<PAGE>

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

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

                                    FORM 10-K

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

[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
         EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2001

                                       OR

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

                                     1-10968
                              (Commission File No.)

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

                        MARINER POST-ACUTE NETWORK, 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)

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

           SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

                                                       NAME OF EACH EXCHANGE ON
          TITLE OF EACH CLASS                               WHICH REGISTERED
          -------------------                          ------------------------
Common Stock, Par Value $.01 Per Share                          OTC-BB

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

        SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None

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

       Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to the Form 10K. [X]

       The aggregate market value of the outstanding common stock, par value
$.01 per share (the "Common Stock"), of the registrant held by non-affiliates of
the registrant as of December 17, 2001 was $1,451,188, based on a closing sale
price for the Common Stock of $0.02 per share as reported on the OTC-BB on said
date. For purposes of the foregoing sentence only, all directors are assumed to
be affiliates.

       There were 73,688,379 shares of Common Stock of the registrant issued and
outstanding as of December 17, 2001.

       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 [ ] No [ ] N/A [X] (The registrant and its
subsidiaries have made filings under chapter 11 of the Bankruptcy Code and have
filed a proposed joint plan of reorganization. A hearing upon the adequacy of a
disclosure statement pertaining to the proposed plan of reorganization is
scheduled for January 16, 2002. Prior to the approval of the related disclosure
statement by the United States Bankruptcy Court for the District of Delaware, no
party, including the registrant and its subsidiaries, is permitted to solicit
acceptances of the proposed plan of reorganization referred to above. An
alternative plan of reorganization for a subsidiary of the registrant, Mariner
Health Group, Inc., and its direct and indirect subsidiaries (collectively, the
"Mariner Health Debtors") has been filed by the Mariner Health Debtors' senior
secured lenders).

                       DOCUMENTS INCORPORATED BY REFERENCE
                                      None

================================================================================


<PAGE>



                MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
                                    FORM 10-K
                               SEPTEMBER 30, 2001


                                TABLE OF CONTENTS

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

Item 1.          Business..................................................................................    1

Item 2.          Properties................................................................................   14

Item 3.          Legal Proceedings.........................................................................   15

Item 4.          Submission of Matters to a Vote of Security Holders.......................................   20

PART II
Item 5.          Market for Registrant's Common Stock and Related Stockholder Matters......................   21

Item 6.          Selected Financial Information............................................................   22

Item 7.          Management Discussion and Analysis of Financial Condition and Results of Operations.......   23

Item 7A.         Quantitative and Qualitative Disclosure About Market Risk.................................   38

Item 8.          Financial Statements and Supplementary Data...............................................   38

Item 9.          Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......   39

PART III
Item 10.         Directors and Executives Officers of the Registrant.......................................   39

Item 11.         Executive Compensation....................................................................   41

Item 12.         Security Ownership of Certain Beneficial Owners and Management............................   45

Item 13.         Certain Relationships and Related Transactions............................................   45

PART IV
Item 14.         Exhibits, Financial Statement Schedules and Reports on Form 8-K...........................   46
</TABLE>


                                       i

<PAGE>


                                     PART I

ITEM 1.  BUSINESS

General

       Mariner Post-Acute Network, Inc. and its subsidiaries (collectively, the
"Company") provide post-acute health care services, primarily through the
operation of their skilled nursing facilities ("SNFs"). All references to the
"Company" herein are intended to include the operating subsidiaries through
which the services described herein are directly provided. At September 30,
2001, the Company's significant operations consisted of 326 SNFs, including 9
stand-alone assisted living facilities, in 24 states with approximately 38,700
beds and significant concentrations of facilities and beds in 5 states and
several metropolitan markets (see "Item 2 - Properties"), which represents the
Company's only reportable operating segment. The Company also operates 13 owned,
leased or managed long-term acute care ("LTAC") hospitals with approximately 670
licensed beds in 4 states. See Note 21 of the Company's consolidated financial
statements for financial information about the Company's segments. The Company's
principal executive offices are located at One Ravinia Drive, Suite 1500,
Atlanta, Georgia 30346 and the Company's phone number at such address is (678)
443-7000.

       As of the date hereof, the Company operates approximately 31
institutional pharmacies servicing more than 1,400 affiliated and third-party
long-term care centers (the "APS Division"). The Company and certain of its
subsidiaries have received the approval of the United States Bankruptcy Court
for the District of Delaware (the "Bankruptcy Court") to sell the Company's APS
Division, as more fully described under "- Discontinued Operations," below.
Subject to receipt of necessary governmental approvals, the Company anticipates
that the sale of the Company's APS Division will be consummated on or before
January 31, 2002. Accordingly, the results of the APS Division have been
classified as a discontinued operation in accordance with generally accepted
accounting principles as more fully discussed in Note 4 of the Company's
consolidated financial statements.

       Effective August 1, 1998, the Company changed its name from Paragon
Health Network, Inc. ("Paragon") following the consummation of a merger (the
"Mariner Merger") with Mariner Health Group, Inc. ("Mariner Health") on July 31,
1998. The Company had previously changed its name from Living Centers of
America, Inc. ("LCA") to Paragon on November 4, 1997. The Company was formed in
November 1997 through the recapitalization of LCA by a group of investors and
the subsequent merger of GranCare, Inc. ("GranCare") with a wholly-owned
subsidiary of LCA (the "LCA/GranCare Mergers").

Voluntary Petition for Relief Under Chapter 11 of the Bankruptcy Code

       On January 18, 2000 (the "Petition Date"), Mariner Post-Acute Network,
Inc. and substantially all of its direct and indirect subsidiaries (excluding
Mariner Health and its direct and indirect subsidiaries, the "MPAN Debtors") and
Mariner Health and its direct and indirect subsidiaries (the "Mariner Health
Subsidiaries" and collectively with Mariner Health, the "MHG Debtors"), filed
voluntary petitions for relief (the "Chapter 11 Filings") in the Bankruptcy
Court under chapter 11 of title 11 of the United States Code (the "Bankruptcy
Code"), thus commencing the chapter 11 cases (the "Chapter 11 Cases"). The
Company is presently operating its business as a debtor-in-possession and is
subject to the jurisdiction of the Bankruptcy Court. As a debtor-in-possession,
the Company is authorized to operate its business but may not engage in
transactions outside its ordinary course of business without the approval of the
Bankruptcy Court.

       On November 30, 2001, the MPAN Debtors and the MHG Debtors (collectively,
the "Debtors") filed a Joint Plan of Reorganization and Disclosure Statement
with the Bankruptcy Court. On December 5, 2001, the Bankruptcy Court set a
hearing on the adequacy of the Disclosure Statement for January 16, 2002. On
December 14, 2001, the Debtors filed an Amended Joint Plan of Reorganization and
Disclosure Statement (as further amended from time to time, respectively, the
"Joint Plan" or "Disclosure Statement"). Notice of the hearing on the adequacy
of the Debtors' Disclosure Statement was mailed to the Debtors' various creditor
constituencies and other parties entitled to notice on or about December 15,
2001.

       The Joint Plan is the result of many months of good faith, 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


                                       1
<PAGE>

11 Cases (the "MPAN Committee"), and the committee of unsecured creditors in the
MHG Debtors' Chapter 11 Cases.

       In this regard, the Debtors, a majority of the MPAN Senior Credit
Facility Claim Holders, and a majority of the MHG Senior Credit Facility Claim
Holders entered into a Joint Plan Support Agreement dated as of November 2, 2001
(the "Joint Plan Support Agreement"). The Debtors, a majority of the MPAN Senior
Credit Facility Claim Holders and the MPAN Committee also entered into a Plan
Support Agreement dated as of September 21, 2001 (the "Plan Support Agreement").
The Joint Plan Support Agreement commits the parties thereto to support a plan
of reorganization that conforms with the terms set forth in the Joint Plan
Support Agreement provided that the Joint Plan is confirmed and goes effective
on or before April 1, 2002, and a disclosure statement for such plan is approved
on or before January 31, 2002. The Plan Support Agreement commits the MPAN
Committee to support a plan of reorganization that provides for recoveries to
the MPAN Committee as set forth in the Plan Support Agreement, provided that
such a plan is consummated prior to March 31, 2002.

       NO DISCLOSURE STATEMENT FOR THE JOINT PLAN HAS BEEN APPROVED BY THE
BANKRUPTCY COURT AT THIS TIME IN ACCORDANCE WITH BANKRUPTCY CODE SECTION 1125.
ACCORDINGLY, THE DEBTORS ARE NOT SOLICITING ACCEPTANCES OF THE JOINT PLAN AT
THIS TIME, AND NOTHING HEREIN SHOULD BE CONSTRUED AS SUCH A SOLICITATION.

       If confirmed and consummated, the Joint Plan will provide for the
substantive consolidation of the MPAN Debtors' estates, and for the separate
substantive consolidation of the MHG Debtors' estates. Accordingly, (i) any
claims against and assets of a particular MPAN Debtor will be deemed to be
claims against and assets of all of the MPAN Debtors, and (ii) any claims
against and assets of a particular MHG Debtor will be deemed to be claims
against and assets of all of the MHG Debtors. Notwithstanding the foregoing,
substantive consolidation will not affect the validity of any creditor's
perfected and unavoidable interest in property of the Debtors' estates (such as
validly perfected liens).

       Following consummation of the Joint Plan, the Company will have one
capital structure, and the MPAN Debtors and the MHG Debtors generally will no
longer be required to 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 will receive the
majority of the equity in Mariner Post-Acute Network, Inc. following its
reorganization ("Reorganized MPAN").

       If the Joint Plan is confirmed and consummated, general unsecured
creditors of the MPAN Debtors, other than holders of the Company's issued and
outstanding $275.0 million 9.5% Senior Subordinated Notes due 2007 (the "9.5%
Senior Subordinated Notes") and $294.0 million 10.5% Senior Subordinated
Discount Notes due 2007 (the "10.5% Senior Subordinated Discount Notes" and
together with the 9.5% Senior Subordinated Notes (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 will consist of a limited number of shares (approximately 2% of the New
MPAN Common Stock (as defined herein) to be issued on the Effective Date) of the
Reorganized MPAN's common stock, par value $.01 per share (the "New MPAN Common
Stock"), issued on the effective date of the Joint Plan (the "Effective Date");
and additional warrants to purchase approximately 2% of the New MPAN Common
Stock. Holders of MPAN Senior Subordinated Notes that do not oppose confirmation
of the Joint Plan will receive pro rata distributions from the MPAN Senior
Subordinated Note distribution fund, which also will consist of approximately 2%
of the New MPAN Common Stock and additional warrants to purchase approximately
2% of the New MPAN Common Stock. General unsecured creditors of the MHG Debtors
and holders of Mariner Health's issued and outstanding $150 million principal
amount Senior Subordinated Notes due 2004 (the "MHG Senior Subordinated Notes")
that do not oppose confirmation of the Joint Plan will receive on account of
their claims pro rata distributions from the MHG Debtors' unsecured claims
distribution fund, which will consist 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.

       If the Joint Plan is confirmed and consummated, the Debtors' principal
prepetition secured lender groups (the MPAN Senior Credit Facility Claim Holders
and MHG Senior Credit Facility Claim Holders) will become the majority owners of
Reorganized MPAN, receiving, in the aggregate, distributions of approximately
96% of the


                                       2
<PAGE>

shares of the New MPAN Common Stock as of the Effective Date, in addition to
cash and newly issued debt. Certain of the Debtors' skilled nursing facilities
are 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"). If the Joint Plan is confirmed and consummated,
most Project Lenders will receive (i) a cash payment in an amount necessary (if
any) to provide them a loan-to-collateral-value ratio of 80% ("Cash Pay Down"),
and (ii) a new mortgage note in an amount equal to the balance of their allowed
secured claims after the Cash Pay Down. The collateral of certain Project
Lenders may be returned to them in satisfaction of all or part of their allowed
secured claims. Most other creditors holding allowed secured claims 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 will be paid in full.

       If the Joint Plan is confirmed and consummated, existing stockholder
interests in the currently issued and outstanding common stock, par value $.01
per share, of Mariner Post-Acute Network, Inc. (the "Common Stock") and options
and warrants to acquire the same will be cancelled. Accordingly, holders of
Common Stock are not entitled to vote on the Joint Plan and will be deemed to
have rejected the Joint Plan. Following the Effective Date, Mariner Health and
its direct or indirect subsidiaries will be direct or indirect subsidiaries of
Reorganized MPAN, as set forth in a corporate restructuring program to be
implemented by the Company in connection with the effectiveness of 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.

       THE FOREGOING IS ONLY A GENERAL SUMMARY OF THE PROVISIONS CONTAINED IN
THE JOINT PLAN AND DISCLOSURE STATEMENT. INTERESTED PARTIES SHOULD READ THE
JOINT PLAN AND DISCLOSURE STATEMENT IN THEIR ENTIRETY. THE JOINT PLAN IS
ATTACHED AS EXHIBIT 10.97 TO THIS ANNUAL REPORT ON FORM 10-K. AS NOTED
PREVIOUSLY, NO DISCLOSURE STATEMENT FOR THE JOINT PLAN HAS BEEN APPROVED, AND NO
ACCEPTANCES OF THE JOINT PLAN ARE BEING SOLICITED AT THIS TIME. MOREOVER, THE
JOINT PLAN HAS NOT BEEN CONFIRMED BY THE BANKRUPTCY COURT, AND THERE CAN BE NO
ASSURANCE THAT THE JOINT PLAN WILL BE CONFIRMED OR CONSUMMATED.

       Under the Bankruptcy Code, the Debtors may assume or reject executory
contracts and unexpired leases, including real property lease obligations.
Parties affected by these rejections may file claims with the Bankruptcy Court
in accordance with the reorganization process. The Debtors are actively engaged
in the process of reviewing their respective executory contracts and unexpired
leases and final decisions with respect to assuming or rejecting contracts and
unexpired leases, as well as the approval of the Bankruptcy Court, are still
pending.

       If the Disclosure Statement is approved by the Bankruptcy Court, and only
following such approval, the Joint Plan must be: (i) voted upon by impaired
classes of creditors of the Debtors that are entitled to vote; and (ii) approved
by the Bankruptcy Court. No assurance can be given regarding the approval of the
Disclosure Statement or the Joint Plan, whether the Disclosure Statement or
Joint Plan will be modified, or the terms on which the approval of the
Disclosure Statement or Joint Plan may be conditioned. In addition, there can be
no assurances the Joint Plan will be approved by requisite holders of claims and
equity holders and confirmed by the Bankruptcy Court, or the Joint Plan will be
consummated. Although the Bankruptcy Court may confirm a plan of reorganization
notwithstanding the non-acceptance of the plan by an impaired class of creditors
or equity holders, various requirements of the Bankruptcy Code must be met. If
the Joint Plan is not confirmed and the Company's exclusive right to file and
solicit acceptance of the Joint Plan ends, any party in interest may
subsequently file its own plan of reorganization for the MPAN Debtors or the MHG
Debtors. In addition, as discussed further below, the MHG Senior Credit Facility
Claim Holders have filed their own plan of reorganization for the MHG Debtors.
In light of the Joint Plan Support Agreement, the MHG Senior Credit Facility
Claim Holders are not seeking confirmation of their own alternative plan.
However, if certain deadlines in the Joint Plan Support Agreement are not met,
or if there is otherwise a default under that agreement, the MHG Senior Credit
Facility Claim Holders may elect to seek confirmation of their alternative plan.

Continuing Operations

    General.

       The Company's business operations generally can be divided into the
following principal areas: (a) inpatient services at skilled nursing and
assisted living facilities, (b) LTAC hospitals, and other, and (c)
pharmaceutical


                                       3
<PAGE>

product distribution and services through the Company's APS Division, which as
discussed further herein, the Company is in the process of divesting.

    Inpatient Services.

       Inpatient services constitute the Company's "core" business and are the
largest source of revenue for the Company. As of September 30, 2001, the Company
owned, leased, or managed for third parties 326 inpatient facilities
encompassing approximately 38,700 beds in 24 states. The MPAN Debtors manage all
of the facilities that are currently owned or leased by the MHG Debtors pursuant
to a "Management Protocol," as described further herein. Substantially all of
the Company's inpatient SNFs are certified by the appropriate state agencies for
participation in the Medicare program and in respective state Medicaid programs.

       The Company's inpatient SNFs provide 24-hour care to patients requiring
access to skilled nursing. All patients in the Company's inpatient facilities
receive assistance with activities of daily living ("ADL" services) including
feeding, bathing, dressing, eating, transportation, toileting, and related
services. Inpatient care is provided by registered nurses, licensed practical
nurses, and certified nurses' aides under the supervision of a Director of
Nursing. Each facility also contracts with a local licensed physician to serve
as its Medical Director, and establishes relationships with a number of
independent local specialists, who are available to care for the facility's
patients. The Company's inpatient facilities provide a broad range of case
management services over the course of treatment, including, as appropriate,
ongoing medical evaluation, social service needs, specialty equipment
requirements, outcomes measurement, discharge planning, and arrangement for home
care.

       These basic services are supplemented, in the Company's
Medicare-certified facilities, by rehabilitation services, including physical,
occupational, speech, respiratory, and psychological therapies. These services
were previously provided, in a majority of the Company's facilities, on a
contractual basis between the facility and the Company's rehabilitation services
operations. In connection with the Company's exiting from the contract therapy
business and the closure of that business line in 1999, many of the Company's
therapists became employees of the Company's facilities.

       In addition, the Company operates specialized units in a number of its
inpatient facilities, which provide subacute care to patients with
medically-complex conditions. Within these specialty units, trained staff
members offer care for patients as an alternative to treatment in a more
expensive acute-care hospital setting. In addition to basic therapy services,
these specialty units offer, among others, enteral therapy, intravenous therapy,
specialized wound management, ventilator care, tracheotomy care, cancer care,
and HIV care. These specialized units generally have a higher staffing level per
patient than the Company's other inpatient facilities and compete with
acute-care and rehabilitation hospitals, which the Company believes typically
charge rates higher than those charged by the Company's specialty units. Through
their inpatient division, the Company also offers specialized services for
residents with Alzheimer's disease.

       Included in the inpatient services division are the Company's 9
free-standing, assisted-living facilities that provide furnished rooms and
suites designed for individuals who are either able to live independently within
a sheltered community or who require minimal supervision. For assisted living
residents, the Company provides basic ADL assistance combined with access to
higher acuity settings should a resident's health condition dictate the need for
more intensive services. Certain of the Company's SNFs also include assisted
living operations and apartment units located within or on the same campus as
the SNF.

    Other Business Lines.

       The Company owns, leases, or manages 13 LTAC hospitals encompassing
approximately 670 licensed beds in 4 states. LTACs accommodate the relatively
high-acuity clinical needs of a patient discharged from a short-term acute-care
hospital when the patient's condition warrants more intensive care than can be
provided in a typical nursing facility. The Company's LTACs generally are
located in areas where the Company has a significant concentration of inpatient
facilities to which an LTAC patient can be discharged as the patient's condition
warrants. Medicare reimbursement of the Company's LTACs was not materially
affected by the Balanced Budget Act of 1997 ("Balanced Budget Act"), and the
Company's LTACs continue to be reimbursed on a modified cost basis. However, the
federal government plans to implement a Prospective Payment System ("PPS") for
LTACs to be effective by October 2002. The Company believes that the
implementation of this system may have an adverse effect on its LTAC operations.


                                       4
<PAGE>

       Prior to the Mariner Merger, both the Company and Mariner Health each:
(i) operated a large contract rehabilitation therapy business that provided
comprehensive therapy programs and services, on a contractual basis, to
inpatient healthcare facilities throughout the United States; (ii) operated
outpatient rehabilitation therapy clinics; (iii) managed specialty medical
programs in acute-care hospitals; and (iv) operated home health, hospice, and
private duty nursing branches. On a combined basis, the Company's contract
rehabilitation business served over 1,200 inpatient facilities throughout the
United States and operated 170 outpatient rehabilitation clinics. The Company
also operated specialty medical programs at more than 100 hospitals in 19 states
and more than 30 home health, hospice, and private duty nursing branches in 7
states. These businesses began to generate significant operating losses and
negative cash flow and thus have been divested or closed.

       Currently, these business lines consist of the limited assets, revenues,
and expenses associated with the Company's remaining therapy, home health, and
hospital contract management businesses, which the Company no longer operates.
Although the results of operations from these other business lines are included
in the Company's results of operations for the fiscal year ended September 30,
2001, the Company substantially exited these businesses during the year ended
September 30, 1999.

Discontinued Operations

    American Pharmaceutical Services ("APS").

       The Company's APS Division, provides services and products to more than
1,400 affiliated and third-party healthcare facilities through 31 institutional
pharmacies and 4 distribution centers located in 17 states. As described more
fully below, the Company has obtained the approval of the Bankruptcy Court for
the sale of the APS Division. However, many of the Company's SNFs have
contractual agreements with APS that will, for the most part, remain in effect
after the sale transaction closes.

       The APS Division specializes in meeting the needs of healthcare providers
in subacute care, long-term care, and assisted-living settings. The APS
Division's primary business is the distribution of pharmaceutical products,
intravenous compounds, and enteral therapy supplies and related services to
patients and residents in institutional settings. The APS Division provides
infusion therapies, including hydration, total parenteral nutrition, antibiotic,
and pain-management therapies. Infusion therapies are often required in treating
patients with chronic infections, digestive disorders, cancer, and chronic and
severe pain. The APS Division also provides specialized medical equipment and
supplies, including ventilators, oxygen concentrators, diagnostic equipment, and
various types of durable medical equipment. Equipment and supplies are available
to patients both in inpatient facilities and at home.

       Through contractual agreements, the APS Division provides consultant
pharmacists specializing in long-term care drug regimen reviews and regulatory
monitoring and reporting. Additionally, the APS Division also provides clinical
support for its products and services through long-term care facility staff
education and quality assurance programs.

       The APS Division has incurred operating losses in recent years (except
for the fiscal year ended September 30, 2001 in which the APS Division
recognized net income of $0.7 million) and the Company has determined that the
APS Division is not a strategic fit with the Company's plan for its future
operations. Accordingly, the Company determined that a sale of the APS Division
was in the best interests of its estates and creditors. For more than a year,
the Company actively marketed the APS Division to all known potential buyers
that both (i) were capable of purchasing and operating the business, and (ii)
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. Genesis' initial 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 fees and costs,
including reasonable attorneys' fees, not to exceed in the aggregate $1.7
million, if Genesis was not the successful bidder following the auction and the
Bankruptcy Court approved the sale of the APS Division to an alternative buyer.

       On October 16, 2001, the Bankruptcy Court entered an order in each of the
Debtor's 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


                                       5
<PAGE>

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 up to $18.0 million in
future contingent 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 will be entitled to its full $1.7
million break-up fee. The Company expects to close the sale of the assets of the
APS Division by January 31, 2002.

       APS currently serves 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 GranCare as of the effective time of the February
1997 sale of GranCare's institutional pharmacy business to a predecessor of
Genesis. In connection with the MPAN Debtor'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 or otherwise, and limiting its administrative expenses to amounts
due for goods sold and services rendered.

Marketing

       In marketing their inpatient services, the Company pursues a two-tiered
strategy. The Company promotes its facilities, programs, and services first to
payors and managed care organizations at the regional level and, second, to
healthcare professionals responsible for discharging patients at local hospitals
at the individual facility level. At the regional level, the Company's marketing
personnel seek to establish relationships with payors and managed care
organizations, which are increasingly important sources of referrals for
subacute patients. The Company develops contractual relationships with such
payors and organizations on a local, regional, and national basis.

       Local market coordinators focus on establishing and maintaining
cooperative relationships and networks with physicians, acute-care hospitals,
and other healthcare providers, with an emphasis on specialists who treat
ailments involving long-term care and rehabilitation. Marketing programs
targeting managed care payors are also being implemented at both the local and
national level. Ongoing assessment of patient and physician satisfaction with
the Company's services allows for improvements in service and clinical
performance.

       The Company desires to take advantage of other opportunities for
increased profitability, including arrangements with healthcare providers such
as health maintenance organizations ("HMOs") and other managed care providers,
which the Company believes may increase its subacute care business. Typically,
patients referred by managed care providers, including HMOs and preferred
provider organizations, generate higher revenue per patient day than Medicaid
patients as a result of the higher acuity of the referrals. The Company believes
that its ability to provide subacute and specialty medical services at a lower
cost than acute-care hospitals is a competitive advantage in providing services
to these payor sources.

Competition

       The long-term healthcare industry is segmented into a variety of
competitive areas that provide similar services. These competitors include
nursing homes, hospitals, assisted-living facilities, retirement centers and
communities, home health, and hospice agencies. Many operators of acute-care
hospitals offer or may offer post-acute care services in the future. These
operators would have the competitive advantage of being able to offer


                                       6
<PAGE>

services to patients at their affiliated post-acute care operations. The
Company's skilled nursing facilities historically have competed on a local basis
with other long-term care providers, and the Company's competitive position
varies from facility to facility within the various communities they serve.
Significant competitive factors include the quality of care provided,
reputation, location, physical appearance and, in the case of private pay
patients, price. Since there is little price competition with respect to
Medicaid and Medicare patients, the range of services provided by the Company's
facilities, as well as the location and physical condition of such facilities,
significantly affects their competitive position with regard to such patients.
The Company's ability to compete may also be adversely affected by publicity
regarding the Chapter 11 Cases. Competition in the institutional pharmacy
services markets ranges from small local operators to companies that are
national in scope and distribution capability.

Regulation

    Medicare And Medicaid.

       The Medicare program was enacted in 1965 to provide a nationwide,
federally-funded health insurance program for the elderly. The Medicaid program
is a joint federal-state cooperative arrangement established for the purpose of
enabling states to furnish medical assistance on behalf of aged, blind, or
disabled individuals, or members of families with dependent children, whose
income and resources are insufficient to meet the costs of necessary medical
services. All of the Company's skilled nursing facilities, hospitals, and
pharmacies are licensed under applicable state law, and nearly all are certified
or approved as providers or suppliers under Medicare and state Medicaid
programs, as applicable.

    Historical Cost-Based Reimbursement - Medicare Certified  Skilled Nursing
Facilities.

       The Medicare program consists of two parts: Medicare Part A and Medicare
Part B. Medicare Part A covers inpatient services for hospitals, skilled nursing
facilities and certain other healthcare providers, and patients requiring daily
professional skilled nursing and other rehabilitative care. Medicare Part B
covers services for suppliers of certain medical items, outpatient services and
doctor's services. The Medicare program historically utilized a cost-based,
retrospective reimbursement system for skilled nursing facilities for reasonable
direct and indirect allowable costs incurred in providing "routine service" (as
defined by the program and subject to certain limits) as well as capital costs
and ancillary costs. Pursuant to the Balanced Budget Act, enacted in August
1997, Medicare has transitioned to a Prospective Payment System ("PPS") for
skilled nursing facilities.

       Prior to the implementation of PPS, Medicare revenues were historically
determined from annual cost reports filed by skilled nursing facilities,
including the Company's facilities, that were (and, with respect to cost periods
that have not been settled, still are) subject to audit by fiscal intermediaries
administering the program. As described more fully in "Item 3 - Legal
Proceedings," the Company has reached an agreement in principle with the federal
government that will resolve all prepetition Medicare cost report settlements,
which includes all cost-based periods, as part of a global settlement.

    Prospective Payment Reimbursement - Medicare Certified Skilled Nursing
Facilities.

       The Balanced Budget Act amended the Medicare program by revising the
payment system for skilled nursing facilities. The Balanced Budget Act required
the establishment of PPS, a system under which Medicare Part A payment is
prospectively determined for skilled nursing facilities for cost reporting
periods beginning on or after July 1, 1998. Under PPS, skilled nursing
facilities receive a fixed per diem rate for each of their Medicare Part A
patients that, during the first three years of PPS, is based on a blend of
facility-specific rates and federal acuity-adjusted rates. Following the full
phase in of PPS, which will occur in 2002, all per diem rates will be based
solely on federal acuity-adjusted rates. Subsumed in this per diem rate are
ancillary services, such as pharmacy and rehabilitation therapy services, that
historically were provided to many of the Company's nursing facilities by the
Company's pharmacy and therapy subsidiaries. The inclusion of ancillary services
in the PPS per diem has resulted in significantly lower profit margins in the
Company's pharmacy operations as a result of increased pricing competition and a
change in customers' buying patterns.

       Since the passage of the Balanced Budget Act in 1997, Congress has twice
passed additional legislation intended to mitigate temporarily the reduction in
reimbursement for skilled nursing facilities under the Medicare PPS. First, in
November 1999, Congress passed the Medicare Balanced Budget Refinement Act of
1999 ("BBRA"). Second, in December 2000, Congress passed the Medicare, Medicaid,
and SCHIP Benefits Improvement and Protection Act of 2000 ("BIPA"). Effective
April 1, 2000, the BBRA temporarily increased the PPS per diem rates


                                       7
<PAGE>

by 20 percent for 15 patient-acuity categories (known as resource utilization
groups ("RUGs")), including medically-complex patients, pending implementation
of a refined RUG system that better accounts for medically-complex patients. The
Centers for Medicare & Medicaid Services' ("CMS", f/k/a the Health Care
Financing Administration ("HCFA")) first refinement proposal was to become
effective October 1, 2000, but was withdrawn because it did not more accurately
predict the use of non-therapy ancillary services. The current requirement calls
for the refinement to be developed and implemented effective October 1, 2002.
The revised rates, when finally implemented, are intended to be budget neutral
and simply a redistribution of total payments compared to the rates that would
be paid under the existing system. The BBRA also provided for a four percent
increase in the federal per diem rate for all patient-acuity categories for
fiscal years 2001 and 2002.

       BIPA, among other things, eliminated the scheduled reduction in the
skilled nursing facility market basket update in fiscal year 2001. In fiscal
years 2002 and 2003, payment updates will equal the market basket index ("MBI")
update minus one-half percentage point. Temporary increases in the federal per
diem rates under the BBRA will be in addition to these payment increases. BIPA
also increased payment for the nursing component of each RUG category by 16.66
percent for services furnished beginning April 1, 2001 and before October 1,
2002.

       Moreover, BIPA further refined the consolidated billing requirements. The
law now limits consolidated billing requirements to items and services furnished
to skilled nursing facility patients in a Medicare Part A covered stay and to
therapy services covered under Part B. In other words, for patients not covered
under a Part A stay (e.g., Part A benefits have been exhausted), the skilled
nursing facility may choose to bill for non-therapy Part B services and
supplies, or it may elect to have suppliers continue to bill Medicare directly
for these services. BIPA also modified the treatment of the Part A PPS
rehabilitation patient categories to ensure that Medicare payments for skilled
nursing facility patients with "ultra high" and "very high" rehabilitation
therapy needs are appropriate in relation to payments for patients needing
"high," "medium" or "low" levels of therapy. Effective for services furnished on
or after April 1, 2001, and before implementation of the refined RUG system
(which has yet to occur), the law increased by 6.7 percent the federal per diem
payments for 14 rehabilitation categories. The 20 percent additional payment
under the BBRA for three rehabilitation categories was removed to make this
provision budget neutral.

       The 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 (currently scheduled to be implemented
October 2002) and the increases provided for under BIPA will sunset in October
2002 (the "Medicare Reimbursement Cliff"). Unless additional legislative action
is undertaken by the United States Congress, the loss of revenues associated
with these occurrences will have a material adverse effect on the Company. The
Company preliminarily estimates that these occurrences will result in a loss of
revenue of approximately $72 million in fiscal 2003. While the Company is
hopeful that the United States 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.

    Fee For Service Reimbursement - Medicare Certified Skilled Nursing
Facilities.

       The Company is reimbursed for certain services, such as rehabilitation
therapy services, provided to Medicare skilled nursing facility patients under
the Medicare Part B benefit. The Balanced Budget Act also revised the
reimbursement methodology for therapy services under Medicare Part B.
Historically, Medicare Part B therapy services were reimbursed based on the cost
of the services provided, subject to prudent buyer and salary equivalency
restrictions. In November 1998, certain fee screen schedules were published
setting forth the amounts that can be charged for specific therapy services.
Additionally, the Balanced Budget Act set forth maximum per beneficiary limits
of $1,500 per provider for physical therapy and speech pathology, and $1,500 per
provider for occupational therapy. Both the fee screens and per beneficiary
limits were effective for services rendered following December 31, 1998. The
imposition of fee screens for Part B services, together with the inclusion of
ancillary services in the federal per diem for Part A services, had a material
adverse effect on the Company's therapy business, resulting in part in the
Company's' decision to terminate their third-party contracts to provide therapy
services and to exit this business. The BBRA mitigated the Balanced Budget Act
limitations by providing that the therapy caps do not apply in calendar years
2000 and 2001. This moratorium was extended by BIPA for one additional year,
through calendar year 2002. BIPA also extended the requirement for focused
reviews of therapy claims for the same period.


                                       8
<PAGE>

       The BBRA also excluded certain items and services from the formerly
all-inclusive skilled nursing facility per diem rates. Specifically, the
following items and services are now separately reimbursable outside of the PPS
rates: (1) ambulance services furnished to an individual in conjunction with
renal dialysis services; (2) chemotherapy items and administration services (as
identified by certain HCFA Common Procedure Coding System ("HCPCS") codes); (3)
radioisotope services (as identified by certain HCPCS codes); and (4) customized
prosthetic devices (artificial limbs) and other custom prostheses if provided to
a skilled nursing facility patient and intended to be used after discharge (as
identified by certain HCPCS codes and other instances chosen by CMS). Payment
for such items and services are made under Part B to the provider of the
service, in conformance with Part B payment rules. Although these items are
separately reimbursed from the PPS rate, CMS, as directed by the BBRA, has
adjusted the PPS payments rates to reflect the fact that these items and
services have been excluded.

    Nursing Home Reimbursement - Medicaid.

       Medicaid is a state-administered program financed by state funds and
matching federal funds. The program provides for medical assistance to the
indigent and certain other eligible persons. Medicaid reimbursement formulas are
established by each state with the approval of the federal government in
accordance with federal guidelines. All of the states in which the Company
operates currently use cost-based reimbursement systems, which generally may be
categorized as prospective or retrospective in nature. Under a prospective
system, per diem rates are established based upon the historical cost of
providing services during a prior year, adjusted to reflect factors such as
inflation and any additional services which are required to be performed. Many
of the prospective payment systems under which the Company operates contain an
acuity measurement system, which adjusts rates based on the care needs of the
patient. Under a retrospective systems, skilled nursing facilities are paid on
an interim basis for services provided, subject to adjustments based on
allowable costs, which are generally submitted on an annual basis. Additional
payment by the state or repayment to the state can result from the submission of
a cost report and its ultimate settlement. The majority of the states in which
the Company operates use prospective systems.

       The Balanced Budget Act also contained a number of changes affecting the
Medicaid program. Significantly, the law repealed the Boren Amendment, which
required state Medicaid programs to reimburse nursing facilities for the costs
that are incurred by efficiently and economically operated nursing homes. Since
repeal, many states have sought to lower their nursing home payment rates, and
several have succeeded. It is unclear at this time the extent to which
additional state Medicaid programs will adopt changes in their Medicaid
reimbursement systems, or, if adopted and implemented, what effect such
initiatives would have on the Company. Nevertheless, there can be no assurance
that future changes in Medicaid reimbursement rates to nursing facilities will
not have an adverse effect on the Company. Further, the Balanced Budget Act
allows states to mandate enrollment in managed care systems without seeking
approval from the HHS Secretary for waivers from certain Medicaid requirements
as long as certain standards are met. These managed care programs have
historically exempted institutional care, although some states have instituted
pilot programs to provide such care under managed care programs. Effective for
Medicaid services provided on or after October 1, 1997, states have considerable
flexibility in establishing payment rates. The Company is not able to predict
whether any states' waiver provisions will change the Medicaid reimbursement
systems for long-term care facilities from cost-based or fee-for-service to
managed care negotiated or capitated rates or otherwise affect the level of
payments to the Company.

       On January 12, 2001, the HHS Secretary issued final regulations to
implement changes to the Medicaid "upper payment limit" requirements. The
purpose of the rule is to stop states from using certain accounting techniques
to inappropriately obtain extra federal Medicaid matching funds that are not
necessarily spent on healthcare services for Medicaid beneficiaries. Although
the rule will be phased in over eight years to reduce the adverse impact on
certain states, the rule eventually could result in decreased federal funding to
state Medicaid programs, that have used inter-governmental transfers to enhance
their federal funding, which, in turn, could prompt certain states to reduce
Medicaid reimbursements to providers, including nursing facilities. CMS has
announced that it is contemplating proposing additional restrictions on such
funding.

    Medicare Reimbursement - Long-Term Acute-Care Hospitals.

       In recent years, Congress has taken steps to require a new Medicare PPS
for LTACs, which currently are reimbursed under a cost-based methodology. Under
the current law, the HHS Secretary is directed to design and implement a new
per-discharge long-term care hospital PPS by October 1, 2002. If the HHS
Secretary fails to meet this deadline, the HHS Secretary must instead implement
a PPS for these hospitals based on the acute hospital diagnosis related
groupings.


                                       9
<PAGE>

    Federal Privacy and Transaction Regulations.

       Other federal legislation requires major changes in the transmission and
retention of health information by the Company. The Health Insurance Portability
and Accountability Act of 1996 ("HIPAA") mandates, among other things, the
adoption of standards for the electronic exchange of health information in an
effort to encourage overall administrative simplification and enhance the
effectiveness and efficiency of the healthcare industry. Among the standards
that HHS has adopted or will adopt pursuant to HIPAA are standards for the
following: electronic transactions and code sets; unique identifiers for
providers, employers, health plans, and individuals; security and electronic
signatures; privacy; and enforcement.

       Although HIPAA was intended ultimately to reduce administrative expenses
and burdens faced within the healthcare industry, the Company believes that the
law will require significant and costly changes to current practices. HHS has
released two rules to date mandating the use of new standards with respect to
certain healthcare transactions and health information. The first rule requires
the use of uniform standards for common healthcare transactions, including
healthcare claims information, plan eligibility, referral certification and
authorization, claims status, plan enrollment and disenrollment, payment and
remittance advice, plan premium payments, and coordination of benefits. It also
establishes standards for the use of electronic signatures.

       The second rule released by HHS imposes new standards relating to the
privacy of individually identifiable health information. These standards not
only require the Company's compliance with rules governing the use and
disclosure of protected health information, but they also require the Company to
impose those rules, by contract, on any business associate to whom such
information is disclosed. Rules governing the security of health information
have been proposed but have not yet been issued in final form.

