<PAGE>

================================================================================
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                 --------------

                                   FORM 10-Q

                                 --------------

[X]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
         EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002

                                       OR

[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
         EXCHANGE ACT OF 1934

                                    0-49813
                             (Commission File No.)

                                 --------------

                           MARINER HEALTH CARE, INC.
             (Exact Name of Registrant as Specified in its Charter)

                                 --------------

                 DELAWARE                                      74-2012902
    (State or Other Jurisdiction of                         (I.R.S. Employer
     Incorporation or Organization)                        Identification No.)

     ONE RAVINIA DRIVE, SUITE 1500
           ATLANTA, GEORGIA                                       30346
(Address of Principal Executive Office)                         (Zip Code)

                                 (678) 443-7000
              (Registrant's Telephone Number, Including Area Code)

                        MARINER POST-ACUTE NETWORK, INC.
                                 (Former name)

                                 --------------

         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 [ ]

         There were 20,000,000 shares of Common Stock of the registrant issued
and outstanding as of May 13, 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 [ ] N/A [ ] (The registrant and its
subsidiaries filed petitions under chapter 11 of the United States Bankruptcy
Code on January 18, 2000 in the United States Bankruptcy Court for the District
of Delaware (the "Bankruptcy Court"). On April 3, 2002, the Bankruptcy Court
entered orders confirming the "Second Amended Joint Plan of Reorganization for
Mariner Post-Acute Network, Inc, Mariner Health Group, Inc., and Their
Respective Debtor Affiliates Dated February 1, 2002" (as modified on March 25,
2002 for Confirmation, the "Joint Plan"). The Joint Plan became effective on
May 13, 2002.).

===============================================================================
<PAGE>

                           MARINER HEALTH CARE, INC.

                  (FORMERLY MARINER POST-ACUTE NETWORK, INC.)

                                   FORM 10-Q

                                 MARCH 31, 2002

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                            PAGE
                                                                                                            ----
<S>              <C>                                                                                        <C>
PART I

Item 1.          Condensed Consolidated Financial Statements...............................................   1

Item 2.          Management Discussion and Analysis of Financial Condition and Results of Operations.......  18

Item 3.          Quantitative and Qualitative Disclosure About Market Risk.................................  27

PART II

Item 1.          Legal Proceedings.........................................................................  27

Item 2.          Changes in Securities and Use of Proceeds.................................................  28

Item 3.          Defaults Upon Certain Securities..........................................................  28

Item 4.          Submission of Matters to a Vote of Security Holders.......................................  28

Item 5.          Other Information.........................................................................  28

Item 6.          Exhibits and Reports on Form 8-K..........................................................  28
</TABLE>
<PAGE>

                                     PART I

ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                           MARINER HEALTH CARE, INC.
                  (FORMERLY MARINER POST-ACUTE NETWORK, INC.)
       (DEBTOR-IN-POSSESSION FROM JANUARY 18, 2000 THROUGH MAY 13, 2002)
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                        THREE MONTHS ENDED
                                                                                             MARCH 31,
                                                                                   -----------------------------
                                                                                      2002               2001
                                                                                   ----------         ----------
<S>                                                                                <C>                <C>
Net revenues ..............................................................        $  454,619         $  467,671

Costs and expenses:
   Salaries, wages and benefits ...........................................           280,574            288,177
   Nursing, dietary and other supplies ....................................            27,469             30,704
   Ancillary services .....................................................            27,746             26,608
   General and administrative .............................................            41,479             47,121
   Insurance ..............................................................            30,958             27,317
   Rent ...................................................................            11,774             17,178
   Depreciation and amortization ..........................................             8,901             11,755
   Provision for bad debts ................................................            13,035              5,868
                                                                                   ----------         ----------
     Total costs and expenses .............................................           441,936            454,728
                                                                                   ----------         ----------
Operating income ..........................................................            12,683             12,943

Other income (expenses):
   Interest expense (contractual interest for the three months ended
     March 31, 2002 and 2001 was $36,067 and $49,629, respectively) .......              (990)                --
   Interest income ........................................................               782                417
   Reorganization items ...................................................           (48,496)              (191)
   Other ..................................................................                54                976
                                                                                   ----------         ----------
(Loss) income from continuing operations before income taxes ..............           (35,967)            14,145

Provision for income taxes ................................................                --                 --
                                                                                   ----------         ----------
(Loss) income from continuing operations ..................................           (35,967)            14,145

Discontinued operations:
   Loss from operations of discontinued pharmacy operations ...............                --               (969)
   Gain on sale of discontinued pharmacy operations .......................            21,386                 --
                                                                                   ----------         ----------
Net (loss) income .........................................................        $  (14,581)        $   13,176
                                                                                   ==========         ==========

(Loss) earnings per share--basic and diluted:
   (Loss) income from continuing operations ...............................        $    (0.49)        $     0.20
   Discontinued operations:
        Loss from operations of discontinued pharmacy operations ..........                --              (0.02)
        Gain on sale of discontinued pharmacy operations ..................              0.29                 --
                                                                                   ----------         ----------
   Net (loss) income per share ............................................        $    (0.20)        $     0.18
                                                                                   ==========         ==========
</TABLE>

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

                                       1
<PAGE>

                           MARINER HEALTH CARE, INC.
                  (FORMERLY MARINER POST-ACUTE NETWORK, INC.)
       (DEBTOR-IN-POSSESSION FROM JANUARY 18, 2000 THROUGH MAY 13, 2002)
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                  (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                                    MARCH 31,          DECEMBER 31,
                                                                                       2002                2001
                                                                                   -----------         ------------
                                                                                   (UNAUDITED)
<S>                                                                                <C>                 <C>
                              ASSETS

Current assets:
   Cash and cash equivalents ..............................................        $   220,631         $   213,740
   Receivables, net of allowance for doubtful accounts of $70,663
     and $61,049 ..........................................................            234,196             238,736
   Inventories ............................................................              6,844               6,720
   Net assets of discontinued operations ..................................                 --              59,053
   Prepaid expenses and other current assets ..............................             28,291              34,628
                                                                                   -----------         -----------
     Total current assets .................................................            489,962             552,877

Property and equipment, net of accumulated depreciation of
   $354,697 and $356,926 ..................................................            394,088             412,965
Goodwill, net of accumulated amortization of $35,641 and $37,425 ..........            186,648             193,651
Restricted investments ....................................................             41,187              37,767
Other assets ..............................................................             25,893              25,095
                                                                                   -----------         -----------
                                                                                   $ 1,137,778         $ 1,222,355
                                                                                   ===========         ===========

            LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:
   Current maturities of long-term debt ...................................        $        --         $        --
   Accounts payable .......................................................             71,512              66,217
   Accrued compensation and benefits ......................................             97,865              91,368
   Accrued insurance obligations ..........................................             27,260              24,725
   Other current liabilities ..............................................             48,458              22,926
                                                                                   -----------         -----------
     Total current liabilities ............................................            245,095             205,236

Liabilities subject to compromise .........................................          2,176,863           2,289,600

Long-term debt, net of current maturities .................................             59,688              59,688
Long-term insurance reserves ..............................................            115,213             107,734
Other liabilities .........................................................             18,739              22,785
Minority interest .........................................................              4,452               4,572
                                                                                   -----------         -----------
     Total liabilities ....................................................          2,620,050           2,689,615

Commitments and contingencies

Stockholders' equity (deficit):
   Preferred stock, $.01 par value; 5,000,000 shares authorized;
     none issued ..........................................................                 --                  --
   Common stock, $.01 par value; 500,000,000 shares authorized;
     73,688,379 shares issued .............................................                737                 737
   Capital surplus ........................................................            980,952             980,952
   Accumulated deficit ....................................................         (2,463,959)         (2,449,378)
   Accumulated other comprehensive (loss) gain ............................                 (2)                429
                                                                                   -----------         -----------
     Total stockholders' deficit ..........................................         (1,482,272)         (1,467,260)
                                                                                   -----------         -----------
                                                                                   $ 1,137,778         $ 1,222,355
                                                                                   ===========         ===========
</TABLE>

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


                                       2
<PAGE>

                           MARINER HEALTH CARE, INC.
                  (FORMERLY MARINER POST-ACUTE NETWORK, INC.)
       (DEBTOR-IN-POSSESSION FROM JANUARY 18, 2000 THROUGH MAY 13, 2002)
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                         THREE MONTHS ENDED
                                                                                             MARCH 31,
                                                                                   -----------------------------
                                                                                      2002               2001
                                                                                   ----------         ----------
<S>                                                                                <C>                <C>
Cash flows from operating activities:
   Net (loss) income ......................................................        $  (14,581)        $   13,176
   Adjustments to reconcile net (loss) income to net cash provided by
     operating activities:
       Depreciation and amortization ......................................             8,901             11,755
       Equity earnings/minority interest ..................................               (54)              (976)
       Reorganization items ...............................................            48,496                191
       Provision for bad debts ............................................            13,035              5,868
       Loss from discontinued pharmacy operations .........................                --               (969)
       Gain on sale of discontinued pharmacy operations ...................           (21,386)                --
   Changes in operating assets and liabilities:
       Receivables ........................................................           (11,517)            (4,231)
       Inventories ........................................................              (426)              (264)
       Prepaid expenses and other current assets ..........................             5,079              2,105
       Accounts payable ...................................................              (409)             1,617
       Accrued liabilities and other current liabilities ..................            (1,060)            (5,962)
   Changes in long-term insurance reserves ................................            10,010             14,095
   Other ..................................................................            (2,970)             8,983
                                                                                   ----------         ----------
 Net cash provided by operating activities of continuing operations
     before reorganization items ..........................................            33,118             45,388
                                                                                   ----------         ----------

Net cash provided by discontinued pharmacy operations .....................                --              3,623
                                                                                   ----------         ----------

   Payment of reorganization items, net ...................................           (10,132)           (12,968)
                                                                                   ----------         ----------

Cash flows from investing activities:
   Purchases of property and equipment ....................................            (9,819)            (7,446)
   Disposition of assets ..................................................            90,253              2,518
   Restricted investments .................................................            (3,851)             1,340
   Other ..................................................................                69                131
                                                                                   ----------         ----------
Net cash provided (utilized) by investing activities ......................            76,652             (3,457)

Cash flows from financing activities:
   Repayment of prepetition long-term debt ................................           (92,247)           (11,263)
   Payment of deferred financing fees .....................................              (500)                --
   Other ..................................................................                --                 11
                                                                                   ----------         ----------
Net cash utilized by financing activities .................................           (92,747)           (11,252)
                                                                                   ----------         ----------
Increase in cash and cash equivalents .....................................             6,891             21,334

Cash and cash equivalents, beginning of year ..............................           213,740            182,352
                                                                                   ----------         ----------
Cash and cash equivalents, end of period ..................................        $  220,631         $  203,686
                                                                                   ==========         ==========
</TABLE>

   The accompanying notes are an integral part of these financial statements

                                       3
<PAGE>

                           MARINER HEALTH CARE, INC.
                  (FORMERLY MARINER POST-ACUTE NETWORK, INC.)
       (DEBTOR-IN-POSSESSION FROM JANUARY 18, 2000 THROUGH MAY 13, 2002)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

NOTE 1   NATURE OF BUSINESS

     REPORTING ENTITY

         Mariner Health Care, Inc. (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 are intended to include the operating subsidiaries through
which the services described herein are directly provided. At March 31, 2002,
the Company's significant operations consisted of 307 SNFs, including 9
stand-alone assisted living facilities, in 23 states with approximately 37,000
licensed beds and significant concentrations of facilities and beds in 5 states
and several metropolitan markets, which represents 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 11 for financial information about the Company's
reportable segments.

