent in its capacity as such, as the case may be, in any way relating to or arising out of this Agreement or any of the Loan Documents or any action taken or omitted by Agent in its capacity as such and by Funding Agent in its capacity as such, as the case may be, in under this Agreement or any of the Loan Documents, in proportion to each Lender’s Pro Rata Share, but only to the extent that any of the foregoing is not reimbursed by Borrowers; provided, however, that no Lender shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses, advances or disbursements to the extent resulting from Agent’s or Funding Agent’s, as applicable, gross negligence or willful misconduct as determined by a final non-appealable order by a court of competent jurisdiction. If any indemnity furnished to Agent or Funding Agent, as the case may be, for any purpose shall, in the opinion of Agent or Funding Agent, as applicable, be insufficient or become impaired, Agent and Funding Agent, as applicable, may call for additional indemnity and cease, or not commence, to do the acts indemnified against even if so directed by the Required Lenders and/or Required Revolving Lenders or such other portion of the Lenders as shall be prescribed by this Agreement until such additional indemnity is furnished. The obligations of Lenders under this Section 9.2(e) shall survive the payment in full of the Obligations and the termination of this Agreement. Notwithstanding anything to the contrary contained in this Section 9.2(e), the Lenders shall not have any obligation under this Section 9.2(e) to reimburse or indemnify Funding Agent for any Lender Indemnified Liability for which the Credit Parties party hereto are not obligated to reimburse or indemnify Funding Agent under Section 8.2 {Expenses} or Section 8.12 {Indemnification} of this Agreement.

(f) Chatham (or any Successor Agent) and UBOC (or any Successor Agent) Individually.

(i) With respect to its Revolving Commitments and Term Loans hereunder, Chatham (or any Successor Agent) shall have and may exercise the same rights and powers hereunder and is subject to the same obligations and liabilities as and to the extent set forth herein for any other Lender. Chatham (or any Successor Agent), either directly or through strategic affiliations, may lend money to, acquire equity or other ownership interests in, provide advisory services to and generally engage in any kind of banking, trust or other business with any Credit Party as if it were not acting as Agent pursuant hereto and without any duty to account therefor to Lenders. Chatham (or any Successor Agent), either directly or through strategic affiliations, may accept fees and other consideration from any Credit Party for services in connection with this Agreement or otherwise without having to account for the same to Lenders.

(ii) With respect to its Revolving Commitments and Term Loan hereunder, UBOC (or any Successor Funding Agent) shall have and may exercise the same rights and powers hereunder and is subject to the same obligations and liabilities as and to the extent set forth herein for any other Lender. UBOC (or any Successor Funding Agent), either directly or through strategic affiliations, may lend money to, acquire equity or other ownership interests in, provide advisory services to and generally engage in any kind of banking, trust or other business with any Credit Party as if it were not acting as Funding Agent pursuant hereto and without any duty to account therefor to Lenders. UBOC (or any Successor Funding Agent), either directly or through strategic affiliations, may accept fees and other consideration from any Credit Party for services in connection with this Agreement or otherwise without having to account for the same to Lenders.

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(g) Successor Agents.

(i) Resignation of Agent. Agent may resign from the performance of all its agency functions and duties hereunder at any time by giving at least thirty (30) Business Days’ prior written notice to Borrowers’ Agent and Lenders. Such resignation shall take effect upon the acceptance by a successor Agent of appointment pursuant to clause (ii) below or as otherwise provided in clause (ii) below.

(ii) Appointment of Successor. Upon any such applicable notice of resignation pursuant to clause (i) above, Required Lenders shall appoint a successor Agent, which, unless an Event of Default has occurred and is continuing, shall be reasonably acceptable to Borrowers’ Agent. If a successor Agent shall not have been so appointed within the thirty (30) Business Day period referred to in clause (i) above, the retiring Agent upon notice to Borrowers’ Agent, shall then appoint a successor Agent who shall serve as Agent until such time, if any, as Required Lenders appoint a successor Agent in the manner as provided above.

(iii) Successor Agents. Upon the acceptance of any appointment as Agent or under the Loan Documents by a successor Agent such successor Agent or shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent and the retiring Agent shall be discharged from its duties and obligations under the Loan Documents. After any retiring Agent’s resignation as Agent the provisions of this Section 9.2 shall continue to inure to its benefit as to any actions taken or omitted to be taken by it in its capacity as Agent.

(iv) Resignation of Funding Agent. Funding Agent may resign from the performance of all its agency functions and duties hereunder at any time by giving at least thirty (30) Business Days’ prior written notice to Borrowers’ Agent, Agent and Lenders. Such resignation shall take effect upon the acceptance by a successor Funding Agent of appointment pursuant to clause (v) below or as otherwise provided in clause (v) below.

