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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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FORM 10-Q



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|      |  |                                                                                          
|----- |  | -----------------------------------------------------------------------------------------
|[X]   |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. 
|      |  |                                                                                          
|      |  | For the quarterly period ended September 30, 2002                                        
|      |  |                                                                                          
|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)




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|                                         |  |                    
|---------------------------------------- |  | -------------------
|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

There were 20,000,000 shares of Common Stock of the registrant outstanding
as of November 12, 2002.

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



|                                                                                              |  |  |  |  |  |  |  | 
|--------------------------------------------------------------------------------------------- |  |  |  |  |  |  |  | 
|PART I   FINANCIAL INFORMATION                                                               
|Item 1. Condensed Consolidated Financial Statements                                          
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|Item 4. Controls and Procedures                                                              
|PART II OTHER INFORMATION                                                                    
|Item 1. Legal Proceedings                                                                    
|Item 2. Changes in Securities and Use of Proceeds                                            
|Item 3. Defaults upon Certain Securities                                                     
|Item 4. Submission of Matters to a Vote of Security Holders                                  
|Item 5. Other Information                                                                    
|Item 6. Exhibits and Reports on Form 8-K                                                     
|EX-99.1 SECTION 906 CERTIFICATION OF THE CEO                                                 
|EX-99.2 SECTION 906 CERTIFICATION OF THE CFO                                                 



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##### Table of Contents



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 |  |  | 23 |     
|Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk                            |  |  | 37 |     
|Item 4. |  | Controls and Procedures                                                               |  |  | 38 |     
|Part II |  | OTHER INFORMATION                                                                     |  |  |    |     
|Item 1. |  | Legal Proceedings                                                                     |  |  | 38 |     
|Item 2. |  | Changes in Securities and Use of Proceeds                                             |  |  | 38 |     
|Item 3. |  | Defaults Upon Certain Securities                                                      |  |  | 38 |     
|Item 4. |  | Submission of Matters to a Vote of Security Holders                                   |  |  | 39 |     
|Item 5. |  | Other Information                                                                     |  |  | 39 |     
|Item 6. |  | Exhibits and Reports on Form 8-K                                                      |  |  | 39 |     





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##### Table of Contents






PART I       FINANCIAL INFORMATION




Item 1.       Condensed Consolidated Financial Statements

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

|                                                             |                                                            |                          |         |         |                     |   |               |         |                     |  |               |   |             |         |               |   |           |           |         |   |           |         |           |  | 
|------------------------------------------------------------ | ---------------------------------------------------------- | ------------------------ | ------- | ------- | ------------------- | - | ------------- | ------- | ------------------- |  | ------------- | - | ----------- | ------- | ------------- | - | --------- | --------- | ------- | - | --------- | ------- | --------- |  | 
|                                                             |                                                            |                          |         |         | Reorganized Company |   |               |         | Predecessor Company
|                                                             |                                                            |                          |         |         |                     |   |               |         |                    
|                                                             |                                                            |                          |         |         | Three Months        |   | Five Months   |         |                     |  | Three Months  |   | Four Months |         | Nine Months  
|                                                             |                                                            |                          |         |         | Ended               |   | Ended         |         |                     |  | Ended         |   | Ended       |         | Ended        
|                                                             |                                                            |                          |         |         | September 30,       |   | September 30, |         |                     |  | September 30, |   | April 30,   |         | September 30,
|                                                             |                                                            |                          |         |         | 2002                |   | 2002          |         |                     |  | 2001          |   | 2002        |         | 2001         
|                                                             |                                                            |                          |         |         |                     |   |               |         |                     |  |               |   |             |         |              
|Net revenue                                                  |                                                            | $                        | 445,866 |         |                     | $ | 740,954       |         |                     |  |               | $ | 463,895     |         |               | $ | 601,437   |           |         | $ | 1,401,787 |        
|Costs and expenses:                                          |                                                            |                          |         |         |                     |   |               |         |                     |  |               |   |             |         |               |   |           |           |         |   |           |        
|                                                             | Salaries, wages and benefits                               |                          |         | 272,802 |                     |   |               | 455,971 |                     |  |               |   |             | 284,007 |               |   |           | 369,237   |         |   |           | 856,529 |          
|                                                             | Nursing, dietary and other supplies                        |                          |         | 26,545  |                     |   |               | 44,701  |                     |  |               |   |             | 29,329  |               |   |           | 36,586    |         |   |           | 90,337  |          
|                                                             | Ancillary services                                         |                          |         | 27,969  |                     |   |               | 47,145  |                     |  |               |   |             | 37,627  |               |   |           | 36,105    |         |   |           | 91,016  |          
|                                                             | General and administrative                                 |                          |         | 44,851  |                     |   |               | 69,257  |                     |  |               |   |             | 50,515  |               |   |           | 55,997    |         |   |           | 145,057 |          
|                                                             | Insurance                                                  |                          |         | 29,642  |                     |   |               | 48,572  |                     |  |               |   |             | 28,939  |               |   |           | 39,879    |         |   |           | 90,174  |          
|                                                             | Rent                                                       |                          |         | 11,077  |                     |   |               | 18,341  |                     |  |               |   |             | 13,614  |               |   |           | 15,624    |         |   |           | 44,877  |          
|                                                             | Depreciation and amortization                              |                          |         | 9,429   |                     |   |               | 14,351  |                     |  |               |   |             | 13,628  |               |   |           | 11,733    |         |   |           | 38,035  |          
|                                                             | Provision for bad debts                                    |                          |         | 4,695   |                     |   |               | 7,194   |                     |  |               |   |             | 13,664  |               |   |           | 25,344    |         |   |           | 23,535  |          
|                                                             | Loss on settlement with government                         |                          |         |        |                     |   |               |        |                     |  |               |   |             | 33,410  |               |   |           |          |         |   |           | 33,410  |          
|                                                             |                                                            |                          |         |         |                     |   |               |         |                     |  |               |   |             |         |               |   |           |           |         |   |           |        
|                                                             |                                                            | Total costs and expenses |         |         | 427,010             |   |               |         | 705,532             |  |               |   |             |         | 504,733       |   |           |           | 590,505 |   |           |         | 1,412,970 | 
|                                                             |                                                            |                          |         |         |                     |   |               |         |                     |  |               |   |             |         |               |   |           |           |         |   |           |        
|Operating income (loss)                                      |                                                            |                          | 18,856  |         |                     |   | 35,422        |         |                     |  |               |   | (40,838     | )       |               |   | 10,932    |           |         |   | (11,183   | )      
|Other income (expenses):                                     |                                                            |                          |         |         |                     |   |               |         |                     |  |               |   |             |         |               |   |           |           |         |   |           |        
|                                                             | Interest expense                                           |                          |         | (9,931  | )                   |   |               | (15,444 | )                   |  |               |   |             | (1,149  | )             |   |           | (3,017    | )       |   |           | (1,962  | )        
|                                                             | Interest income                                            |                          |         | 1,425   |                     |   |               | 3,645   |                     |  |               |   |             | 2,958   |               |   |           | 1,154     |         |   |           | 3,542   |          
|                                                             | Reorganization items                                       |                          |         |        |                     |   |               |        |                     |  |               |   |             | (18,206 | )             |   |           | 1,394,309 |         |   |           | (39,619 | )        
|                                                             | Other                                                      |                          |         | (300    | )                   |   |               | (416    | )                   |  |               |   |             | (176    | )             |   |           | 1,495     |         |   |           | 825     |          
|                                                             |                                                            |                          |         |         |                     |   |               |         |                     |  |               |   |             |         |               |   |           |           |         |   |           |        
|Income (loss) from continuing
operations before income taxes |                                                            |                          | 10,050  |         |                     |   | 23,207        |         |                     |  |               |   | (57,411     | )       |               |   | 1,404,873 |           |         |   | (48,397   | )      
|Provision (benefit) for income taxes                         |                                                            |                          | 4,100   |         |                     |   | 9,363         |         |                     |  |               |   | (4,807      | )       |               |   |          |           |         |   | (4,807    | )      
|                                                             |                                                            |                          |         |         |                     |   |               |         |                     |  |               |   |             |         |               |   |           |           |         |   |           |        
|Income (loss) from continuing
operations                     |                                                            |                          | 5,950   |         |                     |   | 13,844        |         |                     |  |               |   | (52,604     | )       |               |   | 1,404,873 |           |         |   | (43,590   | )      
|Discontinued operations:                                     |                                                            |                          |         |         |                     |   |               |         |                     |  |               |   |             |         |               |   |           |           |         |   |           |        
|                                                             | Income from operations of discontinued
pharmacy operations |                          |         |        |                     |   |               |        |                     |  |               |   |             | 1,042   |               |   |           |          |         |   |           | 285     |          
|                                                             | Gain on sale of discontinued
pharmacy operations           |                          |         |        |                     |   |               |        |                     |  |               |   |             |        |               |   |           | 29,082    |         |   |           |        |          
|                                                             |                                                            |                          |         |         |                     |   |               |         |                     |  |               |   |             |         |               |   |           |           |         |   |           |        
|Net income (loss)                                            |                                                            | $                        | 5,950   |         |                     | $ | 13,844        |         |                     |  |               | $ | (51,562     | )       |               | $ | 1,433,955 |           |         | $ | (43,305   | )      
|                                                             |                                                            |                          |         |         |                     |   |               |         |                     |  |               |   |             |         |               |   |           |           |         |   |           |        

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

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

|                                                                            |                                          |   |                                                            |        |                     |   |               |        |                     |   |               |   |             |        |               |      |       |        |  |      |       |        |   |   | 
|--------------------------------------------------------------------------- | ---------------------------------------- | - | ---------------------------------------------------------- | ------ | ------------------- | - | ------------- | ------ | ------------------- | - | ------------- | - | ----------- | ------ | ------------- | ---- | ----- | ------ |  | ---- | ----- | ------ | - | - | 
|                                                                            |                                          |   |                                                            |        | Reorganized Company |   |               |        | Predecessor Company
|                                                                            |                                          |   |                                                            |        |                     |   |               |        |                    
|                                                                            |                                          |   |                                                            |        | Three Months        |   | Five Months   |        |                     |   | Three Months  |   | Four Months |        | Nine Months  
|                                                                            |                                          |   |                                                            |        | Ended               |   | Ended         |        |                     |   | Ended         |   | Ended       |        | Ended        
|                                                                            |                                          |   |                                                            |        | September 30,       |   | September 30, |        |                     |   | September 30, |   | April 30,   |        | September 30,
|                                                                            |                                          |   |                                                            |        | 2002                |   | 2002          |        |                     |   | 2001          |   | 2002        |        | 2001         
|                                                                            |                                          |   |                                                            |        |                     |   |               |        |                     |   |               |   |             |        |              
|Earnings (loss) per share  basic and
diluted:                              |                                          |   |                                                            |        |                     |   |               |        |                     |   |               |   |             |        |               |      |       |        |  |      |       |       
|                                                                            | Income (loss) from continuing operations |   | $                                                          | 0.30   |                     |   | $             | 0.69   |                     |   |               |   | $           | (0.71  | )             |      | $     | 19.07  |  |      | $     | (0.59  | )
|                                                                            | Discontinued operations:                 |   |                                                            |        |                     |   |               |        |                     |   |               |   |             |        |               |      |       |        |  |      |       |        |  
|                                                                            |                                          |   | Income from operations of
discontinued pharmacy operations |        |                     |  |               |        |                     |  |               |   |             |        |               | 0.01 |       |        |  |     |       |        |   |  | 
|                                                                            |                                          |   | Gain on sale of discontinued
pharmacy operations           |        |                     |  |               |        |                     |  |               |   |             |        |               |     |       |        |  | 0.39 |       |        |   |  | 
|                                                                            |                                          |   |                                                            |        |                     |   |               |        |                     |   |               |   |             |        |               |      |       |        |  |      |       |       
|Net income (loss) per share                                                 |                                          | $ | 0.30                                                       |        |                     | $ | 0.69          |        |                     |   |               | $ | (0.70       | )      |               | $    | 19.46 |        |  | $    | (0.59 | )     
|                                                                            |                                          |   |                                                            |        |                     |   |               |        |                     |   |               |   |             |        |               |      |       |        |  |      |       |       
|Weighted average number of
common and common
equivalent shares outstanding: |                                          |   |                                                            |        |                     |   |               |        |                     |   |               |   |             |        |               |      |       |        |  |      |       |       
|                                                                            | Basic and diluted                        |   |                                                            | 20,000 |                     |   |               | 20,000 |                     |   |               |   |             | 73,688 |               |      |       | 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
(dollars in thousands, except share amounts)

|                                                                                |                                                                                                                           |                                      |           |               |         |  |  |              |           |            |            |  
|------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------- | ------------------------------------ | --------- | ------------- | ------- |  |  | ------------ | --------- | ---------- | ---------- | -
|                                                                                |                                                                                                                           |                                      |           | Reorganized   |         |  |  | Predecessor 
|                                                                                |                                                                                                                           |                                      |           | Company       |         |  |  | Company     
|                                                                                |                                                                                                                           |                                      |           |               |         |  |  |             
|                                                                                |                                                                                                                           |                                      |           | September 30, |         |  |  | December 31,
|                                                                                |                                                                                                                           |                                      |           | 2002          |         |  |  | 2001        
|                                                                                |                                                                                                                           |                                      |           |               |         |  |  |             
|                                                                                |                                                                                                                           |                                      |           | (unaudited)   |         |  |  |              |           |           
|ASSETS                                                                          |                                                                                                                           |                                      |           |               |         |  |  |              |           |           
|Current assets:                                                                 |                                                                                                                           |                                      |           |               |         |  |  |              |           |           
|                                                                                | Cash and cash equivalents                                                                                                 |                                      | $         | 93,713        |         |  |  |              | $         | 213,740    |           
|                                                                                | Receivables, net of allowance for doubtful accounts of $82,693 and $61,049                                                |                                      |           | 246,709       |         |  |  |              |           | 238,736    |           
|                                                                                | Inventories                                                                                                               |                                      |           | 7,634         |         |  |  |              |           | 6,720      |           
|                                                                                | Net assets of discontinued operations                                                                                     |                                      |           |              |         |  |  |              |           | 59,053     |           
|                                                                                | Other current assets                                                                                                      |                                      |           | 34,586        |         |  |  |              |           | 34,628     |           
|                                                                                |                                                                                                                           |                                      |           |               |         |  |  |              |           |            |           
|                                                                                |                                                                                                                           | Total current assets                 |           |               | 382,642 |  |  |              |           |            | 552,877    |  
|Property and equipment, net of accumulated depreciation of $17,671 and $356,926 |                                                                                                                           |                                      | 579,658   |               |         |  |  |              | 412,965   |           
|Reorganization value in excess of amounts allocable to identifiable assets      |                                                                                                                           |                                      | 264,954   |               |         |  |  |              |          |           
|Goodwill, net of $37,425 in accumulated amortization as of December 31, 2001    |                                                                                                                           |                                      | 6,793     |               |         |  |  |              | 193,651   |           
|Restricted investments                                                          |                                                                                                                           |                                      | 37,233    |               |         |  |  |              | 37,767    |           
|Other assets                                                                    |                                                                                                                           |                                      | 26,109    |               |         |  |  |              | 25,095    |           
|                                                                                |                                                                                                                           |                                      |           |               |         |  |  |              |           |            |           
|                                                                                |                                                                                                                           | $                                    | 1,297,389 |               |         |  |  | $            | 1,222,355 |           
|                                                                                |                                                                                                                           |                                      |           |               |         |  |  |              |           |            |           
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)                                  |                                                                                                                           |                                      |           |               |         |  |  |              |           |           
|Current liabilities:                                                            |                                                                                                                           |                                      |           |               |         |  |  |              |           |           
|                                                                                | Current maturities of long-term debt                                                                                      |                                      | $         | 6,196         |         |  |  |              | $         |           |           
|                                                                                | Accounts payable                                                                                                          |                                      |           | 52,839        |         |  |  |              |           | 66,217     |           
|                                                                                | Accrued compensation and benefits                                                                                         |                                      |           | 82,143        |         |  |  |              |           | 91,368     |           
|                                                                                | Accrued insurance obligations                                                                                             |                                      |           | 28,013        |         |  |  |              |           | 24,725     |           
|                                                                                | Other current liabilities                                                                                                 |                                      |           | 88,935        |         |  |  |              |           | 22,926     |           
|                                                                                |                                                                                                                           |                                      |           |               |         |  |  |              |           |            |           
|                                                                                |                                                                                                                           | Total current liabilities            |           |               | 258,126 |  |  |              |           |            | 205,236    |  
|Liabilities subject to compromise                                               |                                                                                                                           |                                      |          |               |         |  |  |              | 2,289,600 |           
|Long-term debt, net of current maturities                                       |                                                                                                                           |                                      | 481,754   |               |         |  |  |              | 59,688    |           
|Long-term insurance reserves                                                    |                                                                                                                           |                                      | 190,809   |               |         |  |  |              | 107,734   |           
|Other liabilities                                                               |                                                                                                                           |                                      | 26,231    |               |         |  |  |              | 27,357    |           
|                                                                                |                                                                                                                           |                                      |           |               |         |  |  |              |           |            |           
|                                                                                |                                                                                                                           | Total liabilities                    |           |               | 956,920 |  |  |              |           |            | 2,689,615  |  
|Commitments and contingencies                                                   |                                                                                                                           |                                      |           |               |         |  |  |              |           |           
|Stockholders equity (deficit):                                                 |                                                                                                                           |                                      |           |               |         |  |  |              |           |           
|                                                                                | Reorganized Company preferred stock, $.01 par value; 10,000,000 shares
authorized; none issued or outstanding             |                                      |           |              |         |  |  |              |           |           |           
|                                                                                | Predecessor preferred stock, $.01 par value; 5,000,000 shares authorized; none
issued or outstanding                      |                                      |           |              |         |  |  |              |           |           |           
|                                                                                | Reorganized Company common stock, $.01 par value; 80,000,000 shares authorized;
20,000,000 shares issued and outstanding  |                                      |           | 200           |         |  |  |              |           |           |           
|                                                                                | Predecessor Company common stock, $.01 par value; 500,000,000 shares
authorized; 73,688,379 shares issued and outstanding |                                      |           |              |         |  |  |              |           | 737        |           
|                                                                                | Reorganized Company warrants to purchase common stock                                                                     |                                      |           | 935           |         |  |  |              |           |           |           
|                                                                                | Capital in excess of par value                                                                                            |                                      |           | 358,977       |         |  |  |              |           | 980,952    |           
|                                                                                | Accumulated deficit                                                                                                       |                                      |           | (19,890       | )       |  |  |              |           | (2,449,378 | )         
|                                                                                | Accumulated other comprehensive income                                                                                    |                                      |           | 247           |         |  |  |              |           | 429        |           
|                                                                                |                                                                                                                           |                                      |           |               |         |  |  |              |           |            |           
|                                                                                |                                                                                                                           | Total stockholders equity (deficit) |           |               | 340,469 |  |  |              |           |            | (1,467,260 | )
|                                                                                |                                                                                                                           |                                      |           |               |         |  |  |              |           |            |           
|                                                                                |                                                                                                                           | $                                    | 1,297,389 |               |         |  |  | $            | 1,222,355 |           
|                                                                                |                                                                                                                           |                                      |           |               |         |  |  |              |           |            |           