         Until January 6, 2002, the Company also operated approximately 31
institutional pharmacies and four distribution centers located in 17 states,
servicing more than 1,400 affiliated and third-party long-term care centers
(the "APS Division"). During the quarter ended December 31, 2001, the Company,
including certain of its subsidiaries, received the approval of the United
States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court")
to sell the APS Division, which transaction was consummated on January 6, 2002.
Accordingly, the results of the APS Division have been treated as a
discontinued operation in accordance with accounting principles generally
accepted in the United States. See Note 4.

     PETITIONS FOR REORGANIZATION UNDER CHAPTER 11

         On January 18, 2000 (the "Petition Date"), the Company, excluding one
of its direct subsidiaries, Mariner Health Group, Inc. ("Mariner Health"), and
its direct and indirect subsidiaries, the "MPAN Debtors," and Mariner Health
and its direct and indirect subsidiaries (collectively, the "MHG Debtors")
filed voluntary petitions for relief (collectively, the "Chapter 11 Filings")
in the Bankruptcy Court under chapter 11 title 11 of the United States Code
(the "Bankruptcy Code"), thus commencing the chapter 11 cases (the "Chapter 11
Cases"). On March 25, 2002, the Bankruptcy Court held a hearing on confirmation
of the Company's joint plan of reorganization filed on February 1, 2002 (as
modified at the confirmation hearing and including the related Disclosure
Statement and other exhibits as attachments thereto, the "Joint Plan"). The
Joint Plan became effective on May 13, 2002 (the "Effective Date"). In
connection with its emergence from bankruptcy, the Company changed its name to
Mariner Health Care, Inc. See Note 3.

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 costs
described in Note 3, 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.

       During the three months ended March 31, 2002, the Company operated its
business as a debtor-in-possession subject to the jurisdiction of the
Bankruptcy Court. Accordingly, the accompanying unaudited condensed
consolidated financial statements have been prepared on a going concern basis
which assumes continuity of operations and realization of assets and settlement
of liabilities and commitments in the normal course of business. These
financial statements have also been presented 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"). The statement requires a segregation of liabilities subject to
compromise by the Bankruptcy Court as of the Petition Date and identification
of all transactions and events that are directly associated with the
reorganization of the Company (see Note 3). Pursuant to SOP 90-7, prepetition
liabilities are reported on the basis of


                                       4
<PAGE>

                           MARINER HEALTH CARE, INC.
                  (FORMERLY MARINER POST-ACUTE NETWORK, INC.)
       (DEBTOR-IN-POSSESSION FROM JANUARY 18, 2000 THROUGH MAY 13, 2002)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

the expected amounts of such allowed claims, as opposed to the amounts for
which those claims may be settled. These financial statements do not include
any adjustments that will result from the resolution of the Chapter 11 Cases or
other matters discussed in the accompanying notes. In connection with its
emergence from bankruptcy, the Company will adopt the fresh start accounting
provisions of SOP 90-7 in the second quarter of 2002, which will result in the
revaluation of assets and liabilities to reflect the provisions of the Joint
Plan. Management believes this adoption will change materially the amounts
currently recorded in these financial statements.

         These financial statements should be read in conjunction with the
audited consolidated financial statements and notes thereto for the three months
ended December 31, 2001 included in the Company's Transition Report on From 10-K
for the transition period from October 1, 2002 to December 31, 2002 filed with
the SEC.

     RECENT ACCOUNTING PRONOUNCEMENTS

         In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), which
establishes new rules on the accounting for goodwill and other intangible
assets. Under SFAS 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. Intangible assets with definite lives
will continue to be amortized over their estimated useful lives. The
amortization provisions of SFAS 142 apply immediately to goodwill and
intangible assets acquired after June 30, 2001. With respect to goodwill and
intangible assets acquired prior to July 1, 2001, companies are required to
adopt SFAS 142 in their fiscal year beginning after December 15, 2001. The
Company adopted SFAS 142 on January 1, 2002. However, due to the Chapter 11
Cases, the Company cannot currently estimate the impact these impairment tests
will have on its consolidated financial position, results of operations, or
cash flows until after the adoption of the fresh start accounting provisions of
SOP 90-7 during the second quarter of 2002.

         In accordance with the adoption of SFAS 142, the Company discontinued
amortizing goodwill effective January 1, 2002. The following table sets forth
the impact on the Company's earnings for the three months ended March 31, 2001
relating to the adoption of SFAS 142.

<TABLE>
<CAPTION>
                                                              THREE MONTHS ENDED
                                                                   MARCH 31,
                                                                     2001
                                                              ------------------
         <S>                                                  <C>
         Reported net income .............................        $   13,176

         Add back: goodwill amortization .................             3,037
                                                                  ----------
         Adjusted net income .............................        $   16,213
                                                                  ==========

         Earnings per share - basic and diluted:
         Reported net income .............................        $     0.18
         Goodwill amortization ...........................              0.04
                                                                  ----------
         Adjusted net income .............................        $     0.22
                                                                  ==========
</TABLE>

     RECLASSIFICATIONS

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

NOTE 3   PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE

     CHAPTER 11 CASES

         As previously noted, on the Petition Date, the Company and
substantially all of its subsidiaries filed voluntary petitions for relief in
the Bankruptcy Court under chapter 11 title 11 of the Bankruptcy Code. 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,


                                       5
<PAGE>

                           MARINER HEALTH CARE, INC.
                  (FORMERLY MARINER POST-ACUTE NETWORK, INC.)
       (DEBTOR-IN-POSSESSION FROM JANUARY 18, 2000 THROUGH MAY 13, 2002)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

2002. The Bankruptcy Court approved the Disclosure Statement related to the
Joint Plan on February 1, 2002 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
Effective Date of the Joint Plan was May 13, 2002.

         In connection with the emergence from bankruptcy, the Company entered
into a $297.0 million senior credit facility, dated as of the Effective Date,
(the "Exit Facility") with a group of various lenders. The Exit Facility
provided funds to satisfy certain obligations of the Company to its creditors
under the Joint Plan and will provide funds for general working capital
purposes, and for permitted acquisitions. In addition, the Company issued
$150.0 million in secured notes to certain senior secured lenders in connection
with the treatment of their claims under the Joint Plan. See Note 12.

     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
MPAN Debtors' prepetition senior secured credit facility (the "MPAN Senior
Credit Facility Claim Holders"), the lenders under the MHG Debtors' prepetition
senior secured credit facility (the "MHG Senior Credit Facility Claim
Holders"), the committee of unsecured creditors in the MPAN Debtors' Chapter 11
Cases (the "MPAN Committee"), and the committee of unsecured creditors in the
MHG Debtors' Chapter 11 Cases.

         The Joint Plan provided for the substantive consolidation of the MPAN
Debtors' estates, and for 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 provide 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. The MPAN Senior Credit Facility Claim Holders and MHG Senior
Credit Facility Claim Holders received the substantial majority of the equity
in the Company following its reorganization (the "Reorganized Company"). See
below.

         General unsecured creditors of the MPAN Debtors (other than holders of
the Company's formerly issued and outstanding $275.0 million principal amount
9.5% Senior Subordinated Notes due 2007 and $294.0 million principal amount
10.5% Senior Subordinated Discount Notes due 2007, collectively, the "MPAN
Senior Subordinated Notes") will receive on account of their allowed unsecured
claims pro rata distributions from the MPAN Debtors' general unsecured claims
distribution fund, which consists of approximately 2% of the Reorganized
Company's common stock, par value $.01 per share (the "New Common Stock"),
issued on the Effective Date; and additional warrants to purchase approximately
2% of the New Common Stock. Holders of MPAN Senior Subordinated Notes will
receive pro rata distributions from the MPAN Senior Subordinated Note
distribution fund, which also consisted of approximately 2% of the New Common
Stock and additional warrants to purchase approximately 2% of the New Common
Stock. General unsecured creditors of the MHG Debtors and holders of Mariner
Health's formerly issued and outstanding $150.0 million principal amount Senior
Subordinated Notes due 2004 will receive on account of their allowed claims pro
rata distributions from the MHG Debtors' unsecured claims distribution fund,
which consists of cash in an amount equal to the lesser of (i) $7.5 million, or
(ii) such amount as may be necessary to fund a 5% distribution to the foregoing
holders of allowed claims. Holders of punitive damage claims and securities
damages claims will receive no distributions under the Joint Plan on account of
such claims.


                                       6
<PAGE>

                           MARINER HEALTH CARE, INC.
                  (FORMERLY MARINER POST-ACUTE NETWORK, INC.)
       (DEBTOR-IN-POSSESSION FROM JANUARY 18, 2000 THROUGH MAY 13, 2002)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

         The Debtors' principal prepetition secured lender groups (the MPAN
Senior Credit Facility Claim Holders and MHG Senior Credit Facility Claim
Holders) became the majority owners of the Reorganized Company, receiving, in
the aggregate, distributions of approximately 96% of the shares of New Common
Stock as of the Effective Date, in addition to cash and $150.0 million newly
issued secured debt (see Note 12.) Certain of the Debtors' SNFs were encumbered
by mortgage debt owing to third parties other than the MPAN Senior Credit
Facility Claim Holders and MHG Senior Credit Facility Claim Holders (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; (iii) an agreement to surrender six SNFs and certain other collateral in
satisfaction of mortgages on those SNFs (see Note 5); and (iv) an agreement to
surrender two other SNFs in satisfaction of mortgages on those SNFs. In
addition, the Joint Plan proposes treatment for one other Project Lender, which
treatment, if approved by the Bankruptcy Court, will consist of (a) a cash
payment in an amount necessary (if any) to provide the Project Lender with a
loan-to-collateral-value ratio of 80% (the "Cash Pay Down"); and (b) a new
mortgage note in an amount equal to the balance of the respective allowed
secured claim after the Cash Pay Down. The particular Project Lender and the
Company have agreed to defer resolution of the Joint Plan's treatment of the
claim, notwithstanding confirmation of the Joint Plan, so as to enable the
parties to attempt to negotiate a consensual treatment. There can be no
assurances that the parties will reach agreement, or that the Bankruptcy Court
will approve the proposed treatment of the claim under the Joint Plan.

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

         The holders of preferred stock, common stock, and options to purchase
common stock of the Company prior to the Effective Date did not, and will not,
receive any distributions under the Joint Plan. Following the Effective Date,
Mariner Health was merged out of existence and its direct or 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 will affect the rights of creditors and equity holders.

     DEBTOR-IN-POSSESSION FINANCING AGREEMENTS

         In connection with the Chapter 11 Filings, the MPAN Debtors obtained a
commitment for $100.0 million in debtor-in-possession ("DIP") financing (the
"MPAN DIP Financing") from a group 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. The MHG Debtors also
obtained a commitment for $50.0 million in DIP financing (the "MHG DIP
Financing" and together with the MPAN DIP Financing, the "DIP Financings") from
a group 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.

         Interest was payable on the principal amount outstanding under the MPAN
DIP Financing at a per annum rate of interest 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 of interest 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. At March 31, 2002, there were no outstanding borrowings under either
of the DIP Financings except for approximately $4.7 million of letters of credit
issued under


                                       7
<PAGE>

                           MARINER HEALTH CARE, INC.
                  (FORMERLY MARINER POST-ACUTE NETWORK, INC.)
       (DEBTOR-IN-POSSESSION FROM JANUARY 18, 2000 THROUGH MAY 13, 2002)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

the MPAN DIP Financing and $7.9 million of letters of credit issued under the
MHG DIP Financing, which was collateralized by $8.3 million of cash in a
collateral account with PNC that was not available for other purposes. Both the
MPAN DIP Financing and the MHG DIP Financing were terminated on the Effective
Date, at which time there were also no outstanding borrowings under either of
the DIP Financings. Approximately $12.6 million in outstanding letters of credit
issued for the account of the Debtors prior to the Effective Date under the DIP
Financings were terminated upon consummation of the Joint Plan and were cash
collateralized in accordance with the Joint Plan as a condition to its
consummation.

