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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
______________


FORM 10-Q
______________

(Mark One)[X]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.For the quarterly period ended September 30, 2003OR[ ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.For the transition period from _______________  to _______________


0-49813

(Commission file number)


______________

MARINER HEALTH CARE, INC.

(Exact name of registrant as specified in its charter)


______________

Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
    
    74-2012902
(I.R.S. Employer
Identification No.)One Ravinia Drive, Suite 1500
Atlanta, Georgia
(Address of Principal Executive Offices)
    
    30346
(Zip Code)


(678) 443-7000

(Registrants Telephone Number, Including Area Code)


______________

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  o

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).   Yes  x   No  o

There were 20,000,000 shares of Common Stock of the registrant outstanding
as of October 31, 2003.

Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.   Yes  x   No  o



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TABLE OF CONTENTS

PagePart I
    
    FINANCIAL INFORMATIONItem 1.
    
    Condensed Consolidated Financial Statements
    
    
    1Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    27Item 4.
    
    Controls and Procedures
    
    
    27Part II
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    29Item 2.
    
    Changes in Securities and Use of Proceeds
    
    
    29Item 3.
    
    Defaults Upon Senior Securities
    
    
    29Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    29Item 5.
    
    Other Information
    
    
    29Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    29






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PART I

ITEM 1. FINANCIAL STATEMENTS

MARINER HEALTH CARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)

PredecessorReorganized Company
    
    
    CompanyThree Months Ended
    
    Nine Months
    
    Five Months
    

    Four MonthsSeptember 30,
    
    Ended
    
    Ended
    

    Ended2003
    
    2002
    
    September 30, 2003
    
    September 30, 2002
    


    April 30, 2002(unaudited)
    
    (unaudited)
    
    (unaudited)
    
    (unaudited)
    

    (audited)Net revenue
    
    $
    451,510
    
    
    $
    445,866
    
    
    $
    1,321,306
    
    
    $
    740,954
    
    

    $
    601,437Costs and expensesOperating expenses
    
    
    393,193
    
    
    
    372,730
    
    
    
    1,154,630
    
    
    
    621,924
    
    

    
    522,775General and administrative
    
    
    42,162
    
    
    
    44,851
    
    
    
    120,072
    
    
    
    69,257
    
    

    
    55,997Depreciation and amortization
    
    
    9,691
    
    
    
    9,429
    
    
    
    27,897
    
    
    
    14,351
    
    

    
    11,733Total costs and expenses
    
    
    445,046
    
    
    
    427,010
    
    
    
    1,302,599
    
    
    
    705,532
    
    

    
    590,505Operating income
    
    
    6,464
    
    
    
    18,856
    
    
    
    18,707
    
    
    
    35,422
    
    

    
    10,932Other income (expenses)Interest expense (contractual interest
for the four months ended
April 30, 2002 was $9,630)
    
    
    (8,993
    )
    
    
    (9,931
    )
    
    
    (26,915
    )
    
    
    (15,444
    )
    

    
    (3,017
    )Interest income
    
    
    709
    
    
    
    1,425
    
    
    
    2,229
    
    
    
    3,645
    
    

    
    1,154Reorganization items
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    

    
    1,394,309Other
    
    
    (48
    )
    
    
    (300
    )
    
    
    (99
    )
    
    
    (416
    )
    

    
    1,495(Loss) income from continuing operations
before income taxes
    
    
    (1,868
    )
    
    
    10,050
    
    
    
    (6,078
    )
    
    
    23,207
    
    

    
    1,404,873(Benefit) provision for income taxes
    
    
    (747
    )
    
    
    4,100
    
    
    
    (2,431
    )
    
    
    9,363
    
    

    
    (Loss) income from continuing operations
    
    
    (1,121
    )
    
    
    5,950
    
    
    
    (3,647
    )
    
    
    13,844
    
    

    
    1,404,873Discontinued operationsGain on sale of discontinued pharmacy
operations, net of income taxes
    
    
    7,200
    
    
    
    
    
    
    
    10,800
    
    
    
    
    
    

    
    29,082Net income
    
    $
    6,079
    
    
    $
    5,950
    
    
    $
    7,153
    
    
    $
    13,844
    
    

    $
    1,433,955Earnings (loss) per share  basic and diluted(Loss) income from continuing operations
    
    $
    (0.06
    )
    
    $
    0.30
    
    
    $
    (0.18
    )
    
    $
    0.69
    
    

    $
    19.07Gain on sale of discontinued
pharmacy operations
    
    
    0.36
    
    
    
    
    
    
    
    0.54
    
    
    
    
    
    

    
    0.39Net income per share
    
    $
    0.30
    
    
    $
    0.30
    
    
    $
    0.36
    
    
    $
    0.69
    
    

    $
    19.46Weighted average number of common and
common equivalent shares outstandingBasic and diluted
    
    
    20,000
    
    
    
    20,000
    
    
    
    20,000
    
    
    
    20,000
    
    

    
    73,688


The accompanying notes are an integral part of these condensed consolidated
financial statements.

1



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MARINER HEALTH CARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)

September 30, 2003
    
    December 31, 2002(unaudited)
    
    (audited)ASSETSCurrent assetsCash and cash equivalents
    
    $
    49,625
    
    
    $
    38,618Receivables, net of allowance for doubtful accounts of $69,857
and $72,996
    
    
    267,105
    
    
    
    264,092Assets held for sale
    
    
    49,787
    
    
    
    Prepaid expenses and other current assets
    
    
    37,119
    
    
    
    34,947Total current assets
    
    
    403,636
    
    
    
    337,657Property and equipment, net of accumulated depreciation of $51,091 and $26,427
    
    
    548,779
    
    
    
    567,260Reorganization value in excess of amounts allocable to identifiable assets
    
    
    195,117
    
    
    
    201,388Restricted investments
    
    
    21,886
    
    
    
    38,693Other assets
    
    
    33,585
    
    
    
    33,740$
    1,203,003
    
    
    $
    1,178,738LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesCurrent maturities of long-term debt
    
    $
    12,833
    
    
    $
    9,793Accounts payable
    
    
    41,136
    
    
    
    48,417Accrued compensation and benefits
    
    
    85,621
    
    
    
    68,444Accrued insurance obligations
    
    
    45,752
    
    
    
    28,650Other current liabilities
    
    
    52,526
    
    
    
    65,787Total current liabilities
    
    
    237,868
    
    
    
    221,091Long-term debt, net of current maturities
    
    
    467,431
    
    
    
    474,969Long-term insurance reserves
    
    
    197,975
    
    
    
    195,562Other liabilities
    
    
    20,568
    
    
    
    14,044Minority interest
    
    
    3,693
    
    
    
    4,677Total liabilities
    
    
    927,535
    
    
    
    910,343Stockholders equityPreferred stock, $.01 par value; 10,000,000 shares
authorized; none issued or outstanding
    
    
    
    
    
    
    Common stock, $.01 par value; 80,000,000 shares authorized;
20,000,000 shares issued and outstanding
    
    
    200
    
    
    
    200Warrants to purchase common stock
    
    
    935
    
    
    
    935Capital in excess of par value
    
    
    358,977
    
    
    
    358,977Accumulated deficit
    
    
    (84,895
    )
    
    
    (92,048
    )Accumulated other comprehensive income
    
    
    251
    
    
    
    331Total stockholders equity
    
    
    275,468
    
    
    
    268,395$
    1,203,003
    
    
    $
    1,178,738


The accompanying notes are an integral part of these condensed consolidated financial statements.

2



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MARINER HEALTH CARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

PredecessorReorganized Company
    
    
    CompanyNine Months
    
    Five Months
    

    Four MonthsEnded
    
    Ended
    
    EndedSeptember 30, 2003
    
    September 30, 2002
    

    April 30, 2002(unaudited)
    
    (unaudited)
    

    (audited)Cash flows from operating activitiesNet income
    
    $
    7,153
    
    
    $
    13,844
    
    

    $
    1,433,955Adjustments to reconcile net income to net cash
provided by operating activitiesDepreciation and amortization
    
    
    27,897
    
    
    
    14,351
    
    

    
    11,733Equity earnings/minority interest
    
    
    99
    
    
    
    416
    
    

    
    33Reorganization items, net
    
    
    
    
    
    
    
    
    

    
    (1,394,309
    )Casualty gain
    
    
    
    
    
    
    
    
    

    
    (1,527
    )Provision for bad debts
    
    
    12,095
    
    
    
    7,194
    
    

    
    25,344Provision for deferred income taxes
    
    
    (2,431
    )
    
    
    9,363
    
    

    
    Amortization of deferred financing costs
    
    
    948
    
    
    
    
    
    

    
    Gain on sale of discontinued pharmacy operations
    
    
    (10,800
    )
    
    
    
    
    

    
    (29,082
    )Changes in operating assets and liabilitiesReceivables
    
    
    (18,004
    )
    
    
    (18,101
    )
    

    
    (13,090
    )Prepaid expenses and other current assets
    
    
    (3,062
    )
    
    
    (5,729
    )
    

    
    3,192Accounts payable
    
    
    (7,281
    )
    
    
    (1,261
    )
    

    
    (27,211
    )Accrued and other current liabilities
    
    
    30,676
    
    
    
    (10,648
    )
    

    
    25,323Changes in long-term insurance reserves
    
    
    2,413
    
    
    
    16,726
    
    

    
    11,369Other
    
    
    (1,078
    )
    
    
    178
    
    

    
    (7,185
    )Net cash provided by operating activities from
continuing operations before reorganization items
    
    
    38,625
    
    
    
    26,333
    
    

    
    38,545Payment of reorganization items, net
    
    
    (7,359
    )
    
    
    (20,437
    )
    

    
    (35,813
    )Cash flows from investing activitiesPurchases of property and equipment
    
    
    (52,411
    )
    
    
    (17,287
    )
    

    
    (27,553
    )Proceeds from sale of property, equipment and other assets
    
    
    18,132
    
    
    
    2,784
    
    

    
    92,446Restricted investments
    
    
    16,727
    
    
    
    13,695
    
    

    
    (14,975
    )Insurance proceeds
    
    
    2,896
    
    
    
    
    
    

    
    6,020Net collections on notes receivable
    
    
    369
    
    
    
    58
    
    

    
    146Net cash (utilized) provided by investing activities
    
    
    (14,287
    )
    
    
    (750
    )
    

    
    56,084Cash flows from financing activitiesProceeds from issuance of long-term debt
    
    
    
    
    
    
    
    
    

    
    212,000Repayment of long-term debt
    
    
    (4,498
    )
    
    
    (2,693
    )
    

    
    (386,872
    )Payment of deferred financing fees
    
    
    (1,474
    )
    
    
    
    
    

    
    (6,424
    )Net cash utilized by financing activities
    
    
    (5,972
    )
    
    
    (2,693
    )
    

    
    (181,296
    )Increase (decrease) in cash and cash equivalents
    
    
    11,007
    
    
    
    2,453
    
    

    
    (122,480
    )Cash and cash equivalents, beginning of period
    
    
    38,618
    
    
    
    91,260
    
    

    
    213,740Cash and cash equivalents, end of period
    
    $
    49,625
    
    
    $
    93,713
    
    

    $
    91,260


The accompanying notes are an integral part of these condensed consolidated
financial statements.

3



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MARINER HEALTH CARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

NOTE
1           GENERAL

Nature of Business

Mariner Health Care, Inc. through its operating subsidiaries (collectively, the
Company) provides post-acute healthcare services, primarily through the
operation of skilled nursing facilities (SNFs). All references to the
Company herein are intended to include the operating subsidiaries through
which the services described herein are directly provided. At September 30,
2003, the Companys significant operations consist of 286 owned, leased, or
managed SNFs and eight assisted living facilities and apartments, in 23 states
with 35,530 licensed beds, including 20 SNFs with 2,502 beds located in the
state of Florida that have been identified as held for sale. A significant
concentration of these facilities are in Texas, North Carolina, Colorado,
California and Florida and several metropolitan markets, which represent the
Companys only reportable operating segment (see Note 6). Included in the
total SNFs are seven managed SNFs with 1,066 licensed beds. At September 30,
2003, the Company also operated 12 owned, leased, or managed long-term acute
care hospitals (LTACs) in four states with 638 licensed beds. Effective
October 1, 2003, 19 facilities in the state of Florida were sold (the
Florida Sale) (see Note 7).