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
(dollars in thousands)
(unaudited)

|                                                                                               |                                                                                   |                                                  |        |               |         |   |  |                     |          |               |            |   |         |         |         |  
|---------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------- | ------------------------------------------------ | ------ | ------------- | ------- | - |  | ------------------- | -------- | ------------- | ---------- | - | ------- | ------- | ------- | -
|                                                                                               |                                                                                   |                                                  |        | Reorganized   |         |   |  |                     |          |               |            |   |         |        
|                                                                                               |                                                                                   |                                                  |        | Company       |         |   |  | Predecessor Company
|                                                                                               |                                                                                   |                                                  |        |               |         |   |  |                    
|                                                                                               |                                                                                   |                                                  |        | Five Months   |         |   |  | Four Months         |          | Nine Months  
|                                                                                               |                                                                                   |                                                  |        | Ended         |         |   |  | Ended               |          | Ended        
|                                                                                               |                                                                                   |                                                  |        | September 30, |         |   |  | April 30,           |          | September 30,
|                                                                                               |                                                                                   |                                                  |        | 2002          |         |   |  | 2002                |          | 2001         
|                                                                                               |                                                                                   |                                                  |        |               |         |   |  |                     |          |              
|Cash flows from operating activities:                                                          |                                                                                   |                                                  |        |               |         |   |  |                     |          |               |            |   |         |        
|                                                                                               | Net income (loss)                                                                 |                                                  | $      | 13,844        |         |   |  |                     | $        | 1,433,955     |            |   | $       | (43,305 | )      
|                                                                                               | Adjustments to reconcile net income to net cash provided by
operating activities: |                                                  |        |               |         |   |  |                     |          |               |            |   |         |         |        
|                                                                                               |                                                                                   | Depreciation and amortization                    |        |               | 14,351  |   |  |                     |          |               | 11,733     |   |         |         | 38,035  |  
|                                                                                               |                                                                                   | Provision for bad debts                          |        |               | 7,194   |   |  |                     |          |               | 25,344     |   |         |         | 23,535  |  
|                                                                                               |                                                                                   | Reorganization items, net                        |        |               |        |   |  |                     |          |               | (1,394,309 | ) |         |         | 39,619  |  
|                                                                                               |                                                                                   | Casualty gain                                    |        |               |        |   |  |                     |          |               | (1,527     | ) |         |         |        |  
|                                                                                               |                                                                                   | Equity earnings/minority interest                |        |               | 416     |   |  |                     |          |               | 33         |   |         |         | (825    | )
|                                                                                               |                                                                                   | Provision for deferred income taxes              |        |               | 9,363   |   |  |                     |          |               |           |   |         |         |        |  
|                                                                                               |                                                                                   | Loss on settlement with government               |        |               |        |   |  |                     |          |               |           |   |         |         | 33,410  |  
|                                                                                               |                                                                                   | Income from discontinued pharmacy operations     |        |               |        |   |  |                     |          |               |           |   |         |         | (285    | )
|                                                                                               |                                                                                   | Gain on sale of discontinued pharmacy operations |        |               |        |   |  |                     |          |               | (29,082    | ) |         |         |        |  
|                                                                                               | Changes in operating assets and liabilities:                                      |                                                  |        |               |         |   |  |                     |          |               |            |   |         |         |        
|                                                                                               |                                                                                   | Receivables                                      |        |               | (18,101 | ) |  |                     |          |               | (13,090    | ) |         |         | (29,741 | )
|                                                                                               |                                                                                   | Inventories                                      |        |               | (3      | ) |  |                     |          |               | (1,218     | ) |         |         | 1,115   |  
|                                                                                               |                                                                                   | Other current assets                             |        |               | (5,726  | ) |  |                     |          |               | 4,410      |   |         |         | 6,552   |  
|                                                                                               |                                                                                   | Accounts payable                                 |        |               | (1,261  | ) |  |                     |          |               | (27,211    | ) |         |         | 21,946  |  
|                                                                                               |                                                                                   | Accrued and other current liabilities            |        |               | (10,648 | ) |  |                     |          |               | 25,323     |   |         |         | (7,756  | )
|                                                                                               | Changes in long-term insurance reserves                                           |                                                  |        | 16,726        |         |   |  |                     |          | 11,369        |            |   |         | 37,196  |        
|                                                                                               | Other                                                                             |                                                  |        | 178           |         |   |  |                     |          | (7,185        | )          |   |         | (8,200  | )      
|                                                                                               |                                                                                   |                                                  |        |               |         |   |  |                     |          |               |            |   |         |         |        
|Net cash provided by operating activities of continuing
operations before reorganization items |                                                                                   |                                                  | 26,333 |               |         |   |  |                     | 38,545   |               |            |   | 111,296 |        
|                                                                                               |                                                                                   |                                                  |        |               |         |   |  |                     |          |               |            |   |         |         |        
|Net cash provided by discontinued pharmacy operations                                          |                                                                                   |                                                  |       |               |         |   |  |                     |         |               |            |   | 8,760   |        
|                                                                                               |                                                                                   |                                                  |        |               |         |   |  |                     |          |               |            |   |         |         |        
|                                                                                               | Payment of reorganization items, net                                              |                                                  |        | (20,437       | )       |   |  |                     |          | (35,813       | )          |   |         | (40,840 | )      
|                                                                                               |                                                                                   |                                                  |        |               |         |   |  |                     |          |               |            |   |         |         |        
|                                                                                               | Cash flows from investing activities:                                             |                                                  |        |               |         |   |  |                     |          |               |            |   |         |         |        
|                                                                                               |                                                                                   | Capital expenditures                             |        |               | (17,287 | ) |  |                     |          |               | (27,553    | ) |         |         | (23,849 | )
|                                                                                               |                                                                                   | Disposition of assets                            |        |               | 2,784   |   |  |                     |          |               | 92,446     |   |         |         | 4,393   |  
|                                                                                               |                                                                                   | Restricted investments                           |        |               | 13,695  |   |  |                     |          |               | (14,975    | ) |         |         | 3,348   |  
|                                                                                               |                                                                                   | Other                                            |        |               | 58      |   |  |                     |          |               | 6,166      |   |         |         | 718     |  
|                                                                                               |                                                                                   |                                                  |        |               |         |   |  |                     |          |               |            |   |         |         |        
|Net cash (utilized) provided by investing activities                                           |                                                                                   |                                                  | (750   | )             |         |   |  |                     | 56,084   |               |            |   | (15,390 | )      
|                                                                                               | Cash flows from financing activities:                                             |                                                  |        |               |         |   |  |                     |          |               |            |   |         |         |        
|                                                                                               |                                                                                   | Proceeds from issuance of long-term debt         |        |               |        |   |  |                     |          |               | 212,000    |   |         |         |        |  
|                                                                                               |                                                                                   | Repayment of long-term debt                      |        |               | (2,693  | ) |  |                     |          |               | (386,872   | ) |         |         | (33,275 | )
|                                                                                               |                                                                                   | Payment of deferred financing fees               |        |               |        |   |  |                     |          |               | (6,424     | ) |         |         |        |  
|                                                                                               |                                                                                   | Other                                            |        |               |        |   |  |                     |          |               |           |   |         |         | (3,853  | )
|                                                                                               |                                                                                   |                                                  |        |               |         |   |  |                     |          |               |            |   |         |         |        
|Net cash utilized by financing activities                                                      |                                                                                   |                                                  | (2,693 | )             |         |   |  |                     | (181,296 | )             |            |   | (37,128 | )      
|                                                                                               |                                                                                   |                                                  |        |               |         |   |  |                     |          |               |            |   |         |         |        
|Increase (decrease) in cash and cash equivalents                                               |                                                                                   |                                                  | 2,453  |               |         |   |  |                     | (122,480 | )             |            |   | 26,698  |        
|Cash and cash equivalents, beginning of period                                                 |                                                                                   |                                                  | 91,260 |               |         |   |  |                     | 213,740  |               |            |   | 182,352 |        
|                                                                                               |                                                                                   |                                                  |        |               |         |   |  |                     |          |               |            |   |         |         |        
|Cash and cash equivalents, end of period                                                       |                                                                                   | $                                                | 93,713 |               |         |   |  | $                   | 91,260   |               |            | $ | 209,050 |        
|                                                                                               |                                                                                   |                                                  |        |               |         |   |  |                     |          |               |            |   |         |         |        

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

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##### Table of Contents



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

NOTE 1       NATURE OF BUSINESS

Reporting Entity

Mariner Health Care, Inc. (Mariner or the Company, f/k/a Mariner
Post-Acute Network, Inc.) provides post-acute health care services, primarily
through the operation of its skilled nursing facilities (SNFs). All
references to the Company herein include the operating subsidiaries through
which the services described herein are directly provided. At September 30,
2002, the Companys significant operations consisted of approximately 295 SNFs
in 23 states, including 9 stand-alone assisted living facilities, with
approximately 35,800 licensed beds and significant concentrations of facilities
and beds in 5 states and several metropolitan markets, which represented the
Companys only reportable operating segment. The Company also operates 13
owned, leased or managed long-term acute care (LTAC) hospitals in 4 states
with approximately 670 licensed beds. See Note 13 for financial information
about the Companys reportable segment.

At a meeting of our Board of Directors duly called and held on December
13, 2001, our Amended and Restated Bylaws were amended to change our fiscal
year end from September 30 to December 31.

Reorganization Under Chapter 11

As described in more detail below, on January 18, 2000 (the Petition
Date) the Company and certain of its subsidiaries filed voluntary petitions
with the United States Bankruptcy Court for the District of Delaware (the
Bankruptcy Court). On May 13, 2002 (the Effective Date), the Company
emerged from proceedings under chapter 11 of title 11 (Chapter 11) of the
United States Code (the Bankruptcy Code) pursuant to the terms of its Joint
Plan (as defined below). On March 25, 2002, 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). In connection with its emergence from
bankruptcy, the Company changed its name to Mariner Health Care, Inc. See Note
3 for more information about the Companys bankruptcy proceedings.

NOTE 2       BASIS OF PRESENTATION

The accompanying
unaudited condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and
Exchange Commission (the SEC). Certain information and
disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the
United States have been condensed or omitted pursuant to such rules
and regulations. 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 in Notes 3 and 4, 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.

Since filing for
protection under the Bankruptcy Code on January 18, 2000, the
Company operated its business as a debtor-in-possession subject to
the jurisdiction of the Bankruptcy Court until its emergence from
bankruptcy on May 13, 2002. Accordingly, the Companys
consolidated financial statements for periods prior to its emergence
from bankruptcy were prepared in conformity 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)
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 connection with
its emergence from bankruptcy, the Company reflected the terms of the
Joint Plan in its consolidated financial statements by adopting the
principles of fresh-start reporting in accordance with SOP 90-7. For
financial reporting purposes, the effects of the consummation of the
Joint Plan as well as adjustments for fresh-start reporting have been
recorded in the accompanying unaudited condensed consolidated
financial statements as of May 1, 2002. Therefore as used in
this Form 10-Q, the term Predecessor Company refers to
the Company and its operations for periods prior to bankruptcy and
for financial reporting purposes prior to May 1, 2002, while the
term Reorganized Company is used to describe the Company
for periods after its emergence from bankruptcy and for financial
reporting purposes, after May 1, 2002. Under fresh-start
reporting, a new entity is deemed to be created for financial
reporting purposes and the recorded amounts of assets and liabilities
are adjusted to reflect their estimated fair values. Since
fresh-start reporting materially changed the amounts previously
recorded in the Company's consolidated financial statements, a black
line 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 to signify the
difference in the basis of preparation of financial information for
each respective entity.

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##### Table of Contents



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

The Reorganized
Company has adopted the accounting policies of the Predecessor
Company as described in the audited consolidated financial statements
of the Predecessor Company for the transition period from
October 1, 2001 to December 31, 2001 included in the
Predecessor Company's Transition Report filed on Form 10-K with
the SEC on March 21, 2002 (the Transition Report).
These financial statements should be read in conjunction with the
Transition Report. In accordance with the fresh-start reporting
provisions of SOP 90-7, the Company has also adopted changes in
accounting principles that will be required in the financial
statements of the Reorganized Company within the following twelve
months (see Recent Accounting Pronouncements).

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. However, capital costs (rent, interest,
depreciation and amortization) of the Predecessor Company that were
based on pre-petition contractual agreements and historical costs 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.

The Company recorded
a gain of approximately $1,229.6 million from the restructuring of its debt in accordance with the provisions of the Joint Plan.
Other significant adjustments 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 have been reflected in the
operating results of the Predecessor Company for the four months ended April
30, 2002.

Recent Accounting Pronouncements

In July 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 146 (SFAS No. 146)
Accounting for Costs Associated with Exit or Disposal Activities. SFAS No.
146 replaces Emerging Issues Task Force Issue No. 94-3, Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity.
SFAS No. 146 requires the recognition of costs associated with exit or
disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. SFAS No. 146 is applied prospectively
to exit or disposal activities initiated after December 31, 2002 with early
adoption encouraged. The Company adopted SFAS No. 146 on May 1, 2002 in
connection with its adoption of fresh-start reporting. The adoption of SFAS
No. 146 did not have a material impact on the consolidated financial statements
of the Company.

In April 2002, FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. SFAS No. 145 rescinds SFAS No. 4, Reporting Gains and Losses
from Extinguishment of Debt. As a result, gains and losses from
extinguishment of debt should be classified as extraordinary items only if they
meet the criteria in Accounting Principles Board Opinion No. 30 (APB No. 30).
SFAS No. 44, Accounting for Intangible Assets of Motor Carriers, was issued
to establish accounting requirements for the effects of transition to the
provisions of the Motor Carrier Act of 1980. Because those transitions have
been completed, SFAS No. 44 is no longer necessary. SFAS No. 64,
Extinguishments of

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##### Table of Contents



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

Debt Made to Satisfy Sinking-Fund Requirements, amended
SFAS No. 4, and is no longer necessary because SFAS No. 4 has been rescinded.
SFAS No. 145 amends SFAS No. 13, Accounting for Leases, to eliminate an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. The provisions of
SFAS No. 145 related to the recision of SFAS No. 4 will be applied in fiscal
years beginning after May 15, 2002. The provisions of SFAS No. 145 related to
SFAS No. 13 will be effective for transactions occurring after May 15, 2002,
with early application encouraged. All other provisions of SFAS No. 145 are
effective for financial statements issued on or after May 15, 2002, with early
application encouraged. The Company adopted SFAS No. 145 on May 1, 2002 in
connection with its adoption of fresh-start reporting and has presented the
reorganization and restructuring of its debt in connection with the terms of
the Joint Plan as a reorganization item (see Note 3).

In July 2001, FASB issued SFAS No. 142 Goodwill and Other Intangible
Assets. SFAS No. 142 establishes new accounting and reporting standards for
goodwill and other intangible assets. Under SFAS No. 142, goodwill and
intangible assets with indefinite lives will no longer be amortized. However,
they will be subject to annual impairment tests as prescribed by the statement.
The provisions of this statement were required to be applied starting with the
fiscal year beginning after December 15, 2001. In accordance with the adoption
of SFAS No. 142, the Company discontinued amortizing goodwill effective January
1, 2002. Intangible assets with definite lives will continue to be amortized
over their estimated useful lives. The Company adopted the provisions of
fresh-start reporting as of May 1, 2002. On this date, the intangible assets
of the Reorganized Company were restated to their fair market value based upon
estimates provided by an independent financial advisor.

The following table shows the impact on the Companys earnings relating to
the adoption of SFAS No. 142 for the periods indicated (in thousands of
dollars, except earnings per share amounts):

|                                        |  |                     |         |               |  |   |         |  
|--------------------------------------- |  | ------------------- | ------- | ------------- |  | - | ------- | -
|                                        |  | Predecessor Company
|                                        |  |                    
|                                        |  | Three Months        |         | Nine Months  
|                                        |  | Ended               |         | Ended        
|                                        |  | September 30,       |         | September 30,
|                                        |  | 2001                |         | 2001         
|                                        |  |                     |         |              
|Reported net loss                       |  | $                   | (51,562 | )             |  | $ | (43,305 | )
|Add back: goodwill amortization         |  |                     | 2,714   |               |  |   | 8,526   |  
|                                        |  |                     |         |               |  |   |         |  
|Adjusted net loss                       |  | $                   | (48,848 | )             |  | $ | (34,779 | )
|                                        |  |                     |         |               |  |   |         |  
|Earnings per share  basic and diluted: |  |                     |         |               |  |   |         |  
|Reported net loss                       |  | $                   | (0.70   | )             |  | $ | (0.59   | )
|Goodwill amortization                   |  |                     | 0.04    |               |  |   | 0.12    |  
|                                        |  |                     |         |               |  |   |         |  
|Adjusted net loss                       |  | $                   | (0.66   | )             |  | $ | (0.47   | )
|                                        |  |                     |         |               |  |   |         |  

Reclassifications

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

NOTE 3       REORGANIZATION UNDER CHAPTER 11 OF THE BANKRUPTCY CODE

As previously noted, on the Effective Date, the Company emerged from
proceedings under Chapter 11 of the Bankruptcy Code pursuant to the terms of
the Joint Plan. On January 18, 2000 (the Petition Date), Mariner Post-Acute
Network, Inc. and certain of its direct and indirect subsidiaries (other than
its wholly owned subsidiary, Mariner Health Group, Inc. (MHG), and its direct
and indirect subsidiaries, the MPAN Debtors) filed voluntary petitions with
the Bankruptcy Court for protection under Chapter 11 of the Bankruptcy Code. On
the same date, MHG and certain of its direct and indirect subsidiaries (the
MHG Debtors) also filed for relief under Chapter 11 of the Bankruptcy Code,
thus commencing the chapter 11 cases (the Chapter 11 Cases).

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##### Table of Contents



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

On November 30, 2001, the MPAN Debtors and the MHG Debtors (collectively,
the Debtors) filed an initial version of the Joint Plan with the Bankruptcy
Court. The Joint Plan was amended on December 14, 2001 and again on February 1,
2002, at which time the Bankruptcy Court approved the Disclosure Statement
related to the Joint Plan and authorized the Debtors to solicit votes in favor
of the Joint Plan. A hearing on confirmation of the Joint Plan by the
Bankruptcy Court was held on March 25, 2002, in connection with which the Joint
Plan was further amended. The Bankruptcy Court confirmed the Joint Plan, as
amended in connection with confirmation, in orders dated April 3, 2002. The
Joint Plan was consummated on May 13, 2002, at which time the automatic stay
imposed by the Bankruptcy Code was terminated. See below for a summary of the
Joint Plan, which is qualified in its entirety by reference to all of the
provisions of the Joint Plan, as filed with the SEC on April 17, 2002 as
Exhibit 2.1 to the Companys Current Report on Form 8-K.

Joint Plan of Reorganization

The Joint Plan resulted from many months of good faith and arms length
negotiations among representatives of the Debtors, the lenders under the
Debtors prepetition senior secured credit facilities and the committees of
unsecured creditors in the Debtors Chapter 11 Cases. The principal provisions
of the Joint Plan provided for, among other things, the substantive
consolidation of the MPAN Debtors estates, and the separate substantive
consolidation of the MHG Debtors estates. Accordingly, any claims against, and
assets of, a particular MPAN Debtor as of the Effective Date were deemed to be
claims against and assets of all of the MPAN Debtors, and any claims against,
and assets of, a particular MHG Debtor as of the Effective Date were deemed to
be claims against and assets of all of the MHG Debtors. Notwithstanding the
foregoing, substantive consolidation did not affect the validity of any
creditors perfected and unavoidable interest in property of the Debtors
estates (such as validly perfected liens). In addition, the Bankruptcy Courts
orders confirming the Joint Plan provided that the determinations regarding
substantive consolidation do not apply to claims arising after the Joint Plans
Effective Date. As a result of the consummation of the Joint Plan, the Company
has one capital structure, and the MPAN Debtors and the MHG Debtors no longer
operate separately, except with respect to the resolution of claims in their
respective Chapter 11 Cases. In addition, the principal lenders under the
Debtors prepetition senior credit facilities received the substantial majority
of the equity in the Reorganized Company in accordance with the provisions of
the Joint Plan (see below).

Pursuant to the Joint Plan, the principal lenders under the Debtors
prepetition senior credit facilities received, among other things: (i) $275.0
million of available cash, as defined in the Joint Plan, after giving effect to
certain adequate protection payments paid to senior lenders in connection with
the disposition of assets; (ii) $150.0 million in principal amount of newly
issued secured debt (the Second Priority Notes) (see Note 5); and (iii) 19.2
million shares of the Reorganized Companys common stock, par value $.01 per
share (the New Common Stock), representing approximately 96% of the New
Common Stock issued as of the Effective Date.