     GENERAL

         On the Petition Date, the Company received approval from the
Bankruptcy Court to pay prepetition and postpetition employee wages, salaries,
benefits, and other employee obligations. The Bankruptcy Court also approved
orders granting authority, among other things, to pay prepetition claims of
certain critical vendors, utilities, and patient obligations. All other
prepetition liabilities at March 31, 2002 and December 31, 2001 are classified
as liabilities subject to compromise.

     LIABILITIES SUBJECT TO COMPROMISE

         "Liabilities subject to compromise" refers to liabilities incurred
prior to the Chapter 11 Filings. These liabilities, consisting primarily of
long-term debt and certain accounts payable and accrued liabilities, represent
the Company's estimate of known or potential prepetition claims to be resolved
in connection with the Chapter 11 Cases. Such claims remain subject to future
adjustments based on negotiations, actions of the Bankruptcy Court, further
developments with respect to disputed claims, future rejection of executory
contracts or unexpired leases, determination as to the value of any collateral
securing claims, treatment under the Joint Plan, and other events. Payment
terms for these amounts are set forth in the Joint Plan. A summary of the
principal categories of claims classified as liabilities subject to compromise
at March 31, 2002 and December 31, 2001 are as follows (in thousands of
dollars):

<TABLE>
<CAPTION>
                                                      MARCH 31,        DECEMBER 31,
                                                         2002              2001
                                                     -----------       ------------
                                                     (UNAUDITED)
<S>                                                  <C>               <C>
Long-term debt ..............................        $1,949,996         $2,052,730
Accounts payable ............................            89,825             95,911
Accrued interest ............................            79,959             79,959
Accrued insurance obligations ...............            86,268             86,268
Other accrued liabilities ...................             3,068              7,706
Deferred loan costs .........................           (32,253)           (32,974)
                                                     ----------         ----------
                                                     $2,176,863         $2,289,600
                                                     ==========         ==========
</TABLE>

         Primarily all liabilities subject to compromise would have been
classified as current liabilities at March 31, 2002 and December 31, 2001 if
the Chapter 11 Filings had not been filed.

         In accordance with SOP 90-7, effective January 18, 2000, the Company
discontinued accruing interest relating to its debt facilities currently
classified as liabilities subject to compromise. Contractual interest was $36.1
million and $49.6 million for the three months ended March 31, 2002 and 2001,
respectively, which is $35.1 million and $49.6 million in excess of interest
expense included in the accompanying unaudited condensed consolidated financial
statements for the three months ended March 31, 2002 and 2001, respectively.
Interest expense for the three months ended March 31, 2002 and 2001 represents
interest paid on certain capital leases and other miscellaneous indebtedness.

     REORGANIZATION ITEMS

         Reorganization items consist of income, expenses and other costs
directly related to the reorganization of the Company since the Chapter 11
Filings. Reorganization items included in the accompanying unaudited condensed


                                       8
<PAGE>

                           MARINER HEALTH CARE, INC.
                  (FORMERLY MARINER POST-ACUTE NETWORK, INC.)
       (DEBTOR-IN-POSSESSION FROM JANUARY 18, 2000 THROUGH MAY 13, 2002)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

consolidated statements of operations for the three months ended March 31, 2002
and 2001 consist of the following (in thousands of dollars):

<TABLE>
<CAPTION>
                                                                                        THREE MONTHS ENDED
                                                                                             MARCH 31,
                                                                                   -----------------------------
                                                                                      2002               2001
                                                                                   ----------         ----------
<S>                                                                                <C>                <C>
Professional fees .........................................................        $   28,041         $   11,272
DIP financing fees ........................................................               376              1,080
Other reorganization costs ................................................             7,783              2,874
Net loss (gain) on divestitures ...........................................            12,775            (12,777)
Gain on settlement of prepetition accounts payable ........................                --                (69)
Interest earned on accumulated cash resulting from Chapter 11 Filings .....              (479)            (2,189)
                                                                                   ----------         ----------
                                                                                   $   48,496         $      191
                                                                                   ==========         ==========
</TABLE>

NOTE 4   DISCONTINUED OPERATIONS

         As noted previously, the Company obtained the approval of the
Bankruptcy Court for the sale of its APS Division, which was consummated on
January 6, 2002. The APS Division incurred operating losses in recent years and
the Company determined the APS Division was not a strategic fit with the
Company's core operations. Accordingly, the Company determined that a sale of
the APS Division was in the best interests of its estates and creditors. The
Company actively marketed the APS Division to all known potential buyers that
were capable of purchasing and operating the business and expressed an interest
in such an acquisition following notification by the Company.

         After the Company concluded extensive due diligence and prolonged
negotiations with more than one potential buyer, Genesis Health Ventures, Inc.
and its affiliate, NeighborCare Pharmacy Services, Inc. (collectively,
"Genesis"), emerged as the parties making the best initial offer for the APS
Division, which offer was subject to an auction and overbidding process under
the supervision of the Bankruptcy Court in return for Genesis' right to a
break-up fee and reimbursement of reasonable costs not to exceed $1.7 million
if Genesis was not the successful bidder following the auction and Bankruptcy
Court approval of the sale to an alternative buyer.

         On October 16, 2001, the Bankruptcy Court entered an order in each of
the Debtors' Chapter 11 Cases authorizing: (i) the implementation of certain
notice, overbid, and auction procedures in connection with the sale of the APS
Division; and (ii) the break-up fee arrangements outlined in the relevant asset
purchase agreement. On October 17, 2001, each of the Debtors filed a motion
("APS Sale Motion") in their respective Chapter 11 Cases seeking approval of
the sale of the APS Division free and clear of liens, claims, encumbrances, and
interests to the party making the highest and best offer, and to take certain
actions in connection with the sale of the APS Division.

         In response to the APS Sale Motion, an overbid for the assets of the
APS Division was received from Omnicare, Inc. and its wholly owned affiliate,
APS Acquisition LLC (collectively, "Omnicare"). 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 by both Genesis and Omnicare,
Omnicare was determined to have made the highest and best bid for the assets of
the APS Division. On December 5, 2001, at the conclusion of the hearing on the
APS Sale Motion, 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. As a result of the selection of Omnicare as the purchaser of
the assets of the APS Division, Genesis became entitled to its full $1.7
million break-up fee, $0.5 million of which was paid on December 11, 2001 with
the remaining $1.2 million paid on January 19, 2002. The Company consummated
the sale of the APS Division on January 6, 2002 and realized a gain on the sale
during the first quarter of 2002 of approximately $21.4 million.

         APS continues to serve approximately 216 of the Company's facilities
through contractual arrangements. Likewise, Genesis provides pharmaceutical
supplies and services and related consulting services to the approximately 58
SNFs that were operated by one of the Company's wholly owned subsidiaries,
GranCare, Inc.


                                       9
<PAGE>

                           MARINER HEALTH CARE, INC.
                  (FORMERLY MARINER POST-ACUTE NETWORK, INC.)
       (DEBTOR-IN-POSSESSION FROM JANUARY 18, 2000 THROUGH MAY 13, 2002)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

("GranCare"), as a result of an agreement with a predecessor of Genesis at the
February 1997 sale of GranCare's institutional pharmacy business. In connection
with the Company's Chapter 11 Cases, Genesis asserted arrearages under
executory contracts in amounts approximating $22.0 million, plus an unspecified
amount of liquidated damages that would be owing in the event the contracts
with Genesis were terminated. Pursuant to a settlement agreement approved by
the Bankruptcy Court, (a) the contracts with Genesis were assumed, as modified,
by entering into uniform and restated agreements for a term of 18 months; (b)
pricing relief was granted; (c) cure amounts were limited to a single claim in
the amount of $6.0 million which, rather than being paid in cash, was instead
allowed as a general unsecured claim in the MPAN Debtors' Chapter 11 Cases; and
(d) mutual releases were exchanged, with Genesis waiving any claims in the
Debtors' Chapter 11 Cases for liquidated damages, administrative expenses, or
otherwise, and limiting its administrative expenses to amounts due for goods
sold and services rendered.

         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 for the three
months ended March 31, 2001 are as follows (in thousands of dollars):

<TABLE>
<CAPTION>
                                                                       THREE MONTHS ENDED
                                                                            MARCH 31,
                                                                              2001
                                                                       ------------------
         <S>                                                           <C>
         Net revenues .............................................        $   53,112

         Total costs and expenses .................................            53,611
                                                                           ----------
         Operating loss ...........................................              (499)

         Other expenses ...........................................              (470)
                                                                           ----------
         Loss from operations of discontinued pharmacy operat$ ....              (969)
                                                                           ==========
</TABLE>

         The assets and liabilities of such operations to be discontinued
consisted of the following at December 31, 2001 (in thousands of dollars):

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                                     2001
                                                                 ------------
                                                                   (AUDITED)
         <S>                                                     <C>
         Receivables .....................................        $   26,792
         Inventories .....................................            13,007
         Prepaid expenses and other current assets .......               749
         Property and equipment, net .....................            11,315
         Goodwill, net ...................................             8,966
         Other assets ....................................             1,526
         Liabilities subject to compromise ...............            (1,458)
         Other liabilities ...............................            (1,844)
                                                                  ----------
         Net assets of discontinued operations ...........        $   59,053
                                                                  ==========
</TABLE>

NOTE 5   DIVESTITURES

         During the three months ended March 31, 2002, the Company completed
the sale or divestiture of approximately 10 owned or leased SNFs and certain
assets, which resulted in a net loss of approximately $2.5 million and is
included in net loss (gain) on divestitures within reorganization items. In
addition, effective April 3, 2002, the Company divested itself of 6 facilities,
which resulted in a net loss of approximately $10.3 million and is included in
net loss (gain) on divestitures within reorganization items for the three
months ended March 31, 2002. See Note 3. These 16 facilities reported net
revenues of approximately $10.6 million and $13.3 million for the three months
ended March 31, 2002 and 2001, respectively. The Company anticipates that in
the aggregate, these divestitures will improve operating results in the future.

         During the three months ended March 31, 2001, the Company completed
the sale or divestiture of approximately 11 owned or leased SNFs and certain
assets, which resulted in a net gain of approximately


                                      10
<PAGE>

                           MARINER HEALTH CARE, INC.
                  (FORMERLY MARINER POST-ACUTE NETWORK, INC.)
       (DEBTOR-IN-POSSESSION FROM JANUARY 18, 2000 THROUGH MAY 13, 2002)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

$12.8 million. These facilities reported net revenues of approximately $4.1
million for the three months ended March 31, 2001. The Company anticipates that
in the aggregate, these divestitures will improve operating results in future
periods.

NOTE 6   REVENUES

         The Company has agreements with third-party payors that provide for
payments to the Company's SNFs. These payment arrangements may be based upon
prospective rates, reimbursable costs, established charges, discounted charges
or per diem payments. Revenues are 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.