(v) Appointment of Successor. Upon any such applicable notice of resignation pursuant to clause (iv) above, Agent shall become a successor Funding Agent hereunder, unless Required Lenders or Agent shall appoint a different successor Funding Agent (acceptable to Agent) within the thirty (30) Business Day period referred to in clause (iv) above, which, unless an Event of Default has occurred and is continuing, shall also be reasonably acceptable to Borrowers’ Agent.

(vi) Successor Funding Agents. Upon the acceptance of any appointment as Funding Agent under clause (v) above, such successor Funding Agent or shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Funding Agent and the retiring Funding Agent shall be discharged from its duties and obligations under the Loan Documents. After any retiring Funding

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Agent’s resignation as Funding Agent the provisions of this Section 9.2 shall continue to inure to its benefit as to any actions taken or omitted to be taken by it in its capacity as Funding Agent.

(h) Collateral Matters.

(i) Release of Collateral. Lenders hereby irrevocably authorize Agent, at its option and in its discretion, to release any Lien granted to or held by Agent upon any Collateral (x) upon termination of the Revolving Commitments and payment and satisfaction of all Obligations (other than contingent indemnification obligations to the extent no claims giving rise thereto have been asserted), (y) constituting property being sold or disposed of if Borrowers (or any of them) certify to Agent that the sale or disposition is made in compliance with the provisions of this Agreement (and Agent may rely in good faith conclusively on any such certificate, without further inquiry) or (z) in accordance with the provisions of the next sentence. In addition, with the consent of Required Lenders, Agent may release any Lien granted to or held by Agent upon any Collateral having a book value not greater than ten percent (10%) of the total book value of all Collateral, either in a single transaction or in a series of related transactions; provided, however, that in no event will Agent, acting under the authority granted to it pursuant to this sentence, release Collateral having a total book value in excess of twenty percent (20%) of the book value of all Collateral, as determined by Agent.

(ii) Confirmation of Authority; Execution of Releases. Without in any manner limiting Agent’s authority to act without any specific or further authorization or consent by Lenders (as set forth in Section 9.2(h)(i)), each Lender agrees to confirm in writing, upon request by Agent or Borrowers’ Agent, the authority to release any Collateral conferred upon Agent under clauses (x) and (y) of Section 9.2(h)(i). Upon receipt by Agent of any required confirmation from the Required Lenders of its authority to release any particular item or types of Collateral, and upon at least ten (10) Business Days’ prior written request by Borrowers’ Agent, Agent shall (and is hereby irrevocably authorized by Lenders to) execute such documents as may be necessary to evidence the release of the Liens granted to Agent upon such Collateral; provided, however, that (x) Agent shall not be required to execute any such document on terms which, in Agent’s opinion, would expose Agent to liability or create any obligation or entail any consequence other than the release of such Liens without recourse or warranty, and (y) such release shall not in any manner discharge, affect or impair the Obligations or any Liens upon (or obligations of any Credit Party, in respect of), all interests retained by any Credit Party, including the proceeds of any sale, all of which shall continue to constitute part of the Collateral.

(iii) Absence of Duty. Agent shall have no obligation whatsoever to any Lender or any other Person to assure that the property covered by the Collateral Documents exists or is owned by Borrowers or any other Credit Party or is cared for, protected or insured or has been encumbered or that the Liens granted to Agent have been properly or sufficiently or lawfully created, perfected, protected or enforced or are

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entitled to any particular priority, or to exercise at all or in any particular manner or under any duty of care, disclosure or fidelity, or to continue exercising, any of the rights, authorities and powers granted or available to Agent in this Section 9.2(h) or in any of the Loan Documents, it being understood and agreed that in respect of the property covered by the Security Documents or any act, omission or event related thereto, Agent may act in any manner it may deem appropriate, in its discretion, given Agent’s own interest in property covered by the Security Documents as one of the Lenders and that Agent shall have no duty or liability whatsoever to any of the other Lenders, provided that Agent shall exercise the same care which it would in dealing with loans for its own account.

(iv) Agency for Perfection. Agent and each Lender hereby appoint each other Lender as agent for the purpose of perfecting Agent’s security interest in assets which, in accordance with the Code in any applicable jurisdiction, can be perfected by possession or control. Should any Lender (other than Agent) obtain possession or control of any such assets, such Lender shall notify Agent thereof, and, promptly upon Agent’s request therefor, shall deliver such assets to Agent or in accordance with Agent’s instructions or transfer control to Agent in accordance with Agent’s instructions. Each Lender agrees that it will not have any right individually to enforce or seek to enforce any Security Document or to realize upon any collateral security for the Loans unless instructed to do so by Agent in writing, it being understood and agreed that such rights and remedies may be exercised only by Agent.

