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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 June 30, 2003

OR

|      |  |                                                                                          
|----- |  | -----------------------------------------------------------------------------------------
|[   ] |  | 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)



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MARINER HEALTH CARE, INC.


(Exact name of registrant as specified in its charter)





|                                         |  |                    
|---------------------------------------- |  | -------------------
|Delaware                                 |  | 74-2012902         
|(State or other jurisdiction of          |  | (I.R.S. Employer   
|incorporation or organization)           |  | Identification No.)
|                                         |  |                    
|One Ravinia Drive, Suite 1500            |  |                    
|Atlanta, Georgia                         |  | 30346              
|(Address of principal executive offices) |  | (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 August 5, 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

|                                                                                                  |  |      |    | 
|------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                  |  | Page
|                                                                                                  |  |     
|Part I      FINANCIAL INFORMATION                                                                 |  |      |    | 
|Item 1.     Condensed Consolidated Financial Statements                                           |  |      | 1  | 
|Item 2.     Managements Discussion and Analysis of Financial Condition and Results of Operations |  |      | 13 | 
|Item 3.     Quantitative and Qualitative Disclosures About Market Risk                            |  |      | 23 | 
|Item 4.     Controls and Procedures                                                               |  |      | 23 | 
|Part II     OTHER INFORMATION                                                                     |  |      |    | 
|Item 1.     Legal Proceedings                                                                     |  |      | 25 | 
|Item 2.     Changes in Securities and Use of Proceeds                                             |  |      | 25 | 
|Item 3.     Defaults Upon Senior Securities                                                       |  |      | 25 | 
|Item 4.     Submission of Matters to a Vote of Security Holders                                   |  |      | 25 | 
|Item 5.     Other Information                                                                     |  |      | 25 | 
|Item 6.     Exhibits and Reports on Form 8-K                                                      |  |      | 25 | 





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PART I

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

|                                                                           |                                                                                                                               |                          |         |                     |         |               |                     |               |         |   |                |         |                |  |   |           |           |         |   |           |           |         | 
|-------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------- | ------------------------ | ------- | ------------------- | ------- | ------------- | ------------------- | ------------- | ------- | - | -------------- | ------- | -------------- |  | - | --------- | --------- | ------- | - | --------- | --------- | ------- | 
|                                                                           |                                                                                                                               |                          |         | Reorganized Company |         |               | Predecessor Company
|                                                                           |                                                                                                                               |                          |         |                     |         |               |                    
|                                                                           |                                                                                                                               |                          |         | Three Months        |         | Six Months    |                     | Two Months    |         |   | One Month      |         | Four Months   
|                                                                           |                                                                                                                               |                          |         | Ended               |         | Ended         |                     | Ended         |         |   | Ended          |         | Ended         
|                                                                           |                                                                                                                               |                          |         | June 30, 2003       |         | June 30, 2003 |                     | June 30, 2002 |         |   | April 30, 2002 |         | April 30, 2002
|                                                                           |                                                                                                                               |                          |         |                     |         |               |                     |               |         |   |                |         |               
|Net revenue                                                                |                                                                                                                               | $                        | 438,019 |                     |         | $             | 869,796             |               |         | $ | 295,088        |         |                |  | $ | 146,818   |           |         | $ | 601,437   |          
|Costs and expenses                                                         |                                                                                                                               |                          |         |                     |         |               |                     |               |         |   |                |         |                |  |   |           |           |         |   |           |          
|                                                                           | Operating expenses                                                                                                            |                          |         | 382,341             |         |               |                     | 761,437       |         |   |                | 249,194 |                |  |   |           | 131,219   |         |   |           | 522,775   |        
|                                                                           | General and administrative                                                                                                    |                          |         | 40,068              |         |               |                     | 77,910        |         |   |                | 24,406  |                |  |   |           | 14,518    |         |   |           | 55,997    |        
|                                                                           | Depreciation and amortization                                                                                                 |                          |         | 9,483               |         |               |                     | 18,206        |         |   |                | 4,922   |                |  |   |           | 2,832     |         |   |           | 11,733    |        
|                                                                           |                                                                                                                               |                          |         |                     |         |               |                     |               |         |   |                |         |                |  |   |           |           |         |   |           |          
|                                                                           |                                                                                                                               | Total costs and expenses |         |                     | 431,892 |               |                     |               | 857,553 |   |                |         | 278,522        |  |   |           |           | 148,569 |   |           |           | 590,505 | 
|                                                                           |                                                                                                                               |                          |         |                     |         |               |                     |               |         |   |                |         |                |  |   |           |           |         |   |           |          
|Operating income (loss)                                                    |                                                                                                                               |                          | 6,127   |                     |         |               | 12,243              |               |         |   | 16,566         |         |                |  |   | (1,751    | )         |         |   | 10,932    |          
|Other income (expenses)                                                    |                                                                                                                               |                          |         |                     |         |               |                     |               |         |   |                |         |                |  |   |           |           |         |   |           |          
|                                                                           | Interest expense (contractual interest for the one
and four months ended April 30, 2002 was $9,630
and $45,697, respectively) |                          |         | (9,639              | )       |               |                     | (17,922       | )       |   |                | (5,513  | )              |  |   |           | (2,027    | )       |   |           | (3,017    | )      
|                                                                           | Interest income                                                                                                               |                          |         | 692                 |         |               |                     | 1,520         |         |   |                | 2,220   |                |  |   |           | 372       |         |   |           | 1,154     |        
|                                                                           | Reorganization items                                                                                                          |                          |         |                    |         |               |                     |              |         |   |                |        |                |  |   |           | 1,442,805 |         |   |           | 1,394,309 |        
|                                                                           | Other                                                                                                                         |                          |         | (1                  | )       |               |                     | (51           | )       |   |                | (116    | )              |  |   |           | 1,441     |         |   |           | 1,495     |        
|                                                                           |                                                                                                                               |                          |         |                     |         |               |                     |               |         |   |                |         |                |  |   |           |           |         |   |           |          
|(Loss) income from continuing operations
before income taxes               |                                                                                                                               |                          | (2,821  | )                   |         |               | (4,210              | )             |         |   | 13,157         |         |                |  |   | 1,440,840 |           |         |   | 1,404,873 |          
|(Benefit) provision for income taxes                                       |                                                                                                                               |                          | (1,127  | )                   |         |               | (1,684              | )             |         |   | 5,263          |         |                |  |   |          |           |         |   |          |          
|                                                                           |                                                                                                                               |                          |         |                     |         |               |                     |               |         |   |                |         |                |  |   |           |           |         |   |           |          
|(Loss) income from continuing operations                                   |                                                                                                                               |                          | (1,694  | )                   |         |               | (2,526              | )             |         |   | 7,894          |         |                |  |   | 1,440,840 |           |         |   | 1,404,873 |          
|Discontinued operations                                                    |                                                                                                                               |                          |         |                     |         |               |                     |               |         |   |                |         |                |  |   |           |           |         |   |           |          
|                                                                           | Gain on sale of discontinued pharmacy
operations, net of income taxes
of $0, $2,400, $0, $0 and $0                            |                          |         |                    |         |               |                     | 3,600         |         |   |                |        |                |  |   |           | 7,696     |         |   |           | 29,082    |        
|                                                                           |                                                                                                                               |                          |         |                     |         |               |                     |               |         |   |                |         |                |  |   |           |           |         |   |           |          
|Net (loss) income                                                          |                                                                                                                               | $                        | (1,694  | )                   |         | $             | 1,074               |               |         | $ | 7,894          |         |                |  | $ | 1,448,536 |           |         | $ | 1,433,955 |          
|                                                                           |                                                                                                                               |                          |         |                     |         |               |                     |               |         |   |                |         |                |  |   |           |           |         |   |           |          
|(Loss) earnings per share  basic and diluted                              |                                                                                                                               |                          |         |                     |         |               |                     |               |         |   |                |         |                |  |   |           |           |         |   |           |          
|                                                                           | (Loss) income from continuing operations                                                                                      |                          | $       | (0.08               | )       |               | $                   | (0.13         | )       |   | $              | 0.39    |                |  |   | $         | 19.55     |         |   | $         | 19.07     |        
|                                                                           | Gain on sale of discontinued pharmacy operations                                                                              |                          |         |                    |         |               |                     | 0.18          |         |   |                |        |                |  |   |           | 0.10      |         |   |           | 0.39      |        
|                                                                           |                                                                                                                               |                          |         |                     |         |               |                     |               |         |   |                |         |                |  |   |           |           |         |   |           |          
|                                                                           | Net (loss) income per share                                                                                                   |                          | $       | (0.08               | )       |               | $                   | 0.05          |         |   | $              | 0.39    |                |  |   | $         | 19.65     |         |   | $         | 19.46     |        
|                                                                           |                                                                                                                               |                          |         |                     |         |               |                     |               |         |   |                |         |                |  |   |           |           |         |   |           |          
|Weighted average number of common and common
equivalent shares outstanding |                                                                                                                               |                          |         |                     |         |               |                     |               |         |   |                |         |                |  |   |           |           |         |   |           |          
|                                                                           |                                                                                                                               | Basic and diluted        |         |                     | 20,000  |               |                     |               | 20,000  |   |                |         | 20,000         |  |   |           |           | 73,688  |   |           |           | 73,688  | 
|                                                                           |                                                                                                                               |                          |         |                     |         |               |                     |               |         |   |                |         |                |  |   |           |           |         |   |           |          