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission (the SEC). Certain information and disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted pursuant to such rules and regulations. Accordingly, these unaudited
condensed consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and notes thereto included in the
Companys Annual Report for the year ended December 31, 2002 on Form 10-K filed
with the SEC. In the opinion of management, the financial information included
herein reflects all adjustments considered necessary for a fair presentation of
interim results and, except for the items described below in Emergence from
Bankruptcy, all such adjustments are of a normal and recurring nature.
Operating results for interim periods are not necessarily indicative of the
results that may be expected for the entire year.

Emergence from Bankruptcy

On March 25, 2002, the United States Bankruptcy Court for the District of
Delaware (the Bankruptcy Court) approved the Companys second amended and
restated joint plan of reorganization filed on February 1, 2002 (including all
modifications thereof and schedules and exhibits thereto, the Joint Plan).
On May 13, 2002 (the Effective Date), the Company and substantially all of
its subsidiaries emerged from proceedings under chapter 11 of title 11
(Chapter 11) of the United States Code pursuant to the terms of the Joint
Plan. In connection with its emergence from bankruptcy, the Company changed
its name to Mariner Health Care, Inc.

The Company emerged from bankruptcy effective May 1, 2002 for financial
reporting purposes, at which time it adopted the provisions of fresh-start
reporting in accordance with the American Institute of Certified Public
Accountants Statement of Position 90-7, Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code (SOP 90-7). Under fresh-start
reporting, a new entity is deemed to be created for financial reporting
purposes. In adopting the requirements of fresh-start reporting as of May 1,
2002, the provisions of the Companys Joint Plan were implemented, assets and
liabilities were adjusted to their estimated fair values and the accumulated
deficit for the Companys subsidiaries that were part of the Chapter 11 cases
was eliminated. The financial statements for all periods prior to May 1, 2002
reflect the financial position, results of operations and cash flows of the
Companys predecessor entity (the Predecessor Company). The financial
statements for all periods subsequent to May 1, 2002, reflect the consolidated
financial position, results of operations and cash flows of the
reorganized entity (the Reorganized Company). Unless specifically stated as
the Predecessor Company or the Reorganized Company, all references to the
Company include the operations of both the Predecessor Company and Reorganized
Company.

4



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MARINER HEALTH CARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Since fresh-start reporting materially changed the amounts previously recorded
in the consolidated financial statements of the Predecessor Company, a black
line signifying the difference in presentation separates the financial data
pertaining to periods after the adoption of fresh-start reporting from the
financial data pertaining to periods prior to the adoption of fresh-start
reporting.

Between filing for protection under the Bankruptcy Code on January 18, 2000 and
the Effective Date, the Company operated its business as a debtor-in-possession
subject to the jurisdiction of the Bankruptcy Court. Accordingly, the
Predecessor Companys consolidated financial statements presented herein for
periods prior to emergence from bankruptcy are presented in conformity with SOP
90-7 and were prepared on a going concern basis, which assumes continuity of
operations and realization of assets and settlement of liabilities and
commitments in the normal course of business.

In accordance with SOP 90-7, the Company has recorded all transactions directly
related to the reorganization of the Company since the filing of the Chapter 11
cases as reorganization items. In connection with the implementation of
fresh-start reporting, the Company recorded a gain of approximately $1.2
billion from the restructuring of its debt in accordance with the provisions of
the Joint Plan. Other significant adjustments also were recorded to reflect the
provisions of the Joint Plan and the fair values of the assets and liabilities
of the Reorganized Company. For accounting purposes, these transactions are
reflected in the operating results of the Predecessor Company for the four
months ended April 30, 2002.

A summary of the principal categories of reorganization items is as follows (in
thousands):

Four MonthsEndedApril 30, 2002Professional fees
    
    $
    67,976Net loss on divestitures
    
    
    10,766Interest earned on accumulated cash resulting from the Chapter
11 filings
    
    
    (648
    )Other reorganization costs
    
    
    11,031Gain on extinguishment of debt
    
    
    (1,229,557
    )Fresh-start valuation adjustments
    
    
    (253,877
    )$
    (1,394,309
    )


The Reorganized Company adopted the accounting policies of the Predecessor
Company (see the Companys Annual Report for the year ended December 31, 2002
on Form 10-K filed with the SEC). In accordance with the fresh-start reporting
provisions of SOP 90-7, the Reorganized Company also adopted changes in
accounting principles that were required in the consolidated financial
statements of the Reorganized Company within the twelve month period subsequent
to the Effective Date.

The condensed consolidated pro forma effect of the Joint Plan assuming that the
Effective Date occurred on January 1, 2002 is as follows (in thousands, except
per share amounts):

5



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MARINER HEALTH CARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Nine MonthsEndedSeptember 30, 2002Net revenue
    
    $
    1,342,391Income from continuing operations
    
    $
    15,801Gain on sale of discontinued pharmacy operations
    
    
    29,082Net income
    
    $
    44,883Earnings per share  basic and dilutedIncome from continuing operations
    
    $
    0.79Gain on sale of discontinued pharmacy operations
    
    
    1.45Net income
    
    $
    2.24


The condensed consolidated pro forma results exclude reorganization items
recorded prior to May 1, 2002. The condensed consolidated pro forma results
include estimates for depreciation expense, interest expense and the related
income tax effect prior to May 1, 2002. The number of shares outstanding has
also been adjusted. The condensed consolidated pro forma results are not
necessarily indicative of the financial results that might have resulted had
the Effective Date of the Joint Plan actually occurred on January 1, 2002.

Discontinued Pharmacy Operations

In October 2001, the Company received the approval of the Bankruptcy Court to
sell its institutional pharmacy services business (the APS Division), the
sale of which was consummated on January 6, 2002. Accordingly, the results of
the APS Division have been treated as a discontinued operation in accordance
with accounting principles generally accepted in the United States (see Note
3).

Use of 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 amounts reported
in the financial statements and accompanying notes. Although these estimates
are based on managements knowledge of current events, they may ultimately
differ from actual results.

Comprehensive Income

Comprehensive income includes net income, as well as charges and credits to
stockholders equity not included in net income. The components of
comprehensive income, net of income taxes, consist of the following (in
thousands):

PredecessorReorganized Company
    
    
    CompanyThree Months Ended
    
    Nine Months
    
    Five Months
    

    Four MonthsSeptember 30,
    
    Ended
    
    Ended
    

    Ended2003
    
    2002
    
    September 30, 2003
    
    September 30, 2002
    

    April 30, 2002Net income
    
    $
    6,079
    
    
    $
    5,950
    
    
    $
    7,153
    
    
    $
    13,844
    
    

    $
    1,433,955Net unrealized (loss) gain on available-for-sale securities
    
    
    (97
    )
    
    
    284
    
    
    
    (80
    )
    
    
    421
    
    

    
    (603
    )Comprehensive income
    
    $
    5,982
    
    
    $
    6,234
    
    
    $
    7,073
    
    
    $
    14,265
    
    

    $
    1,433,352


Stock-Based Compensation

Reorganized Company.The Reorganized Company maintains two stock-based
compensation plans that provide for the granting of stock options to the
Companys employees and outside directors with exercise prices not less than
the fair market value of the shares at the date of grant. The Reorganized
Company has stock option plans authorizing the grant of stock options to
purchase up to 2,153,022 shares of common stock, par value $0.01 per

6



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##### 



MARINER HEALTH CARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

share (the Common Stock). At September 30, 2003, there were options to
purchase 497,500 shares of common stock outstanding at exercise prices ranging
from $2.65 to $6.30, all of which were equal to the fair market value of the
common stock on the date of the grant. There were options to purchase 87,500
shares of Common Stock exercisable at September 30, 2003.

Stock Option Exchange Program.In the second quarter of 2003, the Companys
Board of Directors approved a voluntary stock option exchange program whereby
the Company offered employees the opportunity to exchange options having an
exercise price of $20.12 for an equal number of new options. Non-employee
members of the Board of Directors were not eligible to participate in the
exchange program.

Under the terms of the program, in order to participate, eligible employees
were required to tender all of their options that were granted with an exercise
price of $20.12 in exchange for a commitment by the Company to grant new
options under the program six-months and one day following the closing date of
the offering period (the date of legal cancellation of the tendered options),
with an exercise price per share equal to the greater of $8.00 or the fair
market value of the Companys Common Stock at that time, whichever is higher.
On June 13, 2003, the Company canceled options to purchase 1,563,560 shares of
the Companys Common Stock. Assuming all employees of the
Company on the date hereof remain employed through the grant date
of the new options, the Compensation Committee of the Board of
Directors will grant new options to purchase 1,458,560 shares of the Companys
Common Stock on the first day that is at least six months and one day following
June 13, 2003. These options will vest in three equal annual
installments beginning on the first anniversary of the date of grant of the new
options, with the exception of the options to be granted to the Companys Chief
Executive Officer, which will vest in accordance with the terms set forth in
his employment agreement. The Company does not expect to record any
significant compensation expense as a result of the exchange program.

Director Stock Option Exchange Offer.On July 30, 2003, the Compensation
Committee of the Board of Directors of the Company approved a program to allow
outside directors to surrender their options to purchase shares of Common Stock
of the Company with an exercise price per share of $20.12, which were granted
on May 16, 2002, in exchange for shares of Common Stock to be granted under the
2003 Outside Directors Stock Incentive Plan. The program will
allow for a
number of shares equal to 30% of the number of options surrendered. The program will allow for each director, other than the Chairman
of the Board of Directors, to receive an offer to exchange their options in
return for a grant of 7,500 shares of Common Stock and the Chairman of the
Board of Directors to receive an offer to exchange his options in return for a
grant of 15,000 shares of Common Stock. The shares will vest according to the
original vesting schedule of the surrendered options. No offer under
the program has been made to date to any director.

Predecessor Company.The Predecessor Company had stock option plans for key
employees and outside directors which authorized the granting of incentive
stock options and nonqualified options. Upon the Companys emergence from
bankruptcy, all the Predecessor Company stock option plans and options granted
were canceled.

7



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##### 



MARINER HEALTH CARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Pro Forma.The Company accounts for stock options in accordance with
Accounting Principles Board (APB) Opinion 25, Accounting for Stock Issued to
Employees, and related interpretations. Accordingly, the Company recognizes
no compensation expense for stock option grants. In accordance with Statement
of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation, as amended by SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure, an Amendment of SFAS No. 123 (SFAS
No. 148), the Companys pro forma net income and earnings per share, assuming
the election had been made to recognize compensation expense on stock-based
awards, are as follows (in thousands, except per share amounts):

PredecessorReorganized Company
    
    
    CompanyThree Months Ended
    
    Nine Months
    
    Five Months
    

    Four MonthsSeptember 30,
    
    Ended
    
    Ended
    

    Ended2003
    
    2002
    
    September 30, 2003
    
    September 30, 2002
    

    April 30, 2002Net income
    
    $
    6,079
    
    
    $
    5,950
    
    
    $
    7,153
    
    
    $
    13,844
    
    

    $
    1,433,955Deduct: total stock-based employee compensation
expense determined under fair value based
methods for all awards, net of tax
    
    
    (540
    )
    
    
    (917
    )
    
    
    (2,242
    )
    
    
    (1,647
    )
    

    
    (123
    )Pro forma net income
    
    $
    5,539
    
    
    $
    5,033
    
    
    $
    4,911
    
    
    $
    12,197
    
    

    $
    1,433,832Basic and diluted earnings per shareAs reported
    
    $
    0.30
    
    
    $
    0.30
    
    
    $
    0.36
    
    
    $
    0.69
    
    

    $
    19.46Pro forma
    
    
    0.28
    
    
    
    0.25
    
    
    
    0.25
    
    
    
    0.61
    
    

    
    19.46


Recent Accounting Pronouncements

In May 2003, the Financial Accounting Standards Board (FASB) issued SFAS No.
150, Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity (SFAS No. 150). SFAS No. 150 improves the accounting
for certain financial instruments that, under previous guidance, issuers could
account for as equity. SFAS No. 150 requires that those instruments be
classified as liabilities in statements of financial position. This statement
is effective for financial instruments entered into or modified after May 31,
2003. On October 29, 2003, FASB deferred for an indefinite period the
application of the guidance in SFAS No. 150. FASB decided to defer the
application of SFAS No. 150 until it could consider some of the resulting
implementation issues associated with the measurement and recognition issues.
The Company has not determined the resulting impact of the adoption of this
statement on its consolidated financial position, results of operations or cash
flows.