(i) Notice of Default. Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default except with respect to defaults in the payment of principal, interest and Fees required to be paid to Agent for the account of Lenders, unless Agent shall have received written notice from a Lender or Borrowers’ Agent referring to this Agreement, describing such Default or Event of Default and stating that such notice is a “notice of default”. Agent will use reasonable efforts to notify each Lender of its receipt of any such notice, unless such notice is with respect to defaults in the payment of principal, interest and fees, in which case Agent will notify each Lender of its receipt of such notice. Agent shall take such action with respect to such Default or Event of Default as may be requested by Required Lenders in accordance with Article VII. Unless and until Agent has received any such request, Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable or in the best interests of Lenders.

(j) Lender Actions Against Collateral. Each Lender agrees that it will not take any enforcement action, nor institute any actions or proceedings, with respect to the Loans, against any Borrower or any Credit Party hereunder or under the other Loan Documents or against any Collateral (including the exercise of any right of set-off) without the consent of the Agent or Required Lenders. All such enforcement actions and proceedings shall be taken in concert and at the direction with the consent of Agent or Required Lenders. Agent is authorized to issue all notices to be issued by or on behalf of Lenders with respect to any Subordinated Debt. With respect to any action by Agent to enforce the rights and remedies of Agent and the Lenders under this Agreement and the other Loan Documents, each Lender hereby consents to the jurisdiction of the court in which such action is maintained, and agrees to deliver its Notes to Agent to the extent necessary to enforce the rights and remedies of Agent for the benefit of the Lenders under the Mortgages in accordance with the provisions hereof.

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Section 9.3 Set Off and Sharing of Payments. In addition to any rights now or hereafter granted under applicable law and not by way of limitation of any such rights, during the continuance of any Event of Default, each Lender is hereby authorized by Borrowers at any time or from time to time, with reasonably prompt subsequent notice to Borrowers’ Agent (any prior or contemporaneous notice being hereby expressly waived) to set off and to appropriate and to apply any and all (A) balances held by such Lender at any of its offices for the account of any Borrower or any of its Subsidiaries (regardless of whether such balances are then due to any Borrower or its Subsidiaries), and (B) other property at any time held or owing by such Lender to or for the credit or for the account of any Borrower or any of its Subsidiaries, against and on account of any of the Obligations; except that no Lender shall exercise any such right without the prior written consent of Agent. Notwithstanding anything herein to the contrary, the failure to give notice of any set off and application made by such Lender to Borrowers’ Agent shall not affect the validity of such set off and application. Any Lender exercising a right to set off shall purchase for cash (and the other Lenders shall sell) interests in each of such other Lender’s Pro Rata Share of the Obligations as would be necessary to cause all Lenders to share the amount so set off with each other Lender entitled to share in the amount so set off in accordance with their respective Pro Rata Shares in a manner consistent with Section 2.19. Borrowers agree, to the fullest extent permitted by law, that, upon the occurrence and during the continuation of an Event of Default, any Lender may exercise its right to set off with respect to amounts in excess of its Pro Rata Share of the Obligations and upon doing so shall deliver such amount so set off to the Agent for the benefit of all Lenders entitled to share in the amount so set off in accordance with their Pro Rata Shares in a manner consistent with Section 2.19.

Section 9.4 Disbursement of Funds. Funding Agent may, on behalf of Revolving Lenders, disburse funds to Borrowers for Revolving Loans requested. Each Revolving Lender shall reimburse Funding Agent on demand for all funds disbursed on its behalf by Funding Agent, or if Funding Agent so requests, each Revolving Lender will remit to Funding Agent its Pro Rata Share of any Revolving Loan before Funding Agent disburses same to Borrowers. If Funding Agent elects to require that each Revolving Lender make funds available to Funding Agent prior to a disbursement by Funding Agent to Borrowers, Funding Agent shall advise each Revolving Lender by telephone or fax of the amount of such Revolving Lender’s Pro Rata Share of the Revolving Loan requested by Borrowers’ Agent no later than 2:00 p.m. (New York time) on the date of funding an Advance applicable thereto, and each such Revolving Lender shall pay Funding Agent such Revolving Lender’s Pro Rata Share of such requested Revolving Loan, in same day funds, by wire transfer to Funding Agent’s account on the date of funding such Advance. If any Revolving Lender fails to pay the amount of its Pro Rata Share within one (1) Business Day after Funding Agent’s demand, Funding Agent shall promptly notify Borrowers’ Agent, and Borrowers shall immediately repay such amount to Funding Agent. Any repayment required pursuant to this Section 9.4 shall be without premium or penalty. Nothing in this Section 9.4 or elsewhere in this Agreement or the other Loan Documents, including the provisions of Section 9.5, shall be deemed to require Funding Agent to advance funds on behalf of any Lender or to relieve any Revolving Lender from its obligation to fulfill its commitments hereunder or to prejudice any rights that Funding Agent or Borrowers may have against any Lender as a result of any default by such Revolving Lender hereunder.