       HHS finalized the new transaction standards on August 17, 2000, and the
Company will be required to comply with them by October 16, 2002. Both houses of
Congress have passed legislation that will extend the transaction standards
deadline to October 16, 2003. The privacy standards were issued on December 28,
2000, and became effective on April 14, 2001, with a compliance date of April
14, 2003. Sanctions for failing to comply with HIPAA include criminal penalties
and civil sanctions. The Company is in the process of quantifying the costs
associated with HIPAA compliance and believe they may be material.

    Survey and Certification.

       Long-term care facilities must comply with certain requirements to
participate either as a skilled nursing facility under Medicare or a nursing
facility under Medicaid. Failure to comply may result in termination of the
provider's Medicare and Medicaid provider agreements, after which the facility
or provider would be unable to receive payment for services provided to Medicare
or Medicaid patients until such time as the facility or provider reapplies and
is recertified to participate in Medicare or Medicaid. The Debtors believe they
substantially comply with these regulatory requirements, but there can be no
assurance that the Debtors will be able to maintain such compliance, or will not
be required to expend significant amounts to do so.

    Referral Restrictions and Fraud And Abuse.

       The Medicare and Medicaid anti-kickback statute, 42 U.S.C. section
1320a-7b(b), prohibits the knowing and willful solicitation or receipt of any
remuneration "in return for" referring an individual, or for recommending or
arranging for the purchase, lease, or ordering of any item or service for which
payment may be made under Medicare or a state healthcare program. In addition,
the statute prohibits the offer or payment of remuneration "to induce" a person
to refer an individual, or to recommend or arrange for the purchase, lease, or
ordering of any item or service for which payment may be made under the Medicare
or state healthcare programs. Violation of the anti-kickback statute, pursuant
to the Balanced Budget Act, now carries a civil monetary penalty of $50,000 per
act, and treble the remuneration involved without regard to whether any portion
of that remuneration relates to a lawful purpose. The statute contains "safe
harbor" exceptions including those for certain discounts, group purchasing
organizations, employment relationships, management and personal services
arrangements, health plans, and certain other practices defined in regulatory
safe harbors.

       The Ethics in Patient Referrals Act ("Stark I"), effective January 1,
1992, generally prohibits physicians from referring Medicare patients to
clinical laboratories for testing if the referring physician (or a member of the
physician's immediate family) has a "financial relationship," through ownership
or compensation, with the laboratory. The Omnibus Budget Reconciliation Act of
1993 contains provisions commonly known as "Stark II"


                                       10
<PAGE>

("Stark II") expanding Stark I by prohibiting physicians from referring Medicare
and Medicaid patients to an entity with which a physician has a "financial
relationship" for the furnishing of certain items set forth in a list of
"designated health services," including physical therapy, occupational therapy,
home health services, and other services. Subject to certain exceptions, if such
a financial relationship exists, the entity is generally prohibited from
claiming payment for such services under the Medicare or Medicaid programs, and
civil monetary penalties may be assessed for each prohibited claim submitted.

       There are other provisions in the Social Security Act and in other
federal and state laws authorizing the imposition of penalties, including fines
and exclusion from participation in Medicare and Medicaid, for various billing
and other offenses.

       False claims are prohibited pursuant to criminal and civil statutes.
Criminal provisions at 42 U.S.C. section 1320a-7b(a) prohibit filing false
claims or making false statements to receive payment or certification under
Medicare or Medicaid, or failing to refund overpayments or improper payments;
offenses for violation are felonies punishable by up to five years imprisonment
and/or $25,000 fines. Civil provisions at 31 U.S.C. section 3729 (the federal
False Claims Act ("FCA")) prohibit the knowing filing of a false claim or the
knowing use of false statements to obtain payment; penalties for violations are
fines of not less than $5,500 nor more than $11,000, plus treble damages, for
each claim filed. Suits alleging false claims can be brought by individuals,
including employees and competitors. Allegations have been made under the civil
provisions of FCA in certain qui tam actions that the Company has filed false
claims. As described more fully in "Item 3 - Legal Proceedings," the Company has
reached an agreement in principle with the federal government that will resolve
these federal False Claims Act lawsuits as part of a global settlement.

       In addition to qui tam actions brought by private parties, the Company
believes that governmental enforcement activities have increased at both the
federal and state levels. There can be no assurance that substantial amounts
will not be expended by the Company to cooperate with these investigations and
proceedings or to defend allegations arising therefrom. If it were found that
any of the Company's practices failed to comply with any of the anti-fraud
provisions discussed in the paragraphs above, the Company could be materially
adversely affected.

       Management is unable to predict the effect of future administrative or
judicial interpretations of the laws discussed above, or whether other
legislation or regulations on the federal or state level in any of these areas
will be adopted, what form such legislation or regulations may take, or their
impact on the Company. There can be no assurances that such laws will ultimately
be interpreted in a manner consistent with the Company's' practices. As
described more fully in "Item 3 - Legal Proceedings," the Company has reached an
agreement in principle with the federal government that will resolve these
federal False Claims Act lawsuits as part of a global settlement.

    Certificates Of Need.

       Certificate of Need ("CON") statutes and regulations control the
development and expansion of healthcare services and facilities in certain
states. The CON process is intended to promote quality healthcare at the lowest
possible cost and to avoid the unnecessary duplication of services, equipment,
and facilities. CON or similar laws generally require that approval be obtained
from the designated state health planning agency for certain acquisitions and
capital expenditures, and that such agency determine that a need exists prior to
the expansion of existing facilities, construction of new facilities, addition
of beds, acquisition of major items of equipment, or introduction of new
services. Additionally, several states have instituted moratoria on new CONs or
the approval of new beds.

    Pharmacy Regulation.

       Pharmacy operations are subject to regulation by the various states in
which the Company conducts its business as well as by the federal government.
The Company's pharmacies are regulated under the Food, Drug, and Cosmetic Act
and the Prescription Drug Marketing Act, which are administered by the United
States Food and Drug Administration. Under the Comprehensive Drug Abuse
Prevention and Control Act of 1970, which is administered by the United States
Drug Enforcement Administration ("DEA"), the pharmacies, as dispensers of
controlled substances, must register with the DEA, file reports of inventories
and transactions, and provide adequate security measures. Failure to comply with
such requirements could result in civil or criminal penalties. The Company
believes that its pharmacy operations are in substantial compliance with such
regulations. Furthermore, as explained more fully above under "-American
Pharmaceutical Services", the Company is in the process of divesting its
pharmacy operations to a third party purchaser.


                                       11
<PAGE>

       The Company's pharmacy operations also could be impacted by pending
efforts to revise the Medicare payment methodology for prescription drugs. The
Medicare statute currently requires that payments for drugs and biologicals be
made at 95 percent of the published average wholesale price ("AWP"). In the last
several years, state and federal government enforcement agencies have conducted
an ongoing investigation of manufacturers' practices with respect to AWP in
which they have suggested that "inflated" AWPs have led to excessive government
payments for prescription drugs. To that end, BIPA required the General
Accounting Office ("GAO") to study Medicare reimbursement for drugs and
biologicals and for related services. The HHS Secretary is required to revise
the current Medicare payment methodologies for covered drugs and biologicals and
related services based on the GAO's recommendations. There can be no assurance
that government or private healthcare programs will continue to reimburse for
drugs based on current AWP-based methodologies. It is unclear at this time what
impact any revised Medicare reimbursement formula would have on the Company's
pharmacy operations.

    Compliance Program.

       On March 13, 2000, the OIG issued guidance to help nursing facilities
design effective voluntary compliance programs to prevent fraud, waste, and
abuse in healthcare programs, including Medicare and Medicaid. The guidance,
Compliance Program Guidance for Nursing Facilities, was published as a notice in
the March 13, 2000, Federal Register. The guidance recommends that nursing
facilities enact certain procedures and policies in prevention of fraud, waste,
and abuse. The Company has a compliance program it adopted voluntarily in early
1998, and management believes that their compliance program substantially
incorporates the guidance that the OIG has recommended be included in such
programs.

       The purpose of the Company's compliance program is to address compliance
issues, communicate issues to the Chief Executive Officer and Board of
Directors, monitor the "hotline," and assure ethical and legal conduct by
management and employees. The compliance program is managed by the Internal
Audit Department which works closely with the Human Resources and Legal
Departments on compliance training issues, quality of care issues, and legal
matters involving compliance issues.

       The Company's "hotline" is prominently posted in all of the Company's
skilled nursing facilities and other areas where the Company has operations.
Employees, patients and family members are encouraged to call the "hotline,"
either in person or anonymously, to report any potential issues they might note.
Upon report of a call, the Compliance Department investigates the issue and, if
necessary, liaisons with the appropriate corporate departments in order to
resolve the issue. Employees are assured that any calls to the "hotline" will
not result in any retribution by the Company. Management believes this program
has been highly successful and will help identify trends and potential problem
areas in a timely fashion for quick remediation.

       The Company has also implemented a comprehensive background check
initiative aimed at improving the quality of the Company's workforce and
reducing employee turnover. To the best of the Company's knowledge, the design
of this program meets or exceeds all state and federal regulatory requirements
for background checks.

Sources of Revenue

       The Company receives payments for services rendered to patients from the
federal government under Medicare, from the various states where the Company
operates under Medicaid and from private insurers and the patients themselves.
The Company's revenues and profitability are affected by ongoing efforts of
third-party payors to contain healthcare costs by limiting reimbursement rates,
increasing case management review and negotiating reduced contract pricing. The
federal Medicare program restricts coverage to patients who require skilled care
whereas state-administered Medicaid programs generally provide more restricted
coverage and lower reimbursement rates than private pay sources. See
"--Regulation." The sources and amounts of the Company's patient revenues are
determined by a number of factors, including licensed bed capacity of its
facilities, occupancy rate, payor mix, type of services rendered to the patient
and rates of reimbursement among payor categories (private, Medicare and
Medicaid). Changes in the mix of the Company's patients among the private pay,
Medicare and Medicaid categories as well as changes in the quality mix
significantly affect the profitability of the Company's operations.
Historically, private pay patients have been the most profitable and Medicaid
patients have been the least profitable. Also, the Company historically derived
higher revenues from providing specialized medical services than from providing
routine inpatient care. For the year ended September 30, 2001, the Company
derived 20.5%, 30.2%, and 49.3% of its net patient revenues from private pay,
Medicare and Medicaid services, respectively.


                                       12
<PAGE>

       The Company classifies payments from individuals who pay directly for
services without governmental assistance through the Medicare and Medicaid
programs as private pay revenue. The private pay classification also includes
revenues from managed care companies, commercial insurers, health maintenance
organizations, Veteran's Administration contractual payments, and payments for
services provided under contract management programs. Managed care as a payor
source to nursing home operators is likely to increase over the next several
years. However, revenue from managed care payors does not constitute a
significant portion of the Company's revenue at this time.

Employees

       The Company employs approximately 38,200 employees. The Company depends
upon skilled personnel such as nurses as well as unskilled labor to staff its
facilities. In some areas in which the Company operates there is a labor
shortage that could have a material adverse effect upon the Company's ability to
attract or retain sufficient numbers of skilled personnel or impair the
Company's ability to attract or retain sufficient numbers of unskilled labor at
reasonable wages. See "Management's Discussion of Financial Position and Results
of Operations - Liquidity and Capital Resources."

       The Company has unionized facilities in Northern California, Michigan,
Wisconsin, Connecticut, Maryland, Ohio, West Virginia, and Florida. The Company
has collective bargaining agreements with unions representing employees at 28
facilities. In addition, a union represents employees at another of the Company
facilities without a collective bargaining agreement. The Company, in connection
with the Chapter 11 Cases currently intends to assume its collective bargaining
agreements, or, in one case, assume and assign the agreement to a new operator.

       Of the Company's 12 unionized facilities in Northern California, 11 are
represented by the Service Employees International Union ("SEIU") and are
subject to a regional master collective bargaining agreement. The other
unionized Company facility in Northern California is represented by the
International Brotherhood of Teamsters ("Teamsters"). The SEIU and the Teamsters
primarily represent certified nursing assistants, dietary workers, and laundry
and housekeeping employees. In 5 of the 12 facilities, licensed nurses also are
represented by the relevant union. The agreement with the SEIU expires on April
30, 2004, with a wage and benefit re-opener for the third year of the contract,
which means that the agreement may be subject to renegotiation in 2003. This
agreement has recently been renegotiated and is in the process of being
rexecuted. The Teamsters' agreement expires on December 31, 2002.

       In Michigan, (i) six of the Company's facilities have a regional master
collective bargaining agreement with the SEIU, (ii) one Company facility has an
agreement with the American Federation of State, County, and Municipal Employees
("AFSCME"), and (iii) one Company facility has an employee council. The
agreement with the SEIU expires on May 1, 2004, with a wage and benefits
re-opener for the second and third year of the agreement, which means that the
agreement may be subject to renegotiation in 2002 and 2003. The AFSCME agreement
and the employee council agreement expired on September 30, 2001, and are
currently being renegotiated.

       In Maryland, the SEIU represents employees at three of the Company's
facilities. The agreements will expire on December 31, 2001, January 15, 2002,
and January 31, 2002. The Company is in the process of renegotiating those
contracts. At another of the Company's facilities in Maryland, the employees are
represented by the United Food and Commercial Workers' Union ("UFCWU"). The
UFCWU agreement will expire on April 30, 2004.

       In Wisconsin, there is one Company facility where the workers are
represented by the SEIU. The SEIU agreement with respect to that facility will
expire on May 1, 2004. In Connecticut, there is one Company facility that the
Company is in the process of divesting where the employees are represented by
the SEIU. The relevant agreement will expire on March 15, 2005, and is being
assumed by and assigned to a new operator. The SEIU also represents employees at
one Company facility in West Virginia and another in Florida. The SEIU agreement
for the West Virginia facility will expire on March 1, 2002, and there is no
agreement for the Florida facility. The Company is currently negotiating a
collective bargaining agreement with respect to the Florida facility. In Ohio,
there is one Company facility where the employees are represented by the Hotel
Employees and Restaurant Employees Union ("HEREU"). The HEREU agreement with
respect to that facility will expire on June 30, 2002.

       The Debtors cannot predict the effect continued union representation or
future organizational activities will have on their businesses. For example, the
SEIU in Connecticut engaged in multiple strikes before an agreement was reached.
Likewise, the SEIU in California and Michigan engaged in informational picketing
before an agreement


                                       13
<PAGE>

was reached. However, the aforementioned organizations have not caused any
material work stoppages in the past. There is no assurance that the Company will
not experience a material work stoppage in the future.

ITEM 2.  PROPERTIES

       Throughout the pendency of the Chapter 11 Cases, the Company has sought
to strengthen its financial performance and operations by divesting
underperforming facilities and facilities not otherwise strategic to the
Company's operations. Since the Petition Date, the Company has divested 74
facilities, including: (i) rejections of 33 facility leases, both by operation
of law pursuant to Bankruptcy Code section 365(d)(4) and after notice and a
hearing in accordance with Bankruptcy Code section 365(a); (ii) expirations of
leases of 6 facilities; (iii) sales of 17 facilities pursuant to Bankruptcy Code
section 363; (iv) closures of 4 facilities pursuant to plans approved by the
required regulatory authorities; and (v) terminations of a management agreement
with respect to 1 facility.

       In addition, the Company has rejected 47 leases of office and multiuse
space no longer required by their existing operations or formerly used in
discontinued and divested business lines.

       At September 30, 2001, the Company operated an aggregate of 326 skilled
nursing and assisted living facilities of which 210 were owned and 115 were
subject to long-term operating leases or subleases and 1 was managed. The
Company's facilities that are leased are subject to long-term operating leases
or subleases which require the Company, among other things, to fund all
applicable capital expenditures, taxes, insurance and maintenance costs. The
annual rent payable under each of the leases generally increases based on a
fixed percentage, increases in the U.S. Consumer Price Index or increases in
facility revenues. Many of the leases contain renewal options to extend the
terms. The Company considers its properties are well maintained and are in
suitable condition for the conduct of its business.

       The following table sets forth certain information concerning the skilled
nursing and assisted living facilities operated by the Company as of September
30, 2001.

<TABLE>
<CAPTION>

                                                                  NUMBER OF FACILITIES                 NUMBER OF
                                                         ---------------------------------------       LICENSED
STATE                                                    OWNED      LEASED   MANAGED       TOTAL          BEDS
-----                                                    -----      ------   -------       -----      ----------
<S>                                                      <C>        <C>      <C>           <C>        <C>

Alabama............................................         5           2       --            7             803
Arizona............................................         3           5       --            8             984
California.........................................         8          21       --           29           3,358
Colorado...........................................        26           4       --           30           3,152
Connecticut........................................         2           1       --            3             340
Florida............................................        19           9       --           28           3,522
Georgia............................................         4           6       --           10           1,275
Illinois...........................................         9           4       --           13           1,234
Louisiana..........................................         1           2       --            3             612
Maryland...........................................        11           2       --           13           2,157
Massachusetts......................................         5          --       --            5             562
Michigan...........................................        10          --       --           10           1,315
Mississippi........................................         1          10       --           11           1,225
Nebraska...........................................         7          --       --            7             581
North Carolina.....................................        29           2       --           31           3,958
Ohio...............................................         1          --       --            1              93
Pennsylvania.......................................         2          --       --            2             205
South Carolina.....................................         3           9       --           12           1,544
Tennessee..........................................         2           4       --            6             689
Texas..............................................        52          32        1           85           9,730
Virginia...........................................        --           2       --            2             166
West Virginia......................................         1          --       --            1             186
Wisconsin..........................................         5          --       --            5             629
Wyoming............................................         4          --       --            4             417
                                                          ---         ---       --          ---          ------
     Total.........................................       210         115        1          326          38,737
                                                          ===         ===       ==          ===          ======
</TABLE>


                                       14
<PAGE>


       The Company calculated its aggregate occupancy percentages for all of its
skilled nursing facilities as 87.4%, 86.1%, and 85.4% for the fiscal years ended
September 30, 2001, 2000, and 1999, respectively. However, the Company believes
that occupancy percentages should not be relied upon alone to determine the
profitability of a facility. Other factors include, among other things, the
sources of payment, terms of reimbursement and the acuity level for each of the
patients in such facilities. The Company also believes there is not a consistent
industry standard as to how occupancy is measured and that the information may
not be comparable among long-term care providers. The Company computes average
occupancy percentages by dividing the total number of beds occupied by the total
number of licensed beds available for use during the periods indicated.
"Licensed beds" refers to the number of beds for which a license has been
issued, which may vary in some instances from licensed beds available for use.

       The following table sets forth certain information concerning the LTAC
hospitals operated by the Company as of September 30, 2001.

<TABLE>
<CAPTION>
                               OWNED OR LEASED            MANAGED               TOTAL
                              -----------------     -----------------      ----------------
                              FACILITIES   BEDS     FACILITIES   BEDS      FACILITIES  BEDS
                              ----------   ----     ----------   ----      ----------  ----
<S>                           <C>          <C>      <C>          <C>       <C>         <C>
Arizona...................        1          21          --        --           1        21
Louisiana.................        3         172          --        --           3       172
Ohio......................       --          --           2        75           2        75
Texas.....................        6         377           1        25           7       402
                                 --         ---          --       ---          --       ---
   Total..................       10         570           3       100          13       670
                                 ==         ===          ==       ===          ==       ===
</TABLE>

       The average occupancy rate for the Company's LTAC hospitals for the
fiscal years ended September 30, 2001, 2000 and 1999 was 82.0%, 79.9% and 68.0%,
respectively.

       Certain of the above properties serve as collateral for various mortgage
debt instruments or capitalized lease obligations. The Company is in the final
stages of reviewing its portfolio of properties and is in the process of
divesting those properties that it believes do not meet acceptable quality or
financial performance standards or do not fit strategically into the Company's
operations.

       As a result of the Chapter 11 Filings, the Company is in default under
certain of the leases and security arrangements pertaining to the facilities
listed above. Additionally, certain of the Company's leases contain cross
default provisions that may be triggered if certain of the Company's debt
obligations are accelerated. The Company has received default notices under its
leases from landlords owning a material number of the Company's facilities and
security arrangements with certain lenders, primarily as a result of the
Company's financial condition. The Joint Plan proposes treatments of certain
Project Lenders with which they may not agree. There can be no assurance that
the existing defaults and/or defaults that may arise in the future under such
leases and security arrangements will not have a material adverse effect on the
Company or its attempts to confirm the Joint Plan.

       In addition, the APS Division operates 31 institutional pharmacies
located in 14 states, all of which are leased. As indicated previously, the
Company will assume and assign a number of the real property leases relating to
its APS Division. Those leases affiliated with the APS Division's operations
that are not assumed and assigned will be rejected pursuant to the Joint Plan or
following the closing of the APS Division sale transaction, subject to such
period of occupancy as the purchaser of the APS Division may require for
transition purposes and as ordered by the Bankruptcy Court.

       Finally, the Company leases three locations for corporate and regional
offices, including its headquarters in Atlanta, Georgia. In addition, the
Company's (i) LTAC operations lease 1 location in Austin, Texas that serves as
the headquarters for the LTAC operations and (ii) the APS Division leases 1
location in Naperville, Illinois, which serves as the APS Division's corporate
headquarters, as well as 3 locations that serve as distribution centers.

ITEM 3.  LEGAL PROCEEDINGS

       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


                                       15
<PAGE>

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 the Company
has significant operations, insurance coverage for the risk of punitive and
certain other damages arising from general and professional liability litigation
may not be available in certain circumstances. There can be no assurance that
the Company will not be liable for punitive or other damages awarded in
litigation for which insurance coverage is not available. The Company also
believes that there has been, and will continue to be, an increase in
governmental investigations of long-term care providers, particularly in the
area of Medicare/Medicaid false claims as well as an increase in enforcement
actions resulting from these investigations. While the Company believes that it
provides quality care to the patients in its facilities and materially complies
with all applicable regulatory requirements, given the Company's current
financial difficulties and lack of liquidity, 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, and without giving
effect to the discharge of certain of these claims in the Company's Chapter 11
Cases under Section 1141 of the Bankruptcy Code upon confirmation of the Joint
Plan 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, given the
Company's current financial condition, lack of liquidity and change in the
Company's general liability and professional liability ("GL/PL") insurance
policies, 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 an agreement in principle
on the following terms 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 description of the principal terms set forth herein is intended to
reflect the material concepts that have been part of the negotiations between
the Company and the United States. The Company and the United States are working
together to draft a mutually-acceptable settlement agreement and obtain all
necessary approvals for the settlement to be effective. Any settlement agreement
will be subject to Bankruptcy Court approval and become effective upon the
Effective Date of the Joint Plan (if confirmed) and is anticipated to include
that: (i) all Medicare Claims and debts arising prior to the Petition Date will
be released as between CMS and the Company; (ii) the United States will approve
a settlement of Medicare administrative appeals related to disallowances under
the prudent buyer principle ("Prudent Buyer Settlement"); the Company will waive
its rights to collect any amounts due pursuant to the Prudent Buyer Settlement;
CMS will adjust certain SNF 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 million; (iv) the Department of
Justice will release 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 will be responsible for any attorney fees sought by qui tam
relators' counsel and will be negotiated by Company counsel; (vi) the United
States will waive any claims for Medicare reimbursement for two voluntary
disclosures made by the Company to the United States; the United States will
also waive any Claims for Medicare reimbursement related to an OIG
investigation; (vii) the Company will enter into a corporate integrity agreement
("CIA") with the OIG; this agreement is also under negotiation; (viii) the
Company will reject and terminate certain


                                       16
<PAGE>

provider agreements for discontinued operations in the home health and
rehabilitation businesses; (ix) the Company and the United States will agree 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 January 18, 2000 Petition
Date) will be fully and finally resolved by the settlement; accordingly, the
Company will withdraw 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.

       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 agreed to a negotiated settlement and compromise of
the United States Claims. In connection with this Global Settlement, certain of
the matters described and identified below will be resolved.

       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. The complaint has been unsealed and the Company
has been advised that the government has declined to intervene in this matter
under the Federal False Claims Act. 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. This action is expected
to be settled as part of the Global Settlement.

       On August 25, 1998, a complaint was filed by the United States against
the Company's GranCare and International X-Ray subsidiaries and certain other
parties under the Civil False Claims Act and in common law and equity. The
lawsuit, U.S. v. Sentry X-Ray, Ltd., et al., civil action no. 98-73722, was
filed in United States District Court for the Eastern District of Michigan.
Valley X-Ray operates a mobile X-Ray company in Michigan. A Company subsidiary,
International X-Ray, Inc., owns a minority partnership interest in defendant
Valley X- Ray. The case asserts five claims for relief, including two claims for
violation of the Civil False Claims Act, two alternative claims of common law
fraud and unjust enrichment, and one request for application of the Federal Debt
Collection Procedures Act. The two primary allegations of the complaint are that
(i) the X-Ray company received Medicare overpayments for transportation costs in
the amount of $657,767; and (ii) the X-Ray company "upcoded" Medicare claims for
EKG services in the amount of $631,090. The United States has requested treble
damages as well as civil penalties of $5,000 to $10,000 for each of the alleged
388 submitted Medicare claims. The total damages sought varies from $5.3 million
to $7.2 million. As the result of a motion filed by the Company on November 23,
1998, GranCare was dismissed from the case. 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. This action
was settled on March 30, 2001 at no cost to the Company. The United States is no
longer pursuing this action and Valley X-Ray is in the process of winding up its
affairs.

       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, ss. 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.


                                       17
<PAGE>

       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. To date, the Government has declined to intervene. The complaint
which was unsealed, has been amended to add additional relators and allegations
under the Federal False Claims Act. In response to the Notice of Stay submitted
under 11 U.S.C. ss. 362, the District Court, on January 26, 2000, dismissed the
plaintiffs' claims against defendants subject to reinstatement within thirty
(30) days after the stay is discontinued. This action is expected to be settled
as part of the Global Settlement.

       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. After conducting an
investigation in which the Company cooperated by producing documents responsive
to an administrative subpoena and allowing certain employee interviews, the
United States Department of Justice elected not to intervene. The district court
unsealed the Complaint on October 15, 1999. On December 14, 1999, the Company
filed a motion to dismiss the relators' complaint. 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.
This action is expected to be settled as part of the Global Settlement.

       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 United States has not yet made its
intervention decision in the case. The complaint alleges that the 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 principle and interest had
been made. False statements were allegedly submitted and fraudulent records
created during the years 1992 through 1996. This action is expected to be
settled as part of the Global Settlement.

       On approximately August 31, 2000, the United States Attorney for Eastern
District of Michigan issued a subpoena duces tecum to Cambridge East. 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 are expected to be
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. 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. The Company is cooperating with the investigation and has retained
experienced counsel to assist in responding to the subpoenas and to advise the
Company with respect to this investigation. This investigation is expected to be
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 United States had not yet made
its intervention decision. 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


                                       18
<PAGE>

facility entered into an illegal referral arrangement involving waiver of
co-insurance payments. The allegations cover all claims for reimbursement made
by certain of the Company's facilities from the federal government during
calendar years 1992 through 1999. The complaint seeks treble damages and
penalties under the Federal Civil False Claims Act, and attorneys fees and
costs. This action is expected to be settled as part of the Global Settlement.

       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 United States had not yet made
its intervention decision in either case when stays were entered, and the
matters remain sealed. 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 skilled nursing facilities during the cost report
years 1992 through 1999. The complaint seeks treble damages and penalties under
the federal Civil False Claims Act, and attorneys fees and costs. These actions
are expected to be settled as part of the Global Settlement.

       On October 5, 2000, NovaCare Holdings, Inc. ("NCH") filed a complaint
(the "NCH Complaint") in the Chapter 11 Cases commencing Adversary Proceeding
No. 00-1577 (MFW), NovaCare Holdings, Inc. v. Mariner Post-Acute Network, Inc.,
et al. The Company and various subsidiaries (the "defendant subsidiaries") are
named as defendants in the NCH Complaint. In the NCH Complaint, NCH alleges that
its predecessors in interest (hereinafter also referred to as "NCH") were party
to contracts with various subsidiaries of the Company under which NCH provided
services to patients at various facilities of such subsidiaries. It further
alleges that pursuant to these contracts, NCH provided certain services for
which it was paid, but with respect to which HCFA (now CMS) disallowed the
facilities' claims for reimbursement (the "NCH HCFA Disallowances"). After the
NCH HCFA Disallowances, NCH allegedly provided credits to the facilities equal
to the amount of the NCH HCFA Disallowances. Appeals of the NCH HCFA
Disallowances were filed, and NCH alleges that it holds a constructive trust or
equitable lien on any amounts which may be recovered from HCFA as a result of
such appeals. In the alternative, NCH alleges that it holds an administrative
priority claim for any such amounts that are paid by HCFA and not turned over to
NCH. The aggregate amount of the credits that are related to the NCH HCFA
Disallowances and with respect to which NCH asserts a constructive trust, an
equitable lien, and/or an administrative priority claim is approximately $8.2
million. In addition, NCH asserts administrative priority claims as well as
claims for an equitable lien and constructive trust for attorneys fees and
expenses relating to the appeals of other disallowance decisions by HCFA (the
"Other HCFA Disallowances"); the NCH Complaint states that NCH has incurred at
least $275,000 of such expenses.

       On December 13, 2001, the Company filed a motion to approve a settlement
agreement with NCH, pursuant to which, among other things, (i) the Company would
pay NCH $3.3 million in cash; (ii) the NCH Complaint and all other pleadings
associated with the adversary proceeding would be dismissed, with prejudice;
(iii) NCH would withdraw any proofs of claim that it has filed against the
Company and any of its subsidiaries, which include a bankruptcy claim of at
least approximately $9.5 million in the Company's Chapter 11 Cases (which
consists of an allegedly secured claim of at least approximately $8.2 million
and an alleged unsecured claim of at least approximately $1.1 million), and an
allegedly secured claim of at least approximately $0.7 million in the Mariner
Health Chapter 11 Cases; and (iv) NCH, on the one hand, and the Company and its
subsidiaries, on the other, would exchange mutual releases. The NCH Settlement
Motion is scheduled to be heard by the Bankruptcy Court on January 3, 2002.

       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 GL/PL
insurance issued to the Company's MHG subsidiary 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


                                       19
<PAGE>

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; (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. The
parties intend that the notices of withdrawal will be filed with the Bankruptcy
Court shortly. 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 an agreement in principle with the State of Texas to resolve the claims
of the Texas Department of Human Services ("TDHS") and Office of Attorney
General ("TOAG"), including those for civil penalties and administrative
penalties. The following description reflects the main terms of the agreement
between the Company and the State of Texas, which is subject to Bankruptcy Court
approval. A motion to approve the settlement, which will attach a copy of the
settlement agreement ("Texas Settlement Agreement"), will be filed with the
Bankruptcy Court in advance of the confirmation hearing to confirm the Company's
Plan of Reorganization.

       The settlement provides that all prepetition claims of TDHS and TOAG
related to civil penalties and administrative penalties will be satisfied in
full by allowing TDHS/TOAG an unsecured claim in the Company's Chapter 11 Cases
in the amount of $1.6 million, which claim will be subordinated to all other
general unsecured claims, and by payment to TDHS/TOAG of $0.6 million in cash
within twenty (20) business days after entry of the Bankruptcy Court's order
approving the Texas Settlement Agreement. With respect to postpetition TDHS
Claims based on administrative penalties, subject to certain exceptions: (i) all
claims for $1,500 or less will be settled for $0 and no findings of fact; (ii)
all claims in excess of $75,000 will not be resolved by virtue of the Texas
Settlement Agreement, but rather will be resolved on an individual basis or
tried in the ordinary course of the Company's business; and (iii) all
postpetition claims between $1,500 and $75,000 will be settled in full by
payment by the Company of sixty-five percent (65%) of the imposed administrative
penalty that is the basis for the claim within twenty (20) business days after
entry of the Bankruptcy Court's order approving the Texas Settlement Agreement.
Postpetition TOAG Claims for civil penalties will not be resolved by virtue of
the Texas Settlement Agreement, but rather will be resolved on an individual
basis or tried in the ordinary course of the Company's business. The Company
will agree not to contest certain survey findings of fact that support the
relevant penalty claims, but reserves the right to contest survey findings of
fact unrelated to the penalty claims, as well as the legal conclusion resulting
from the facts and the application and use of the findings of fact. Upon
compliance with the Texas Settlement Agreement, the Company will receive a
release of all prepetition claims of TDHS and TOAG related to civil penalties
and administrative penalties.

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

       Not applicable.


                                       20
<PAGE>




                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

Principal Markets and Sales Prices of Common Equity Securities

       The Common Stock has traded on the OTC-BB under the symbol "MPAN Q" since
November 2, 1999. The Common Stock previously traded on the New York Stock
Exchange ("NYSE") under the symbol "MPN" from August 1, 1998 through November 1,
1999. The following table shows the high and low sales prices for the Common
Stock as reported by the NYSE and the OTC-BB for the periods indicated:

<TABLE>
<CAPTION>
                              FISCAL YEAR 2001           FISCAL YEAR 2000
                          -------------------------  --------------------------
QUARTER ENDED                HIGH          LOW          HIGH           LOW
                          ------------  -----------  ------------  ------------
<S>                       <C>           <C>          <C>           <C>
December 31............    $     0.09   $     0.03    $     0.41    $     0.05
March 31...............    $     0.27   $     0.05    $     0.50    $     0.06
June 30................    $     0.17   $     0.08    $     0.23    $     0.06
September 30...........    $     0.10   $     0.04    $     0.16    $     0.08
</TABLE>


Number of Stockholders

       At September 30, 2001, there were approximately 1,029 holders of record
of the Company's common stock.

Dividends

       The Company has not paid nor declared any cash dividends on its common
stock since its inception. During the Company's Chapter 11 Cases, the Company is
prohibited from paying dividends.


                                       21
<PAGE>


ITEM 6.      SELECTED FINANCIAL DATA

       The following selected financial data are for each of the fiscal years in
the period 1997 through 2001 and as of the end of each such fiscal years. The
statement of operations data presented for fiscal years 2001, 2000 and 1999 and
the balance sheet data as of the end of fiscal years 2001 and 2000 are derived
from the Company's consolidated financial statements and related notes thereto
included elsewhere herein. The 1998 financial information gives effect to the
LCA/GranCare Mergers effective November 1, 1997 and the Mariner Merger effective
July 31, 1998.

<TABLE>
<CAPTION>
                                                                  FISCAL YEAR ENDED SEPTEMBER 30,
                                            -----------------------------------------------------------------------------
                                               2001              2000             1999             1998            1997
                                            -----------      -----------      -----------      -----------      ---------
                                                      (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL DATA)

<S>                                         <C>              <C>              <C>              <C>              <C>
STATEMENT OF OPERATIONS DATA:
 Net revenues ..........................    $ 1,872,135      $ 1,879,307      $ 1,990,863      $ 1,802,203      $ 943,540
 Total costs and expenses ..............      1,863,657        1,885,867        3,414,448        1,921,464        875,469
                                            -----------      -----------      -----------      -----------      ---------
 Operating income (loss) ...............          8,478           (6,560)      (1,423,585)        (119,261)        68,071
 Other income (expenses):
   Interest expense ....................         (5,171)         (71,905)        (204,247)        (125,267)       (21,335)
   Interest and dividend income ........          6,007           11,366            9,075           10,980          4,549
   Reorganization items ................        (47,721)         (10,816)              --               --             --
   Other ...............................           (462)           2,261              771             (322)           (24)
                                            -----------      -----------      -----------      -----------      ---------
 Income (loss) from continuing
   operations before income taxes ......        (38,869)         (75,654)      (1,617,986)        (233,870)        51,261
 Provision (benefit) for income taxes ..         (4,807)         (19,374)              --          (10,866)        33,604
                                            -----------      -----------      -----------      -----------      ---------
 Income (loss) from continuing
   operations ..........................        (34,062)         (56,280)      (1,617,986)        (223,184)        17,657
 Discontinued operations:
   Income (loss) from discontinued
     pharmacy operations ...............            667           (2,705)        (160,296)          24,807         26,260
                                            -----------      -----------      -----------      -----------      ---------
 Income (loss) before extraordinary
   loss ................................        (33,395)         (58,985)      (1,778,282)        (198,377)        43,917
 Extraordinary loss on early
   extinguishment of debt, net of
   $6,034 income tax benefit ...........             --               --               --          (11,275)            --
                                            -----------      -----------      -----------      -----------      ---------
 Net income (loss) .....................    $   (33,395)     $   (58,985)     $(1,778,282)     $  (209,652)     $  43,917
                                            ===========      ===========      ===========      ===========      =========


 Earnings (loss) per share (1):
 Basic:
   Income (loss) from continuing
     operations ........................    $     (0.46)     $     (0.76)     $    (22.03)     $     (4.59)     $    0.30
   Income (loss) from discontinued
     operations ........................           0.01            (0.04)           (2.18)            0.51           0.45
   Extraordinary loss ..................             --               --               --            (0.23)            --
                                            -----------      -----------      -----------      -----------      ---------
   Net income (loss) ...................    $     (0.45)     $     (0.80)     $    (24.21)     $     (4.31)     $    0.75
                                            ===========      ===========      ===========      ===========      =========

Diluted:
   Income (loss) from continuing
     operations ........................    $     (0.46)     $     (0.76)     $    (22.03)     $     (4.59)     $    0.29
   Income (loss) from discontinued
     operations ........................           0.01            (0.04)           (2.18)            0.51           0.44
   Extraordinary loss ..................             --               --               --            (0.23)            --
                                            -----------      -----------      -----------      -----------      ---------
   Net income (loss) ...................    $     (0.45)     $     (0.80)     $    (24.21)     $     (4.31)     $    0.73
                                            ===========      ===========      ===========      ===========      =========


 Shares used in computing earnings
  (loss) per share:
 Basic (1) .............................         73,688           73,688           73,459           48,601         58,613
                                            ===========      ===========      ===========      ===========      =========
 Diluted (1) ...........................         73,688           73,688           73,459           48,601         59,808
                                            ===========      ===========      ===========      ===========      =========


 OPERATING STATISTICS:
 Number of facilities (end of period) ..            326              364            413              428            202
 Average occupancy rate ................           87.4%            86.1%          85.4%            84.1%          82.9%
 Revenue by payor source:
   Medicaid ............................           49.3%            50.9%          46.9%            42.1%          41.6%
   Medicare ............................           30.2%            27.4%          27.5%            30.7%          29.4%
   Private and other ...................           20.5%            21.7%          25.6%            27.2%          29.0%
</TABLE>

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

(1)      Earnings per share and number of shares outstanding have been adjusted
         to reflect the three-for-one stock split effective December 30, 1997.