In April 2003, FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities (SFAS No. 149), which is
effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. SFAS No. 149 amends and
clarifies accounting and reporting for derivative instruments. In particular,
this statement amends certain other pronouncements and clarifies the
circumstances under which a contract with an initial net investment meets the
characteristics of a derivative and when a derivative contains a financial
component. The guideline should be applied prospectively. The adoption of SFAS
149 did not have a material impact on the consolidated financial position,
results of operations or cash flows of the Company.

In January 2003, FASB issued FASB Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46). FIN 46 addresses the consolidation of
entities whose equity holders have either (a) not provided sufficient equity at
risk to allow the entity to finance its own activities or (b) do not possess
certain characteristics of a controlling financial interest. FIN 46 sets forth
a model to evaluate potential consolidation of these entities, known as
variable interest entities (VIEs), based on an assessment of which party to
the VIE, if any, absorbs a majority of the exposure to its expected losses,
receives a majority of its expected residual returns, or both (the primary
beneficiary). FIN 46 is effective for all new VIEs created or acquired after
January 31, 2003 (see Note 7). Originally, for VIEs created or acquired prior
to February 1, 2003, the provisions of FIN 46 were to be applied for the first
interim or annual period beginning after June 15, 2003. However, on October 8,
2003, FASB deferred the effective date for applying the provisions of FIN 46
until the first reporting period after December 15, 2003 for interests held by
public entities in VIEs or potential VIEs created before February 1, 2003. FIN
46 also sets forth certain disclosures regarding interests in VIEs that are
deemed significant, even if consolidation is not required. The

8



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##### 



MARINER HEALTH CARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Company is currently evaluating the impact of FIN 46 on its consolidated
financial position, results of operation or cash flows for VIEs or potential
VIEs created before February 1, 2003.

In December 2002, FASB issued SFAS No. 148, which provides alternative methods
of transition for an entity that voluntarily changes to the fair value based
method of accounting for stock-based employee compensation. The provisions of
this statement were effective December 31, 2002. Management currently intends
to continue to account for stock-based compensation under the intrinsic value
method set forth in APB Opinion 25 and related interpretations. For this
reason, the transition guidance of SFAS No. 148 did not have a material impact
on the consolidated financial position, results of operations or cash flows of
the Company. SFAS No. 148 does amend existing guidance with respect to
required disclosures, regardless of the method of accounting used. These
required disclosures have been presented above.

In November 2002, FASB issued FASB Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. This interpretation elaborates on the
disclosures to be made by a guarantor in its financial statements under certain
guarantees that it has issued. It also clarifies that a guarantor is required
to recognize, at the inception of a guarantee, a liability for the fair value
of the obligation undertaken in issuing the guarantee. The disclosure
requirements of this interpretation were effective as of December 31, 2002 and
require disclosure of the nature of the guarantee, the maximum potential amount
of future payments that the guarantor could be required to make under the
guarantee, and the current amount of the liability, if any, for the guarantors
obligations under the guarantee. The recognition requirements of this
interpretation were effective beginning January 1, 2003. The implementation of
this interpretation did not have a material impact on the consolidated
financial position, results of operations or cash flows of the Company.

Comparability of Financial Information

The adoption of fresh-start reporting as of May 1, 2002 materially changed the
amounts previously recorded in the consolidated financial statements of the
Predecessor Company. With respect to reported operating results, management
believes that business segment operating income of the Predecessor Company is
generally comparable to that of the Reorganized Company, excluding divested
facilities. However, capital costs, such as interest, depreciation and
amortization, of the Predecessor Company generally are not comparable to those
of the Reorganized Company. In addition, the reported financial position and
cash flows of the Predecessor Company generally are not comparable to those of
the Reorganized Company.

Reclassifications

Certain prior year amounts have been reclassified to conform with the current
period financial statement presentation.

NOTE 2
     REVENUE

Net revenue is recorded based on estimated amounts due from patients and
third-party payors for healthcare services provided, including anticipated
settlements under reimbursement agreements with Medicare, Medicaid and other
third-party payors, and is recognized in the period in which the services are
provided. Revenue is recorded net of provisions for discount arrangements with
commercial payors and contractual allowances with third-party payors, primarily
Medicare and Medicaid. Net revenue realizable under third-party payor
agreements are subject to change due to examination and retroactive adjustment.
Estimated third-party payor settlements are recorded in the period the related
services are rendered. The methods of making such estimates are reviewed
periodically, and differences between the net amounts accrued and subsequent
settlements or estimates of expected settlements are reflected in the current
period results of operations.

The Medicaid and Medicare programs are highly regulated. The failure of the
Company or its customers to comply with applicable reimbursement regulations
could adversely affect the Companys business. It is not possible to quantify
fully the effect of potential legislative or regulatory changes, the
administration of such legislation or any

9



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##### 



MARINER HEALTH CARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

other governmental initiatives on the Companys business. Accordingly, there
can be no assurance that the impact of these changes or any future healthcare
legislation will not further adversely affect the Companys business. There
can be no assurance that payments under governmental and private third party
payor programs will be timely, will remain at levels comparable to present
levels or will, in the future, be sufficient to cover the costs allocable to
patients eligible for reimbursement pursuant to such programs. The Companys
financial condition and results of operations may be materially and adversely affected by the
reimbursement process, which in the healthcare industry is complex and can
involve lengthy delays between the time that revenue is recognized and the time
that reimbursement amounts are settled.

The following is a summary of approximate net revenue by payor type for the
periods indicated (in thousands):

PredecessorReorganized Company
    
    
    CompanyThree Months Ended
    
    Nine Months
    
    Five Months
    

    Four MonthsSeptember 30,
    
    Ended
    
    Ended
    

    Ended2003
    
    2002
    
    September 30, 2003
    
    September 30, 2002
    

    April 30, 2002Medicaid
    
    $
    220,511
    
    
    $
    214,009
    
    
    $
    634,574
    
    
    $
    356,517
    
    

    $
    287,073Medicare
    
    
    147,426
    
    
    
    142,977
    
    
    
    442,571
    
    
    
    242,314
    
    

    
    207,286Private and other
    
    
    83,573
    
    
    
    88,880
    
    
    
    244,161
    
    
    
    142,123
    
    

    
    107,078Net revenue
    
    $
    451,510
    
    
    $
    445,866
    
    
    $
    1,321,306
    
    
    $
    740,954
    
    

    $
    601,437


NOTE 3           DIVESTITURES AND CASUALTY GAIN

Assets Held for Sale

In the normal course of business, the Company evaluates the performance of its
operating units in order to make a determination of whether to sell
under-performing or non-strategic assets. An increasing trend in malpractice
litigation claims, rising costs of litigation, and losses associated with these
lawsuits have caused many insurance carriers to raise the cost of insurance
premiums or refuse to write insurance policies. These problems are
particularly acute in the state of Florida where, because of higher claim
amounts, general liability and professional liability costs have become
increasingly expensive.

On August 19, 2003, the Company met all six of the requirements set forth in
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets
(SFAS No. 144), to classify certain assets of 20 of its SNFs located in the
state of Florida as held for sale. SFAS No. 144 addresses financial accounting
and reporting for the impairment or disposal of long lived assets. Under SFAS
No. 144, when a long-lived asset or group of assets (disposal group) meets
certain criteria set forth in the Statement, the long lived asset (disposal
group) must be classified as held for sale in the consolidated balance sheet.
Accordingly, the assets of the above referenced 20 Florida SNFs have been classified as held
for sale in the accompanying unaudited condensed consolidated balance sheet
and are measured at the lower of their carrying value or fair value less costs
to sell. Depreciation of the assets ceased on August 19, 2003. Effective
October 1, 2003, the Company completed the sale of 19 of the 20 SNFs classified as assets held for sale. The
Company expects to complete the sale of the remaining SNF in the disposal group
within one year.

The Company has entered into an administrative services agreement with the new
operator of the divested SNFs to perform certain back office services. These
back office services include accounting support, procurement of business
supplies, billing and collections, and information technology services. The
Company determined that the sale did not meet the accounting criteria for
discontinued operations under SFAS No. 144 due to the existence of cash flows
generated by the back office service agreement.

10



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##### 



MARINER HEALTH CARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

A summary of the major classes of assets held for sale is as follows (in
thousands):

September 30, 2003Prepaid expenses and other current assets
    
    $
    521Property and equipment, net
    
    
    42,995Reorganization value in excess of amounts allocable to identifiable assets
    
    
    6,271$
    49,787


Discontinued Pharmacy Operations

On January 6, 2002, the Company consummated the sale of its APS Division to
Omnicare, Inc. and its wholly owned affiliate, APS Acquisition LLC
(collectively, Omnicare). During the quarter ended December 31, 2001, the
Company received the approval of the Bankruptcy Court to sell the APS Division,
subject to an auction and overbidding process under the supervision of the
Bankruptcy Court. As a result, an auction of the assets comprising the APS
Division was held on December 4, 2001, at which time, following competitive
bidding at the auction, Omnicare was determined to have made the highest and
best bid for the assets of the APS Division. On December 5, 2001, the
Bankruptcy Court approved the sale of the APS Division to Omnicare for a cash
closing price of $97.0 million and up to $18.0 million in future payments,
depending upon certain post-closing operating results of the APS Division (the
Earnout Payments). During the four months ended April 30, 2002, the Company
realized a gain on the sale of the APS Division of $29.1 million. During the
three months ended March 31, 2003, the Company earned and received the first
Earnout Payment of $6.0 million, at which time it recorded a gain of $3.6
million, net of taxes of $2.4 million. On July 23, 2003, the Company and
Omnicare entered into an agreement whereby all conditions for the remaining
Earnout Payments were considered to have been met and the Company received the
remaining $12.0 million on August 5, 2003, at which time it recorded a gain of
$7.2 million, net of taxes of $4.8 million.

Other Divestitures

During the three months and five months ended September 30, 2002, the Company
completed the sale or divestiture of three owned or leased SNFs and certain
assets. No gain or loss was recorded. These facilities reported net revenue
of approximately $0.4 million, $1.8 million and $6.7 million for the three,
five and nine months ended September 30, 2002, respectively.

During the four months ended April 30, 2002, the Predecessor Company completed
the sale or divestiture of approximately 20 owned or leased SNFs and certain
assets, which resulted in a net loss of approximately $10.8 million and is
included in net loss on divestitures within reorganization items. These
facilities reported net revenue of approximately $13.0 million for the four
months ended April 30, 2002.

Casualty Gain

During April 2002, the Predecessor Company recorded a net gain of approximately
$1.5 million relating to certain owned and leased facilities that were damaged
by floods. The net gain is included in other income and is comprised of a gain
of approximately $14.4 million relating to owned and capital leased facilities
whose net carrying value was less than the insurance proceeds expected to be
received, offset by a loss of approximately $12.9 million relating to operating
leased facilities whose estimated costs to repair are in excess of the expected
insurance proceeds to be received.

11



---



##### 



MARINER HEALTH CARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

NOTE 4           EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings
per share for the periods indicated in accordance with SFAS No. 128, Earnings
per Share (in thousands, except per share data):

PredecessorReorganized Company
    
    

    CompanyThree Months Ended
    
    Nine Months
    
    Five Months
    

    Four MonthsSeptember 30,
    
    Ended
    
    Ended
    

    Ended2003
    
    2002
    
    September 30, 2003
    
    September 30, 2002
    

    April 30, 2002Numerator for basic and diluted (loss) income per share(Loss) income from continuing operations
    
    $
    (1,121
    )
    
    $
    5,950
    
    
    $
    (3,647
    )
    
    $
    13,844
    
    

    $
    1,404,873Discontinued operationsGain on sale of discontinued pharmacy
operations, net of income taxes
    
    
    7,200
    
    
    
    
    
    
    
    10,800
    
    
    
    
    
    

    
    29,082Net income
    
    $
    6,079
    
    
    $
    5,950
    
    
    $
    7,153
    
    
    $
    13,844
    
    

    $
    1,433,955Denominator for basic income (loss) per
share  weighted average shares
    
    
    20,000
    
    
    
    20,000
    
    
    
    20,000
    
    
    
    20,000
    
    

    
    73,688Effect of dilutive securities  stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    

    
    Denominator for diluted income (loss) per
share  adjusted weighted average
shares and assumed conversions
    
    
    20,000
    
    
    
    20,000
    
    
    
    20,000
    
    
    
    20,000
    
    

    
    73,688Earnings (loss) per share  basic and diluted(Loss) income from continuing operations
    
    $
    (0.06
    )
    
    $
    0.30
    
    
    $
    (0.18
    )
    
    $
    0.69
    
    

    $
    19.07Discontinued operationsGain on sale of discontinued
pharmacy operations
    
    
    0.36
    
    
    
    
    
    
    
    0.54
    
    
    
    
    
    

    
    0.39Net income per share
    
    $
    0.30
    
    
    $
    0.30
    
    
    $
    0.36
    
    
    $
    0.69
    
    

    $
    19.46


The effect of dilutive securities for all periods presented has been excluded
because the effect is antidilutive.