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Section 9.5 Disbursements of Advances; Payment.

(a) Advances; Payments. At least once each calendar month or more frequently at Funding Agent’s election (each, a “Settlement Date”), Funding Agent shall advise each Lender by telephone or fax of the amount of such Lender’s Pro Rata Share of principal, interest and Fees paid for the benefits of Lenders with respect to each applicable Loan. Provided that each Lender has funded all payments and Advances required to be made by it and purchased all participations required to be purchased by it under this Agreement and the other Loan Documents as of such Settlement Date, Funding Agent shall pay to each Lender such Lender’s Pro Rata Share of principal, interest and Fees paid by Borrowers to Agent since the previous Settlement Date for the benefit of such Lender on the Loans held by it. Such payments shall be made by wire transfer to such Lender’s account (as specified by such Lender in such Lender’s signature page to this Agreement or the applicable Assignment Agreement) not later than 3:00 p.m. (New York time) on the next Business Day following each Settlement Date. To the extent that any Lender (a “Non-Funding Lender”) has failed to fund all such payments and Advances or failed to fund the purchase of all such participations required to be funded or purchased by such Lender pursuant to this Agreement, Funding Agent and/or Agent shall be entitled to set off the funding shortfall against that Non-Funding Lender’s Pro Rata Share of all payments received from or in respect of Borrowers.

(b) Availability of Lender’s Pro Rata Share. Funding Agent may assume that each Revolving Lender will make its Pro Rata Share of each Advance available to Funding Agent on date of funding of such Advance. If such Pro Rata Share is not, in fact, paid to Funding Agent by such Revolving Lender when due, Funding Agent will be entitled to recover such amount on demand from such Revolving Lender without setoff, counterclaim or deduction of any kind. If any Revolving Lender fails to pay the amount of its Pro Rata Share forthwith upon Funding Agent’s demand, Funding Agent shall promptly notify Borrowers’ Agent and Borrowers shall immediately repay such amount to Funding Agent. Nothing in this Section 9.5(b) or elsewhere in this Agreement or the other Loan Documents shall be deemed to require Agent to advance funds on behalf of any Revolving Lender or to relieve any Revolving Lender from its obligation to fulfill its Revolving Commitments hereunder or to prejudice any rights that Borrowers may have against any Revolving Lender as a result of any default by such Revolving Lender hereunder. To the extent that Funding Agent advances funds to Borrowers on behalf of any Revolving Lender and is not reimbursed therefor on the same Business Day as such Advance is made, Funding Agent shall be entitled to retain for its account all interest accrued on such Advance until reimbursed by the applicable Revolving Lender.

(c) Return of Payments.

(i) If Funding Agent or Agent, as the case may be, pays an amount to a Lender under this Agreement in the belief or expectation that a related payment has been or will be received by Funding Agent or Agent, as the case may be, from Borrowers and such related payment is not received by Funding Agent or Agent then Funding Agent and Agent, as applicable, will be entitled to recover such amount from such Lender on demand without setoff, counterclaim or deduction of any kind.

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(ii) If Agent or Funding Agent determines at any time that any amount received by Agent or Funding Agent, as the case may be, under this Agreement must be returned to any Borrower or paid to any other Person pursuant to any insolvency law or otherwise, then, notwithstanding any other term or condition of this Agreement or any other Loan Document, Agent and Funding Agent, as applicable, shall not be required to distribute any portion thereof to any Lender. In addition, each Lender will repay to Agent or Funding Agent, as the case may be, on demand any portion of such amount that Agent and Funding Agent, as applicable, has distributed to such Lender, together with interest at such rate, if any, as Agent and Funding Agent, as the case may be, is required to pay to any Borrower or such other Person, without setoff, counterclaim or deduction of any kind.