                                       22
<PAGE>

<TABLE>
<CAPTION>
                                                                FISCAL YEAR ENDED SEPTEMBER 30,
                                         -----------------------------------------------------------------------------
                                              2001            2000            1999            1998            1997
                                         ------------    ------------    ------------    ------------    ------------
                                                 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL DATA)
<S>                                      <C>             <C>             <C>             <C>             <C>
 BALANCE SHEET DATA:
 Working capital.....................    $    334,444    $    331,711    $ (1,829,065)   $    484,879    $    202,886
 Total assets........................    $  1,230,978    $  1,247,635    $    977,728    $  3,033,915    $    871,941
 Long-term debt, including current
   portion (2).......................    $  2,116,755    $  2,147,756    $  2,146,434    $  2,022,480    $    293,533
 Stockholders' equity (deficit)......    $ (1,471,509)   $ (1,440,177)   $ (1,386,019)   $    397,014    $    375,283
 Total capitalization................    $    645,246    $    707,579    $    760,415    $  1,625,466    $    668,816
</TABLE>

---------------
(2)    Long-term debt, including current portion, at September 30, 2001 includes
       approximately $2,057,067 classified as liabilities subject to compromise.
       At September 30, 2000 all long-term debt, including current portion, is
       classified as liabilities subject to compromise.

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

       The Selected Financial Data in Item 6 and the Company's consolidated
financial statements included herein set forth certain data with respect to the
financial position, results of operations and cash flows of the Company which
should be read in conjunction with the following discussion and analysis.

Overview

       The Company is one of the nation's largest providers of post-acute health
care services, primarily through the operation of its skilled nursing
facilities. At September 30, 2001, the Company's significant operations
consisted of 326 SNFs, including 9 stand-alone assisted living facilities, in 24
states with approximately 38,700 licensed beds and significant concentrations of
facilities and beds in five states and several metropolitan markets. The Company
also operates 13 owned, leased or managed LTAC hospitals with approximately 670
licensed beds in four states. See Note 21 of the Company's consolidated
financial statements for financial information about the Company's segments.

       As previously noted, on January 18, 2000, Mariner Post-Acute Network,
Inc., Mariner Health, and substantially all of their respective subsidiaries
filed voluntary petitions in the Bankruptcy Court under chapter 11 of title 11
of the Bankruptcy Code. The Company is presently operating its business as a
debtor-in-possession subject to the jurisdiction of the Bankruptcy Court. On
November 30, 2001, the Debtors filed their Joint Plan and related Disclosure
Statement with the Bankruptcy Court. On December 14, 2001 the Debtors filed an
amendment to both the Joint Plan and Disclosure Statement. AS NOTED PREVIOUSLY,
NO DISCLOSURE STATEMENT FOR THE JOINT PLAN HAS BEEN APPROVED BY THE BANKRUPTCY
COURT, AND NO ACCEPTANCES OF THE JOINT PLAN ARE BEING SOLICITED AT THIS TIME.
MOREOVER, THE JOINT PLAN HAS NOT BEEN CONFIRMED BY THE BANKRUPTCY COURT, AND
THERE CAN BE NO ASSURANCE THAT THE JOINT PLAN WILL BE CONFIRMED OR CONSUMMATED.

       A hearing on the Disclosure Statement has been set for January 16, 2002.
Until the Joint Plan is confirmed, the Chapter 11 Cases raise doubt about the
Company's ability to continue as a going concern. The ability of the Company to
continue as a going concern and the appropriateness of using the going concern
basis of accounting is dependent upon, among other things, the ability of the
Company to comply with the terms of its various commitments of
debtor-in-possession financing, confirmation of a plan of reorganization,
success of future operations after such confirmation, and the ability to
generate sufficient cash from operations and financing sources to meet
obligations. The Joint Plan will change materially the amounts currently
recorded in the Company's consolidated financial statements (see Note 3 of the
Company's consolidated financial statements). See "Business" for a summary of
the Joint Plan, which is qualified in its entirety by reference to the Joint
Plan filed as an exhibit to this Annual Report on Form 10-K.

       At a meeting of the Board of Directors of the Company duly called and
held on December 13, 2001, the Company's Amended and Restated Bylaws were
amended to change the Company's fiscal year end to December 31. Accordingly, the
Company will include audited financial statements for the year ended December
31, 2001 in a transitional Annual Report on Form 10-K with respect to this
period.


                                       23
<PAGE>

       Historically, the Company (i) operated a large contract rehabilitation
therapy business that provided comprehensive therapy programs and services, on a
contractual basis, to inpatient healthcare facilities throughout the United
States; (ii) operated outpatient rehabilitation therapy clinics; (iii) managed
specialty medical programs in acute-care hospitals; and (iv) operated home
health, hospice, and private duty nursing branches (the "Divested Businesses").
In addition, since the inception of the Chapter 11 Cases, the Company has
divested itself of 74 SNFs (the "Divested Facilities") through lease rejections,
lease expirations, facility sales and facility closures. The net effect of the
Divested Businesses and Divested Facilities has had a positive effect on the
Company's results of operations.

         On December 5, 2001, the Bankruptcy Court approved the sale of the APS
Division to Omnicare. The Company expects the sale of the APS Division to close
by January 31, 2002. Accordingly, the APS Division has been reflected as a
discontinued operation and is not included in the year to year comparison
presented below. See "Business-American Pharmaceutical Services" and Note 4 to
the Consolidated Financial Statements.

Results of Operations

       Net revenues for nursing home services accounted for $1,759.9 million, or
94.0%, and $1,768.7 million, or 94.1%, of the Company's $1,872.1 million and
$1,879.3 million total net revenues for the fiscal years ended September 30,
2001 and 2000, respectively. 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. The following table sets forth certain operating data for
the Company's SNFs as of the dates indicated.

<TABLE>
<CAPTION>
                                                              FISCAL YEAR ENDED SEPTEMBER 30,
                                                              --------------------------------
                                                               2001        2000         1999
                                                              --------------------------------

<S>                                                           <C>         <C>          <C>
Total average residents.................................      35,047      39,099       40,389
Weighted average licensed beds available for use........      40,105      45,389       47,267
Weighted average occupancy..............................        87.4%       86.1%        85.4%
</TABLE>

         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 the Company's revenues and profitability. Changes in
reimbursement rates, including the implementation of PPS, have adversely
affected the Company resulting in significantly lower Medicare revenues than the
Company would have received under the previous cost-based payment methodology.
Under this system, each skilled nursing facility received an interim payment
during the year then submitted an annual cost report prepared in accordance
with federal and state regulations, subject to audit and retroactive adjustment
in future periods. In the opinion of management, adequate provision has been
made for such adjustments and final settlements should not have a material
effect on financial position or results of operations.

       The table below sets forth the approximate percentage of the Company's
net patient revenues derived from the various sources of payment for the periods
indicated.

<TABLE>
<CAPTION>
                                                               FISCAL YEAR ENDED SEPTEMBER 30,
                                                               -------------------------------
                                                                 2001        2000        1999
                                                               -------------------------------
<S>                                                              <C>         <C>         <C>
Medicaid................................................         49.3%       50.9%       46.9%
Medicare................................................         30.2%       27.4%       27.5%
Private and other.......................................         20.5%       21.7%       25.6%
</TABLE>

Fiscal Year 2001 Compared to Fiscal Year 2000

         Net revenues totaled $1,872.1 million for fiscal year 2001, a decrease
of $7.2 million, or 0.4%, as compared to fiscal year 2000. Although, net
revenues for nursing home services experienced a decrease of $8.8 million, or
0.5%, net revenues of the Company's SNFs, excluding the Divested Facilities,
increased by 9.2%, or approximately $139.9 million. The increase resulted from
numerous factors including a 4.8% increase in Medicare reimbursement rates in
connection with the recent legislative relief provided by the BBRA and BIPA. In
addition, average per diem rates for Medicaid reimbursement increased 7.4% in
fiscal year 2001 as compared to fiscal year 2000. This increase was offset by a
decrease in revenues of $149.4 million due to the impact of the divestiture of
approximately 44 SNFs during fiscal year 2001 and 28 SNFs during fiscal year
2000. The Company anticipates that, in the aggregate, these divestitures will
improve operating results in the future (see Note 5 of the Company's
consolidated financial statements).

         Operating income (loss), which includes impairment of long-lived
assets of $19.4 million, recapitalization, indirect merger and other expenses
of $8.6 million, and loss on disposal of assets of $3.7 million for fiscal year
2000, increased from an operating loss of $6.6 million in fiscal 2000 to
operating income of $8.5 million in fiscal 2001. Total costs to expenses,
excluding impairment of long lived assets recapitalization, indirect merger and
other expenses, and loss on disposal of assets ("Operating Costs"), increased
$9.5 million from $1,854.2 million for fiscal year 2000 to $1,863.7 million for
fiscal year 2001.

         Operating costs for fiscal year 2001 include a charge of approximately
$33.4 million primarily relating to the settlement of qui tam actions included
in the Global Settlement (see Item 3 -- legal proceedings). In addition
ancillary service expenses increased $22.6 million, or 25.3%, from $89.5
million for fiscal year 2000 to $112.1 million for fiscal year 2001. The cost
of ancillary services, which includes pharmaceuticals, is affected by the level
of service provided and patient acuity. Insurance expense, which includes the
cost of premiums for risks insured through third party insurance carriers and
loss provisions for self insured retention and deductibles, also increased
$14.1 million, or 13.5%, for fiscal year 2001 as compared to fiscal year 2000.
The increase in insurance expense relates to an increase in premium costs and
increased loss provisions for incurred but not reported losses, primarily
related to the state of Florida. The increases within Operating Costs were
offset by decreases in salaries, wages and benefits of approximately $19.0
million, rent expense of $17.9 million, and general and administrative expenses
of $15.3 million, or 7.3%. Salaries, wages and benefits, which comprise 61.5%
and 62.8% of Operating Costs for fiscal year 2001 and 2000, respectively,
decreased primarily as a result of the divesture of approximately 72 SNFs
during the past two fiscal years. The decrease 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. See
"--Regulation." The decrease in rent expense from $80.6 million for fiscal year
2000 to $62.8 million for fiscal year 2001 was primarily a result of the
divestiture of facilities during both of the fiscal years. General and
administrative expenses, which include the indirect administrative costs
associated with operating the Company, decreased during fiscal year 2001 as
compared to fiscal year 2000 mainly as a result of the Company's continued
efforts to reduce overhead costs.

         Interest expense totalled $5.2 million for fiscal year 2001 as compared
to $71.9 million for fiscal year 2000. The decrease is due to the fact that
since the Petition Date, the Company discontinued accruing interest relating to
its debt facilities currently classified as liabilities subject to compromise in
accordance with the American Institute of Certified Public Accountants Statement
of Position 98-7, "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code" ("SOP 90-7"). Contractual interest for the fiscal years ended
September 30, 2001 and 2000 was $201.1 million and $238.8 million, respectively,
which is $195.9 million and $167.0 million in excess of interest expense
included in the Company's consolidated financial statements included herein.

         Reorganization items, consisting of income, expenses and other costs
directly related to the reorganization of the Company since the Chapter 11
Filings, increased approximately $36.9 million from $10.8 million in fiscal
year 2000 to $47.7 million in fiscal year 2001. The increase is attributable to
an increase of $14.1 million for professional fees incurred in connection with
the Chapter 11 Cases and an increase of $9.6 million for other reorganization
costs, which primarily relate to employee retention and severance, due to the
impact of the facilities divested during fiscal year 2001. In addition, net
gain on divestiture included in reorganization items decreased from $14.7
million to a net loss on divestiture of $1.5 million for fiscal year 2000 and
2001, respectively. During fiscal year 2000, the Company realized a net gain of
approximately $11.1 million due to a settlement agreement reached with Senior
Housing Properties Trust primarily related to the leasing of twenty-two Company
facilities. (See Note 5 of the Company consolidated financial statements).

         The results of the APS Division have been classified as a
discontinued operation. Income from operations of discontinued pharmacy
operations increased from a loss of $2.7 million for fiscal year 2000 to income
of $0.7 million for fiscal 2001. Revenues of the APS Division decreased by $22.7
million for fiscal year 2001 as compared to fiscal year 2000. The decrease is
primarily attributable to a reduction in the number of beds served as well as
decreased sales to new and existing customers. Total costs and expenses
decreased $28.4 million primarily as a result of an decrease of $15.9 million in
ancillary services expense, which is affected by the level of service provided
and patient acuity, and a decrease in salaries, wages and benefits of $15.9
million. See Note 4 of the Company's consolidated financial statements.


                                       24
<PAGE>

Fiscal Year 2000 Compared to Fiscal Year 1999

       Net revenues totaled $1,879.3 million for fiscal year 2000, a decrease of
$111.6 million as compared to fiscal year 1999. Net revenues decreased by $286.6
million primarily as a result of the termination of all contracts to provide
therapy services effective May 31, 1999 and the divestiture or closure of the
Company's outpatient rehabilitation clinics, hospital rehabilitation management
contract business, and substantially all home health operations during fiscal
year 1999. This decrease was offset by an increase in nursing home services of
$175.0 million, which is a result of a change in the payor mix year over year
and increased average per diem rates from Medicaid. In addition, during fiscal
year 1999 the Company recorded $122.0 million of adjustments to reduce the
estimated amount due from third-party payors, which included $39.3 million to
reduce the estimated amount receivable from cost reports filed, remaining open
or settled during the year. The remaining $82.7 million of adjustments was
recorded to reflect amounts due to the Medicare program for previously received
reimbursement and to reduce the estimated amount receivable from all Medicare
cost report appeal items, primarily pertaining to related party adjustments
asserted by the fiscal intermediaries through the reopening of certain Mariner
Health cost reports, primarily for 1995 and 1996 (see Note 1 of the Company's
consolidated financial statements). During fiscal year 2000, the Company
divested itself of approximately 29 owned, leased and managed skilled nursing
facilities which resulted in a decrease in net revenues of approximately, $33.7
million. The net results of these divestitures are expected to have a positive
effect on operating results (see Note 5 of the Company's consolidated financial
statements).

       Total costs and expenses, excluding impairment of long--lived assets,
recapitalization, indirect merger and other costs, and loss on disposal of
assets decreased approximately $380.5 million, or 17.0% to $1,854.2 million for
fiscal year 2000 as compared to fiscal year 1999. These costs and expenses
primarily consist of salaries, wages, and employee benefits, which represent
approximately $1,165.0 million, or 62.8%, of the total for fiscal year 2000 as
compared to $1,210.4 million, or 54.2%, of the total for fiscal year 1999.
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. See "- Regulation." The cost of ancillary


                                       25
<PAGE>

services, which includes pharmaceuticals, is also affected by the level of
service provided and patient acuity. Ancillary services decreased approximately
$129.8 million, or 59.2%, primarily due to the result of the implementation of
PPS and the insourcing of previously outsourced contract rehabilitation
therapists. General and administrative expenses, which include the indirect
administrative costs associated with operating the Company, decreased
approximately $63.6 million, or 23.4%, to $208.2 million for fiscal year 2000
as compared to fiscal year 1999 mainly as a result of the Company's continued
efforts to reduce overhead costs.

       Rent expense totaled $80.6 million for fiscal year 2000, a decrease of
$18.2 million, or 18.4%, as compared to fiscal year 1999. In addition,
depreciation and amortization expense totaled $49.2 million for fiscal year
2000, a decrease of $58.3 million, or 54.2%. These decreases were primarily a
result of the impact of the Divested Businesses, and the write-down of the
Company's long-lived assets during fiscal year 1999, and the divestiture of
facilities during fiscal year 2000 and 1999.

       Provision for bad debts totaled $30.2 million for fiscal year 2000, a
decrease of $73.3 million as compared to fiscal year 1999. The decrease
primarily relates to an increased provision for bad debts in fiscal year 1999.
The increase in fiscal year 1999 was primarily due to the effects of the
implementation of PPS, which reduced the cash flows of the therapy operations'
customers resulting in an increased aging and uncollectible accounts receivable.
In addition, the Company's accounts receivable continued to deteriorate during
the year due to the multiple complexities involved with the change to Medicare
PPS billing, system conversions and consolidation, and turnover of
facility-level billing and collection personnel (see Note 13 of the Company's
consolidated financial statements).

       In the fourth quarter of fiscal year 2000, the Company recorded a
non-cash charge related to the impairment of certain long-lived assets as
required by the Company's accounting policy, which follows the guidelines of
Statement of Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
("SFAS 121"). Under SFAS 121, an impairment loss is recognized when indicators
of impairment are present and the sum of the expected undiscounted cash flows
are not sufficient to recover the asset's carrying amount. The difference
between the carrying amount of the long-lived assets being evaluated and the
estimated fair value of the assets represents the impairment loss. Fair value is
based on market prices where available, estimates of market value, or
determinations using various valuation techniques including anticipated future
cash flows discounted at rates commensurate with the risks involved. This
analysis resulted in the identification and measurement of an impairment loss of
approximately $19.4 million during fiscal year 2000 relating principally to
several skilled nursing facilities with cash flow losses or where projected cash
flows were not sufficient to recover the carrying amount of their goodwill and
property and equipment. The impairment loss was comprised of $12.1 million of
goodwill and $7.3 million of property and equipment (see Note 14 of the
Company's consolidated financial statements).

       Recapitalization, indirect merger, and other expenses totaled
approximately $8.6 million for fiscal year 2000 and included approximately $5.5
million of costs incurred to outside professionals related to the Company's
defaults in connection with its indebtedness prior to the Petition Date,
approximately $2.8 million of costs incurred related to the closure of its
therapy business and $0.3 million of other expenses. Recapitalization, indirect
merger, and other expenses totaled approximately $61.9 million for fiscal year
1999 and included approximately $15.6 million of costs related to the Mariner
Merger, approximately $15.1 million of costs incurred to outside professionals
related to the Company's defaults in connection with its indebtedness and
approximately $31.2 million of other expenses.

       Loss on disposal of assets totaled $3.7 million during fiscal year 2000
which included a net loss of approximately $2.7 million as a result of the
Company's disposition of its remaining home health operations. Loss on disposal
of assets totaled $242.7 million during fiscal year 1999 which primarily
reflected the termination of contracts to provide therapy services and the
closure of the therapy business effective May 31, 1999. The Company also
recorded a loss on disposal of $2.5 million resulting from the sale of the
assets of the outpatient rehabilitation clinics and $4.9 million resulting from
the sale of the hospital rehabilitation management contract business (see Note 5
of the Company's consolidated financial statements).

       Interest expense totaled $71.9 million for fiscal year 2000, a decrease
of $132.3 million as compared fiscal year 1999. The decrease is due to the fact
that the Company has discontinued accruing interest relating to its debt
facilities currently classified as liabilities subject to compromise effective
January 18, 2000 in accordance with SOP 90-7. Contractual interest for fiscal
year 2000 was $238.9 million which is $167.0 million in excess of interest
expense included in the Company's consolidated financial statements for fiscal
year 2000.


                                       26
<PAGE>

       Reorganization items totaled $10.8 million for fiscal year 2000.
Reorganization items consist of income, expenses and other costs directly
related to the reorganization of the Company since the Chapter 11 Filings (see
Note 3 of the Company's consolidated financial statements).

       The results of the APS Division have been classified as a discontinued
operation. Income from operations of discontinued pharmacy operations increased
from a loss of $160.3 million for fiscal year 1999 to a loss of $2.7 million for
fiscal 2000. Revenues of the APS Division decreased by $43.3 million for fiscal
year 2000 as compared to fiscal year 1999. The majority of the decrease is
attributable to a reduction in the number of beds served as well as lower
revenues attributable to the loss of a contract to provide respiratory services
to a major customer. The remaining decrease is principally attributable to lower
per unit pricing charged to customers as a result of PPS. Total costs and
expenses of the APS Division, excluding a charge for impairment of long-lived
assets of $120.8 million in fiscal 1999, decreased $78.8 million. The decreases
were primarily a result of decreases in ancillary services of $23.5 million and
provision for bad debits of $26.8 million. See Note 4 of the Company's
consolidated financial statements.

Seasonality

       The Company's 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.

Liquidity and Capital Resources of the Company

    Overview.

       Cash and cash equivalents were $209.0 million at September 30, 2001. The
Company and its subsidiaries also have available $75.0 million in
debtor-in-possession financing, as described below, none of which was borrowed
as of such date except for approximately $6.0 million of letters of credit
issued under the Company DIP Financing (as defined below). In addition, $7.9
million of letters of credit are issued under Mariner Health DIP Financing (as
defined below), collateralized by $8.3 million of cash collateral with PNC Bank,
National Association ("PNC") which cash collateral is not available for other
purposes.

       Cash provided by operating activities of continuing operations was $139.6
million for the fiscal year ended September 30, 2001 as compared to $126.9
million provided by operating activities of continuing operations for the fiscal
year September 30, 2000. Receivables increased $58.0 million in the fiscal year
ended September 30, 2001 principally in the Company's nursing home segment
resulting from an increase in average days outstanding, increased reimbursement
rates under the Medicare and Medicaid programs, and an increase in weighted
average occupancy in fiscal 2001 as compared to fiscal 2000. Long-term insurance
reserves increased approximately $53.9 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.

       Cash utilized by investing activities was $19.4 million for the fiscal
year ended September 30, 2001 as compared to $2.2 million provided by investing
activities for the fiscal year ended September 30, 2000. Cash utilized by
investing activities primarily consisted of the use of $31.9 million related to
capital expenditures for the year ended September 30, 2001. Cash utilized by
investing activities also included $7.9 million of proceeds from the sale of
property, equipment and other assets (see Note 5 of the Company's consolidated
financial statements).

       Cash utilized by financing activities was $39.7 million in the fiscal
year ended September 30, 2001 as compared to cash utilized by financing
activities of $10.3 million for the year ended September 30, 2000. Cash utilized
by financing activities for the fiscal years ended September 30, 2001 and 2000
primarily represent principal repayments of prepetition long-term debt,
including repayments made against the Company's senior credit facility as a
result of the application of a portion of the cash proceeds received from the
sales of certain facilities and other assets, adequate protection payments with
regard to certain mortgaged facilities, and notional amounts related to certain
capital equipment leases as adequate protection payments (see "-
Debtor-in-Possession Financing for the Company"). In addition, cash utilized by
financing activities for the fiscal year ended September 30, 2001 includes a
$15.0 million adequate protection payment by Mariner Health to the MHG Senior
Credit Facility Claim Holders in connection with the extension of the maturity
date of the Mariner Health DIP Financing (as defined below) to December 31, 2001
(see "- Debtor-in-Possession Financing for Mariner Health").

       The primary sources of revenue for the Company 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 the Company's 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. See "Business--Regulation."

       For cost reporting periods that ended before the start 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


                                       27
<PAGE>

that could be further delayed by appeals and litigation. All outstanding
pre-petition cost reports are expected to be settled in connection with the
Global Settlement. See "Item 3 - Legal Proceedings."

       The Company provides certain services and supplies between subsidiary
companies, some of which are charged at cost and others of which are charged at
market rates. Subject to certain exceptions, Medicare's "related organization
principle" generally requires that services and supplies furnished to nursing
facilities by related entities be included in the nursing facility's
reimbursable cost at the cost of the supplying entity. The Company believes that
the services and supplies furnished to nursing facilities at market rates
qualify for exception to the related organization principle. Certain of the
Company's Medicare fiscal intermediaries have taken the position that the
related party transactions do not qualify for this exception to the related
party rules and have made adjustments that reduce Medicare allowable cost to the
cost of the supplying entity. During the third quarter of fiscal 1999, the
intermediaries for the Mariner Health facilities reopened previously settled
cost reports to impose such related party adjustments for services furnished to
the facilities by Mariner Health's rehabilitation subsidiary. All related party
adjustments are expected to be settled in connection with the Global Settlement.
See "Item 3 - Legal Proceedings." If not resolved in the Global Settlement,
these items will be appealed to the Provider Reimbursement Review Board (the
"PRRB") and through the full appeal process as is warranted. The adjustments
affect only periods during which the facilities were reimbursed for Medicare on
the basis of reasonable and necessary cost; there would not be any impact for
periods that are reimbursed under PPS.

       During the third quarter of fiscal 1999, the Medicare fiscal
intermediaries for the subsidiaries operated by Mariner Health reopened
approximately fifty 1995 and 1996 cost reports and issued revised notices of
program reimbursement ("NPRs") imposing prudent buyer or related party
adjustments as well as applying an administrative resolution related to the cost
report treatment of admissions costs. The reopenings resulted in reductions in
reimbursable costs of approximately $16.9 million. The Company believes that it
has substantial arguments for both issues and has appealed the adjustments to
the PRRB. In lieu of recoupment by the fiscal intermediary, the Company reached
an agreement with CMS and the intermediary and implemented an extended repayment
plan. The balance as of the date of the agreement was approximately $15.9
million, which was repaid over a period of one year. The intermediary has
completed audit procedures but has not issued NPR's for most of the remaining
cost based Mariner Health cost reports (1997 and 1998). As part of the chapter
11 process, the Company and Mariner Health entered into stipulations with the
U.S. Department of Health and Human Services whereby, among other things, CMS
will not recoup certain prepetition overpayments for the pendancy of obligations
under the Company's and Mariner Health's DIP Financings (as defined below)
obligations. Accordingly, repayment obligations which may arise from the
issuance of NPRs may be stayed for an interim period. Should the NPRs result in
a repayment requirement not within the purview of the stipulation, or after the
pendancy of obligations under the DIP Financings, the Company and Mariner Health
would seek to enter into an extended repayment plan with CMS at that time.
However, the Company expects that all of the open cost-based cost reporting
periods will be resolved in connection with the Global Settlement. See "Item
3-Legal Proceedings."

       Although the Company has over the course of the last year seen a
reduction in its labor costs 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 the Company plans to continue operations. While this
has not yet had a material adverse effect on the Company's operations, there can
be no assurance that an increase in nursing staff wages will not have such an
effect in the future. The Company believes that these increases are a result of
a decrease in the number of people entering the nursing profession and an
increased demand for nurses in the healthcare industry. The Company has
experienced increased staffing requirements in order to maintain compliance with
various Medicaid Programs. The Company anticipates 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. The Company is exploring ways in which
to address this problem, including recruiting labor from overseas and providing
incentives for nurses to remain in the Company's employment.

       GL/PL insurance costs for the long-term care industry, particularly in
Florida and Texas, where the Company maintains 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 the


                                       28
<PAGE>

Company operates. The Company anticipates that this trend will continue, and
that its GL/PL costs will continue to increase. These increases have already had
an adverse effect on the Company's operations. No assurance can be given that
the Company's GL/PL costs will not continue to rise, or that GL/PL coverage will
be available to the Company in the future.

       The Company currently purchases excess liability insurance only. Due to
the hardening of the liability insurance market for the long-term care industry,
the Company currently maintains an unaggregated $1.0 million self-insured
retention per claim. Prior to July 31, 1999, the Company's liability insurance
policies included aggregated stop loss features limiting the Company's
out-of-pocket exposure. With stop loss insurance unavailable to the Company, the
expected direct costs have continued to increase. This increased exposure will
have a delayed negative effect on operating cash flow as claims develop over the
next several years.

       As previously noted, the Company filed the Joint Plan and is hopeful that
it will be confirmed, which, if confirmed, will allow the Company to formally
combine the MPAN Debtors' operations with the MHG Debtors' operations. In the
event the Joint plan is not confirmed, the MHG Senior Credit Facility Claim
Holders may seek, in the Bankruptcy Court, confirmation of the alternative plan
pertaining only to MHG Debtors (the "MHG Stand Alone Plan"). The adequacy of
the proposed disclosure statement with respect to the MHG Stand Alone Plan was
approved by the Bankruptcy Court at a hearing held on August 7, 2001. The MHG
Stand Alone Plan contemplates the termination of the existing Management
Protocol pursuant to which Mariner Post-Acute Network, Inc. manages the MHG
Debtors' assets. In the event that the MHG Stand Alone Plan is confirmed in the
future by the Bankruptcy Court, the revenue to Mariner Post-Acute Network, Inc.
provided by the existing Management Protocol would no longer be available and
this loss of revenues would have a material adverse effect on Mariner
Post-Acute Network, Inc. Accordingly, if the Joint Plan is not confirmed and
the MHG Stand Alone Plan is confirmed, the Company will be required to
substantially reduce its overhead costs in order to accommodate the loss of
revenue associated with the Management Protocol. No assurance can be given that
Mariner Post-Acute Network, Inc. will be able to reduce its overhead costs in
an expeditious fashion. On December 5, 2001 the Bankruptcy Court approved an
amendment to the terms of the existing Management Protocol that reduces the
management payment received by Mariner Post-Acute Network, Inc. from the MHG
Debtors by $1.0 million per month effective November 1, 2001.

    Prepetition Debt.

       Due to the failure to make scheduled payments, comply with certain
financial covenants, and the commencement of the Chapter 11 Cases, the Company
is in default on all, or substantially all, of its prepetition debt obligations.
Except as otherwise may be determined by the Bankruptcy Court, the automatic
stay protection afforded by the Bankruptcy Code prevents any action from being
taken with regard to any of the defaults under the prepetition debt obligations.
These obligations are classified as liabilities subject to compromise at
September 30, 2001.

       The obligations of Mariner Post-Acute Network, Inc. under its senior
credit facility, as well as obligations in respect of a synthetic lease
transaction and under a deficiency note relating to a total return swap
terminated in August 1999, are guaranteed by substantially all of the Mariner
Post-Acute Network, Inc. subsidiaries other than the Omega Debtors (as defined
below), Mariner Health and the Mariner Health Subsidiaries, and are secured by
substantially all of the otherwise unencumbered owned assets of Mariner
Post-Acute Network, Inc. and such subsidiaries. Mariner Health's obligations
under its senior credit facility are guaranteed by substantially all of the
Mariner Health Subsidiaries and are secured by substantially all of the
otherwise unencumbered assets of Mariner Health and such subsidiary guarantors.
Unlike the MPAN Debtors, the MHG Debtors neither guarantee the obligations of
Mariner Post-Acute Network, Inc. under the Mariner Post-Acute Network, Inc.
debt facilities (other than guaranteeing certain obligations of Mariner
Post-Acute Network, Inc. relating to the latter's prepetition total return swap
transaction) nor pledge their assets to secure such obligations.
Correspondingly, the MPAN Debtors do not guarantee or assume any obligations
under the Mariner Health debt facilities. The MHG Debtors are not subject to
the covenants contained in the MPAN Debtors' debt facilities, and the covenants
contained in the Mariner Health debt facilities are not binding on the MPAN
Debtors.

       No principal payments have been made on prepetition indebtedness since
the Petition Date with the exception of repayments made against the Company's
senior credit facilities, primarily as a result of the application of a portion
of the cash proceeds received from the sales of certain facilities and other
assets, adequate protection payments with regard to certain mortgaged
facilities, and notional amounts related to certain capital equipment leases as
adequate protection payments, as more particularly described below (see "-
Debtor-in-Possession


                                       29
<PAGE>

Financing for the Company"). Mariner Health made a $15.0 million adequate
protection payment to the MHG Senior Credit Facility Claim Holders in connection
with the extension of the Mariner Health DIP Financing (as defined below)
maturity date to December 31, 2001 from the July 19, 2001 maturity date.
Subsequently, an additional adequate protection payment of $7.5 million was made
to the MHG Senior Credit Facility Claim Holders in connection with the further
extension of the maturity of the Mariner Health DIP financing to April 1, 2002
(see "- Debtor-in-Possession Financing for Mariner Health").

    Debtor-in-Possession Financing for the Company.

       In connection with the Chapter 11 Filings, the MPAN Debtors entered into
a $100.0 million debtor-in-possession financing arrangement (as amended from
time to time, the "MPAN DIP Financing") with a group of lenders (the "MPAN DIP
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 ("Foothill"). On March 20, 2000 the Bankruptcy Court
granted final approval (the "Final MPAN DIP Order") of the MPAN DIP Financing.

       The MPAN DIP Financing initially established a $100.0 million secured
revolving credit facility to provide funds for working capital and other lawful
corporate purposes for use by the MPAN Debtors. At the request of the MPAN
Debtors, the size of the MPAN DIP Financing was reduced to $50.0 million on
January 11, 2001. The agreement related to the MPAN DIP Financing (the "MPAN DIP
Credit Agreement") provides that amounts outstanding under the MPAN DIP
Financing may not at any time exceed the maximum borrowing amounts established
for the MPAN Debtors under the Final MPAN DIP Order or the MPAN borrowing base
of eligible accounts receivable (the "MPAN Borrowing Base"). Up to $10.0 million
of the MPAN DIP Financing may be utilized for the issuance of letters of credit
as needed in the business of the MPAN Debtors. Interest accrues 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 ("ABR") plus three percent (3%) and
is payable monthly in arrears. During the existence and continuation of a
default in the payment of any amount due and payable by the MPAN Debtors under
the MPAN DIP Credit Agreement, interest will accrue at the default rate of ABR
plus five percent (5%) per annum.

       The terms of the MPAN DIP Financing require that Mariner Post-Acute
Network, Inc. prepay principal to the extent that the principal amount
outstanding under the MPAN DIP Financing at any time exceeds the MPAN Borrowing
Base then in effect. To the extent proceeds of loans under the MPAN DIP
Financing are used to complete the construction of certain healthcare facilities
(which proceeds are not permitted to exceed $8.8 million), proceeds from the
sale of any such properties must be used first to repay any portion of the loans
made pursuant to the MPAN DIP Financing, with 75% of any remaining net cash
proceeds to be applied as an adequate protection payment to the lenders under
the MPAN Debtors' prepetition senior secured credit facility, and the remaining
25% of such excess net cash proceeds to be retained by the MPAN Debtors as
additional working capital. Pursuant to the terms of the Final MPAN DIP Order,
75% of the net cash proceeds of other asset sales approved by the Bankruptcy
Court and the requisite MPAN DIP Lenders are to be applied as an adequate
protection payment to the lenders under the MPAN Debtors' prepetition senior
credit facility. Mariner Post-Acute Network, Inc. has the right to make optional
prepayments in increments of $1.0 million, and to reduce the commitment under
the MPAN DIP Credit Agreement in increments of $5.0 million.

       The obligations of Mariner Post-Acute Network, Inc. under the MPAN DIP
Credit Agreement are jointly and severally guaranteed by each of the other MPAN
Debtors, except for certain MPAN Debtors owning facilities mortgaged to Omega
Healthcare Investors, Inc. (the "Omega Debtors") whose guarantee is limited to
the negative cash flows of the Omega Debtors, pursuant to the MPAN DIP Credit
Agreement, the Final MPAN DIP Order and the Final MPAN Cash Collateral Order
(defined below). Under the terms of the Final MPAN DIP Order, the obligations of
the MPAN Debtors under the MPAN DIP Credit Agreement (the "MPAN DIP
Obligations") constitute allowed super priority administrative expense claims
pursuant to section 364(c)(1) of the Bankruptcy Code (subject to a carve out for
certain professional fees and expenses incurred by the MPAN Debtors). The MPAN
DIP Obligations are secured by perfected liens on all or substantially all of
the assets of the MPAN Debtors (excluding bankruptcy causes of action), the
priority of which liens (relative to prepetition creditors having valid,
non-avoidable, perfected liens in those assets and to any "adequate protection"
liens granted by the Bankruptcy Court) is established in the Final MPAN DIP
Order and the related cash collateral order entered by the Bankruptcy Court (the
"Final MPAN Cash Collateral Order"). The Bankruptcy Court has also granted
certain prepetition creditors of the MPAN Debtors replacement liens and other
rights as "adequate protection" against any diminution of the value of their
existing collateral that may result from allowing the MPAN Debtors to use cash
collateral in


                                       30
<PAGE>

which such creditors had valid, non-avoidable and perfected liens as of the
Petition Date. The discussion contained in this paragraph is qualified in its
entirety by reference to the Final MPAN DIP Order, the Final MPAN Cash
Collateral Order, and related stipulations, and reference should be made to such
orders (which are available from the Bankruptcy Court) and stipulations for a
more complete description of such terms.

       The MPAN DIP Credit Agreement contains customary representations,
warranties and other affirmative and restrictive covenants of the MPAN Debtors,
as well as certain financial covenants relating to minimum EBITDA, maximum
capital expenditures, and minimum patient census. The breach of such
representations, warranties or covenants, to the extent not waived or cured
within any applicable grace or cure periods, could result in MPAN Debtors being
unable to obtain further advances under the MPAN DIP Financing and possibly the
exercise of remedies by the MPAN DIP Lenders, either of which events could
materially impair the ability of the MPAN Debtors to successfully reorganize in
chapter 11 and to operate as a going concern. Such a default may also impair the
ability of the MPAN Debtors to use cash collateral to fund operations. At
September 30, 2001, no revolving loans were outstanding under the MPAN DIP
Financing and approximately $6.0 million of letters of credit issued under the
MPAN DIP Credit Agreement were outstanding. Mariner Post-Acute Network, Inc. is
currently not in compliance with the EBITDA covenant contained in the MPAN DIP
Credit Agreement. The Company's failure to comply with this EBITDA covenant is
principally the result of a charge taken in connection with the Global
Settlement with CMS. The MPAN Debtors have obtained a waiver of this covenant
violation from the MPAN DIP Lenders.

       The outstanding principal of the MPAN DIP Financing, together with all
accrued and unpaid interest and all other obligations thereunder, was originally
due and payable one year from the Petition Date. With the approval of the
Bankruptcy Court, the MPAN Debtors, Chase and the requisite MPAN DIP Lenders
amended the MPAN DIP Credit Agreement as of January 11, 2001, to (among other
things) extend the maturity date of the MPAN DIP Financing from January 19, 2001
to August 31, 2001. Effective as of January 19, 2001, the MPAN Debtors exercised
its right under the MPAN DIP Credit Agreement to reduce the $100.0 million MPAN
DIP Financing commitment to $50.0 million. The scheduled termination date of the
MPAN DIP Credit Agreement was subsequently extended to December 31, 2001 by
amendment to the MPAN DIP Credit Agreement dated as of June 26, 2001, and
approved by the Bankruptcy Court on August 7, 2001. The scheduled termination
date of the MPAN DIP Credit Agreement was again subsequently extended to April
1, 2002 by amendment to the MPAN DIP Credit Agreement dated as of November 16,
2001, and approved by the Bankruptcy Court on December 5, 2001.