         A summary of approximate net revenues by payor type for the three
months ended March 31, 2002 and 2001 is as follows (in thousands of dollars):

<TABLE>
<CAPTION>
                                                THREE MONTHS ENDED
                                                     MARCH 31,
                                             ------------------------
                                               2002            2001
                                             --------        --------
         <S>                                 <C>             <C>
         Medicaid ...................        $217,254        $226,167
         Medicare ...................         156,839         143,831
         Private and other ..........          80,526          97,673
                                             --------        --------
                                             $454,619        $467,671
                                             ========        ========
</TABLE>

NOTE 7   COMPREHENSIVE INCOME

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

<TABLE>
<CAPTION>
                                                                                     THREE MONTHS ENDED
                                                                                          MARCH 31,
                                                                                  -------------------------
                                                                                    2002             2001
                                                                                  --------         --------
         <S>                                                                      <C>              <C>
         Net (loss) income ...............................................        $(14,581)        $ 13,176
         Net unrealized (losses) gains on available-for-sale securities ..            (431)             152
                                                                                  --------         --------
         Comprehensive (loss) income .....................................        $(15,012)        $ 13,328
                                                                                  ========         ========
</TABLE>


                                      11
<PAGE>

                           MARINER HEALTH CARE, INC.
                  (FORMERLY MARINER POST-ACUTE NETWORK, INC.)
       (DEBTOR-IN-POSSESSION FROM JANUARY 18, 2000 THROUGH MAY 13, 2002)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

NOTE 8   EARNINGS PER SHARE

         The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data) in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings per Share":

<TABLE>
<CAPTION>
                                                                                        THREE MONTHS ENDED
                                                                                             MARCH 31,
                                                                                   -----------------------------
                                                                                      2002               2001
                                                                                   ----------         ----------
<S>                                                                                <C>                <C>
Numerator for basic and diluted (loss) income per share:
   (Loss) income from continuing operations ...............................        $  (35,967)        $   14,145
   Discontinued operations:
     Loss from operations of discontinued pharmacy operations .............                --               (969)
     Gain on sale of discontinued pharmacy operations .....................            21,386                 --
                                                                                   ----------         ----------
   Net (loss) income ......................................................        $  (14,581)        $   13,176
                                                                                   ==========         ==========

Denominator:
   Denominator for basic (loss) income per share--weighted average
     shares ...............................................................            73,688             73,688
   Effect of dilutive securities--stock options ...........................                --                 --
                                                                                   ----------         ----------
   Denominator for diluted (loss) income per share--adjusted weighted
     average shares and assumed conversions ...............................            73,688             73,688
                                                                                   ==========         ==========

(Loss) earnings per share--basic and diluted:
   (Loss) income from continuing operations ...............................        $    (0.49)        $     0.20
   Discontinued operations:
     Loss from operations of discontinued pharmacy operations .............                --              (0.02)
     Gain on sale of discontinued pharmacy operations .....................              0.29                 --
                                                                                   ----------         ----------
   Net (loss) income per share ............................................        $    (0.20)        $     0.18
                                                                                   ==========         ==========
</TABLE>

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

NOTE 9   INCOME TAXES

         Due to the Company's net operating loss carryforwards, the Company
does not expect to pay income taxes regarding any net profits generated during
the current fiscal year. Subsequent to the Company's emergence from bankruptcy,
the Company will incur income tax expense on profits generated from operations.
Additionally, the Company has not reduced its deferred asset valuation
allowance due to the continuing uncertainty of future profitability.

NOTE 10  LITIGATION

         As is typical in the healthcare industry, the Company is and will be
subject to claims that its services have resulted in resident injury or other
adverse effects, the risks of which will be greater for higher acuity residents
receiving services from the Company than for other long-term care residents. In
addition, resident, visitor, and employee injuries will also subject the Company
to the risk of litigation. The Company has experienced an increasing trend in
the number and severity of litigation and claims asserted against the Company.
Management believes that this trend is endemic to the long-term care industry
and is a result of the increasing number of large judgments, including large
punitive damage awards, against long-term care providers in recent years
resulting in an increased awareness by plaintiffs' lawyers of potentially large
recoveries. In certain 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 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 it provides quality care to


                                      12
<PAGE>

                           MARINER HEALTH CARE, INC.
                  (FORMERLY MARINER POST-ACUTE NETWORK, INC.)
       (DEBTOR-IN-POSSESSION FROM JANUARY 18, 2000 THROUGH MAY 13, 2002)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

the patients in its facilities and 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.

         From time to time, the Company and its subsidiaries have been parties
to various legal proceedings in the ordinary course of their respective
businesses. In the opinion of management, except as described below, there are
currently no proceedings which, individually, if determined adversely to the
Company, and after taking into account the insurance coverage maintained by the
Company, would have a material adverse effect on the Company's financial
position or results of operations. Although the Company believes that any of
the proceedings not discussed below will not individually have a material
adverse impact on the Company if determined adversely to the Company, settling
a large number of cases within the Company's $1.0 million self-insured
retention limit could have a material adverse effect on the Company.

         The Company and its subsidiaries have reached a settlement with the
United States to resolve certain United States Claims against the Company and
its subsidiaries arising prior to the Petition Date (the "Global Settlement").
United States Claims are those claims or causes of action against the Company
asserted by or on behalf of the United States (including all of its agencies,
departments, agents, fiscal intermediaries, employees, assigns, or third
parties under 31 U.S.C. ss. 3730(b) or (d), and also including all qui tam
actions) seeking payments, damages, offsets, recoupments, penalties, attorneys'
fees, costs, expenses of any kind, or other remedies of any kind: (i) under the
False Claims Act, 31 U.S.C. ss.ss. 3729-3733; the Civil Monetary Penalties Law,
42 U.S.C. ss. 1320a-7a; and the Program Fraud Civil Remedies Act, 31 U.S.C.
ss.ss. 3801-3812; 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, under the TRICARE Program, 10
U.S.C. ss.ss. 1071-1106, or any other federal health program; (iii) for civil
monetary penalties imposed pursuant to 42 U.S.C. ss. 1395i-3(h)(2)(B)(ii) and 42
U.S.C. ss. 1396r(h)(2)(A)(ii) or other applicable law; (iv) arising under any
provider agreement or similar agreement with the United States; and (v) for
permissive exclusion from Medicare, Medicaid, and other federal health programs
(as defined in 42 U.S.C. ss. 1320a-7b(f) and under 42 U.S.C. ss. 1320a-7(b) and
42 U.S.C. ss. 1320a-7a). The Global Settlement was approved by the Bankruptcy
Court on April 3, 2002.

         Among other things, the Global Settlement provided that: (i) all
Medicare Claims and debts arising prior to the Petition Date were released as
between the Centers for Medicare and Medicaid Services ("CMS") and the Company;
(ii) the United States approved a settlement of Medicare administrative appeals
related to disallowances under the prudent buyer principle ("Prudent Buyer
Settlement"); the Company waived its rights to collect any amounts due pursuant
to the Prudent Buyer Settlement; CMS adjusted certain Medicare prospective
payment system ("PPS") base year cost reports so that certain SNF cost reports
with fiscal years ending December 31, 2001 and after are calculated accurately;
(iii) CMS will pay the Company $3.0 million; (iv) the Department of Justice
released the Company from certain "covered conduct" alleged within 6 qui tam
lawsuits and certain other disputes under the Federal False Claims Act; (v) the
Company is responsible for any attorney fees sought by qui tam relators'
counsel and any settlement will be negotiated by Company counsel; (vi) the
United States waived any claims for Medicare reimbursement for two voluntary
disclosures made by the Company to the United States; the United States also
waived any Claims for Medicare reimbursement related to an Office of Inspector
General ("OIG") investigation; (vii) the Company entered into a corporate
integrity agreement ("CIA") with the OIG; (viii) the Company rejected and
terminated certain provider agreements for discontinued operations; (ix) the
Company and the United States agreed to a list of facilities that are included
in this settlement; (x) all prepetition cost years (i.e., cost years ending on
or before the Petition Date) were fully and finally resolved by the settlement;
accordingly, the Company withdrew all pending challenges to CMS' determinations
relating to these cost years, including, but not limited to, administrative
appeals and requests for reopening; (xi) for cost years that span the Petition
Date CMS will finally settle the cost reports for such "straddle" years, and
the Company will retain its rights to appeal or request the reopening of such
years, but any relief awarded to the Company relating to such 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 will pay as an administrative expense any
portion of a Medicare overpayment or civil monetary penalty that accrued after
the Petition Date.


                                      13
<PAGE>
                           MARINER HEALTH CARE, INC.
                  (FORMERLY MARINER POST-ACUTE NETWORK, INC.)
       (DEBTOR-IN-POSSESSION FROM JANUARY 18, 2000 THROUGH MAY 13, 2002)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)


         The Company denies liability for the United States Claims. However, in
order to avoid the delay, uncertainty, inconvenience and expense of protracted
litigation, the parties have reached a negotiated settlement and compromise of
the United States Claims. The Global Settlement became effective on April 3,
2002. In accordance with accounting principles generally accepted in the United
States, the Company has recorded a charge of approximately $33.4 million
principally relating to the qui tam actions pertaining to the Global Settlement
in its statement of operations for the fourth quarter of the fiscal year ended
September 30, 2001.

         On March 18, 1998, a complaint was filed under seal by a former
employee against the Company, certain of its predecessor entities and affiliates
in the United States District Court for the Northern District of Alabama,
alleging, inter alia, employment discrimination, wrongful discharge, negligent
hiring, violation of the Federal False Claims Act, and retaliation under the
False Claims Act. The action is titled Powell, et al. v. Paragon Health Inc., et
al., civil action No. CV-98-0630-S. This action has been settled between the
parties as part of the Global Settlement. Under the terms of the Global
Settlement, the plaintiff (relator) must shortly withdraw and proof of claim
filed in the bankruptcy and move the dismissal of this action.

         On October 1, 1998, a class action complaint was asserted against
certain of the Company's predecessor entities and affiliates and certain other
parties in the Tampa, Florida, Circuit Court, Ayres, et al. v. Donald C. Beaver,
et al., case no. 98-7233. The complaint asserted three claims for relief,
including breach of fiduciary duty against one group of defendants, breach of
fiduciary duty against another group of defendants, and civil conspiracy arising
out of issues involving facilities previously operated by the Brian Center
Corporation or one of its subsidiaries, and later by a subsidiary of LCA, a
wholly-owned subsidiary of the Company, as a result of the merger with Brian
Center Corporation. All defendants submitted Motions to Dismiss which were heard
by the Court on September 15, 1999. The Court granted defendant Donald C.
Beaver's Motion to Dismiss on December 6, 1999. In accordance with the Company's
voluntary filing under chapter 11 of the Bankruptcy Code and more particularly,
ss. 362 of that Code, this matter was stayed on January 18, 2000. On or about
April 19, 2000, plaintiffs filed an Amending Petition seeking to bring Donald C.
Beaver back into the case as a defendant. Mr. Beaver has filed a Motion to
Dismiss the Amending Petition and no date for hearing has been set. In
accordance with the Company's voluntary filing under chapter 11 of the
Bankruptcy Code, and more particularly, section 362 of the Bankruptcy Code, all
proceedings against the Company were stayed. However, in exchange for the
Company's agreement to lift the stay, the plaintiffs have agreed to limit all
recovery from the Company in this case to insurance proceeds.

         On November 16, 1998, a complaint was filed under seal by a former
employee against the Company, certain of its predecessor entities and affiliates
in the United States District Court for the Southern District of Texas, alleging
violation of the Federal False Claims Act. The action is titled United States ex
rel. Nelius, et al., v. Mariner Health Group, Inc., et al., civil action No.
H-98-3851. This action has been settled between the parties as part of the
Global Settlement. Under the terms of the Global Settlement, the plaintiff
(relator) must shortly withdraw and proof of claim filed in the bankruptcy and
move the dismissal of this action.