(iii) Non-Funding Lenders. The failure of any Non-Funding Lender to make any Advance or any payment required by it hereunder on the date specified therefor shall not relieve any other Lender (each such other Revolving Lender, an “Other Lender”) of its obligations to make such Advance or purchase such participation on such date, but neither any Other Lender, neither Funding Agent nor Agent shall be responsible for the failure of any Non-Funding Lender to make an Advance, purchase a participation or make any other payment required hereunder. Notwithstanding anything set forth herein to the contrary, a Non-Funding Lender shall not have any voting or consent rights under or with respect to any Loan Document or constitute a “Lender”, or a “Revolving Lender” (or be included in the calculation of “Required Lenders” or “Required Revolving Lenders” hereunder) for any voting or consent rights under or with respect to any Loan Document.

ARTICLE X

AMENDMENT AND RESTATEMENT

Section 10.1 Amendment and Restatement; No Novation. On the Effective Date, the Original Credit Agreement shall be amended and restated in its entirety by this Agreement and (i) all references to the Original Credit Agreement in any Loan Document other than this Agreement (including in any amendment, waiver or consent) shall be deemed to refer to the Original Credit Agreement as amended and restated hereby, (ii) all references to any section (or subsection) of the Original Credit Agreement in any Loan Document (but not herein) shall be amended to be, mutatis mutandis, references to the corresponding provisions of this Agreement and (iii) except as the context otherwise provides, all references to this Agreement herein (including for purposes of indemnification and reimbursement of fees) shall be deemed to be reference to the Original Credit Agreement as amended and restated hereby. This Agreement is not intended to constitute, and does not constitute, a novation of the obligations and liabilities under the Original Credit Agreement (including the Obligations) or to evidence payment of all or any portion of such obligations and liabilities.

Section 10.2 Effect on Original Credit Agreement and on the Obligations. On and after the Effective Date, (i) the Original Credit Agreement shall be of no further force and effect except as amended and restated hereby and except to evidence (A) the incurrence by any Credit

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Party of the “Obligations” under and as defined therein (whether or not such “Obligations” are contingent as of the Effective Date), (B) the representations and warranties made by any Credit Party prior to the Effective Date and (C) any action or omission performed or required to be performed pursuant to such Original Credit Agreement prior to the Effective Date (including any failure, prior to the Effective Date, to comply with the covenants contained in such Original Credit Agreement) and (ii) the terms and conditions of this Agreement and the Beneficiaries’ rights and remedies under the Loan Documents, shall apply to all Obligations incurred under the Original Credit Agreement and the Notes issued thereunder.

Section 10.3 No Implied Waivers. Except as expressly provided in any Loan Document, this Agreement (x) shall not cure any breach of the Original Credit Agreement or any “Default” or “Event of Default” thereunder existing prior to the date hereof and (y) is limited as written and is not a consent to any other modification of any term or condition of any Loan Document, each of which shall remain in full force and effect.

Section 10.4 Reaffirmation of Liens and obligations.

(a) Each of the Borrowers and the other Credit Parties reaffirms the Liens granted pursuant to the Security Documents to the Administrative Agent for the benefit of the Beneficiaries, which Liens shall continue in full force and effect during the term of this Agreement and any renewals or extensions thereof and shall continue to secure the Obligations.

(b) Each of the Credit Parties signatory hereto reaffirms all of its obligations and undertakings under each of the Loan Documents to which it is a party and acknowledges and agrees that subsequent to, and after taking account of the provisions of this Agreement, each such Loan Document is and shall remain in full force and effect in accordance with the terms thereof.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written.

BORROWERS:

SUNLINK HEALTH SYSTEMS, INC.,

as a Borrower and Borrowers’ Agent

By:

Name:

Title:

SUNLINK HEALTHCARE, LLC,

as a Borrower

By its Sole Member SunLink Health Systems, Inc.

By:

Name:

Title:

DEXTER HOSPITAL, LLC, as a Borrower
By its Sole Member SunLink Healthcare, LLC
	By its Sole Member SunLink Health Systems, Inc.
	By:
	Name:
	Title:

CLANTON HOSPITAL, LLC, as a Borrower
By its Sole Member SunLink Healthcare, LLC
	By its Sole Member SunLink Health Systems; Inc.
	By:
	Name:
	Title:

[Signature Page 1 to the Amended and Restated Credit Agreement]

SOUTHERN HEALTH CORPORATION OF ELLIJAY, INC.,

as a Borrower

By:

Name:

Title:

SOUTHERN HEALTH CORPORATION OF DAHLONEGA, INC.,

as a Borrower

By:

Name:

Title:

SOUTHERN HEALTH CORPORATION OF HOUSTON, INC.,

as a Borrower

By:

Name:

Title:

SOUTHERN HEALTH CORPORATION OF JASPER, INC.,

as a Borrower

By:

Name:

Title:

HEALTHMONT OF GEORGIA, INC.,

as a Borrower

By:

Name:

Title:

[Signature Page 2 to the Amended and Restated Credit Agreement]

HEALTHMONT, LLC,

as a Borrower

By its Sole Member SunLink Health Systems, Inc.