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

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

|                                                                               |                                                                                                      |                            |           |               |         |                   |           |         |         | 
|------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------------------- | -------------------------- | --------- | ------------- | ------- | ----------------- | --------- | ------- | ------- | 
|                                                                               |                                                                                                      |                            |           | June 30, 2003 |         | December 31, 2002
|                                                                               |                                                                                                      |                            |           |               |         |                  
|                                                                               |                                                                                                      |                            |           | (unaudited)   |         |                   |           |        
|ASSETS                                                                         |                                                                                                      |                            |           |               |         |                   |           |        
|Current
assets
Cash and cash equivalents                                       |                                                                                                      | $                          | 52,212    |               |         | $                 | 38,618    |        
|                                                                               | Receivables, net of allowance for doubtful accounts of $73,926
and $72,996                           |                            |           | 264,527       |         |                   |           | 264,092 |        
|                                                                               | Prepaid expenses and other current assets                                                            |                            |           | 38,218        |         |                   |           | 34,947  |        
|                                                                               |                                                                                                      |                            |           |               |         |                   |           |        
|                                                                               |                                                                                                      | Total current assets       |           |               | 354,957 |                   |           |         | 337,657 | 
|                                                                               |                                                                                                      |                            |           |               |         |                   |           |        
|Property and equipment, net of accumulated depreciation of $44,344 and $26,427 |                                                                                                      |                            | 584,482   |               |         |                   | 567,260   |        
|Reorganization value in excess of amounts allocable to identifiable assets     |                                                                                                      |                            | 201,388   |               |         |                   | 201,388   |        
|Restricted investments                                                         |                                                                                                      |                            | 22,290    |               |         |                   | 38,693    |        
|Other assets                                                                   |                                                                                                      |                            | 34,161    |               |         |                   | 33,740    |        
|                                                                               |                                                                                                      |                            |           |               |         |                   |           |        
|                                                                               |                                                                                                      | $                          | 1,197,278 |               |         | $                 | 1,178,738 |        
|                                                                               |                                                                                                      |                            |           |               |         |                   |           |        
|LIABILITIES AND STOCKHOLDERS EQUITY                                           |                                                                                                      |                            |           |               |         |                   |           |        
|Current liabilities                                                            |                                                                                                      |                            |           |               |         |                   |           |        
|                                                                               | Current maturities of long-term debt                                                                 |                            | $         | 12,965        |         |                   | $         | 9,793   |        
|                                                                               | Accounts payable                                                                                     |                            |           | 55,109        |         |                   |           | 48,417  |        
|                                                                               | Accrued compensation and benefits                                                                    |                            |           | 84,088        |         |                   |           | 68,444  |        
|                                                                               | Accrued insurance obligations                                                                        |                            |           | 38,142        |         |                   |           | 28,650  |        
|                                                                               | Other current liabilities                                                                            |                            |           | 55,816        |         |                   |           | 65,787  |        
|                                                                               |                                                                                                      |                            |           |               |         |                   |           |        
|                                                                               |                                                                                                      | Total current liabilities  |           |               | 246,120 |                   |           |         | 221,091 | 
|                                                                               |                                                                                                      |                            |           |               |         |                   |           |        
|Long-term debt, net of current maturities                                      |                                                                                                      |                            | 468,804   |               |         |                   | 474,969   |        
|Long-term insurance reserves                                                   |                                                                                                      |                            | 193,401   |               |         |                   | 195,562   |        
|Other liabilities                                                              |                                                                                                      |                            | 15,822    |               |         |                   | 14,044    |        
|Minority interest                                                              |                                                                                                      |                            | 3,645     |               |         |                   | 4,677     |        
|                                                                               |                                                                                                      |                            |           |               |         |                   |           |        
|                                                                               |                                                                                                      | Total liabilities          |           |               | 927,792 |                   |           |         | 910,343 | 
|                                                                               |                                                                                                      |                            |           |               |         |                   |           |        
|Stockholders equity                                                           |                                                                                                      |                            |           |               |         |                   |           |        
|                                                                               | Preferred 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           |         |                   |           | 200     |        
|                                                                               | Warrants to purchase common stock                                                                    |                            |           | 935           |         |                   |           | 935     |        
|                                                                               | Capital in excess of par value                                                                       |                            |           | 358,977       |         |                   |           | 358,977 |        
|                                                                               | Accumulated deficit                                                                                  |                            |           | (90,974       | )       |                   |           | (92,048 | )      
|                                                                               | Accumulated other comprehensive income                                                               |                            |           | 348           |         |                   |           | 331     |        
|                                                                               |                                                                                                      |                            |           |               |         |                   |           |        
|                                                                               |                                                                                                      | Total stockholders equity |           |               | 269,486 |                   |           |         | 268,395 | 
|                                                                               |                                                                                                      |                            |           |               |         |                   |           |        
|                                                                               |                                                                                                      | $                          | 1,197,278 |               |         | $                 | 1,178,738 |        
|                                                                               |                                                                                                      |                            |           |               |         |                   |           |        