         On October 27, 1999, the Company was served with a Complaint in United
States ex rel. Cindy Lee Anderson Rutledge and Partnership for Fraud Analysis
and State of Florida ex rel. Cindy Lee Anderson Rutledge Group, Inc., ARA Living
Centers, Inc. and Living Centers of America, Inc., No. 97-6801, filed in the
United States District Court for the Eastern District of Pennsylvania. This
action originally was filed under seal on November 5, 1997, by relators Cindy
Lee Anderson Rutledge and the Partnership for Fraud Analysis under the Federal
False Claims Act and the Florida False Claims Act. The Complaint alleges that
the Company is liable under the Federal False Claims Act and the Florida False
Claims Act for alleged violations of regulations pertaining to the training and
certification of nurse aides at former LCA facilities. This action has been
settled between the parties as part of the Global Settlement. Under the terms of
the Global Settlement, the plaintiff (relator) must shortly withdraw and proof
of claim filed in the bankruptcy and move the dismissal of this action.

         On approximately January 20, 2000, the OIG issued subpoenas duces tecum
to the Company and Summit Medical Management (a subsidiary of the Company). The
subpoenas request documents relating to the purchase of Summit Medical
Management and other subsidiaries. In addition, the subpoenas request other
broad categories of documents. As part of the Global Settlement negotiations,
the Company was informed that a complaint had been filed, United States ex rel
Weatherford v. Summit Institute of Pulmonary Medicine and Rehabilitation, et al.
(N.D.Ga.). The federal government informed the Company that this matter involves
claims under the Federal Civil False Claims Act against a Company subsidiary and
another health care provider. The complaint alleges that the


                                       14
<PAGE>
                           MARINER HEALTH CARE, INC.
                  (FORMERLY MARINER POST-ACUTE NETWORK, INC.)
       (DEBTOR-IN-POSSESSION FROM JANUARY 18, 2000 THROUGH MAY 13, 2002)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

Company improperly accounted for a loan in cost reports submitted on behalf of
the Summit Institute of Pulmonary Medicine and Southwest Medical Center by Forum
Health, which falsely represented that payments of principal and interest had
been made. This action has been settled between the parties as part of the
Global Settlement. Under the terms of the Global Settlement, the plaintiff
(relator) must shortly withdraw and proof of claim filed in the bankruptcy and
move the dismissal of this action.

         On approximately August 31, 2000, the United States Attorney for
Eastern District of Michigan issued a subpoena duces tecum to Cambridge East
Health Care Center, one of the Company's SNFs. The subpoena requests medical
records and other broad categories of documents. The Company has produced a
substantial amount of documents responsive to the subpoena. The Company is
cooperating with the investigation and has retained experienced counsel to
assist in responding to the subpoena and to advise the Company with respect to
this investigation. This investigation is still in its preliminary stages. Civil
aspects of this investigation have been settled as part of the Global
Settlement.

         On approximately June 8, 1999, December 13, 2000, and October 16, 2001,
the OIG issued subpoenas duces tecum to Mariner of Catonsville, one of the
Company's SNFs. The subpoenas request medical records pertaining to residents
and employment and business records. The subpoenas also request other broad
categories of documents. The Company has produced a substantial amount of
documents responsive to the subpoenas. This investigation has been resolved as
part of the Global Settlement.

         In connection with negotiating the Global Settlement, the Company was
apprised of an action entitled United States ex rel. Carroll. v. Living Centers
of America, et al., No. 97-cv-2606 (M.D. Fla.). This matter involves claims
under the Federal Civil False Claims Act against a number of the Company's
subsidiaries and other health care providers. The complaint alleges that certain
of the Company's facilities engaged in fraudulent practices which resulted in
their filing false claims with the federal government in connection with
reimbursement for durable medical supplies under the Medicare program. The
complaint also alleges that certain of the Company's facilities engaged in a
reimbursement scheme whereby the facility entered into an illegal referral
arrangement involving waiver of co-insurance payments. This action has been
settled between the parties as part of the Global Settlement. Under the terms of
the Global Settlement, the plaintiff (relator) must shortly withdraw and proof
of claim filed in the bankruptcy and move the dismissal of this action.

         Also in connection with negotiating the Global Settlement, the Company
was apprised of two actions entitled United States ex rel. Roberts v. Vencor,
Inc., et al., No 96-cv-2308 (JWL)(D.Kan.) and United States ex rel. Rivera v.
Restore Respiratory Care, Inc., et al. (N.D.Ga.). These matters involve claims
under the Federal Civil False Claims Act against a number of the Company's
subsidiaries and other health care providers. The complaints allege that the
Company overbilled the United States for and maintained false or fraudulent
documentation of respiratory care services and associated supplies provided to
Medicare patients at certain of the Company's SNFs during the cost report years
1992 through 1999. This action has been settled between the parties as part of
the Global Settlement. Under the terms of the Global Settlement, the plaintiff
(relator) must shortly withdraw and proof of claim filed in the bankruptcy and
move the dismissal of this action.

         On June 11, 2001, one of the Company's 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 seeks, among other things, certain
declaratory judgments that Royal is not required to insure, in whole or in
part, certain of the personal injury claims falling under two policies of
general liability and professional liability insurance issued to the Company's
subsidiary, Mariner Health, by Royal. In particular, the adversary proceeding
raised the following issues, among others: (i) in cases alleging multiple
injuries or "continuing wrongs," what event triggers coverage; (ii) in such
cases, whether one or more self-insured retentions apply before coverage
becomes available; (iii) whether Royal has to drop down to provide "first
dollar" coverage under one policy; and (iv) with respect to a policy cancelled
by Royal on July 31, 1999, long before the policy would have expired by its
terms, whether the aggregate self-insured retention should be prorated due to
the cancellation.

         On July 23, 2001, the Company filed an Answer, Affirmative Defenses,
and Counterclaim. The Counterclaim was amended on August 21, 2001 (as amended,
"Counterclaim"). The Counterclaim joined issue with certain of the declaratory
judgments sought by Royal, and also sought, inter alia, declaratory judgments
and monetary relief relating to, among other things: (i) whether the policies
are subject to self-insured retentions or deductibles;


                                       15
<PAGE>
                           MARINER HEALTH CARE, INC.
                  (FORMERLY MARINER POST-ACUTE NETWORK, INC.)
       (DEBTOR-IN-POSSESSION FROM JANUARY 18, 2000 THROUGH MAY 13, 2002)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)


(ii) whether Royal breached its duty to defend under the policies; and (iii)
whether Royal breached the alternative dispute resolution procedure order (the
"ADR Procedure") entered by the Bankruptcy Court or acted in bad faith in
impeding the Company's efforts under the ADR Procedure. Additionally, the
Counterclaim objected to Royal's proofs of claim.

         One of the Company's excess insurance carriers, Northfield Insurance
Company ("Northfield") moved to intervene in the Royal adversary proceeding on
July 25, 2001. The Company did not oppose the motion to intervene, which 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 the Counterclaim without prejudice, and Royal and
the Company agreed to work together to resolve claims in the ADR Procedure.
Northfield did not agree to dismiss its complaint in intervention. Accordingly,
the Company and Northfield are currently engaging in discovery.

         In addition to the Global Settlement discussed above, the Company has
reached agreements with various states to resolve prepetition claims of
overpayments paid to the Company in excess of which it was entitled in
connection with services rendered, including civil and administrative penalties.
The settlements provide for, among other things, repayment of approximately $8.4
million to the states and all Medicaid claims and debts arising prior to the
Petition Date were released between individual states and the Company.

NOTE 11       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 to be an operating segment, and eliminations.

         The Company primarily evaluates segment performance and allocates
resources based on operating margin, which basically represents revenues 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, 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 by segment are not provided to the Company's chief
operating decision maker.


                                       16
<PAGE>
                           MARINER HEALTH CARE, INC.
                  (FORMERLY MARINER POST-ACUTE NETWORK, INC.)
       (DEBTOR-IN-POSSESSION FROM JANUARY 18, 2000 THROUGH MAY 13, 2002)
                   NOTES TO 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 three month periods ended March 31, 2002
and 2001 (in thousands of dollars):

<TABLE>
<CAPTION>
                                           NURSING HOME
                                             SERVICES       OTHER         TOTAL
                                           ------------   --------      --------
<S>                                        <C>            <C>           <C>
THREE MONTHS ENDED MARCH 31, 2002

Revenues from external customers             $426,915     $ 27,704      $454,619
                                             ========     ========      ========

Operating margin                             $ 35,137     $(13,553)     $ 21,584
Depreciation and amortization                   8,046          855         8,901

                                             --------     --------      --------
Operating income (loss)                      $ 27,091     $(14,408)     $ 12,683
                                             ========     ========      ========


THREE MONTHS ENDED MARCH 31, 2001

Revenues from external customers             $439,428     $ 28,243      $467,671
                                             ========     ========      ========

Operating margin                               34,975      (10,277)       24,698
Depreciation and amortization                   8,897        2,858        11,755

                                             --------     --------      --------
Operating income (loss)                      $ 26,078     $(13,135)     $ 12,943
                                             ========     ========      ========
</TABLE>


NOTE 12       SUBSEQUENT EVENTS

         On the Effective Date, and in connection with the consummation of the
Joint Plan, we entered into a Credit and Guaranty Agreement with a group of
various lenders, which established (a) a revolving line of credit of $85.0
million (the "Revolving Credit Facility"); and (b) term loan facilities of
$212.0 million (the "Term Loans" and collectively with the Revolving Credit
Facility, the "Exit Facility"). The Revolving Credit Facility includes a $50.0
million sublimit for the issuance of letters of credit.

         Outstanding loans under the Exit Facility bear interest, at the
Company's 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 margin for loans under the
Revolving Credit Facility are subject to adjustment in the future in accordance
with a performance-based grid. The Exit Facility is guaranteed by substantially
all of the Company's subsidiaries and is secured by liens and security interest
on substantially all of the Company's real property and personal property
assets. The Exit Facility also requires the Company to maintain compliance with
certain financial and non-financial covenants, including minimum fixed charge
coverage ratios, minimum consolidated adjusted EBITDA, maximum total leverage
and senior leverage ratios, and maximum capital expenditures.

         Proceeds of loans made 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 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 or
letters of credit were outstanding under the Revolving Credit Facility as of May
13, 2002.

         Proceeds of 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 May 13, 2002, the
interest rate on the Term Loans was 5.22%. The Term Loans amortize in quarterly
installments at a rate of 1% per year, 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.

         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 we issued $150.0 million of
senior secured notes due in 2009 (the "Senior Secured Notes"). The Senior
Secured Notes bear interest at a 3-month eurodollar rate, adjusted quarterly,
plus 5.5%. At May 13, 2002, the interest rate payable under the Senior Secured
Notes was 7.47%. The Senior Secured Notes mature on May 13, 2009, and are
subject to redemption without premium or penalty at any time, at the Company's
option. 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. Such obligations are
secured by liens and security interests in the same collateral as that pledged
to secure the Exit Facility. However, the liens and security interests
benefiting the Senior Secured Note holders and trustee rank immediately junior
in priority behind the liens and security interests securing the Exit Facility.

         On May 13, 2002, the Company filed a registration statement with the
SEC on Form 8-A to register the New Common Stock under Section 12(g) of the
Exchange Act. The Form 8-A also registered the Company's warrants to purchase
New Common Stock issued pursuant to 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 common stock, par value $.01 per share, and 10,000,000 shares
reserved for issuance as preferred stock, par value $.01 per share.