    Debtor-in-Possession Financing for Mariner Health.

       Among the orders entered by the Bankruptcy Court on the Petition Date in
the Chapter 11 Cases of Mariner Health and its subsidiaries were orders
approving (a) the use of cash collateral by the MHG Debtors, and (b) the funding
of up to $50.0 million in principal amount at any time outstanding under a
debtor-in-possession financing arrangement (the "Mariner Health DIP Financing"
and together with the MPAN DIP Financing, the "DIP Financings") pursuant to that
certain Debtor-in-Possession Credit Agreement dated as of January 20, 2000 (as
amended from time to time, the "Mariner Health DIP Credit Agreement") by and
among Mariner Health and each of the other MHG Debtors, as co-borrowers
thereunder, the lenders signatory thereto as lenders (the "Mariner Health DIP
Lenders"), First Union National Bank, as Syndication Agent, PNC Capital Markets,
Inc. and First Union Securities, Inc., as co-arrangers, and PNC, as
Administrative Agent and Collateral Agent. After a final hearing on February 16,
2000, the Bankruptcy Court entered into an order granting final approval of the
Mariner Health DIP Financing (the "Final Mariner Health DIP Order").

       The Mariner Health DIP Credit Agreement initially established a $50.0
million secured revolving credit facility comprised of a $40.0 million tranche A
revolving loan commitment and a $10.0 million tranche B revolving loan
commitment. At the request of Mariner Health, the size of the Mariner Health DIP
Financing was reduced to $25.0 million on January 19, 2001. As a result of such
reduction, the $10.0 million tranche B revolving loan commitment was eliminated.
Under the Mariner Health DIP Credit Agreement's terms, advances under the
Mariner Health DIP Financing may be used by the MHG Debtors (and to a limited
degree, by certain joint venture subsidiaries of Mariner Health that are not
debtors in the Mariner Health Chapter 11 Proceedings) for working capital and
other lawful corporate purposes. Amounts outstanding under the Mariner Health
DIP Financing may not at any time exceed the maximum borrowing amounts
established for the MHG Debtors under the Final Mariner Health DIP Order.
Originally, up to $5.0 million of the Mariner Health DIP Financing could be
utilized for the issuance of letters of credit as needed in the businesses of
the MHG Debtors; however, the letter of credit sublimit


                                       31
<PAGE>

was increased to $10.0 million pursuant to the Tenth Amendment to the Mariner
Health DIP Credit Agreement dated as of March 20, 2001 (the "Tenth Mariner
Health DIP Amendment").

       Interest accrues on the principal amount outstanding under the Mariner
Health 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 is 250 basis
points. Such interest is due and payable monthly in arrears. During the
existence and continuation of any event of default under the Mariner Health DIP
Credit Agreement, the interest rates normally applicable to loans under the
Mariner Health DIP Financing will be increased by another 250 basis points per
annum.

       The outstanding principal of the Mariner Health DIP Financing, together
with all accrued and unpaid interest and all other obligations thereunder, are
due and payable on the "Commitment Termination Date", originally defined as the
first to occur of (i) January 19, 2001, unless extended (see discussion below
regarding extensions to date); (ii) the effective date of a joint plan of
reorganization for the MHG Debtors; (iii) the date of termination of the
exclusivity rights of the MHG Debtors to file a plan of reorganization; (iv) the
filing by the MHG Debtors of any plan of reorganization (or the modification of
any such plan previously filed with the Bankruptcy Court) not previously
approved by the holders of at least 66-2/3% of the outstanding loans or
commitments under the Mariner Health DIP Financing; (v) the date of termination
of the commitments under the Mariner Health DIP Credit Agreement during the
continuation of an event of default thereunder; or (vi) the date on which all or
substantially all of the assets or stock of the MHG Debtors is sold or otherwise
transferred. Under the Mariner Health DIP Credit Agreement's current terms, the
MHG Debtors must also prepay principal to the extent that the principal amount
outstanding under the Mariner Health DIP Financing at any time exceeds the
Mariner Health borrowing base then in effect. The Mariner Health borrowing base
for any month is an amount equal to $7.5 million in excess of the "Working
Capital Facility" borrowings projected for such month in Mariner Health's year
2000 DIP budget, plus (as a result of the Tenth Mariner Health DIP Amendment),
the undrawn availability under the $7.9 million letter of credit issued by PNC
pursuant to the Mariner Health DIP Credit Agreement to secure Mariner Health's
obligations in respect of its replacement surety program (the "Replacement MHG
Surety LOC").

       The Mariner Health DIP Credit Agreement also provides for mandatory
prepayments under the following circumstances: (a) with net cash proceeds from
asset sales, the incurrence of certain debt, the issuance of new equity, the
receipt of tax refunds exceeding $100,000 in the aggregate, and the receipt of
casualty proceeds in excess of $100,000 that are not applied within 60 days
after receipt to the repair, rebuilding, restoration or replacement of the
assets damaged or condemned (or committed within such period of time to be so
applied); and (b) on each business day, the amount of cash held by the MHG
Debtors in excess of the sum of $5.0 million plus the aggregate sum of the
minimum amount required by depositary banks to be kept in deposit accounts,
concentration accounts and other accounts with such banks. Amounts prepaid
pursuant to clause (a) of the immediately preceding sentence will permanently
reduce the amount of the Mariner Health DIP Financing commitments on a dollar
for dollar basis. Amounts prepaid pursuant to clause (b) of the same sentence
will not permanently reduce such commitments. The MHG Debtors have the right to
make optional prepayments in the minimum principal amount of $1.0 million, and
in increments of $100,000 in excess thereof, and, on three business days'
notice, to reduce the commitments under the Mariner Health DIP Credit Agreement
in the minimum amount of $5.0 million, or in increments of $1.0 million in
excess thereof.

       As provided in the Final Mariner Health DIP Order, the obligations of the
MHG Debtors under the Mariner Health DIP Credit Agreement (together with certain
potential cash management system liabilities secured on a pari passu basis
therewith, the "Mariner Health DIP Obligations") constitute allowed super
priority administrative expense claims pursuant to section 364(c)(1) of the
Bankruptcy Code (subject to a carve-out for certain professional fees and
expenses incurred by the Mariner Debtors). The Mariner Health DIP Obligations
are secured by perfected liens on all or substantially all of the assets of the
MHG Debtors (excluding bankruptcy causes of action), the priority of which liens
(relative to prepetition creditors having valid, non-avoidable, perfected liens
in those assets and to any "adequate protection" liens granted by the Bankruptcy
Court) is established in the Final Mariner Health DIP Order and the related cash
collateral orders entered by the Bankruptcy Court (the "Mariner Health Cash
Collateral Order"). The Bankruptcy Court has also granted certain prepetition
creditors of the MHG Debtors replacement liens and other rights as "adequate
protection" against any diminution of the value of their existing collateral
that may result from allowing the MHG Debtors to use cash collateral in which
such creditors had valid, non-avoidable and perfected liens as of the Chapter 11
Filings. The discussion contained in this paragraph is qualified in its entirety
by reference to the Final Mariner Health DIP Order, the related Mariner Health
Cash


                                       32
<PAGE>

Collateral Orders, and related stipulations, and reference should be made to
such orders (which are available from the Bankruptcy Court) and stipulations for
a more complete description of such terms.

       The Mariner Health DIP Credit Agreement contains customary
representations, warranties and other affirmative and restrictive covenants of
the MHG Debtors, as well as certain financial covenants. The breach of such
representations, warranties or covenants, to the extent not waived or cured
within any applicable grace or cure periods, could result in the MHG Debtors
being unable to obtain further advances under the Mariner Health DIP Financing
and possibly the exercise of remedies by the Mariner Health DIP Lenders, either
of which events could materially impair the ability of the MHG Debtors to
successfully reorganize in chapter 11 and to operate as a going concern.

       Among its other restrictive covenants, the Mariner Health DIP Credit
Agreement limits affiliate transactions with the MPAN Debtors, but does
contemplate weekly overhead payments to Mariner Post-Acute Network, Inc. equal
to 1.25% of projected net inpatient revenues for the then-current month, subject
to a monthly "true-up," such that the payments for such month equal 5% of actual
net inpatient revenues of the MHG Debtors. In connection with the thirteenth
amendment to the Mariner Health DIP Credit Agreement approved by the Bankruptcy
court on December 5, 2001, the overhead payments to Mariner Post-Acute Network,
Inc. under the Management Protocol were reduced by $1.0 million per month
effective retroactively to November 1, 2001. Such payments may be suspended by
the MHG Debtors if certain defaults specified in the Mariner Health DIP Credit
Agreement occur and are continuing, though such fees will still accrue and will
become due and payable if and when the subject default has been cured or waived.

       By amendment dated as of January 19, 2001, and with the approval of the
Bankruptcy Court, the Mariner Health DIP Credit Agreement was amended to extend
the stated termination date of the Mariner Health DIP Financing from January 19,
2001 to July 19, 2001 (which has subsequently been extended by amendment dated
as of July 19, 2001, to December 31, 2001, and again extended by amendment dated
November 15, 2001 to April 1, 2002), and to reduce the maximum amount of the
Mariner Health DIP Financing from $50.0 million to $25.0 million (as a result of
which the tranche B component was eliminated). Such amendment also, among other
things, extended the deadline for filing a plan of reorganization to February
20, 2001, imposed a 25 basis point utilization fee on borrowings under the
Mariner Health DIP Financing in excess of $5.0 million and amended certain
reporting requirements. An amendment dated as of March 20, 2001, among other
things, increased the letter of credit sublimit and the borrowing base to permit
the issuance of a $7.9 million letter of credit to facilitate implementation of
a replacement surety bond program by Mariner Health, which was issued in July
2001. Because the Replacement MHG Surety LOC expires well after the Commitment
Termination Date for the Mariner Health DIP Facility, the March 20, 2001
amendment required such letter of credit to be 105% cash collateralized.

       On or about May 14, 2001, Mariner Health and representatives of the
Mariner Health DIP Lenders and the MHG Senior Credit Facility Claim Holders
entered into a stipulation (the "May 14 Stipulation") (i) extending from May 21,
2000 to July 20, 2001, the MHG Debtors' exclusive right to file a plan of
reorganization, and (ii) if the MHG Debtors filed a plan within that time,
extending the MHG Debtor's exclusive right to solicit acceptances of such plan
to September 20, 2001; however, such exclusivity rights were modified in that
stipulation to permit MHG Senior Credit Facility Claim Holders to file their own
plan or plans of reorganization for the MHG Debtors and to solicit acceptances
thereto, or (at the sole option of the MHG Senior Credit Facility Claim Holders)
to file a joint plan of reorganization with the MHG Debtors and solicit
acceptances thereto. The MHG Debtor's plan exclusivity was subsequently
extended, most recently until March 29, 2002. The May 14 Stipulation was
subsequently approved by the Bankruptcy Court. The May 14 Stipulation
constituted a waiver by the Mariner Health DIP Lenders of the covenant in the
Mariner Health DIP Credit Agreement that the MHG Debtors file a plan of
reorganization by a certain time and an agreement that the modification of the
MHG Debtors' exclusivity rights pursuant to that stipulation would not
constitute an event of default under the Mariner Health DIP Credit Agreement.

    Omega Settlement.

       As of the Petition Date, Professional Health Care Management, Inc.
("PHCMI"), 13 of its subsidiaries ("PHCMI Subsidiaries"), Living Centers-PHCM,
Inc. ("LC-PHCM", and together with PHCMI and the PHCMI Subsidiaries, "Omega
Debtors"), and all MPAN Debtors, were indebted to Omega Healthcare Investors,
Inc. ("Omega") in connection with a 1992 loan in the original principal amount
of $58.8 million ("Omega Loan"). The Omega Loan was guaranteed by the PHCMI
Subsidiaries and LC-PHCM ("Omega Guaranties"). GranCare was also obligated under
a "keepwell agreement" relating to PHCMI. The Omega Loan and the Omega
Guaranties were


                                       33
<PAGE>

secured by first mortgages on 13 skilled nursing facilities operated by the
PHCMI Subsidiaries in Michigan, and three more operated by PHCMI in North
Carolina (collectively, "Omega Facilities").

       Following extensive negotiations with Omega, MPAN, GranCare, and the
Omega Debtors implemented a consensual restructuring of the Omega indebtedness
and settlement of the disputes relating to the Omega Loan. As the first step of
this restructuring, effective February 1, 2001, with the approval of Omega and
the Bankruptcy Court, PHCMI sold the four worst performing facilities within the
Omega portfolio ("Ciena Facilities") to an affiliate of Ciena Healthcare
Management, Inc., in exchange for, among other things, a $9.0 million purchase
money note, secured by first mortgages on the Ciena Facilities ("Ciena Purchase
Money Loan"). PHCMI contemporaneously assigned an undivided 50% interest in the
Ciena Purchase Money Loan to Omega in return for a $4.5 million credit against
the obligations of the Omega Debtors in connection with the Omega Loan. The
immediate effect of this transition was to eliminate four facilities that
generated substantial negative cash flow from the Omega Debtors' portfolio as
well as to reduce the indebtedness to Omega.

       As the second step of the Omega restructuring, Omega, MPAN, GranCare, and
the Omega Debtors entered into a settlement agreement dated as of August 1,
2001, pursuant to which, among other things, (a) PHCMI agreed to transfer its
residual 50% interest in the Ciena Purchase Money Loan to Omega for
approximately $3.5 million, plus 50% of principal payments received under the
Ciena Purchase Money Loan in excess of $8 million and interest payments received
under the Ciena Purchase Money Loan in excess of $960,000 annually; (b) the
parties agreed to amend and restate the Omega Loan (the "Amended Omega Loan") to
reflect an outstanding principal indebtedness of approximately $59.7 million, to
pay interest on the Omega Loan for the period from January 1, 2000 to closing of
the restructure at a compromise rate, to reduce the interest rate applicable
after closing substantially (to 11.57% per annum, from more than 16%), to extend
the maturity of the Amended Omega Loan from 2007 to 2010, with an option for
PHCMI to extend the loan to 2021, to grant PHCMI the right to prepay the Amended
Omega Loan in full between February 1, 2005 and July 31, 2005 at 103% of par,
plus accrued and unpaid interest; and to provide for payment to Omega of an
annual amendment fee (25% of free cash flow from the remaining 12 Omega
Facilities); (c) PHCMI agreed to pay Omega (until the PHCMI Majority Equity Sale
referred to below is consummated) a monthly amendment fee equal to 50% of the
"return on equity" component of Medicaid reimbursement for the North Carolina
Omega Facilities; and (d) the Company agreed to manage, or cause one of its
wholly-owned Debtor subsidiaries to manage, the remaining Omega Facilities. The
compensation for such management services includes 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 remaining Omega Facilities ("Omega Incentive
Management Fee"). The "keepwell" agreement of GranCare and certain other
liabilities of the Omega Debtors to Omega arising prior to closing were to be
terminated and released. The transactions described in this paragraph were
approved by order of the Bankruptcy Court entered on or about August 22, 2001,
and were closed effective September 1, 2001.

       In light of the non-recourse nature of the Amended Omega Loan beyond the
Omega Debtors and the stock of PHCMI that was pledged to Omega, the Company, in
consultation with representatives of the Agent for the Company's prepetition
senior secured credit facility (participants in which would own the vast
majority of the equity of the reorganized Company if the Joint Plan is confirmed
and consummated), concluded that it would be appropriate to reserve an option to
sell a majority of the issued and outstanding capital stock of PHCMI, and
attendant control rights to an unaffiliated third party. To that end GranCare,
as the sole shareholder of PHCMI, and PHCMI entered into a Share Purchase
Agreement dated as of September 1, 2001 ("SPA") with an unaffiliated investor,
Nexion Health BKC, Inc. ("Nexion"), in which GranCare, subject to Bankruptcy
Court approval, reserved an option to sell 51% of the issued and outstanding
capital stock of PHCMI, and attendant control rights, to Nexion ("PHCMI Majority
Equity Sale") for a purchase price of $300,000. If such option is exercised, the
stock of LC-PHCM will first be transferred to PHCMI, so that all 12 Omega
Facilities will be owned by PHCMI or its subsidiaries, and the management
agreement between the MPAN Debtor subsidiary managing the subject Omega
Facilities and the Omega Debtors will be modified in certain respects,
including, among other things, to reduce the Omega Incentive Management Fee to
70% of free cash flow of the remaining Omega Facilities. In addition, a
shareholders agreement among Nexion, GranCare, and PHCMI would become effective.
Pursuant to such shareholders agreement, among other things, Nexion would be
entitled to receive from PHCMI a preferred distribution (51% of the "return on
equity" Medicaid reimbursement for the three Omega Facilities in North Carolina,
subject to a $130,000 minimum annual distribution), payable monthly. GranCare
would also be granted an option to later re-purchase the 51% equity stake in
PHCMI at certain times in the future for a price equal to 51% of the average
distributable cash flow of PHCMI for the three years immediately preceding the
stock buyback, multiplied by five (5). The Bankruptcy Court entered an order on
or about


                                       34
<PAGE>

December 5, 2001, approving the SPA and the PHCMI Majority Equity Sale
transaction. No decision has yet been made by the Company whether GranCare will
exercise the option to consummate the PHCMI Majority Equity Sale.

    Healthcare Regulatory Matters.

       The Balanced Budget Act of 1997 (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 are to be achieved through a reduction in the growth of payments to
providers and physicians. These cuts have had, and will continue to have, a
material adverse effect on the Company. Since the passage of the Balanced Budget
Act in 1997, Congress has twice passed additional legislation intended to
mitigate temporarily the reduction in reimbursement for SNFs under the Medicare
PPS. However, 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 (currently scheduled to be
implemented October 2002) and the increases provided for under BIPA will sunset
in October 2002. Unless additional legislative action is undertaken by the
United States Congress, the loss of revenues associated with these occurrences
will have a material adverse effect on the Company. The Company preliminarily
estimates that these occurrences will result in a loss of revenue of
approximately $72 million in fiscal year 2003. While the Company is 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. See "Business-Regulation" for a detailed explanation of the effects of
governmental regulatory action on the Company's liquidity and results of
operations.

    Other Factors Affecting Liquidity and Capital Resources.

       In addition to outstanding principal and accrued interest payments on its
long-term indebtedness which generally are suspended as the consequence of the
Chapter 11 Filings, the Company has significant rent obligations relating to its
leased facilities. Without giving any effect to any potential restructuring of
current rent obligations, the Company's total rent obligations for fiscal year
2001 were approximately $62.8 million and are estimated to be $35.7 million in
fiscal year 2002.

       The Company's 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 $31.9 million for the fiscal year ended
September 30, 2001 and are estimated to be $30.0 million for the fiscal year
ended September 30, 2002. Capital expenditures in the fiscal years ended
September 30, 2001 and 2000 were financed principally through internally
generated funds.

       The Company has experienced an increasing trend in the number and
severity of litigation 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 against long-term care providers in recent
years resulting in an increased awareness by plaintiff's lawyers of potentially
large recoveries. The Company also believes 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 the Company
believes that it provides quality care to 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. See "-Legal Proceedings."

       The Company currently maintains 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 the Company.

       The Mariner Health DIP Credit Agreement limits the ability of the MHG
Debtors from engaging in affiliate transactions and making restricted payments,
specifically including payments to the MPAN Debtors. However, the Mariner Health
DIP Credit Agreement permits, among other things, weekly overhead payments to
Mariner Post-Acute Network, Inc. (see "- Mariner Health Debtor-in-Possession
Financing" above), the purchase of


                                       35
<PAGE>

pharmaceutical goods and services from certain MPAN Debtors, the allocation to,
and payment by, the MHG Debtors of their share of certain taxes, insurance
obligations and employee benefit obligations paid for and administered on a
consolidated basis by the Company, and certain ordinary course transactions
which are on terms no less favorable to the subject MHG Debtors than the terms
obtainable from a non-affiliate, and for which the approval of the requisite
Mariner Health DIP Lenders and the Bankruptcy Court have been obtained. Except
as provided above, the MPAN Debtors and the MHG Debtors are prohibited from
comingling funds and paying the obligations of the other.

       At September 30, 2001, the MPAN Debtors had, in the aggregate,
approximately $141.9 million in their corporate concentration bank accounts that
was available to be used for ongoing operations, subject to the terms and
restrictions of the Final MPAN Cash Collateral Orders and the Final MPAN DIP
Order. The aggregate amount in the MPAN Debtors' corporate concentration account
at December 21, 2001 was approximately $150.0 million. At September 30, 2001,
Mariner Health had, in the aggregate, approximately $6.9 million in its
corporate concentration bank accounts that was available to be used for ongoing
operations, subject to the terms and restrictions of the Mariner Health Cash
Collateral Orders and the Final Mariner Health DIP Order. The aggregate amount
in Mariner Health's corporate concentration account at December 21, 2001 was
approximately $2.8 million. In the event that the Joint Plan is confirmed, all
of the MHG Debtors' and MPAN Debtors' cash would be distributed to (or reserved
for distribution to) holders of claims, less $25 million that would be retained
for general working capital purposes.

       In connection with the Joint Plan, the Company is undertaking a corporate
restructuring that will result in certain of the Company's 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 the Company in
respect of the provision of services to Medicare and Medicaid patients. Although
the Company does not believe that the application of CHOW rules will result in a
material adverse effect on the Company's cash flows, financial performance or
results of operations, no assurances can be made in this regard.

       While management believes that the Company's cash should be sufficient to
fund the Company's working capital needs until confirmation of a plan of
reorganization, the use of this cash collateral is prohibited under the
Bankruptcy Code absent an order of the Bankruptcy Court permitting the use of
the cash collateral. The use of the Company's cash collateral to fund working
capital is currently permitted by the respective DIP Financings.

       While management believes that the amounts available to the MPAN Debtors
from the MPAN DIP Financing and cash collateral will be sufficient to fund the
operations of the MPAN Debtors until such time as a plan of reorganization is
confirmed, there can be no assurances in this regard; a default under the MPAN
DIP Credit Agreement may impair the ability of the MPAN Debtors to use cash
collateral to fund operations. The Company is currently in violation of the
EBITDA Covenant contained in the Company DIP Credit Agreement and has obtained a
waiver of this current violation from the Company's DIP Lenders. See
"Debtor-in-Possession Financing for the Company").

       While management believes that the amounts available to the MHG Debtors
from the Mariner Health DIP Financing and cash collateral will be sufficient to
fund the operations of the MHG Debtors until such time as the a plan of
reorganization is confirmed, there can be no assurances in this regard; a
default under the Mariner Health DIP Credit Agreement may impair the ability of
the MHG Debtors to use cash collateral to fund operations.

       The Joint Plan currently contemplates that upon confirmation the Company
will retain $25 million in cash and will need to obtain a revolver of $50
million to $100 million to further meet its working capital needs. While
management believes that these amount will be sufficient to fund its working
capital needs and fund its debt obligations as contemplated in the exit
financing provisions of the Joint Plan, there can be no assurance that the
Company will have sufficient liquidity to meet its operational needs. The
ability of the Company to fund such requirements will depend, among other
things, the ability of the Company to obtain the exit financing contemplated in
the Joint Plan on commercially reasonable terms, on future economic conditions
and on financial, business and other factors, many of which are beyond the
control of the Company. For additional information concerning the capital
structure of Reorganized MPAN and the exit financing, please review the Joint
Plan filed as an exhibit to this Annual Report on Form 10-K.


                                       36
<PAGE>

    Impact of Inflation

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

    Cautionary Statements

       Information provided herein by the Company contains, and from time to
time the Company may disseminate materials and make statements which may contain
"forward-looking" information, as that term is defined by the Private Securities
Litigation Reform Act of 1995 (the "Act"). In particular, the information
contained in "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" contains information
concerning the Company's plan to restructure its debt obligations and other
financial commitments. The aforementioned forward looking statements, as well as
other forward looking statements made herein, are qualified in their entirety by
these cautionary statements, which are being made pursuant to the provisions of
the Act and with the intention of obtaining the benefits of the "safe harbor"
provisions of the Act.

       The Company cautions investors that any forward-looking statements made
by the Company are not guarantees of future performance and that actual results
may differ materially from those in the forward-looking statements as a result
of various factors, including, but not limited to, the following:

(i)      There can be no assurance that the amounts available to the Company
         through the DIP Financings will be sufficient to fund the operations of
         the Company until the Joint Plan or another plan of reorganization is
         confirmed by the Bankruptcy Court overseeing the Company's Chapter 11
         Cases.

(ii)     There can be no assurance that the Company will be able to continue to
         use cash collateral to fund its working capital needs.

(iii)    There can be no assurance that the Joint Plan or any other plan of
         reorganization confirmed in connection with the Chapter 11 Cases will
         allow the Company to operate profitably under PPS or give the Company
         sufficient liquidity to meet its operational needs.

(iv)     There can be no assurances as to whether or not the Joint Plan will be
         confirmed, and the impact confirmation of the Joint Plan may have on
         the Company and its respective creditors and shareholders.

(v)      There can be no assurance regarding the future availability or terms of
         financing in light of the Company's Chapter 11 Cases.

(vi)     There can be no assurance regarding any adverse actions which may be
         taken by creditors or landlords of the Company which may have the
         effect of preventing or unduly delaying confirmation of the Joint Plan
         or another plan of reorganization in connection with the Company's
         Chapter 11 Filings.

(vii)    The Company may have difficulty in attracting patients or labor as a
         result of its Chapter 11 Filings.

(viii)   The Company may be subject to increased regulatory oversight as a
         result of its Chapter 11 Filings.

(ix)     In recent years, an increasing number of legislative proposals have
         been introduced or proposed by Congress and in some state legislatures
         which would effect major changes in the healthcare system. However, the
         Company cannot predict the type of healthcare reform legislation which
         may be proposed or adopted by Congress or by state legislatures.
         Accordingly, the Company is unable to assess the effect of any such
         legislation on its business. There can be no assurance that any such
         legislation will not have a material adverse impact on the future
         growth, revenues, and net income of the Company.

 (x)    The Company derives a substantial portion of its revenue from Medicaid
        and Medicare. These programs are highly regulated and subject to
        frequent and substantial changes. There can be no assurance that
        statutory or regulatory changes will not impose substantially higher
        costs of providing care and administering facilities


                                       37
<PAGE>

         and reduce reimbursement below a level sufficient to cover costs. In
         particular, if the Medicaid Reimbursement Cliff, discussed in the
         "Regulation" portion of Item I above (pursuant to which temporary
         measures to mitigate the effect of reimbursement reductions will
         terminate) takes effect as scheduled, there could be a material adverse
         effect on the Company's revenue and financial condition.

(xi)     The Company also derives a substantial portion of its revenue from
         private third-party payors, such as commercial insurance companies,
         health maintenance organizations. These private payors have undertaken
         cost-containment measures designed to limit payments to healthcare
         providers. There can be no assurance that payments under private
         third-party payor programs will be sufficient to cover the costs
         allocable to patients eligible for reimbursement. The Company cannot
         predict whether or what cost-containment measures will be adopted in
         the future or, if adopted and implemented, what effect, if any, such
         proposals might have on the operations and financial condition of the
         Company.

(xii)    The Company is subject to extensive federal, state and local
         regulations governing licensure, conduct of operations at existing
         facilities, construction of new facilities, purchase or lease of
         existing facilities, addition of new services, certain capital
         expenditures, cost-containment and reimbursement for services rendered.
         The failure to obtain or renew required regulatory approvals or
         licenses, the failure to comply with applicable regulatory
         requirements, the delicensing of facilities owned, leased or managed by
         the Company or the disqualification of the Company from participation
         in certain federal and state reimbursement programs, or the imposition
         of harsh enforcement sanctions could have a material adverse effect
         upon the operations and financial condition of the Company.

(xiii)   There can be no assurance that an adverse determination in a legal
         proceeding or governmental investigation, whether currently asserted or
         arising in the future, will not have a material adverse effect on the
         Company's financial position.

(xiv)    There can be no assurance that the Company can continue to obtain
         insurance coverage similar to that it currently maintains, without
         paying substantially higher premiums, or that such current or future
         coverage will be adequate to satisfy adverse determinations against the
         Company.

(xv)     The Company may experience additional staffing needs in order to comply
         with various Medicaid programs and wages of nursing staff may increase
         due to shortages of qualified employees.

         In addition, the Company's Chapter 11 Filings may disrupt its
operations and may result in a number of other operational difficulties,
including the following:

(a)      The Company's ability to access capital markets will likely be limited;

(b)      The Company's senior management may be required to expend a substantial
         amount of time and effort in connection with solicitations of approval
         of the Joint Plan, and in otherwise administering issues involved in
         the Chapter 11 Cases, which could have a disruptive impact on
         management's ability to focus on the operation of the Company's
         business;

(c)      The Company may be unable to retain top management and other key
         personnel;

(d)      The Company may experience a reduction in the census at its skilled
         nursing facilities and hospitals; and

(e)      Suppliers to the Company may stop providing supplies or services to the
         Company or provide such supplies or services only on "cash on
         delivery," "cash on order" or other terms that could have an adverse
         impact on the Company's cash flow.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

         Not applicable.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         Information with respect to Item 8 is contained in the Company's
consolidated financial statements and financial statement schedules and are set
forth herein beginning on Page F-1.


                                       38
<PAGE>

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

         Not applicable.


                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

       The following sets forth information concerning the executive management
and directors of the Company, including each person's name, age as of September
30, 2001 and principal occupation or employment during the past five years.


<TABLE>
<CAPTION>
             NAME                   AGE                       POSITION
             ----                   ---                       --------
<S>                                 <C>     <C>
C. Christian Winkle............     38      President, Chief Executive Officer and Director
Susan Thomas Whittle...........     54      Executive Vice President, General Counsel and Secretary
Boyd P. Gentry.................     43      Senior Vice President and Treasurer
John J. Notermann..............     38      Senior Vice President, Corporate Development
David F. Polakoff, M.D. .......     47      Senior Vice President, Medical Affairs and Chief Medical Officer
Gene E. Burleson...............     60      Chairman of the Board and Director
Joel S. Kanter.................     45      Director
William G. Petty, Jr...........     56      Director
</TABLE>


       C. Christian Winkle is the President, Chief Executive Officer and a
Director of the Company. Before becoming President and Chief Executive Officer,
Mr. Winkle served as the Executive Vice President of the Company from January
27, 1999 to March 20, 2000. Prior to that, Mr. Winkle served as Executive Vice
President and Chief Operating Officer of Integrated Health Services, Inc.
("IHS"). From November 1995 to April 1997, he served as Executive Vice
President--Field Operations of IHS' owned and leased facilities, and from March
1994 to November 1995, he served as Senior Vice President--Operations of IHS.
Prior to serving as Senior Vice President--Operations of IHS, Mr. Winkle served
as Regional Vice President of Operations and President--MSU Product Development
of IHS from September 1992 to March 1994.

       Susan Thomas Whittle is Executive Vice President, General Counsel and
Secretary of the Company and has served as Senior Vice President, General
Counsel and Secretary since November 4, 1997 and Executive Vice President since
April 17, 2000. Prior to that, Ms. Whittle served as Vice President, General
Counsel and Secretary of LCA from September 1993 to November 4, 1997. Before
joining LCA, Ms. Whittle was a partner with the law firms of Clark, Thomas &
Winters of Austin, Texas since February 1992, and Wood, Lucksinger & Epstein, a
national healthcare law firm, from May 1981 through February 1992.

       Boyd P. Gentry is Senior Vice President and Treasurer, a position he has
held with the Company since November, 1997. Mr. Gentry has also served as
President and Treasurer of APS since September 30, 2000. Mr. Gentry joined the
Company in June 1995 as Vice President, Investor Relations, and Treasurer. Prior
to his time with the Company and its predecessor companies, Mr. Gentry held
various commercial lending, loan syndication, structured finance and asset
securitization roles with Bank of America (formerly NationsBank) where his last
position was Senior Vice President, Corporate Banking.

       John J. Notermann is the Senior Vice President of Corporate Development
of the Company. Before holding this position, Mr. Notermann served as Vice
President of Corporate Taxation from August 1998 to April 2000. Prior to his
employment with the Company, Mr. Notermann held various positions with the
professional services firm of Ernst & Young beginning in 1987. Prior to his
departure from Ernst & Young in 1998, Mr. Notermann was a partner with the firm.

       David F. Polakoff, M.D. has served as Senior Vice President, Medical
Affairs and Chief Medical Officer of the Company since August 1998. From
December 1997 through July 1998 Dr. Polakoff was the Chief Medical Officer of
Mariner Health. Prior to joining Mariner Health, Dr. Polakoff served on the full
time faculty of Harvard Medical School, where he taught Geriatric Medicine from
1988 through 1997. He retains an adjunct faculty appointment at this time.
Contemporaneous with his Harvard tenure, Dr. Polakoff served in various
positions,


                                       39
<PAGE>

culminating as Director of the Geriatric Research, Education and Clinical Center
of the West Roxbury VA Medical Center (a Harvard teaching hospital).

       Gene E. Burleson is Chairman of the Board of the Company and has served
as a director since November 4, 1997. Mr. Burleson currently serves as Chairman
of the Board of Argonne Properties, Inc., a private investment company. Prior to
that, Mr. Burleson served as the Chairman of the Board of GranCare, and its
predecessor, GranCare, Inc., a California corporation ("GranCare-California")
from 1988 to November 4, 1997. Additionally, Mr. Burleson served as President
and Chief Executive Officer of GranCare-California from December 1990 to
February 1997. Upon completion of the merger between GranCare-California and
Vitalink Pharmacy Services, Inc. ("Vitalink") in February 1997, Mr. Burleson
became Chief Executive Officer and a director of Vitalink. Mr. Burleson resigned
as Chief Executive Officer and as a director of Vitalink in August 1997. Mr.
Burleson currently serves on the boards of directors of three other public
companies: Alterra Healthcare, Inc. ("Alterra"), a developer and manager of
assisted living facilities; Decker Outdoor Corp., a footwear manufacturer; and
Tower Hill Capital Group, a provider of small business financial and consulting
services.

       Joel S. Kanter has served as a director of the Company since November 4,
1997. From February 1995 to the present, Mr. Kanter has served as the Chief
Executive Officer of Walnut Financial Services, Inc., a provider of small
business financial and consulting services, including venture capital and other
financing. From 1986 to the present, Mr. Kanter has been the President of Windy
City, Inc., a private investment company, and from 1988 to February 1995, he
served as a consultant to Walnut Capital Corporation, a closely-held investment
management and advisory firm. Mr. Kanter also serves on the boards of directors
of four other publicly held companies: I-Flow Corporation, a home infusion pump
manufacturer; Encore Medical Corporation, a manufacturer of implant devices;
Magna Labs, Inc., a manufacturer of resonance imaging systems; and THCG, Inc., a
provider of investment banking services to Internet and e-commerce concerns.

       William G. Petty, Jr. has served as a director of the Company since
November 4, 1997. Mr. Petty served as a director of GranCare from July 1995 by
virtue of GranCare's merger with Evergreen Healthcare, Inc., a publicly held
long-term care provider ("Evergreen"). Since July 1996, Mr. Petty has been a
Managing Director of Beecken, Petty & Company. Beecken Petty & Company is the
general partner of Healthcare Equity Partners, LP, a venture capital
partnership. Mr. Petty served as Chairman of the Board of Directors, President
and Chief Executive Officer of Evergreen from June 1993 to July 1995 and served
as President and Chief Executive Officer of Evergreen Healthcare Ltd., L.P., an
affiliate of Evergreen, from 1988 to 1992. Mr. Petty also served as Chairman of
the Board, Chief Executive Officer and President of National Heritage, Inc. from
October 1992 to June 1993. Mr. Petty also served as the Chief Executive Officer
of Alterra from 1993 until February 1996.

Section 16(a) Beneficial Ownership Reporting Compliance

       Under the federal securities laws, the Company's directors and executive
officers, and any persons holding more than 10% of the common stock outstanding,
are required to report their initial ownership of common stock and any
subsequent changes in that ownership to the Securities and Exchange Commission
and the exchange upon which the Company's securities are traded. Specific due
dates for these reports have been established and the Company is required to
disclose any failure to file by these dates during the Company's most recent
fiscal year. To the Company's knowledge, all of these filing requirements were
satisfied. In making these disclosures, the Company has relied solely on its
review of copies of the reports that have been submitted to the Company with
respect to its most recent fiscal year.


                                       40
<PAGE>

ITEM 11. EXECUTIVE COMPENSATION

Summary Compensation Table

       The following table sets forth certain summary information concerning
compensation earned during fiscal 2001 by the individual serving as the Chief
Executive Officer of the Company during fiscal 2001 and the four other most
highly compensated executive officers of the Company serving at September 30,
2001 who earned over $100,000 in salary and bonus. See "- Employment and
Severance Agreements" below for a description of the employment and severance
agreements entered into with certain of the executives named below.

<TABLE>
<CAPTION>
                                                                                      LONG-TERM
                                                                                     COMPENSATION
                                                                                     ------------
                                                     ANNUAL COMPENSATION($)           SECURITIES
                                               ---------------------------------      UNDERLYING
                                  FISCAL                                              OPTIONS/SAR       ALL OTHER
NAME AND PRINCIPAL POSITION        YEAR            SALARY             BONUS               (#)          COMPENSATION
---------------------------      --------      -------------      -------------      ------------     ---------------
<S>                              <C>           <C>                <C>                <C>              <C>

C. Christian Winkle...........     2001        $     652,550      $     780,000             --         $  12,900  (4)
  President, Chief Executive       2000        $     570,962      $     600,000             --         $  15,453  (3)
     Officer and a Director (1)    1999 (2)    $     338,478      $     150,000             --                --

Susan Thomas Whittle..........     2001        $     333,500      $     250,000             --         $  10,350  (5)
   Executive Vice President,       2000        $     328,482      $     175,000             --                --
   General Counsel and             1999        $     290,936      $      91,500             --                --
   Secretary

Boyd P. Gentry................     2001        $     262,846      $     150,000             --         $   8,342  (5)
   Senior Vice President and       2000        $     235,000      $      85,000             --                --
   Treasurer                       1999        $     204,596      $      79,200             --                --

John J. Notermann.............     2001        $     235,000      $      65,000             --         $  10,945  (5)
   Senior Vice President-          2000        $     235,000      $     125,000             --         $  65,402  (3)
   Corporate Development           1999        $     204,308      $      75,829             --                --

David F. Polakoff, M.D........     2001        $     350,000      $      90,000             --         $  11,562  (5)
   Senior Vice President,          2000        $     354,039      $      50,000             --                --
     Medical Affairs and           1999        $     332,659                 --             --                --
     Chief Medical Officer
</TABLE>


--------------
(1)      Effective March 21, 2000, Mr. Winkle was appointed President and Chief
         Executive Officer and was elected as a Director.