NOTE 5           CONTINGENCIES

From time to time, the Company has been party to various legal proceedings in
the ordinary course of business. As is typical in the healthcare industry, the
Company is and expects to remain subject to claims that its services have
resulted in resident injury or other adverse effects. In addition, resident,
visitor and employee injuries will also subject the Company to the risk of
litigation. The healthcare industry in general continues to experience an
increasing trend in the frequency and severity of litigation and claims.

On June 11, 2001, one of the Companys prior liability insurance carriers,
Royal Surplus Lines Insurance Company (Royal), commenced an adversary
proceeding in the Bankruptcy Court, styled Royal Surplus Lines Insurance
Company v. Mariner Health Group et al. (MHG), Adversary Proceeding No.
A-01-4626 (MFW). In its complaint, Royal sought among other things,
declaratory judgments that it would not be required to insure some claims
falling under two professional and general liability insurance (PL/GL)
policies issued to one of the Companys subsidiaries by Royal. One of the
Companys prior liability insurance carriers, Northfield Insurance Company
(Northfield), moved to intervene in the Royal adversary proceeding on July
25, 2001. The Company did not oppose the motion to intervene, and it was
subsequently granted.

Prior to the parties engaging in any significant discovery, they agreed to
mediate the issues arising out of the Royal adversary proceeding. After the
mediation, Royal agreed to dismiss its complaint without prejudice, the Company
agreed to dismiss its counterclaim without prejudice, and Royal and the Company
agreed to work together to resolve claims in an alternative dispute resolution
procedure. Northfield did not agree to dismiss its complaint in intervention.
Accordingly, Northfield and the Company are currently engaging in discovery.

In August 2002, the Company filed a complaint in the State Court of Fulton
County, Georgia against PricewaterhouseCoopers, LLP (PWC) and several former
officers of MHG (the Individual Defendants). The Fulton County action
asserts claims for fraud and breach of fiduciary duty against the Individual
Defendants and claims for fraud, professional negligence, negligent
misrepresentation and aiding and abetting breach of fiduciary

12



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##### 



MARINER HEALTH CARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

duty against PWC. Many of these claims arise from the July 1998 acquisition of
MHG by Paragon Health Network, Inc. (Paragon) a predecessor of the Company. Other claims arise from
duties that the Company believes the Individual Defendants breached as officers
of MHG and Mariner Post-Acute Network, Inc., Paragons successor following the MHG acquisition. In the
Fulton County action, the Company is seeking actual damages, including
compensatory, consequential and punitive damages in an amount to be determined
at trial. Discovery is in the early stages.

In response to the action the Company commenced in Fulton County, the
Individual Defendants filed an action in Chancery Court in Delaware in
September 2002 styled Stratton et al. v. Mariner Health Care, Inc., United
States Bankruptcy Court for the District of Delaware. Chapter 11 Case Nos.
00-00113 (MFW) and 00-00215 (MFW), Adversary Nos. 02-5604 and 02-5606. In the
Chancery Court action, the Individual Defendants generally claim they are not
liable for the claims asserted in the Fulton County action and that the Company
is contractually and statutorily obligated to indemnify them against the claims
in the Fulton County action. The Company removed the Chancery Court action to
the Bankruptcy Court. After removal, the Company answered the complaint and
filed counterclaims. The Individual Defendants moved to remand the action back
to the Chancery Court. The Company opposed the motion, which is pending.

After the Individual Defendants filed the Chancery Court action, the Company
also filed an adversary proceeding in the Bankruptcy Court styled Mariner
Health Care, Inc. v. Stratton et al.,United States Bankruptcy Court for the
District of Delaware, Chapter 11 Case Nos. 00-00113 (MFW) and 00-00215 (MFW),
Adversary No. 02-05598 (consolidated with Adversary No. 02-05599). In this
enforcement action (the Enforcement Action), the Company generally alleged
that it does not have any obligation to indemnify the Individual Defendants and
the Individual Defendants pursuit of their indemnification claims violated the
Companys discharge in bankruptcy. The Individual Defendants filed
counterclaims generally alleging that the Company has an obligation to
indemnify them against the claims in the Fulton County action and that the
Company is estopped from asserting those claims. The Company moved to dismiss
the Individual Defendants estoppel counterclaim. The Individual Defendants
opposed the motion, and on April 10, 2003 the Bankruptcy Court granted the
motion to dismiss.

After the Company filed the Fulton County action, former members of MHGs board
of directors filed an action in the Superior Court of Cobb County, Georgia
against PWC and the Individual Defendants based on claims arising out of MHGs
acquisition of ConvalescentServices, Inc. in 1995 because of the Individual
Defendants and PWCs alleged misrepresentations. This action is William R.
Bassett, et al. v. PricewaterhouseCoopers, LLP, et al., Superior Court of Cobb
County, Georgia, Case No. 02-1-8314-35. The plaintiffs in the Cobb County
action seek damages in excess of $200 million. The Individual Defendants added
the Company as a third-party defendant in the Cobb County action seeking to
recover on indemnification claims similar to those made by them in the Chancery
Court action, and which are now pending, and subject to resolution before the
Bankruptcy Court in the Enforcement Action. The Cobb County action is in the
early stages of discovery.

In May 2003, the Company filed a complaint in the United States District Court
for the Eastern District of Texas, Beaumont Division, entitled Mariner Health
Care, Inc. vs. Indemnity Insurance Company of North America, Inc., Case No. 103
CV 0279. The Company is seeking a declaratory judgment determining its rights
and the obligations of Indemnity Insurance Company of North America, Inc.
(IINA) under an IINA policy of insurance regarding property damage and
related losses at the Companys facilities in Beaumont and Houston, Texas
caused by Tropical Storm Allison in June 2001. The Company additionally
asserts breach of contract and unfair claims handling practices claims against
IINA. The Company further seeks statutory damages, punitive damages and
attorneys fees under Texas Insurance Code and the Texas Civil Practice and
Remedies Code. IINA has answered the Companys complaint and the parties are
in the process of pretrial discovery, with an anticipated trial date in the
third quarter of 2004.

NOTE 6           SEGMENT INFORMATION

As previously disclosed, the Company has one reportable segment in accordance
with SFAS No. 131 Disclosures about Segments of an Enterprise and Related
Information, nursing home services, which provides long-term healthcare
through the operation of skilled nursing and assisted living facilities in the
United States. The Other

13



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##### 



MARINER HEALTH CARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

category includes the Companys non-reportable segments, primarily its LTAC
hospitals, corporate items not considered to be an operating segment and
eliminations.

The Company primarily evaluates segment performance and allocates resources
based on operating margin, which basically represents net revenue less
operating expenses. Operating margin does not include interest income,
interest expense, reorganization items, income taxes or extraordinary items.
The Company does not have any intersegment revenue. Asset information,
including capital expenditures, and net income (loss) beyond operating margins
are not provided by reportable segment to the Companys chief operating
decision maker.

The following tables summarize operating results by reportable segment,
excluding the results of the APS Division, for the periods indicated (in
thousands):

PredecessorReorganized Company
    
    
    CompanyThree Months Ended
    
    Nine Months
    
    Five Months
    

    Four MonthsSeptember 30,
    
    Ended
    
    Ended
    

    Ended2003
    
    2002
    
    September 30, 2003
    
    September 30, 2002
    

    April 30, 2002Revenue from external customersNursing home services
    
    $
    421,622
    
    
    $
    417,390
    
    
    $
    1,233,868
    
    
    $
    693,460
    
    

    $
    564,350Other
    
    
    29,888
    
    
    
    28,476
    
    
    
    87,438
    
    
    
    47,494
    
    

    
    37,087Consolidated revenue
    
    $
    451,510
    
    
    $
    445,866
    
    
    $
    1,321,306
    
    
    $
    740,954
    
    

    $
    601,437Operating marginNursing home services
    
    $
    34,683
    
    
    $
    41,917
    
    
    $
    99,678
    
    
    $
    73,363
    
    

    $
    44,405Other
    
    
    (18,528
    )
    
    
    (13,632
    )
    
    
    (53,074
    )
    
    
    (23,590
    )
    

    
    (21,740
    )Consolidated operating margin
    
    
    16,155
    
    
    
    28,285
    
    
    
    46,604
    
    
    
    49,773
    
    

    
    22,665Depreciation and amortization
    
    
    9,691
    
    
    
    9,429
    
    
    
    27,897
    
    
    
    14,351
    
    

    
    11,733Operating income
    
    $
    6,464
    
    
    $
    18,856
    
    
    $
    18,707
    
    
    $
    35,422
    
    

    $
    10,932


NOTE
7           SUBSEQUENT EVENTS

Florida Sale.Effective October 1, 2003, the Company completed the Florida
Sale, which is classified as assets held for sale in the accompanying balance
sheet, selling 19 Florida SNFs to an affiliate of Formation Capital, LLC and Longwing Real Estate
Ventures, LLC (collectively, Formation) for
$86.0 million. The sold SNFs have 2,385 licensed beds. There is
one
remaining facility, subject to a sale agreement with Formation, which is included in assets held for sale as of September
30, 2003. The Company expects to
complete the sale of the remaining SNF in the disposal group within one year.

The purchase price for the Florida Sale consisted of approximately $73.0
million in gross cash proceeds and a five-year subordinated promissory note in
the amount of $13.0 million bearing interest at 8% annually and payable in full
on September 30, 2008. The net cash proceeds, after transaction costs and
retirement of $11.4 million of facility specific mortgage debt, were
approximately $52.5 million, which were used to reduce the Companys
outstanding senior term loan balance to approximately $156.3 million.

Net divested revenues were $38.0 and $108.9 million for the three and nine month periods
ended September 30, 2003, respectively, attributable to the 19
divested Florida Sale
facilities. Operating loss for the 19 divested Florida SNFs was $2.5 and $4.9 million for the three and nine
month periods ended September 30, 2003, respectively. Depreciation and
amortization expense was $0.3, and $1.2 million for the three and nine month
periods ended September 30, 2003, respectively.

As discussed in Note 3, effective October 1, 2003, the Company entered into an
administrative services agreement with and provided short-term financing to the
new operator of the 19 divested Florida SNFs. Applying the principles of FIN
46 to the administrative service arrangement and the short-term
financing, the Company determined that it is
neither the primary beneficiary nor the holder of any significant variable
interest in the new operator, as delineated by FIN 46. Accordingly, FIN 46
does not require the Company to consolidate the new operator.

14



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MARINER HEALTH CARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Florida Lease Termination.On October 27, 2003, the Company entered into a
definitive agreement with a group of affiliated landlords to terminate seven
capital leases with respect to SNFs located in the state of Florida (the
Florida Lease Termination). The seven SNFs have 840 licensed beds. The
Florida Lease Termination, which the Company anticipates will close on or
before the end of the calendar year, is expected to result in the elimination
of approximately $30 million in capital lease indebtedness from the Companys
balance sheet.

Net revenues were $13.2 and $39.1 million for the three and nine month periods
ended September 30, 2003, respectively, attributable to the seven Florida Lease
Termination facilities. Operating loss was $0.4, and $1.2 million for the
three and nine month periods ended September 30, 2003, respectively.
Depreciation and amortization expense was $0.1 and $0.3 million for the three
and nine month periods ended September 30, 2003, respectively.

Louisiana Lease Termination and Sale.Effective October 31, 2003, certain
subsidiaries of the Company entered into agreements to terminate their
operation of two SNFs in Metairie and Waldon, Louisiana and transfer those
operations to a third party on or about November 30, 2003, which is the same
date that the related lease agreements expire by their terms. On November 7,
2003, the Company entered into a definitive agreement to sell its SNF located
in Jefferson, Louisiana to a third party for $5.0 million. The Jefferson sale
transaction is expected to close on or about November 30, 2003.
Coincident with the
termination of the Metairie and Waldon leases and the sale of the Jefferson
SNF, the Company (through its operating subsidiaries) will no longer own or
operate SNFs in the state of Louisiana.