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

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

|                                                                                                 |                                                                                  |                                                            |        |                     |         |               |                     |       |                |   |   |          |           |            |  
|------------------------------------------------------------------------------------------------ | -------------------------------------------------------------------------------- | ---------------------------------------------------------- | ------ | ------------------- | ------- | ------------- | ------------------- | ----- | -------------- | - | - | -------- | --------- | ---------- | -
|                                                                                                 |                                                                                  |                                                            |        | Reorganized Company |         |               | Predecessor Company
|                                                                                                 |                                                                                  |                                                            |        |                     |         |               |                    
|                                                                                                 |                                                                                  |                                                            |        | Six Months          |         | Two Months    |                     |       | Four Months   
|                                                                                                 |                                                                                  |                                                            |        | Ended               |         | Ended         |                     |       | Ended         
|                                                                                                 |                                                                                  |                                                            |        | June 30, 2003       |         | June 30, 2002 |                     |       | April 30, 2002
|                                                                                                 |                                                                                  |                                                            |        |                     |         |               |                     |       |               
|Cash flows from operating activities                                                             |                                                                                  |                                                            |        |                     |         |               |                     |       |                |   |   |          |          
|                                                                                                 | Net income                                                                       |                                                            | $      | 1,074               |         |               | $                   | 7,894 |                |   |   | $        | 1,433,955 |           
|                                                                                                 | Adjustments to reconcile net income to net cash
provided by operating activities |                                                            |        |                     |         |               |                     |       |                |   |   |          |           |           
|                                                                                                 |                                                                                  | Depreciation and amortization                              |        |                     | 18,206  |               |                     |       | 4,922          |   |   |          |           | 11,733     |  
|                                                                                                 |                                                                                  | Equity earnings/minority interest                          |        |                     | 51      |               |                     |       | 116            |   |   |          |           | 33         |  
|                                                                                                 |                                                                                  | Reorganization items, net                                  |        |                     |        |               |                     |       |               |   |   |          |           | (1,394,309 | )
|                                                                                                 |                                                                                  | Casualty gain                                              |        |                     |        |               |                     |       |               |   |   |          |           | (1,527     | )
|                                                                                                 |                                                                                  | Provision for bad debts                                    |        |                     | 7,701   |               |                     |       | 2,499          |   |   |          |           | 25,344     |  
|                                                                                                 |                                                                                  | Provision for deferred income taxes                        |        |                     | (1,684  | )             |                     |       | 5,263          |   |   |          |           |           |  
|                                                                                                 |                                                                                  | Amortization of deferred financing costs                   |        |                     | 608     |               |                     |       | 134            |   |   |          |           |           |  
|                                                                                                 |                                                                                  | Gain on sale of discontinued pharmacy operations           |        |                     | (3,600  | )             |                     |       |               |   |   |          |           | (29,082    | )
|                                                                                                 | Changes in operating assets and liabilities                                      |                                                            |        |                     |         |               |                     |       |                |   |   |          |           |           
|                                                                                                 |                                                                                  | Receivables                                                |        |                     | (11,024 | )             |                     |       | (9,496         | ) |   |          |           | (13,090    | )
|                                                                                                 |                                                                                  | Prepaid expenses and other current assets                  |        |                     | (3,271  | )             |                     |       | (6,105         | ) |   |          |           | 3,192      |  
|                                                                                                 |                                                                                  | Accounts payable                                           |        |                     | 6,692   |               |                     |       | 8,263          |   |   |          |           | (27,211    | )
|                                                                                                 |                                                                                  | Accrued and other current liabilities                      |        |                     | 19,335  |               |                     |       | (5,686         | ) |   |          |           | 25,323     |  
|                                                                                                 | Changes in long-term insurance reserves                                          |                                                            |        | (2,161              | )       |               |                     | 9,773 |                |   |   |          | 11,369    |           
|                                                                                                 | Other                                                                            |                                                            |        | 1,140               |         |               |                     | 754   |                |   |   |          | (7,185    | )         
|                                                                                                 |                                                                                  |                                                            |        |                     |         |               |                     |       |                |   |   |          |           |           
|Net cash provided by operating activities from
continuing operations before reorganization items |                                                                                  |                                                            | 33,067 |                     |         |               | 18,331              |       |                |   |   | 38,545   |          
|                                                                                                 |                                                                                  |                                                            |        |                     |         |               |                     |       |                |   |   |          |           |           
|Payment of reorganization items, net                                                             |                                                                                  |                                                            | (5,018 | )                   |         |               | (9,474              | )     |                |   |   | (35,813  | )        
|                                                                                                 |                                                                                  |                                                            |        |                     |         |               |                     |       |                |   |   |          |           |           
|Cash flows from investing activities                                                             |                                                                                  |                                                            |        |                     |         |               |                     |       |                |   |   |          |          
|                                                                                                 |                                                                                  | Purchases of property and equipment                        |        |                     | (35,428 | )             |                     |       | (5,870         | ) |   |          |           | (27,553    | )
|                                                                                                 |                                                                                  | Proceeds from sale of property, equipment and other assets |        |                     | 6,132   |               |                     |       |               |   |   |          |           | 92,446     |  
|                                                                                                 |                                                                                  | Restricted investments                                     |        |                     | 16,420  |               |                     |       | (869           | ) |   |          |           | (14,975    | )
|                                                                                                 |                                                                                  | Insurance proceeds                                         |        |                     | 2,888   |               |                     |       |               |   |   |          |           | 6,020      |  
|                                                                                                 |                                                                                  | Net collections on notes receivable                        |        |                     |        |               |                     |       | 58             |   |   |          |           | 146        |  
|                                                                                                 |                                                                                  |                                                            |        |                     |         |               |                     |       |                |   |   |          |           |           
|Net cash (utilized) provided by investing activities                                             |                                                                                  |                                                            | (9,988 | )                   |         |               | (6,681              | )     |                |   |   | 56,084   |          
|                                                                                                 |                                                                                  |                                                            |        |                     |         |               |                     |       |                |   |   |          |           |           
|Cash flows from financing activities                                                             |                                                                                  |                                                            |        |                     |         |               |                     |       |                |   |   |          |          
|                                                                                                 |                                                                                  | Proceeds from issuance of long-term debt                   |        |                     |        |               |                     |       |               |   |   |          |           | 212,000    |  
|                                                                                                 |                                                                                  | Repayment of long-term debt                                |        |                     | (2,993  | )             |                     |       | (1,272         | ) |   |          |           | (386,872   | )
|                                                                                                 |                                                                                  | Payment of deferred financing fees                         |        |                     | (1,474  | )             |                     |       |               |   |   |          |           | (6,424     | )
|                                                                                                 |                                                                                  |                                                            |        |                     |         |               |                     |       |                |   |   |          |           |           
|Net cash utilized by financing activities                                                        |                                                                                  |                                                            | (4,467 | )                   |         |               | (1,272              | )     |                |   |   | (181,296 | )        
|                                                                                                 |                                                                                  |                                                            |        |                     |         |               |                     |       |                |   |   |          |           |           
|Increase (decrease) in cash and cash equivalents                                                 |                                                                                  |                                                            | 13,594 |                     |         |               | 904                 |       |                |   |   | (122,480 | )        
|Cash and cash equivalents, beginning of period                                                   |                                                                                  |                                                            | 38,618 |                     |         |               | 91,260              |       |                |   |   | 213,740  |          
|                                                                                                 |                                                                                  |                                                            |        |                     |         |               |                     |       |                |   |   |          |           |           
|Cash and cash equivalents, end of period                                                         |                                                                                  | $                                                          | 52,212 |                     |         | $             | 92,164              |       |                |   | $ | 91,260   |          
|                                                                                                 |                                                                                  |                                                            |        |                     |         |               |                     |       |                |   |   |          |           |           

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

3



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

NOTE 1                BASIS OF PRESENTATION

Nature of Business

Mariner Health Care, Inc. and its subsidiaries (collectively, the Company)
provide 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 June 30, 2003, the Companys
significant operations consisted of 296 nursing facilities, including 287 SNFs
and nine stand alone assisted living facilities and apartments, in 23 states
with 35,723 licensed beds and significant concentrations of facilities and beds
in five states and several metropolitan markets, which represents the Companys
only reportable operating segment (see Note 6). Included in the total SNFs are
eight managed SNFs with 1,135 licensed beds. At June 30, 2003, the Company
also operated 13 owned, leased or managed long-term acute care hospitals
(LTACs) in four states with 683 licensed beds.

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 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 stated otherwise as the Predecessor
Company or the Reorganized Company, all references to the Company include the
operations of both the Predecessor Company and Reorganized Company.

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.

4



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

Between filing for protection under
Chapter 11 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 follows (in
thousands):

|                                                                          |  |                     |            |                   |  |   |            |  
|------------------------------------------------------------------------- |  | ------------------- | ---------- | ----------------- |  | - | ---------- | -
|                                                                          |  | Predecessor Company
|                                                                          |  |                    
|                                                                          |  | One Month Ended     |            | Four Months Ended
|                                                                          |  | April 30,           |            | April 30,        
|                                                                          |  | 2002                |            | 2002             
|                                                                          |  |                     |            |                  
|Professional fees                                                         |  | $                   | 39,559     |                   |  | $ | 67,976     |  
|Net (gain) loss on divestitures                                           |  |                     | (2,009     | )                 |  |   | 10,766     |  
|Interest earned on accumulated
cash resulting from the Chapter
11 filings |  |                     | (169       | )                 |  |   | (648       | )
|Other reorganization costs                                                |  |                     | 3,248      |                   |  |   | 11,031     |  
|Gain on extinguishment of debt                                            |  |                     | (1,229,557 | )                 |  |   | (1,229,557 | )
|Fresh-start valuation adjustments                                         |  |                     | (253,877   | )                 |  |   | (253,877   | )
|                                                                          |  |                     |            |                   |  |   |            |  
|                                                                          |  | $                   | (1,442,805 | )                 |  | $ | (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 follows (in thousands, except per
share amounts):

|                                                 |                                                  |   |                  |      | 
|------------------------------------------------ | ------------------------------------------------ | - | ---------------- | ---- | 
|                                                 |                                                  |   | Six Months Ended
|                                                 |                                                  |   | June 30, 2002   
|                                                 |                                                  |   |                 
|Net revenue                                      |                                                  | $ | 896,525          |     
|                                                 |                                                  |   |                  |     
|Income from continuing operations                |                                                  | $ | 18,458           |     
|Gain on sale of discontinued pharmacy operations |                                                  |   | 29,082           |     
|                                                 |                                                  |   |                  |     
|Net income                                       |                                                  | $ | 47,540           |     
|                                                 |                                                  |   |                  |     
|Earnings per share  basic and diluted           |                                                  |   |                  |     
|                                                 | Income from continuing operations                |   | $                | 0.92 | 
|                                                 | Gain on sale of discontinued pharmacy operations |   |                  | 1.45 | 
|                                                 |                                                  |   |                  |     
|                                                 | Net income                                       |   | $                | 2.38 | 
|                                                 |                                                  |   |                  |     

5



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

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.