                                       17
<PAGE>
ITEM 2.      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
             RESULTS OF OPERATIONS

         The accompanying unaudited condensed consolidated financial statements
set forth certain data with respect to the financial position, results of
operations, and cash flows of our company which should be read in conjunction
with the following discussion and analysis. 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 March 31, 2002, we operated 307 SNFs in 23 states with approximately
37,000 licensed beds and significant concentrations of facilities and beds in 5
states and several metropolitan markets. We also operated 13 owned, leased, or
managed long-term acute care, or LTAC, hospitals with approximately 670
licensed beds in 4 states. See Note 11 of the accompanying unaudited condensed
consolidated financial statements for financial information about our company's
only reportable segment.

         Inpatient services provided at our SNFs are our primary service
offering and account for over 90% of our revenues 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 and
is not included in the year to year comparisons presented below. See Note 4 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 to December 31.

    Reorganization.

         On January 18, 2000, 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. Our
financial difficulties were primarily attributable to fundamental changes in
governmental reimbursement policies, including the Medicare program's transition
from a cost-based reimbursement system to a prospective payment system, or PPS.
These changes resulted in revenue declines that despite our efforts to reduce
costs and adjust operations prohibited us from servicing our then existing
financing arrangements.

         On March 25, 2002, the Bankruptcy Court held a hearing regarding
confirmation of our 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. The Joint Plan became
effective on May 13, 2002, or the Effective Date. 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 as
an exhibit to our Transition Report on Form 10-K for the transition period from
October 1, 2002 to December 31, 2001. 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 various lenders, consisting of $212.0 million of term loans, or the
Term Loans, and a $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 Exit Facility. The Exit Facility provided funds to
satisfy certain obligations to our creditors under the Joint Plan and will
provide funds for general working capital purposes and for permitted
acquisitions. See "Capital Resources" below.


                                       18
<PAGE>
    Basis of Presentation

         During the three months ended March 31, 2002, we operated our business
as a debtor-in-possession subject to the jurisdiction of the Bankruptcy Court.
Accordingly, the accompanying unaudited condensed consolidated financial
statements have been presented 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", or SOP 90-7, and
accounting principles generally accepted in the United States applicable to a
going concern, which assumes continuity of operations and realization of assets
and settlement of liabilities and commitments in the normal course of business.
The accompanying unaudited condensed consolidated financial statements do not
include any adjustments that will result from the resolution of the Chapter 11
Cases or other matters discussed in the accompanying notes. In connection with
our emergence from bankruptcy, we will adopt the fresh start accounting
provisions of SOP 90-7 in the second quarter of 2002, which will result in the
revaluation of assets and liabilities to reflect the provisions of the approved
Joint Plan. Management believes the adoption of the fresh start accounting
provision of SOP 90-7 will change materially the amounts currently recorded in
the accompanying unaudited condensed consolidated financial statements.

         The accompanying unaudited condensed consolidated financial statements
do not include all of the disclosures normally required by accounting principles
generally accepted in the United States. Accordingly, these statements should be
read in conjunction with the audited consolidated financial statements and notes
thereto for our Transition Report on Form 10-K for the transition period from
October 1, 2001 through December 31, 2001, filed with the Securities and
Exchange Commission.

Results of Operations

         The following table sets forth the approximate percentage of our net
revenues derived from the various sources of payment and certain operating data
for our SNFs for the periods indicated.

<TABLE>
<CAPTION>
                                                                THREE MONTHS ENDED
                                                                    MARCH 31,
                                                     -----------------------------------
                                                                2002         2001
                                                     -----------------------------------
<S>                                                           <C>          <C>
 Medicaid                                                       47.8%        48.3%
 Medicare                                                       34.5%        30.8%
 Private and other                                              17.7%        20.9%

 Total average residents                                      31,429       35,646
 Weighted average licensed beds available for use             36,391       40,621
 Weighted average occupancy                                     86.4%        87.8%
</TABLE>

Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001.

    Net Revenues.

         Net revenues totaled $454.6 million for the three months ended March
31, 2002, a decrease of $13.1 million, or 2.8%, as compared to the three months
ended March 31, 2001. Net revenues for nursing home services accounted for
$426.9 million, or 93.9%, of total net revenues for the three months ended March
31, 2002 as compared to $439.4 million, or 94.0%, for the three months ended
March 31, 2001. Revenues for nursing home services are derived from the
provision of routine and ancillary services and are a function of occupancy
rates and payor mix. Although net revenues for nursing home services experienced
a decrease of approximately $12.5 million, or 2.8%, net revenues of our SNFs,
excluding facilities that have already been divested, increased by approximately
$26.0 million, or 6.5%, which translates into an increase in revenue per patient
day of approximately 7.6%. The increase resulted from numerous factors,
including a 5.4% increase in Medicare reimbursement rates in connection with the
recent legislative relief provided by Medicare, Medicaid, and SCHIP 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 7.4% in the three months ended March 31,
2002 as compared to the three months ended March 31, 2001. These increases were
offset by a decrease in revenues during the three months ended March 31, 2002
as compared to the three months ended March 31, 2001 of approximately $38.5
million due to the impact of the divestiture of facilities during the past
twelve months. We anticipate that, in the aggregate, these


                                       19
<PAGE>
divestitures will improve operating results in the future (see Note 5 of the
accompanying unaudited condensed consolidated financial statements).

    Costs and expenses.

       Total costs and expenses decreased $12.8 million, or 2.8%, from $454.7
million for the three months ended March 31, 2001 to $441.9 million for the
three months ended March 31, 2002. The decrease is attributable to numerous
factors, including decreases in salaries, wages and benefits of $7.6 million,
general and administrative expenses of $5.6 million and rent expense of $5.4
million. Salaries, wages, and benefits, which comprise 63.5% and 63.4% of total
costs and expenses for the three months ended March 31, 2002 and 2001,
respectively, decreased by $7.6 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 are partially offset by an increase in
wages. Various federal, state and local regulations impose, 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 have an impact on staffing levels, as well as the mix of staff and
therefore impact total costs and expenses. The decrease in general and
administrative expenses of $5.6 million during the three months ended March 31,
2002 as compared to the three months ended March 31, 2001 resulted mainly from
our continued efforts to reduce overhead costs. The decrease in rent expense
from $17.2 million for the three months ended March 31, 2001 to $11.8 million
for the three months ended March 31, 2002 was primarily a result of the
divestiture of facilities during the past twelve months. The decreases in these
costs were partially offset by an increase in provision for bad debts of $7.2
million, which primarily resulted from a re-evaluation of our allowance for
doubtful accounts triggered by deterioration in the agings of certain
categories of receivables related to facilities which have been divested.

    Interest Expense.

         Interest expense totaled $1.0 million for the three months ended March
31, 2002 as compared to $0.0 million for the three months ended March 31, 2001.
In accordance with SOP 90-7, we discontinued accruing interest relating to our
debt obligations currently classified as liabilities subject to compromise.
Contractual interest for the three months ended March 31, 2002 and 2001 was
$36.1 million and $49.6 million, which is $35.1 million and $49.6 million,
respectively, in excess of interest expense included in the accompanying
unaudited condensed consolidated financial statements.

    Reorganization items.

         Reorganization items, which consist of income, expenses and other costs
directly related to our reorganization since the Chapter 11 Filings, increased
approximately $48.3 million from $0.2 million for the three months ended March
31, 2001 to $48.5 million for the three months ended March 31, 2002. The
increase is primarily attributable to an increase of $16.8 million for
professional fees incurred in connection with the various aspects of the Chapter
11 Cases, including, among other things, filing of the Joint Plan. The remaining
increase in reorganization items is attributable to net losses on divestitures
during the three months ended March 31, 2002 of $12.8 million as compared to net
gains on divestitures during the three months ended March 31, 2001 of $12.8
million. See Note 3 of the accompanying 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 March 31, 2002, we recorded a gain
on the sale of the APS Division of approximately $21.4 million. Loss from
operations of discontinued pharmacy operations was approximately $1.0 million
for the three months ended March 31, 2001. See Note 4 of the accompanying
unaudited condensed consolidated financial statements.

Seasonality

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

                                       20
<PAGE>
Liquidity and Capital Resources of the Company

    Cash Flows.

         Cash and cash equivalents were $220.6 million at March 31, 2002 as
compared to $213.7 million at December 31, 2001. See the unaudited Condensed
Consolidated Statements of Cash Flows in the accompanying unaudited condensed
consolidated financial statements. During the three months ended March 31, 2002,
there was an increase in cash and cash equivalents of $6.9 million as compared
to an increase in cash and cash equivalents of $21.3 million during the three
months ended March 31, 2001.

         Cash provided by operating activities of continuing operations before
reorganization items was $33.1 million for the three months ended March 31, 2002
as compared to $45.4 million for the three months ended March 31, 2001. During
the three months ended March 31, 2002, receivables increased approximately $11.5
million due to multiple factors including seasonal cycles and timing of
third-party payments. Long-term insurance reserves increased approximately $10.0
million resulting from the provision for the current period and reduction in
claims settled due to the automatic stay protection afforded by the Bankruptcy
Code. We believe that cash flows from operations, along with available
borrowings under our new Exit Facility, are sufficient to meet our current
liquidity needs.

         Cash provided by investing activities was $76.7 million for the three
months ended March 31, 2002 as compared to $3.5 million utilized by investing
activities for the three months ended March 31, 2001. Cash provided by investing
activities during the three months ended March 31, 2002 consisted of the net
proceeds from the disposition of assets of $90.3 million, primarily related to
the sale of the APS Division (see Note 4 of the accompanying unaudited condensed
consolidated financial statements), as compared to $2.5 million of proceeds from
the disposition of assets for the three months ended March 31, 2001. Cash flows
from investing activities also included the utilization of $9.8 million related
to capital expenditures for the three months ended March 31, 2002 as compared to
$7.4 million for the three months ended March 31, 2001.

         Cash utilized by financing activities was $92.7 million for the three
months ended March 31, 2002 as compared to $11.3 million for the three months
ended March 31, 2001. Cash utilized by financing activities for the three months
ended March 31, 2002 and 2001 primarily represents principal repayments of
prepetition long-term debt, including repayments made against our prepetition
senior credit facility as a result of the application of a majority of the cash
proceeds received from the disposition of assets and adequate protection
payments with regard to certain mortgaged facilities and notional amounts
related to certain capital equipment leases. The increase in repayments for the
three months ended March 31, 2002 as compared to March 31, 2001 primarily
resulted from increased repayments made against our prepetition senior credit
facilities as a result of the application of a majority of the cash proceeds
received from the sale of the APS Division during the three months ended March
31, 2002 (see Note 4 of the accompanying unaudited condensed consolidated
financial statements).

    Capital Resources.

         Exit Facility. On the Effective Date, and in connection with the
consummation of the Joint Plan, we entered into a Credit and Guaranty Agreement
with a group of various lenders, which established (a) a revolving line of
credit of $85.0 million, or the Revolving Credit Facility; and (b) term loan
facilities of $212.0 million, or the Term Loans. The Term Loans and the
Revolving Credit Facility are collectively referred to as the Exit Facility. The
Revolving Credit Facility includes a $50.0 million sublimit for the issuance of
letters of credit.

         Outstanding loans under the Exit 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 margin for loans under the Revolving Credit Facility
are subject to adjustment in the future in accordance with a performance-based
grid. The Exit Facility is guaranteed by substantially all of our subsidiaries
and is secured by liens and security interest on substantially all of our real
property and personal property assets. The Exit Facility also requires us to
maintain compliance with certain financial and non-financial covenants,
including minimum fixed charge coverage ratios, minimum consolidated adjusted
EBITDA, maximum total leverage and senior leverage ratios, and maximum capital
expenditures.