15



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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

The accompanying unaudited condensed consolidated financial statements set
forth certain information with respect to the financial position, results of
operations and cash flows for our company which should be read in conjunction
with the following discussion and analysis. As used in this report, references
to we, us, our, Mariner or similar terms include Mariner Health Care,
Inc. and its operating subsidiaries.

Mariner is one of the largest providers of long-term healthcare services in the
United States based on net revenue and the number of nursing homes owned,
leased and managed. We provide these services primarily through the operation
of skilled nursing facilities, or SNFs, and long-term acute care hospitals, or
LTACs. As of September 30, 2003, our significant operations consist of 286
owned, leased, or managed SNFs and eight free standing assisted living
facilities and apartments, in 23 states with 35,530 licensed beds, including 20
SNFs with 2,502 beds located in the state of Florida that have been identified
as assets held for sale. A significant concentration of these facilities are
in Texas, North Carolina, Colorado, California and Florida and several
metropolitan markets. Included in the total SNFs are seven managed SNFs with
1,066 licensed beds. At September 30, 2003, we also operated 12 owned, leased,
or managed LTACs in four states with 638 licensed beds. As of September 30,
2003, we owned 192 of our facilities, and 13 of our facilities were leased
under capital leases. Effective October 1, 2003, 19 facilities in
the state of Florida were sold.

Inpatient services provided at our SNFs and LTACs are our primary service
offering and have historically accounted for over 90% of our net revenue and
cash flows. Through our SNFs, we provide 24-hour care to patients requiring
skilled nursing services, including assistance with activities of daily living,
therapy and rehabilitation services. Our LTACs accommodate the relatively high
acuity needs of patients discharged from short-term, acute-care hospitals when
the patients condition warrants more intensive care than can be provided in a
typical nursing facility.

Critical Accounting Policies and Estimates

General.The unaudited condensed consolidated financial statements are based
on the application of critical accounting policies and estimates, which require
management to make significant estimates and assumptions. We believe that some
of the more critical judgment areas in the application of accounting policies
that affect our financial condition and results of operations are estimates and
assumptions pertaining to (a) revenue recognition, (b) collectibility of
accounts receivable, (c) insurance and professional liability risks and (d)
income taxes.

Revenue Recognition.We have agreements with third-party payors that provide
for payments to our SNFs. These payment arrangements may be based upon
prospective rates, reimbursable costs, established charges, discounted charges
or per diem payments. Revenue is reported at the estimated net realizable
amounts from Medicare, Medicaid, other third-party payors and individual
patients for services rendered. Retroactive adjustments that are likely to
result from future examinations by third-party payors are accrued on an
estimated basis in the period the related services are rendered and adjusted as
necessary in future periods based on final settlements. There is a possibility
that recorded estimates may change by a material amount. Consistent with
healthcare industry accounting practices, changes to these third-party revenue
estimates are recorded in the year of change or at the time the adjustment
becomes known. At September 30, 2003, there were no material claims or
disputes with third party payors.

Collectibility of Accounts Receivable.Accounts receivable consist primarily
of amounts due from the Medicare and Medicaid programs, other government
programs, managed care health plans, commercial insurance companies and
individual patients. Estimated provisions for doubtful accounts are recorded
to the extent it is probable that a portion or all of a particular account will
not be collected. In evaluating the collectibility of accounts receivable, we
consider a number of factors, including the age of the accounts, changes in
collection patterns, the composition of patient accounts by payor type, the
status of ongoing disputes with third-party payors and general industry
conditions. Changes in these estimates are charged or credited to the results
of operations in the period of the change. If circumstances occur, such as
economic downturn, higher than expected defaults or denials, or reduced
collections, our estimates of the recoverability of our receivables could be
reduced by a material amount. Our provision for bad debts represented 1.0% and
1.1% of net revenue for the three months ended September 30, 2003 and 2002,

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respectively, and 0.9% and 2.4% of net revenue for the nine months ended
September 30, 2003 and 2002, respectively. Our allowance for doubtful accounts
represented 20.7% and 21.7% of gross accounts receivable at September 30, 2003
and December 31, 2002, respectively.

Insurance and Professional Liability Risks.We currently purchase professional
and general liability insurance, or PL/GL, through a third-party insurance
company, maintaining an unaggregated $1.0 million self-insured retention per
claim, except in Colorado, where we maintain first dollar coverage. Loss
provisions in our condensed consolidated financial statements for self-insured
risks, including incurred but not reported losses, are provided on an
undiscounted basis in the period of the related coverage. These provisions are
based on internal and external evaluations of the merits of individual claims,
analysis of claim history and independent actuarially determined estimates.
The methods of making these estimates and establishing the resulting accrued
liabilities are reviewed frequently by management with any material adjustments
resulting from that review reflected in current earnings. Although management
believes that the current provision for loss is adequate, the ultimate
liability may be in excess of or less than the amounts recorded. In the event
the provision for loss reflected in our financial statements is inadequate, our
financial condition and results of operations may be materially adversely
affected.

Accounting for Income Taxes.The provision for income taxes is based upon our
estimate of taxable income or loss for each respective accounting period. We
recognize an asset or liability for the deferred tax consequences of temporary
differences between the tax bases of assets and liabilities and their reported
amounts in the financial statements. These temporary differences will result
in taxable or deductible amounts in future years when the reported amounts of
assets are recovered or liabilities are settled. We also recognize as deferred
tax assets the future tax benefits from net operating and capital loss carry
forwards.

We have limited operating experience
since our emergence from bankruptcy. Furthermore,
there are significant uncertainties that could materially affect the
realization of some of our deferred tax assets. Accordingly, a valuation
allowance is provided for deferred tax assets because it is more likely than
not that none of the net deferred tax asset will be realized through future
taxable earnings or implementation of tax planning strategies.

If all or a portion of the pre-reorganization deferred tax asset is realized in
the future, or considered more likely than not to be realized by us, the
reorganization intangible recorded in connection with fresh-start reporting
will be reduced accordingly. If the reorganization intangible is eliminated in
full, other intangible assets will then be reduced, with any excess treated as
an increase to capital in excess of par value.

At September 30, 2003, we estimate that there remains $575.0 million of Net
Operating Loss, or NOL, carryforwards, utilization of which is subject to
limitations. There can be no assurances that we will be able to utilize these
NOL carryforwards and consequently, they are subject to a 100% valuation
allowance. The income tax benefit of any NOL carryforward utilization will be
applied first as a reduction to reorganization value in excess of amounts
allocable to identifiable assets and, thereafter, as a direct addition to paid
in capital, pursuant to SOP 90-7, at such time it is assured.

If their is a cumulative ownership
change involving shareholders who own 5% or more of the
Companys common stock of more than 50% during the two year
period following our emergence from bankruptcy (May 13, 2002), the remaining NOL carryforwards will
be forgone with no net impact to the condensed consolidated financial
statements. This could result in higher future tax payments if we are
profitable.

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Results of Operations

The following table represents the unaudited interim statements of operations
of the Reorganized Company for the three and nine months ended September 30,
2003 and the three months ended September 30, 2002, and the combined operations
of the Reorganized Company and Predecessor Company for the nine months ended
September 30, 2002 (in thousands):

CombinedReorganizedCompanyand PredecessorReorganized Company
    
    CompanyThree Months Ended
    
    Nine Months
    
    Nine MonthsSeptember 30,
    
    Ended
    
    Ended2003
    
    2002
    
    September
30, 2003
    
    September 30, 2002Net revenue
    
    $
    451,510
    
    
    $
    445,866
    
    
    $
    1,321,306
    
    
    $
    1,342,391Costs and expensesOperating expenses
    
    
    393,193
    
    
    
    372,730
    
    
    
    1,154,630
    
    
    
    1,144,699General and administrative
    
    
    42,162
    
    
    
    44,851
    
    
    
    120,072
    
    
    
    125,254Depreciation and amortization
    
    
    9,691
    
    
    
    9,429
    
    
    
    27,897
    
    
    
    26,084Total costs and expenses
    
    
    445,046
    
    
    
    427,010
    
    
    
    1,302,599
    
    
    
    1,296,037Operating income
    
    
    6,464
    
    
    
    18,856
    
    
    
    18,707
    
    
    
    46,354Other income (expenses)Interest, net
    
    
    (8,284
    )
    
    
    (8,506
    )
    
    
    (24,686
    )
    
    
    (13,662
    )Reorganization items
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,394,309Other
    
    
    (48
    )
    
    
    (300
    )
    
    
    (99
    )
    
    
    1,079(Loss) income from continuing operations
before income taxes
    
    
    (1,868
    )
    
    
    10,050
    
    
    
    (6,078
    )
    
    
    1,428,080(Benefit) provision for income taxes
    
    
    (747
    )
    
    
    4,100
    
    
    
    (2,431
    )
    
    
    9,363(Loss) income from continuing operations
    
    
    (1,121
    )
    
    
    5,950
    
    
    
    (3,647
    )
    
    
    1,418,717Discontinued operationsGain on sale of discontinued pharmacy
operations, net of income taxes
    
    
    7,200
    
    
    
    
    
    
    
    10,800
    
    
    
    29,082Net income
    
    $
    6,079
    
    
    $
    5,950
    
    
    $
    7,153
    
    
    $
    1,447,799


See Item 1, Note 7, Subsequent Events, for a discussion of the impact of the
Florida Sale (as defined in Note 7) and Florida Lease Termination (as defined
in Note 7) on net revenue, operating income, and depreciation and amortization.

Three Months Ended September 30, 2003(Reorganized Company) Compared to the
Three Months Ended September 30, 2002 (Reorganized Company)

Net Revenue.Net revenue, which is derived from the provision of routine and
ancillary services and is a function of occupancy rates, payor mix and acuity
levels of the patients in our facilities, totaled $451.5 million for the three
months ended September 30, 2003, an increase of $5.6 million, or 1.3%, as
compared to the three months ended September 30, 2002. The increase in net
revenue is primarily attributable to an increase in net revenue of our nursing
home services segment of approximately $4.2 million, or 1.0%, primarily due to
an increase in Medicaid rates and a more favorable payor mix due to an increase
in Medicare census, which was offset by the sunset of certain add-on payments
provided under the Medicare Balanced Budget Refinement Act of 1999 and the
Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000
on September 30, 2002 (the Medicare Reimbursement Cliff).

Net revenue of same facility operations increased approximately $13.0 million,
or 3.0% mainly due to a shift in the patient mix to a higher percentage of
Medicare patients and increases in Medicaid rates. Although Medicare rates

18



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decreased as a result of the Medicare Reimbursement Cliff, the volume of
Medicare patients increased 4.3% in facilities we operated during each of the
three month periods ended September 30, 2003 and 2002 which resulted in an increase in net revenue of approximately
$4.8 million. In addition, our average Medicaid rates for same facility
operations increased 4.5%, which resulted in an increase in net revenue of
approximately $9.3 million.

Overall, our occupancy levels for same facility operations remained consistent
at 86.3% and 86.2% for the three months ended September 30, 2003 and 2002,
respectively. We calculate aggregate occupancy percentages for all of our
nursing facilities by dividing the total number of beds occupied by the total
number of licensed beds available for use during the periods indicated.
Licensed beds refer to the number of beds for which a license has been issued,
which may vary in some instances from licensed beds available for use. We do
not believe there is a consistent industry standard as to how occupancy is
measured; for this reason, this information may not be comparable among
long-term care providers. Occupancy percentages should not be relied upon
alone to determine the profitability of a facility. Other factors affecting
profitability include the sources of payment, terms of reimbursement and the
acuity level for each of the patients in the facilities.

Operating Expenses.Operating expenses for the three months ended September
30, 2003 were $393.2 million, an increase of $20.5 million, or 5.5%, compared
to $372.7 million of operating expenses for the three months ended September
30, 2002. After adjusting for the facilities that have been divested,
operating expenses for the three months ended September 30, 2003 were $393.2,
an increase of $30.3 million, or 8.3% compared to $362.9 million of operating
expenses for the three months ended September 30, 2002.