Certain of the Debtors SNFs were also encumbered by mortgage debt owing
to third parties (the Project Lenders). Most Project Lenders received
consensual treatment as provided in the Joint Plan, which included, among other
things, (i) a cash payment of $11.5 million in satisfaction of mortgages on
three SNFs; (ii) a cash payment of approximately $0.5 million and the
restructuring of mortgages on two SNFs; and (iii) an agreement to surrender
certain SNFs and other collateral in satisfaction of mortgages on certain other
SNFs.

Holders of general unsecured allowed claims (other than holders of general
unsecured allowed claims against the MHG Debtors) received pro rata
distributions of 399,078 shares of New Common Stock (approximately 2% of the
New Common Stock issued on the Effective Date) and warrants to purchase an
additional 376,893 shares of New Common Stock. Such warrants have a per share
exercise price of $28.04 and are exercisable for a period of two years beyond
the Effective Date.

The holders of general unsecured allowed claims against the MHG Debtors
received, along with the holders of senior subordinated notes issued by the MHG
Debtors prior to bankruptcy, pro rata distributions of a $7.5 million cash
fund. Holders of senior subordinated notes issued by the MPAN Debtors prior to
bankruptcy received pro rata distributions of 399,078 shares of New Common
Stock (approximately 2% of the New Common Stock issued on the Effective Date)
and warrants to purchase an additional 376,893 shares of the New Common Stock.
Such warrants have a per share exercise price of $28.04 and are exercisable for
a period of two years beyond the Effective Date. Holders of punitive damage
claims and securities damage claims received no distributions under the Joint
Plan on account of such claims.

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##### Table of Contents



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

Most other creditors holding allowed secured claims were unimpaired, paid
in full, or had their collateral returned to them in satisfaction of their
allowed secured claims. Holders of allowed priority tax claims and allowed
other priority claims were paid in full.

The holders of preferred stock, common stock, warrants and options to
purchase common stock of the Company prior to the Effective Date did not
receive any distributions under the Joint Plan. On the Effective Date, MHG was
merged out of existence and its direct and indirect subsidiaries remained
direct or indirect subsidiaries of the Reorganized Company, as set forth in a
corporate restructuring program implemented by the Company in connection with
the Joint Plan and as described in more detail in the Joint Plan. The Joint
Plan contains various other provisions relating to, among other things,
executory contracts and leases, plan implementation and other matters that
affected the rights of creditors and equity holders.

Matters Related to Emergence

In connection with the consummation of the Joint Plan, the Company entered
into a $297.0 million senior credit facility with a syndicate of lenders (the
Senior Credit Facility), dated as of the Effective Date, which provided funds
to satisfy certain obligations of the Predecessor Company to its creditors
under the Joint Plan, for general working capital purposes and for permitted
acquisitions. In connection with the issuance of the Second Priority Notes, the
Company entered into an indenture pertaining to such notes (see Note 5).

On the Effective Date, the Company filed a registration statement on Form
8-A (the Form 8-A) with the SEC to register the New Common Stock and warrants
to purchase the New Common Stock issued in connection with the Joint Plan. In
addition, the Form 8-A disclosed that the Company had filed its Third Amended
and Restated Certificate of Incorporation, which, among other things, changed
the number of authorized shares of capital stock to 90,000,000, with 80,000,000
shares reserved for issuance as New Common Stock and 10,000,000 shares reserved
for issuance as preferred stock, par value $.01 per share (the New Preferred
Stock)(see Note 6).

In connection with the restructuring of its debt in accordance with the
provisions of the Joint Plan, the Company realized a gain of approximately
$1,229.6 million, which is included in reorganization items in the condensed
consolidated statements of operations. For accounting purposes, this gain has
been reflected in the operating results of the Predecessor Company for the four
months ended April 30, 2002. A summary of the gain follows (in thousands of
dollars):

|                                        |                                                      |                                      |           |           |           | 
|--------------------------------------- | ---------------------------------------------------- | ------------------------------------ | --------- | --------- | --------- | 
|Liabilities subject to compromise:      |                                                      |                                      |           |          
|                                        | Pre-petition senior credit facilities and term loans |                                      | $         | 1,217,638 |          
|                                        | Pre-petition senior subordinated debt                |                                      |           | 597,328   |          
|                                        | Other pre-petition debt                              |                                      |           | 134,708   |          
|                                        |                                                      |                                      |           |           |          
|                                        |                                                      | Long-term debt subject to compromise |           |           | 1,949,674 | 
|                                        | Accounts payable and other accrued liabilities       |                                      |           | 169,897   |          
|                                        | Accrued interest                                     |                                      |           | 79,959    |          
|                                        | Deferred loan costs                                  |                                      |           | (32,253   | )        
|                                        |                                                      |                                      |           |           |          
|Total liabilities subject to compromise |                                                      |                                      | 2,167,277 |          
|Less: Consideration exchanged:          |                                                      |                                      |           |          
|                                        | Cash payments                                        |                                      |           | 287,376   |          
|                                        | Value of secured, priority and other claims assumed  |                                      |           | 140,232   |          
|                                        | Value of Second Priority Notes                       |                                      |           | 150,000   |          
|                                        | Value of Reorganized Companys New Common Stock      |                                      |           | 359,177   |          
|                                        | Value of Reorganized Companys warrants              |                                      |           | 935       |          
|                                        |                                                      |                                      |           |           |          
|Gain on debt discharge                  |                                                      | $                                    | 1,229,557 |          
|                                        |                                                      |                                      |           |           |          

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

Reorganization Items

In accordance with SOP 90-7, the Company has recorded all transactions
incurred as a result of the bankruptcy filings as reorganization items. A
summary of the principal categories of reorganization items follows (in
thousands of dollars):

|                                                                          |  |                     |        |             |  |               |            |   |  |   |        |  
|------------------------------------------------------------------------- |  | ------------------- | ------ | ----------- |  | ------------- | ---------- | - |  | - | ------ | -
|                                                                          |  | Predecessor Company
|                                                                          |  |                    
|                                                                          |  | Three Months        |        | Four Months |  | Nine Months  
|                                                                          |  | Ended               |        | Ended       |  | Ended        
|                                                                          |  | September 30,       |        | April 30,   |  | September 30,
|                                                                          |  | 2001                |        | 2002        |  | 2001         
|                                                                          |  |                     |        |             |  |              
|Professional fees                                                         |  | $                   | 9,277  |             |  | $             | 67,976     |   |  | $ | 35,511 |  
|Net loss (gain) on divestitures                                           |  |                     | 7,305  |             |  |               | 10,766     |   |  |   | (1,221 | )
|Interest earned on accumulated cash resulting from
the Chapter 11 filings |  |                     | (1,396 | )           |  |               | (648       | ) |  |   | (4,799 | )
|Other reorganization costs                                                |  |                     | 3,020  |             |  |               | 11,031     |   |  |   | 10,128 |  
|Gain on extinguishment of debt                                            |  |                     |       |             |  |               | (1,229,557 | ) |  |   |       |  
|Fresh-start valuation adjustments                                         |  |                     |       |             |  |               | (253,877   | ) |  |   |       |  
|                                                                          |  |                     |        |             |  |               |            |   |  |   |        |  
|                                                                          |  | $                   | 18,206 |             |  | $             | (1,394,309 | ) |  | $ | 39,619 |  
|                                                                          |  |                     |        |             |  |               |            |   |  |   |        |  

NOTE 4       FRESH-START REPORTING

As previously discussed, in accordance with SOP 90-7, the Company adopted
the provisions of fresh-start reporting as of May 1, 2002. In adopting the
requirements of fresh-start reporting, the Company engaged an independent
financial advisor to assist in the determination of the reorganization value or
fair value of the entity. The independent financial advisor determined an
estimated reorganization value of approximately $816.8 million before
considering any long-term debt or other obligations assumed in connection with
the Joint Plan. This estimate was based upon various valuation methods,
including discounted projected cash flow analysis, selected comparable market
multiples of publicly traded companies and other applicable ratios and economic
industry information relevant to the operations of the Company, as well as
through negotiations with the various creditor parties in interest. The
estimated total equity value of the Reorganized Company aggregating
approximately $326.2 million was determined after taking into account the
values of the obligations assumed in connection with the Joint Plan.

The following reconciliation of the Predecessor Companys consolidated
balance sheet as of April 30, 2002 to that of the Reorganized Company as of May
1, 2002 was prepared to present the adjustments that give effect to the
reorganization and fresh-start reporting.

The adjustments entitled Reorganization reflect the consummation of the
Joint Plan, including the elimination of existing liabilities subject to
compromise and consolidated shareholders deficit, and reflect the
aforementioned $816.8 million reorganization value, which includes the
establishment of $265.0 million of reorganization value in excess of amounts
allocable to net identifiable assets.

The adjustments entitled Fresh-Start Adjustments reflect the adoption of
fresh-start reporting, including the adjustments to record property and
equipment and identifiable intangible assets at their fair values. The assets
and liabilities have been recorded at their fair values based on a preliminary
allocation. Management estimated the fair value of the Companys assets and
liabilities by using both independent appraisals and commonly used discounted
cash flow valuation methods.

Certain of the Companys wholly owned subsidiaries and consolidated joint
ventures did not file for protection under Chapter 11. The non-filing
subsidiaries are not subject to the fresh-start reporting provisions under SOP
90-7 and, consequently, their balance sheets are reflected in the consolidated
balance sheet at historical carrying value.

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

A reconciliation of fresh-start reporting recorded as of May 1, 2002
follows (in thousands of dollars):

|                                                                           |                                                       |                           |           |             |         |                |            |             |          |                   |          |         |        |   |        |          |         |             |           |         |         | 
|-------------------------------------------------------------------------- | ----------------------------------------------------- | ------------------------- | --------- | ----------- | ------- | -------------- | ---------- | ----------- | -------- | ----------------- | -------- | ------- | ------ | - | ------ | -------- | ------- | ----------- | --------- | ------- | ------- | 
|                                                                           |                                                       |                           |           | Predecessor |         |                |            |             |          |                   |          |         |        |   |        |          |         | Reorganized
|                                                                           |                                                       |                           |           | Company     |         |                |            |             |          |                   |          |         |        |   |        |          |         | Company    
|                                                                           |                                                       |                           |           |             |         |                |            |             |          |                   |          |         |        |   |        |          |         |            
|                                                                           |                                                       |                           |           | April 30,   |         |                |            |             |          | Fresh-Start       |          |         |        |   |        | May 1,  
|                                                                           |                                                       |                           |           | 2002        |         | Reorganization |            | Adjustments |          | Reclassifications |          | 2002   
|                                                                           |                                                       |                           |           |             |         |                |            |             |          |                   |          |        
|ASSETS                                                                     |                                                       |                           |           |             |         |                |            |             |          |                   |          |         |        |   |        |          |         |             |           |        
|Current assets:                                                            |                                                       |                           |           |             |         |                |            |             |          |                   |          |         |        |   |        |          |         |             |           |        
|                                                                           | Cash and cash
equivalents                             |                           | $         | 202,338     |         |                | $          | (111,078    | )        |                   | $        |        |        |   | $      |         |         |             | $         | 91,260  |        
|                                                                           | Receivables                                           |                           |           | 232,162     |         |                |            | 3,640       |          |                   |          |        |        |   |        |         |         |             |           | 235,802 |        
|                                                                           | Inventories                                           |                           |           | 7,631       |         |                |            |            |          |                   |          |        |        |   |        |         |         |             |           | 7,631   |        
|                                                                           | Other current assets                                  |                           |           | 28,918      |         |                |            |            |          |                   |          |        |        |   |        |         |         |             |           | 28,918  |        
|                                                                           |                                                       |                           |           |             |         |                |            |             |          |                   |          |         |        |   |        |          |         |             |           |         |        
|                                                                           |                                                       | Total current assets      |           |             | 471,049 |                |            |             | (107,438 | )                 |          |         |       |   |        |          |        |             |           |         | 363,611 | 
|Property and equipment,
net                                                |                                                       |                           | 416,369   |             |         |                |           |             |          |                   | 160,353  |         |        |   |       |          |         |             | 576,722   |        
|Reorganization value in
excess of amounts
allocable to
identifiable assets |                                                       |                           |          |             |         |                | 264,954    |             |          |                   |         |         |        |   |       |          |         |             | 264,954   |        
|Goodwill                                                                   |                                                       |                           | 186,543   |             |         |                |           |             |          |                   | (179,746 | )       |        |   |       |          |         |             | 6,797     |        
|Restricted investments                                                     |                                                       |                           | 34,054    |             |         |                | 16,453     |             |          |                   |         |         |        |   |       |          |         |             | 50,507    |        
|Other assets                                                               |                                                       |                           | 29,251    |             |         |                | 5,924      |             |          |                   | (8,461   | )       |        |   |       |          |         |             | 26,714    |        
|                                                                           |                                                       |                           |           |             |         |                |            |             |          |                   |          |         |        |   |        |          |         |             |           |         |        
|                                                                           |                                                       | $                         | 1,137,266 |             |         | $              | 179,893    |             |          | $                 | (27,854  | )       |        | $ |       |          |         | $           | 1,289,305 |        
|                                                                           |                                                       |                           |           |             |         |                |            |             |          |                   |          |         |        |   |        |          |         |             |           |         |        
|Current liabilities:                                                       |                                                       |                           |           |             |         |                |            |             |          |                   |          |         |        |   |        |          |         |             |           |        
|                                                                           | Current maturities of
long-term debt                  |                           | $         |            |         |                | $          |            |          |                   | $        |        |        |   | $      | 6,220    |         |             | $         | 6,220   |        
|                                                                           | Accounts payable                                      |                           |           | 54,100      |         |                |            |            |          |                   |          |        |        |   |        |         |         |             |           | 54,100  |        
|                                                                           | Accrued compensation
and benefits                     |                           |           | 90,776      |         |                |            |            |          |                   |          |        |        |   |        |         |         |             |           | 90,776  |        
|                                                                           | Accrued insurance
obligations                         |                           |           | 24,826      |         |                |            |            |          |                   |          |        |        |   |        |         |         |             |           | 24,826  |        
|                                                                           | Other current
liabilities                             |                           |           | 110,229     |         |                |            | 7,158       |          |                   |          | (1,897  | )      |   |        | (16,250  | )       |             |           | 99,240  |        
|                                                                           |                                                       |                           |           |             |         |                |            |             |          |                   |          |         |        |   |        |          |         |             |           |         |        
|                                                                           |                                                       | Total current liabilities |           |             | 279,931 |                |            |             | 7,158    |                   |          |         | (1,897 | ) |        |          | (10,030 | )           |           |         | 275,162 | 
|Liabilities subject to
compromise                                          |                                                       |                           | 2,167,277 |             |         |                | (2,167,277 | )           |          |                   |         |         |        |   |       |          |         |             |          |        
|Long-term debt, net of
current maturities                                  |                                                       |                           | 59,688    |             |         |                | 430,955    |             |          |                   |         |         |        |   | (6,220 | )        |         |             | 484,423   |        
|Long-term insurance
reserves                                               |                                                       |                           | 119,002   |             |         |                | 58,268     |             |          |                   |         |         |        |   |       |          |         |             | 177,270   |        
|Other liabilities                                                          |                                                       |                           | 18,497    |             |         |                | 1,901      |             |          |                   | (10,402  | )       |        |   | 16,250 |          |         |             | 26,246    |        
|                                                                           |                                                       |                           |           |             |         |                |            |             |          |                   |          |         |        |   |        |          |         |             |           |         |        
|                                                                           |                                                       |                           | 2,644,395 |             |         |                | (1,668,995 | )           |          |                   | (12,299  | )       |        |   |       |          |         |             | 963,101   |        
|Stockholders equity
(deficit):                                            |                                                       |                           |           |             |         |                |            |             |          |                   |          |         |        |   |        |          |         |             |           |        
|                                                                           | Reorganized Company
common stock                      |                           |           |            |         |                |            | 200         |          |                   |          |        |        |   |        |         |         |             |           | 200     |        
|                                                                           | Predecessor Company
common stock                      |                           |           | 737         |         |                |            | (737        | )        |                   |          |        |        |   |        |         |         |             |           |        |        
|                                                                           | Reorganized Company
warrants to purchase
common stock |                           |           |            |         |                |            | 935         |          |                   |          |        |        |   |        |         |         |             |           | 935     |        
|                                                                           | Capital in excess of
par value                        |                           |           | 980,952     |         |                |            | 359,714     |          |                   |          |        |        |   |        | (981,689 | )       |             |           | 358,977 |        
|                                                                           | Retained earnings
(accumulated deficit)               |                           |           | (2,488,644  | )       |                |            | 1,488,776   |          |                   |          | (15,555 | )      |   |        | 981,689  |         |             |           | (33,734 | )      
|                                                                           | Accumulated other
comprehensive loss                  |                           |           | (174        | )       |                |            |            |          |                   |          |        |        |   |        |         |         |             |           | (174    | )      
|                                                                           |                                                       |                           |           |             |         |                |            |             |          |                   |          |         |        |   |        |          |         |             |           |         |        
|                                                                           |                                                       | $                         | 1,137,266 |             |         | $              | 179,893    |             |          | $                 | (27,854  | )       |        | $ |       |          |         | $           | 1,289,305 |        
|                                                                           |                                                       |                           |           |             |         |                |            |             |          |                   |          |         |        |   |        |          |         |             |           |         |        

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##### Table of Contents



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

Pro Forma Information

The unaudited condensed consolidated pro forma effect of the Joint Plan
assuming that the Effective Date occurred on January 1, 2001 follows (in
thousands of dollars, except per share amounts):

|                                                           |  |               |         |               |  |               |         |               |  |             |           |  |  |   |           |  
|---------------------------------------------------------- |  | ------------- | ------- | ------------- |  | ------------- | ------- | ------------- |  | ----------- | --------- |  |  | - | --------- | -
|                                                           |  |               |         |               |  |               |         |               |  | Reorganized |           |  |  |  
|                                                           |  |               |         |               |  |               |         |               |  | Company and |           |  |  |  
|                                                           |  |               |         |               |  |               |         |               |  | Predecessor |           |  |  |  
|                                                           |  | Reorganized   |         | Predecessor   |  | Company       |         | Predecessor  
|                                                           |  | Company       |         | Company       |  | Combined      |         | Company      
|                                                           |  |               |         |               |  |               |         |              
|                                                           |  | Three Months  |         | Three Months  |  | Nine Months   |         | Nine Months  
|                                                           |  | Ended         |         | Ended         |  | Ended         |         | Ended        
|                                                           |  | September 30, |         | September 30, |  | September 30, |         | September 30,
|                                                           |  | 2002          |         | 2001          |  | 2002          |         | 2001         
|                                                           |  |               |         |               |  |               |         |              
|Revenue                                                    |  | $             | 445,866 |               |  | $             | 463,895 |               |  | $           | 1,342,391 |  |  | $ | 1,401,787 |  
|Income (loss) from continuing operations                   |  |               | 5,950   |               |  |               | (41,597 | )             |  |             | 15,801    |  |  |   | (33,230   | )
|Income from operations of discontinued
pharmacy operations |  |               |        |               |  |               | 1,042   |               |  |             |          |  |  |   | 285       |  
|Gain on sale of discontinued pharmacy operations           |  |               |        |               |  |               |        |               |  |             | 29,082    |  |  |   |          |  
|Net income (loss)                                          |  |               | 5,950   |               |  |               | (40,555 | )             |  |             | 44,883    |  |  |   | (32,945   | )
|Earnings per share:                                        |  |               |         |               |  |               |         |               |  |             |           |  |  |   |           |  
|Income (loss) from continuing operations                   |  | $             | 0.30    |               |  | $             | (2.08   | )             |  | $           | 0.79      |  |  | $ | (1.66     | )
|Income from operations of discontinued
pharmacy operations |  |               |        |               |  |               | 0.05    |               |  |             |          |  |  |   | 0.01      |  
|Gain on sale of discontinued pharmacy operations           |  |               |        |               |  |               |        |               |  |             | 1.45      |  |  |   |          |  
|Net income (loss)                                          |  |               | 0.30    |               |  |               | (2.03   | )             |  |             | 2.24      |  |  |   | (1.65     | )

The unaudited condensed consolidated pro forma results exclude
reorganization items recorded prior to May 1, 2002. The unaudited 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 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.