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.

Discontinued Operations

In October 2001, the Company received the approval of the Bankruptcy Court to
sell its institutional pharmacy services business (the APS Division). The
Company consummated the sale of the APS Division 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).

Comprehensive (Loss) Income

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

|                                                            |  |                     |        |               |                     |               |       |   |                |   |                |  |  |  |   |           |   |  |   |           |  
|----------------------------------------------------------- |  | ------------------- | ------ | ------------- | ------------------- | ------------- | ----- | - | -------------- | - | -------------- |  |  |  | - | --------- | - |  | - | --------- | -
|                                                            |  | Reorganized Company |        |               | Predecessor Company
|                                                            |  |                     |        |               |                    
|                                                            |  | Three Months        |        | Six Months    |                     | Two Months    |       |   | One Month      |   | Four Months   
|                                                            |  | Ended               |        | Ended         |                     | Ended         |       |   | Ended          |   | Ended         
|                                                            |  | June 30, 2003       |        | June 30, 2003 |                     | June 30, 2002 |       |   | April 30, 2002 |   | April 30, 2002
|                                                            |  |                     |        |               |                     |               |       |   |                |   |               
|Net (loss) income                                           |  | $                   | (1,694 | )             |                     | $             | 1,074 |   |                | $ | 7,894          |  |  |  | $ | 1,448,536 |   |  | $ | 1,433,955 |  
|Net unrealized (loss) gain on available-for-sale securities |  |                     | (16    | )             |                     |               | (17   | ) |                |   | 137            |  |  |  |   | (172      | ) |  |   | (603      | )
|                                                            |  |                     |        |               |                     |               |       |   |                |   |                |  |  |  |   |           |   |  |   |           |  
|Comprehensive (loss) income                                 |  | $                   | (1,710 | )             |                     | $             | 1,057 |   |                | $ | 8,031          |  |  |  | $ | 1,448,364 |   |  | $ | 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 share (the
Common Stock). At June 30, 2003, there were options to purchase 525,000
shares of common stock outstanding at exercise prices ranging from $2.65 to
$20.12, 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 85,625 shares of Common Stock exercisable at June 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

6



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

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. The Compensation Committee of the
Board of Directors will grant new options to purchase 1,563,560 shares of the
Companys Common Stock on the first day that is at least six months and one day
following June 13, 2003, assuming all employees who participated in the tender
remain employed by the Company. 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 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.

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.

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
148), the Companys pro forma net (loss) income and (loss) 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):

|                                                                                                                             |  |                     |        |               |                     |               |        |   |                |   |                |   |  |  |   |           |   |  |   |           |  
|---------------------------------------------------------------------------------------------------------------------------- |  | ------------------- | ------ | ------------- | ------------------- | ------------- | ------ | - | -------------- | - | -------------- | - |  |  | - | --------- | - |  | - | --------- | -
|                                                                                                                             |  | Reorganized Company |        |               | Predecessor Company
|                                                                                                                             |  |                     |        |               |                    
|                                                                                                                             |  | Three Months        |        | Six Months    |                     | Two Months    |        |   | One Month      |   | Four Months   
|                                                                                                                             |  | Ended               |        | Ended         |                     | Ended         |        |   | Ended          |   | Ended         
|                                                                                                                             |  | June 30, 2003       |        | June 30, 2003 |                     | June 30, 2002 |        |   | April 30, 2002 |   | April 30, 2002
|                                                                                                                             |  |                     |        |               |                     |               |        |   |                |   |               
|Net (loss) income                                                                                                            |  | $                   | (1,694 | )             |                     | $             | 1,074  |   |                | $ | 7,894          |   |  |  | $ | 1,448,536 |   |  | $ | 1,433,955 |  
|Deduct: total stock-based employee compensation
expense determined under fair value based
methods for all awards, net of tax |  |                     | (844   | )             |                     |               | (1,702 | ) |                |   | (730           | ) |  |  |   | (31       | ) |  |   | (123      | )
|                                                                                                                             |  |                     |        |               |                     |               |        |   |                |   |                |   |  |  |   |           |   |  |   |           |  
|Pro forma net (loss) income                                                                                                  |  | $                   | (2,538 | )             |                     | $             | (628   | ) |                | $ | 7,164          |   |  |  | $ | 1,448,505 |   |  | $ | 1,433,832 |  
|                                                                                                                             |  |                     |        |               |                     |               |        |   |                |   |                |   |  |  |   |           |   |  |   |           |  
|Basic
and diluted (loss) earnings per share                                                                                  |  |                     |        |               |                     |               |        |   |                |   |                |   |  |  |   |           |   |  |   |           |  
|As reported                                                                                                                  |  | $                   | (0.08  | )             |                     | $             | 0.05   |   |                | $ | 0.39           |   |  |  | $ | 19.65     |   |  | $ | 19.46     |  
|Pro forma                                                                                                                    |  |                     | (0.13  | )             |                     |               | (0.03  | ) |                |   | 0.36           |   |  |  |   | 19.66     |   |  |   | 19.46     |  

Recent Accounting Pronouncements

In May 2003, the Financial Accounting Standards Board (FASB) issued SFAS 150,
Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity (SFAS 150). The statement improves the accounting
for certain financial instruments that, under previous guidance, issuers could
account for as equity. The new statement 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, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The company believes the adoption of SFAS 150
will not have a material impact 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 149), which is effective
for contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. SFAS 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

7



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

when a derivative contains a financial component. The guideline should be
applied prospectively. The Company believes the adoption of SFAS 149 will not
have a material impact on its consolidated financial position, results of
operations or cash flows.

In January 2003, FASB issued FASB Interpretation No. 46, Consolidation of
Variable Interest Entities. This interpretation provides guidance with
respect to the identification of variable interest entities and when the
assets, liabilities, noncontrolling interests and results of operations of a
variable interest entity need to be included in a companys consolidated
financial statements. This interpretation is effective for all new variable
interest entities created or acquired after January 31, 2003. For variable
interest entities created or acquired prior to February 1, 2003, the provisions
of this interpretation must be applied for the first interim or annual period
beginning after June 15, 2003. The Company is currently evaluating the effect
that the implementation of this interpretation will have on its results of
operations and financial position for any transaction entered into prior to
February 1, 2003. Since the evaluation is ongoing, the Company does not know
whether this interpretation will have a material impact on the consolidated
financial position or results of operations of the Company. For transactions
entered into after January 31, 2003, this interpretation did not have a
material impact on the consolidated financial position, results of operations
or cash flows of the Company.

In December 2002, FASB issued SFAS 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 148 did not have a material impact on
the consolidated financial position, results of operations or cash flows of the
Company. SFAS 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.

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.

8



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

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

|                  |             |   |                     |         |               |                     |               |         |  |                |         |                |  |  |   |        |         |  |   |         |         | 
|----------------- | ----------- | - | ------------------- | ------- | ------------- | ------------------- | ------------- | ------- |  | -------------- | ------- | -------------- |  |  | - | ------ | ------- |  | - | ------- | ------- | 
|                  |             |   | Reorganized Company |         |               | Predecessor Company
|                  |             |   |                     |         |               |                    
|                  |             |   | Three Months        |         | Six Months    |                     | Two Months    |         |  | One Month      |         | Four Months   
|                  |             |   | Ended               |         | Ended         |                     | Ended         |         |  | Ended          |         | Ended         
|                  |             |   | June 30, 2003       |         | June 30, 2003 |                     | June 30, 2002 |         |  | April 30, 2002 |         | April 30, 2002
|                  |             |   |                     |         |               |                     |               |         |  |                |         |               
|Medicaid          |             | $ | 208,706             |         |               | $                   | 414,063       |         |  | $              | 142,508 |                |  |  | $ | 69,819 |         |  | $ | 287,073 |        
|Medicare          |             |   | 148,710             |         |               |                     | 295,145       |         |  |                | 99,337  |                |  |  |   | 50,447 |         |  |   | 207,286 |        
|Private and other |             |   | 80,603              |         |               |                     | 160,588       |         |  |                | 53,243  |                |  |  |   | 26,552 |         |  |   | 107,078 |        
|                  |             |   |                     |         |               |                     |               |         |  |                |         |                |  |  |   |        |         |  |   |         |        
|                  | Net revenue |   | $                   | 438,019 |               |                     | $             | 869,796 |  |                | $       | 295,088        |  |  |   | $      | 146,818 |  |   | $       | 601,437 | 
|                  |             |   |                     |         |               |                     |               |         |  |                |         |                |  |  |   |        |         |  |   |         |        

NOTE 3   DIVESTITURES AND CASUALTY GAIN

Discontinued 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. 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 from Omnicare on August 5, 2003.