The increase in operating expenses for same facility operations was primarily
attributable to an increase in labor costs and temporary staffing of $18.6
million, or 7.0%. This 7.0% increase is a result of numerous factors including
increased staffing requirements in order to maintain compliance with various
Medicaid programs, a decline in the number of people entering the nursing
profession and an increased demand for nurses in the healthcare industry.
Various federal, state and local regulations impose, depending on service
provided, a variety of regulatory standards for the type, quality and level of
personnel required to provide care or services. These regulatory requirements
have an impact on staffing levels as well as the mix of staff, and therefore,
impact total costs and expenses. We anticipate that the nursing staff shortage
will accelerate, especially in light of a demographic review indicating that a
significant percentage of people engaged in the nursing profession are nearing
retirement age with no significant group of nursing staff candidates to fill
anticipated vacancies. Our other significant operating expense increases
included increases in ancillary costs, which include various types of
therapies, medical supplies and prescription drugs, of $3.5 million, or 12.7%,
and insurance expense of $4.3 million, or 15.5%. Ancillary costs increased as
a result of more medically complex patients due to a shift in the patient mix
as discussed above. Insurance expense is expected to decrease as a result of
the divestiture of the Florida SNFs and the termination of
leases with respect to seven Florida facilities.

General and Administrative.General and administrative expenses for the three
months ended September 30, 2003 were $42.2 million, a decrease of $2.7 million,
or 6.0%, compared to $44.9 million of general and administrative expenses for
the three months ended September 30, 2002. After adjusting for the facilities
that have been divested, general and administrative expenses for the three
months ended September 30, 2003 were $41.2 million, a decrease of $1.8 million,
or 4.2%, compared to $43.0 million of general and administrative expense for
the three months ended September 30, 2002. The decrease in general and
administrative expenses for same facility operations is a result of our
reductions in overhead.

Depreciation and Amortization.Depreciation and amortization expense for the
three months ended September 30, 2003 was $9.7 million, an increase of $0.3
million, or 3.2%, compared to $9.4 million of depreciation and amortization
expenses for the three months ended September 30, 2002. The increase is
attributable to incremental depreciation expense on capital expenditures made
since the prior year in excess of fixed asset divestitures and retirements.

Operating Income.Operating income for the three months ended September 30,
2003 was $6.5 million, while operating income was $18.9 million for the three
months ended September 30, 2002, a net decrease of $12.4 million. After
adjusting for divested facilities, operating income was $7.5 million and $23.3
million, respectively, a decrease of $15.8 million, or 67.8%, for the three
months ended September 30, 2003 and 2002, respectively. The decrease in
operating income was due primarily to the Medicare Reimbursement Cliff and increased labor costs.

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Interest, net.Interest expense, net of interest income for the three months
ended September 30, 2003 was $8.3 million, a decrease of $0.2 million, compared
to $8.5 million for the three months ended September 30, 2002. This decrease
is due to a decrease in interest expense of $0.9 million as a result of a lower
weighted average borrowing rate and a decrease of interest income of $0.7
million, which is primarily attributable to an overall decline in interest
rates.

Discontinued Operations.On January 6, 2002, we consummated the sale of our
institutional pharmacy services business, or APS Division, to Omnicare, Inc.
and its wholly owned affiliate, APS Acquisition LLC, or Omnicare. During the
three months ended December 31, 2001, we received the approval of the
United States Bankruptcy Court for the District of Delaware, or the Bankruptcy
Court to sell the APS Division, subject to an auction and
overbidding process under the supervision of the Bankruptcy Court. As a
result, an auction of the assets comprising the APS Division was held on
December 4, 2001, at which time, following competitive bidding at the auction,
Omnicare was determined to have made the highest and best bid for the assets of
the APS Division. On December 5, 2001, the Bankruptcy Court approved the sale
of the APS Division to Omnicare for a cash closing price of $97.0 million and
up to $18.0 million in future payments, depending upon certain post-closing
operating results of the APS Division, or the Earnout Payments. During the
four months ended April 30, 2002, we realized a gain on the sale of the APS
Division of $29.1 million. On July 23, 2003, we and Omnicare entered into an
agreement whereby all conditions for the remaining Earnout Payments were
considered to have been met and we received the remaining $12.0 million on
August 5, 2003, at which time we recorded a gain of $7.2 million, net of taxes
of $4.8 million.

Income Taxes. We recorded $4.0 million of income tax expense on income
generated in the three months ended September 30, 2003. The $4.0
million income tax expense recorded is the result of a $4.8
million of income tax expense allocable to the gain on sale of discontinued
pharmacy operations, which is reported net of the gain on the statement of
operations, offset by the remaining $0.8 million of income tax benefit allocable to
the losses generated from continuing operations. We recorded $4.1 million of
income tax expense on income generated in the three months ended September 30,
2002.

Nine Months Ended September 30, 2003(Reorganized Company) Compared to the Nine
Months Ended September 30, 2002 (Reorganized Company and Predecessor Company)

Net Revenue.Net revenue totaled $1,321.3 million for the nine months ended
September 30, 2003, a decrease of $21.1 million, or 1.6%, as compared to the
nine months ended September 30, 2002. The decrease in net revenue is primarily
attributable to a decrease in net revenue of our nursing home services segment
of approximately $23.9 million, or 1.9%. The decrease in net revenue from our
nursing home services segment is attributable to a decrease in Medicare rates
as a result of the Medicare Reimbursement Cliff and the divestiture of certain
SNFs, in large part offset by an increase in net revenue in facilities we
operated during each of the nine month periods ended September 30, 2003 and
2002.

Net revenue of same facility operations increased approximately $27.0 million,
or 2.1%, mainly due to a shift in the patient mix to a higher percentage of
Medicare patients and increases in Medicaid rates. Although Medicare rates
decreased as a result of the Medicare Reimbursement Cliff, the volume of
Medicare patients increased 6.8% for our same facility operations, which
resulted in an increase in net revenue of approximately $22.9 million. In
addition, our average Medicaid rates for same facility operations increased
3.7%, which resulted in an increase in net revenue of approximately $22.6
million.

Overall, our occupancy levels for same facility operations remained consistent
at 86.0% and 86.2% for the nine months ended September 30, 2003 and 2002,
respectively.

Operating Expenses.Operating expenses for the nine months ended September 30,
2003 were $1,154.6 million, an increase of $9.9 million, or 0.9%, compared to
$1,144.7 million of operating expenses for the nine months ended September 30,
2002. After adjusting for the facilities that have been divested, operating
expenses for the nine months ended September 30, 2003 were $1,153.4, an
increase of $79.3 million, or 7.4%, compared to $1,074.1 million of operating
expenses for the nine months ended September 30, 2002. The increase in
operating expenses on same facility basis was primarily attributable to an
increase in labor costs and temporary staffing of $48.6 million, or 6.1%. As
previously discussed, this increase is a result of numerous factors, including
increased staffing requirements in order to maintain compliance with various
Medicaid programs, a decline in the number of people entering the nursing
profession and an increased demand for nurses in the healthcare industry.

20



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The remaining increase in operating expenses included an increase in ancillary
services of $17.2 million, or 21.4%, as a result of more medically complex
patients due to a shift in the patient mix, and insurance expense of $9.0
million, or 11.1%, due to the increase of PL/GL insurance expense experienced in the industry (see Other Factors Affecting
Liquidity and Capital Resources). These increases in operating expenses were
partially offset by a decrease in the provision for bad debt of $20.4 million,
or 62.8%, from a charge recorded in the nine months ended September 30, 2002
due to a re-evaluation of our allowance for doubtful accounts triggered by the
deterioration in the aging of certain categories of receivables related to
facilities which were previously divested.

General and Administrative.General and administrative expenses for the nine
months ended September 30, 2003 were $120.1 million, a decrease of $5.2
million, or 4.2%, compared to $125.3 million of general and administrative
expenses for the nine months ended September 30, 2002. After adjusting for the
facilities that have been divested, general and administrative expenses for the
nine months ended September 30, 2003 were $117.3 million, a decrease of $2.5
million, or 2.1%, compared to $119.8 million of general and administrative
expense for the nine months ended September 30, 2002 on a same facility basis.
The decrease in general and administrative expenses for same facility
operations is a result of our reductions in overhead.

Depreciation and Amortization.Depreciation and amortization expense for the
nine months ended September 30, 2003 was $27.9 million, an increase of $1.8
million, or 6.9%, compared to $26.1 million of depreciation and amortization
expenses for the nine months ended September 30, 2002. The increase resulted
from the change in carrying values that were adjusted in fresh-start accounting
to reflect fair value on May 1, 2002 and the impact of current year additions.

Operating Income.Operating income for the nine months ended September 30,
2003 was $18.7 million, while operating income was $46.3 million for the three
months ended September 30, 2002, a net decrease of $27.6 million. After
adjusting for divested facilities, operating income was $23.7 million and $76.1
million, respectively, a decrease of $52.4 million, or 68.8%, for the nine
months ended September 30, 2003 and 2002, respectively. The decrease in
operating income was due to the Medicare Reimbursement Cliff and in increase in
labor costs.

Interest, net.Interest expense, net of interest income for the nine months
ended September 30, 2003 was $24.7 million, an increase of $11.0 million,
compared to $13.7 million for the nine months ended September 30, 2002. This
increase is due to an increase in interest expense of $8.4 million as a result
of our new capital structure upon emergence from bankruptcy and a decrease of
interest income of $2.6 million, which is primarily attributable to a decrease
in cash as a result of the consummation of our second amend and
restated joint plan of reorganization filed on February 1, 2002 in
the Bankruptcy Court and an overall decline in interest rates.

Reorganization Items.Reorganization items, which consisted of income,
expenses and other gains and losses incurred as a result of the bankruptcy
filings, resulted in a $1.4 billion gain for the nine months ended September
30, 2002, which consisted primarily of a $1.2 billion gain on extinguishment of
debt and $0.3 billion of fresh-start valuation adjustments. There were no
reorganization items reflected in our results of operations in the comparable
nine month period ended September 30, 2003 since we emerged from bankruptcy on
May 13, 2002. During the nine month period ended September 30, 2003, we paid
$7.4 million of reorganization items primarily related to legal fees.

Discontinued Operations.On January 6, 2002, we consummated the sale of our
APS Division to Omnicare. During the three months ended December 31, 2001, we
received the approval of the Bankruptcy Court to sell the APS Division, subject
to an auction and overbidding process under the supervision of the Bankruptcy
Court. As a result, an auction of the assets comprising the APS Division was
held on December 4, 2001, at which time, following competitive bidding at the
auction, Omnicare was determined to have made the highest and best bid for the
assets of the APS Division. On December 5, 2001, the Bankruptcy Court approved
the sale of the APS Division to Omnicare for a cash closing price of $97.0
million and up to $18.0 million in Earnout Payments. During the four months
ended April 30, 2002, we realized a gain on the sale of the APS Division of
$29.1 million. During the three months ended March 31, 2003, we received the
first Earnout Payment of $6.0 million and recorded a gain of $3.6 million, net of taxes
of $2.4 million. We entered into an agreement with Omnicare on July 23, 2003,
whereby all conditions for the remaining Earnout Payments were considered to
have been met. During the nine months ended September 30, 2003 we received
$18.0 million, at which time we recorded a gain of $10.8 million, net of taxes
of $7.2 million (which includes the $3.6 million referred to in
the preceding sentence).

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Income Taxes. We recorded $4.8 million of income tax expense on income
generated in the nine months ended September 30, 2003. Of this amount, $7.2
million of income tax expense was allocable to the gain on sale of discontinued
pharmacy operations, and is reported net of the gain on the statement of
operations. The remaining $2.4 million of income tax benefit is allocable to
the losses generated from continuing operations. We recorded $9.4 million of
income tax expense on income generated in the nine months ended September 30,
2002.

Liquidity and Capital Resources

Working Capital and Cash Flows

At September 30, 2003, we had working capital of $165.8 million and cash and
cash equivalents of $49.6 million, compared to working capital of $116.6
million and cash and cash equivalents of $38.6 million at December 31, 2002.
The $49.2 million increase in working capital related primarily to the
classification of assets held for sale. For the nine months ended September
30, 2003, net cash provided by operating activities of continuing operations
before payment of reorganization items was $38.6 million. Net cash provided by
operating activities of continuing operations before payment of reorganization
items was $64.9 million for the nine months ended September 30, 2002. Our
operations cash flows decreased $26.3 million primarily due to divested
facilities, a decrease in operating income, the negative impact of the Medicare
Reimbursement Cliff, and an increase in PL/GL insurance settlement payments for
the nine months ended September 30, 2003.

Purchases of property and equipment were $52.4 million for the nine months
ended September 30, 2003 and $44.8 million for the nine months ended September
30, 2002, both of which were financed through internally generated funds.
Capital expenditures for the nine months ended September 30, 2003 included $7.9
million related to certain facilities that were damaged by floods for which
insurance proceeds of $2.9 million were received in the nine months ended
September 30, 2003. We anticipate receiving additional funds from our
insurance providers to cover these expenditures.