NOTE 5       LONG-TERM DEBT

A summary of long-term debt as of September 30, 2002 and December 31, 2001
follows (in thousands of dollars):

|                                    |                                                                    |                |         |               |         |  |  |              |            |           |        | 
|----------------------------------- | ------------------------------------------------------------------ | -------------- | ------- | ------------- | ------- |  |  | ------------ | ---------- | --------- | ------ | 
|                                    |                                                                    |                |         | Reorganized   |         |  |  | Predecessor 
|                                    |                                                                    |                |         | Company       |         |  |  | Company     
|                                    |                                                                    |                |         |               |         |  |  |             
|                                    |                                                                    |                |         | September 30, |         |  |  | December 31,
|                                    |                                                                    |                |         | 2002          |         |  |  | 2001        
|                                    |                                                                    |                |         |               |         |  |  |             
|                                    |                                                                    |                |         | (unaudited)   |         |  |  |              |            |          
|Secured debt:                       |                                                                    |                |         |               |         |  |  |              |            |          
|                                    | Senior Credit Facility:                                            |                |         |               |         |  |  |              |            |           |       
|                                    |                                                                    | Term Loans     |         | $             | 210,940 |  |  |              |            | $         |       | 
|                                    | Second Priority Notes                                              |                |         | 150,000       |         |  |  |              |            |          |       
|                                    | Pre-petition senior credit facilities                              |                |         |              |         |  |  |              |            | 1,301,982 |       
|                                    | Non-recourse indebtedness of subsidiary                            |                |         | 59,688        |         |  |  |              |            | 59,688    |       
|                                    | Mortgage notes payable and capital leases                          |                |         | 67,322        |         |  |  |              |            | 127,442   |       
|Unsecured debt:                     |                                                                    |                |         |               |         |  |  |              |            |          
|                                    | Prepetition senior subordinated debt, net of unamortized discounts |                |         |              |         |  |  |              |            | 597,328   |       
|                                    | Prepetition notes payable and other unsecured debt                 |                |         |              |         |  |  |              |            | 25,978    |       
|                                    |                                                                    |                |         |               |         |  |  |              |            |           |        | 
|                                    |                                                                    |                | 487,950 |               |         |  |  |              | 2,112,418  |          
|Less: current maturities            |                                                                    |                | (6,196  | )             |         |  |  |              |           |          
|Less: amounts subject to compromise |                                                                    |                |        |               |         |  |  |              | (2,052,730 | )        
|                                    |                                                                    |                |         |               |         |  |  |              |            |           |        | 
|                                    |                                                                    | Long-term debt |         | $             | 481,754 |  |  |              |            | $         | 59,688 | 
|                                    |                                                                    |                |         |               |         |  |  |              |            |           |        | 

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

Senior Credit Facility

As previously noted, on the Effective Date and in connection with the
consummation of the Joint Plan, the Company entered into the Senior Credit
Facility with a syndicate of lenders consisting of: (i) an $85.0 million
revolving credit facility (the Revolving Credit Facility); and (ii) a $212.0
million six-year term loan facility (the Term Loans). Outstanding amounts
under the Senior Credit Facility bear interest, at the Companys election, at a
eurodollar rate or an alternate base rate, in each case, plus an applicable
margin, which ranges from 1.25%-2.25% for base rate loans and 2.25%-3.25% for
eurodollar loans. The interest rate on the Term Loans was 5.31% at September
30, 2002. The applicable margin for loans under the Revolving Credit Facility
is subject to adjustment in the future based upon a performance related grid.

The Senior Credit Facility is guaranteed by substantially all of the
Companys direct and indirect wholly owned subsidiaries and is secured by a
perfected first priority lien or security interest (junior only to liens in
connection with certain third party mortgage loans and other permitted liens)
in substantially all of the Companys tangible and intangible assets. The
Senior Credit Facility limits, among other things, the Companys ability to
incur additional indebtedness or contingent obligations, permit additional
liens, make additional acquisitions, sell or dispose of assets, pay dividends
on common stock and merge or consolidate with any other person or entity. In
addition, the Senior Credit Facility, which contains customary representations
and warranties, restricts the Companys ability to borrow funds thereunder in
the event the Company maintains in excess of a $25.0 million cash balance, and
requires the Company to maintain compliance with certain financial covenants,
including minimum EBITDA (as defined in the Senior Credit Facility), maximum
leverage ratios, minimum fixed charge coverage ratios and maximum capital
expenditures.

The Revolving Credit Facility is available 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
calculation based upon both a percentage of the Companys eligible accounts
receivable and a percentage of the real property collateral value of
substantially all of the Companys SNFs. No borrowings were outstanding under
the Revolving Credit Facility as of September 30, 2002, but approximately $22.6
million of letters of credit were outstanding under the Revolving Credit
Facility on that date.

Proceeds of the Term Loans were used to fund the Companys obligations
under the Joint Plan and to pay in cash all or a portion of certain claims of
pre-petition senior credit facility lenders and mortgage lenders. The Term
Loans amortize in quarterly installments at a rate of 0.25% of the original
principal balance, or $530,000, payable on the last day of each fiscal quarter
beginning June 30, 2002, and mature on May 13, 2008. The Term Loans can be
prepaid at the Companys option without penalty or premium. In addition, the
Term Loans are subject to mandatory prepayment: (i) from the proceeds of
certain asset sales which are not used within 180 days of receipt to acquire
long-term useful assets of the general type used in the Companys business;
(ii) from the proceeds of certain casualty insurance and condemnation awards,
the proceeds of which are not used within 360 days of receipt for the repair,
restoration or replacement of the applicable assets or for the purchase of
other long-term useful assets of the general type used in the Companys
business; and (iii) from the proceeds of the issuance of certain equity
securities and certain debt. The Term Loans are also subject to annual
mandatory prepayment to the extent of 75% of the Companys consolidated excess
cash flow.

The Senior Credit Facility has been amended to, among other things, extend
to February 13, 2003 the deadline for the Company to cause the interest rates
on at least 50% of its total funded debt to be effectively fixed, whether
through interest rate protection agreements or otherwise.

The Company incurred deferred financing costs of approximately $6.4
million related to the Senior Credit Facility. In the quarter ended September
30, 2002, $0.3 million of these costs were amortized as an
increase in interest
expense using the straight line method.

Second Priority Notes

As previously noted, on the Effective Date, and in connection with the
consummation of the Joint Plan, the Company entered into an indenture (the
Indenture) with The Bank of New York, as Trustee, pursuant to which the
Company issued the Second Priority Notes in the aggregate principal amount of
$150.0 million. The Second Priority

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

Notes bear interest at the three-month
London Interbank Offered Rate (LIBOR) plus 550 basis points (7.25% at
September 30, 2002) and mature on May 13, 2009. The Second Priority Notes are
secured by a junior lien on substantially all of the Companys tangible and
intangible assets, subject to liens granted to the lenders interest in the
Senior Credit Facility, liens granted to secure certain third party mortgage
loans and other permitted liens. The Second Priority Notes may be prepaid at
any time without penalty, subject to restrictions in place under the Senior
Credit Facility. The Indenture includes affirmative and negative covenants
customary for similar financings, including, without limitation, restrictions
on additional indebtedness, liens, restricted payments, investments, asset
sales, affiliate transactions and the creation of unrestricted subsidiaries.

Non-Recourse Indebtedness of Subsidiary

One of the Companys wholly owned subsidiaries, Professional Health Care
Management, Inc. (PHCMI), is the borrower under an approximately $59.7
million mortgage loan from Omega Healthcare Investors, Inc. (Omega) that was
restructured as part of the Chapter 11 Cases. The loan (the Omega Loan) bears
interest at a rate of 11.57% per annum, and 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. This
term-extending option meets the definition of an embedded derivative
instrument. This derivative is accounted for as a purchased option, or more
specifically a receiver swaption. The fair market value of the receiver
swaption has been separated from the Omega Loan and recorded as an asset at
current market value. Prior to maturity, the Omega Loan is not subject to
prepayment at the option of PHCMI except (a) between February 1, 2005 and July
31, 2005, at 103% of par (notice of which prepayment must be given by December
31, 2004), and (b) within six months prior to the scheduled maturity date, at
par, in each case plus accrued and unpaid interest. Omega is also entitled to
receive an annual amendment fee equal to 25% of the annual free cash flow from
the Omega Facilities (as defined below).

The Omega Loan is guaranteed by all of PHCMIs subsidiaries (together with
PHCMI, the PHCMI Entities), and is secured by liens and security interests on
all or substantially all of the real property and personal property of the
PHCMI Entities, including nine SNFs located in Michigan and three in North
Carolina (collectively, the Omega Facilities). The Omega Loan constitutes
non-recourse indebtedness to all of the other subsidiaries of the Company, none
of which 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, neither PHCMI nor any of the other PHCMI Entities has guaranteed
either the Senior Credit Facility or the Second Priority Notes, nor have they
pledged their assets for such indebtedness. The Omega Loan restricts the extent
to which the PHCMI Entities can incur other indebtedness, including
intercompany indebtedness from PHCMIs shareholders.

Scheduled Maturities of Long-Term Debt

The scheduled maturities of long-term debt at September 30, 2002 are as
follows for the periods indicated (in thousands of dollars):

|           |  |               |         | 
|---------- |  | ------------- | ------- | 
|           |  | Reorganized  
|           |  | Company      
|           |  |              
|           |  | September 30,
|           |  | 2002         
|           |  |              
|Year 1     |  | $             | 6,196   | 
|Year 2     |  |               | 24,976  | 
|Year 3     |  |               | 11,953  | 
|Year 4     |  |               | 13,815  | 
|Year 5     |  |               | 3,063   | 
|Thereafter |  |               | 427,947 | 
|           |  |               |         | 
|           |  | $             | 487,950 | 
|           |  |               |         | 

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##### Table of Contents



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

At September 30, 2002, the Company had outstanding letters of credit
aggregating approximately $25.6 million, of which $3.0 million were issued
prior to the Effective Date and were collateralized with
approximately $3.2
million of cash in accordance with the Joint Plan. The remaining $22.6 million
in letters of credit were issued after the Effective Date pursuant to the
Senior Credit Facility and are not cash collateralized.

Prepetition Debt  Predecessor Company

In connection with the Chapter 11 Cases, no principal or interest payments
were made on the Companys prepetition indebtedness with the exception of
repayments made against the Companys prepetition senior credit facilities,
primarily as a result of the application of a portion of the cash proceeds
received from the sale of certain facilities and other assets, adequate
protection payments with regard to certain mortgaged facilities, and nominal
amounts related to certain capital equipment leases as adequate protection
payments. Pursuant to the Joint Plan, the principal lenders under the Debtors
prepetition senior credit facilities received, among other things: (i) $275.0
million of cash; (ii) $150.0 million in principal amount of the Second Priority
Notes; and (iii) 19.2 million shares of New Common Stock. Most Project Lenders
received consensual treatment as provided in the Joint Plan, which included:
(i) cash payments of $12.3 million; (ii) the restructuring of certain
mortgages; and (iii) agreements to surrender certain SNFs and other collateral
in satisfaction of mortgages on those SNFs. Holders of senior subordinated
notes issued by the MPAN Debtors prior to bankruptcy received pro rata
distributions of 399,078 shares of New Common Stock and warrants to purchase an
additional 376,893 shares of the New Common Stock (see Note 3).

Debtor-in-Possession Financing Agreements  Predecessor Company

On the Petition Date, the Bankruptcy Court entered orders approving (i) a
$100.0 million debtor-in-possession financing facility for the MPAN Debtors
(the MPAN DIP Financing) from a syndicate of lenders led by JP Morgan Chase
Bank (f/k/a The Chase Manhattan Bank, Chase), which was subsequently replaced
by Foothill Capital Corporation as administrative agent; and (ii) a $50.0
million debtor-in-possession financing facility for the MHG Debtors (the MHG
DIP Financing and, together with the MPAN DIP Financing, the DIP Financings)
from a syndicate of lenders led by PNC Bank, National Association (PNC). In
January 2001, the commitment under the MPAN DIP Financing was reduced from
$100.0 million to $50.0 million, and the commitment under the MHG DIP Financing
was reduced from $50.0 million to $25.0 million. The DIP Financings, and their
related liens, were terminated on the Effective Date, at which time there were
no outstanding borrowings. Approximately $12.6 million in outstanding letters
of credit issued for the account of the Debtors under the DIP Financings prior
to the Effective Date remained outstanding, and were cash collateralized in
accordance with the Joint Plan. As of September 30, 2002, all such letters of
credit (except for one $3.0 million letter of credit) had been replaced by
non-cash collateralized letters of credit issued under the Revolving Credit
Facility.

Interest was payable on the principal amount outstanding under the MPAN
DIP Financing at the per annum rate equal to the Alternative Base Rate of Chase
plus three percent (3%) payable monthly in arrears. Interest was payable on
the principal amount outstanding under the MHG DIP Financing at a per annum
rate equal to the base rate of PNC (i.e., the higher of the PNC prime rate or a
rate equal to the federal funds rate plus 50 basis points) plus the applicable
spread, which was 250 basis points. The obligations of the MPAN Debtors under
the MPAN DIP Financing were jointly and severally guaranteed by each of the
MPAN Debtors and were secured by liens and security interests on substantially
all of the real property and personal property assets of the MPAN Debtors; the
obligations of the MHG Debtors under the MHG DIP Financing were jointly and
severally guaranteed by each of the MHG Debtors and were secured by liens and
security interests on all or substantially all of the real property and
personal property assets of the MHG Debtors. The DIP Financings contained
customary representations, warranties and other affirmative and restrictive
covenants.

NOTE 6       STOCKHOLDERS EQUITY

As of the consummation of the Joint Plan on the Effective Date, the
authorized capital stock of the Reorganized Company consisted of 90,0000,000
shares, with 80,000,000 shares reserved for issuance as New Common Stock and
10,000,000 million shares reserved for issuance as New Preferred Stock. All
shares of authorized common stock and preferred stock of the Predecessor
Company were cancelled as of the Effective Date.

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##### Table of Contents



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

Common Stock

The Company has 80,000,000 shares of New Common Stock that are authorized
to be issued, of which 20,000,000 were issued and outstanding following the
initial distribution of New Common Stock in accordance with the Joint Plan. The
issued and outstanding shares of New Common Stock are validly issued, fully
paid and nonassessable. New Common Stock holders are entitled to one vote per
share for each share held of record on all matters submitted to a vote of
stockholders and are entitled to receive ratably such dividends as may be
declared by the Board of Directors out of funds legally available therefor.
There is no cumulative voting in the election of directors. The Reorganized
Companys Senior Credit Facility and the Indenture contain negative covenants
that impose restrictions on, among other things, the Companys ability to pay
dividends (see Note 5). The Reorganized Company does not plan to pay dividends
on the New Common Stock for the foreseeable future. In the event of a
liquidation, dissolution or winding up of the Company, holders of New Common
Stock will have the right to receive all assets available for distribution to
stockholders (after payment of liabilities and subject to the prior rights of
any holders of preferred stock then outstanding). The New Common Stock holders
have no preemptive rights and no rights to require the redemption of the New
Common Stock.

Warrants

The Reorganized Company issued warrants in connection with the Joint Plan
in consideration of the claims held by creditors in connection with the Chapter
11 Cases, representing the right to purchase an aggregate of 753,786 shares of
New Common Stock, subject to adjustment under certain circumstances. The
initial per share exercise price of the warrants is $28.04. The exercise
period for the warrants began on the Effective Date and expires on May 13,
2004. Each warrant unexercised at the expiration of this period will become
void, and all rights will terminate. An assumed exercise of all warrants would
result in cash proceeds to the Company of approximately $21.1 million. The
warrants were recorded at fair value as consideration exchanged on the
extinguishment of debt.

Stock Options

The Reorganized Company has stock option plans for key employees and
outside directors that authorize the granting of stock options to purchase up
to 2,153,022 shares of New Common Stock. Each option granted as of September
30, 2002 has a maximum term of 10 years. Options granted to key employees as of
September 30, 2002 vest in equal annual installments over four years except
that options to purchase 439,560 shares of New Common Stock granted to the
Reorganized Companys CEO vest at the rate of 8.33% per calendar quarter, with
any remaining options vesting at the end of three years. Options granted to
outside directors as of September 30, 2002 were 25% vested on the date of
grant, with the remaining options vesting in equal annual installments over
three years. At September 30, 2002, there were options to purchase
approximately 1,913,000 shares of New Common Stock granted and outstanding.
All options were granted with an exercise price equal to the fair market value
of the New Common Stock on the date of the grant. There were options to
purchase 80,365 shares of New Common Stock exercisable at September 30, 2002.

For purposes of pro forma disclosures of net income (loss) and earnings
per share as required by SFAS No. 123, the estimated fair value of the options
is amortized to expense over the options vesting period. The fair value of
these options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions: risk-free
interest rate of 4.7%; a dividend yield of 0.0%; volatility factors of the
expected market price of the New Common Stock of 0.51 and a weighted-average
expected life of the options of six years.

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. Option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because options granted pursuant to the Companys stock option plans have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in managements opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of the options
granted pursuant to the Companys stock option plans.

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##### Table of Contents



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

The Company accounts for employee stock options in accordance with APB No.
25 and related interpretations. Accordingly, the Company recognizes no
compensation expense for the stock option grants. In accordance with SFAS No.
123, the Companys pro forma net income, assuming the election had been made to
recognize compensation expense on stock-based awards, would have been
approximately $5.4 million, or $0.27 per share, for the three months ended
September 30, 2002 and approximately $12.9 million, or $0.65 per share, for the
five months ended September 30, 2002.

NOTE 7       DIVESTITURES AND CASUALTY GAIN

Discontinued Operations

On January 6, 2002, the Company consummated the sale of its institutional
pharmacy services business (the APS Division) to Omnicare, Inc. and its
wholly owned affiliate, APS Acquisition LLC (collectively, Omnicare). During
the quarter ended December 31, 2001, the Company, including certain of its
subsidiaries, 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 (subject to adjustments as provided in the
relevant asset purchase agreement and expected to be finalized in the Companys
fiscal year ended December 31, 2002) and up to $18.0 million in future
payments, depending upon certain post-closing operating results of the APS
Division. During the four months ended April 30, 2002, the Company realized a
gain on the sale of the APS Division of approximately $29.1 million.

The Company has reclassified its prior consolidated financial statements
to present the operating results of the APS Division as a discontinued
operation. Operating results for the APS Division were as follows for the
periods indicated (in thousands of dollars):

|                                                           |  |                     |        |               |  |   |         |  
|---------------------------------------------------------- |  | ------------------- | ------ | ------------- |  | - | ------- | -
|                                                           |  | Predecessor Company
|                                                           |  |                    
|                                                           |  | Three Months        |        | Nine Months  
|                                                           |  | Ended               |        | Ended        
|                                                           |  | September 30,       |        | September 30,
|                                                           |  | 2001                |        | 2001         
|                                                           |  |                     |        |              
|Net revenue                                                |  | $                   | 53,416 |               |  | $ | 160,839 |  
|Total costs and expenses                                   |  |                     | 52,262 |               |  |   | 159,883 |  
|                                                           |  |                     |        |               |  |   |         |  
|Operating income                                           |  |                     | 1,154  |               |  |   | 956     |  
|Other expenses                                             |  |                     | (112   | )             |  |   | (671    | )
|                                                           |  |                     |        |               |  |   |         |  
|Income from operations of discontinued pharmacy operations |  | $                   | 1,042  |               |  | $ | 285     |  
|                                                           |  |                     |        |               |  |   |         |  

Other Divestitures

During the three months and five months ended September 30, 2002, the
Company completed the sale or divestiture of 3 owned or leased SNFs and certain
assets. No gain or loss was recorded. These facilities reported net revenue
of approximately $0.4 million, $1.8 million and $6.7 million for the three,
five and nine months ended September 30, 2002, respectively. In addition,
these facilities reported net revenue of approximately $3.8 million and $11.8
million for the three and nine months ended September 30, 2001, respectively.