Other Divestitures

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 (gain) on divestitures within reorganization items. These
facilities reported net revenue of approximately $13.0 million and $0.6 million
for the four months ended April 30, 2002 and one month ended April 30, 2002,
respectively.

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.

9



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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):

|                                                                                                           |                                          |                                                  |        |                     |   |               |                     |               |       |  |                |       |                |  |  |        |           |       |  |        |           |        | 
|---------------------------------------------------------------------------------------------------------- | ---------------------------------------- | ------------------------------------------------ | ------ | ------------------- | - | ------------- | ------------------- | ------------- | ----- |  | -------------- | ----- | -------------- |  |  | ------ | --------- | ----- |  | ------ | --------- | ------ | 
|                                                                                                           |                                          |                                                  |        | Reorganized Company |   |               | Predecessor Company
|                                                                                                           |                                          |                                                  |        |                     |   |               |                    
|                                                                                                           |                                          |                                                  |        | Three Months        |   | Six Months    |                     | Two Months    |       |  | One Month      |       | Four Months   
|                                                                                                           |                                          |                                                  |        | Ended               |   | Ended         |                     | Ended         |       |  | Ended          |       | Ended         
|                                                                                                           |                                          |                                                  |        | June 30, 2003       |   | June 30, 2003 |                     | June 30, 2002 |       |  | April 30, 2002 |       | April 30, 2002
|                                                                                                           |                                          |                                                  |        |                     |   |               |                     |               |       |  |                |       |               
|Numerator for basic and diluted (loss) income per share                                                    |                                          |                                                  |        |                     |   |               |                     |               |       |  |                |       |                |  |  |        |           |       |  |        |          
|                                                                                                           | (Loss) income from continuing operations |                                                  | $      | (1,694              | ) |               | $                   | (2,526        | )     |  | $              | 7,894 |                |  |  | $      | 1,440,840 |       |  | $      | 1,404,873 |       
|                                                                                                           | Discontinued operations                  |                                                  |        |                     |   |               |                     |               |       |  |                |       |                |  |  |        |           |       |  |        |           |       
|                                                                                                           |                                          | Gain on sale of discontinued pharmacy operations |        |                     |  |               |                     |               | 3,600 |  |                |       |               |  |  |        |           | 7,696 |  |        |           | 29,082 | 
|                                                                                                           |                                          |                                                  |        |                     |   |               |                     |               |       |  |                |       |                |  |  |        |           |       |  |        |           |       
|                                                                                                           | Net (loss) income                        |                                                  | $      | (1,694              | ) |               | $                   | 1,074         |       |  | $              | 7,894 |                |  |  | $      | 1,448,536 |       |  | $      | 1,433,955 |       
|                                                                                                           |                                          |                                                  |        |                     |   |               |                     |               |       |  |                |       |                |  |  |        |           |       |  |        |           |       
|Denominator for basic (loss) income per share  weighted average shares                                    |                                          |                                                  | 20,000 |                     |   |               | 20,000              |               |       |  | 20,000         |       |                |  |  | 73,688 |           |       |  | 73,688 |          
|Effect of dilutive securities  stock options                                                              |                                          |                                                  |       |                     |   |               |                    |               |       |  |               |       |                |  |  |       |           |       |  |       |          
|                                                                                                           |                                          |                                                  |        |                     |   |               |                     |               |       |  |                |       |                |  |  |        |           |       |  |        |           |       
|Denominator for diluted (loss) income per share  adjusted weighted
average shares and assumed conversions |                                          |                                                  | 20,000 |                     |   |               | 20,000              |               |       |  | 20,000         |       |                |  |  | 73,688 |           |       |  | 73,688 |          
|                                                                                                           |                                          |                                                  |        |                     |   |               |                     |               |       |  |                |       |                |  |  |        |           |       |  |        |           |       
|(Loss) earnings per share  basic and diluted                                                              |                                          |                                                  |        |                     |   |               |                     |               |       |  |                |       |                |  |  |        |           |       |  |        |          
|                                                                                                           | (Loss) income from continuing operations |                                                  | $      | (0.08               | ) |               | $                   | (0.13         | )     |  | $              | 0.39  |                |  |  | $      | 19.55     |       |  | $      | 19.07     |       
|                                                                                                           | Discontinued operations                  |                                                  |        |                     |   |               |                     |               |       |  |                |       |                |  |  |        |           |       |  |        |           |       
|                                                                                                           |                                          | Gain on sale of discontinued pharmacy operations |        |                     |  |               |                     |               | 0.18  |  |                |       |               |  |  |        |           | 0.10  |  |        |           | 0.39   | 
|                                                                                                           |                                          |                                                  |        |                     |   |               |                     |               |       |  |                |       |                |  |  |        |           |       |  |        |           |       
|                                                                                                           | Net (loss) income per share              |                                                  | $      | (0.08               | ) |               | $                   | 0.05          |       |  | $              | 0.39  |                |  |  | $      | 19.65     |       |  | $      | 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 addition, a new lawsuit was filed on or about April 14, 2003 in the United
States District court for the Northern District of Georgia, Atlanta Division,
entitled Northfield Insurance Company v. Mariner Health Care, Inc., No.
1:03-CV-098-BBM. In this insurance coverage action, Northfield claims it is
not obligated to provide the Company with coverage for an incident arising from
a death in a Texas facility. Northfield claims that the Company breached its
contractual obligations to Northfield by failing to accept a reasonable
settlement demand that was within the

10



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##### 



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

Companys self-insured retention. The Company contends that this suit is more
properly brought in the bankruptcy proceedings pending in Delaware. Further,
the Company contends that it has no contractual obligation to settle within its
self-insured retention.

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 duty against PWC.
Many of these claims arise from the July 1998 acquisition of MHG by Paragon
Health Network, Inc. (Paragon). Other claims arise from duties that the
Company believes the Individual Defendants breached as officers of MHG and
MPAN, 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 Convalesant Services, 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.

NOTE 6   SEGMENT INFORMATION

As previously disclosed, the Company has one reportable segment, nursing home
services, which provides long-term healthcare through the operation of skilled
nursing and assisted living facilities in the United States. The Other
category includes the Companys non-reportable segments, primarily its LTAC
hospitals, corporate items not considered to be an operating segment and
eliminations.

11



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##### 



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

The Company primarily evaluates segment performance and allocates resources
based on operating margin, which basically represents revenue less operating
expenses. Operating margin does not include interest income, interest expense,
reorganization items, income taxes or extraordinary items. Gains or losses on
sales of assets and certain items, including impairment of assets, legal and
regulatory matters and restructuring costs are also excluded from operating
margin and not considered in the evaluation of segment performance. The
Company does not have any intersegment revenue. Asset information by segment,
including capital expenditures, and net income (loss) beyond operating margins
are not provided to the Companys chief operating decision maker.