Our operations require capital expenditures for renovations of existing
facilities in order to continue to meet regulatory requirements, upgrade
facilities for the treatment of sub-acute patients, accommodate the addition of
specialty medical services and improve the physical appearance of facilities
for marketing purposes. In addition, capital expenditures are required for
completion of certain facility expansions, new construction projects and
supporting non-nursing home operations. We also anticipate spending a portion
of our planned capital expenditures for the twelve months ending December 31,
2003 on additions to our information technology systems, which include a new
centralized clinical billing function and enhancements to other accounting and
human resource systems. Some of the costs associated with these additions may
qualify as capital expenditures in accordance with American Institute of
Certified Public Accountants Statement of Position 98-1, Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use. During the
nine months ended September 30, 2003 we capitalized approximately $32.2 million
related to this initiative.

During the nine months ended September 30, 2003, we received $18.0 million of
Earnout Payments related to the sale of the APS Division, which occurred prior to our emergence from
bankruptcy (see Note 3 of the accompanying unaudited condensed consolidated
financial statements). During the nine months ended September 30, 2002, we
received net proceeds from the disposition of assets of $95.2 million, which
primarily related to the sale of the APS Division.

During the nine months ended September 30, 2003, we made aggregate principal
repayments of long-term debt of $4.5 million, of which $1.6 million related to
scheduled repayments of our Senior Credit Facility (as hereinafter defined).
The remaining $2.9 million related to scheduled repayments of our mortgages and
capital leases.

Subsequent to September 30, 2003,
we received net proceeds of $73.0 million
from the sale of 19 SNFs in the state of Florida, of which $52.5 million was
used to reduce total outstanding borrowings under our Senior Credit Facility
and $11.4 million was used to pay-off facility specific mortgages.

Based upon existing cash levels, expected operating cash flows and capital
spending, and the availability of borrowings under our revolving credit facility, management believes that we
have the necessary

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financial resources to satisfy our liquidity needs for the foreseeable future.
For a discussion of items that may have an adverse impact on our future
liquidity, see Cautionary Statements below.

Capital Resources

As a result of the sale of the Florida facilities subsequent to September 30,
2003, we reduced our Term Loan borrowings by $52.5 million. We are currently
evaluating the secured and unsecured debt markets for potential refinancing
opportunities for both our Senior Credit Facility and Second Priority Notes (as hereinafter defined);
 however, we can make no assurances that we will be able to
conduct a refinancing, if any, on better terms than currently exist.

Senior Credit Facility.We are currently the borrower
under a $297.0 million
senior credit facility (the Senior Credit Facility), with a syndicate of
lenders that provides for a $212.0 million six-year term loan facility (the
Term Loan) and an $85.0 million revolving credit facility (the Revolving
Credit Facility).

At September 30, 2003, $208.8 million in borrowings were outstanding under the
Term Loan, which bears interest, at our election, using either a base rate or
eurodollar rate, plus an applicable margin which ranges from 2.25% to 3.25% for
base rate loans and 3.25% to 4.25% for eurodollar rate loans, subject to
quarterly adjustment depending on our total debt leverage ratio. At September
30, 2003, the per annum interest rate on outstanding the Term Loan ranged from
5.37% to 7.25%.

The Term Loan amortizes in quarterly installments at a rate of 0.25% of the
original principal balance, or $0.5 million, payable on the last day of each
fiscal quarter and mature on May 13, 2008. The Term Loan can be prepaid at our
option without penalty or premium and is subject to mandatory prepayment in
certain events such as some asset or securities sales or our receipt of certain
insurance proceeds. The Term Loan is also subject to annual mandatory
prepayment to the extent of 75% of our consolidated excess cash flow. Any
mandatory prepayment of our Term Loan reduces our remaining financial
flexibility by reducing our available cash balance. While we are currently
unable to quantify the extent to which this will affect our future operations,
it is possible that it will make it more difficult or impossible for us to fund
future operations, which could impair our operating results.

Borrowings under the $85.0 million Revolving Credit Facility may be used for
general corporate purposes, including working capital and permitted
acquisitions. Usage under the Revolving Credit Facility, which matures on May
13, 2007, is subject to a borrowing base determined using a percentage of our
eligible accounts receivable and a percentage of the real property collateral
value of substantially all of our SNFs. No borrowings were outstanding under
the Revolving Credit Facility as of September 30, 2003; however, approximately
$36.3 million of letters of credit issued under the Revolving Credit Facility
were outstanding on that date which reduces our borrowing capacity under the
Revolving Credit Facility on a dollar-for-dollar basis.

The Senior Credit Facility is guaranteed by substantially all of our
subsidiaries and is secured by liens and security interests on substantially
all of our real property and personal property assets. In addition to those
described above, covenants negotiated in the Senior Credit Facility restrict
our ability to borrow funds in the event we maintain a cash book balance in
excess of $25.0 million and also require us to maintain compliance with certain
financial and non-financial covenants, including minimum fixed charge coverage
ratios, minimum consolidated adjusted EBITDA (as defined in the Senior Credit
Facility), maximum total leverage and senior leverage ratios, as well as
maximum capital expenditures. Effective March 31, 2003, we amended our Senior
Credit Facility to adjust certain financial covenants through December 31,
2004, which also increased our interest rates. We were in compliance with the
financial covenants at September 30, 2003.

Effective as of October 1, 2003, we further amended our Senior Credit Facility
to permit the sale of 20 Florida skilled nursing facilities to an affiliate of
Formation Capital LLC and Longwing Real Estate Ventures, LLC, and the
termination of capital leases on seven other Florida facilities. That
amendment also adjusts our capital expenditure covenant and extends the
deadline for us to hedge a portion of our variable interest rate interest
exposure.

Second Priority Notes.We are also the borrower
of $150.0 million secured
debt, or the Second Priority Notes, which bear interest at a 3-month LIBOR,
adjusted quarterly, plus 550 basis points. At September 30, 2003, the interest
rate payable under the Second Priority Notes was 6.6%. The Second Priority
Notes mature on May 13, 2009, and are subject to redemption without premium or
penalty at any time, at our option. The Indenture covering these notes
includes affirmative and negative covenants customary for similar financings,
including, restrictions on

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additional indebtedness, liens, restricted payments, investments, asset sales,
affiliate transactions and the creation of unrestricted subsidiaries. At
September 30, 2003, we were in compliance with all of the covenants. Liens and
security interests in the same collateral as that pledged to secure the Senior
Credit Facility secure these obligations. However, the liens and security
interests benefiting the Second Priority Note holders and trustee rank
immediately junior in priority behind the liens and security interests securing
the Senior Credit Facility.

Non-Recourse Indebtedness of Unrestricted Subsidiary.Professional Health Care
Management, Inc., or PHCMI, a wholly owned subsidiary of ours, is the borrower
under an approximately $59.7 million mortgage loan from Omega Healthcare
Investors, Inc., or Omega, that was restructured as part of the Chapter 11
cases. The loan, or the Omega Loan, bears interest at a rate of 11.57% per
annum, is guaranteed by all the subsidiaries of PHCMI and is secured by liens
and security interests on all or substantially all of the real property and
personal property of PHCMI and its subsidiaries, or the PHCMI Entities,
including nine SNFs located in Michigan and three others in North Carolina,
collectively referred to as the Omega Facilities. Omega is also entitled to
receive an annual amendment fee equal to 25% of the free cash flow from the
Omega Facilities.

The Omega Loan provides for interest only payments until its scheduled maturity
on August 31, 2010, which may be extended at PHCMIs option until August 31,
2021. Prior to maturity, the Omega Loan is not subject to prepayment without
the consent of Omega except (a) between February 1, 2005 and July 31, 2005, at
103% of par, and (b) within six months prior to the scheduled maturity date, at
par, in each case plus accrued and unpaid interest.

The Omega Loan constitutes non-recourse indebtedness to the rest of the legal
entities of Mariner excluding PHCMI, or the MHC Entities. None of the MHC
Entities have guaranteed the Omega Loan or pledged assets to secure the Omega
Loan, other than the pledge of PHCMIs issued and outstanding capital stock.
In addition, none of the PHCMI Entities have guaranteed either our Senior
Credit Facility or the Second Priority Notes, nor have they pledged their
assets for those indebtednesses. The Omega Loan restricts the extent to which
PHCMI can incur other indebtedness, including intercompany indebtedness from
PHCMIs shareholders.

Other Factors Affecting Liquidity and Capital Resources

Healthcare Regulatory and Legislative Matters.Due to the impact of the
Medicare Reimbursement Cliff, we are currently receiving a lower rate of
Medicare reimbursement for services provided after September 30, 2002 than we
did before that date. The remaining increases in Medicare reimbursement for
high-acuity patients provided for under the Medicare Balanced Budget Refinement
Act of 1999, and the Medicare, Medicaid, and SCHIP Benefits Improvement and
Protection Act of 2000 are expected to terminate when the Centers for Medicare
& Medicaid Services, or CMS, implements a resource utilization group
refinement. CMS announced that it was delaying the implementation of any
further refinements to the reimbursement rates until October 1, 2004, at the
earliest. Not accounting for other factors, such as pending refinements to the
Medicare reimbursement system, potential Medicaid cuts and increased labor
costs as previously described, the Medicare Reimbursement Cliff alone resulted
in a loss of revenue of approximately $8.8 million for the quarter ended
September 30, 2003. The Medicare Reimbursement Cliff is expected to result in
a loss of revenue of $9.4 million in the last three months of 2003 and up to
approximately $37.0 million annually, thereafter before taking into account the
mitigating legislation described below. The impact, and expected continued
impact, of the Medicare Reimbursement Cliff has and will continue to materially
adversely affect our cash flows for the indefinite future.

On August 4, 2003 CMS published in the Federal Register the final fiscal year
2004 skilled nursing facility prospective payment system rules effective
October 1, 2003. The final rules make two significant enhancements to the
market basket adjusting the fiscal year 2004 base rates by a total of 6.26% (3%
increase in the annual update factor and a 3.26% upward adjustment correcting
for previous forecast errors). These two changes are estimated to increase
Medicare payment rates per patient day by approximately $19. The actual
increase will vary from facility to facility because of geographic wage
adjustments and variances in patient acuity. The final rules also provide for
the continuation through fiscal year 2004 of certain payment add-ons, which
were authorized in the Balanced Budget Refinement Act of 1999 to compensate for
the cost of providing non-therapy ancillary services.

We also are reimbursed for services, such as rehabilitation therapy services,
provided to SNF patients under the Medicare Part B benefit. The Balanced
Budget Act of 1997, or the Balanced Budget Act, changed the reimbursement
methodology for Medicare Part B therapy services from cost based to fee screen
payments. It also imposed annual limits per beneficiary of $1,500 for physical
therapy and speech language pathology combined and

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$1,500 for occupational therapy. Subsequent moratoria on imposition of the
therapy limits expired on December 31, 2002; however, CMS instructed Medicare
contractors to continue to pay claims without limits until they developed a
system to monitor the volume of services provided to beneficiaries. The per
beneficiary limits were to be imposed beginning July 1, 2003 at $1,590 for
physical therapy and speech language pathology combined and $1,590 for
occupational therapy; however, imposition of the limits was further delayed
until September 1, 2003 and will be applicable through the end of calendar year
2003. In the absence of further Congressional action on this issue, new limits
will be established for calendar year 2004 and later and will be adjusted by a
Medicare economic index. We are unable to quantify whether the reinstatement
of limits on reimbursement for Part B therapy services will have an impact on
our business or the extent of the possible impact, as this will be a function
of the number of patients receiving therapy and the level of therapy they
require.

CMS has issued regulations to replace the reasonable cost-based payment system
for LTACs with a prospective payment system, or PPS. As of October 1, 2002, and
subject to a five-year phase-in period during which reimbursement will be based
on a blend of federal rates and a cost-based reimbursement system (although
some facilities can elect to adopt the full federal rates immediately), LTACs
are paid under this new PPS. This PPS uses information from patient records to
classify patients into distinct long-term care diagnosis related groups, based
on clinical characteristics and expected resource needs. Separate per-discharge
payments will be calculated for each diagnosis related group. All of our LTACs
have elected to adopt the full federal rate immediately. Our LTACs have not
experienced any adverse effect to date as a result of the new LTAC PPS.