During the four months ended April 30, 2002, the 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 revenues of approximately $13.0 million for the four
months ended April 30, 2002. In addition, these facilities reported net
revenues of approximately $16.0 million and $46.2 million for the three and
nine months ended September 30, 2001, respectively.

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

During the nine months ended September 30, 2001, the Company completed the
sale or divestiture of approximately 41 owned or leased SNFs and certain
assets, which resulted in a net gain of approximately $0.9 million. These
facilities reported net revenue of approximately $10.7 million and $60.4
million for the three and nine months ended September 30, 2001, respectively,

Casualty Gain

During April 2002, the 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. Approximately $13.4 million of the insurance
proceeds have been received as of September 30, 2002.

NOTE 8       REVENUE

Net revenue includes amounts payable for services rendered to patients
from the federal government under Medicare, from the various states where the
Company operates under Medicaid, from private insurers and the patients
themselves. The sources and amounts of the Companys patient revenue is
determined by a number of factors, including licensed bed capacity of its
facilities, occupancy rate, payor mix, type of services rendered to the patient
and rates of reimbursement among payor categories (private, Medicare and
Medicaid). Changes in the mix of the Companys patients among the private pay,
Medicare and Medicaid categories, as well as changes in the quality mix,
significantly affect the profitability of the Companys operations.

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

|                  |  |                     |         |               |  |                     |         |               |  |             |  |               |         |  |  |   |         |  |  |   |           | 
|----------------- |  | ------------------- | ------- | ------------- |  | ------------------- | ------- | ------------- |  | ----------- |  | ------------- | ------- |  |  | - | ------- |  |  | - | --------- | 
|                  |  | Reorganized Company |         |               |  | Predecessor Company
|                  |  |                     |         |               |  |                    
|                  |  | Three Months        |         | Five Months   |  |                     |         | Three Months  |  | Four Months |  | Nine Months  
|                  |  | Ended               |         | Ended         |  |                     |         | Ended         |  | Ended       |  | Ended        
|                  |  | September 30,       |         | September 30, |  |                     |         | September 30, |  | April 30,   |  | September 30,
|                  |  | 2002                |         | 2002          |  |                     |         | 2001          |  | 2002        |  | 2001         
|                  |  |                     |         |               |  |                     |         |               |  |             |  |              
|Medicaid          |  | $                   | 214,009 |               |  | $                   | 356,517 |               |  |             |  | $             | 236,003 |  |  | $ | 287,073 |  |  | $ | 685,162   | 
|Medicare          |  |                     | 142,977 |               |  |                     | 242,314 |               |  |             |  |               | 139,926 |  |  |   | 207,286 |  |  |   | 435,318   | 
|Private and other |  |                     | 88,880  |               |  |                     | 142,123 |               |  |             |  |               | 87,966  |  |  |   | 107,078 |  |  |   | 281,307   | 
|                  |  |                     |         |               |  |                     |         |               |  |             |  |               |         |  |  |   |         |  |  |   |           | 
|Net
revenue       |  | $                   | 445,866 |               |  | $                   | 740,954 |               |  |             |  | $             | 463,895 |  |  | $ | 601,437 |  |  | $ | 1,401,787 | 
|                  |  |                     |         |               |  |                     |         |               |  |             |  |               |         |  |  |   |         |  |  |   |           | 

NOTE 9       COMPREHENSIVE INCOME

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

|                                                               |  |                     |       |               |  |                     |        |               |  |             |  |               |         |   |  |   |           |   |  |   |         |  
|-------------------------------------------------------------- |  | ------------------- | ----- | ------------- |  | ------------------- | ------ | ------------- |  | ----------- |  | ------------- | ------- | - |  | - | --------- | - |  | - | ------- | -
|                                                               |  | Reorganized Company |       |               |  | Predecessor Company
|                                                               |  |                     |       |               |  |                    
|                                                               |  | Three Months        |       | Five Months   |  |                     |        | Three Months  |  | Four Months |  | Nine Months  
|                                                               |  | Ended               |       | Ended         |  |                     |        | Ended         |  | Ended       |  | Ended        
|                                                               |  | September 30,       |       | September 30, |  |                     |        | September 30, |  | April 30,   |  | September 30,
|                                                               |  | 2002                |       | 2002          |  |                     |        | 2001          |  | 2002        |  | 2001         
|                                                               |  |                     |       |               |  |                     |        |               |  |             |  |              
|Net income (loss)                                              |  | $                   | 5,950 |               |  | $                   | 13,844 |               |  |             |  | $             | (51,562 | ) |  | $ | 1,433,955 |   |  | $ | (43,305 | )
|Net unrealized gains (losses) on
available-for-sale securities |  |                     | 284   |               |  |                     | 421    |               |  |             |  |               | 814     |   |  |   | (603      | ) |  |   | 2,002   |  
|                                                               |  |                     |       |               |  |                     |        |               |  |             |  |               |         |   |  |   |           |   |  |   |         |  
|Comprehensive income (loss)                                    |  | $                   | 6,234 |               |  | $                   | 14,265 |               |  |             |  | $             | (50,748 | ) |  | $ | 1,433,352 |   |  | $ | (41,303 | )
|                                                               |  |                     |       |               |  |                     |        |               |  |             |  |               |         |   |  |   |           |   |  |   |         |  

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

NOTE 10       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        |   | Five Months   |   |                     |   | Three Months  |  | Four Months |   | Nine Months  
|                                                         |                                                                                                            |                                                            |   | Ended               |   | Ended         |   |                     |   | Ended         |  | Ended       |   | Ended        
|                                                         |                                                                                                            |                                                            |   | September 30,       |   | September 30, |   |                     |   | September 30, |  | April 30,   |   | September 30,
|                                                         |                                                                                                            |                                                            |   | 2002                |   | 2002          |   |                     |   | 2001          |  | 2002        |   | 2001         
|                                                         |                                                                                                            |                                                            |   |                     |   |               |   |                     |   |               |  |             |   |              
|Numerator for basic and diluted
income (loss) per share: |                                                                                                            |                                                            |   |                     |   |               |   |                     |   |               |  |             |   |               |       |  |   |           |        |  |   |        
|                                                         | Income (loss) from continuing
operations                                                                   |                                                            | $ | 5,950               |   |               | $ | 13,844              |   |               |  |             | $ | (52,604       | )     |  | $ | 1,404,873 |        |  | $ | (43,590 | )  
|                                                         | Discontinued operations:                                                                                   |                                                            |   |                     |   |               |   |                     |   |               |  |             |   |               |       |  |   |           |        |  |   |         |    
|                                                         |                                                                                                            | Income from operations of
discontinued pharmacy
operations |   |                     |  |               |   |                     |  |               |  |             |   |               | 1,042 |  |   |           |       |  |   |         | 285 | 
|                                                         |                                                                                                            | Gain on sale of discontinued
pharmacy operations           |   |                     |  |               |   |                     |  |               |  |             |   |               |      |  |   |           | 29,082 |  |   |         |    | 
|                                                         |                                                                                                            |                                                            |   |                     |   |               |   |                     |   |               |  |             |   |               |       |  |   |           |        |  |   |         |    
|                                                         | Net income (loss)                                                                                          |                                                            | $ | 5,950               |   |               | $ | 13,844              |   |               |  |             | $ | (51,562       | )     |  | $ | 1,433,955 |        |  | $ | (43,305 | )  
|                                                         |                                                                                                            |                                                            |   |                     |   |               |   |                     |   |               |  |             |   |               |       |  |   |           |        |  |   |         |    
|Denominator:                                             |                                                                                                            |                                                            |   |                     |   |               |   |                     |   |               |  |             |   |               |       |  |   |           |        |  |   |        
|                                                         | Denominator for basic income
(loss) per share  weighted
average shares                                    |                                                            |   | 20,000              |   |               |   | 20,000              |   |               |  |             |   | 73,688        |       |  |   | 73,688    |        |  |   | 73,688  |    
|                                                         | Effect of dilutive
securities  stock options                                                              |                                                            |   |                    |   |               |   |                    |   |               |  |             |   |              |       |  |   |          |        |  |   |        |    
|                                                         |                                                                                                            |                                                            |   |                     |   |               |   |                     |   |               |  |             |   |               |       |  |   |           |        |  |   |         |    
|                                                         | Denominator for diluted income
(loss) per share  adjusted
weighted average shares and
assumed conversions |                                                            |   | 20,000              |   |               |   | 20,000              |   |               |  |             |   | 73,688        |       |  |   | 73,688    |        |  |   | 73,688  |    
|                                                         |                                                                                                            |                                                            |   |                     |   |               |   |                     |   |               |  |             |   |               |       |  |   |           |        |  |   |         |    
|Earnings (loss) per share  basic
and diluted:           |                                                                                                            |                                                            |   |                     |   |               |   |                     |   |               |  |             |   |               |       |  |   |           |        |  |   |        
|                                                         | Income (loss) from continuing
operations                                                                   |                                                            | $ | 0.30                |   |               | $ | 0.69                |   |               |  |             | $ | (0.71         | )     |  | $ | 19.07     |        |  | $ | (0.59   | )  
|                                                         | Discontinued operations:                                                                                   |                                                            |   |                     |   |               |   |                     |   |               |  |             |   |               |       |  |   |           |        |  |   |         |    
|                                                         |                                                                                                            | Income from operations of
discontinued pharmacy
operations |   |                     |  |               |   |                     |  |               |  |             |   |               | 0.01  |  |   |           |       |  |   |         |    | 
|                                                         |                                                                                                            | Gain on sale of discontinued
pharmacy operations           |   |                     |  |               |   |                     |  |               |  |             |   |               |      |  |   |           | 0.39   |  |   |         |    | 
|                                                         |                                                                                                            |                                                            |   |                     |   |               |   |                     |   |               |  |             |   |               |       |  |   |           |        |  |   |         |    
|                                                         | Net income (loss) per share                                                                                |                                                            | $ | 0.30                |   |               | $ | 0.69                |   |               |  |             | $ | (0.70         | )     |  | $ | 19.46     |        |  | $ | (0.59   | )  
|                                                         |                                                                                                            |                                                            |   |                     |   |               |   |                     |   |               |  |             |   |               |       |  |   |           |        |  |   |         |    

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

NOTE 11       INCOME TAXES

The Company recorded approximately $4.1 million and $9.4 million of income
tax expense on profits generated from operations in the three month and five
month periods ended September 30, 2002, respectively.

The reorganization of the Company on the Effective Date constituted an
ownership change under Section 382 of the Internal Revenue Code (Section
382), which imposes annual limitations on the utilization of loss
carryforwards after certain ownership changes. However, if certain historical
creditor tests are met, the annual

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

limitation imposed by Section 382 resulting
from the reorganization will not apply. The Company believes it meets the
required tests but is currently in the process of undertaking a more complete
analysis. If the tests are met, the net operating losses (NOLs) must be
reduced by interest deducted for income tax purposes for the period from
October 1, 1998 through the change date on indebtedness that was converted into
stock pursuant to the Joint Plan.

In connection with the reorganization, the Company realized a gain from
the extinguishment of indebtedness of approximately $1,229.6 million. This gain
will not be taxable since the gain resulted from the reorganization of the
Company under the Bankruptcy Code. However, the Company will be required, as
of the beginning of its 2003 taxable year, to reduce its tax attributes
including: (a) NOLs; (b) tax credits; and (c) tax bases in assets in an amount
equal to such gain on extinguishment. The Company currently estimates that the
NOLs will be reduced by approximately $309.0 million pursuant to the provisions
above. The Company had approximately $835.0 million of NOLs as of December 31,
2001, which will expire at various dates through 2021.

The Company has not reduced its deferred asset valuation allowance for
current profits because the Company believes the deferred tax assets will not
be recognized under the more likely than not standard.

NOTE 12       LITIGATION

Legal Proceedings

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 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, and the Company, continue to experience an
increase in the frequency and severity of litigation and claims.

In some states in which the Company has significant operations, insurance
coverage for the risk of punitive and certain other damages arising from
general and professional liability litigation may not be available in certain
circumstances. There can be no assurance that the Company will not be liable
for punitive or other damages awarded in litigation for which insurance
coverage is not available. The Company also believes 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.
While the Company believes that quality care is provided to patients in its
facilities and that it materially complies with all applicable regulatory
requirements, an adverse determination in a legal proceeding or governmental
investigation, whether currently asserted or arising in the future, could have
a material adverse effect on the Companys financial condition.

On June 11, 2001, one of the Companys prior liability insurance carriers,
Royal, commenced an adversary proceeding in the Bankruptcy Court, styled Royal
Surplus Lines Insurance Company v. Mariner Health Group et al., 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 of
the personal injury claims falling under two PL/GL policies issued to one of
the Companys subsidiaries by Royal. One of the Companys prior excess
liability insurance carriers, Northfield Insurance Company, or 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, the parties
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. The Company is vigorously pursuing this matter.

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

Global Settlement

The Company has reached a settlement with the United States to resolve
certain United States Claims (as defined below) against the Company that arose
prior to filing for bankruptcy, or the Petition Date. This settlement is
referred to as the Global Settlement. United States Claims are those claims or
causes of action asserted by or on behalf of the United States seeking remedies
of any kind: (i) under the False Claims Act, the Civil Monetary Penalties Law,
and the Program Fraud Civil Remedies Act and/or other statutory or common law
doctrines of payment by mistake, unjust enrichment, breach of contract, or
fraud; (ii) for administrative overpayments, including claims or causes of
action for services rendered or products supplied under Medicare, the TRICARE
Program, or any other federal health program; (iii) for specified civil
monetary penalties; (iv) arising under any provider or similar agreement with
the United States; and (v) for permissive exclusion from Medicare, Medicaid and
other federal health programs. The Global Settlement was approved by the
Bankruptcy Court and became effective on April 3, 2002.

Under the Global Settlement: (i) all Medicare claims and debts arising
prior to the Petition Date were released as between CMS and the Company; (ii)
the United States approved a settlement of Medicare administrative appeals
related to disallowances under the prudent buyer principle, or the Prudent
Buyer Settlement; the Company waived its rights to collect any amounts due
under the Prudent Buyer Settlement; CMS adjusted specified Medicare PPS base
year cost reports to accurately calculate PPS rates; (iii) CMS agreed to pay
the Company $3.0 million; (iv) the Department of Justice released the Company
from certain covered conduct alleged within six qui tam lawsuits and other
disputes under the Federal False Claims Act; (v) the Company agreed to be
responsible for any attorney fees sought by qui tam relators counsel; (vi) the
United States waived any claims for (a) Medicare reimbursement for two
voluntary disclosures made by the Company to the United States and (b) Medicare
reimbursement related to an Office of Inspector General, or OIG, investigation;
(vii) the Company agreed to enter into the Corporate Integrity Agreement with
the OIG; (viii) the Company rejected and terminated specified provider
agreements for discontinued operations; (ix) the Company agreed to a list of
facilities that are covered by the Global Settlement; (x) all cost years ending
on or before the Petition Date were fully and finally resolved by the Global
Settlement; (xi) for cost years that span the Petition Date, CMS agreed to
settle the cost reports for these years, and the Company retained its rights
to appeal or request the reopening of such years, but any relief awarded
relating to those years will be pro-rated so that the prepetition portion is
waived and the postpetition portion is preserved; and (xii) as part of the cure
for the assumption of Medicare provider agreements, or in the case of any
rejected and terminated provider agreements, the Company agreed to pay any
portion of a Medicare overpayment or civil monetary penalty that accrued after
the Petition Date.

In accordance with accounting principles generally accepted in the United
States, the Company recorded a charge of approximately $33.4 million relating
to the Global Settlement in its statement of operations for the fourth quarter
of the fiscal year ended September 30, 2001.

NOTE 13       SEGMENT INFORMATION

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 an operating segment and eliminations.

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

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

The following tables summarize operating results and other financial
information, by business segment, excluding the results of the discontinued
operations of the APS Division, for the periods indicated (in thousands of
dollars):

|                                 |                       |   |                     |         |               |   |                     |         |               |  |             |   |               |         |   |   |         |         |   |   |           |           |  
|-------------------------------- | --------------------- | - | ------------------- | ------- | ------------- | - | ------------------- | ------- | ------------- |  | ----------- | - | ------------- | ------- | - | - | ------- | ------- | - | - | --------- | --------- | -
|                                 |                       |   | Reorganized Company |         |               |   | Predecessor Company
|                                 |                       |   |                     |         |               |   |                    
|                                 |                       |   | Three Months        |         | Five Months   |   |                     |         | Three Months  |  | Four Months |   | Nine Months  
|                                 |                       |   | Ended               |         | Ended         |   |                     |         | Ended         |  | Ended       |   | Ended        
|                                 |                       |   | September 30,       |         | September 30, |   |                     |         | September 30, |  | April 30,   |   | September 30,
|                                 |                       |   | 2002                |         | 2002          |   |                     |         | 2001          |  | 2002        |   | 2001         
|                                 |                       |   |                     |         |               |   |                     |         |               |  |             |   |              
|Revenue from external customers: |                       |   |                     |         |               |   |                     |         |               |  |             |   |               |         |   |   |         |         |   |   |           |          
|                                 | Nursing home services |   | $                   | 417,390 |               |   | $                   | 693,460 |               |  |             |   | $             | 435,323 |   |   | $       | 564,350 |   |   | $         | 1,316,001 |  
|                                 | Other                 |   |                     | 28,476  |               |   |                     | 47,494  |               |  |             |   |               | 28,572  |   |   |         | 37,087  |   |   |           | 85,786    |  
|                                 |                       |   |                     |         |               |   |                     |         |               |  |             |   |               |         |   |   |         |         |   |   |           |           |  
|Consolidated revenues            |                       | $ | 445,866             |         |               | $ | 740,954             |         |               |  |             | $ | 463,895       |         |   | $ | 601,437 |         |   | $ | 1,401,787 |          
|                                 |                       |   |                     |         |               |   |                     |         |               |  |             |   |               |         |   |   |         |         |   |   |           |           |  
|Operating margin:                |                       |   |                     |         |               |   |                     |         |               |  |             |   |               |         |   |   |         |         |   |   |           |          
|                                 | Nursing home services |   | $                   | 41,917  |               |   | $                   | 73,363  |               |  |             |   | $             | (5,685  | ) |   | $       | 44,405  |   |   | $         | 79,085    |  
|                                 | Other                 |   |                     | (13,632 | )             |   |                     | (23,590 | )             |  |             |   |               | (21,525 | ) |   |         | (21,740 | ) |   |           | (52,233   | )
|                                 |                       |   |                     |         |               |   |                     |         |               |  |             |   |               |         |   |   |         |         |   |   |           |           |  
|Consolidated operating margin    |                       |   | 28,285              |         |               |   | 49,773              |         |               |  |             |   | (27,210       | )       |   |   | 22,665  |         |   |   | 26,852    |          
|Depreciation and amortization    |                       |   | 9,429               |         |               |   | 14,351              |         |               |  |             |   | 13,628        |         |   |   | 11,733  |         |   |   | 38,035    |          
|                                 |                       |   |                     |         |               |   |                     |         |               |  |             |   |               |         |   |   |         |         |   |   |           |           |  
|Operating income (loss)          |                       | $ | 18,856              |         |               | $ | 35,422              |         |               |  |             | $ | (40,838       | )       |   | $ | 10,932  |         |   | $ | (11,183   | )        
|                                 |                       |   |                     |         |               |   |                     |         |               |  |             |   |               |         |   |   |         |         |   |   |           |           |  

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Item 2.       Managements Discussion and Analysis of Financial Condition and Results of Operations

The following Managements Discussion and Analysis of Financial Condition
and Results of Operations should be read in conjunction with the Managements
Discussion and Analysis of Financial Condition and Results of Operations and
the audited financial statements and related notes contained in our transition
report on Form 10-K for the transition period from October 1, 2001 to December
31, 2001, or the Transition Report, filed with the SEC. Results for the three
and nine months ended September 30, 2002 are not necessarily indicative of the
results to be expected for the fiscal year ending December 31, 2002. This
discussion contains forward-looking statements that involve risks and
uncertainties. The terms company, we, our, and us, refer to Mariner
Health Care, Inc. (f/k/a/ Mariner Post-Acute Network, Inc.) and its direct and
indirect subsidiaries.