         Proceeds of loans made 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

                                       21
<PAGE>
percentage of the real property collateral value of substantially all of our
SNFs. No borrowings or letters of credit were outstanding under the Revolving
Credit Facility as of May 13, 2002.

         Proceeds of 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 May 13, 2002, the
interest rate on the Term Loans was 5.22%. The Term Loans amortize in quarterly
installments at a rate of 1% per year, 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 certain equity securities and certain debt. The Term Loans are also subject
to annual mandatory prepayment to the extent of 75% of our company's
consolidated excess cash flow.

         Senior Secured Notes. On the Effective Date, and in connection with the
consummation of the Joint Plan, we entered into an indenture with The Bank of
New York, as trustee, pursuant to which we issued $150.0 million of senior
secured notes due in 2009, or the Senior Secured Notes. The Senior Secured Notes
bear interest at a 3-month eurodollar rate, adjusted quarterly, plus 5.5%. At
May 13, 2002, the interest rate payable under the Senior Secured Notes was
7.47%. The Senior Secured Notes mature on May 13, 2009, and are subject to
redemption without premium or penalty at any time, at our option. 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. Such obligations are secured by liens and
security interests in the same collateral as that pledged to secure the Exit
Facility. However, the liens and security interests benefiting the Senior
Secured Note holders and trustee rank immediately junior in priority behind the
liens and security interests securing the Exit Facility.

         Other Secured Indebtedness. 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 and is guaranteed
by all 14 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 such subsidiaries, or the PHCMI Entities, including 9 SNFs located in
Michigan and 3 others in North Carolina, or the Omega Facilities. The Omega Loan
constitutes non-recourse indebtedness to the rest of the legal entities of
Mariner Health Care, Inc. 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 Exit 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.

         The Omega Facilities are managed by one of our wholly owned
subsidiaries under a management agreement, or the PHCMI Management Agreement,
which pays the manager a monthly management fee equal to 5% of gross revenues,
plus an annual incentive management fee equal to 75% of free cash flow from the
Omega Facilities. The remaining 25% of free cash flow from the Omega Facilities
is paid annually to Omega as an amendment fee. The PHCMI Management Agreement
expires by its terms on August 31, 2005, subject to two successive extension
options unilaterally exercisable by the manager, the first being a three-year
extension term, and the second being a two-year extension term.

         At May 13, 2002, we also had approximately $21.3 million in outstanding
letters of credit under credit facilities terminated upon consummation of the
Joint Plan. The terminated letters of credit were cash collateralized in
accordance with the Joint Plan as a condition to its consummation.

    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


                                       22
<PAGE>
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 sell Nexion 51% of the
issued and outstanding capital stock of PHCMI and attendant control rights. The
transaction described in the prior sentence is referred to in this document as
the "PHCMI Majority Equity Sale."

         Upon exercise of its option under the SPA and the consummation of the
PHCMI Majority Equity Sale, the PHCMI Management Agreement will be modified in
certain respects, including for the purpose of reducing the annual incentive
management fee payable to the manager from 75% of the free cash flow of the
Omega Facilities to 70%. The annual amendment fee to Omega equal to 25% of the
Omega Facilities' free cash flow would continue. See "-Other Secured
Indebtedness", above.

         Furthermore, upon exercise of such option, a shareholder's agreement
will become operative between GranCare and Nexion, referred to as the PHCMI
Shareholder's Agreement. The board of directors of PHCMI will be controlled by
Nexion, which will have the right to appoint a majority of that board. The
business and affairs of PHCMI will be controlled by the board of directors
through majority vote. We, as affiliated minority shareholder, however, will
retain certain "protective rights" through the unanimous board of directors
approval requirement for certain enumerated acts or transactions. Matters
requiring unanimous PHCMI board approval include, among other things, certain
mergers, asset acquisitions or sales, changes in the type of business conducted
by the PHCMI Entities, optional prepayments of the Omega Loan, organizational
document amendments, certain debt incurrences and certain extraordinary
dividends and distributions.

         Other provisions of the PHCMI Shareholder's Agreement granted GranCare
a right of first refusal to purchase any Omega Facility under certain
circumstances, if they became the subject of a bona fide third party purchase
offer, and also granted an option, or the GranCare Majority Equity Repurchase
Option, to purchase Nexion's 51% equity stake in PHCMI on December 1, 2004, or
if such option is not exercised on December 1, 2004, then on any business day
after August 31, 2005. The aggregate price at which such option can be exercised
is equal to the product of 51% of the average distributable cash flow of PHCMI
for the three years immediately preceding the stock buy-back, multiplied by
five.

         Prior to exercise of the GranCare Majority Equity Repurchase Option,
Nexion would be entitled to receive from PHCMI a monthly preferred distribution
equal to 51% of the "return on equity" Medicaid reimbursement for the three
Omega Facilities in North Carolina, subject to a $130,000 minimum annual
distribution.

         Nexion, a subsidiary of Nexion Health, Inc. based near Baltimore,
Maryland, is an independent operator of SNFs and is wholly unrelated to us and
our affiliates. The SPA, the PHCMI Shareholder's Agreement, the PHCMI
Management Agreement, and all other documents relating to the PHCMI Majority
Equity Sale were negotiated by us at arms length with Nexion and Omega. Omega
and the Bankruptcy Court have approved the PHCMI Majority Equity Sale.

         Although the Omega Loan constitutes non-recourse indebtedness as to
the MHC Entities other than the PHCMI Entities, the assets and liabilities of
PHCMI, including the Omega Loan, are currently reflected on our consolidated
balance sheet. The PCHMI Majority Equity Sale was structured to deleverage our
company with the objective of removing the Omega Loan, together with the other
assets and liabilities of the PCHMI Entities, from our consolidated balance
sheet. However, there can be no assurance that we will be able to remove the
assets and liabilities of the PCHMI Entities from our consolidated balance
sheet if the PHCMI Majority Equity Sale is consummated. In light of recent
events, management has been advised that the requirements necessary to achieve
off-balance sheet accounting treatment are currently being reevaluated. Even if
the PHCMI Majority Equity Sale is consummated and off balance sheet accounting
treatment is available, we would be still be required to reflect on our
consolidated balance sheet our residual 49% share of the net assets and/or net
liabilities of the PCHMI Entities, including any indebtedness, pursuant to the
equity method of accounting. The option under the SPA to trigger the PHCMI
Majority Interest Sale was scheduled to expire on the Effective Date. However,
pursuant to an agreement with Nexion, the option under the SPA to trigger the
PHCMI Majority Interest Sale was extended to August 15, 2002.

    Healthcare Regulatory Matters.

         The Balanced Budget Act contains numerous changes to the Medicare and
Medicaid programs with the intent of slowing the growth of payments under these
programs by $115.0 billion and $13.0 billion, through the end of 2001 and 2002,
respectively. Approximately 50% of the savings were achieved through a reduction
in the growth of


                                       23
<PAGE>
payments to providers and physicians. These cuts have had, and will 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 BBRA
will terminate when CMS implements a RUG refinement to more accurately predict
the cost of non-therapy ancillary services. On April 3, 2002, CMS issued a press
release announcing that these RUG refinements will not be implemented for the
fiscal year beginning October 1, 2002; as a result, CMS estimates that nursing
homes will receive an estimated $1.0 billion in temporary add-on payments in the
next fiscal year. Although the RUG refinements have been delayed at least one
year, certain other increases provided for under the BIPA and the BBRA will
sunset in October 2002. Unless additional legislative action is undertaken by
the United States Congress, the loss of revenues associated with the provisions
of BIPA and BBRA that will sunset in October 2002 will have a material adverse
effect on the Company. Our company's management preliminarily estimates that
these occurrences will result in a loss of revenue of approximately $35.0
million in fiscal year 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.

         CMS also is moving towards replacing the reasonable cost-based payment
system for LTAC hospitals, or LTCHs, with a PPS, as mandated by the BBRA and
subsequently refined by BIPA. On March 22, 2002, CMS published a LTCH PPS
proposed rule that would use information from LTCH patient records to classify
patients into distinct long-term care diagnosis-related groups, or LTC-DRGs,
based on clinical characteristics and expected resource needs. Separate
per-discharge payments would be calculated for each DRG. CMS plans to publish
the final LTCH PPS rule by August 2002, and the new system is to be effective
October 1, 2002. The new system would be phased in over five years, with
reimbursement based on a blend of federal rates and cost-based reimbursement
during the transition period, although certain facilities could elect to
immediately adopt the full federal rates. If the Secretary for Health and Human
Services, or the Secretary, is unable to implement the per-discharge LTCH PPS by
October 1, 2002, BIPA requires the Secretary to implement a PPS for these
hospitals using existing acute hospital DRGs that have been modified where
feasible to account for resource use of LTCH patients, using the most recently
available hospital discharge data for such services furnished on or after that
date. Because the rulemaking has not been finalized, we cannot predict the
ultimate impact the new system will have on the LTACs 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 generally are made within 30 to 60 days after services are provided.
For Medicare cost reporting periods beginning July 1, 1998 and thereafter, the
federal Medicare program converted to 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 that are
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 (and to the extent final cost reports for prior periods are
not settled, still are) reimbursed under Medicare on the basis of 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 outstanding
pre-petition cost reports were settled in connection with the Global Settlement.

         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 revenues and profitability. Changes in reimbursement
rates, including the implementation of Medicare PPS, have adversely affected us
resulting in significantly lower Medicare revenues than we would have received
under the previous cost-based payment methodology.

    Other Factors Affecting Liquidity and Capital Resources.

         Although we have seen a reduction in our labor costs over the course of
the last year through the divestiture of facilities and various business lines,
as well as corporate overhead reductions, this reduction has been partially
offset by wage increases for various nursing staff positions 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 an increase in
nursing staff wages will not have such an effect in the future. We believe that
these increases are a result

                                       24
<PAGE>
of a decrease in the number of people entering the nursing profession and an
increased demand for nurses in the healthcare industry. We have 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 are exploring ways in which to address this
problem, including recruiting labor from overseas and providing incentives for
nurses to remain in our employment.

         We have experienced an increasing trend in the number and severity of
litigation claims asserted against us. Our management believes that this trend
is endemic to the long-term care industry and is a result of the increasing
number of large judgments, including large punitive damage awards, against
long-term care providers in recent years resulting in an increased awareness by
plaintiffs' lawyers of potentially large recoveries. 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. See "-Legal Proceedings."

         Insurance costs in the long-term care industry for general liability
and professional liability coverage, or GL/PL, particularly in Florida and Texas
where we maintain significant operations, continue to rise at a dramatic rate.
Significant increases in the number of claims and the amount of an average claim
continue. Insurance markets have responded to this significant increase by
severely restricting the availability of long-term care GL/PL coverage. As a
result of the changes described above, fewer companies are engaged in insuring
long-term care companies; and those that do offer insurance coverage do so at a
very high cost. This is in large part a result of plaintiff lawyer activity in
certain markets in which we operate. We anticipate that these trends will
continue, and that GL/PL costs will continue to increase. These increases have
already had an adverse effect on our operations. No assurance can be given that
our GL/PL costs will not continue to rise, or that GL/PL coverage will be
available to us in the future.

         We currently purchase excess liability insurance only and maintain an
unaggregated $1.0 million self-insured retention per claim. 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
will 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, GL/PL, 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 other obligations of our company.

         We also have significant rent obligations relating to our leased
facilities. Without giving any effect to any potential restructuring of current
rent obligations, our total rent obligations were approximately $11.8 million
for the three months ended March 31, 2002, $17.2 million for the three months
ended March 31, 2001, and are estimated to be approximately $47.2 million for
the year ended December 31, 2002. We have rejected approximately 54 leases of
office space no longer required by our existing operations or formerly used in
discontinued or divested business lines.