In June 2003, the U.S. House and Senate adopted separate Medicare reform bills
that would, if enacted, institute wide-ranging changes in Medicare
reimbursement policies for a variety of Medicare providers. In their current
form, neither of the bills currently would materially affect Medicare SNF or
LTAC reimbursement rates. Nevertheless, no assurances can be given that
legislation ultimately enacted by Congress, if any, would not reduce Medicare
reimbursement levels or impose additional costs on our business.

Upon our emergence from bankruptcy, we had ten Medicare fiscal intermediaries
through which Medicare claims were paid and cost reports were filed and
settled. In order to streamline the Medicare billing and cost reporting
process, we requested that all of our facilities be converted to one fiscal
intermediary, Mutual of Omaha, or Mutual, starting with Medicare years
beginning after September 30, 2002. The primary dates for conversion were
October 1, 2002, January 1, 2003 and April 1, 2003.

The Balanced Budget Act contained a number of changes affecting the Medicaid
program. Significantly, the law repealed the Boren Amendment, which required
state Medicaid programs to reimburse nursing facilities for the costs that are
incurred by efficiently and economically operated nursing homes. Since that
repeal, many states where we maintain significant operations have sought to
lower their nursing home payment rates, and several have succeeded. It is
unclear at this time the extent to which additional state Medicaid programs
will adopt changes in their Medicaid reimbursement systems, or, if adopted and
implemented, what effect these initiatives would have on us. Additionally,
rising Medicaid costs and decreasing state revenue caused by current economic
conditions have prompted an increasing number of states to cut Medicaid funding
or limit access to their Medicaid programs as a means of balancing their state
budgets. Existing and future initiatives affecting Medicaid reimbursement may
reduce utilization of (and reimbursement for) nursing facility services. We
cannot assure you that future changes in Medicaid reimbursement rates to
nursing facilities will not have a material adverse effect on us.

The Health Insurance Portability and Accountability Act of 1996 established
privacy regulations to improve the efficiency and effectiveness of the health
care system by standardizing the electronic transmission of certain
administrative and financial transactions. HIPAA seeks to protect the security
and privacy of identifiable health information for individual patients. HIPAA
regulations require that electronic transactions, claims information, plan
eligibility, referral certification and authorization, claims status, plan
enrollment and disenrollment and payment and remittance advice, be transmitted
electronically and uniformly. This new method of submitting information,
including payment information, to our fiscal intermediaries, Medicaid agencies
and other third party payors was originally required under HIPAA to be
implemented on October 16, 2003.

On September 23, 2003, the Department of Health and Human Services, or DHHS,
acknowledged that not all of the health care providers and health plans, state
Medicaid offices and third party payors are capable of accepting claims
transactions in a manner that is compliant with the HIPAA Standard Transactions
and Code Set specifications.

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Therefore, DHHS has agreed to allow covered entities to accept both
HIPAA-complaint and non-compliant transactions until such time as DHHS
determines that compliance has been achieved. Our claims are submitted by
paper claims, direct data entry or through the use of a health care
clearinghouse. Our clearinghouse has advised us that it has been testing and
is currently compliant with the Standard Transactions and Code Set
specification. We are prepared to utilize our contingency plan if necessary.
Although we can make no assurances, we do not anticipate that our liquidity
will be adversely affected during the transition.

Insurance.Insurance related costs in the long-term care industry continue to
rise at a dramatic rate. This primarily includes PL/GL, workers compensation
and directors and officers liability programs. Significant increases in the
frequency and severity of PL/GL claims also continues. Insurance markets have
responded to this significant increase by severely restricting the availability
of PL/GL insurance coverage. As a result of these changes, fewer companies are
engaged in insuring long-term care companies for PL/GL losses, and those that
do offer insurance coverage do so at a very high cost. These increases have
already had an adverse effect on our operations. No assurance can be given
that our PL/GL costs will not continue to rise, or that PL/GL coverage will be
available to us in the future. We are in the process of exiting operations in
certain states in which PL/GL insurance coverage has become cost prohibitive to
maintain. We are evaluating other states to determine whether to continue
operations in those markets.

In some states in which we have significant operations, insurance coverage for
the risk of punitive damages arising from PL/GL claims and/or litigation may
not, in certain cases, be available due to state law prohibitions or
limitations of availability. We cannot assure you that we will not be liable
for punitive damage awards that are either not covered by, or are in excess of,
our insurance policy limits. We also believe that there has been, and will
continue to be, an increase in governmental investigations of long-term care
providers, particularly in the area of Medicare/Medicaid false claims, as well
as an increase in enforcement actions resulting from these investigations.
Insurance is not available to cover such losses, and any adverse determination
in a legal proceeding or governmental investigation, whether currently asserted
or arising in the future, could have a material adverse effect on our financial
condition.

Due to the rising cost and limited availability of PL/GL insurance, we
currently purchase excess PL/GL liability insurance only and maintain an
unaggregated $1.0 million self-insured retention per claim, in all states
except Colorado, where we maintain first dollar coverage. Additionally, we
currently self insure the first $0.5 million of each employee injury claim.
Because we are largely self-insured on both of these programs, there is no
limit on the maximum number of claims or amount for which we can be liable in
any policy period. Although we base our loss estimates on independent
actuarial analyses using the information we have to date, the amount of the
losses could exceed our estimates. In the event our actual liability exceeds
our estimates for any given period, our results of operations and financial
condition could be materially adversely impacted.

Cautionary Note Regarding Forward-Looking Statements

Certain statements in this quarterly report on Form 10-Q may constitute
forward-looking statements as defined in Section 27A of the Securities Act of
1933, or the Securities Act, Section 21E of the Securities Exchange Act of
1934, or the Exchange Act, the Private Securities Litigation Reform Act of
1995, or the PSLRA, or in releases made by the Securities and Exchange
Commission, or the SEC, all as may be amended from time to time. Statements contained in
this quarterly report that are not historical facts may be forward-looking
statements within the meaning of the PSLRA. Any such forward-looking
statements reflect our beliefs and assumptions and are based on information
currently available to us. Forward-looking statements are only predictions and
involve known and unknown risks, uncertainties and other factors that may cause
our actual results, performance or achievements, or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. These cautionary
statements are being made pursuant to the Securities Act, the Exchange Act and
the PSLRA with the intention of obtaining the benefits of the safe harbor
provisions of such laws. Mariner cautions investors that any forward-looking
statements we make are not guarantees or indicative of future performance. For
additional information regarding factors that may cause our results of
operations to differ materially from those presented herein, please see Risk
Factors contained in our annual report on Form 10-K for the fiscal year ended
December 31, 2002.

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You can identify forward-looking statements as those that are not historical in
nature, particularly those that use terminology such as may, will,
should, expect, anticipate, contemplate, estimate, believe, plan,
project, predict, potential or continue, or the negative of these, or
similar terms. In evaluating these forward-looking statements, you should
consider the following factors, as well as others contained in our public
filings from time to time, which may cause our actual results to differ
materially from any forward-looking statement:



| |  |  | our existing and future indebtedness;
| | - |  | -------------------------------------



| |  |  | changes in Medicare, Medicaid and certain private payors reimbursement levels;
| | - |  | -------------------------------------------------------------------------------



| |  |  | existing government regulations and changes in, or the failure to
comply with, governmental regulations;
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | the ability to control costs and implement measures designed to enhance operating efficiencies;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | legislative proposals for health care or tort reform;
| | - |  | -----------------------------------------------------



| |  |  | competition;
| | - |  | ------------



| |  |  | the ability to attract and retain qualified personnel at a reasonable cost;
| | - |  | ---------------------------------------------------------------------------



| |  |  | changes in current trends in the cost and volume of general and professional liability claims;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | possible investigations or proceedings against us initiated by states or the federal government;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | state regulation of the construction or expansion of health care providers;
| | - |  | ---------------------------------------------------------------------------



| |  |  | litigation;
| | - |  | -----------



| |  |  | unavailability of adequate insurance coverage on reasonable terms; and
| | - |  | ----------------------------------------------------------------------



| |  |  | an increase in senior debt or reduction in cash flow upon our purchase or sale of assets.
| | - |  | -----------------------------------------------------------------------------------------

Any subsequent written or oral forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by the
cautionary statements set forth or referred to above, as well as the risk
factors contained in our Annual Report for the year ended December 31, 2002 on
Form 10-K. Except as required by law, we disclaim any obligation to update
such statements or to publicly announce the result of any revisions to any of
the forward-looking statements contained herein to reflect future events or
developments.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

At September 30, 2003, the fair value of our fixed rate long-term debt exceeded
the carrying value by $2.8 million, which represented an increase in fair value
since year-end. See the discussion of our market risk in our Annual Report for
the year ended December 31, 2002 on Form 10-K filed with the SEC.

ITEM 4. CONTROLS AND PROCEDURES

We currently have in place systems relating to disclosure controls and
procedures with respect to the accurate and timely recording, processing,
summarizing and reporting of information required to be disclosed in our
Exchange Act reports. We periodically review and evaluate these disclosure
controls and procedures systems to ensure this information is accumulated and
communicated to management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions about required
disclosure. In completing our review and evaluation in connection with the
preparation of this quarterly report within 90 days prior to the date of the
report, management necessarily applied its judgment in assessing the costs and
benefits of these controls and procedures which, by their nature, can provide
only reasonable assurance regarding managements control objectives.

Also, in connection with the audit of our financial statements for the year
ended December 31, 2002, our independent auditor reported to senior management
and the audit committee that they concluded we had, during the

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period covered by that audit, an insufficient number of corporate accounting
personnel with the appropriate experience for their responsibilities and the
accurate assessment and application of accounting principles. Since our
emergence from bankruptcy, we have been addressing and continue to address this
issue through the hiring of additional qualified accounting and finance
personnel. Notwithstanding the foregoing, the Chief Executive Officer and
Chief Financial Officer believe our internal controls and procedures are
effective, in all material respects. There have been no significant changes in
our internal controls or in other factors that could significantly affect our
internal controls, other than the hiring of additional personnel, which we will
continue to do. On May 27, 2003, the SEC promulgated rules extending the date
for compliance with Section 404 of the Sarbanes-Oxley Act of 2002 to December
2004 and implementing certain other requirements under this law. We have
engaged an outside consultant in order to work with us in evaluating our
internal control procedures. We cannot provide assurance that our current
internal controls will not change in the future to reflect potential new rules
of the SEC.

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PART II

ITEM 1. LEGAL PROCEEDINGS

Not applicable.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

Exhibit Number
    
    Description of Exhibit10.1
    
    Third Amendment to Credit and Guaranty Agreement dated as of
September 30, 2003 by and among Mariner Health Care, Inc.,
certain subsidiaries of Mariner Health Care, Inc. and certain
other signatories thereto.10.2
    
    Asset Purchase Agreement dated as of August 19, 2003 by and
among Formation Properties III, LLC, certain affiliates of
Formation Properties III, LLC, Mariner Health Care, Inc. and
certain subsidiaries of Mariner Health Care, Inc.10.3
    
    First Amendment to Asset Purchase Agreement dated as of
September 30, 2003 by and among Formation Properties III, LLC,
certain affiliates of Formation Properties III, LLC, Mariner
Health Care, Inc. and certain subsidiaries of Mariner Health
Care, Inc.10.4
    
    Promissory Note dated as of October 1, 2003 from FC Properties
III, LLC in favor of Mariner Health Care, Inc.31.1
    
    Chief Executive Officer Certification Rule 13a-14(a)/15d-14(a)


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31.2
    
    Chief Financial Officer Certification Rule 13a-14(a)/15d-14(a)32.1
    
    Chief Executive Officer Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 200232.2
    
    Chief Financial Officer Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002


(b) Reports on Form 8-K

On August 20,
2003, Mariner filed a Current Report on Form 8-K announcing the execution of an agreement to sell 20 facilities
located in Florida.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

MARINER HEALTH CARE, INCBy:
    
    /s/ C. Christian WinkleC. Christian Winkle
President and Chief Executive Officer


Date:   November 14, 2003

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

Signature
    
    Title
    
    Date/s/ C. Christian WinkleC. Christian Winkle
    
    President, Chief Executive Officer and
Director (Principal Executive Officer)
    
    November 14, 2003/s/ Michael E. BoxerMichael E. Boxer
    
    Executive Vice President and
Chief Financial Officer (Principal
Financial Officer)
    
    November 14, 2003/s/ William C. StraubWilliam C. Straub
    
    Senior Vice President, Controller,
Chief Accounting Officer (Principal
Accounting Officer)
    
    November 14, 2003


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