(2)      Mr. Winkle's employment commenced January 20, 1999. Accordingly,
         compensation information for fiscal 1999 reflects a partial year of
         service.

(3)      Represents temporary living expenses.

(4)      Represents automobile allowance.

(5)      Represents automobile allowance of $7,800 and matching contributions
         under the Company's 401(k) Plan.


                                       41
<PAGE>


Options Grants, Exercises and Fiscal Year End Value Tables

       No options were granted by the Company during the fiscal year ended
September 30, 2001. The following table summarizes the value of stock options
held at the end of the fiscal year by the executive officers named in the
Summary Compensation Table under Item 11 above.

    Aggregate Option/SAR Exercises During Last Fiscal Year and Value of
Options/SARs at Fiscal Year-End.

<TABLE>
<CAPTION>

                             SHARES
                            ACQUIRED                               NUMBER OF                 VALUE OF UNEXERCISED
                               ON           VALUE            SECURITIES UNDERLYING                IN-THE-MONEY
                            EXERCISE       REALIZED        UNEXERCISED OPTIONS/SARS         OPTIONS/SARS AT FISCAL
NAME EXERCISABLE               (#)            ($)             AT FISCAL YEAR-END                YEAR-END($)(1)
----------------          -----------    -------------    -----------   -------------     -----------   -------------
                                                          EXERCISABLE   UNEXERCISABLE     EXERCISABLE   UNEXERCISABLE
<S>                       <C>            <C>              <C>           <C>               <C>
Mr. Winkle...............      --             --          125,000 (2)     125,000 (2)         --            --
Ms. Whittle..............      --             --          100,000 (3)      52,500 (4)         --            --
Mr. Notermann............      --             --           51,250 (5)      31,250 (6)         --            --
Dr. Polakoff.............      --             --           47,500 (7)      22,500 (8)         --            --
Mr. Gentry...............      --             --           61,250 (9)      36,250 (10)        --            --
</TABLE>

--------------------------
         (1)      As of September 28, 2001, the last trading day in fiscal 2001,
                  the exercise prices of all options held by the named executive
                  officers were above the closing price of the Common Stock on
                  that date ($0.04).

         (2)      Represents options to purchase 125,000 shares of Common Stock
                  at the exercise price of $4.4375.

         (3)      Includes options to purchase 56,250, 15,000, 3,750 and 25,000
                  shares of Common Stock at exercise prices of $16.35, $12.125,
                  $2.50 and $2.1875, respectively.

         (4)      Includes options to purchase 18,750, 5,000, 3,750 and 25,000
                  shares of Common Stock at exercise prices of $16.35, $12.125,
                  $2.50 and $2.1875, respectively.

         (5)      Includes options to purchase 30,000, 3,750 and 17,500 shares
                  of Common Stock at exercise prices of $9.75, $2.50 and
                  $2.1875, respectively.

         (6)      Includes options to purchase 10,000, 3,750 and 17,500 shares
                  of Common Stock at exercise prices of $9.75, $2.50 and
                  $2.1875, respectively.

         (7)      Includes options to purchase 37,500 and 10,000 shares of
                  Common Stock at exercise prices of $12.125 and $2.1875,
                  respectively.

         (8)      Includes options to purchase 12,500 and 10,000 shares of
                  Common Stock at exercise prices of $12.125 and $2.1875,
                  respectively.

         (9)      Includes options to purchase 22,500, 15,000, 3,750 and 20,000
                  shares of Common Stock at exercise prices of $16.35, $12.125,
                  $2.50 and $2.1875, respectively.

         (10)     Includes option to purchase 7,500, 5,000, 3,750 and 20,000
                  shares of Common Stock at exercise prices of $16.35, $12.125,
                  $2.50 and $2.1875, respectively.

Employment and Severance Agreements

       Effective July 7, 2000, the Company gained Bankruptcy Court approval of
its Severance Plan for Employees (the "Severance Plan"), which was essentially a
continuation of the Company's severance plan that was in effect prior to the
Bankruptcy Proceedings. The Severance Plan provides severance benefits for those
employees who are terminated from employment due to a job elimination or a
reduction in force. In the event an employee, other than an employee who has a
salary grade of 8 or higher (an "Executive Employee"), becomes entitled to
severance benefits, the employee shall receive salary continuation benefits
equal to the greater of: (i) four weeks of salary; or (ii) one week of salary
for each year of service, plus two weeks for each $10,000 increment of the
employee's annual base salary in excess of $40,000 per year (not to exceed 26
weeks of salary continuation). An Executive Employee who is entitled to salary
continuation benefits shall receive benefits based upon the Executive Employee's
salary grade. Salary grades 16, 13-15, 9-12, and 8 shall receive 24, 18, 12 and
6 months of salary continuation benefits, respectively. In addition, the
Severance Plan provides that the Chief Executive Officer may, in his discretion,
designate certain employees to receive additional salary continuation benefits
for up to 52 weeks. Also the Chief Executive Officer may designate certain
employees that are requested to stay with the Company after being notified of a
job elimination to receive lump sum payments equal to 5% of the employee's
annual base salary for each month the employee remains with the Company. In the
event of certain changes in the business, the Chief Executive Officer may limit
the class of employees eligible to receive such benefits. The employee is
obligated under the Severance Plan to seek other employment. Salary continuation
benefits are reduced by the amount of compensation paid to the employee by such
other employer. In consideration for receiving salary continuation benefits, the
employee must release the Company from any claims the employee may have against
the Company.


                                       42
<PAGE>

       On July 7, 2000, the Company received Bankruptcy Court approval of the
Key Employee Retention Policy (the "Retention Policy"). The Retention Policy
provides for a pool of funds to be paid to approximately 30 key management
personnel upon the successful emergence by the Company from the Chapter 11
Cases. If the Company successfully emerges from chapter 11 on or before March
31, 2001, the available pool of funds is $5 million. The pool of available funds
will be reduced on a monthly basis to $4.5 million. The Company's successful
emergence from the Bankruptcy Proceedings on or after June 1, 2001 results in a
bonus pool of $4.5 million, which will not be further reduced. The purpose of
the Retention Policy is to provide employees that are critical to the Company's
reorganization with an incentive to remain in its employment.

       In order to be eligible for a bonus under the Retention Policy (a
"Retention Bonus"), an eligible employee must continue employment through
consummation of a Plan of Reorganization and must render satisfactory job
performance. Whether an eligible employee has rendered satisfactory job
performance and allocation of the retention pool is at the discretion of the
Chief Executive Officer of the Company. The Chief Executive Officer has made
preliminary allocations of the retention pool, but has the discretion to add
additional participants and reallocate Retention Bonus amounts to others in the
event any participant leaves the employment of the Company prior to the
successful consummation of a plan of reorganization. Prior to payment, the three
largest payments under the Retention Policy must be ratified by the Board of
Directors of the Company. Preliminary allocations of the retention pool have
been made to Messrs. Winkle, Polakoff and Gentry and Ms. Whittle in the amounts
of up to $2 million, $50,000, $225,000 and $350,000, respectively (subject to
reduction depending on the date of the effectiveness of a plan of reorganization
and subject to increase in the event of a reallocation).

       The Company has entered into employment and severance agreements with its
current Chief Executive Officer, Mr. C. Christian Winkle and each of the
executive officers named in the Summary Compensation Table above. The material
terms of these agreements are set forth below. On January 18, 2000, the Company
and substantially all of its subsidiaries filed the Chapter 11 Filings in the
Bankruptcy Court. None of the agreements referred to below have been assumed or
rejected by the Company. With respect to the officers and other employees whose
employment relationship with the Company was terminated prior to January 18,
2000, the Company and its subsidiaries ceased making severance payments on the
date of the Chapter 11 Filings in accordance with applicable law.

       C. Christian Winkle. The Company entered into an employment agreement
with Mr. Winkle dated January 20, 1999. Mr. Winkle's agreement provides for a
three-year term, with annual automatic extensions of the term for an additional
year unless, not later than 90 days prior to any such anniversary, either party
notifies the other that such extension shall not take effect. The agreement
permits Mr. Winkle to earn an annual bonus of between 80% and 150% of his annual
base salary if the Company achieves certain financial targets.

       Upon satisfying certain requirements, the agreement may be terminated at
any time by Mr. Winkle for "good reason" (consisting of certain actions or
failures to act by the Company), or with 60 days' prior written notice for any
other reason. If, following a change of control, the Company terminates Mr.
Winkle's employment without Cause (as defined in the agreement) or Mr. Winkle
terminates his employment for good reason, then the Company is required to pay
Mr. Winkle his full salary through the "Date of Termination" (as defined in the
agreement) and all other unpaid amounts due under any other compensation plan,
together with liquidated damages which, subject to certain limited exceptions,
are equal to two and one-half times the sum of Mr. Winkle's annual salary and
the target bonus for Mr. Winkle then in effect. In addition, if it is determined
that the Company has met certain financial objectives established in connection
with certain incentive compensation plans, the Company shall pay Mr. Winkle the
bonus for which he would otherwise be eligible, pro rated to reflect the portion
of the fiscal year worked by Mr. Winkle prior to the termination of his
employment. If, prior to a change of control, the Company terminates Mr.
Winkle's employment without Cause, or Mr. Winkle terminates his employment for
good reason, the Company is required to pay Mr. Winkle his full salary and
bonuses for which he would otherwise be eligible through the later of the Date
of Termination (as defined in the agreement) or two years from the date of the
agreement.

       Susan Thomas Whittle. The Company entered into an employment agreement
with Ms. Whittle dated November 4, 1997. Ms. Whittle's agreement provides for a
two-year term, with annual automatic extensions of the term for an additional
year unless, not later than 90 days prior to any such anniversary, either party
notifies the other that such extension shall not take effect. The agreement
currently permits Ms. Whittle to earn an annual bonus of between 25% and 150%


                                       43
<PAGE>

of her annual base salary if certain performance standards established by the
Compensation Committee of the Board of Directors (the "Compensation Committee")
are achieved.

       The agreement may be terminated at any time by Ms. Whittle for "good
reason" (consisting of certain actions or failures to act by the Company
following a "Change of Control," (as defined in the agreement)), or with 60
days' prior written notice for any other reason. If, following any Change of
Control, the Company terminates Ms. Whittle's employment in breach of the
agreement, or Ms. Whittle terminates her employment for good reason, then the
Company is required to pay Ms. Whittle her full salary through the "Date of
Termination" (as defined in the agreement) and all other unpaid amounts due
under any other compensation plan, together with liquidated damages which,
subject to certain limited exceptions, are equal to two times the sum of Ms.
Whittle's annual salary and average bonuses for the two previous fiscal years.
In addition, the Company is also required to pay Ms. Whittle a bonus (a
"Separation Bonus") at a specified target performance level, pro rated to
reflect the portion of the fiscal year worked by Ms. Whittle prior to the
termination of her employment. If, prior to a Change of Control, the Company
terminates Ms. Whittle's employment without cause, or Ms. Whittle resigns as a
result of the Company's failure to comply with a material provision of the
agreement, the Company is required to pay Ms. Whittle her full salary through
the date of termination and all other unpaid amounts due under any compensation
plan, together with liquidated damages equal to the greater of either (A) the
remaining amount of base salary owed for the term of the agreement; or (B) an
amount equal to a sum of (x) nine months of Ms. Whittle's base salary, plus (y)
one additional month of Ms. Whittle's base salary at the aforementioned rate for
each full year of service beyond the first anniversary of her employment
agreement, with a maximum of 18 months of base salary payments. In such event,
the Company is also required to pay Ms. Whittle the Separation Bonus.

         Boyd P. Gentry, John J. Notermann, David Polakoff, M.D. The employment
agreements of Messrs. Gentry, Notermann and Polakoff are identical to Ms.
Whittle's, except that Messrs. Gentry, Notermann, and Polakoff entered into
their employment agreements on October 1, 1999, August 10, 1993, and July 31,
1998, respectively.

Compensation of Outside Directors

       Upon their election to the Board of Directors, non-employee directors
receive options to purchase 15,000 shares of common stock. In addition, on the
date of each subsequent annual meeting of stockholders, directors who were not
initially elected to the Board of Directors during the previous six months,
receive options to purchase an additional 6,000 shares of common stock. The
exercise price of the options is equal to the fair market value of the common
stock on the date of grant and the options vest in 25% annual increments
beginning on the first anniversary of the date of grant.

       In addition to the option grants described above, each non-employee
director receives an annual retainer of $25,000 in four quarterly installments.
Committee chairmen receive an additional $5,000 per calendar year. Non-employee
directors also receive $1,500 per Board meeting attended, $1,000 per committee
meeting attended and $500 for each telephonic meeting in which they participate.

       In addition to his compensation as Chairman of the Board of Directors,
Mr. Burleson chairs the Company's Restructuring Committee which meets on a
weekly basis. Mr. Burleson received an additional $1,000 per meeting attended
during fiscal 2001.

Compensation Committee Interlocks and Insider Participation

       For the Company's fiscal year ended September 30, 2001, the Compensation
Committee was composed of Messrs. Kanter, Burleson and Petty. None of such
directors had any "interlock" relationship to report during the fiscal year
ended September 30, 2001.


                                       44
<PAGE>

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

       The following table sets forth, as of December 18, 2001, the number and
percentage of shares of Common Stock beneficially owned (as defined in Rule
13d-4 adopted under the Securities Exchange Act of 1934) by (i) all persons
known to the Company to own beneficially more than 5% of the Common Stock of the
Company; (ii) each of the Company's directors; (iii) the Company's current Chief
Executive Officer and the executive officers named in the Summary Compensation
Table under Item 11 above; and (iv) all current directors and current and former
executive officers of the Company as a group.


<TABLE>
<CAPTION>
                                                                                   NUMBER OF
                                                                                    SHARES       PERCENTAGE
BENEFICIAL OWNER                                                                     OWNED          OWNED
----------------                                                                 -------------   ----------
<S>                                                                              <C>             <C>
Credit Suisse First Boston
   11 Madison Avenue, New York, New York 10010-3629..........................    16,364,771         22.2%
C. Christian Winkle..........................................................       125,000 (1)       *
Susan Thomas Whittle.........................................................       100,600 (2)       *
John J. Notermann............................................................        53,890 (3)       *
David F. Polakoff, M.D. .....................................................        52,500 (4)       *
Boyd P. Gentry...............................................................        61,250 (5)       *
Gene E. Burleson.............................................................       650,683 (6)       *
Joel S. Kanter...............................................................       222,050 (7)       *
William G. Petty, Jr.........................................................       494,765 (8)       *
All current directors and executive officers as a group (8 persons)..........     1,760,783 (9)      2.4%
</TABLE>

--------------
         *        Represents less than one percent of the outstanding shares of
                  Common Stock at December 17, 2001.


         (1)      Represents options to purchase shares of Common Stock,
                  exercisable within 60 days of the date hereof.

         (2)      Includes exercisable options to purchase 100,000 shares of
                  Common Stock, exercisable within 60 days of the date hereof,
                  as well as 600 shares held in an estate over which Ms. Whittle
                  has beneficial ownership and as to which Ms. Whittle has sole
                  voting power and sole dispositive power.

         (3)      Includes options to purchase 51,250 shares of Common Stock,
                  exercisable within 60 days of the date hereof.

         (4)      Includes options to purchaser 47,500 shares of Common Stock,
                  exercisable within 60 days of the date hereof.

         (5)      Represents options to purchase 61,250 shares of Common Stock,
                  exercisable within 60 days of the date hereof.

         (6)      Includes options to purchase 232,254 shares of Common Stock,
                  exercisable within 60 days of the date hereof.

         (7)      Includes 95,000 shares owned of record by the Kanter Family
                  Foundation; 3 shares owned of record by Walnut Capital, over
                  which Mr. Kanter has sole voting power and sole dispositive
                  power and as to which Mr. Kanter disclaims beneficial
                  ownership; 80,000 shares owned of record by Windy City, Inc.,
                  over which Mr. Kanter has sole voting power and sole
                  dispositive power and as to which Mr. Kanter disclaims
                  beneficial ownership; 1,000 shares owned in Mr. Kanter's
                  spouse's individual retirement account. Also includes options
                  to purchase 41,694 shares of Common Stock, exercisable within
                  60 days of the date hereof .

         (8)      Includes 288,942 shares owned of record by a trust of which
                  Mr. Petty is a beneficiary over which Mr. Petty has sole
                  voting power and sole dispositive power, 102,960 shares owned
                  by his spouse and options to purchase 97,815 shares of Common
                  Stock, exercisable within 60 days of the date hereof.

         (9)      Includes options to purchase 757,263 shares of Common Stock.



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

       Not applicable.


                                       45
<PAGE>



ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

  (a)    Documents filed as part of this report:

         1.       Financial Statements

       The following reports and financial statements are filed herewith on the
pages indicated:


<TABLE>
<CAPTION>
                                                                                            PAGE
                                                                                            ----
<S>                                                                                         <C>
Report of Independent Auditors............................................................  F-2

Consolidated Balance Sheets as of September 30, 2001 and 2000.............................  F-3

 Consolidated Statements of Operations for the years ended
  September 30, 2001, 2000 and 1999.......................................................  F-4

 Consolidated Statements of Stockholders' Equity (Deficit) for the years ended
  September 30, 2001, 2000 and 1999.......................................................  F-5

 Consolidated Statements of Cash Flows for the years ended
  September 30, 2001 and 2000.............................................................  F-6

Notes to Consolidated Financial Statements................................................  F-7
</TABLE>


         2.       Financial Statement Schedule

       The following schedule is filed herewith:

       Schedule II--Valuation and Qualifying Accounts and Reserves

       All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and, therefore,
have been omitted.

         3.       Exhibits


 EXHIBITS

         *3.1     Second Amended and Restated Certificate of Incorporation of
                  the Registrant (filed as Annex VIII to Registrant's
                  Registration Statement on Form S-4, Registration No.
                  333-57339, and incorporated herein by reference).

         *3.2     Third Amended and Restated Bylaws of the Registrant (filed as
                  Exhibit 10.108 to the Registrant's Annual Report on Form 10-K
                  for the fiscal year ended September 30, 2000, and incorporated
                  herein by reference).

          3.3     Resolution amending the Third Amended and Restated Bylaws of
                  the Registrant, adopted December 13, 2001.

         *4.1     Form of Common Stock Certificate of the Registrant (filed as
                  Exhibit 4.1 to the Registrant's Annual Report on Form 10-K for
                  the fiscal year ended September 30, 1998, and incorporated
                  herein by reference).

         *4.2     Registration Rights Agreement dated as of July 13, 1998 by and
                  among the Registrant, Rembert T. Cribb and Michael E.
                  Fitzgerald (filed as Exhibit 4.5 to the Registrant's Annual
                  Report on Form 10-K for the fiscal year ended September 30,
                  1998, and incorporated herein by reference).

         *4.3     Indenture dated as of November 4, 1997, between the Registrant
                  and IBJ Schroder Bank & Trust Company (the "Company
                  Indenture") (filed as Exhibit 4.5 to the Registrant's Annual
                  Report on Form 10-K for the fiscal year ended September 30,
                  1997, and incorporated herein by reference).

         *4.4     10 1/2% Senior Subordinated Discount Note Due 2007 pertaining
                  to the Company Indenture (filed as Exhibit 4.6 to the
                  Registrant's Registration Statement on Form S-4, Registration
                  No. 333-43663, and incorporated herein by reference).


                                       46
<PAGE>

         *4.5     9 1/2% Senior Subordinated Note Due 2007 pertaining to the
                  Company Indenture (filed as Exhibit 4.5 to the Registrant's
                  Registration Statement on Form S-4, Registration No.
                  333-43663, and incorporated herein by reference).

         *4.6     Indenture dated as of April 4, 1996 between Mariner Health and
                  State Street Bank and Trust Company, as trustee (the "Mariner
                  Health Indenture"), including (i) the form of 9% Senior
                  Subordinated Note due 2006, Series A and (ii) the form of 9%
                  Senior Subordinated Note due 2006, Series B (Incorporated by
                  reference to Exhibits 4.1, 4.2, and 10.1 to Mariner Health's
                  Current Report on Form 8-K dated April 4, 1996).

         *4.7     Amendment No. 1 to Mariner Health Indenture, dated September
                  11, 1998 (filed as Exhibit 4.10 to the Registrant's Annual
                  Report on Form 10-K for the fiscal year ended September 30,
                  1998, and incorporated herein by reference).

        *10.1     Agreement Regarding Certain Kellett Issues dated June 19, 1998
                  by and among Mariner Health, Mariner Health Care of Nashville,
                  Inc., Stiles A. Kellett, Jr., Samuel B. Kellett, certain
                  partnerships controlled by the Kelletts, and the Registrant
                  (filed as Exhibit 10.8 to the Registrant's Registration
                  Statement on Form S-4, Registration No. 333-57339, and
                  incorporated herein by reference).

        *10.2     Form of Lease by and between CSI and each of the following
                  lessors: (i) Houston-Northwest Medical Investors, Ltd., (ii)
                  Fort Bend Medical Investors, Ltd., (iii) Northwest Healthcare
                  L.P., (iv) Dallas Medical Investors, Ltd., (v) Creek Forest
                  Limited, (vi) Denver Medical Investors, Ltd., (vii) South
                  Denver Healthcare Associates, Ltd., (viii) Belleair East
                  Medical Investors, Ltd., (ix) Tallahassee Healthcare
                  Associates, Ltd., (x) Port Charlotte Healthcare Associates,
                  Ltd., (xi) Melbourne Healthcare Associates, Ltd., (xii)
                  Pinellas III Healthcare Associates, Ltd., (xiii) Polk
                  Healthcare L.P., and (xiv) Orange Healthcare Ltd. (filed as
                  Exhibit 10.37 to Mariner Health's Annual Report on Form 10-K
                  for the fiscal year ended December 31, 1995, and incorporated
                  herein by reference).

        *10.3     Amended and Restated Purchase Option Agreement dated as of May
                  24, 1995 by and among Convalescent Services, Inc. ("CSI"),
                  Mariner Health and the Lessors (filed as Exhibits 2.5 and 10.5
                  to Mariner Health's Form 10-Q for the quarter ended June 30,
                  1995, as amended, and incorporated herein by reference).

         10.4     First Amendment of the Amended and Restated Option Agreement,
                  dated as of April 2, 1999, among Mariner Health Care of
                  Nashville, Inc., as successor to Convalescent Services, Inc.
                  ("CSI"), Mariner Health Group, Inc., and the Lessors.

        *10.5     Second Amendment of Amended and Restated Operating Lease dated
                  June 19, 1998, by and between Belleair East Medical Investors,
                  Ltd. (L.P.) and Mariner Health Care of Nashville, Inc. (filed
                  as Exhibit 10.2 to the Registrant's Annual Report on Form 10-K
                  for the fiscal year ended September 30, 1998, and incorporated
                  herein by reference).

        *10.6     Second Amendment of Amended and Restated Operating Lease dated
                  June 19, 1998, by and between Port Charlotte Health Care
                  Associates, Ltd. (L.P.) and Mariner Health Care of Nashville,
                  Inc. (filed as Exhibit 10.3 to the Registrant's Annual Report
                  on Form 10-K for the fiscal year ended September 30, 1998, and
                  incorporated herein by reference).

        *10.7     First Amendment of Amended and Restated Operating Lease dated
                  June 19, 1998, by and between Denver Medical Investors, Ltd.
                  (L.P.) and Mariner Health Care of Nashville, Inc. (filed as
                  Exhibit 10.4 to the Registrant's Annual Report on Form 10-K
                  for the fiscal year ended September 30, 1998, and incorporated
                  herein by reference).

        *10.8     +Employment Agreement between the Registrant and C. Christian
                  Winkle, dated January 20, 1999 (filed as Exhibit 10.2 to the
                  Registrant's Form 10-Q for the quarter ended December 31,
                  1998, and incorporated herein by reference).

        *10.9     +Employment Agreement between the Registrant and Susan Thomas
                  Whittle (filed as Exhibit 10.3 to the Registrant's Annual
                  Report on Form 10-K for the fiscal year ended September 30,
                  1997, and incorporated herein by reference).

        *10.10    +Employment Agreement between the Registrant and Francis W.
                  Cash dated September 18, 1999 (filed as Exhibit 10.94 to the
                  Registrant's Form 10-K for the fiscal year ended September 30,
                  1999, and incorporated herein by reference).


                                       47
<PAGE>

        *10.11    +Form of Employment Agreement entered into between the
                  Registrant and its Senior Vice Presidents (filed as Exhibit
                  10.14 to the Registrant's Annual Report on Form 10-K for the
                  fiscal year ended September 30, 1998, and incorporated herein
                  by reference).

        *10.12    +Form of Employment Agreement entered into between the
                  Registrant and its Vice Presidents (filed as Exhibit 10.12 to
                  the Registrant's Annual Report on Form 10-K for the fiscal
                  year ended September 30, 1997, and incorporated herein by
                  reference).

        *10.13    +Mariner Post-Acute Network, Inc. Severance Plan for
                  Employees, effective July 7, 2000 (filed as Exhibit 10.016 to
                  the Registrant's Annual Report on Form 10-K for the fiscal
                  year ended September 30, 2000, and incorporated herein by
                  reference).

        *10.14    +Key Employee Retention Policy, effective July 7, 2000 (filed
                  as Exhibit 10.016 to the Registrant's Annual Report on Form
                  10-K for the fiscal year ended September 30, 2000, and
                  incorporated herein by reference).

        *10.15    +First Amendment to Paragon Health Network, Inc. 1997
                  Long-Term Incentive Plan (filed as Exhibit 10.17 to the
                  Registrant's Annual Report on Form 10-K for the fiscal year
                  ended September 30, 1998, and incorporated herein by
                  reference).

        *10.16    +Paragon Health Network, Inc. Incentive Compensation Plan
                  (filed as Exhibit 10.18 to the Registrant's Annual Report on
                  Form 10-K for the fiscal year ended September 30, 1997, and
                  incorporated herein by Reference).

        *10.17    +Paragon Health Network, Inc. Employee Stock Purchase Plan
                  (filed as Exhibit 10.78 to the Registrant's Annual Report on
                  Form 10-K for the fiscal year ended September 30, 1998, and
                  incorporated herein by reference).

        *10.18    +First Amendment to Mariner Post-Acute Network, Inc. Employee
                  Stock Purchase Plan (formerly the Paragon Health Network, Inc.
                  Employee Stock Purchase Plan) (filed as Exhibit 10.79 to the
                  Registrant's Annual Report on Form 10-K for the fiscal year
                  ended September 30, 1998, and incorporated herein by
                  reference).

        *10.19    +First Amendment to the New GranCare, Inc. 1996 Stock
                  Incentive Plan (filed as Exhibit 10.20 to the Registrant's
                  Annual Report on Form 10-K for the fiscal year ended September
                  30, 1998, and incorporated herein by reference).

        *10.20    +New GranCare, Inc. 1996 Replacement Stock Option Plan (filed
                  with Amendment No. 1 to GranCare's Registration Statement on
                  Form S-1, Registration No. 333-19097, and incorporated herein
                  by reference).

        *10.21    +First Amendment to the New GranCare, Inc. 1996 Replacement
                  Stock Option Plan (filed as Exhibit 10.22 to the Registrant's
                  Annual Report on Form 10-K for the fiscal year ended September
                  30, 1998, and incorporated herein by reference).

        *10.22    +New GranCare, Inc. Outside Directors' Stock Incentive Plan
                  (filed with Amendment No. 1 to GranCare's Registration
                  Statement on Form S-1, Registration No. 333-19097, and
                  incorporated herein by reference).

        *10.23    +First Amendment to the New GranCare, Inc. Outside Directors
                  Stock Incentive Plan (filed as Exhibit 10.24 to the
                  Registrant's Annual Report on Form 10-K for the fiscal year
                  ended September 30, 1998, and incorporated herein by
                  reference).

        *10.24    +Second Amendment to the New GranCare, Inc. Outside Directors
                  Stock Incentive Plan (filed as Exhibit 10.25 to the
                  Registrant's Annual Report on Form 10-K for the fiscal year
                  ended September 30, 1998, and incorporated herein by
                  reference).

        *10.25    Indemnification Agreement dated as of February 21, 1992
                  between LCA and the ARA Group, Inc. (filed as Exhibit 10.4 to
                  Registrant's Registration Statement on Form S-1, Registration
                  No. 33-44726, and incorporated herein by reference).

        *10.26    Assignment Agreement dated as of February 21, 1992 between LCA
                  and the ARA Group, Inc. (filed as Exhibit 10.6 to Registrant's
                  Registration Statement on Form S-1, Registration No. 33-44726,
                  and, incorporated herein by reference).

         10.27    Settlement Agreement Re: Pharmacy Supply Contracts, dated
                  October 9, 2001, by and between Registrant and its affiliates
                  and NeighborCare Pharmacy Services.


                                       48
<PAGE>

         10.28    Form of Pharmacy Dispensing Services Agreement between
                  Registrant's affiliates and NeighborCare's affiliates.

         10.29    Form of Consultant Pharmacy Agreement between Registrant's
                  affiliates and NeighborCare's affiliates.

         10.30    Form of Service Agreement between Registrant's affiliates and
                  NeighborCare's affiliates.

         10.31    Settlement Agreement Re NHP Lease Portfolio, dated June 27,
                  2001, by and among Registrant and its affiliates and
                  Nationwide Health Properties, Inc. ("NHP") and its affiliates,
                  including as exhibits Operations Transfer Agreement, Revised
                  and Restated Master Addendum to Leases.

         10.32    Guaranty of Leases, dated June 27, 2001 by Registrant in favor
                  of NHP.

        *10.33    Asset Purchase Agreement, dated December ___, 2000, by and
                  among Midtown Real Estate Company, LLC, as buyer, Professional
                  Health Care Management, Inc. ("PHCM") as seller and Frenchtown
                  Nursing Home, Inc., Madonna Nursing Center, Inc., Middlebelt
                  Nursing Home, Inc. and St. Anthony Nursing Home, Inc. (each a
                  subsidiary of PHCM) (filed as Exhibit 10.5 to the Registrant's
                  Quarterly Report for the period ended December 31, 2000, and
                  incorporated herein by reference).

        *10.34    Ancillary Restructuring Agreement, dated December 21, 2000, by
                  and among Omega Healthcare Investors, Inc. ("Omega"), PHCM and
                  Cambridge Bedford, Inc., Cambridge East, Inc., Cambridge
                  North, Inc., Cambridge South, Inc., Clintonaire Nursing Home,
                  Inc., Crestmont Health Center, Inc, Heritage Nursing Home,
                  Inc., Nightingale East Nursing Center, Inc. and
                  Middlebelt-Hope Nursing Home, Inc. (each as subsidiary of
                  PHCM), Living Centers - PHCM, Inc., GranCare, Inc. and the
                  Registrant (filed as Exhibit 10.6 to the Registrant's
                  Quarterly Report on Form 10-Q for the period ended December
                  31, 2000, and incorporated herein by reference).

        *10.35    Order under 11 U.S.C. ss.ss. 105, 363, 364, 365, and 1146(c)
                  and Fed. R. Bankr. P. 6004, 6906 and 9019: (i) authorizing the
                  sale to an affiliate of Ciena Healthcare Management, Inc. of
                  four facilities and related personal property free and clear
                  of all claims, liens, encumbrances and interests; (ii)
                  approving a related ancillary restructuring agreement with
                  Omega, the mortgage of the subject property; (iii) determining
                  that such sale is exempt from any stamp, transfer, recording,
                  or similar tax; (iv) authorizing the rejection of certain
                  executory contracts; and (v) granting related relief (filed as
                  Exhibit 10.7 to the Registrant's Quarterly Report on Form 10-Q
                  for the period ended December 31, 2001, and incorporated
                  herein by reference).

        *10.36    Form of Settlement Agreement by and among Senior Housing
                  Properties Trust; SPTMNR Properties Trust; Five Star Quality
                  Care, Inc.; SHOPCO-AZ, LLC; SHOPCO-CA, LLC; SHOPCO-Colorado,
                  LLC; SHOPCO-WI, LLC; the Registrant; GranCare, Inc.; AMS
                  Properties, Inc.; and GCI Health Care Centers, Inc. (filed as
                  Exhibit 10.2 to the Registrant's Form 10-Q for the quarter
                  ended June 30, 2000).

        *10.37    Order Under 11 U.S.C.ss.ss.105, 363, 365 and 1146(c) and Fed.
                  R. Bankr. P. 6004, 6006 and 9019: (i) Approving Settlement
                  Agreement With Senior Housing Properties Trust And Certain
                  Related Entities; (ii) Authorizing The Sale Of Rights And
                  Interests In And To Certain Leased Facilities And Personal
                  Property To Senior Housing Properties Trust Free And Clear Of
                  All Liens, Claims, Encumbrances, And Interests; (iii)
                  Determining That Such Sale Is Exempt From Any Stamp, Transfer,
                  Recording, Or Similar Tax; (iv) Authorizing The Assumption Of
                  Certain Leasehold Interests; and (v) Granting Related Relief
                  Including, A Prohibition Against Recourse (filed as Exhibit
                  10.1 to the Registrant's Form 10-Q for the quarter ended June
                  30, 2000, and incorporated herein by reference).

        *10.38    Credit Agreement for $890,000,000 dated as of November 4,
                  1997, by and among the Registrant, as Borrower, The Chase
                  Manhattan Bank, as Administrative Agent, NationsBank, N.A., as
                  Documentation Agent, and the several lenders from time to time
                  parties thereto (filed as Exhibit 10.48 to the Registrant's
                  Annual Report on Form 10-K for the fiscal year ended September
                  30, 1997, and incorporated herein by reference).

        *10.39    First Amendment, dated as of July 8, 1998, by and among the
                  Registrant, The Chase Manhattan Bank, as Administrative Agent,
                  NationsBank, N.A., as Documentation Agent, and the several
                  lenders parties thereto, relating to the Credit Agreement
                  identified in Item 10.38 above (filed as Exhibit 10.48 to the
                  Registrant's Annual Report on Form 10-K for the fiscal year
                  ended September 30, 1998, and incorporated herein by
                  reference).


                                       49
<PAGE>


        *10.40    Second Amendment, dated as of December 22, 1998, by and among
                  the Registrant, The Chase Manhattan Bank, as Administrative
                  Agent, NationsBank, N.A., as Documentation Agent, and the
                  several lender parties thereto, relating to the Credit
                  Agreement identified in Item 10.38 above (filed as Exhibit
                  10.49 to the Registrant's Annual Report on Form 10-K for the
                  fiscal year ended September 30, 1998, and incorporated herein
                  by reference).

        *10.41    Guarantee and Collateral Agreement dated as of November 4,
                  1997, by and among the Registrant and certain of its
                  subsidiaries in favor of The Chase Manhattan Bank, as
                  Collateral Agent (filed as Exhibit 10.49 to the Registrant's
                  Annual Report on Form 10-K for the fiscal year ended September
                  30, 1997, and incorporated herein by reference).

        *10.42    Amended and Restated Participation Agreement ("FBTC
                  Participation Agreement") dated November 4, 1997, by and among
                  LCA, as Lessee, FBTC Leasing Corp. ("FBTC"), as Lessor, The
                  Chase Manhattan Bank, as Agent for the Lenders, the Fuji Bank
                  Limited (Houston Agency), as Co-Agent, and the Lenders parties
                  thereto (filed as Exhibit 10.50 to the Registrant's Annual
                  Report on Form 10-K for the fiscal year ended September 30,
                  1997, and incorporated herein by reference).

        *10.43    First Amendment to FBTC Participation Agreement dated July 8,
                  1998 (filed as Exhibit 10.52 to the Registrant's Annual Report
                  on Form 10-K for the fiscal year ended September 30, 1998, and
                  incorporated herein by reference).

        *10.44    Second Amendment to FBTC Participation Agreement dated
                  December 22, 1998 (filed as Exhibit 10.53 to the Registrant's
                  Annual Report on Form 10-K for the fiscal year ended September
                  30, 1998, and incorporated herein by reference).

        *10.45    Amended and Restated Guaranty ("FBTC Guarantee") dated
                  November 4, 1997, by and among the Registrant and certain
                  other guarantors signatory thereto in favor of The Chase
                  Manhattan Bank, as Administrative Agent (filed as Exhibit
                  10.51 to the Registrant's Annual Report on Form 10-K for the
                  fiscal year ended September 30, 1997, and incorporated herein
                  by reference).

        *10.46    First Amendment to FBTC Guarantee dated July 8, 1998 (filed as
                  Exhibit 10.55 to the Registrant's Annual Report on Form 10-K
                  for the fiscal year ended September 30, 1998, and incorporated
                  herein by reference).

        *10.47    Second Amendment to FBTC Guarantee dated December 22, 1998
                  (filed as Exhibit 10.56 to the Registrant's Annual Report on
                  Form 10-K for the fiscal year ended September 30, 1998, and
                  incorporated herein by reference).

        *10.48    Lease dated October 10, 1996, between FBTC, as Lessor, and
                  LCA, as Lessee (filed as Exhibit 10.52 to the Registrant's
                  Annual Report on Form 10-K for the fiscal year ended September
                  30, 1997, and incorporated herein by reference).

        *10.49    Amendment to Lease dated as of November 4, 1997 between FBTC
                  and LCA (filed as Exhibit 10.53 to the Registrant's Annual
                  Report on Form 10-K for the fiscal year ended September 30,
                  1997, and incorporated herein by reference).

        *10.50    Form of Mortgage and Security Agreement with respect to five
                  of GranCare's facilities located in the State of Illinois to
                  secure a loan in the aggregate principal amount of $16.5
                  million from Health Care Capital Finance, Inc., each agreement
                  dated as of March 23, 1995 (filed with GranCare's Annual
                  Report on Form 10-K for the fiscal year ended December 31,
                  1995, and incorporated herein by reference).

        *10.51    Credit Agreement dated as of May 18, 1994 by and among Mariner
                  Health, PNC Bank, N.A. ("PNC Bank") and the other banks party
                  thereto. (filed as Exhibit 10.1 to Mariner Health's Quarterly
                  Report on Form 10-Q/A for the quarter ended June 30, 1994, and
                  incorporated herein by reference).