         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 its
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. Capital expenditures totaled $9.8 million for the three months ended
March 31, 2002, $7.4 million for the three months ended March 31, 2001, and are
estimated to be approximately $25.0 million for the year ended December 31,
2002. Capital expenditures in the three month periods ended March 31, 2002 and
2001 were financed through internally generated funds.

         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


                                       25
<PAGE>
adverse effect on our cash flows, financial performance or results of
operations, no assurances can be made in this regard.

Recent Accounting Pronouncements

         In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), which
establishes new rules on the accounting for goodwill and other intangible
assets. Under SFAS 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. Intangible assets with definite lives will
continue to be amortized over their estimated useful lives. The amortization
provisions of SFAS 142 apply immediately to goodwill and intangible assets
acquired after June 30, 2001. With respect to goodwill and intangible assets
acquired prior to July 1, 2001, companies are required to adopt SFAS 142 in
their fiscal year beginning after December 15, 2001. We adopted SFAS 142 on
January 1, 2002. However, due to the Chapter 11 Cases, we cannot currently
estimate the impact these impairment tests will have on our consolidated
financial position, results of operations, or cash flows until after the
adoption of the fresh start accounting provisions of SOP 90-7 during the second
quarter of 2002.

         In accordance with the adoption of SFAS 142, we discontinued amortizing
goodwill effective January 1, 2002. The following table sets forth the impact on
our earnings for the three months ended March 31, 2001 relating to the adoption
of SFAS 142.

<Table>
<Caption>

                                                                THREE MONTHS ENDED
                                                                     MARCH 31,
                                                                       2001
                                                                 ---------------
<S>                                                             <C>
Reported net income ........................................     $        13,176

Add back: goodwill amortization ............................               3,037
                                                                 ---------------
Adjusted net income ........................................     $        16,213
                                                                 ===============

Earnings per share - basic and diluted:
Reported net income ........................................     $          0.18
Goodwill amortization ......................................                0.04
                                                                 ---------------
Adjusted net income ........................................     $          0.22
                                                                 ===============
</TABLE>


    Cautionary Statements

       Statements contained in this quarterly report that are not historical
facts may be forward-looking statements within the meaning of federal law. Such
forward-looking statements reflect our management's beliefs and assumptions and
are based on information currently available to our management. Forward-looking
statements 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. Such
factors include, among others, the following:


-  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;

-  our adoption of "fresh start" accounting;

-  the ability to effectively implement our revised business plan, including
   measures designed to enhance margins;

-  our plan to increase density in target markets;

-  legislative proposals for health care reform;

-  competition;

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


                                       26
<PAGE>
-  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.

         All subsequent written and oral forward-looking statements attributable
to us or persons acting on our behalf are expressly qualified in their entirety
by the cautionary statements set forth or referred to above in this paragraph.
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.

         Forward-looking statements are 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 various
factors, including the factors described above and elsewhere in this quarterly
report. Such factors may cause our actual results to differ materially from any
forward-looking statement.

       Forward-looking statements are only predictions. The forward-looking
events discussed in this quarterly report may not occur, and actual events and
results may differ materially and are subject to risks, uncertainties and
assumptions about us. We are not obligated to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.

ITEM 3.      QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

       Not applicable.


                                    PART II

ITEM 1.      LEGAL PROCEEDINGS

         As is typical in the healthcare industry, we are and will be subject to
claims that our services have resulted in resident injury or other adverse
effects, the risks of which will be greater for higher acuity residents
receiving services us than for other long-term care residents. In addition,
resident, visitor, and employee injuries will also subject us to the risk of
litigation. We have experienced an increasing trend in the number and severity
of litigation and claims asserted against us. We believe that this trend is
endemic to the long-term care industry and is a result of the increasing number
of large judgments, including large punitive damage awards, against long-term
care providers in recent years resulting in an increased awareness by
plaintiff's lawyers of potentially large recoveries. In certain states in which
we have 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 we
will not be liable for punitive or other damages awarded in litigation for which
insurance coverage is not available. We also believe that there has been, and
will continue to be, an increase in governmental investigations of long-term
care providers, particularly in the area of Medicare/Medicaid false claims as
well as an increase in enforcement actions resulting from these investigations.
While we believe that we provide quality care to the patients in our facilities
and we materially comply with all applicable regulatory requirements a
materially 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.

         From time to time, we have been party to various legal proceedings in
the ordinary course of business. In our opinion, except for the approval of the
Global Settlement by the Bankruptcy Court as noted in Note 10 of the
accompanying unaudited condensed consolidated financial statements, there have
been no material developments in the litigation matters set forth in our
Transition Report on Form 10-K for the period October 1, 2002 to December 31,
2001.

                                       27
<PAGE>
ITEM 2.      CHANGES IN SECURITIES AND USE OF PROCEEDS

         In connection with our emergence from bankruptcy we adopted our Third
Amended and Restated Certificate of Incorporation and Amended and Restated
Bylaws. The documents described in the prior sentence are referred to
collectively in this document as the "Charter Documents." The Charter documents
have the effect of modifying the rights of our common stock, par value $.01 per
share, which is registered under the Securities Exchange Act of 1934, as
amended. A description of how the rights of our common stock holders were
modified by the Charter Documents is contained in the Registration Statement on
Form 8-A filed by us with the Securities and Exchange Commission on May 13,
2002, which description is incorporated by reference into this quarterly report.

ITEM 3.      DEFAULTS UPON CERTAIN SECURITIES

         On January 18, 2000, the company and substantially all of our
subsidiaries filed voluntary petitions for relief in the Bankruptcy Court under
chapter 11 title 11 of the Bankruptcy Code. As a result, during the period
covered by the quarterly report, no principal or interest payments were
made on prepetition indebtedness with the exception of repayments made against
our senior credit facilities as a result of the application of a majority of the
cash proceeds received from the disposition of assets and adequate protection
payments with regard to certain mortgaged facilities and notional amounts
related to certain capital equipment leases.

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

<TABLE>
<CAPTION>
EXHIBITS
--------
<S>      <C>
4.1      Warrant Agreement, dated as of May 13, 2002 between Mariner Health
         Care, Inc. and American Stock Transfer & Trust Company, as Warrant
         Agent.

4.2      Indenture, dated as of May 13, 2002, among Mariner Health Care, Inc.,
         the Guarantors listed on Schedule I thereto, and the Bank of New York
         with respect to the issuance of $150,000,000 in Principal Amount of
         Second Priority Secured Notes due 2009.

4.3      Form of Note issued in connection with the Indenture, dated as of May
         13, 2002, among Mariner Health Care, Inc., the Guarantors listed on
         Schedule I thereto, and the Bank of New York with respect to the
         issuance of $150,000,000 in Principal Amount of Second Priority Secured
         Notes due 2009.

4.4      Form of Common Stock Certificate for the Common Stock of Mariner Health
         Care, Inc., par value, $.01 per share.

10.1     Equity Registration Rights Agreement, dated as of May 13, 2002 by and
         among Mariner Health Care, Inc., and OCM Administrative Services II,
         L.L.C.

10.2     Debt Registration Rights Agreement, dated as of May 13, 2002 by and
         among Mariner Health Care, Inc. and OCM Administrative Services II,
         L.L.C.

10.3     Credit and Guaranty Agreement dated as of May 13, 2002 among Mariner
         Health Care, Inc., certain subsidiaries of Mariner Health Care, Inc.,
         as Guarantors, various Lenders, Goldman Sachs Credit Partners L.P., and
         UBS Warburg LLC, as Joint Lead Arrangers, Goldman Sachs Credit Partners
         L.P., as Syndication Agent, General Electric Capital Corporation, as
         Collateral Monitoring Agent and Documentation Agent, and UBS AG
         Stamford Branch, as Administrative Agent, with respect to $297,000,000
         Senior Secured Credit Facilities.

10.4     Pledge and Security Agreement dated as of May 13, 2002 between each of
         Mariner Health Care, Inc., and the other Grantors party thereto, and
         Residential Funding Corporation d/b/a GMAC-RFC Health Capital, as the
         Joint Collateral Agent.

10.5     Intercreditor and Collateral Agency Agreement dated as of May 13, 2002
         among (i) Residential Funding Corporation d/b/a GMAC-RFC Health
         Capital, as Joint Collateral Agent thereunder, (ii) UBS AG, Stamford
         Branch, in its capacity as Administrative Agent, the Bank of New York,
         as trustee under the Rollover Note Indenture referred to therein, and
         Mariner Health Care, Inc.
</TABLE>

(b)  Reports on Form 8-K

         On April 3, 2002 we filed a Current Report on Form 8-K announcing that
the Bankruptcy Court had confirmed the Joint Plan. This Form 8-K also announced
that we entered into a commitment letter for the senior exit facility.

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<PAGE>

                                   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. Straub
                                      -------------------------------------
                                      William C. Straub
                                      Senior Vice President and
                                      Chief Accounting Officer (Principal
                                      Financial and Accounting Officer)

Date:    May 20, 2002



                                       29
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS
--------
<S>      <C>
4.1      Warrant Agreement, dated as of May 13, 2002 between Mariner Health
         Care, Inc. and American Stock Transfer & Trust Company, as Warrant
         Agent.

4.2      Indenture, dated as of May 13, 2002, among Mariner Health Care, Inc.,
         the Guarantors listed on Schedule I thereto, and the Bank of New York
         with respect to the issuance of $150,000,000 in Principal Amount of
         Second Priority Secured Notes due 2009.

4.3      Form of Note issued in connection with the Indenture, dated as of May
         13, 2002, among Mariner Health Care, Inc., the Guarantors listed on
         Schedule I thereto, and the Bank of New York with respect to the
         issuance of $150,000,000 in Principal Amount of Second Priority Secured
         Notes due 2009.

4.4      Form of Common Stock Certificate for the Common Stock of Mariner Health
         Care, Inc., par value, $.01 per share.

10.1     Equity Registration Rights Agreement, dated as of May 13, 2002 by and
         among Mariner Health Care, Inc., and OCM Administrative Services II,
         L.L.C.

10.2     Debt Registration Rights Agreement, dated as of May 13, 2002 by and
         among Mariner Health Care, Inc. and OCM Administrative Services II,
         L.L.C.

10.3     Credit and Guaranty Agreement dated as of May 13, 2002 among Mariner
         Health Care, Inc., certain subsidiaries of Mariner Health Care, Inc.,
         as Guarantors, various Lenders, Goldman Sachs Credit Partners L.P., and
         UBS Warburg LLC, as Joint Lead Arrangers, Goldman Sachs Credit Partners
         L.P., as Syndication Agent, General Electric Capital Corporation, as
         Collateral Monitoring Agent and Documentation Agent, and UBS AG
         Stamford Branch, as Administrative Agent, with respect to $297,000,000
         Senior Secured Credit Facilities.

10.4     Pledge and Security Agreement dated as of May 13, 2002 between each of
         Mariner Health Care, Inc., and the other Grantors party thereto, and
         Residential Funding Corporation d/b/a GMAC-RFC Health Capital, as the
         Joint Collateral Agent.

10.5     Intercreditor and Collateral Agency Agreement dated as of May 13, 2002
         among (i) Residential Funding Corporation d/b/a GMAC-RFC Health
         Capital, as Joint Collateral Agent thereunder, (ii) UBS AG Stamford
         Branch, in its capacity as Administrative Agent, the Bank of New York,
         as trustee under the Rollover Note Indenture referred to therein, and
         Mariner Health Care, Inc.
</TABLE>


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