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

|                                |                       |   |                     |         |               |                     |               |         |   |                |         |                |   |  |   |         |         |   |   |         |         |  
|------------------------------- | --------------------- | - | ------------------- | ------- | ------------- | ------------------- | ------------- | ------- | - | -------------- | ------- | -------------- | - |  | - | ------- | ------- | - | - | ------- | ------- | -
|                                |                       |   | Reorganized Company |         |               | Predecessor Company
|                                |                       |   |                     |         |               |                    
|                                |                       |   | Three Months        |         | Six Months    |                     | Two Months    |         |   | One Month      |         | Four Months   
|                                |                       |   | Ended               |         | Ended         |                     | Ended         |         |   | Ended          |         | Ended         
|                                |                       |   | June 30, 2003       |         | June 30, 2003 |                     | June 30, 2002 |         |   | April 30, 2002 |         | April 30, 2002
|                                |                       |   |                     |         |               |                     |               |         |   |                |         |               
|Revenue from external customers |                       |   |                     |         |               |                     |               |         |   |                |         |                |   |  |   |         |         |   |   |         |        
|                                | Nursing home services |   | $                   | 409,931 |               |                     | $             | 812,246 |   |                | $       | 275,707        |   |  |   | $       | 137,436 |   |   | $       | 564,350 |  
|                                | Other                 |   |                     | 28,088  |               |                     |               | 57,550  |   |                |         | 19,381         |   |  |   |         | 9,382   |   |   |         | 37,087  |  
|                                |                       |   |                     |         |               |                     |               |         |   |                |         |                |   |  |   |         |         |   |   |         |         |  
|Consolidated revenue            |                       | $ | 438,019             |         |               | $                   | 869,796       |         |   | $              | 295,088 |                |   |  | $ | 146,818 |         |   | $ | 601,437 |        
|                                |                       |   |                     |         |               |                     |               |         |   |                |         |                |   |  |   |         |         |   |   |         |         |  
|Operating margin                |                       |   |                     |         |               |                     |               |         |   |                |         |                |   |  |   |         |         |   |   |         |        
|                                | Nursing home services |   | $                   | 31,921  |               |                     | $             | 64,995  |   |                | $       | 31,303         |   |  |   | $       | 7,134   |   |   | $       | 44,405  |  
|                                | Other                 |   |                     | (16,311 | )             |                     |               | (34,546 | ) |                |         | (9,815         | ) |  |   |         | (6,053  | ) |   |         | (21,740 | )
|                                |                       |   |                     |         |               |                     |               |         |   |                |         |                |   |  |   |         |         |   |   |         |         |  
|Consolidated operating margin   |                       |   | 15,610              |         |               |                     | 30,449        |         |   |                | 21,488  |                |   |  |   | 1,081   |         |   |   | 22,665  |        
|Depreciation and amortization   |                       |   | 9,483               |         |               |                     | 18,206        |         |   |                | 4,922   |                |   |  |   | 2,832   |         |   |   | 11,733  |        
|                                |                       |   |                     |         |               |                     |               |         |   |                |         |                |   |  |   |         |         |   |   |         |         |  
|Operating income (loss)         |                       | $ | 6,127               |         |               | $                   | 12,243        |         |   | $              | 16,566  |                |   |  | $ | (1,751  | )       |   | $ | 10,932  |        
|                                |                       |   |                     |         |               |                     |               |         |   |                |         |                |   |  |   |         |         |   |   |         |         |  

12



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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 Health Care, Inc. through its operating subsidiaries 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 June
30, 2003, we operated 296 owned, leased or managed facilities in 23 states,
including 287 SNFs and nine stand along assisted living facilities and
apartments, or ALFs, with 35,723 licensed beds, as well as 13 LTACs in four
states with 683 licensed beds. Included in the total number of SNFs are eight
managed SNFs with 1,135 licensed beds. As of June 30, 2003, we owned 192 of
our facilities, and 13 of our facilities were leased under capital leases. We
have significant facility concentrations in five states and several
metropolitan markets.

Inpatient services provided at our SNFs, ALFs and LTACs are our primary service
offering and have historically accounted for over 90% of our 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 at least 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.

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, reduced collections or change in our
payor mix, our estimates of the recoverability of our receivables could be
reduced by a material amount. Our provision for bad debts represented 0.9% and
3.1% of net revenue for the six months ended June 30, 2003 and 2002,
respectively. Our allowance for doubtful accounts represented 21.8% and 21.7%
of accounts receivable at June 30, 2003 and December 31, 2002, respectively.

13



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##### 



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 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 as a Reorganized Company. Furthermore,
there are significant uncertainties with respect to future Medicare payments to
both our SNFs and LTACs that could materially affect the realization of some of
our deferred tax assets. Accordingly, a valuation allowance is provided for
deferred tax assets because the ability to realize the deferred tax assets is
uncertain.

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.

14



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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 six months ended June 30, 2003 and
the combined operations of the Reorganized Company and Predecessor Company for
the three and six months ended June 30, 2002 (in thousands):

|                                                             |                                                  |                          |         |                     |         |                         |         |               |         |               |           |                              |         |   |           |           |         | 
|------------------------------------------------------------ | ------------------------------------------------ | ------------------------ | ------- | ------------------- | ------- | ----------------------- | ------- | ------------- | ------- | ------------- | --------- | ---------------------------- | ------- | - | --------- | --------- | ------- | 
|                                                             |                                                  |                          |         |                     |         |                         |         |               |         |               |           | Combined Reorganized Company
|                                                             |                                                  |                          |         | Reorganized Company |         | and Predecessor Company
|                                                             |                                                  |                          |         |                     |         |                        
|                                                             |                                                  |                          |         | Three Months        |         | Six Months              |         | Three Months  |         | Six Months   
|                                                             |                                                  |                          |         | Ended               |         | Ended                   |         | Ended         |         | Ended        
|                                                             |                                                  |                          |         | June 30, 2003       |         | June 30, 2003           |         | June 30, 2002 |         | June 30, 2002
|                                                             |                                                  |                          |         |                     |         |                         |         |               |         |              
|                                                             |                                                  |                          |         |                     |         |                         |         |               |         |               |           |                              |         |   |           |          
|Net revenue                                                  |                                                  | $                        | 438,019 |                     |         | $                       | 869,796 |               |         | $             | 441,906   |                              |         | $ | 896,525   |          
|                                                             |                                                  |                          |         |                     |         |                         |         |               |         |               |           |                              |         |   |           |          
|Costs and expenses                                           |                                                  |                          |         |                     |         |                         |         |               |         |               |           |                              |         |   |           |          
|                                                             | Operating expenses                               |                          | 382,341 |                     |         |                         | 761,437 |               |         |               | 380,413   |                              |         |   | 771,969   |          
|                                                             | General and administrative                       |                          |         | 40,068              |         |                         |         | 77,910        |         |               |           | 38,924                       |         |   |           | 80,403    |        
|                                                             | Depreciation and amortization                    |                          |         | 9,483               |         |                         |         | 18,206        |         |               |           | 7,754                        |         |   |           | 16,655    |        
|                                                             |                                                  |                          |         |                     |         |                         |         |               |         |               |           |                              |         |   |           |          
|                                                             |                                                  | Total costs and expenses |         |                     | 431,892 |                         |         |               | 857,553 |               |           |                              | 427,091 |   |           |           | 869,027 | 
|                                                             |                                                  |                          |         |                     |         |                         |         |               |         |               |           |                              |         |   |           |          
|Operating income                                             |                                                  |                          | 6,127   |                     |         |                         | 12,243  |               |         |               | 14,815    |                              |         |   | 27,498    |          
|                                                             |                                                  |                          |         |                     |         |                         |         |               |         |               |           |                              |         |   |           |          
|Other income (expenses)                                      |                                                 
|                                                             | Interest, net                                    |                          | (8,947  | )                   |         |                         | (16,402 | )             |         |               | (4,948    | )                            |         |   | (5,156    | )        
|                                                             | Reorganization items                             |                          |         |                    |         |                         |         |              |         |               |           | 1,442,805                    |         |   |           | 1,394,309 |        
|                                                             | Other                                            |                          |         | (1                  | )       |                         |         | (51           | )       |               |           | 1,325                        |         |   |           | 1,379     |        
|                                                             |                                                  |                          |         |                     |         |                         |         |               |         |               |           |                              |         |   |           |          
|(Loss) income from continuing operations
before income taxes |                                                  |                          | (2,821  | )                   |         |                         | (4,210  | )             |         |               | 1,453,997 |                              |         |   | 1,418,030 |          
|(Benefit)
provision for income taxes                         |                                                  |                          | (1,127  | )                   |         |                         | (1,684  | )             |         |               | 5,263     |                              |         |   | 5,263     |          
|                                                             |                                                  |                          |         |                     |         |                         |         |               |         |               |           |                              |         |   |           |          
|(Loss) income from continuing operations                     |                                                  |                          | (1,694  | )                   |         |                         | (2,526  | )             |         |               | 1,448,734 |                              |         |   | 1,412,767 |          
|Discontinued operations                                      |                                                  |                          |         |                     |         |                         |         |               |         |               |           |                              |         |   |           |          
|                                                             | Gain on sale of discontinued
pharmacy operations |                          |         |                    |         |                         |         | 3,600         |         |               |           | 7,696                        |         |   |           | 29,082    |        
|                                                             |                                                  |                          |         |                     |         |                         |         |               |         |               |           |                              |         |   |           |          
|Net (loss) income                                            |                                                  | $                        | (1,694  | )                   |         | $                       | 1,074   |               |         | $             | 1,456,430 |                              |         | $ | 1,441,849 |          
|                                                             |                                                  |                          |         |                     |         |                         |         |               |         |               |           |                              |         |   |           |          