        *10.52    Defined Care Partner Agreement, dated as of January 5, 1996,
                  by and among AmHS Purchasing Partners, L.P. ("AmHSPP"),
                  Mariner Health Care, Inc. and Mariner Health, including:
                  Exhibit A, Warrant to Purchase 210,000 Shares of Mariner
                  Health's Common Stock by and among AmHSPP and Mariner Health;
                  and Exhibit B, Warrant to Purchase 1,890,000 Shares of Mariner
                  Health's Common Stock by and among AmHSPP and Mariner Health
                  (filed as Exhibit 10.36 to Mariner Health's Annual Report on
                  Form 10-K for the fiscal year ended December 31, 1995, and
                  incorporated herein by reference).


                                       50
<PAGE>

         *10.53   Amended and Restated $250,000,000 Revolving Credit Facility
                  Credit Agreement (through Amendment No. 18) dated December 23,
                  1998, by and among Mariner Health, PNC Bank, as Administrative
                  Agent, First Union, as Syndication Agent, and the financial
                  institutions referred to therein as "Banks" (filed as Exhibit
                  10.63 to the Registrant's Form 10-K for the fiscal year ended
                  September 30, 1998, and incorporated herein by reference).

         *10.54   Guaranty and Suretyship Agreement dated as of May 18, 1994,
                  from various subsidiaries of Mariner Health signatory thereto
                  in favor of PNC Bank, as Agent (filed as Exhibit 10.66 to the
                  Registrant's Annual Report on Form 10-K for the fiscal year
                  ended September 30, 1998, and incorporated herein by
                  reference).

         *10.55   Collateral Agency and Sharing Agreement dated as of December
                  23, 1998, by and among Mariner Health, its subsidiary
                  guarantors and PNC Bank as Collateral Agent, revolving credit
                  facility Administrative Agent and term loan Administrative
                  Agent (filed as Exhibit 10.67 to the Registrant's Annual
                  Report on Form 10-K for the fiscal year ended September 30,
                  1998, and incorporated herein by reference).

         *10.56   $210,000,000 Term Loan Facility Credit Agreement, dated as of
                  December 23, 1998, by and among Mariner Health, PNC Bank, as
                  Administrative Agent, First Union, as Syndication Agent, and
                  the financial institutions referred to therein as "Banks"
                  (filed as Exhibit 10.68 to the Registrant's Annual Report on
                  Form 10-K for the fiscal year ended September 30, 1998 and
                  incorporated herein by reference).

         *10.57   Amended and Restated Pledge Agreement (Borrower Pledging
                  Stock) dated as of December 23, 1998, from various
                  subsidiaries of Mariner Health signatory thereto in favor of
                  PNC Bank, as Collateral Agent, relating to the pledge of stock
                  of subsidiaries of Mariner Health (filed as Exhibit 10.69 to
                  the Registrant's Annual Report on Form 10-K for the fiscal
                  year ended September 30, 1998, and incorporated herein by
                  reference).

         *10.58   Amended and Restated Pledge Agreement (Pledging Stock) dated
                  as of December 23, 1998, from various subsidiaries of Mariner
                  Health signatory thereto in favor of PNC Bank, as Collateral
                  Agent, relating to the pledge of stock of subsidiaries of
                  Mariner Health held by the subsidiary pledgors (filed as
                  Exhibit 10.70 to the Registrant's Annual Report on Form 10-K
                  for the fiscal year ended September 30, 1998, and incorporated
                  herein by reference).

         *10.59   Amended and Restated Pledge Agreement (Pledging Partnership
                  Interests) dated as of December 23, 1998, from various
                  subsidiaries of Mariner Health signatory thereto in favor of
                  PNC Bank, as Collateral Agent, relating to the pledge of
                  certain partnership interests held by such subsidiaries (filed
                  as Exhibit 10.71 to the Registrant's Annual Report on Form
                  10-K for the fiscal year ended September 30, 1998, and
                  incorporated herein by reference).

         *10.60   Amended and Restated Pledge Agreement (Pledging Limited
                  Liability Company Interests) dated as of December 23, 1998,
                  from various subsidiaries of Mariner Health signatory thereto
                  in favor of PNC Bank, as Collateral Agent, relating to the
                  pledge of certain limited liability company membership
                  interests held by such subsidiaries (filed as Exhibit 10.72 to
                  the Registrant's Annual Report on Form 10-K for the fiscal
                  year ended September 30, 1998, and incorporated herein by
                  reference).

         *10.61   Amended and Restated Pledge Agreement (Tri-State Pledging
                  Partnership Interests) dated as of December 23, 1998, from
                  Tri-State Health Care, Inc. ("Tri-State") in favor of PNC
                  Bank, as Collateral Agent, relating to the pledge of certain
                  partnership interests held by Tri-State (filed as Exhibit
                  10.73 to the Registrant's Annual Report on Form 10-K for the
                  fiscal year ended September 30, 1998, and incorporated herein
                  by reference).

         *10.62   Security Agreement dated as of December 23, 1998 from Mariner
                  Health and its subsidiary guarantors in favor of PNC Bank, as
                  Collateral Agent (filed as Exhibit 10.74 to the Registrant's
                  Annual Report on Form 10-K for the fiscal year ended September
                  30, 1998, and incorporated herein by reference).


                                       51
<PAGE>


         *10.63   Continuing Agreement of Guaranty and Suretyship dated as of
                  December 23, 1998 from various subsidiaries of Mariner Health
                  in favor of the Collateral Agent relating to the $210,000,000
                  term loan facility of Mariner Health (filed as Exhibit 10.75
                  to the Registrant's Annual Report on Form 10-K for the fiscal
                  year ended September 30, 1998, and incorporated herein by
                  reference).

         *10.64   Amended and Restated $210,000,000 Term Loan Facility Credit
                  Agreement (the "Mariner Health Term Loan Agreement"), dated,
                  as amended, as of January 19, 19999, by and among Mariner
                  Health, PNC Bank, as Administrative Agent, First Union, as
                  Syndication Agent, and the financial institutions referred to
                  therein (filed as Exhibit 10.5 to the Registrant's Form 10-Q
                  for the quarter ended December 31, 1998, and incorporated
                  herein by reference).

         *10.65   Third Amendment to Credit Agreement dated as of May 11, 1999,
                  by and among the Company, The Chase Manhattan Bank, as
                  Administrative Agent, and the lenders signatory thereto,
                  amending the Senior Credit Facility (filed as Exhibit 10.1 to
                  the Registrant's Form 10-Q for the quarter ended March 31,
                  1999, and incorporated herein by reference).

         *10.66   Third Amendment to Guarantee dated as of May 11, 1999, by and
                  among the Company, its subsidiaries signatory thereto, and The
                  Chase Manhattan Bank, as Administrative Agent, amending the
                  Amended and Restated Guarantee dated as of November 4, 1997
                  (filed as Exhibit 10.2 to the Registrant's Form 10-Q for the
                  quarter ended March 31, 1999, and incorporated herein by
                  reference).

         *10.67   Third Amendment to Participation Agreement dated as of May 11,
                  1999, by and among Living Centers Holding Company, FBTC
                  Leasing Corp., The Chase Manhattan Bank, as Agent, and The
                  Fuji Bank, Limited (Houston Agency), amending the Amended and
                  Restated Participation Agreement dated as of November 4, 1997
                  (filed as Exhibit 10.3 to the Registrant's Form 10-Q for the
                  quarter ended March 31, 1999, and incorporated herein by
                  reference).

         *10.68   Amendment No. 21 to Revolving Credit Facility Credit
                  Agreement, dated as of October 29, 1999, by and among Mariner
                  Health, PNC Bank, as Administrative Agent, First Union
                  National Bank, as Syndication Agent, and the financial
                  institutions referred to therein, to which is attached as an
                  exhibit an amended and restated $250,000,000 Revolving Credit
                  Facility Credit Agreement, by and among Mariner Health, PNC
                  Bank, as Administrative Agent, First Union National Bank, as
                  Syndication Agent, and the financial institutions referred to
                  therein, as "Banks" (filed as Exhibit 10.85 to the
                  Registrant's Form 10-K for the fiscal year ended September 30,
                  1999, and incorporated herein by reference).

         *10.69   Amendment No. 2 to Term Loan Facility Credit Agreement, dated
                  as of October 29, 1999, by and among Mariner Health, PNC Bank,
                  as Administrative Agent, First Union National Bank, as
                  Syndication Agent, and the financial institutions referred to
                  therein, to which is attached as an exhibit an amended and
                  restated $210,000,000 Term Loan Facility Credit Administrative
                  Agent, First Union National Bank, as Syndication Agent, and
                  the financial institutions referred to therein, as "Banks"
                  (filed as Exhibit 10.87 to the Registrant's Form 10-K for the
                  fiscal year ended September 30, 1999, and incorporated herein
                  by reference).

         *10.70   Confirmation for U.S. Dollar Total Return Swap Transaction
                  dated September 21, 1998, between NationsBank, N.A. and the
                  Registrant in connection with the ISDA Master Agreement (1992
                  form) dated as of October 31, 1997 between NationsBank, N.A.
                  and the Registrant (filed as Exhibit 10.76 to the Registrant's
                  Annual Report on Form 10-K for the fiscal year ended September
                  30, 1998, and incorporated herein by reference).

         *10.71   Guaranty dated as of September 21, 1998, from Mariner Health
                  and the subsidiaries of Mariner Health signatory thereto, in
                  favor of NationsBank, N.A. relating to the total return swap
                  referred to in Item 10.70 above (filed as Exhibit 10.77 to the
                  Registrant's Annual Report on Form 10-K for the fiscal year
                  ended September 30, 1998, and incorporated herein by
                  reference).


                                       52
<PAGE>

         *10.72   Acknowledgement and Amendment, dated August 16, 1999, to the
                  Credit Agreement, dated November 4, 1997 (as amended by the
                  First Amendment, dated as of July 8, 1998, the Second
                  Amendment, dated as of December 22, 1998, the Third Amendment,
                  dated as of May 11, 1999), among Mariner Post-Acute Network,
                  Inc., as the Borrower, the several banks and other financial
                  institutions or entities from time to time parties thereto, as
                  the Lenders, Bank of America, N.A., as Documentation Agent,
                  and The Chase Manhattan Bank, as the Administrative Agent
                  (filed as Exhibit 10.89 to the Registrant's Form 10-K for the
                  fiscal year ended September 30, 1999, and incorporated herein
                  by reference).

         *10.73   Promissory Note, dated August 16, 1999, by Mariner Post-Acute
                  Network, Inc., as the Maker, to Bank of America, N.A., as the
                  Holder, in the principal amount of $26,485,562.79 (filed as
                  Exhibit 10.90 to the Registrant's Form 10-K for the fiscal
                  year ended September 30, 1999, and incorporated herein by
                  reference).

         *10.74   Debtor-In-Possession Credit Agreement dated as of January 20,
                  2000, by and among Mariner Health, certain subsidiaries of
                  Mariner Health, First Union National Bank, N.A., as
                  Syndication Agent, PNC Capital Markets, Inc. and First Union
                  Securities, Inc., as Co-Arrangers, PNC Bank, National
                  Association, as Collateral and Administrative Agent, and
                  certain other lenders (filed as Exhibit 10.95 to the
                  Registrant's Form 10-K for the fiscal year ended September 30,
                  1999, and incorporated herein by reference).

         *10.75   Eighth Amendment, dated January 19, 2001, to
                  Debtor-In-Possession Credit Agreement, dated as of January 20,
                  2000 (filed as Exhibit 10.3 to Registrant's Quarterly Report
                  on Form 10-Q for the period ended December 31, 2001, and
                  incorporated herein by reference).

         *10.76   Ninth Amendment, dated February 20, 2001, to
                  Debtor-In-Possession Credit Agreement, dated as of January 20,
                  2000 (filed as Exhibit 10.1 to Registrant's Quarterly Report
                  on Form 10-Q for the period ended March 31, 2001, and
                  incorporated herein by reference).

         *10.77   Tenth Amendment, dated March 20, 2001, to Debtor-In-Possession
                  Credit Agreement, dated as of January 20, 2000 (filed as
                  Exhibit 10.2 to Registrant's Quarterly Report on Form 10-Q for
                  the period ended March 31, 2001, and incorporated herein by
                  reference).

         *10.78   Eleventh Amendment, dated April 20, 2001, to
                  Debtor-In-Possession Credit Agreement, dated as of January 20,
                  2000 (filed as Exhibit 10.3 to Registrant's Quarterly Report
                  on Form 10-Q for the period ended March 31, 2001, and
                  incorporated herein by reference).

         *10.79   Twelfth Amendment, dated July 19, 2001, to
                  Debtor-In-Possession Credit Agreement, dated as of January 20,
                  2000 (filed as Exhibit 10.1 to Registrant's Quarterly Report
                  on Form 10-Q for the period ended June 30, 2001, and
                  incorporated herein by reference).

          10.80   Thirteenth Amendment, dated November 15, 2001, to
                  Debtor-In-Possession Credit Agreement dated as of January 20,
                  2000.

         *10.81   Revolving Credit and Guaranty Agreement between dated as of
                  January 18, 2000, by and among the Registrant, certain
                  subsidiaries of the Registrant, the Chase Manhattan Bank, as
                  Agent, and certain other lenders (filed as Exhibit 10.96 to
                  the Registrant's Form 10-K for the fiscal year ended September
                  30, 1999, and incorporated herein by reference).

         *10.82   Third Amendment, dated January 11, 2001, to Revolving Credit
                  and Guaranty Agreement dated as of January 18, 2000 (filed as
                  Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for
                  the period ended December 31, 2001, and incorporated herein by
                  reference).

         *10.83   Fourth Amendment, dated June 26, 2001, to Revolving Credit and
                  Guaranty Agreement dated as of January 18, 2000 (filed as
                  Exhibit 10.2 to Registrant's Quarterly Report on Form 10-Q for
                  the period ended June 30, 2001, and incorporated herein by
                  reference).

          10.84   Fifth Amendment, dated November 16, 2001, to Revolving Credit
                  and Guaranty Agreement dated as of January 18, 2000.

         *10.85   Security and Pledge Agreement dated January 18, 2000, by and
                  among the Registrant, certain subsidiaries of the Registrant
                  and The Chase Manhattan Bank, as Agent, and certain other
                  lenders (filed as Exhibit 10.97 to the Registrant's Form 10-K
                  for the fiscal year ended September 30, 1999, and incorporated
                  herein by reference).


                                       53
<PAGE>

         *10.86   Security Agreement dated January 20, 2000, by and among
                  Mariner Health, First Union National Bank, N.A., PNC Bank,
                  National Association and certain other lenders (filed as
                  Exhibit 10.98 to the Registrant's Form 10-K for the fiscal
                  year ended September 30, 1999, and incorporated herein by
                  reference).

         *10.87   Final Order Authorizing Debtors to Obtain Post-Petition
                  Financing and to Utilize Cash Collateral and Granting Adequate
                  Protection to Pre-Petition Secured Parties (entered 3/20/00)
                  (filed as Exhibit 10.1 to the Registrant's Form 10-Q for the
                  quarter ended March 31, 2000, and incorporated herein by
                  reference).

         *10.88   Order Approving Assumption of Unexpired Leases and Lease
                  Amendment Agreement With Mid-South Health Care Associates
                  (entered 3/30/00) (filed as Exhibit 10.2 to the Registrant's
                  Form 10-Q for the quarter ended March 31, 2000, and
                  incorporated herein by reference).

         *10.89   Order on Motion for Order Approving Assumption of Unexpired
                  Leases, Lease Guaranty and Lease Amendments, as Consensually
                  Amended, with Premier Properties of South Carolina and Village
                  Green Convalescent Center, Inc. (entered 3/30/00) (filed as
                  Exhibit 10.3 to the Registrant's Form 10-Q for the quarter
                  ended March 31, 2000) (filed as Exhibit 10.3 to the
                  Registrant's Form 10-Q for the quarter ended March 31, 2000,
                  and incorporated herein by reference).

         *10.90   Final Order (i) Authorizing Postpetition Financing Pursuant to
                  11 U.S.C. (S) 364, (ii) Granting Senior Liens and Superiority
                  Administrative Expense Claim Status Pursuant to 11 U.S.C.
                  (S)(S) 105, 364, 503(b) and 507, (iii) Authorizing Use of Cash
                  Collateral Pursuant to 11 U.S.C. (S) 363, and (iv) Granting
                  Adequate Protection Pursuant to 11 U.S.C. (S)(S) 363 and 364
                  (filed as Exhibit 10.3 to the Registrant's Form 10-Q for the
                  quarter ended December 31, 1999, and incorporated herein by
                  reference).

          10.91   Asset Purchase Agreement, dated as of December 5, 2001, by and
                  among Registrant and its affiliates, Omnicare, Inc. and APS
                  Acquisition LLC.

          10.92   Form of Pharmacy Dispensing Services Agreement by and between
                  American Pharmaceutical Services, Inc. and certain of
                  Registrant's subsidiaries with amendments.

          10.93   Form of Consultant Pharmacist Agreement by and between
                  American Pharmaceutical Services, Inc. and certain of
                  Registrant's subsidiaries.

          10.94   Form of Respiratory Therapy Equipment Agreement by and between
                  American Pharmaceutical Services, Inc. and certain of
                  Registrant's subsidiaries.

          10.95   Cheetah Master Lease Agreement, dated January 25, 2001,
                  between Studer/Morton Companies, Inc. and Living Centers of
                  Texas, Inc.

          10.96   Form of Amendment of Lease Agreement By and Between
                  Studer/Morton Companies, Inc., and Living Centers of Texas,
                  Inc., dated January 25, 2001 for each of five facilities.

         10.97    Joint Plan or Reorganization for Mariner Post-Acute Network,
                  Inc., Mariner Health Group, Inc., and Their Respective Debtor
                  Affiliates Dated November 30, 2001.

         21       Subsidiaries of Mariner Post-Acute Network, Inc.

         23       Consent of Ernst & Young LLP.

--------------
    * Incorporated by reference as indicated.

    + Represents management contracts or compensatory plans or arrangements
required to be filed as exhibits to this Annual Report by Item 601(d)(10)(iii)
of Regulation S-K.

       Mariner Post-Acute Network, Inc. will furnish a copy of any exhibit
described above to any beneficial holder of its securities upon receipt of a
written request therefor, provided that such holder pays to Mariner Post-Acute
Network, Inc. a fee compensating it for its reasonable expenses in furnishing
such exhibits.

         (b)      Reports on Form 8-K Not applicable

         (c)      Exhibits The response to this portion of Item 14 is contained
                  in Item 14(a)(3) of this report.

         (d)      Financial Statements Schedule


       The response to this portion of Item 14 is contained in Item 8 of this
report.


                                       54
<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 POST-ACUTE NETWORK, INC.
                                     (Registrant)


                                 By: /s/ Susan Thomas Whittle
                                     ----------------------------------------
                                     Susan Thomas Whittle
                                     Executive Vice President, General Counsel
                                     and Secretary

Date: December 28, 2001

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

<TABLE>
<CAPTION>
           SIGNATURE                                TITLE                             DATE
           ---------                                -----                             ----
<S>                                  <C>                                          <C>

/s/ C. Christian Winkle              President, Chief Executive Officer and       December 28, 2001
------------------------------       Director (Principal Executive Officer)
C. Christian Winkle


/s/ William C. Straub                Senior Vice President, Controller and        December 28, 2001
------------------------------       Chief Accounting Officer (Principal
William C. Straub                    Financial and Accounting Officer)


/s/ Gene E. Burleson                 Chairman of the Board and Director           December 28, 2001
------------------------------
Gene E. Burleson


/s/ Joel S. Kanter                   Director                                     December 28, 2001
------------------------------
Joel S. Kanter


/s/ William G. Petty, Jr.            Director                                     December 28, 2001
------------------------------
William G. Petty, Jr.
</TABLE>





<PAGE>

                MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
                  (DEBTOR-IN-POSSESSION AS OF JANUARY 18, 2000)


                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


                               SEPTEMBER 30, 2001

<TABLE>
<CAPTION>
                                                                                  PAGE
                                                                                  ----
<S>                                                                               <C>
Report of Independent Auditors..................................................  F-2

Consolidated Balance Sheets as of September 30, 2001 and 2000...................  F-3

Consolidated Statements of Operations for the years ended
  September 30, 2001, 2000 and 1999.............................................  F-4

Consolidated Statements of Stockholders' Equity (Deficit) for the years ended
  September 30, 2001, 2000 and 1999.............................................  F-5

Consolidated Statements of Cash Flows for the years ended
  September 30, 2001 and 2000...................................................  F-6

Notes to Consolidated Financial Statements......................................  F-7
</TABLE>




                                      F-1
<PAGE>

                         REPORT OF INDEPENDENT AUDITORS

To the Stockholders and Board of Directors of
  Mariner Post-Acute Network, Inc.

         We have audited the accompanying consolidated balance sheets of Mariner
Post-Acute Network, Inc. and subsidiaries as of September 30, 2001 and 2000, and
the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for each of the three years in the period ended
September 30, 2001. Our audits also included the financial statement schedule
listed in the index at Item 14. These consolidated financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and schedule
based on our audits.

         We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Mariner Post-Acute Network, Inc. and subsidiaries at September 30, 2001 and
2000, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended September 30, 2001, in conformity
with accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.

         The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As more fully
described in Note 3 of the accompanying consolidated financial statements, the
Company has incurred net losses, has a capital deficit of approximately $1.5
billion at September 30, 2001 and has not been in compliance with certain
covenants of various loan agreements. In addition, the Company and substantially
all of its subsidiaries filed separate voluntary petitions for relief under
chapter 11 of the U.S. Bankruptcy Code and continue to operate as a
debtor-in-possession under the protection of chapter 11. These matters raise
substantial doubt about the Company's ability to continue as a going concern. On
November 30, 2001, the Company filed a plan of reorganization with the U.S.
Bankruptcy Court, which was amended on December 14, 2001. No disclosure
statement has been approved for this plan, and no solicitation of acceptances
for this plan are being sought at this time. In the event the plan of
reorganization is confirmed and consummated, continuation of the business
thereafter is dependent on the Company's ability to achieve successful future
operations. The accompanying consolidated financial statements do not include
any adjustments reflecting the possible future effects on the recoverability and
classification of assets or the amount and classification of liabilities that
may result from the outcome of these uncertainties.

                                                     ERNST & YOUNG LLP


 Atlanta, Georgia
 December 12, 2001,except for Note 1,
   as to which the date is December 15, 2001



                                      F-2
<PAGE>

                MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
                  (DEBTOR-IN-POSSESSION AS OF JANUARY 18, 2000)
                           CONSOLIDATED BALANCE SHEETS
                  (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                                                    SEPTEMBER 30,
                                                                                          -------------------------------
                                                                                             2001                2000
                                                                                          -----------         -----------
<S>                                                                                       <C>                 <C>
                                    ASSETS

Current assets:
   Cash and cash equivalents .....................................................        $   209,050         $   170,468
   Receivables, net of allowance for doubtful accounts of $53,286 and $44,624  ...            241,860             246,695
   Inventories ...................................................................              6,769               8,032
   Net assets of discontinued operations .........................................             60,360              70,979
   Prepaid expenses and other current assets .....................................             42,164              52,032
                                                                                          -----------         -----------
     Total current assets ........................................................            560,203             548,206

Property and equipment, net ......................................................            416,026             439,044
Goodwill, net ....................................................................            196,223             207,652
Restricted investments ...........................................................             32,831              35,671
Other assets .....................................................................             25,695              17,062
                                                                                          -----------         -----------
                                                                                          $ 1,230,978         $ 1,247,635
                                                                                          ===========         ===========

                LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:
   Current maturities of long-term debt ..........................................        $        --         $        --
   Accounts payable ..............................................................             72,608              67,810
   Accrued compensation and benefits .............................................            100,488              91,629
   Accrued insurance obligations .................................................             24,764               9,616
   Other current liabilities .....................................................             27,899              47,440
                                                                                          -----------         -----------
     Total current liabilities ...................................................            225,759             216,495

Liabilities subject to compromise ................................................          2,293,820           2,369,549

Long-term debt, net of current maturities ........................................             59,688                  --
Long-term insurance reserves .....................................................             92,769              68,987
Other liabilities ................................................................             25,827              28,124
Minority interest ................................................................              4,624               4,657
                                                                                          -----------         -----------
     Total liabilities ...........................................................          2,702,487           2,687,812

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 ...........................................................         (2,453,773)         (2,420,378)
   Accumulated other comprehensive gain (loss) ...................................                575              (1,488)
                                                                                          -----------         -----------
     Total stockholders' equity (deficit) ........................................         (1,471,509)         (1,440,177)
                                                                                          -----------         -----------
                                                                                          $ 1,230,978         $ 1,247,635
                                                                                          ===========         ===========
</TABLE>



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


                                      F-3
<PAGE>


                MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
                  (DEBTOR-IN-POSSESSION AS OF JANUARY 18, 2000)
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


<TABLE>
<CAPTION>
                                                                                         YEAR ENDED SEPTEMBER 30,
                                                                            -----------------------------------------------
                                                                                2001              2000              1999
                                                                            -----------       -----------       -----------
<S>                                                                         <C>               <C>               <C>
Net revenues .........................................................      $ 1,872,135       $ 1,879,307       $ 1,990,863

Costs and expenses:
   Salaries, wages and benefits ......................................        1,146,048         1,165,033         1,210,447
   Nursing, dietary and other supplies ...............................          120,403           127,024           128,520
   Ancillary services ................................................          112,083            89,464           219,292
   General and administrative ........................................          192,956           208,226           271,786
   Insurance .........................................................          118,436           104,380            94,796
   Rent ..............................................................           62,782            80,643            98,860
   Depreciation and amortization .....................................           49,399            49,235           107,506
   Provision for bad debts ...........................................           28,140            30,166           103,512
   Loss on settlement with government ................................           33,410                --                --
   Impairment of long-lived assets ...................................               --            19,413           875,093
   Recapitalization, indirect merger and other expenses ..............               --             8,610            61,901
   Loss on disposal of assets ........................................               --             3,673           242,735
                                                                            -----------       -----------       -----------
     Total costs and expenses ........................................        1,863,657         1,885,867         3,414,448
                                                                            -----------       -----------       -----------
Operating income (loss) ..............................................            8,478            (6,560)       (1,423,585)

Other income (expenses):
   Interest expense (Contractual interest for the fiscal year
     ended September 30, 2001 and 2000 was $201,066
     and $238,911, respectively) .....................................           (5,171)          (71,905)         (204,247)
   Interest and dividend income ......................................            6,007            11,366             9,075
   Reorganization items ..............................................          (47,721)          (10,816)               --
   Other .............................................................             (462)            2,261               771
                                                                            -----------       -----------       -----------
Loss from continuing operations before income taxes ..................          (38,869)          (75,654)       (1,617,986)

Benefit for income taxes .............................................           (4,807)          (19,374)               --
                                                                            -----------       -----------       -----------
Loss from continuing operations ......................................          (34,062)          (56,280)       (1,617,986)

Discontinued operations:
   Income (loss) from operations of discontinued
     pharmacy operations .............................................              667            (2,705)         (160,296)
                                                                            -----------       -----------       -----------
Net loss .............................................................      $   (33,395)      $   (58,985)      $(1,778,282)
                                                                            ===========       ===========       ===========


Earnings (loss) per share--basic and diluted:
   Loss from continuing operations ...................................      $     (0.46)      $     (0.76)      $    (22.03)
   Earnings (loss) from discontinued operations ......................             0.01             (0.04)            (2.18)
                                                                            -----------       -----------       -----------
   Net loss per share ................................................      $     (0.45)      $     (0.80)      $    (24.21)
                                                                            ===========       ===========       ===========
</TABLE>








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



                                      F-4

<PAGE>


                MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
                  (DEBTOR-IN-POSSESSION AS OF JANUARY 18, 2000)
            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                        (DOLLARS AND SHARES IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                                     ACCUMULATED
                                                                                                        OTHER
                                                    COMMON STOCK                                    COMPREHENSIVE
                                                 -------------------     CAPITAL      ACCUMULATED       INCOME
                                                  SHARES      AMOUNT     SURPLUS        DEFICIT         (LOSS)           TOTAL
                                                 --------     ------     --------    -------------     ---------      -----------
<S>                                              <C>          <C>        <C>         <C>               <C>            <C>
BALANCE, SEPTEMBER 30, 1998 ..............         73,277      $ 733     $980,142     $  (583,111)     $    (750)     $   397,014

Comprehensive loss:
   Net loss ..............................             --         --           --      (1,778,282)            --       (1,778,282)
   Unrealized loss on securities
     available-for-sale, net of tax ......             --         --           --              --         (5,565)          (5,565)
                                                                                                                      -----------
Comprehensive loss .......................                                                                             (1,783,847)

Issuance of common stock .................             49         --          127              --             --              127
Funding of employee benefit plans ........            369          4          683              --             --              687
                                                 --------      -----     --------     -----------      ---------      -----------
BALANCE, SEPTEMBER 30, 1999 ..............         73,695        737      980,952      (2,361,393)        (6,315)      (1,386,019)

Comprehensive loss:
   Net loss ..............................             --         --           --         (58,985)            --          (58,985)
   Unrealized gain on securities
     available-for-sale, net of tax ......             --         --           --              --          4,827            4,827
                                                                                                                      -----------
Comprehensive loss .......................                                                                                (54,158)

Retirement of stock ......................             (7)        --           --              --             --               --
                                                 --------      -----     --------     -----------      ---------      -----------
BALANCE, SEPTEMBER 30, 2000 ..............         73,688        737      980,952      (2,420,378)        (1,488)      (1,440,177)

Comprehensive loss:
   Net loss ..............................             --         --           --         (33,395)            --          (33,395)
   Unrealized gain on securities
     available-for-sale, net of tax ......             --         --           --              --          2,063            2,063
                                                                                                                      -----------
Comprehensive loss .......................                                                                                (31,332)
                                                 --------      -----     --------     -----------      ---------      -----------
BALANCE, SEPTEMBER 30, 2001 ..............         73,688      $ 737     $980,952     $(2,453,773)     $     575      $(1,471,509)
                                                 ========      =====     ========     ===========      =========      ===========
</TABLE>




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


                                      F-5
<PAGE>

                MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
                  (DEBTOR-IN-POSSESSION AS OF JANUARY 18, 2000)
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                           YEAR ENDED SEPTEMBER 30,
                                                                                  -----------------------------------------
                                                                                    2001           2000             1999
                                                                                  ---------      ---------      -----------
<S>                                                                               <C>            <C>            <C>
Cash flows from operating activities:
   Net loss .................................................................     $ (33,395)     $ (58,985)     $(1,778,282)
   Adjustments to reconcile net loss to net cash provided
     (utilized) by operating activities
       Depreciation and amortization ........................................        49,399         49,235          107,506
       Interest accretion on discounted debt ................................            --         15,540           20,091
       Equity earnings/minority interest ....................................           462         (2,261)            (771)
       Reorganization items .................................................        47,721         10,816               --
       Provision for bad debts ..............................................        28,140         30,166          103,512
       Loss on settlement with government ...................................        33,410             --               --
       Impairment of long-lived assets ......................................            --         19,413          875,093
       Change in estimate related to reduction in revenue ...................            --             --          122,023
       Loss on disposal of assets ...........................................            --          3,673          242,735
       (Income) loss from discontinued pharmacy operations ..................          (667)         2,705          160,296
   Changes in operating assets and liabilities:
       Receivables ..........................................................       (57,972)       (27,594)          19,411
       Inventories ..........................................................           395           (884)          (2,440)
       Prepaid expenses and other current assets ............................        16,142        (18,915)          67,599
       Accounts payable .....................................................        22,382         40,969          (20,206)
       Accrued liabilities and other current liabilities ....................       (16,068)       110,088          (22,243)
   Changes in long-term insurance reserves ..................................        53,903        (19,181)          19,589
   Other ....................................................................        (4,208)       (27,922)          17,897
                                                                                  ---------      ---------      -----------
 Net cash provided (utilized) by operating activities of
     continuing operations before reorganization items ......................       139,644        126,863          (68,190)
                                                                                  ---------      ---------      -----------
 Net cash provided by discontinued pharmacy operations ......................         4,235          5,384            8,632
                                                                                  ---------      ---------      -----------

   Payment of reorganization items, net .....................................       (46,191)       (25,503)              --
                                                                                  ---------      ---------      -----------

Cash flows from investing activities:
   Purchases of property and equipment ......................................       (31,902)       (30,563)         (73,251)
   Proceeds from sale of property, equipment and other
     assets .................................................................         7,900         11,337           87,032
   Restricted investments ...................................................         3,393         22,405           13,714
   Net collections on notes receivable ......................................         1,171          1,405           10,466
   Other ....................................................................            --         (2,360)              --
                                                                                  ---------      ---------      -----------
Net cash (utilized) provided by investing activities ........................       (19,438)         2,224           37,961

Cash flows from financing activities:
   Net draws under prepetition credit line ..................................            --             --          222,350
   Repayment of prepetition long-term debt ..................................       (39,668)       (10,402)        (105,135)
   Proceeds from Deficiency Note ............................................            --             --           26,486
   Repurchase of subordinated debt ..........................................            --             --          (46,661)
   Deferred financing fees ..................................................            --             --           (7,538)
   Other ....................................................................            --             85              598
                                                                                  ---------      ---------      -----------
Net cash (utilized) provided by investing activities ........................       (39,668)       (10,317)          90,100
                                                                                  ---------      ---------      -----------
Increase in cash and cash equivalents .......................................        38,582         98,651           68,503

Cash and cash equivalents, beginning of year ................................       170,468         71,817            3,314
                                                                                  ---------      ---------      -----------
Cash and cash equivalents, end of year ......................................     $ 209,050      $ 170,468      $    71,817
                                                                                  =========      =========      ===========
</TABLE>

    The accompanying notes are an integral part of these financial statements



                                      F-6
<PAGE>

                MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES
                  (DEBTOR-IN-POSSESSION AS OF JANUARY 18, 2000)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1        NATURE OF BUSINESS

    REPORTING ENTITY

         Mariner Post-Acute Network, Inc. and its subsidiaries (collectively,
the "Company") provide post-acute health care services, primarily through the
operation of their skilled nursing facilities ("SNFs"). All references to the
"Company" herein are intended to include the operating subsidiaries through
which the services described herein are directly provided. At September 30,
2001, the Company's significant operations consisted of 326 skilled nursing
facilities, including 9 stand-alone assisted living facilities, in 24 states
with approximately 39,000 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 21 for financial
information about the Company's segments.

         The Company also continues to operate 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"). The Company and certain of its subsidiaries have received the
approval of the United States Bankruptcy Court for the District of Delaware (the
"Bankruptcy Court") to sell the Company's institutional pharmacy business.
Accordingly, the APS Division has 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
Mariner Health Group, Inc. ("Mariner Health") and its direct and indirect
subsidiaries (the "Mariner Health Subsidiaries" and collectively with Mariner
Health, the "MHG Debtors"), the "MPAN Debtors") and 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"). The Company is presently operating its business as a
debtor-in-possession and is subject to the jurisdiction of the Bankruptcy Court.
The Company's need to seek relief afforded by the Bankruptcy Code is due, in
part, to the significant financial pressure created by the implementation of the
Balanced Budget Act enacted on August 5, 1997 (the "Balanced Budget Act"). As a
debtor-in-possession, the Company is authorized to operate its business but may
not engage in transactions outside its ordinary course of business without the
approval of the Bankruptcy Court.

         On November 30, 2001, the MPAN Debtors and the MHG Debtors
(collectively, the "Debtors") filed a Joint Plan of Reorganization and
Disclosure Statement with the Bankruptcy Court. On December 5, 2001, the
Bankruptcy Court set a hearing on the adequacy of the Disclosure Statement for
January 16, 2002. On December 14, 2001, the Debtors filed an Amended Joint Plan
of Reorganization and Disclosure Statement (as further amended from time to
time, respectively, the "Joint Plan" or "Disclosure Statement"). Notice of the
hearing on the adequacy of the Debtors' Disclosure Statement was mailed to the
Debtors' various creditor constituencies and other parties entitled to notice on
or about December 15, 2001. See Note 3.

NOTE 2        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    BASIS OF PRESENTATION

         The accompanying consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
on a going concern basis which assumes continuity of operations and realization
of assets and settlement of liabilities and commitments in the ordinary course
of business. The financial statements do not include any adjustments reflecting
the possible future effects on the recoverability and classification of assets
or the amount and classification of liabilities that may result from the outcome
of uncertainties discussed herein. The accompanying consolidated 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 the expected amounts of such allowed claims, as


                                      F-7
<PAGE>

opposed to the amounts for which those claims may be settled. Under a confirmed
final plan of reorganization, those claims may be settled at amounts
substantially less than their allowed amounts.

         The Company's reorganization proceedings raise substantial doubt about
the Company's ability to continue as a going concern. The ability of the Company
to continue as a going concern and the appropriateness of using the going
concern basis of accounting is dependent upon, among other things, its ability
to comply with the terms of its various commitments, including its
debtor-in-possession financing, confirmation of a plan of reorganization,
success of future operations after such confirmation, and the ability to
generate sufficient cash from operations and financing sources to meet
obligations.

         The accompanying consolidated financial statements include the accounts
of the Company. All significant intercompany accounts and transactions have been
eliminated in consolidation.

    USE OF ESTIMATES

         The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Although these estimates are based on management's
knowledge of current events, they may ultimately differ from actual results.

    RECLASSIFICATIONS

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

    CASH AND CASH EQUIVALENTS

         The Company considers all highly liquid, unrestricted investments with
original maturities of three months or less to be cash equivalents.

         As a result of separate DIP Financings (as defined) and prepetition
senior credit facilities, the Company maintains separate centralized cash
management systems for the MPAN Debtors and for the MHG Debtors in which cash
receipts are transferred periodically from facility and ancillary company
depository accounts to a separate cash concentration account for the MPAN
Debtors or the MHG Debtors. Funds are then used to provide for normal working
capital requirements, including reduction of the outstanding credit lines, or
placement of excess funds in investment grade investments. In accordance with
SOP 90-7, interest income earned since the Petition Date on cash accumulated
during the Chapter 11 Cases is classified as reorganization items (see Note 3).

    INVENTORIES

         Inventories, consisting principally of medical supplies, are valued at
the lower of cost (first-in, first-out) or market.