Overview

We are one of the largest providers of long-term health care services in
the United States. We provide these services through the operation of skilled
nursing facilities, or SNFs, and long-term acute care hospitals, or LTACs. At
September 30, 2002, we operated approximately 295 SNFs in 23 states with
approximately 35,800 licensed beds and significant concentrations of facilities
and beds in 5 states and several metropolitan markets. We also operated 13
owned, leased or managed LTAC hospitals in 4 states with approximately 670
licensed beds. See Note 13 of the accompanying unaudited condensed consolidated
financial statements for financial information about our reportable segment.

Inpatient services provided at our SNFs 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 a short-term, acute-care hospital when the
patients condition warrants more intensive care than can be provided in a
typical nursing facility.

On January 6, 2002, we consummated the sale of our institutional pharmacy
services business, or the APS Division, to Omnicare, Inc. and its wholly owned
affiliate, APS Acquisition LLC, or, collectively, Omnicare. Accordingly, the
APS Division has been reflected as a discontinued operation. See Note 7 of the
accompanying unaudited condensed consolidated financial statements.

At a meeting of our Board of Directors duly called and held on December
13, 2001, our Amended and Restated Bylaws were amended to change our fiscal
year end from September 30 to December 31.

Reorganization

On January 18, 2000, or the Petition Date, we filed voluntary petitions
for relief in the United States Bankruptcy Court for the District of Delaware,
or the Bankruptcy Court, under chapter 11 of title 11 of the United States
Code, or the Bankruptcy Code, thus commencing the chapter 11 cases, or the
Chapter 11 Cases. On May 13, 2002, or the Effective Date, we emerged from
proceedings under chapter 11 of title 11 of the United States Code, or the
Bankruptcy Code, pursuant to the terms of our joint plan of reorganization. On
March 25, 2002, the Bankruptcy Court held a hearing regarding confirmation of
our second amended and restated joint plan of reorganization filed on February
1, 2002, or, as modified at the confirmation hearing and including the related
Disclosure Statement, exhibits and attachments, the Joint Plan. See Note 3 of
the accompanying unaudited condensed consolidated financial statements for a
summary of the Joint Plan, which is qualified in its entirety by reference to
the Joint Plan filed with the SEC as Exhibit 2.1 to our Current Report on Form
8-K dated April 17, 2002. In connection with our emergence from bankruptcy, we
changed our name to Mariner Health Care, Inc.

On the Effective Date and in connection with the consummation of the Joint
Plan, we entered into a $297.0 million senior credit facility with a group of
lenders, consisting of $212.0 million of term loans, or the Term Loans, and an
$85.0 million revolving line of credit, or the Revolving Credit Facility. The
Term Loans and the Revolving Credit Facility are referred to collectively as
the Senior Credit Facility. The Senior Credit Facility provided funds to
satisfy certain obligations to our creditors under the Joint Plan, and provides
funds for general working capital purposes and for permitted acquisitions. We
also issued $150.0 million in principal amount of secured debt due 2009, or the
Second Priority Notes, to our senior secured creditors in the Chapter 11 Cases.
See Capital Resources below.

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Basis of Presentation

The accompanying
unaudited condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. 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. 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 in
Notes 3 and 4, 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.

Since filing for
protection under the Bankruptcy Code on January 18, 2000, the
Company operated its business as a debtor-in-possession subject to
the jurisdiction of the Bankruptcy Court until its emergence from
bankruptcy on May 13, 2002. Accordingly, the Companys
consolidated financial statements for periods prior to its emergence
from bankruptcy were prepared in conformity with the American
Institute of Certified Public Accountants Statement of Position 90-7,
Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code 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 connection with
its emergence from bankruptcy, the Company reflected the terms of the
Joint Plan in its consolidated financial statements by adopting the
principles of fresh-start reporting in accordance with SOP 90-7. For
financial reporting purposes, the effects of the consummation of the
Joint Plan as well as adjustments for fresh-start reporting have been
recorded in the accompanying unaudited condensed consolidated
financial statements as of May 1, 2002. Therefore as used in
this Form 10-Q, the term Predecessor Company refers
to the Company and its operations for periods prior to bankruptcy and
for financial reporting purposes prior to May 1, 2002, while the
term Reorganized Company is used to described the Company
for periods after its emergence from bankruptcy and for financial
reporting purposes, after May 1, 2002. Under fresh-start
reporting, a new entity is deemed to be created for financial
reporting purposes and the recorded amounts of assets and liabilities
are adjusted to reflect their estimated fair values. Since
fresh-start reporting materially changed the amounts previously
recorded in the Companys consolidated financial statements, a
black line 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
to signify the difference in the basis of preparation of financial
information for each respective entity.

The Reorganized
Company has adopted the accounting policies of the Predecessor
Company as described in the audited consolidated financial statements
of the Predecessor Company for the transition period from
October 1, 2001 to December 31, 2001 included in the
Predecessor Companys Transition Report filed on Form 10-K
with the SEC on March 21, 2002. These financial statements
should be read in conjunction with the Transition Report. In
accordance with the fresh-start reporting provisions of
SOP 90-7, the Company has also adopted changes in accounting
principles that will be required in the financial statements of the
Reorganized Company within the following twelve months.

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. However, capital costs (rent, interest,
depreciation and amortization) of the Predecessor Company that were
based on pre-petition contractual agreements and historical costs 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.

In connection with the restructuring of our debt in accordance with the
provisions of the Joint Plan, we recorded a gain of approximately $1,229.6
million. Other significant adjustments were also 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 have
been reflected in the operating results of the Predecessor Company for the four
months ended April 30, 2002.

Critical Accounting Policies

We believe the following critical accounting policies, among others,
affect the more significant judgments and estimates used in the preparation of
our consolidated financial statements.

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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.

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.

Reserves for 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 for professional liability
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 such estimates and establishing the resulting accrued
liabilities are reviewed frequently by management with any adjustments
reflected in current earnings. Although management believes the provision for
these losses is adequate, the ultimate liability may be in excess of or less
than the amounts recorded.

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 basis of the 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
carryforwards.

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 affect materially the
realization of certain deferred tax assets. Accordingly, a valuation allowance
is provided for deferred tax assets because the realizability of the deferred
tax assets is uncertain.

If all or a portion of the pre-reorganization deferred tax asset is
recognized in the future, or considered more likely than not to be recognized
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.

Valuation of long-lived assets and reorganization value in excess of
amounts allocable to identifiable assets.

We regularly review the carrying value of certain long-lived assets and
identifiable intangible assets with respect to any events or circumstances that
indicate an impairment or an adjustment to the amortization period is
necessary. If circumstances suggest the recorded amounts cannot be recovered,
calculated based upon estimated future undiscounted cash flows, the carrying
values of these assets are reduced to fair value.

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Reorganization value in excess of amounts allocable to identifiable assets
represents the portion of reorganization value that could not be attributable
to specific tangible or identified intangible assets recorded in connection
with fresh-start reporting. In connection with the June 2001 issuance of SFAS
No. 142, Goodwill and Other Intangible Assets, we have ceased to amortize
intangible assets beginning on January 1, 2002. Instead of amortization, we are
required to perform annual impairment tests for the excess reorganization value
recorded. The impairment test for the excess reorganization value recorded in
connection with our fresh-start reporting, effective May 1, 2002, will be
performed during the quarter ending December 31, 2002.

Recent Accounting Pronouncements

In July 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 146 (SFAS No. 146)
Accounting for Costs Associated with Exit or Disposal Activities. SFAS No.
146 replaces Emerging Issues Task Force Issue No. 94-3 Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity.
SFAS No. 146 requires the recognition of costs associated with exit or
disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. SFAS No. 146 is applied prospectively
to exit or disposal activities initiated after December 31, 2002 with early
adoption encouraged. The Company adopted SFAS No. 146 on May 1, 2002 in
connection with its adoption of fresh-start reporting. The adoption of SFAS
No. 146 did not have a material impact on the consolidated financial statements.

In April 2002, FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. SFAS No. 145 rescinds SFAS No. 4, Reporting Gains and Losses
from Extinguishment of Debt. As a result, gains and losses from
extinguishment of debt should be classified as extraordinary items only if they
meet the criteria in Opinion 30. SFAS No. 44, Accounting for Intangible
Assets of Motor Carriers, was issued to establish accounting requirements for
the effects of transition to the provisions of the Motor Carrier Act of 1980.
Those transitions have been completed so SFAS No. 44 is no longer necessary.
SFAS No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements, amended SFAS No. 4, and is no longer necessary because SFAS No.
4 has been rescinded. SFAS No. 145 amends SFAS No. 13, Accounting for
Leases, to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. The provisions of SFAS No. 145 related to the recision of SFAS
No. 4 shall be applied in fiscal years beginning after May 15, 2002. The
provisions of SFAS No. 145 related to SFAS No. 13 shall be effective for
transactions occurring after May 15, 2002, with early application encouraged.
All other provisions of SFAS No. 145 are effective for financial statements
issued on or after May 15, 2002, with early application encouraged. The
Company adopted SFAS No. 145 on May 1, 2002 in connection with its adoption of
fresh-start reporting and has presented the reorganization and restructuring of
its debt in connection with the terms of the Joint Plan as a reorganization
item (see Note 3 of our accompanying unaudited condensed consolidated financial
statements).

In July 2001, FASB issued SFAS No. 142 Goodwill and Other Intangible
Assets. SFAS No. 142 establishes new accounting and reporting standards for
goodwill and other intangible assets. Under SFAS No. 142, goodwill and
intangible assets with indefinite lives will no longer be amortized. However,
they will be subject to annual impairment tests as prescribed by the statement.
The impairment test for the excess reorganization value recorded in connection
with the our fresh-start reporting, effective May 1, 2002, will be performed
during the quarter ending December 31, 2002. The provisions of this statement
were required to be applied starting with the fiscal year beginning after
December 15, 2001. In accordance with the adoption of SFAS No. 142, we
discontinued amortizing goodwill effective January 1, 2002. Intangible assets
with definite lives will continue to be amortized over their estimated useful
lives. We adopted the provisions of fresh-start reporting as of May 1, 2002.
On this date, the intangible assets for the Reorganized Company were adjusted
to their fair value based upon estimates provided by an independent financial
advisor.

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The following table sets forth the impact on the Companys earnings
relating to the adoption of SFAS No. 142 for the periods indicated (in
thousands of dollars, except earnings per share amounts):

|                                        |  |                     |         |               |  |   |         |  
|--------------------------------------- |  | ------------------- | ------- | ------------- |  | - | ------- | -
|                                        |  | Predecessor Company
|                                        |  |                    
|                                        |  | Three Months        |         | Nine Months  
|                                        |  | Ended               |         | Ended        
|                                        |  | September 30,       |         | September 30,
|                                        |  | 2001                |         | 2001         
|                                        |  |                     |         |              
|Reported net loss                       |  | $                   | (51,562 | )             |  | $ | (43,305 | )
|Add back: goodwill amortization         |  |                     | 2,714   |               |  |   | 8,526   |  
|                                        |  |                     |         |               |  |   |         |  
|Adjusted net loss                       |  | $                   | (48,848 | )             |  | $ | (34,779 | )
|                                        |  |                     |         |               |  |   |         |  
|Earnings per share  basic and diluted: |  |                     |         |               |  |   |         |  
|Reported net loss                       |  | $                   | (0.70   | )             |  | $ | (0.59   | )
|Goodwill amortization                   |  |                     | 0.04    |               |  |   | 0.12    |  
|                                        |  |                     |         |               |  |   |         |  
|Adjusted net loss                       |  | $                   | (0.66   | )             |  | $ | (0.47   | )
|                                        |  |                     |         |               |  |   |         |  

Results of Operations

The consolidated results of operations data for the three months ended
September 30, 2002 and nine months ended September 30, 2002 reflect the
combined results of our Predecessor Company and Reorganized Mariner, is not a
presentation in accordance with accounting principles generally accepted in the
United States and is presented solely for convenience purposes, as certain
items are compared and discussed in our results of operations appearing below.

|                                                 |             |   |               |         |               |   |               |         |               |   |             |           |  |   |         |           | 
|------------------------------------------------ | ----------- | - | ------------- | ------- | ------------- | - | ------------- | ------- | ------------- | - | ----------- | --------- |  | - | ------- | --------- | 
|                                                 |             |   |               |         |               |   |               |         |               |   | Reorganized |           |  |   |        
|                                                 |             |   |               |         |               |   |               |         |               |   | Company and |           |  |   |        
|                                                 |             |   |               |         |               |   |               |         |               |   | Predecessor |           |  |   |        
|                                                 |             |   | Reorganized   |         | Predecessor   |   | Company       |         | Predecessor  
|                                                 |             |   | Company       |         | Company       |   | Combined      |         | Company      
|                                                 |             |   |               |         |               |   |               |         |              
|                                                 |             |   | Three Months  |         | Three Months  |   | Nine Months   |         | Nine Months  
|                                                 |             |   | Ended         |         | Ended         |   | Ended         |         | Ended        
|                                                 |             |   | September 30, |         | September 30, |   | September 30, |         | September 30,
|                                                 |             |   | 2002          |         | 2001          |   | 2002          |         | 2001         
|                                                 |             |   |               |         |               |   |               |         |              
|Medicaid                                         |             | $ | 214,009       |         |               | $ | 236,003       |         |               | $ | 643,590     |           |  | $ | 685,162 |          
|Medicare                                         |             |   | 142,977       |         |               |   | 139,926       |         |               |   | 449,600     |           |  |   | 435,318 |          
|Private and other                                |             |   | 88,880        |         |               |   | 87,966        |         |               |   | 249,201     |           |  |   | 281,307 |          
|                                                 |             |   |               |         |               |   |               |         |               |   |             |           |  |   |         |          
|                                                 | Net revenue |   | $             | 445,866 |               |   | $             | 463,895 |               |   | $           | 1,342,391 |  |   | $       | 1,401,787 | 
|                                                 |             |   |               |         |               |   |               |         |               |   |             |           |  |   |         |          
|Total average residents                          |             |   | 30,551        |         |               |   | 32,969        |         |               |   | 31,175      |           |  |   | 34,414  |          
|Weighted average licensed beds
available for use |             |   | 34,641        |         |               |   | 37,705        |         |               |   | 35,418      |           |  |   | 39,247  |          
|Weighted average occupancy                       |             |   | 88.2          | %       |               |   | 87.4          | %       |               |   | 88.0        | %         |  |   | 87.7    | %        

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The following table sets forth the consolidated results of our operations
for the periods indicated (in thousands of dollars):

|                                                             |                                                            |                          |         |               |         |               |         |               |         |               |           |             |           |   |           |         |           | 
|------------------------------------------------------------ | ---------------------------------------------------------- | ------------------------ | ------- | ------------- | ------- | ------------- | ------- | ------------- | ------- | ------------- | --------- | ----------- | --------- | - | --------- | ------- | --------- | 
|                                                             |                                                            |                          |         |               |         |               |         |               |         |               |           | Reorganized |           |   |           |        
|                                                             |                                                            |                          |         |               |         |               |         |               |         |               |           | Company and |           |   |           |        
|                                                             |                                                            |                          |         |               |         |               |         |               |         |               |           | Predecessor |           |   |           |        
|                                                             |                                                            |                          |         | Reorganized   |         | Predecessor   |         | Company       |         | Predecessor  
|                                                             |                                                            |                          |         | Company       |         | Company       |         | Combined      |         | Company      
|                                                             |                                                            |                          |         |               |         |               |         |               |         |              
|                                                             |                                                            |                          |         | Three Months  |         | Three Months  |         | Nine Months   |         | Nine Months  
|                                                             |                                                            |                          |         | Ended         |         | Ended         |         | Ended         |         | Ended        
|                                                             |                                                            |                          |         | September 30, |         | September 30, |         | September 30, |         | September 30,
|                                                             |                                                            |                          |         | 2002          |         | 2001          |         | 2002          |         | 2001         
|                                                             |                                                            |                          |         |               |         |               |         |               |         |              
|Net revenue                                                  |                                                            | $                        | 445,866 |               |         | $             | 463,895 |               |         | $             | 1,342,391 |             |           | $ | 1,401,787 |        
|Costs and expenses:                                          |                                                            |                          |         |               |         |               |         |               |         |               |           |             |           |   |           |        
|                                                             | Salaries, wages and benefits                               |                          |         | 272,802       |         |               |         | 284,007       |         |               |           | 825,208     |           |   |           | 856,529 |          
|                                                             | Nursing, dietary and other
supplies                        |                          |         | 26,545        |         |               |         | 29,329        |         |               |           | 81,287      |           |   |           | 90,337  |          
|                                                             | Ancillary services                                         |                          |         | 27,969        |         |               |         | 37,627        |         |               |           | 83,250      |           |   |           | 91,016  |          
|                                                             | General and administrative                                 |                          |         | 44,851        |         |               |         | 50,515        |         |               |           | 125,254     |           |   |           | 145,057 |          
|                                                             | Insurance                                                  |                          |         | 29,642        |         |               |         | 28,939        |         |               |           | 88,451      |           |   |           | 90,174  |          
|                                                             | Rent                                                       |                          |         | 11,077        |         |               |         | 13,614        |         |               |           | 33,965      |           |   |           | 44,877  |          
|                                                             | Depreciation and amortization                              |                          |         | 9,429         |         |               |         | 13,628        |         |               |           | 26,084      |           |   |           | 38,035  |          
|                                                             | Provision for bad debts                                    |                          |         | 4,695         |         |               |         | 13,664        |         |               |           | 32,538      |           |   |           | 23,535  |          
|                                                             | Loss on settlement with government                         |                          |         |              |         |               |         | 33,410        |         |               |           |            |           |   |           | 33,410  |          
|                                                             |                                                            |                          |         |               |         |               |         |               |         |               |           |             |           |   |           |        
|                                                             |                                                            | Total costs and expenses |         |               | 427,010 |               |         |               | 504,733 |               |           |             | 1,296,037 |   |           |         | 1,412,970 | 
|                                                             |                                                            |                          |         |               |         |               |         |               |         |               |           |             |           |   |           |        
|Operating income (loss)                                      |                                                            |                          | 18,856  |               |         |               | (40,838 | )             |         |               | 46,354    |             |           |   | (11,183   | )      
|Other income (expenses):                                     |                                                            |                          |         |               |         |               |         |               |         |               |           |             |           |   |           |        
|                                                             | Interest, net                                              |                          |         | (8,506        | )       |               |         | 1,809         |         |               |           | (13,662     | )         |   |           | 1,580   |          
|                                                             | Reorganization items                                       |                          |         |              |         |               |         | (18,206       | )       |               |           | 1,394,309   |           |   |           | (39,619 | )        
|                                                             | Other                                                      |                          |         | (300          | )       |               |         | (176          | )       |               |           | 1,079       |           |   |           | 825     |          
|                                                             |                                                            |                          |         |               |         |               |         |               |         |               |           |             |           |   |           |        
|Income (loss) from continuing
operations before income taxes |                                                            |                          | 10,050  |               |         |               | (57,411 | )             |         |               | 1,428,080 |             |           |   | (48,397   | )      
|Provision (benefit) for income taxes                         |                                                            |                          | 4,100   |               |         |               | (4,807  | )             |         |               | 9,363     |             |           |   | (4,807    | )      
|                                                             |                                                            |                          |         |               |         |               |         |               |         |               |           |             |           |   |           |        
|Income (loss) from continuing
operations                     |                                                            |                          | 5,950   |               |         |               | (52,604 | )             |         |               | 1,418,717 |             |           |   | (43,590   | )      
|Discontinued operations:                                     |                                                            |                          |         |               |         |               |         |               |         |               |           |             |           |   |           |        
|                                                             | Income from operations of
discontinued pharmacy
operations |                          |         |              |         |               |         | 1,042         |         |               |           |            |           |   |           | 285     |          
|                                                             | Gain on sale of discontinued
pharmacy operations           |                          |         |              |         |               |         |              |         |               |           | 29,082      |           |   |           |        |          
|                                                             |                                                            |                          |         |               |         |               |         |               |         |               |           |             |           |   |           |        
|Net income (loss)                                            |                                                            | $                        | 5,950   |               |         | $             | (51,562 | )             |         | $             | 1,447,799 |             |           | $ | (43,305   | )      
|                                                             |                                                            |                          |         |               |         |               |         |               |         |               |           |             |           |   |           |        

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Three Months Ended September 30, 2002 Compared to Three Months Ended September
30, 2001.