By:

Name:

Title:

HEALTHMONT OF MISSOURI, LLC, as a Borrower
By its Sole Member HealthMont, LLC
	By its Sole Member SunLink Health Systems, Inc.
	By:
	Name:
	Title:

SUNLINK SERVICES, INC.,

as a Borrower

By:

Name:

Title:

SUNLINK HOMECARE SERVICES, LLC,

as a Borrower

By:

Name:

Title:

KRUG PROPERTIES, INC.,

as a Borrower

By:

Name:

Title:

[Signature Page 3 to the Amended and Restated Credit Agreement]

CENTRAL ALABAMA MEDICAL ASSOCIATES, LLC,
as a Borrower
By its Sole Member HealthMont, LLC
	By its Sole Member SunLink Health Systems, Inc.
	By:
	Name:
	Title:
DAHLONEGA CLINIC, LLC, as a Borrower
By its Sole Member Southern Health Corporation of Dahlonega, Inc.
	By:
	Name:
	Title:

CARMICHAEL’S CASHWAY PHARMACY, INC.,

as a Borrower

By:

Name:

Title:

CARMICHAEL’S NUTRITIONAL DISTRIBUTOR, INC.,

as a Borrower

By:

Name:

Title:

[Signature Page 4 to the Amended and Restated Credit Agreement]

BREATH OF LIFE HOME HEALTH EQUIPMENT, INC.,

as a Borrower

By:

Name:

Title:

GUARANTORS/CREDIT PARTIES:

SUNLINK HEALTHCARE INVESTMENTS, INC.,

as a Guarantor and a Credit Party

By:

Name:

Title:

Address for All Borrowers and other Credit Parties

For Purposes of Notice:

900 Circle 75 Parkway

Suite 1120

Atlanta, GA 30339

Fax: (770) 933-7010

Attention: Mark J. Stockslager

[Signature Page 5 to the Amended and Restated Credit Agreement]

CHATHAM CREDIT MANAGEMENT III, LLC,

as Agent

By:

Name:

Title:

Address for Agent:

400 Galleria Parkway, Suite 1950

Atlanta, GA 30339

ATTN: Account Officer

Fax: (770) 618-2101

[Signature Page 6 to the Amended and Restated Credit Agreement]

UNION BANK OF CALIFORNIA, N.A.,

as Funding Agent

By:

Name:

Title:

Address for Funding Agent:

445 South Figueroa Street, 16th Floor

Los Angeles, CA 90771

ATTN: Michael Tschida/Sean Conlon

Fax: (213) 236-7636

[Signature Page 7 to the Amended and Restated Credit Agreement]

CHATHAM CREDIT MANAGEMENT III, LLC, not individually, but as agent for CHATHAM INVESTMENT FUND QP III, LLC, as a Lender and CHATHAM INVESTMENT FUND III, LLC,

as a Lender

By:

Name:

Title:

Address for Lender:

400 Galleria Parkway, Suite 1950

Atlanta, GA 30339

ATTN: Account Officer

Fax: (770) 618-2101

[Signature Page 8 to the Amended and Restated Credit Agreement]

UNION BANK OF CALIFORNIA, N.A.,

as a Lender

By:

Name:

Title:

Address for Lender:

445 South Figueroa Street, 16th Floor

Los Angeles, CA 90771

ATTN: Michael Tschida/Sean Conlon

Fax: (213) 236-7636

[Signature Page 9 to the Amended and Restated Credit Agreement]

ANNEX A to

CREDIT AGREEMENT

PRO RATA SHARE AND LOAN AMOUNTS

Revolving Commitments	Lender	Pro Rata Share
Revolving Commitment $10,000,000	CHATHAM CREDIT MANAGEMENT III, LLC, not individually, but as agent for CHATHAM INVESTMENT FUND QP III, LLC, as a Lender and CHATHAM INVESTMENT FUND III, LLC	83.333%
Revolving Commitment $2,000,000	UNION BANK OF CALIFORNIA, N.A.	16.667%
Total Revolving Commitments: $12,000,000
Term Loan	Lender
Term Loan $21,816,666.69	CHATHAM CREDIT MANAGEMENT III, LLC, not individually, but as agent for CHATHAM INVESTMENT FUND QP III, LLC, as a Lender and CHATHAM INVESTMENT FUND III, LLC	62.857%
Term Loan $12,891,666.65	UNION BANK OF CALIFORNIA, N.A.	37.143%
Total Term Loan: $34,708,333.34

Annex A to the Credit Agreement

EX-10.28

Exhibit 10.28

AMENDMENT

AMENDMENT (the “Amendment”) dated as of August 29, 2008 but effective as of July 1, 2008, to Amended and Restated Employment Agreement dated as of July 1, 2005, as amended to date (“Employment Agreement”), by and between SUNLINK HEALTH SYSTEMS, INC., an Ohio corporation (“SunLink”), and HARRY R. ALVIS, an individual resident of the State of Georgia (the “Executive”).