    PROPERTY AND EQUIPMENT

         Property and equipment are stated at cost less accumulated
depreciation. Major replacements and significant improvements are capitalized,
whereas ordinary maintenance and repairs are expensed as incurred. Interest
costs related to funds borrowed to finance construction are capitalized but were
not significant for all periods presented. Depreciation and amortization are
provided on a straight-line basis over the estimated useful lives of the assets
as follows:

<TABLE>
    <S>                                                  <C>
    Buildings.........................................   25-40 years
    Building improvements.............................   10-15 years
    Furniture, fixtures and equipment.................    3-15 years
</TABLE>



                                      F-8
<PAGE>

    GOODWILL

         Goodwill represents the excess of acquisition cost over the fair value
of net assets acquired in various purchase business combinations and is
amortized on a straight-line basis over the estimated useful lives of the
related assets. Amortization of goodwill charged to expense was $11.3 million,
$12.6 million and $41.6 million for the fiscal years ended September 30, 2001,
2000 and 1999, respectively. Accumulated amortization at September 30, 2001 and
2000 was $34.9 million and $24.0 million, respectively. During the fiscal year
ended September 30, 2000, the Company revised its estimate of the useful life of
existing goodwill from 30 and 40 years to 20 years. The net effect of such
change was a charge of $4.4 million, or $0.06 per share, for the fiscal year
ended September 30, 2000.

    ASSESSMENT OF LONG-LIVED ASSETS

         The Company periodically evaluates the carrying values of its
long-lived assets, including goodwill, whenever events or circumstances indicate
that the carrying amount of these assets may not be recoverable or the estimated
useful life has changed in accordance with Statement of Financial Accounting
Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("SFAS 121"). Under SFAS 121, an impairment
loss is recognized when indicators of impairment are present and the sum of the
expected undiscounted cash flows are not sufficient to recover the asset's
carrying amount. The difference between the carrying amount of the long-lived
assets being evaluated and the estimated fair value of the assets represents the
impairment loss. Fair value is based on market prices where available, estimates
of market value, or determinations using various valuation techniques including
anticipated future cash flows discounted at rates commensurate with the risks
involved. See Note 14 for discussion of impairment charges.

    RESTRICTED INVESTMENTS

         Restricted investments represent cash, fixed interest securities, and
other investments that have primarily been designated to pay insurance claims of
the Company's wholly-owned insurance subsidiaries. Restricted investments also
include amounts restricted for collateral under the terms of certain letters of
credit and mortgage agreements. See Note 8. These restricted investments have
been classified as available-for-sale securities in accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" and, accordingly, are reported at their estimated
fair value with unrealized gains and losses, net of related tax effects,
included with accumulated other comprehensive income as a separate component of
stockholders' equity.

    PROFESSIONAL LIABILITY RISKS

         The Company currently purchases general and professional liability
insurance through a third party insurance company, maintaining an unaggregated
$1.0 million self-insured retention per claim. Loss provisions for professional
liability risks, including incurred but not reported losses, are provided on an
undiscounted basis in the period of the related coverage. These provisions are
based on internal and external evaluations of the merits of individual claims,
analysis of claim history, and independent actuarially determined estimates. The
methods of making such estimates and establishing the resulting accrued
liabilities are reviewed frequently by the Company's management with any
adjustments resulting therefrom reflected in current earnings. Claims are paid
over varying periods which generally range from one to five years.

         Prior to July 31, 1999, the Company's general and professional
insurance included aggregated stop loss features limiting the Company's
out-of-pocket exposure. For the policy period from April 1, 1999 through July
31, 1999, the total exposure for general and professional liability claims is
limited to $23.1 million; for the policy period from April 1, 1998 through March
31, 1999, the Company's total exposure is limited to $7.7 million.

    INCOME TAXES

         Noncurrent deferred income taxes arise primarily from timing
differences resulting from using accelerated depreciation for tax purposes,
reserves for uninsured losses not deductible in the current period, and other
timing differences (see Note 17).

         The Company files a consolidated federal income tax return. Federal and
state income tax payments made for the fiscal years ended September 30, 2001,
2000 and 1999 were $0.8 million, $0.6 million and $3.0 million,


                                      F-9
<PAGE>

respectively. In addition to the tax payments made, the Company received $4.0
million, $21.9 million and $78.1 million in tax refunds during the fiscal years
ended September 30, 2001, 2000 and 1999, respectively.

    NET REVENUES

         Revenues are derived from services rendered to patients for routine
long-term care, including daily dietary, social and recreational services, and a
full range of pharmacy, rehabilitation and medical services. Revenues are
recorded based upon established rates and adjusted for differences between such
rates and estimated amounts reimbursable by third-party payors when applicable.
Estimated settlements under third-party payor retrospective rate setting
programs (primarily Medicare and Medicaid) are accrued in the period the related
services are rendered. Historically, the Medicare program utilized a cost-based
retrospective reimbursement system for skilled nursing facilities based on
reasonable direct and indirect allowable costs, as well as capital costs and
ancillary costs, primarily therapy and pharmacy costs. Under this system, each
skilled nursing facility received an interim payment during the year then
submitted an annual cost report prepared in accordance with federal and state
regulations, subject to audit and retroactive adjustment in future periods. In
the opinion of management, adequate provision has been made for such adjustments
and final settlements should not have a material effect on financial position or
results of operations. The Balanced Budget Act made numerous changes to the
Medicare program through the implementation of a prospective payment system
("PPS") whereby reimbursement for skilled nursing facilities is based on an
all-inclusive per diem rate, which varies depending on the level of acuity of
the patient. See Note 6.

    CHANGE IN ACCOUNTING ESTIMATES

         During the fiscal year ended September 30, 1999, the Company recorded
$122.0 million of adjustments to reduce the estimated amount due from
third-party payors, which included $39.3 million to reduce the estimated amount
receivable from cost reports filed or settled during the period. The remaining
$82.7 million of adjustments was recorded to reflect amounts due to the Medicare
program for previously received reimbursement and to reduce the estimated amount
receivable from all Medicare cost report appeal items, primarily pertaining to
related party adjustments asserted by the fiscal intermediaries through the
reopening of certain Mariner Health cost reports. The reopening of these cost
reports were to incorporate adjustments that reduced the allowable costs of
rehabilitation therapy services furnished to the Mariner Health facilities by
Mariner Health's rehabilitation subsidiaries. At June 30, 1999, Mariner Health
had received revised notices of program reimbursement ("NPRs") for approximately
fifty 1995 and 1996 cost reports of its facilities, which resulted in reductions
in reimbursable cost of approximately $16.9 million. The loss per share of this
$122.0 million change in estimate was approximately ($1.66) for the fiscal year
ended September 30, 1999. In lieu of recoupment by the fiscal intermediaries,
the Company reached an agreement with the Health Care Financing Administration
("HCFA"), which subsequently was renamed the Centers for Medicare and Medicaid
Services ("CMS"), and the fiscal intermediaries, implementing an extended
repayment plan. The balance as of the date of the agreement was approximately
$15.9 million, which was repaid over a period of one year.

    COMPREHENSIVE INCOME

         In fiscal 1999, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which
establishes standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. The adoption
of this statement did not have a material impact on the Company's financial
position or results of operations. Comprehensive income includes net income
(loss), as well as charges and credits directly to stockholders' equity
(deficit), which are excluded from net income (loss). The Company has presented
comprehensive income in the consolidated statements of stockholders' equity
(deficit).

    SEGMENT REPORTING

         During Fiscal 1999, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and
Related Information ("SFAS 131"), which establishes standards for the method
that public business enterprises report information about operating segments in
financial statements. SFAS 131 also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The adoption of SFAS 131 did not affect results of operations or financial
position. See Note 21.



                                      F-10
<PAGE>

    STOCK-BASED COMPENSATION

         The Company grants stock options for a fixed number of shares to
employees with an exercise price equal to the fair value of the shares at the
date of the grant. The Company accounts for employee stock options in accordance
with APB Opinion 25, "Accounting for Stock Issued to Employees" ("APB 25"), and
related interpretations. Accordingly, the Company recognizes no compensation
expense for stock option grants.

         In October 1995, the Financial Accounting Standards Board (the "FASB")
adopted Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), which allows companies the option to
retain the current accounting approach for recognizing stock-based expense in
the financial statements or to adopt a new accounting method based on the
estimated fair value of the employee stock option. Companies that do not follow
the new fair-value based method are required to provide pro forma disclosures of
net income and earnings per share as if the fair-value method of accounting had
been applied. See Note 11 for the pro forma effects on the Company's reported
net income (loss) and earnings (loss) per share assuming the election had been
made to recognize compensation expense on stock-based awards in accordance with
SFAS 123.

    RECENT ACCOUNTING PRONOUNCEMENTS

         In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
Gains or losses from changes in fair value would be recognized in earnings in
the period of change unless the derivative is designated as a hedging
instrument. In June 1999, the FASB issued Statement of Financial Accounting
Standards No. 137, which amended SFAS 133, delaying its effective date to fiscal
years beginning after June 15, 2000. The Company does not currently hold any
derivative instruments nor does it currently engage in hedging activities. The
Company adopted this accounting standard as required effective October 1, 2000
and it did not have a material impact on its consolidated financial position or
results of operations.

         In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 141, "Business Combinations" ("SFAS 141"), which is effective for
all business combinations completed after June 30, 2001. SFAS 141 eliminates the
pooling-of-interests method of accounting for business combinations except for
qualifying business combinations initiated prior to July 1, 2001. In addition,
SFAS 141 further clarifies the criteria to recognize intangible assets
separately from goodwill. The Company does not expect there to be a material
impact on its consolidated financial position, results of operations, or cash
flows as a result of adopting this accounting standard.

         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. SFAS 142 will be effective
for the Company beginning October 1, 2002. Until the Company and Mariner Health
file a plan of reorganization that is confirmed by the Bankruptcy Court, the
Company cannot currently estimate the impact these impairment tests will have on
its consolidated financial position or result of operations.

         In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"). Companies are required to adopt SFAS 144 in their fiscal
year beginning after December 15, 2001. SFAS 144 changes the criteria that would
have to be met to classify an asset as held-for-sale, revises the rules
regarding reporting the effects of a disposal of a segment of a business and
requires expected future operating losses from discontinued operations to be
displayed in discontinued operations in the period(s) in which the losses were
incurred. The Company does not expect there to be a material impact on its
financial position, results of operations, or cash flows, as a result of
adopting this accounting standard.



                                      F-11
<PAGE>

NOTE 3        PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE

    EVENTS LEADING TO BANKRUPTCY

         During fiscal year 1999, the Company experienced significant losses,
resulting in certain financial covenant violations under the Company's various
loan agreements (see Note 9). In addition, the Company did not make any
scheduled interest and principal payments due subsequent to September 30, 1999,
which resulted in an event of default under its loan agreements. The inability
of the Company to service or restructure its debt and other obligations
culminated in the Chapter 11 Filings on January 18, 2000. While the Chapter 11
Filings constituted a default under the Company's various financing
arrangements, section 362 of the Bankruptcy Code imposes an automatic stay that
generally precludes any creditors and other interested parties under such
arrangements from taking any remedial action in response to any such resulting
default outside of the Chapter 11 Cases without obtaining relief from the
automatic stay from the Bankruptcy Court.

    REORGANIZATION

         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 (the "MPAN DIP 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
("Foothill"). The MHG Debtors also obtained a commitment for $50.0 million in
DIP financing (the "Mariner Health DIP Financing" and together with the MPAN DIP
Financing, the "DIP Financings") from a group of lenders (the "Mariner Health
DIP Lenders") led by PNC Bank, National Association ("PNC"). The commitment
under the MPAN DIP Financing has been reduced to $50.0 million. The commitment
under the Mariner Health DIP Financing has been reduced to $25.0 million. See
Note 9.

         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 September 30, 2001 and 2000 are classified in the consolidated
balance sheet as liabilities subject to compromise. The Company has been and
intends to continue to pay postpetition claims of vendors and providers in the
ordinary course of business.

         As previously noted, on November 30, 2001, the Debtors filed a Joint
Plan and Disclosure Statement with the Bankruptcy Court. The Joint Plan is the
result of 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.

         In this regard, the Debtors, a majority of the MPAN Senior Credit
Facility Claim Holders, and a majority of the MHG Senior Credit Facility Claim
Holders entered into a Joint Plan Support Agreement dated as of November 2, 2001
(the "Joint Plan Support Agreement"). The Debtors, a majority of the MPAN Senior
Credit Facility Claim Holders and the MPAN Committee also entered into a Plan
Support Agreement dated as of September 21, 2001 (the "Plan Support Agreement").
The Joint Plan Support Agreement commits the parties thereto to support a plan
of reorganization that conforms with the terms set forth in the Joint Plan
Support Agreement provided that the Joint Plan is confirmed and goes effective
on or before April 1, 2002, and a disclosure statement for such plan is approved
on or before January 31, 2002. The Plan Support Agreement commits the MPAN
Committee to support a plan of reorganization that provides for recoveries to
the MPAN Committee as set forth in the Plan Support Agreement provided that such
a plan is consummated prior to March 31, 2002.

         If confirmed and consummated, the Joint Plan will provide 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 will be deemed to be claims
against and assets of all of the MPAN Debtors, and any claims against and assets
of a particular MHG Debtor will be deemed to be claims against and assets of all
of the MHG Debtors. Notwithstanding the foregoing, substantive consolidation
will not affect the validity of any creditor's perfected and unavoidable
interest in property of the Debtors' estates (such as validly perfected liens).


                                      F-12
<PAGE>

         Following consummation of the Joint Plan, the Company will have one
capital structure, and the MPAN Debtors and the MHG Debtors generally will no
longer be required to 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 will receive the
majority of the equity in the Company following its reorganization ("Reorganized
MPAN").

         If the Joint Plan is confirmed and consummated, general unsecured
creditors of the MPAN Debtors, other than holders of the Company's issued and
outstanding $275.0 million principal amount 9.5% Senior Subordinated Notes due
2007 (the "9.5% Senior Subordinated Notes") and $294.0 million principal amount
10.5% Senior Subordinated Discount Notes due 2007 (the "10.5% Senior
Subordinated Discount Notes," and together with the 9.5% Senior Subordinated
Notes, 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 will consist of approximately 2% of
the Reorganized MPAN's common stock, par value $.01 per share (the "New MPAN
Common Stock"), issued on the effective date of the Joint Plan (the "Effective
Date"); and additional warrants to purchase approximately 2% of the New MPAN
Common Stock. Holders of MPAN Senior Subordinated Notes that do not oppose
confirmation of the Joint Plan will receive pro rata distributions from the MPAN
Senior Subordinated Note distribution fund, which also will consist of
approximately 2% of the New MPAN Common Stock and additional warrants to
purchase approximately 2% of the New MPAN Common Stock. General unsecured
creditors of the MHG Debtors and holders of Mariner Health's issued and
outstanding $150.0 million principal amount Senior Subordinated Notes due 2004
(the "MHG Senior Subordinated Notes") that do not oppose confirmation of the
Joint Plan will receive on account of their claims pro rata distributions from
the MHG Debtors' unsecured claims distribution fund, which will consist 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.

         If the Joint Plan is confirmed and consummated, the Debtors' principal
prepetition secured lender groups (the MPAN Senior Credit Facility Claim Holders
and MHG Senior Credit Facility Claim Holders) will become the majority owners of
Reorganized MPAN, receiving, in the aggregate, distributions of approximately
96% of the shares of New MPAN Common Stock as of the Effective Date, in addition
to cash and newly issued debt. Certain of the Debtors' SNFs are 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"). If the Joint Plan is confirmed, most Project Lenders will receive a
cash payment in an amount necessary (if any) to provide them a
loan-to-collateral-value ratio of 80% (the "Cash Pay Down") and a new mortgage
note in an amount equal to the balance of their allowed secured claims after the
Cash Pay Down. The collateral of certain Project Lenders may be returned to them
in satisfaction of all or part of their allowed secured claims. Most other
creditors holding allowed secured claims 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
will be paid in full.

         If the Joint Plan is confirmed and consummated, existing stockholder
interests in the currently issued and outstanding common stock, par value $.01
per share, of Mariner Post-Acute Network, Inc. (the "Common Stock") and options
and warrants to acquire the same will be cancelled. Accordingly, holders of
Common Stock are not entitled to vote on the Joint Plan and will be deemed to
have rejected the Joint Plan. Following the Effective Date, Mariner Health and
its direct or indirect subsidiaries will be direct or indirect subsidiaries of
Reorganized MPAN as set forth in a corporate restructuring program to be
implemented by the Company in connection with the effectiveness of 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.

         Under the Bankruptcy Code, the Debtors may assume or reject executory
contracts and unexpired leases, including real property lease obligations.
Parties affected by these rejections may file claims with the Bankruptcy Court
in accordance with the reorganization process. The Debtors are actively engaged
in the process of reviewing their respective executory contracts and unexpired
leases and final decisions with respect to assuming or rejecting contracts and
unexpired leases, as well as the approval of the Bankruptcy Court, are still
pending.

         If the Disclosure Statement is approved by the Bankruptcy Court, and
only following such approval, the Joint Plan must be voted upon by impaired
classes of creditors of the Debtors that are entitled to vote and approved by
the Bankruptcy Court. No assurance can be given regarding the approval of the
Disclosure Statement or Joint Plan,


                                      F-13

<PAGE>

whether the Disclosure Statement or Joint Plan will be modified, or the terms on
which the approval of the Disclosure Statement or Joint Plan may be conditioned.
In addition, there can be no assurances that the Joint Plan will be approved by
requisite holders of claims and equity holders and confirmed by the Bankruptcy
Court, or that the Joint Plan will be consummated. Although the Bankruptcy Court
may confirm a plan of reorganization notwithstanding the non-acceptance of the
plan by an impaired class of creditors or equity holders, various requirements
of the Bankruptcy Code must be met. If the Joint Plan is not confirmed and the
Company's exclusive right to file and solicit acceptance of the Joint Plan ends,
any party in interest may subsequently file its own plan of reorganization for
the MPAN Debtors or the MHG Debtors. In addition, on June 12, 2001, the MHG
Senior Credit Facility Claim Holders filed their own plan of reorganization for
the MHG Debtors, which has since been amended (including amendments thereto,
"the MHG Bank Groups' Plan"), and a proposed disclosure statement for the MHG
Bank Groups' Plan. The adequacy of the disclosure statement was subsequently
approved by the Bankruptcy Court at a hearing held on August 7, 2001, subject to
various amendments in response to objections thereto. In light of the Joint Plan
Support Agreement, the MHG Senior Credit Facility Claim Holders are not seeking
confirmation of their own alternative plan. However, if certain deadlines in the
Joint Plan Support Agreement are not met, or if there is otherwise a default
under that agreement, the MHG Senior Credit Facility Claim Holders may elect to
seek confirmation of their alternative plan.

     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 will be established in connection with the Joint Plan. A
summary of the principal categories of claims classified as liabilities subject
to compromise at September 30, 2001 and 2000 are as follows (in thousands of
dollars):

<TABLE>
<CAPTION>
                                                                             SEPTEMBER 30,
                                                                    --------------------------------
                                                                       2001                 2000
                                                                    -----------          -----------
         <S>                                                        <C>                  <C>
         Long-term debt ...................................         $ 2,057,067          $ 2,147,756
         Accounts payable .................................              95,794               82,318
         Accrued interest .................................              79,959               85,564
         Accrued insurance obligations ....................              86,268               71,745
         Other accrued liabilities ........................               7,706               15,140
         Deferred loan costs ..............................             (32,974)             (32,974)
                                                                    -----------          -----------
                                                                    $ 2,293,820          $ 2,369,549
                                                                    ===========          ===========
</TABLE>

         Approximately $2.3 billion and $2.4 billion of liabilities subject to
compromise would have been classified as current liabilities at September 30,
2001 and 2000, respectively if the Chapter 11 Filings had not been filed.

         In accordance with SOP 90-7, effective January 18, 2000, the Company
has discontinued accruing interest relating to its debt facilities currently
classified as liabilities subject to compromise. Contractual interest for the
fiscal years ended September 30, 2001 and 2000 was $201.1 million and $238.9
million, respectively, which is $195.9 million and $167.0 million in excess of
interest expense included in the accompanying consolidated financial statements
for the fiscal years ended September 30, 2001 and 2000. Interest expense for the
fiscal years ended September 30, 2001 and 2000 represents interest paid on
certain capital leases and other miscellaneous indebtedness.


                                      F-14

<PAGE>

     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 consolidated statements of
operations for the fiscal years ended September 30, 2001 and 2000 consist of the
following (in thousands of dollars):

<TABLE>
<CAPTION>
                                                                    FISCAL YEAR ENDED SEPTEMBER 30,
                                                                    --------------------------------
                                                                       2001                 2000
                                                                    -----------          -----------
         <S>                                                        <C>                 <C>
         Professional fees ................................         $    37,002         $     22,918
         DIP financing fees ...............................               3,156                2,852
         Other reorganization costs .......................              12,233                2,607
         Net loss (gain) on divestitures ..................               1,531              (14,688)
         Gain on settlement of prepetition accounts payable                 (89)                (410)
         Interest earned on accumulated cash resulting from
             Chapter 11 Filings ...........................              (6,112)              (2,463)
                                                                    -----------          -----------
                                                                    $    47,721          $    10,816
                                                                    ===========          ===========
</TABLE>


NOTE 4   DISCONTINUED OPERATIONS

         As noted previously, the Company has obtained the approval of the
Bankruptcy Court for the sale of its pharmaceutical division. The APS Division
has incurred operating losses in recent years and the Company has determined
that the APS Division is 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. However, numerous of the Company's
SNFs have contractual agreements with APS that will, for the most part, remain
in effect after the sale transaction closes.

         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 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 of the Company authorizing: (i) the implementation
of certain notice, overbid, and auction procedures in connection with the
Company's 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 (the "APS Sale Motion") in each of their respective
Chapter 11 Cases seeking approval of the sale of APS 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. 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 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 will be entitled to its full $1.7 million break-up fee. The Company
expects to close the sale of the assets of the APS Division by January 31, 2002.

         APS currently serves approximately 216 of the Company's facilities
through contractual arrangements. Likewise, Genesis provides pharmaceutical
supplies and services and related consulting services to approximately 58 SNFs
that are operated by one of the Company's wholly owned subsidiaries, GranCare,
Inc. ("GranCare"), as a result of an agreement with a predecessor of Genesis at
the February 1997 sale of GranCare's institutional pharmacy


                                      F-15

<PAGE>

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 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 each of the
three fiscal years in the period ended September 30, 2001 are as follows (in
thousands of dollars):

<TABLE>
<CAPTION>
                                                                            FISCAL YEAR ENDED SEPTEMBER 30,
                                                                   ---------------------------------------------------
                                                                      2001                2000                  1999
                                                                   ---------            ---------            ---------
<S>                                                                <C>                  <C>                  <C>
Net revenues ..........................................            $ 214,633            $ 238,372            $ 281,717

Total costs and expenses ..............................              213,225              241,669              441,267
                                                                   ---------            ---------            ---------
Operating income (loss) ...............................                1,408               (3,297)            (159,550)

Other income (expenses) ...............................                 (741)                 592                 (746)
                                                                   ---------            ---------            ---------
Income (loss) from operations of discontinued
     pharmacy operations ..............................            $     667            $  (2,705)           $(160,296)
                                                                   =========            =========            =========
</TABLE>


         The assets and liabilities of such operations to be discontinued
consisted of the following at September 30, 2001 and 2000 (in thousands of
dollars):

<TABLE>
<CAPTION>
                                                                                   SEPTEMBER 30,
                                                                        -----------------------------------
                                                                            2001                    2000
                                                                        -----------             -----------
<S>                                                                     <C>                     <C>
Receivables ................................................            $    28,386             $    35,505
Inventories ................................................                 13,368                  12,638
Prepaid expenses and other current assets ..................                    550                     603
Property and equipment, net ................................                 10,778                  13,369
Goodwill, net ..............................................                  8,966                   9,729
Other assets ...............................................                  1,637                   2,301
Liabilities subject to compromise ..........................                 (1,575)                 (1,664)
Other liabilities ..........................................                 (1,750)                 (1,502)
                                                                        -----------             -----------
Net assets of discontinued operations ......................            $    60,360             $    70,979
                                                                        ===========             ===========
</TABLE>

         The net assets of discontinued operations at September 30, 2000 are
classified as a net current asset based substantially on the original
classification of such assets and liabilities.

NOTE 5  DIVESTITURES

     FISCAL YEAR 2001

         During fiscal year 2001, the Company completed the sale or divestiture
of approximately 44 owned, leased or managed SNFs and certain assets, which
resulted in a net gain of approximately $3.7 million. These facilities reported
net revenues of approximately $110.7 million, $173.0 million and $173.7 million
for the fiscal years ended September 30, 2001, 2000 and 1999, respectively. The
Company anticipates that in the aggregate, these divestitures will improve
operating results in future periods.

     FISCAL YEAR 2000

         During the period from the Petition Date through September 30, 2000,
the Company completed the sale or divestiture of certain owned, leased or
managed SNFs and certain assets, which resulted in a net gain of


                                      F-16

<PAGE>

approximately $3.6 million. The Company anticipates that in the aggregate, these
divestitures will improve operating results in future periods.

         The Company, through its GranCare subsidiaries, leased twenty-two
facilities from Senior Housing Properties Trust ("SHPT") and its wholly-owned
subsidiary SPTMNR Properties Trust ("SPTMNR"), which succeeded to the interests
of Health and Retirement Properties Trust ("HRPT") to various agreements,
(collectively, the "SNH Entities"). On June 30, 2000, the Company, SPTMNR and
SHPT executed a settlement agreement, which was approved by the Bankruptcy Court
on May 10, 2000, whereby: (a) the Company obtained fee simple ownership of five
of the previously leased facilities from the SNH Entities; (b) seventeen
facilities leased by the Company and related personal property were assigned to
affiliates of the SNH Entities; (c) a cash collateral deposit of $15.0 million
and shares of HRPT and SPTMNR stock, with a market value of $7.2 million, were
retained by the SNH Entities; and (d) the Company agreed to manage the seventeen
facilities transferred to the SNH Entities during a transition period, which
ended December 31, 2000. Upon termination of the management agreement, the
Company has no further relationship with or obligations to the SNH Entities. As
a result of the settlement, the Company realized a net gain of approximately
$11.1 million, which is included as part of the Company's net gain on
divestitures and included in the accompanying consolidated statements of
operations as reorganization items.

         During the quarter ended December 31, 1999, the Company completed the
sale of certain SNFs and other assets, which resulted in a net gain on sale of
assets of approximately $1.4 million. In addition, the Company also disposed of
its remaining home health operations and recorded a net loss on disposal of
assets of approximately $2.7 million.

           The 28 skilled nursing facilities divested during fiscal year 2000
reported net revenues of approximately $87.1 million and $130.7 million for the
fiscal years ended September 30, 2000 and 1999, respectively.

      FISCAL YEAR 1999

         On July 29, 1999, the Company completed the sale of its hospital
rehabilitation management contract business to National Rehab Partners, Inc.,
which resulted in a loss on sale of $4.9 million.

         On June 30, 1999, the Company completed the sale of the assets of its
outpatient rehabilitation management contract to HealthSouth Corporation, which
resulted in a loss on sale of $2.5 million.

         Effective May 31, 1999, the Company terminated all of its contracts to
provide therapy services to both unaffiliated third-parties and to the Company's
SNFs. As a result of the contract terminations and the closure of its therapy
business, the Company recorded a loss on the disposal of the goodwill associated
with the therapy business of $228.5 million and a loss on disposal of related
assets of $7.5 million.

         The Company also disposed of substantially all of its home health,
contract management operations, and approximately 15 SNFs during the year ended
September 30, 1999, recording a net gain on disposal of $0.7 million. These SNFs
reported net revenues of approximately $32.0 million for the fiscal year ended
September 30, 1999.

NOTE 6   REVENUES

         Net revenues include amounts payable for services rendered to patients
from the federal government under Medicare, from the various states where the
Company operates under Medicaid, and from private insurers and the patients
themselves. Prior to May 31, 1999, net revenues also included amounts received
under management contracts with non-affiliated SNFs and other entities for
rehabilitation therapy services as well as revenues from the Company's medical
products and home health care services. Primarily as a result of changes in
Medicare reimbursement effected under the Balanced Budget Act, these businesses
began to generate, or were anticipated to generate, significant operating losses
and negative cash flow and have been divested or closed (see Note 5).

         The sources and amounts of the Company's patient revenues are
determined by a number of factors, including licensed bed capacity of its
facilities, occupancy rate, payor mix, type of services rendered to the patient,
and rates of reimbursement among payor categories (private, Medicare, and
Medicaid). Changes in the mix of the Company's patients among the private pay,
Medicare and Medicaid categories as well as changes in the quality mix
significantly affect the profitability of the Company's operations.


                                      F-17

<PAGE>

         A summary of approximate net revenues by payor type for the fiscal
years ended September 30, 2001, 2000 and 1999 is as follows (in thousands of
dollars):

<TABLE>
<CAPTION>
                                                                               FISCAL YEAR ENDED SEPTEMBER 30,
                                                                   -----------------------------------------------------
                                                                      2001                 2000                  1999
                                                                   -----------          -----------          -----------
         <S>                                                       <C>                  <C>                  <C>
         Medicaid ..............................................   $   923,576          $   956,290          $   934,619
         Medicare ..............................................       565,230              514,881              548,266
         Private and other .....................................       383,329              408,136              507,978
                                                                   -----------          -----------          -----------
                                                                   $ 1,872,135          $ 1,879,307          $ 1,990,863
                                                                   ===========          ===========          ===========
</TABLE>

     BALANCED BUDGET ACT AND THE PROSPECTIVE PAYMENT SYSTEM

         As noted previously, the Balanced Budget Act amended the Medicare
program by revising the payment system for skilled nursing services through the
implementation of PPS whereby reimbursement for SNFs is based on an
all-inclusive per diem rate, which varies depending on the level of acuity of
the patient. As a result, SNFs reimbursed under the Medicare program are paid a
federal per diem rate for virtually all covered services, including pharmacy and
therapy services, regardless of the actual costs incurred by the provider. Each
patient is evaluated and assigned to one of 44 Resource Utilization Groups
("RUGs") which correspond to the patient's acuity level under the PPS patient
classification system. The patient's RUG classification dictates the per diem
reimbursement rate for that patient. The higher the acuity level of the patient,
the more services that are required by that patient. Accordingly, a higher
acuity patient that requires more services is assigned to a higher payment
grouping, resulting in a higher per diem rate. As of July 1, 1999, all
facilities were being funded under the provisions of PPS, and, as such, revenues
recorded consist of the aggregate payments expected from Medicare for individual
claims at the appropriate payment rates.

         The Balanced Budget Act also provided that for SNFs in operation prior
to 1996, the federal per diem rate would be phased in over a four-year period.
In November 1999, Congress passed the Balanced Budget Refinement Act of 1999
("BBRA") which, among other things, allowed each skilled nursing facility to
apply to adopt the full federal rate at the beginning of their cost reporting
periods beginning on, or after, January 1, 2000, or to continue to phase in to
the federal rate over the next three years using a blended transition rate (see
Recent Legislation below). An evaluation was completed by the management of the
Company to determine the SNFs that would benefit from adoption of the full
federal rate and the Company has taken advantage of this election where
appropriate.

     RECENT LEGISLATION

         Since the passage of the Balanced Budget Act, Congress has passed
additional legislation intended to temporarily mitigate the reduction in
reimbursement for SNFs under PPS. As noted previously, Congress passed the BBRA
in November 1999 and, in December 2000, passed the Benefits Improvement and
Protection Act of 2000 ("BIPA").

         Among other things, the BBRA provides for a temporary 20% increase in
the federal per diem rate or the federal component of the blended transition
rate (facilities subject to the full federal rate would receive 100% of the
enhancement) for 15 of the 44 RUGs to recognize the costs associated with the
more medically complex patients. The increase is for services provided beginning
April 1, 2000 (BIPA amended this provision to redistribute the amounts
applicable to rehabilitation patients from three specific RUG categories across
all 14 rehabilitation RUG categories) and will remain in effect until the
Secretary of HHS implements a refined patient classification to better account
for medically-complex patients. The BBRA also provides for a 4% increase in the
federal per diem rate for all patient acuity categories for the twelve months
ending September 30, 2001 and 2002. In addition, the BBRA also excludes certain
items and services from the formerly all-inclusive PPS per diem rates, such as
ambulance services furnished to an individual in conjunction with renal dialysis
services, chemotherapy items, radioisotope services and customized prosthetic
devices (artificial limbs).

         In addition to the changes made by the BBRA, BIPA provides for, among
other things, an increase in the nursing component of all RUG categories by
16.66% over an 18 month period commencing April 1, 2001, and requires the
Comptroller General to complete a study of nursing staff ratios by August 1,
2002. BIPA also increased the SNF prospective payment inflation adjustment
upward for rates effective October 1, 2000 through September 30, 2001. Moreover,
BIPA further refines certain consolidated billing requirements established by
the Balanced Budget Act.


                                      F-18

<PAGE>
           However, 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 (currently scheduled to be
implemented October 2002) and the increases provided for under BIPA will sunset
in October 2002. Unless additional legislative action is undertaken by the
United States Congress, the loss of revenues associated with these occurrences
will have a material adverse effect on the Company. The Company preliminarily
estimates that these occurrences will result in a loss of revenue of
approximately $72 million in fiscal year 2003. While the Company is 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.

           Laws and regulations governing the Medicare and Medicaid programs are
complex and subject to interpretation. The Company is aware of certain current
investigations and additional possible investigations involving allegations of
potential wrongdoing with respect to Medicare and Medicaid (see Note 18). While
the Company believes that it is in compliance with all applicable laws and
regulations, compliance with such laws and regulations can be subject to future
government review and interpretation as well as significant regulatory action
including fines, penalties, and potential exclusion from the Medicare and
Medicaid programs.

NOTE 7   PROPERTY AND EQUIPMENT

         Property and equipment at September 30, 2001 and 2000 consisted of the
following (in thousands of dollars):

<TABLE>
<CAPTION>
                                                                                 SEPTEMBER 30,
                                                                       -----------------------------------
                                                                          2001                     2000
                                                                       -----------             -----------
         <S>                                                           <C>                     <C>
         Land .............................................            $    65,665             $    68,633
         Buildings and improvements .......................                443,119                 447,729
         Leasehold improvements ...........................                 53,600                  57,804
         Furniture, fixtures and equipment ................                163,435                 156,954
         Leased property under capital leases .............                 41,152                  41,035
                                                                       -----------             -----------
              Total .......................................                766,971                 772,155
         Less: Accumulated depreciation ...................               (350,945)               (333,111)
                                                                       -----------             -----------
                                                                       $   416,026             $   439,044
                                                                       ===========             ===========
</TABLE>


         Depreciation expense, including amortization of assets under capital
leases, related to property and equipment for the fiscal years ended
September 30, 2001, 2000 and 1999 was $37.4 million, $32.3 million and $65.1
million, respectively.

NOTE 8   RESTRICTED INVESTMENTS

         Restricted investments at September 30, 2001 and 2000 included the
following (in thousands of dollars):

<TABLE>
<CAPTION>
                                                                                       GROSS          GROSS       ESTIMATED
                                                                       AMORTIZED    UNREALIZED     UNREALIZED       FAIR
                                                                         COST         GAINS          LOSSES         VALUE
                                                                       --------     -----------    -----------    ---------
<S>                                                                    <C>          <C>            <C>            <C>
SEPTEMBER 30, 2001
Restricted by self insurance programs:
    U.S. Treasury Notes .........................................      $  3,293      $     47      $      --       $  3,340
    Corporate debt securities ...................................         9,975           399             --         10,374
    Mortgage-backed securities ..................................         4,440           129             --          4,569
    Cash ........................................................         1,137            --             --          1,137
    Other .......................................................           749            --             --            749
                                                                       --------      --------       --------       --------
                                                                         19,594           575             --         20,169
Restricted by bank agreements:
    Cash Collateral Accounts ....................................        12,662            --             --         12,662
                                                                       --------      --------       --------       --------
                                                                       $ 32,256      $    575       $     --       $ 32,831
                                                                       ========      ========       ========       ========

SEPTEMBER 30, 2000
Restricted by self insurance programs:
    U.S. Treasury Notes .........................................      $  3,108      $     18       $    (27)      $  3,099
    Asset-backed securities .....................................         1,262            --            (35)         1,227
    Corporate debt securities ...................................        19,736            31           (259)        19,508
    Mortgage-backed securities ..................................         2,301             6             --          2,307
    Cash ........................................................         5,956            --             --          5,956
                                                                       --------      --------       --------       --------
                                                                         32,363            55           (321)        32,097
Restricted by bank agreements:
    Cash Collateral Accounts ....................................         3,574            --             --          3,574
                                                                       --------      --------       --------       --------
                                                                       $ 35,937      $     55       $   (321)      $ 35,671
                                                                       ========      ========       ========       ========
</TABLE>


                                      F-19

<PAGE>

         Proceeds from the sales and maturities of investments were $20.8
million, $16.8 million and $32.3 million for the fiscal years ended
September 30, 2001, 2000 and 1999, respectively.

         The amortized cost and estimated fair value of debt securities and
other investments at September 30, 2001, by contractual maturity, are shown
below (in thousands of dollars). Expected maturities may differ from contractual
maturities because borrowers may have the right to call or repay obligations
with or without call or prepayment penalties.