Net Revenue

Net revenue totaled $445.9 million for the three months ended September
30, 2002, a decrease of $18.0 million, or 3.9%, compared to the three months
ended September 30, 2001. Net revenue from nursing home services accounted for
$417.4 million, or 93.6%, of total net revenue for the three months ended
September 30, 2002 compared to $435.3 million, or 93.8%, of total net revenue
for the three months ended September 30, 2001. Revenue from nursing home
services was derived from the provision of routine and ancillary services and
is a function of occupancy rates and payor mix. Although net revenue from
nursing home services decreased by approximately $17.9 million, or 4.1%, net
revenue of our SNFs, excluding facilities that have been divested, increased by
approximately $12.1 million, or 2.8%, which translates to an increase in
revenue per patient day of approximately $9.19, or 6.6%. The increase resulted
from numerous factors, including an increase in average per diem rates for
Medicaid reimbursement in the three months ended September 30, 2002 compared to
the three months ended September 30, 2001 and the favorable improvement in
payor mix. These increases were offset by a decrease in revenue during the
three months ended September 30, 2002 compared to the three months ended
September 30, 2001 of approximately $19.4 million due to the impact of the
divestiture of facilities during the past twelve months (see Note 7 of our
unaudited condensed consolidated financial statements).

Costs and expenses

Total costs and expenses for the three months ended September 30, 2002
were $427.0 million, a decrease of $77.7 million, or 15.4%, compared to $504.7
million in total costs and expenses for the three months ended September 30,
2001. The decrease was caused by many factors, including a charge of
approximately $33.4 million in the three months ended September 30, 2001
primarily relating to the settlement of qui tamactions included in the Global
Settlement which was not present in the three months ended September 30, 2002
(see Note 12 of our unaudited condensed consolidated financial statements).
The decline in costs and expenses was also attributable to a 4.0% decrease in
salaries, wages and benefits to $272.8 million in the three months ended
September 30, 2002, from $284.0 million in the three months ended September 30, 2001. Salaries,
wages and benefits comprise 61.2% of net revenue in both periods. In the
three months ended September 30, 2002, costs of ancillary services decreased
$9.7 million, or 25.7%, compared to the three months ended September 30, 2001.
The provision for bad debts decreased $9.0 million, or 65.6%, in the three
months ended September 30, 2002 compared to the three months ended September
30, 2001. These decreases resulted mainly from the divestiture of facilities.

Reorganization items

We were deemed to emerge from bankruptcy on May 1, 2002 for accounting
purposes. Therefore, there were no reorganization items recorded in the three
months ended September 30, 2002. Reorganization items, which consisted of
income, expenses and other costs incurred as a result of the bankruptcy
filings, were $18.2 million in the three months ended September 2001 (see Note
3 of our unaudited condensed consolidated financial statements).

Discontinued Operations

The results of the APS Division have been classified as a discontinued
operation in accordance with accounting principles generally accepted in the
United States. During the three months ended September 30, 2002 there was no
activity recorded in the statement of operations related to the APS Division.
For the three months ended September 30, 2001, income from operations of
discontinued pharmacy operations was approximately $1.0 million (see Note 7 of
our unaudited condensed consolidated financial statements).

Nine Months Ended September 30, 2002 Compared to Nine Months Ended September
30, 2001.

Net Revenue

Net revenue totaled $1,342.4 million for the nine months ended September
30, 2002, a decrease of $59.4 million, or 4.2%, compared to the nine months
ended September 30, 2001. Net revenue for nursing home services accounted for
$1,257.8 million, or 93.7%, of total net revenue for the nine months ended
September 30, 2002 compared to $1,316.0 million, or 93.9%, of total net revenue
for the nine months ended September 30, 2001. Revenue from nursing home
services was derived from the provision of routine and ancillary services and
is a function of occupancy rates and payor mix. Although net revenue from
nursing home services decreased approximately $58.2 million, or 4.4%, net
revenue of our SNFs, excluding facilities that have been divested,

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increased by approximately $38.7 million, or 3.0%, which translates to an increase in
revenue per patient day of approximately $8.87, or 6.4%. The increase resulted
from numerous factors, including an increase in Medicare reimbursement rates in
connection with the recent legislative relief provided by Medicare Balanced
Budget Refinement Act of 1999, or BBRA, and the Medicare, Medicaid and SCHIP
Benefits Improvement and Protection Act of 2000, or BIPA, which mitigated the
final year over year phase-in effect of PPS. In addition, average per diem
rates for Medicaid reimbursement increased 6.7% in the nine months ended
September 30, 2002 compared to the nine months ended September 30, 2001. These
increases were offset by a decrease in revenue during the nine months ended
September 30, 2002 compared to the nine months ended September 30, 2001 of
approximately $37.7 million due to the impact of the divestiture of facilities
during the past twelve months (see Note 7 of our unaudited condensed
consolidated financial statements).

Costs and expenses

Total costs and expenses for the nine months ended September 30, 2002 were
$1,296.0 million, a decrease of $116.9 million, or 8.3%, compared to $1,413.0
million of total costs and expenses for the nine months ended September 30,
2001. The decrease was attributable to numerous factors, including decreases in
salaries, wages and benefits of $31.3 million, and general and administrative
expenses of $19.8 million. Salaries, wages and benefits, which comprised 61.5%
and 61.1% of net revenue for the nine months ended September 30, 2002 and 2001,
respectively, decreased by $31.3 million primarily as a result of the
facilities divested during the past twelve months. The decrease in salaries,
wages and benefits resulting from the divestitures was partially offset by an
increase in wages. Various federal, state and local regulations imposed,
depending on the services provided, a variety of regulatory standards for the
type, quality and level of personnel required to provide care or services.
These regulatory requirements had an impact on staffing levels, as well as the
mix of staff and therefore impacted total costs and expenses.

The decrease in general and administrative expenses of $19.8 million
during the nine months ended September 30, 2002 compared to the nine months
ended September 30, 2001 resulted mainly from our continued efforts to reduce
overhead costs. Depreciation and amortization expense decreased approximately
$12.0 million, or 31.4%, to $26.1 million for the nine months ended September 30, 2002
compared to $38.0 million for the nine months ended September 30, 2001. The
decrease was primarily due to $8.5 million in amortization expense recorded in
the nine months ended September 30, 2001. On January 1, 2002, we discontinued
amortization of intangible assets upon adoption of SFAS No. 142 (see Note 2 of
our unaudited condensed consolidated financial statements). Rent expense
decreased approximately $10.9 million, or 24.3%, to $34.0 million for the nine
months ended September 30, 2002 compared to $44.9 million for the nine months
ended September 30, 2001. The decrease was due to the divestiture of facilities
and renegotiations of certain leases during the past twelve months. These
decreases were partially offset by an increase in the provision for bad debts
of $9.1 million, which resulted mainly from a reevaluation of our allowance for
doubtful accounts triggered by deterioration in the aging of certain categories
of receivables related to facilities which have been divested.

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
$1,394.3 million gain for the nine months ended September 30, 2002 compared to
a $39.6 million loss for the nine months ended September 30, 2001. During the
nine months ended September 30, 2002, we recorded a gain of approximately
$1,229.6 million from the restructuring of our debt in accordance with the
provisions of the Joint Plan. In addition, we recorded a gain on fresh-start
valuation adjustments of approximately $253.9 million to reflect adjustments to
record property and equipment and identifiable intangible assets at their fair
values in accordance with our adoption of fresh-start reporting (see Note 3 of
our unaudited condensed consolidated financial statements).

Discontinued Operations

The results of the APS Division have been classified as a discontinued
operation in accordance with accounting principles generally accepted in the
United States. During the nine months ended September 30, 2002, we recorded a
gain on the sale of the APS Division of approximately $29.1 million. Income
from operations of discontinued pharmacy operations was approximately $0.3
million for the nine months ended September 30, 2001 (see Note 7 of our
unaudited condensed consolidated financial statements).

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Liquidity and Capital Resources of the Company

|                         |                  |                                         |         |                        |         |      |        |             |       |             |        |               |        |   |        |        |        |   |         |        |         | 
|------------------------ | ---------------- | --------------------------------------- | ------- | ---------------------- | ------- | ---- | ------ | ----------- | ----- | ----------- | ------ | ------------- | ------ | - | ------ | ------ | ------ | - | ------- | ------ | ------- | 
|                         |                  |                                         |         | Payments Due by Period
|                         |                  |                                         |         |                       
|                         |                  |                                         |         |                        |         |      |        | Less Than 1 |       |             |        |               |        |   |        |        |        |   |         |       
|                         |                  |                                         |         | Total                  |         | Year |        | 1 - 3 Years |       | 4 - 5 Years |        | After 5 Years
|                         |                  |                                         |         |                        |         |      |        |             |       |             |        |              
|Contractual Obligations: |                  |                                         |         |                        |         |      |        |             |       |             |        |               |        |   |        |        |        |   |         |       
|                         | Long-term debt   |                                         |         |                        |         |      |        |             |       |             |        |               |        |   |        |        |        |   |         |        |        
|                         |                  | Term Loans                              |         | $                      | 210,940 |      |        | $           | 2,120 |             |        | $             | 4,240  |   |        | $      | 4,240  |   |         | $      | 200,340 | 
|                         |                  | Second Priority Notes                   |         |                        | 150,000 |      |        |             |      |             |        |               |       |   |        |        |       |   |         |        | 150,000 | 
|                         |                  | Non-recourse indebtedness of
subsidiary |         |                        | 59,688  |      |        |             |      |             |        |               |       |   |        |        |       |   |         |        | 59,688  | 
|                         |                  | Mortgage notes payable                  |         |                        | 11,750  |      |        |             | 442   |             |        |               | 337    |   |        |        | 401    |   |         |        | 10,570  | 
|                         |                  | Capital leases                          |         |                        | 55,572  |      |        |             | 3,634 |             |        |               | 32,352 |   |        |        | 12,237 |   |         |        | 7,349   | 
|                         | Operating leases |                                         |         | 198,569                |         |      |        | 34,409      |       |             |        | 55,999        |        |   |        | 37,063 |        |   |         | 71,098 |        
|                         | Other            |                                         |         | 1,909                  |         |      |        | 135         |       |             |        | 238           |        |   |        | 154    |        |   |         | 1,382  |        
|                         |                  |                                         |         |                        |         |      |        |             |       |             |        |               |        |   |        |        |        |   |         |        |         | 
|                         |                  | $                                       | 688,428 |                        |         | $    | 40,740 |             |       | $           | 93,166 |               |        | $ | 54,095 |        |        | $ | 500,427 |       
|                         |                  |                                         |         |                        |         |      |        |             |       |             |        |               |        |   |        |        |        |   |         |        |         | 

|                        |                       |   |                                            |        |      |   |             |        |             |   |               |   |  |   |   |   |  |   |       |       | 
|----------------------- | --------------------- | - | ------------------------------------------ | ------ | ---- | - | ----------- | ------ | ----------- | - | ------------- | - |  | - | - | - |  | - | ----- | ----- | 
|                        |                       |   | Amount of Commitment Expiration Per Period
|                        |                       |   |                                           
|                        |                       |   |                                            |        |      |   | Less Than 1 |        |             |   |               |   |  |   |   |   |  |   |      
|                        |                       |   | Total                                      |        | Year |   | 1 - 3 Years |        | 4 - 5 Years |   | After 5 Years
|                        |                       |   |                                            |        |      |   |             |        |             |   |              
|Commercial Commitments: |                       |   |                                            |        |      |   |             |        |             |   |               |   |  |   |   |   |  |   |       |      
|                        | Letters of credit (1) |   | $                                          | 25,563 |      |   | $           | 25,563 |             |   | $             |  |  |   | $ |  |  |   | $     |      | 
|                        | Guarantees            |   |                                            | 5,100  |      |   |             |       |             |   |               |  |  |   |   |  |  |   |       | 5,100 | 
|                        |                       |   |                                            |        |      |   |             |        |             |   |               |   |  |   |   |   |  |   |       |       | 
|                        |                       | $ | 30,663                                     |        |      | $ | 25,563      |        |             | $ |              |   |  | $ |  |   |  | $ | 5,100 |      
|                        |                       |   |                                            |        |      |   |             |        |             |   |               |   |  |   |   |   |  |   |       |       | 

(1)  Includes letters of credit collateralized with approximately $3.2 million
in cash.

Working Capital and Cash Flows

At September 30, 2002, we had working capital of $124.5 million and cash
and cash equivalents of $93.7 million, compared to working capital of $347.6
million and cash and cash equivalents of $213.7 million at December 30, 2001.
For the five months ended September 30, 2002, net cash provided by operating
activities of continuing operations before reorganization items was
approximately $26.3 million. Net cash provided by operating activities of
continuing operations before reorganization items was approximately $38.5
million for the four months ended April 30, 2002. See the unaudited condensed
consolidated statements of cash flows in our unaudited condensed consolidated
financial statements. For the nine months ended September 30, 2001, net cash
provided by operating activities of continuing operations before reorganization
items was approximately $111.3 million.

Capital expenditures were approximately $17.3 million for the five months
ended September 30, 2002, $27.6 million for the four months ended April 30,
2002 and $23.8 million for the nine months ended September 30, 2001, all of
which were financed through internally generated funds. Capital expenditures
for the four months ended April 30, 2002 included approximately $15.2 million
related to certain facilities that were damaged by floods (see Note 7 of the
accompanying unaudited condensed consolidated financial statements). Our
operations require capital expenditures for renovations of existing facilities
in order to continue to meet regulatory requirements, to upgrade facilities for
the treatment of subacute patients and accommodate the addition of specialty
medical services and to improve the physical appearance of facilities for
marketing purposes. In addition, there are capital expenditures required for
completion of certain existing facility expansions and new construction
projects in process, as well as supporting non-nursing home operations. We expect planned capital
expenditures for the twelve months ending December 31, 2002 to approximate
$50.0 million.

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During the four months ended April 30, 2002, we received net proceeds from
the disposition of assets of approximately $92.4 million, which primarily
related to the sale of the APS Division (see Note 7 of the accompanying
unaudited condensed consolidated financial statements). During the nine months
ended September 30, 2001, we received net proceeds from the disposition of
assets of approximately $4.4 million. The majority of the cash from the
disposition of assets was used for repayments against our prepetition senior
credit facilities as adequate protection payments.

During the five months ended September 30, 2002, we made aggregate
principal repayments of long-term debt of approximately $2.7 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 (see Note 3 of
the accompanying unaudited condensed consolidated financial statements). In
connection with our emergence from bankruptcy, we made borrowings of $212.0
million under our new Senior Credit Facility (see Note 5 of the accompanying
unaudited condensed consolidated financial statements). During the nine months
ended September 30, 2001, we made aggregate principal repayments of long-term
debt of approximately $33.3 million.

Although we are still in the process of determining the impact that the
Medicare Reimbursement Cliff will have on our cash flows, we believe that our
cash flow from operations, along with available borrowings under the Senior
Credit Facility, will be sufficient to meet our operational liquidity needs for
the next twelve months. For a discussion of items that may have an adverse
impact on our future liquidity, see Cautionary Statements below.

Because we are currently unable to determine the full impact of the
Medicare Reimbursement Cliff, it may become more difficult
for us to comply with some of the financial covenants contained in
our Senior Credit Facility. If necessary, we will seek waivers of these covenants or
amendments to the Senior Credit Facility or other applicable debt obligations so that we can continue to remain
in compliance after accounting for the full impact of the Medicare
Reimbursement Cliff. We cannot provide any assurance that we will be able to
obtain any necessary amendment or waiver on commercially reasonable terms, if
at all. We are currently unable to determine the full impact of the
Medicare Reimbursement Cliff on the recoverability of our long-lived
assets. There can be no assurance that when the full impact of the
Medicare Reimbursement Cliff has been determined by us, that this
impact will not have a material adverse effect on our long-lived
assets.

Capital Resources

Senior Credit Facility. Outstanding loans under the Senior Credit Facility
bear interest, at our election, using either a base rate or eurodollar rate,
plus an applicable margin which ranges from 1.25%-2.25% for base rate loans and
2.25%-3.25% for eurodollar rate loans. The applicable margins for loans under
the Revolving Credit Facility are subject to adjustment in the future based on
a performance-based grid. 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. The Senior Credit Facility restricts our ability to borrow funds in the
event we maintain a cash balance in excess of $25.0 million, and also requires
us to maintain compliance with certain financial and non-financial covenants,
including minimum fixed charge coverage ratios, minimum consolidated adjusted
EBITDA (as defined in the Senior Credit Facility), maximum total leverage and
senior leverage ratios and maximum capital expenditures.

Borrowings under the 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 September 30, 2002; however, approximately
$22.6 million of letters of credit issued under the Revolving Credit Facility
were outstanding on that date.

Borrowings under the Term Loans were used to fund our obligations under
the Joint Plan and to pay in cash all or a portion of certain claims of
prepetition senior credit facility lenders and mortgage lenders. At September
30, 2002, the interest rate on the Term Loans was 5.31%. The Term Loans
amortize in quarterly installments at a rate of 0.25% of the original principal
balance, or $530,000, payable on the last day of each fiscal quarter beginning
June 30, 2002, and mature on May 13, 2008. The Term Loans can be prepaid at our
option without penalty or premium. In addition, the Term Loans are subject to
mandatory prepayment: (i) from the proceeds of certain asset sales which are
not used within 180 days of receipt to acquire long-term useful assets of the
general type used in our business; (ii) from the proceeds of certain casualty
insurance and condemnation awards, the proceeds of which are not used
within 360 days of receipt for the repair, restoration or replacement of
the applicable assets or for the purchase of other long-term useful assets of
the general type used in our business; and (iii) from the proceeds of the
issuance of

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certain equity securities and certain debt. The Term Loans are also
subject to annual mandatory prepayment to the extent of 75% of our consolidated
excess cash flow.

The Senior Credit Facility was amended to, among other things, extend to
February 13, 2003 the deadline for the Company to cause the interest rates on
at least 50% of our total funded debt to be effectively fixed, whether through
interest rate protection agreements or otherwise.

Second Priority Notes. The Second Priority Notes bear interest at a
3-month London Inter-Bank Offered Rate, or LIBOR, adjusted quarterly, plus 550
basis points. At September 30, 2002, the interest rate payable under the Second
Priority Notes was 7.25%. 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, without limitation,
restrictions on additional indebtedness, liens, restricted payments,
investments, asset sales, affiliate transactions and the creation of
unrestricted subsidiaries. These obligations are secured by liens and security
interests in the same collateral as that pledged to secure the Senior Credit
Facility. 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.