Three Months Ended June 30, 2003(Reorganized Company) Compared to the Three
Months Ended June 30, 2002 (Combined Reorganized Company and Predecessor
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 $438.0 million for the three
months ended June 30, 2003, a decrease of $3.9 million, or 0.9%, as compared
to the three months ended June 30, 2002. The decrease in net revenue is
primarily attributable to a decrease in net revenue of our nursing home
services segment of approximately $3.2 million, or 0.8%. The decrease in net
revenue from our nursing home services segment is attributable to a decrease in
Medicare rates as a result of 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) and the divestiture of
certain SNFs, in large part offset by an increase in net revenue in facilities
we operated during each of the three month periods ended June 30, 2003 and 2002
(same facility operations).

Net revenue of same facility operations increased approximately $9.5 million,
or 2.5% mainly due to a shift in the patient mix to a higher percentage of
Medicare patients and increases in Medicaid rates. Although Medicare rates

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decreased as a result of the Medicare Reimbursement Cliff, the volume of
Medicare patients increased 8.9% for
same facility operations, which resulted in an increase in net revenue of
approximately $9.8 million. In addition, our average Medicaid rates for same
facility operations increased 3.6% which resulted in an increase in net revenue
of approximately $7.3 million.

Overall, our occupancy levels for same facility operations remained consistent
at 85.7% and 85.9% for the three months ended June 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 June 30,
2003 were $382.3 million, an increase of $1.9 million, or 0.5%, compared to
$380.4 million of operating expenses for the three months ended June 30, 2002.
After adjusting for the facilities that have been divested, operating expenses
for the three months ended June 30, 2003 were $382.3, an increase of $28.1
million, or 7.9% compared to $354.2 million of operating expenses for the three
months ended June 30, 2002.

The increase in operating expenses for same facility operations was primarily
attributable to an increase in labor costs and temporary staffing of $14.6
million, or 5.6%. This 5.6% 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. In addition, we anticipate an increase in employee
benefits expense during the current year due to the rising cost of employee
health insurance as a result of the participation rate among employees and an
increase in the cost of insurance per employee. Our other significant
operating expense increases included increases in ancillary costs, which
include various types of therapies, medical supplies and prescription drugs, of
$8.4 million, or 31.8%, and insurance expense of $4.2 million, or 16.1%.
Ancillary costs increased as a result of more medically complex patients due to
a shift in the patient mix as discussed above.

General and Administrative.General and administrative expenses for the three
months ended June 30, 2003 were $40.1 million, an increase of $1.2 million, or
3.1%, compared to $38.9 million of general and administrative expenses for the
three months ended June 30, 2002. After adjusting for the facilities that have
been divested, general and administrative expenses for the three months ended
June 30, 2003 were $40.1 million, an increase of $3.0 million, or 8.1%,
compared to $37.1 million of general and administrative expense for the three
months ended June 30, 2002. The increase in general and administrative
expenses for same facility operations is a result of numerous factors including
additional costs associated with the establishment of a new centralized
clinical billing function.

Depreciation and Amortization.Depreciation and amortization expense for the
three months ended June 30, 2003 was $9.5 million, an increase of $1.7 million,
or 21.8%, compared to $7.8 million of depreciation and amortization expenses
for the three months ended June 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.

Interest, net.Interest expense, net of interest income for the three months
ended June 30, 2003 was $8.9 million, an increase of $4.0 million, compared to
$4.9 million for the three months ended June 30, 2002. This increase is due to
an increase in interest expense of $2.1 million as a result of our new capital
structure upon emergence from bankruptcy and a decrease of interest income of
$1.9 million, which is primarily attributable to a decrease in cash as a result
of our emergence from bankruptcy and an overall decline in interest rates.

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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 three months ended June 30,
2002, which consisted primarily of $1.2 billion gain on early extinguishment of
debt and $0.3 billion gain on fresh-start valuation adjustments. There were no
reorganization items reflected in our results of operations in the comparable
three month period ended June 30, 2003 since we emerged from bankruptcy on May
13, 2002. During the three month period ended June 30, 2003, we paid $3.6
million of reorganization items.

Six Months Ended June 30, 2003(Reorganized Company) Compared to the Six Months
Ended June 30, 2002 (Combined Reorganized Company and Predecessor Company)

Net Revenue.Net revenue totaled $869.8 million for the six months ended June
30, 2003, a decrease of $26.7 million, or 3.0%, as compared to the six months
ended June 30, 2002. The decrease in net revenue is primarily attributable to
a decrease in net revenue of our nursing home services segment of approximately
$27.9 million, or 3.3%. 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 six month periods ended June 30, 2003 and 2002 (same facility
operations).

Net revenue of same facility operations increased approximately $13.5 million,
or 1.8%, mainly due to a shift in the patient mix to a higher percentage of
Medicare patients payor mix and increases in Medicaid pay rates. Although
Medicare rates decreased as a result of the Medicare Reimbursement Cliff, the
volume of Medicare patients increased 8.1% for our same facility operations,
which resulted in an increase in net revenue of approximately $18.1 million.
In addition, or average Medicaid rates for same facility operations increased
3.3%, which resulted in an increase in net revenue of approximately $13.2
million.

Overall, our occupancy levels for same facility operations remained consistent
at 85.8% and 86.2% for the six months ended June 30, 2003 and 2002,
respectively.

Operating Expenses.Operating expenses for the six months ended June 30, 2003
were $761.4 million, a decrease of $10.6 million, or 1.4%, compared to $772.0
million of operating expenses for the six months ended June 30, 2002. After
adjusting for the facilities that have been divested, operating expenses for
the six months ended June 30, 2003 were $761.4, an increase of $44.3 million,
or 6.2%, compared to $717.1 million of operating expenses for the six months
ended June 30, 2002. The increase in operating expenses for same facility
operations was primarily attributable to an increase in labor costs and
temporary staffing of $31.5 million, or 6.0%. 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.

The remaining increase in operating expenses included an increase in ancillary
services of $14.4 million, or 27.4%, as a result of more medically complex
patients due to a shift in the patient mix, and insurance expense of $4.2
million, or 7.7%. These increases in operating expenses were partially offset
by a decrease in the provision for bad debt of $6.9 million, or 47.3%, from a
charge recorded in the six months ended June 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 six
months ended June 30, 2003 were $77.9 million, an decrease of $2.5 million, or
3.1%, compared to $80.4 million of general and administrative expenses for the
six months ended June 30, 2002. After adjusting for the facilities that have
been divested, general and administrative expenses for the six months ended
June 30, 2003 were $77.9 million, an increase of $2.0 million, or 2.6%,
compared to $75.9 million of general and administrative expense for the six
months ended June 30, 2002. The increase in general and administrative expenses
for same facility is a result of numerous factors including additional costs
associated with the establishment of a new centralized clinical billing
function.

Depreciation and Amortization.Depreciation and amortization expense for the
six months ended June 30, 2003 was $18.2 million, an increase of $1.5 million,
or 9.0%, compared to $16.7 million of depreciation and amortization

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expenses
for the six months ended June 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.

Interest, net.Interest expense, net of interest income for the six months
ended June 30, 2003 was $16.4 million, an increase of $11.2 million, compared
to $5.2 million for the six months ended June 30, 2002. This increase is due
to an increase in interest expense of $9.4 million as a result of our new
capital structure upon emergence from bankruptcy and a decrease of interest
income of $1.9 million, which is primarily attributable to a decrease in cash
as a result of our emergence from bankruptcy 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 six months ended June 30,
2002, which consisted primarily of $1.2 billion gain on early extinguishment of
debt and $0.3 billion gain on fresh-start valuation adjustments. There were no
reorganization items reflected in our results of operations in the comparable
six month period ended June 30, 2003 since we emerged from bankruptcy on May
13, 2002. During the six month period ended June 30, 2003, we paid $5.0
million of reorganization items.