RECITALS

WHEREAS, SunLink and the Executive entered into the Employment Agreement which provides for the terms and conditions of SunLink’s employment of the Executive;

WHEREAS, the Fixed Term of the Employment Agreement expired as of June 30, 2007 and the Extended Term of the Employment Agreement expired as of June 30, 2008; and

WHEREAS, the parties have agreed, subject to the terms and conditions hereof, to amend the Employment Agreement to, among other things, extend the term of the Employment Agreement as more fully set forth herein.

NOW THEREFORE, in consideration of the foregoing and the mutual covenants and agreements herein contained, SunLink and the Executive hereby agree as follows:

1. DEFINITIONS. Terms defined in the Employment Agreement shall have the same meaning herein unless otherwise defined herein or unless the context clearly requires otherwise.

2. AMENDMENTS.

(a) The first sentence of Section 2 of the Employment Agreement shall be amended by deleting the words “June 30, 2007” and replacing with the words “June 30, 2009”.

(b) Section 4(a) of the Employment Agreement shall be amended by inserting the words “or the Extended Term, as applicable,” after the words “the Fixed Term” in the first sentence thereof.

(c) Section 4(c) of the Employment Agreement shall be amended by deleting the words “fifteen (15) months” in the 5^th line thereof and replacing with the words “twelve (12) months”.

3. MISCELLANEOUS.

(a) Counterparts. This Amendment may be executed by the parties hereto in any number of separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument.

(b) Construction. (i) Any provision of this Amendment which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability shall not invalidate or render unenforceable such provision in any other jurisdiction. To the extent permitted by law, the Executive hereby waives any provision of law which renders any provision hereof prohibited or unenforceable in any respect.

(ii) All references to the Employment Agreement are construed as references to the Employment Agreement as amended by this Amendment, and as the same may be further amended from time to time.

(c) No Further Waivers. Except as expressly amended hereby, all representations, warranties, terms, covenants and conditions of the Employment Agreement shall remain unamended and not waived and shall continue to be in full force and effect and the Employment Agreement is hereby confirmed and ratified. No amendment of any provision of this Amendment shall be effective unless it is in writing and signed by SunLink and the Executive.

(d) Governing Law and Arbitration. The provisions of Section 15 and 16 of the Employment Agreement are incorporated by reference as if more fully set forth herein.

(e) Further Assurances. The parties agree to take all actions necessary to effectively carry out the intent and purpose of this Amendment.

(this space intentionally left blank)

-2-

IN WITNESS WHEREOF, the parties have caused this Amendment to be duly executed and delivered as of the date first written above.

SUNLINK HEALTH SYTEMS, INC.
By:	/s/ Robert M. Thornton, Jr.
Name:	Robert M. Thornton, Jr.
Title:	President
	/s/ Harry R. Alvis, L.S.
	HARRY R. ALVIS

EX-21.1

Exhibit 21.1

LIST OF SUBSIDIARIES

The active subsidiaries of SunLink Health Systems, Inc. are listed below, do business under the name under which they are organized, and are included in the consolidated financial statements of the Company. The names, jurisdiction of incorporation of such subsidiaries, and percentage of voting securities owned by the Company are set forth below.