Other Letters of Credit. As of September 30, 2002, the Reorganized Company
had outstanding $3.0 million in letters of credit issued under the Predecessor
Companys pre-Effective Date credit facilities and secured by approximately
$3.2 million of cash collateral.

Non-Recourse Indebtedness of Unrestricted Subsidiary. One of our wholly
owned subsidiaries, Professional Health Care Management, Inc., or PHCMI, 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, or 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. This term-extending option
meets the definition of an embedded derivative instrument. This derivative is
accounted for as a purchased option, or more specifically a receiver
swaption. The fair market value of the receiver swaption has been separated
from the Omega Loan and recorded as an asset at current market value. Prior to
maturity, the Omega Loan is not subject to prepayment at the option of PHCMI
except (a) between February 1, 2005 and July 31, 2005, at 103% of par (notice
of which prepayment must be given by December 31, 2004), 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 the Senior Credit
Facility or the Senior Secured Notes, nor have they pledged their assets for
such indebtedness. The Omega Loan restricts the extent to which PHCMI can incur
other indebtedness, including intercompany indebtedness from PHCMIs
shareholders.

Omega Settlement.

In light of the non-recourse nature of the Omega Loan beyond the PHCMI
Entities and the stock of PHCMI that was pledged to Omega, our management, in
consultation with representatives of the agent for our prepetition senior
credit facilities (participants in which became the owners of the vast majority
of the equity of our reorganized company under the Joint Plan), concluded that
it would be appropriate to structure an option to sell a 51% interest in PHCMI.
To that end, prior to the Effective Date, one of our wholly owned subsidiaries,
GranCare, Inc., or GranCare, as the sole shareholder of PHCMI, entered into a
Share Purchase Agreement dated as of September 1, 2001, or SPA, with PHCMI and
an unaffiliated investor, Nexion Health BKC, Inc., or Nexion. Pursuant to the
SPA, GranCare received an option to, among other things, sell Nexion 51% of the
issued and outstanding capital stock of PHCMI and attendant control rights. After the Effective Date, and in
connection with our corporate restructuring program, GranCares interest in the
PHCMI stock and under the SPA were transferred to a newly formed wholly

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owned subsidiary of ours known as PHCMI Holding Company, LLC. The option under the
SPA was originally scheduled to expire on the Effective Date. Pursuant to an
agreement with Nexion, the option was extended to August 15, 2002. However, our
Board of Directors determined that it was not in our best interest to exercise
the option so it was allowed to expire, unexercised, on August 15, 2002.

Healthcare Regulatory Matters.

The Balanced Budget Act contained numerous changes to the Medicare and
Medicaid programs with the intent of slowing the growth of payments under these
programs by approximately $115.0 billion and $13.0 billion, respectively,
through the end of 2002. Approximately 50% of the savings were achieved through
a reduction in the growth of payments to providers and physicians. These cuts
have had, and are expected to continue to have, a material adverse effect on
us. Since the passage of the Balanced Budget Act, Congress has twice passed
additional legislation intended to mitigate temporarily the reduction in
reimbursement for SNFs under the Medicare PPS. However, certain increases in
Medicare reimbursement provided for under the subsequent legislation will
terminate when the Center for Medicare and Medicaid Services, or CMS (formally
known as the Health Care Financing Administration), implements a resource
utilization group, or RUG, refinement to more accurately predict the cost of
non-therapy ancillary services. On April 3, 2002, CMS issued a press release
announcing these RUG refinements will not be implemented for the fiscal year
beginning October 1, 2002; as a result, CMS estimates nursing homes will
continue to receive an estimated $1.0 billion in temporary add-on payments in
the next Federal fiscal year. This policy was confirmed in the final SNF PPS
rule for Federal fiscal year 2003 published July 31, 2002. Although the RUG
refinements have been delayed at least one year, certain other legislative
increases expired on October 1, 2002. Unless additional legislative action is
undertaken by the United States Congress, the loss of revenue associated with
the legislative provisions that expired on October 1, 2002 will have a material
adverse effect on us. Our management preliminarily estimates that these
occurrences will result in a loss of revenue of approximately $40.0 million in
the Federal fiscal year 2003. The previous legislation also imposed a
moratorium on the per beneficiary Part B therapy limits of $1,500 for physical
therapy and speech language pathology combined and $1,500 for occupational
therapy. The moratorium expires on January 1, 2003 unless Congress acts to
continue the moratorium. The House of Representatives approved legislation,
H.R. 4954 in June 2002, that would provide certain temporary SNF payment
increases, including increases in the nursing component of the PPS rate in
Federal fiscal years 2003 through 2005. The Senate, however, has not yet
approved such legislation. While we are hopeful that Congress will enact
legislation in a timely fashion, no assurances can be given as to whether
Congress will take action, the timing of any action, or the form of any relief
that may be enacted.

CMS has replaced the reasonable cost based payment system for LTACs with a
prospective payment system, or PPS. Final regulations were issued on August
30, 2002 and the system is now effective for cost reporting periods beginning
on or after October 1, 2002. The new prospective payment system classifies
patients into distinct Long Term Care Hospital diagnosis-related groups, or
LTC-DRGs, which are based on clinical characteristics of the patient and
expected resources required to provide treatment. The system allows for
approximately 500 different classifications with specific per-discharge
payments calculated for each LTC-DRG. The regulations allow a five-year
transition period, during which reimbursement is based on a blend of the new
LTC-DRG payment and cost based reimbursement. The facilities have the option
of electing 100% PPS reimbursement at any time during the phase-in period. We
cannot predict the ultimate impact the new system will have on the LTACs that
we operate.

Our primary sources of revenue are the federal Medicare program and the
state Medicaid programs. Although payment cycles for these programs vary,
payments are generally made within 30 to 60 days after services are provided.
For Medicare cost reporting periods beginning July 1, 1998, the Federal
Medicare program began to convert to a PPS for SNF services. Since the end of
the third quarter of 1999, all of our SNFs have been reimbursed under PPS,
which provides acuity-based rates that are established at the beginning of the
Medicare reporting year. Payments for nursing facility services provided to
Medicaid recipients are paid at rates that are set by each individual states
Medicaid program.

For cost reporting periods that ended before the implementation of PPS,
the facilities were reimbursed under Medicare based on reasonable and necessary
costs as determined from annual cost reports. This retrospective settlement
system resulted in final cost report settlements that generally were not
finally settled until two years after the end of the cost reporting period, and
that could be further delayed by appeals and litigation. All pre-petition cost
reports were settled in connection with the Global Settlement.

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Reimbursement rates from government sponsored programs, such as Medicare
and Medicaid, are strictly regulated and subject to funding appropriations from
federal and state governments. Ongoing efforts of third-party payors to contain
healthcare costs by limiting reimbursement rates, increasing case management
review and negotiating reduced contract pricing continue to affect our revenue
and profitability. Changes in reimbursement rates, including the implementation
of Medicare PPS, have adversely affected us. The result is significantly lower
Medicare revenue than under the previous cost-based payment methodology.

Other Factors Affecting Liquidity and Capital Resources

We are currently receiving a lower rate of Medicare reimbursement for
services provided on or after October 1, 2002 than we did before that date. The
remaining increases in Medicare reimbursement for high-acuity patients provided
for under the BBRA and BIPA are expected to terminate when CMS implements a RUG
refinement to more accurately predict the cost of non-therapy ancillary
services, which is currently scheduled to be implemented sometime after fiscal
year 2003. While the U.S. House of Representatives approved legislation in June
2002 to provide temporary increases in the SNF nursing component in 2003
through 2005 and a temporary increase in payments for residents with AIDS, the
U.S. Senate has not acted on this legislation to date. Unless additional
legislative action is undertaken by Congress to restore the Medicare payments,
the loss of revenues associated with these occurrences is expected to have a
material adverse effect on us. We preliminarily estimate that these occurrences
will result in a loss of revenue of approximately $10.0 million in the last
three months of 2002 and $30.0 million in the first nine months of 2003. While
we are hopeful that Congress will act in a timely fashion, no assurances can be
given as to whether Congress will take action, the timing of any action, or the
form of any relief enacted. The impact, and expected continued impact, of the
Medicare Reimbursement Cliff is expected to materially adversely affect our
cash flows for the indefinite future. A more complete discussion of the
expected impact of the Medicare Reimbursement Cliff is contained in Capital
Resources and Working Capital and Cash Flows.

We are also reimbursed for services, such as rehabilitation therapy
services, provided to Medicare SNF patients under the Medicare Part B benefit.
The BBA also revised the reimbursement methodology for therapy services under
Medicare Part B and set a maximum per beneficiary amount, or limit, of $1,500
per provider for physical therapy and speech pathology combined, and another
limit of $1,500 for occupational therapy. A subsequent moratorium on the
therapy limitation is expected to expire at the end of calendar year 2002,
although the House of Representatives approved a bill in June 2002 to extend
the moratorium through calendar year 2004. This legislation has not yet been
considered by the Senate. In the event the Senate fails to act in a timely
manner, the reinstatement of the limits on reimbursement for therapy will have
an adverse impact on our business.

Due to a decrease in the number of people entering the nursing profession
and an increased demand for nurses in the healthcare industry, we have
experienced a significant increase in our labor costs over the course of the
last year in certain markets in which we plan to continue operations. While
this has not yet had a material adverse effect on our operations, there can be
no assurance that further increases in nursing staff wages will not have such
an effect in the future. We have also experienced increased staffing
requirements in order to maintain compliance with various Medicare and Medicaid
programs. 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 younger nursing staff candidates to fill
anticipated vacancies.

We have experienced an increasing trend in the number and severity of
litigation claims asserted against us. We also believe that there has been, and
will continue to be, an increase in governmental investigatory activity of
long-term care providers, particularly in the area of false claims. While we
believe that we provide quality care to the patients in our facilities and
materially comply with all applicable regulatory requirements, an adverse
determination in a legal proceeding or governmental investigation, whether
currently asserted or arising in the future, could have a material adverse
effect on us.

Insurance costs in the long-term care industry for PL/GL, particularly in
Florida and Texas where we maintain significant operations, continue to rise.
Insurance markets have responded to this significant increase in the frequency
and severity of claims by severely restricting the availability of long-term
care PL/GL coverage. As a result, fewer companies are engaged in insuring
long-term care companies, and those that do offer insurance coverage do so at a
very high cost. We anticipate that these trends will continue, and that PL/GL
costs will continue to increase. 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.

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We currently purchase excess 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. Prior to July 31, 1999, our
liability insurance policies included aggregated stop loss features limiting
our out-of-pocket exposure. With stop loss insurance unavailable to us, the
expected direct costs have continued to increase. This increased exposure is
expected to have a delayed negative effect on our operating cash flow as claims
develop over the next several years.

We currently maintain two captive insurance subsidiaries to provide for
reinsurance obligations under workers compensation, PL/GL and automobile
liability for losses that occurred prior to April 1, 1998. These obligations
are funded with long-term, fixed income, investments which are not available to
satisfy our other obligations.

Additionally, we currently self-insure the first $500,000 of each
workers compensation claim. Because we are self-insured, there is not a limit
on the maximum number of claims or amount for which we can be liable in any
period. Although we base our loss estimates on annual actuarial analyses, we
may not be able to accurately predict the number or value of workers
compensation losses we incur. In the event our actual liability exceeds our
estimate for any given period, our results of operations and financial
condition could be materially adversely impacted.

We have recently hired additional personnel as we continue to implement
our revised business plan in connection with our emergence from bankruptcy.
This, combined with rising costs of employee benefits generally, is expected to
result in an increase in employee benefit costs in fiscal year 2003. We
preliminarily estimate that these increases in benefit costs will result in an
additional $14.0 million expense to us in fiscal year 2003.

We also have significant rent obligations relating to operating leases.
Total rent expense was approximately $18.4 million, $15.6 million and $44.9
million for the five months ended September 30, 2002, four months ended April
30, 2002, and the nine months ended September 30, 2001, respectively. We
estimate rent expense to be approximately $46.0 million for the twelve months
ending December 31, 2002.

In connection with the Joint Plan, we have undertaken a corporate
restructuring that will result in certain of our SNFs becoming subject to
applicable state and federal change of ownership (CHOW) rules that may have
the effect of stopping or delaying the payment of amounts owed to us in respect
of the provision of services to Medicare and Medicaid patients. Although we do
not believe that the application of CHOW rules will result in a material
adverse effect on our cash flows, financial performance or results of
operations, no assurances can be made in this regard.

Seasonality

Our revenue and operating income generally fluctuate from quarter to
quarter. This seasonality is related to a combination of factors that include
the timing of third-party payment rate changes, the number of workdays in the
period and seasonal census cycles.

Impact of Inflation

The health care industry is labor intensive. Wages and other labor-related
costs are especially sensitive to inflation. Increases in wages and other
labor-related costs as a result of inflation or the increase in minimum wage
requirements without a corresponding increase in Medicaid and Medicare
reimbursement rates would adversely impact us. In some of our markets, there is
a labor shortage that could have an adverse effect upon our ability to attract
or retain sufficient numbers of skilled and unskilled personnel at reasonable
wages. Accordingly, rising wage rates have had an adverse effect on us in some
of our markets.

Cautionary Statements

Statements contained in this quarterly report that are not historical
facts may be forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. 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.

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



| |  | our existing and future indebtedness;                                                                   
|- |  | --------------------------------------------------------------------------------------------------------
| 
| |  | changes in Medicare, Medicaid and certain private payors reimbursement levels;                         
| 
| |  | existing government regulations and changes in, or the failure to comply with, governmental regulations;
| 
| |  | the ability to control costs and implement measures designed to enhance operating efficiencies;         
| 
| |  | legislative proposals for health care 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. 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

The following discussion of our Companys exposure to market risk has been
prepared using certain assumptions considered reasonable in light of
information currently available to us. Given the unpredictability of interest
rates as well as other factors, actual results could differ materially from
those projected.

At September 30, 2002, our principal exposure to market risk relates to
changes in LIBOR, which affects the interest paid on our variable rate
borrowings and the fair value of our fixed rate borrowings. The following
table provides information about our financial instruments that are sensitive
to changes in interest rates. The following table presents principal cash flows
and related weighted average interest rates by expected maturity for the
periods indicated (in thousands of dollars, except interest rates):
37Table of Contents

|                                                   |  |                     |       |        |  |        |        |        |  |        |       |            |  |       |        |                    |  |   |       |   |  |   |         |   |  |   |         |  |  |            |         | 
|-------------------------------------------------- |  | ------------------- | ----- | ------ |  | ------ | ------ | ------ |  | ------ | ----- | ---------- |  | ----- | ------ | ------------------ |  | - | ----- | - |  | - | ------- | - |  | - | ------- |  |  | ---------- | ------- | 
|                                                   |  | Expected Maturities
|                                                   |  |                    
|                                                   |  |                     |       |        |  |        |        |        |  |        |       |            |  |       |        |                    |  |   |       |   |  |   |         |   |  |   |         |  |  | Fair Value
|                                                   |  |                     |       |        |  |        |        |        |  |        |       |            |  |       |        |                    |  |   |       |   |  |   |         |   |  |   |         |  |  | At        
|                                                   |  | Year 1              |       | Year 2 |  | Year 3 |        | Year 4 |  | Year 5 |       | Thereafter |  | Total |        | September 30, 2002
|                                                   |  |                     |       |        |  |        |        |        |  |        |       |            |  |       |        |                   
|Liabilities:                                       |  |                     |       |        |  |        |        |        |  |        |       |            |  |       |        |                    |  |   |       |   |  |   |         |   |  |   |         |  |  |            |         | 
|Long-term debt,
including
amounts due in
one year: |  |                     |       |        |  |        |        |        |  |        |       |            |  |       |        |                    |  |   |       |   |  |   |         |   |  |   |         |  |  |            |         | 
|Fixed rate                                         |  | $                   | 4,076 |        |  | $      | 22,856 |        |  | $      | 9,833 |            |  | $     | 11,695 |                    |  | $ | 943   |   |  | $ | 77,607  |   |  | $ | 127,010 |  |  | $          | 130,219 | 
|Average interest
rate                              |  |                     | 9.2   | %      |  |        | 9.3    | %      |  |        | 9.9   | %          |  |       | 10.2   | %                  |  |   | 10.7  | % |  |   | 10.8    | % |  |   |         |  |  |            |         | 
|Variable rate                                      |  | $                   | 2,120 |        |  | $      | 2,120  |        |  | $      | 2,120 |            |  | $     | 2,120  |                    |  | $ | 2,120 |   |  | $ | 350,340 |   |  | $ | 360,940 |  |  | $          | 360,940 | 

The average interest rates on the variable rate portion of our financial
instruments over the expected maturities described above varies. Outstanding
loans under the Senior Credit Facility bear interest, at our election, using
either a base rate or eurodollar rate, plus an applicable margin which ranges
from 1.25%-2.25% for base rate loans and 2.25%-3.25% for eurodollar rate loans.
The Second Priority Notes bear interest at 3-month LIBOR, adjusted quarterly,
plus 550 basis points.




Item 4. Controls and Procedures

We currently have in place systems relating to disclosure controls and
procedures with respect to the accurate and timely recordation, processing,
summarization 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 judgement 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. Based upon
the foregoing, the chief executive officer and chief financial officer believe
our internal controls and procedures are effective, in all material respects.
There have been no significant changes in our internal controls or in other
factors that could significantly affect our internal controls subsequent to the
date we carried out the evaluation. We understand the SEC may be promulgating
additional rules relating to internal controls. We cannot provide assurance
that our current internal controls will not change in the future to reflect
potential new rules of the SEC.




PART II       OTHER INFORMATION




Item 1.          Legal Proceedings

Not applicable.




Item 2.          Changes in Securities and Use of Proceeds

Not applicable.




Item 3.          Defaults upon Certain Securities

Not applicable.

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

Not applicable.




Item 5. Other Information

Not applicable.




Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

|               |      |                        |  |                                                                                                                        |  | 
|-------------- | ---- | ---------------------- |  | ---------------------------------------------------------------------------------------------------------------------- |  | 
|Exhibit Number |      | Description of Exhibit
|               |      |                       
|               | 99.1 |                        |  | Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
|              
|               | 99.2 |                        |  | 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.

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.
(Registrant)                                                                                                         
|                       
|                        |  |                                                                                                                                                
|                       
|                        |  | By:      /s/ William C. StraubWilliam C. Straub
Senior Vice President and
Chief Accounting Officer (Principal
Financial and Accounting Officer)
|                       
|Date: November 14, 2002 |  |                                                                                                                                                

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CERTIFICATION

I, C. Christian Winkle, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of Mariner Health
Care, Inc.;                                                                                                                                                                                                                                              
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:                                                                                                     



| | a) |  | designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the Evaluation
Date); and                                                                                                  
|
| | c) |  | presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the
audit committee of registrants board of directors (or persons
performing the equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrants ability to record, process, summarize and report
financial data and have identified for the registrants
auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrants internal controls; and                                                                                                                                        



|6. |  | The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|      |  |                   |  |                                                                                        
|----- |  | ----------------- |  | ---------------------------------------------------------------------------------------
|Date: |  | November 14, 2002 |  |                                                                                        
|      |  |                   |  |                                                                                        
|      |  |                   |  | /s/ C. Christian Winkle                                                                
|      |  |                   |  |                                                                                        
|      |  |                   |  | C. Christian Winkle
President and
Chief Executive Officer (Principal
Executive Officer)

40



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##### Table of Contents



CERTIFICATION

I, William C. Straub, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of Mariner Health
Care, Inc.;                                                                                                                                                                                                                                              
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:                                                                                                     



| | a) |  | designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the Evaluation
Date); and                                                                                                  
|
| | c) |  | presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the
audit committee of registrants board of directors (or persons
performing the equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrants ability to record, process, summarize and report
financial data and have identified for the registrants
auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrants internal controls; and                                                                                                                                        



|6. |  | The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|
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