Liquidity and Capital Resources

Working Capital and Cash Flows

At June 30, 2003, we had working capital of $108.8 million and cash and cash
equivalents of $52.2 million, compared to working capital of $116.6 million and
cash and cash equivalents of $38.6 million at December 31, 2002. For the six
months ended June 30, 2003, net cash provided by operating activities of
continuing operations before payment of reorganization items was $33.1 million.
Net cash provided by operating activities of continuing operations before
payment of reorganization items was $56.9 million for the six months ended June
30, 2002. Our operations cash flows decreased $23.8 million primarily due to
a decrease in operating income as a result of facility divestitures and the
negative impact of the Medicare Reimbursement Cliff, and an increase in PL/GL
insurance settlement payments for the six months ended June 30, 2003.

Purchases of property and equipment were $35.4 million for the six months ended
June 30, 2003 and $33.4 million for the six months ended June 30, 2002, both of
which were financed through internally generated funds. Capital expenditures
for the six months ended June 30, 2003 included $7.8 million related to certain
facilities that were damaged by floods for which insurance proceeds of $2.9
million were received in the six months ended June 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 anticipate spending a portion of our planned capital expenditures for the
twelve months ending December 31, 2003 to complete additions to our information
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 enhancements 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. In the six months ended June 30, 2003 we have
capitalized approximately $17.7 million relating to this initiative.

During the six months ended June 30, 2003, we received net proceeds from the
disposition of assets of $0.1 million, and an additional $6.0 million of
contingency payments from discontinued operations associated with the sale of
the APS Division prior to our emergence from Chapter 11 (see Note 3 of the
accompanying unaudited condensed consolidated financial statements). During
the six months ended June 30, 2002, we received net proceeds from the
disposition of assets of $92.4 million, which primarily related to the sale of
the APS Division.

During the six months ended June 30, 2003, we made aggregate principal
repayments of long-term debt of $3.0 million, of which $1.0 million related to
scheduled repayments of our senior credit facility. The remaining $2.0

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million
related to scheduled repayments of our mortgages and capital leases. During
the two months ended June 30, 2002, we made aggregate principal repayments of
long-term debt of approximately $1.3 million. During the four
months ended April 30, 2002 we made aggregate principal repayments of long-term
debt of approximately $386.9 million of which approximately $287.4 million was
paid to the principal lenders under our prepetition senior credit facilities in
connection with the consummation of the Joint Plan. In addition, we also
received $212.0 million related to our senior credit facility entered into in
connection with the consummation of the Joint Plan.

Based upon existing cash levels, expected operating cash flows and capital
spending, proposed increases in Medicare and Medicaid reimbursement (see Other
Factors Affecting Liquidity and Capital Resources) and the availability of
borrowings under our revolving credit facility, management believes that we
have the necessary 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

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

At June 30, 2003, $209.4 million in borrowings were outstanding under the Term
loans, which bear 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 June 30,
2003 the per annum interest rate was 5.6%.

The Term Loans amortize 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 Loans can be prepaid at
our option without penalty or premium and are subject to mandatory prepayment
in certain events such as some asset or securities sales or our receipt of
certain insurance proceeds. The Term Loans are also subject to annual
mandatory prepayment to the extent of 75% of our consolidated excess cash flow.
Any mandatory prepayment of our Term Loans will reduce 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 based upon both 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 June 30, 2003; however, approximately $31.8
million of letters of credit issued under the revolving credit facility were
outstanding on that date. Also as of June 30, 2003, $53.2 million remained
available for future borrowings.

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 debt
agreement), 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 are in compliance with the
financial covenants at June 30, 2003.

Second Priority Notes.We are also the borrower of $150.0 million secured
debt, or the Second Priority Notes, which bears interest at a 3-month LIBOR,
adjusted quarterly, plus 550 basis points. At June 30, 2003, the interest rate
payable under the Second Priority Notes was 6.8%. 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 additional indebtedness, liens, restricted payments,
investments, asset sales, affiliate transactions and the creation of

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unrestricted subsidiaries. At June 30, 2003, we are 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. The maturity date of the Omega Loan 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 June
30, 2003. The Medicare Reimbursement Cliff is expected to result in a loss of
revenue of $18.8 million in the last six 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 is required under
HIPAA to be implemented on October 16, 2003. While we believe that we and the
Medicare program will be HIPAA compliant by such date, there is a significant
risk that many of the state Medicaid programs from which we receive Medicaid
reimbursement will not, particularly in light of the budget deficits many of
them are facing.

In the event that a state is unable to process our HIPAA compliant requests for
payment, our liquidity could be adversely affected. We are in the process of
evaluating the extent of the problem, and program testing of the new

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data
submission requirements began on April 16, 2003. Following October 16, 2003,
it will be a violation of HIPAA to submit data in any format other than that
prescribed by HIPAA. We are in the process of developing
contingency plans to address this potential issue, but no assurance can be
given that our liquidity will not be adversely affected following the October
16, 2003 implementation of the new HIPAA electronic transactions and code sets
standards if the state Medicaid programs are not compliant.

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. In certain states in which PL/GL insurance
coverage has become cost prohibitive to maintain. we are evaluating 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, 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.

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

22



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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 June 30, 2003, the fair value of our fixed rate long-term debt exceeded the
carrying value by $3.5 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 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

23



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##### 



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.

24



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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



|(a) |  | The annual meeting of stockholders of Mariner Health Care, Inc. was held on
July 30, 2003.                                                                   
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | All director nominees were elected.                                                                                                                          
|   
|(c) |  | Other than the election of directors, there were no additional matters
voted upon at the meeting. A tabulation of the vote for election of
directors follows:

|                     |  |           |            |               |  |         |         |  |  |  |   | 
|-------------------- |  | --------- | ---------- | ------------- |  | ------- | ------- |  |  |  | - | 
|Director             |  | Votes For |            | Votes Against |  | Abstain
|                     |  |           |            |               |  |        
|Victor L. Lund       |  |           | 17,074,843 |               |  |         | 287,118 |  |  |  |  | 
|C. Christian Winkle  |  |           | 17,074,843 |               |  |         | 287,118 |  |  |  |  | 
|Patrick H. Daugherty |  |           | 16,768,629 |               |  |         | 593,332 |  |  |  |  | 
|Earl P. Holland      |  |           | 17,074,843 |               |  |         | 287,118 |  |  |  |  | 
|Philip L. Maslowe    |  |           | 17,074,843 |               |  |         | 287,118 |  |  |  |  | 
|Mohsin Y. Meghji     |  |           | 17,074,843 |               |  |         | 287,118 |  |  |  |  | 
|M. Edward Stearns    |  |           | 17,074,843 |               |  |         | 287,118 |  |  |  |  | 

|        |  |                  
|------- |  | -----------------
|ITEM 5. |  | OTHER INFORMATION
|        |  |                  
|        |  | Not applicable.  

|        |  |                                 
|------- |  | --------------------------------
|ITEM 6. |  | EXHIBITS AND REPORTS ON FORM 8-K



|(a) |  | Exhibits
|--- |  | --------

|               |  |                                                                                                                                               
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description of Exhibit                                                                                                                        
|               |  |                                                                                                                                               
|31.1           |  | Chief Executive Officer Certification Rule 13a-14(a)/15d-14(a)                                                                                
|               |  |                                                                                                                                               
|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 2002
|               |  |                                                                                                                                               
|32.2           |  | 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
|--- |  | -------------------
|   
|    |  | Not Applicable.    

25



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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, INC.                                
| |  |     |  |                                                          
| |  | By: |  | /s/ C. Christian Winkle                                  
| |  |     |  |                                                          
| |  |     |  | C. Christian Winkle
President and Chief Executive Officer
| |  |     |  |                                                          

Date: August 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 Winkle
C. Christian Winkle |  | President, Chief Executive Officer and
Director (Principal Executive Officer)              |  | August 14, 2003
|                                           
|/s/ Michael E. Boxer
Michael E. Boxer       |  | Executive Vice President and
Chief Financial Officer (Principal
Financial Officer)         |  | August 14, 2003
|                                           
|/s/ William C. Straub
William C. Straub     |  | Senior Vice President, Controller,
Chief Accounting Officer (Principal
Accounting Officer) |  | August 14, 2003

26