Name of Subsidiary	Jurisdiction in Which Incorporated	Percentage of Voting Securities Owned
KRUG Properties Inc.	Ohio	100	%(1)
SunLink Services, Inc.	Georgia	100	%
SunLink ScriptRx, LLC	Georgia	100	%
SunLink Healthcare LLC	Georgia	100	%
KRUG International (UK) Limited	United Kingdom	100	%(6)
HealthMont LLC	Georgia	100	%
Bradley International Holdings Limited	United Kingdom	100	%(2)
Klippan S.A.R.L.	France	100	%(1)(3)
Klippan GmbH	Germany	100	%(1)(3)
Dexter Hospital LLC	Georgia	100	%(4)
Clanton Hospital LLC	Georgia	83	%(10)
Southern Health Corporation of Jasper, Inc.	Georgia	100	%(1)(4)
Southern Health Corporation of Houston, Inc.	Georgia	100	%(4)
Southern Health Corporation of Ellijay, Inc.	Georgia	100	%(4)
Southern Health Corporation of Dahlonega, Inc.	Georgia	100	%(4)
HealthMont of Georgia Inc.	Tennessee	100	%(5)
HealthMont of Missouri, LLC	Georgia	100	%(5)
Carmichael’s Cashway Pharmacy, Inc.	Louisiana	100	%(8)
Carmichael’s Nutritional Distributor, Inc.	Louisiana	100	%(9)
Breath of Life Home Health Equipment	Louisiana	100	%(9)
SunLink Healthcare Investments, Inc.	Georgia	100	%(4)
Pickens Health Care Association, Inc.	Georgia	100	%(1)(4)
HomeTown Health LLC	Georgia	47	%(7)
CastleLink Assurance Ltd.	Cayman Islands	100	%
Southeastern Healthcare Alliance, Inc.	Georgia	100	%(4)
Central Alabama Medical Associates, LLC	Georgia	100	%(4)
Dahlonega Clinic LLC	Georgia	100	%(7)

(1) Subsidiaries included within discontinued operations.

(2) Subsidiary of KRUG International (UK) Ltd. in liquidation

(3) Subsidiaries of Bradley International Holdings Ltd.

(4) Subsidiaries of SunLink Healthcare LLC

(5) Subsidiaries of HealthMont LLC

(6) In liquidation

(7) Subsidiary of Southern Health Corporation of Dahlonega, Inc.

(8) Subsidiary of SunLink Homecare Services, LLC

(9) Subsidiary of Carmichael’s Cashway Pharmacy, Inc

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statement No. 333-06129 of SunLink Health Systems, Inc. on Form S-8, Registration Statement No. 33-88190 of SunLink Health Systems, Inc. on Form S-3, Registration Statement No. 333-99667 of SunLink Health Systems, Inc. on Form S-8, Registration Statement No. 333-99669 of SunLink Health Systems, Inc. on Form S-8, and Registration Statement No. 333-137474 of SunLink Health Systems, Inc. on Form S-8, of our reports dated September 25, 2008, appearing in this Annual Report on Form 10-K of SunLink Health Systems, Inc. for the year ended June 30, 2008.

/s/ Cherry, Bekaert & Holland, L.L.P.

Atlanta, Georgia

September 25, 2008

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Robert M. Thornton, Jr., the Chief Executive Officer of SunLink Health Systems, Inc. (the “Company”), certify that:

(1) I have reviewed this annual report on Form 10-K of the Company;

(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;

(4) The Company’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) [Intentionally Omitted];

(c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of June 30, 2008 (the “Evaluation Date”) based on such evaluation; and

(d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during our most recent fiscal quarter ended on the Evaluation Date, that has materially affected , or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

(5) The Company’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

/s/    ROBERT M. THORNTON, JR.        

Robert M. Thornton, Jr.

SunLink Health Systems, Inc.

Chief Executive Officer

September 25, 2008

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Mark J. Stockslager, the Chief Financial Officer of SunLink Health Systems, Inc. (the “Company”), certify that:

(1) I have reviewed this annual report on Form 10-K of the Company;

(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;

(4) The Company’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) [Intentionally Omitted];

(c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of June 30, 2008 (the “Evaluation Date”) based on such evaluation; and

(d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during our recent fiscal quarter ended on the Evaluation Date, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

(5) The Company’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

/s/    MARK J. STOCKSLAGER        

Mark J. Stockslager

SunLink Health Systems, Inc.

Chief Financial Officer

September 25, 2008

EX-32.1

Exhibit 32.1

SUNLINK HEALTH SYSTEMS, INC.

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the annual report of SunLink Health Systems, Inc. (the “Company”) on Form 10-K for the year ended June 30, 2008, as filed with the United States Securities and Exchange Commission on the date hereof (the “Report”), I, Robert M. Thornton, Jr., Chief Executive Officer of the Company, do hereby certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

By:	/s/    ROBERT M. THORNTON, JR.
	Robert M. Thornton, Jr. Chief Executive Officer

September 25, 2008

EX-32.2

Exhibit 32.2

SUNLINK HEALTH SYSTEMS, INC.

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the annual report of SunLink Health Systems, Inc. (the “Company”) on Form 10-K for the year ended June 30, 2008, as filed with the United States Securities and Exchange Commission on the date hereof (the “Report”), I, Mark J. Stockslager, Chief Financial Officer of the Company, do hereby certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

By:	/s/    MARK J. STOCKSLAGER
	Mark J. Stockslager Chief Financial Officer

September 25, 2008