<TABLE>
<CAPTION>
                                                                                                ESTIMATED
                                                                        AMORTIZED                 FAIR
                                                                           COST                   VALUE
                                                                       -----------             -----------
<S>                                                                    <C>                     <C>
Due in one year or less ..........................                     $     1,689             $     1,696
Due after one year through five years ............                           9,102                   9,493
Due after five years through ten years ...........                           2,477                   2,525
Due after ten years ..............................                              --                      --
                                                                       -----------             -----------
                                                                            13,268                  13,714

Mortgage-backed securities .......................                           4,440                   4,569
Cash, Cash Collateral Account and Other ..........                          14,548                  14,548
                                                                       -----------             -----------
Total ............................................                     $    32,256             $    32,831
                                                                       ===========             ===========
</TABLE>


NOTE 9   DEBT

         Long-term debt at September 30, 2001 and 2000 is summarized in the
following table (in thousands of dollars):

<TABLE>
<CAPTION>
                                                                          SEPTEMBER 30,
                                                              -----------------------------------
                                                                 2001                     2000
                                                              -----------             -----------
<S>                                                           <C>                     <C>
Senior credit facilities:
    Senior Credit Facility .......................            $   894,208             $   905,981
    Mariner Health Senior Credit Facility ........                225,991                 233,835
    Mariner Health Term Loan Facility ............                185,283                 192,439

Subordinated debt:
    Senior Subordinated Notes ....................                274,121                 274,121
    Senior Subordinated Discount Notes ...........                220,071                 220,071
    Mariner Health Senior Subordinated Notes .....                103,136                 103,136

Other, including capital lease obligations .......                213,945                 218,173
                                                              -----------             -----------
                                                                2,116,755               2,147,756

Less: current maturities .........................                     --                      --
Less amounts subject to compromise ...............             (2,057,067)             (2,147,756)
                                                              -----------             -----------
Total long-term debt .............................            $    59,688             $        --
                                                              ===========             ===========
</TABLE>

     PREPETITION DEBT

         Due to the failure to make scheduled payments, comply with certain
financial covenants and the commencement of the Chapter 11 Cases, the Company is
in default on substantially all of its prepetition debt obligations. Except as
otherwise may be determined by the Bankruptcy Court, the automatic stay
protection afforded by the Bankruptcy Code generally prevents any action from
being taken with regard to any of the defaults under the prepetition debt
obligations. These obligations are classified in the accompanying consolidated
financial statements as liabilities subject to compromise at September 30, 2001
and 2000 (see Note 3).

         The obligations of Mariner Post-Acute Network, Inc. under its senior
credit facility, as well as obligations in respect of a synthetic lease
transaction and under a deficiency note relating to a total return swap
terminated in August 1999, are guaranteed by substantially all of the Mariner
Post-Acute Network, Inc. subsidiaries other than the Omega Debtors (as defined
below), Mariner Health and the Mariner Health Subsidiaries, and are secured by


                                      F-20

<PAGE>

substantially all of the otherwise unencumbered owned assets of Mariner
Post-Acute Network, Inc. and such subsidiaries. Mariner Health's obligations
under its senior credit facility are guaranteed by substantially all of the
Mariner Health Subsidiaries and are secured by substantially all of the
otherwise unencumbered assets of Mariner Health and such subsidiary guarantors.
Unlike the MPAN Debtors, the MHG Debtors neither guarantee the Mariner
Post-Acute Network, Inc. obligations under the Mariner Post-Acute Network, Inc.
debt facilities (other than guaranteeing certain obligations of Mariner
Post-Acute Network, Inc. relating to the latter's prepetition total return swap
transaction) nor pledge their assets to secure such obligations.
Correspondingly, the MPAN Debtors do not guarantee or assume any obligations
under the Mariner Health debt facilities. The MHG Debtors are not subject to the
covenants contained in the MPAN Debtors' debt facilities, and the covenants
contained in the Mariner Health debt facilities are not binding on the MPAN
Debtors.

         No principal payments have been made on prepetition indebtedness since
the Petition Date with the exception of repayments made against the Company's
senior credit facilities, primarily as a result of the application of a portion
of the cash proceeds received from the sales of certain facilities and other
assets, adequate protection payments with regard to certain mortgaged
facilities, and notional amounts related to certain capital equipment leases as
adequate protection payments. In addition, during July 2001, Mariner Health made
a $15.0 million adequate protection payment to the MHG Senior Credit Facility
Claim Holders in connection with the extension of the Mariner Health DIP
Financing maturity date to December 31, 2001. Subsequently, an additional
adequate protection payment of $7.5 million was made to the MHG Senior Credit
Facility Claim Holders in connection with the further extension of the maturity
of the Mariner Health DIP financing to April 1, 2002 (see "-
Debtor-in-Possession Financing for Mariner Health"). Interest paid on
prepetition indebtedness in fiscal year 2001 was $5.2 million. Interest paid on
prepetition indebtedness was $20.5 million during fiscal year 2000, of which
$15.6 million was paid prior to the Petition Date, and $175.8 million during
fiscal year 1999.

     SENIOR CREDIT FACILITY

         The Senior Credit Facility consists of four components: a 6 1/2 year
term loan facility in an aggregate principal amount of $315.0 million (the
"Tranche A Term Loan Facility"); a 7 1/2 year loan facility in an aggregate
principal amount of $250.0 million (the "Tranche B Term Loan Facility"); a 8 1/2
year term loan facility in an aggregate principal amount of $250.0 million (the
"Tranche C Term Loan Facility"); and a 6 1/2 year revolving credit facility in
the maximum amount of $175.0 million (the "Revolving Credit Facility"). Loans
made under the Tranche A Term Loan Facility (the "Tranche A Term Loans"), the
Tranche B Term Loan Facility ("Tranche B Term Loans") and the Tranche C Term
Loan Facility ("Tranche C Term Loans") are collectively referred to herein as
"Term Loans". Advances under the Revolving Credit Facility are sometimes
referred to as "Revolving Loans." Principal amounts outstanding under the
Revolving Credit Facility were scheduled to mature in April 2005.

         Interest on outstanding borrowings under the Revolving Credit Facility
accrue, at the option of the Company, at the Alternate Base Rate (the "ABR") of
Chase or at a reserve adjusted Eurodollar Rate (the "Eurodollar Rate") plus, in
each case, an Applicable Margin. The term "Applicable Margin" means a percentage
that will vary in accordance with a pricing matrix based upon the respective
term loan tenor and the Company's leverage ratio.

         Prior to the effectiveness of the December 22, 1998 amendment to the
Senior Credit Facility (the "December 1998 Amendment"), the Applicable Margins
for the Revolving Credit Facility and the Tranche A Term Loan Facility in the
pricing matrix ranged from 0% to 1.25% for ABR loans and 0.08% to 1.25% for
loans under the Eurodollar rate. The applicable interest rate margin for Tranche
B Term Loans was 1.50% for loans under the ABR and 2.50% for Eurodollar loans.
The applicable interest rate margin for the Tranche C Term Loans was 1.75% for
loans under the ABR and 2.75% for Eurodollar loans. Immediately prior to the
December 1998 Amendment, the Applicable Margins for ABR Loans and Eurodollar
Loans under the Revolving Credit Facility and the Tranche A Term Loan Facility
were 1.25% and 2.25% respectively.

         Following the December 1998 Amendment, the Applicable Margins in the
pricing matrix pertaining to the Revolving Credit Facility and Tranche A Term
Loans ranged from 1.25% for ABR loans and 1.75% to 2.75% for loans under the
Eurodollar. The applicable interest rate margin for Tranche B Term Loans was
2.25% for loans under the ABR and 3.25% for Eurodollar loans. The applicable
interest rate margin for Tranche C Term Loans was 2.25% for loans under the ABR
and 3.50% for Eurodollar loans.

         In connection with the May 11, 1999 amendment (the "May 1999
Amendment") to the Senior Credit Facility, all of the Applicable Margins were
increased by 50 basis points. Following the May 1999 Amendment, the


                                      F-21

<PAGE>

Applicable Margins in the pricing matrix pertaining to Revolving Loans and
Tranche A Term Loans range from 0.75% to 1.75% for ABR loans and 2.25% to 3.25%
for loans under the Eurodollar. The applicable interest rate margin for Tranche
B Term Loans is 2.75% for loans under the ABR and 3.75% for Eurodollar loans.
The applicable interest rate margin for Tranche C Term Loans is 3.00% for loans
under the ABR and 4.00% for Eurodollar loans.

         The Senior Credit Facility contains customary covenants which, among
other things, require maintenance of certain financial ratios and limit amounts
of additional debt and repurchases of common stock. The Company obtained a
waiver under the Senior Credit Facility with respect to certain financial
covenant defaults existing at March 31, 1999. At September 30, 1999, the Company
was in violation of all financial covenants. In addition, in order to conserve
its liquidity, the Company did not make the November 1999 interest payments due
on the Senior Credit Facility. The lenders under the Senior Credit Facility
signed a forbearance agreement, pursuant to which they agreed not to take any
remedial action with respect to events of default (including acceleration of
their debt), subject to no new events of default occurring. The forbearance
agreement did not waive any events of default, and it expired on January 14,
2000.

     SENIOR SUBORDINATED NOTES

         On November 4, 1997, the Company completed a private offering to
institutional investors of $275.0 million of its 9.5% Senior Subordinated Notes
due 2007, at a price of 99.5% of face value and $294.0 million of its 10.5%
Senior Subordinated Discount Notes due 2007, at a price of 59.6% of face value
(collectively, the "Notes"). Interest on the Senior Subordinated Notes is
payable semi-annually. Interest on the Senior Subordinated Discount Notes will
accrete until November 1, 2002 at a rate of 10.57% per annum, compounded
semi-annually, and were to be cash pay at a rate of 10.5% per annum thereafter.
The Notes are scheduled to mature on November 1, 2007. The Company did not make
the scheduled interest payment of approximately $13.2 million due on the Senior
Subordinated Notes in November 1999 and such default was not cured within the
applicable grace period.

     MARINER HEALTH SENIOR CREDIT FACILITY AND MARINER HEALTH TERM LOAN FACILITY

         Mariner Health is the borrower under a $460.0 million senior secured
revolving loan facility (the "Mariner Health Senior Credit Facility"), by and
among Mariner Health, the lenders signatory thereto (the "Mariner Health
Lenders"), and PNC, as agent for the Mariner Health Lenders. The Mariner Health
Senior Credit Facility terminated on January 3, 2000 without the scheduled
maturity payment being made. The borrowing availability and rate of interest
varied depending upon specified financial ratios with applicable interest rate
margins ranging between 0% and 0.25% for prime-base borrowings and between 0.50%
and 1.75% for Eurodollar-based advances.

         Effective December 23, 1998, Mariner Health amended the Mariner Health
Senior Credit Facility (the "Mariner Health Senior Credit Facility Amendment")
to (a) reduce the amount of the revolving commitment from $460.0 million to
$250.0 million; (b) provide additional financial covenant flexibility for
Mariner Health and its subsidiaries; (c) increase the applicable interest rate
margins so that they range from 0.25% to 1.25% for prime-based loans, and from
1.75% to 2.75% for Eurodollar-based advances; (d) modify certain of the
operating covenants referred to in the immediately preceding paragraph; and (e)
expand the amount and types of collateral pledged to secure the Mariner Health
Senior Credit Facility. Immediately after giving effect to the Mariner Health
Senior Credit Facility Amendment, the applicable interest rate margin for
prime-based advances increased to 0.75%, and the applicable interest rate margin
for Eurodollar-based borrowings increased to 2.25%.

         Contemporaneously with the effectiveness of the Mariner Health Senior
Credit Facility Amendment, Mariner Health entered into a term loan agreement
dated as of the same date (the "Mariner Term Loan Agreement") with PNC, as
administrative agent, First Union National Bank, as syndication agent, and the
financial institutions signatory thereto as lenders (the "Term Lenders"),
pursuant to which the Term Lenders made a $210 million senior secured term loan
to Mariner Health (the "Mariner Health Term Loan"). The interest rate pricing
and covenants contained in the Mariner Health Term Loan Agreement are
substantially similar to the corresponding provisions of the Mariner Health
Senior Credit Facility, as amended by the Mariner Health Senior Credit Facility
Amendment. The Mariner Health Term Loan matured on January 3, 2000, is
guaranteed by the same subsidiary guarantors as he Mariner Health Senior Credit
Facility, and is cross-defaulted and cross-collateralized with the Mariner
Health Senior Credit Facility.


                                      F-22

<PAGE>

         Mariner Health was not in compliance with certain of the financial
covenants contained in the Mariner Health Senior Credit Facility and in the
Mariner Health Term Loan Facility as of March 31, 1999, and again as of June 30,
1999 and September 30, 1999. In addition, Mariner Health failed to make its
October 1, 1999 interest payments due on the Mariner Health Senior Credit
Facility and on the Mariner Health Term Loan Facility within the applicable
grace period, although it was ultimately able to satisfy such obligations
through amendments to those credit facilities which permitted cash collateral
held by the collateral agent to be applied for such purpose. However, as
previously noted, Mariner Health did not make the required payments with regard
to the Mariner Health Term Loan and Mariner Health Senior Credit Facility at
their respective January 3, 2000 maturity dates.

     MARINER HEALTH SENIOR SUBORDINATED NOTES

         Mariner Health is also the issuer of $150.0 million of 9 1/2% Senior
Subordinated Notes due 2006 (the "Mariner Notes") which were issued pursuant to
an indenture dated as of April 4, 1996 (the "Mariner Indenture") with Mariner
Health as issuer and State Street Bank and Trust Company as trustee (the
"Mariner Trustee"). The Mariner Notes are obligations solely of Mariner Health
and are not guaranteed by the Company or any of its subsidiaries (other than
Mariner Health). Because of the existing, unwaived financial covenant defaults
under the Mariner Health Senior Credit Facility and the Mariner Health Term Loan
Facility, the agents under such facilities gave notice to Mariner Health and the
Mariner Trustee that they were instituting a 179-day payment blockage period,
during which no payments of debt service on the Mariner Notes could be made.
Accordingly, Mariner Health did not make the scheduled $7.1 million interest
payment due on the Mariner Notes on October 1, 1999. The 30-day grace period
having expired without such interest payment being made, an event of default
exists under the Mariner Indenture.

     DEBTOR-IN-POSSESSION FINANCING FOR THE COMPANY

         As noted previously, the MPAN Debtors entered into a $100.0 million DIP
financing arrangement in connection with the Chapter 11 Filings. On March 20,
2000, the Bankruptcy Court granted final approval (the "Final MPAN DIP Order,")
of the MPAN DIP Financing. The MPAN DIP Credit Agreement initially established a
$100.0 million secured revolving credit facility to provide funds for working
capital and other lawful corporate purposes for use by the MPAN Debtors. At the
request of the MPAN Debtors, the size of the MPAN DIP Financing was reduced to
$50.0 million on January 11, 2000. The agreement related to the MPAN DIP
Financing (the "MPAN DIP Credit Agreement") provides that amounts outstanding
under the MPAN DIP Financing may not at any time exceed the maximum borrowing
amounts established for the MPAN Debtors under the Final MPAN DIP Order or the
MPAN borrowing base of eligible accounts receivable (the "MPAN Borrowing Base").
Up to $10.0 million of the MPAN DIP Financing may be utilized for the issuance
of letters of credit as needed in the business of the MPAN Debtors. Interest
accrues on the principal amount outstanding under the MPAN DIP Financing at a
per annum rate of interest equal to the ABR of Chase plus three percent (3%) and
is payable monthly in arrears. During the existence and continuation of a
default in the payment of any amount due and payable by the MPAN Debtors under
the MPAN DIP Credit Agreement, interest will accrue at the default rate of ABR
plus five percent (5%) per annum.

         The terms of the MPAN DIP Financing require that Mariner Post-Acute
Network, Inc. prepay principal to the extent that the principal amount
outstanding under the MPAN DIP Financing at any time exceeds the MPAN Borrowing
Base then in effect. To the extent proceeds of loans under the MPAN DIP
Financing are used to complete the construction of certain healthcare facilities
(which proceeds are not permitted to exceed $8.8 million), proceeds from the
sale of any such properties must be used first to repay any portion of the loans
made pursuant to the MPAN DIP Financing, with 75% of any remaining net cash
proceeds to be applied as an adequate protection payment to the lenders under
the MPAN Debtors' prepetition senior secured credit facility and the remaining
25% of such excess net cash proceeds to be retained by the MPAN Debtors as
additional working capital. Pursuant to the terms of the Final MPAN DIP Order,
75% of the net cash proceeds of other asset sales approved by the Bankruptcy
Court and the requisite MPAN DIP Lenders are to be applied as an adequate
protection payment to the lenders under the MPAN Debtors' prepetition senior
credit facility. Mariner Post-Acute Network, Inc. has the right to make optional
prepayments in increments of $1.0 million and reduce the commitment under the
MPAN DIP Credit Agreement in increments of $5.0 million.

         The obligations of Mariner Post-Acute Network, Inc. under the MPAN DIP
Credit Agreement are jointly and severally guaranteed by each of the other MPAN
Debtors, except for certain MPAN Debtors owning facilities mortgaged to Omega
Healthcare Investors, Inc. (the "Omega Debtors") whose guarantee is limited to
the negative cash flows of the Omega Debtors pursuant to the MPAN DIP Credit
Agreement, the Final MPAN DIP Order and the


                                      F-23

<PAGE>

Final MPAN Cash Collateral Order (defined below). Under the terms of the Final
MPAN DIP Order, the obligations of the MPAN Debtors under the MPAN DIP Credit
Agreement (the "MPAN DIP Obligations") constitute allowed super priority
administrative expense claims pursuant to section 364(c)(1) of the Bankruptcy
Code (subject to a carve out for certain professional fees and expenses incurred
by the MPAN Debtors). The MPAN DIP Obligations are secured by perfected liens on
all or substantially all of the assets of the MPAN Debtors (excluding bankruptcy
causes of action), the priority of which liens (relative to prepetition
creditors having valid, non avoidable, perfected liens in those assets and to
any "adequate protection" liens granted by the Bankruptcy Court) is established
in the Final MPAN DIP Order and the related cash collateral order entered by the
Bankruptcy Court (the "Final MPAN Cash Collateral Order"). The Bankruptcy Court
has also granted certain prepetition creditors of the MPAN Debtors replacement
liens and other rights as "adequate protection" against any diminution of the
value of their existing collateral that may result from allowing the MPAN
Debtors to use cash collateral in which such creditors had valid, non-avoidable
and perfected liens as of the Petition Date. The discussion contained in this
paragraph is qualified in its entirety by reference to the Final MPAN DIP Order,
the Final MPAN Cash Collateral Order, and related stipulations, and reference
should be made to such orders (which are available from the Bankruptcy Court)
and stipulations for a more complete description of such terms.

         The MPAN DIP Credit Agreement contains customary representations,
warranties and other affirmative and restrictive covenants of the MPAN Debtors,
as well as certain financial covenants relating to minimum EBITDA, maximum
capital expenditures, and minimum patient census. The breach of such
representations, warranties or covenants, to the extent not waived or cured
within any applicable grace or cure periods, could result in the MPAN Debtors
being unable to obtain further advances under the MPAN DIP Financing and
possibly the exercise of remedies by the MPAN DIP Lenders, either of which
events could materially impair the ability of the MPAN Debtors to successfully
reorganize in chapter 11 and to operate as a going concern. Such a default may
also impair the ability of the MPAN Debtors to use cash collateral to fund
operations. At September 30, 2001, no revolving loans were outstanding under the
MPAN DIP Credit Agreement and approximately $6.0 million of letters of credit
issued under the MPAN DIP Credit Agreement were outstanding. Mariner Post-Acute
Network, Inc. is currently not in compliance with the EBITDA covenant contained
in the MPAN DIP Credit Agreement. Mariner Post-Acute Network, Inc.'s failure to
comply with this EBITDA covenant is principally the result of a charge taken in
connection with the Global Settlement with CMS. The MPAN Debtors have obtained a
waiver of the covenant violation from the MPAN DIP Lenders.

         The outstanding principal of the MPAN DIP Financing, together with all
accrued and unpaid interest and all other obligations thereunder, was originally
due and payable one year from the Petition Date. With the approval of the
Bankruptcy Court, the MPAN Debtors, Chase and the requisite MPAN DIP Lenders
amended the MPAN DIP Credit Agreement as of January 11, 2001, to (among other
things) extend the maturity date of the MPAN DIP Financing from January 19, 2001
to August 31, 2001. The scheduled termination date of the MPAN DIP Credit
Agreement was subsequently extended to December 31, 2001 by amendment to the
MPAN DIP Credit Agreement dated as of June 26, 2001, and approved by the
Bankruptcy Court on August 7, 2001. The scheduled termination date of the MPAN
DIP Credit Agreement was again subsequently extended to April 1, 2002 by
amendment to the MPAN DIP Credit Agreement dated as of November 16, 2001, and
approved by the Bankruptcy Court on December 5, 2001.

      DEBTOR-IN-POSSESSION FINANCING FOR MARINER HEALTH

         Among the orders entered by the Bankruptcy Court on the Petition Date
in the Chapter 11 Cases of Mariner Health and its subsidiaries, were orders
approving (a) the use of cash collateral by the MHG Debtors, and (b) the funding
of up to $50.0 million in principal amount at any time outstanding under a
debtor-in-possession financing arrangement pursuant to that certain
Debtor-in-Possession Credit Agreement dated as of January 20, 2000 (as amended
from time to time, the "Mariner Health DIP Credit Agreement") by and among
Mariner Health and each of the other MHG Debtors, as co-borrowers thereunder,
the Mariner Health DIP Lenders, First Union National Bank, as Syndication Agent,
PNC Capital Markets, Inc. and First Union Securities, Inc., as co-arrangers, and
PNC, as Administrative Agent and Collateral Agent. After a final hearing on
February 16, 2000 the Bankruptcy Court entered an order granting final approval
of the Mariner Health DIP Financing (the "Final Mariner Health DIP Order").

         The Mariner Health DIP Credit Agreement initially established a $50.0
million secured revolving credit facility comprised of a $40.0 million tranche A
revolving loan commitment and a $10.0 million tranche B revolving loan
commitment. At the request of Mariner Health, the size of the Mariner Health DIP
Financing was reduced to


                                      F-24

<PAGE>

$25.0 million on January 19, 2001. As a result of such reduction, the $10.0
million tranche B revolving loan commitment was eliminated. Under the Mariner
Health DIP Credit Agreement's terms, advances under the Mariner Health DIP
Financing may be used by the MHG Debtors (and to a limited degree, by certain
joint venture subsidiaries of Mariner Health that are not debtors in the Mariner
Health Chapter 11 Cases) for working capital and other lawful corporate
purposes. Amounts outstanding under the Mariner Health DIP Financing may not at
any time exceed the maximum borrowing amounts established for the MHG Debtors
under the Final Mariner Health DIP Order. Originally, up to $5.0 million of the
Mariner Health DIP Financing could be utilized for the issuance of letters of
credit as needed in the businesses of the MHG Debtors; however, the letter of
credit sublimit was increased to $10.0 million pursuant to the Tenth Amendment
to the Mariner Health DIP Credit Agreement dated as of March 20, 2001 (the
"Tenth Mariner Health DIP Amendment").

         Interest accrues on the principal amount outstanding under the Mariner
Health 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 is 250 basis
points. Such interest is due and payable monthly in arrears. During the
existence and continuation of any event of default under the Mariner Health DIP
Credit Agreement, the interest rates normally applicable to loans under the
Mariner Health DIP Financing will be increased by another 250 basis points per
annum.

         The outstanding principal of the Mariner Health DIP Financing, together
with all accrued and unpaid interest and all other obligations thereunder, are
due and payable on the "Commitment Termination Date", originally defined as the
first to occur of (i) January 19, 2001, unless extended (such date having since
been extended to April 1, 2002 as discussed below); (ii) the effective date of a
joint plan of reorganization for the MHG Debtors; (iii) the date of termination
of the exclusivity rights of the MHG Debtors to file a plan of reorganization;
(iv) the filing by the MHG Debtors of any plan of reorganization (or the
modification of any such plan previously filed with the Bankruptcy Court) not
previously approved by the holders of at least 66-2/3% of the outstanding loans
or commitments under the Mariner Health DIP Financing; (v) the date of
termination of the commitments under the Mariner Health DIP Credit Agreement
during the continuation of an event of default thereunder; or (vi) the date on
which all or substantially all of the assets or stock of the MHG Debtors is sold
or otherwise transferred. Under the current terms of the Mariner Health DIP
Credit Agreement, the MHG Debtors must also prepay principal to the extent that
the principal amount outstanding under the Mariner Health DIP Financing at any
time exceeds the Mariner Health borrowing base then in effect. The Mariner
Health borrowing base for any month is an amount equal to $7.5 million in excess
of the "Working Capital Facility" borrowings projected for such month in Mariner
Health's year 2000 DIP budget, plus (as a result of the Tenth Mariner Health DIP
Amendment) the undrawn availability under the $7.9 million letter of credit
issued by PNC pursuant to the Mariner Health DIP Credit Agreement to secure
Mariner Health's obligations in respect of its replacement surety program (the
"Replacement MHG Surety LOC").

         The Mariner Health DIP Credit Agreement also provides for mandatory
prepayments under the following circumstances: (a) with net cash proceeds from
asset sales, the incurrence of certain debt, the issuance of new equity, the
receipt of tax refunds exceeding $100,000 in the aggregate, and the receipt of
casualty proceeds in excess of $100,000 that are not applied within 60 days
after receipt to the repair, rebuilding, restoration or replacement of the
assets damaged or condemned (or committed within such period of time to be so
applied); and (b) on each business day, the amount of cash held by the MHG
Debtors in excess of the sum of $5.0 million plus the aggregate sum of the
minimum amount required by depositary banks to be kept in deposit accounts,
concentration accounts and other accounts with such banks. Amounts prepaid
pursuant to clause (a) of the immediately preceding sentence will permanently
reduce the amount of the Mariner Health DIP Financing commitments on a dollar
for dollar basis. Amounts prepaid pursuant to clause (b) of the same sentence
will not permanently reduce such commitments. The MHG Debtors have the right to
make optional prepayments in the minimum principal amount of $1.0 million, and
in increments of $100,000 in excess thereof, and, on three business days'
notice, to reduce the commitments under the Mariner Health DIP Credit Agreement
in the minimum amount of $5.0 million, or in increments of $1.0 million in
excess thereof.

         As provided in the Final Mariner Health DIP Order, the obligations of
the MHG Debtors under the Mariner Health DIP Credit Agreement (together with
certain potential cash management system liabilities secured on a pari passu
basis therewith, the "Mariner Health DIP Obligations") constitute allowed super
priority administrative expense claims pursuant to section 364(c)(1) of the
Bankruptcy Code (subject to a carve-out for certain professional fees and
expenses incurred by the MHG Debtors). The Mariner Health DIP Obligations are
secured by perfected liens on all or substantially all of the assets of the MHG
Debtors (excluding bankruptcy causes of action), the priority of which liens
(relative to prepetition creditors having valid, non-avoidable, perfected liens
in those assets


                                      F-25

<PAGE>

and to any "adequate protection" liens granted by the Bankruptcy Court) is
established in the Final Mariner Health DIP Order and the related cash
collateral orders entered by the Bankruptcy Court (the "Mariner Health Cash
Collateral Orders"). The Bankruptcy Court has also granted certain prepetition
creditors of the Mariner Health Debtors replacement liens and other rights as
"adequate protection" against any diminution of the value of their existing
collateral that may result from allowing the MHG Debtors to use cash collateral
in which such creditors had valid, non-avoidable and perfected liens as of the
Chapter 11 Filings. The discussion contained in this paragraph is qualified in
its entirety by reference to the Final Mariner Health DIP Order, the related
Mariner Health Cash Collateral Orders, and related stipulations, and reference
should be made to such orders (which are available from the Bankruptcy Court)
and stipulations for a more complete description of such terms.

         The Mariner Health DIP Credit Agreement contains customary
representations, warranties and other affirmative and restrictive covenants of
the MHG Debtors, as well as certain financial covenants. The breach of such
representations, warranties or covenants, to the extent not waived or cured
within any applicable grace or cure periods, could result in the MHG Debtors
being unable to obtain further advances under the Mariner Health DIP Financing
and possibly the exercise of remedies by the Mariner Health DIP Lenders, either
of which events could materially impair the ability of the MHG Debtors to
successfully reorganize in chapter 11 and to operate as a going concern. The
occurrence of an event of default under the Mariner Health DIP Credit Agreement
may impair the ability of the MHG Debtors to use cash collateral to fund
operations. At September 30, 2001, no revolving loans were outstanding under the
Mariner Health DIP Credit Agreement and approximately $7.9 million of letters of
credit issued in respect to the Replacement MHG Surety LOC were outstanding
under the Mariner Health DIP Credit Agreement.

         Among its other restrictive covenants, the Mariner Health DIP Credit
Agreement limits affiliate transactions with the MPAN Debtors, but does
contemplate weekly overhead payments to the MPAN Debtors equal to 1.25% of
projected net inpatient revenues for the then-current month, subject to a
monthly "true-up," such that the payments for such month equal 5% of actual net
inpatient revenues of the MHG Debtors. In connection with the thirteenth
amendment to the Mariner Health DIP Credit Agreement approved by the Bankruptcy
court on December 5, 2001, the overhead payments to the MPAN Debtors under the
Management Protocol were reduced by $1.0 million per month effective
retroactively to November 1, 2001. Such payments may be suspended by the MHG
Debtors if certain defaults specified in the Mariner Health Credit Agreement
occur and are continuing, though such fees will still accrue and will become due
and payable if and when the subject default has been cured or waived.

         By amendment dated as of January 19, 2001, and with the approval of the
Bankruptcy Court, the Mariner Health DIP Credit Agreement was amended to extend
the stated termination date of the Mariner Health DIP Financing from January 19,
2001 to July 19, 2001 (which has subsequently been extended by amendment dated
as of July 19, 2001, to December 31, 2001 and again extended by amendment dated
November 15, 2001, to April 1, 2002), and to reduce the maximum amount of the
Mariner Health DIP Financing from $50.0 million to $25.0 million (as a result of
which the tranche B component was eliminated). Such amendment also, among other
things, imposed a 25 basis point utilization fee on borrowings under the Mariner
Health DIP Credit Agreement in excess of $5.0 million and amended certain
reporting requirements. An amendment dated as of March 20, 2001, among other
things, increased the letter of credit sublimit and the borrowing base to permit
the issuance of the Replacement MHG Surety LOC to facilitate implementation of a
replacement surety bond program by Mariner Health, which was issued during July
2001. Because the Replacement MHG Surety LOC expires well after the Commitment
Termination Date for the Mariner Health DIP Facility, the March 20, 2001
amendment required such letter of credit to be 105% cash collateralized.

         On or about May 14, 2001, Mariner Health and representatives of the
Mariner Health DIP Lenders and the Mariner Health Principal Secured Lenders
entered into a stipulation (the "May 14 Stipulation") (i) extending from May 21,
2001 to July 20, 2001, the MHG Debtors' exclusive right to file a plan of
reorganization, and (ii) if the MHG Debtors file a plan within that time,
extending the MHG Debtor's exclusive right to solicit acceptances of such plan
to September 20, 2001; however, such exclusivity rights were modified in that
stipulation to permit MHG Senior Credit Facility Claim Holders to file their own
plan or plans of reorganization for the MHG Debtors and to solicit acceptances
thereto, or (at the sole option of the MHG Senior Credit Facility Claim Holders)
to file a joint plan of reorganization with the MHG Debtors and solicit
acceptances thereto. The MHG Debtors' plan exclusivity was subsequently
extended, most recently until March 29, 2002. The May 14 Stipulation was
subsequently approved by the Bankruptcy Court. The May 14 Stipulation
constituted a waiver by the Mariner Health DIP Lenders of the covenant in the
Mariner Health DIP Credit Agreement that the MHG Debtors file a plan of
reorganization by a


                                      F-26

<PAGE>

certain time and an agreement that the modification of the MHG Debtors'
exclusivity rights pursuant to that stipulation would not constitute an event of
default under the Mariner Health DIP Credit Agreement.

     OMEGA NOTE

         As of the Petition Date, Professional Health Care Management, Inc.
("PHCMI"), 13 of its subsidiaries (the "PHCMI Subsidiaries"), Living
Centers-PHCM, Inc. ("LC-PHCM", and together with PHCMI and the PHCMI
Subsidiaries, the "Omega Debtors"), and all MPAN Debtors, were indebted to Omega
Healthcare Investors, Inc. ("Omega") in connection with a 1992 loan in the
original principal amount of $58.8 million (the "Omega Loan"). The Omega Loan
was guaranteed by the PHCMI Subsidiaries and LC-PHCM (the "Omega Guaranties").
GranCare was also obligated under a "keepwell agreement" relating to PHCMI. The
Omega Loan and the Omega Guaranties were secured by first mortgages on 13
skilled nursing facilities operated by the PHCMI Subsidiaries in Michigan, and
three more operated by PHCMI in North Carolina (collectively, the "Omega
Facilities").

         Following extensive negotiations with Omega, MPAN, GranCare, and the
Omega Debtors implemented a consensual restructuring of the Omega indebtedness
and settlement of the disputes relating to the Omega Loan. As the first step of
this restructuring, effective February 1, 2001 and with the approval of Omega
and the Bankruptcy Court, PHCMI sold four facilities within the Omega portfolio
(the "Ciena Facilities") to an affiliate of Ciena Healthcare Management, Inc.,
in exchange for, among other things, a $9.0 million purchase money note, secured
by first mortgages on the Ciena Facilities (the "Ciena Purchase Money Loan").
PHCMI contemporaneously assigned an undivided 50% interest in the Ciena Purchase
Money Loan to Omega in return for a $4.5 million credit against the obligations
of the Omega Debtors in connection with the Omega Loan. The immediate effect of
this transition was to eliminate four facilities that generated substantial
negative cash flow from the Omega Debtors' portfolio as well as to reduce the
indebtedness to Omega.

         As the second step of the Omega restructuring, Omega, MPAN, GranCare,
and the Omega Debtors entered into a settlement agreement dated as of August 1,
2001, pursuant to which, among other things, (a) PHCMI agreed to transfer its
residual 50% interest in the Ciena Purchase Money Loan to Omega for
approximately $3.5 million, plus 50% of principal payments received under the
Ciena Purchase Money Loan in excess of $8.0 million and interest payments
received under the Ciena Purchase Money Loan in excess of $960,000 annually; (b)
the parties agreed to amend and restate the Omega Loan (the "Amended Omega
Loan") to reflect an outstanding principal indebtedness of approximately $59.7
million, to pay interest on the Omega Loan for the period from January 1, 2000
to closing of the restructure at a compromise rate, to reduce the interest rate
applicable after closing substantially (to 11.57% per annum, from more than
16%), to extend the maturity of the Amended Omega Loan from 2007 to 2010, with
an option for PHCMI to extend the loan to 2021, to grant PHCMI the right to
prepay the Amended Omega Loan in full between February 1, 2005 and July 31, 2005
at 103% of par, plus accrued and unpaid interest; and to provide for payment to
Omega of an annual amendment fee (25% of free cash flow from the remaining 12
Omega Facilities); (c) PHCMI agreed to pay Omega (until the PHCMI Majority
Equity Sale referred to below is consummated) a monthly amendment fee equal to
50% of the "return on equity" component of Medicaid reimbursement for the North
Carolina Omega Facilities; and (d) the Company agreed to manage, or cause one of
its wholly-owned Debtor subsidiaries to manage, the remaining Omega Facilities.
The compensation for such management services includes 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 remaining Omega Facilities (the "Omega Incentive
Management Fee"). The "keepwell" agreement of GranCare and certain other
liabilities of the Omega Debtors to Omega arising prior to closing were to be
terminated and released. The transactions were approved by order of the
Bankruptcy Court entered on or about August 22, 2001, and were closed effective
September 1, 2001.

NOTE 10  PROFESSIONAL LIABILITY RISKS

         In 1998, the Company purchased a fully-insured workers' compensation
policy in certain states where allowable with no deductible or retention, except
in a limited amount of states such as Texas where the Company is a
non-subscriber to workers' compensation but has in place an employee benefit
plan providing for employer-paid benefits comparable to those provided under the
Texas workers' compensation program, with a catastrophic policy in place to
cover any loss above $0.5 million per occurrence. For pre-1998 workers'
compensation claims, Mariner Health was insured under various types of insurance
and financial plans, certain of which are loss-sensitive in nature and design,
which subject Mariner Health to additional future costs for losses incurred in a
prior year, but paid in subsequent fiscal periods, as losses develop. These
liabilities are included in liabilities subject to compromise at September 30,
2001 and 2000 (see Note 3).


                                      F-27

<PAGE>

         The Company currently maintains two wholly-owned captive insurance
subsidiaries, MPN Insurance Company, Ltd. ("MPN Insurance") and GCI Indemnity,
Ltd. ("GCI Indemnity"), to provide for reinsurance obligations under general and
professional liability, workers' compensation and automobile liability for
losses occurring prior to April 1, 1998. Pursuant to the reinsurance agreements,
MPN Insurance and GCI Indemnity are responsible to pay all losses which are
incurred by the company issuing the policies. The maximum loss exposure with
respect to the business written by MPN Insurance is (i) $0.5 million per
occurrence for policy periods prior to July 1, 1996 and $1.0 million per
occurrence for policy periods subsequent to July 1, 1996 for professional
liability; (ii) $0.25 million per occurrence for automobile liability; and (iii)
$0.5 million per occurrence for workers' compensation liability. The maximum
loss exposure with respect to the business written by GCI Indemnity is (i) $0.1
million per occurrence for professional liability; and (ii) $0.35 million per
occurrence for workers' compensation liability. The obligations of MPN Insurance
and GCI Indemnity under the reinsurance agreements are collateralized through a
security trust account which has been designated as restricted investments to
pay for future claims experience applicable to policy periods as previously
stated. Restricted investments at September 30, 2001 and 2000 designated to pay
such claims had an estimated fair value of $20.2 million and $32.1 million,
respectively (see Note 8).

         The Company has experienced an increasing trend in the number and
severity of litigation 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 against long-term care providers in recent
years resulting in an increased awareness by plaintiff's lawyers of potentially
large recoveries. The Company also believes 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 the Company
believes that it provides quality care to 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.

         Total insurance reserves at September 30, 2001 included in the
accompanying consolidated balance sheet are (i) short-term reserves of $24.8
million, which are included in accrued insurance obligations; (ii) long-term
reserves of $92.8 million, which are included in long-term insurance reserves;
and (iii) pre-petition reserves of $86.3 million, which are included in
liabilities subject to compromise (see Note 3). Provisions for such risks were
approximately $118.4 million, $104.4 million and $94.8 million for the fiscal
years ended September 30, 2001, 2000 and 1999, respectively.

NOTE 11  EMPLOYEE STOCK OPTION PLANS

         The Company has stock option plans for key employees and outside
directors which authorize the granting of incentive stock options, nonqualified
options, or any combination of the foregoing to purchase up to approximately $10
million shares. Generally, the exercise price of each option equals market price
of the Company's stock on the date of grant, and an option's maximum term is ten
years after the date of grant. At September 30, 2001 and 2000, there were
2,111,746 and 3,999,936, respectively, options granted and outstanding under
Company's stock option plans.


                                      F-28

<PAGE>

         The following is a summary of the stock option activity and related
information for the fiscal years ended September 30, 2001, 2000 and 1999.

<TABLE>
<CAPTION>
                                                                FISCAL YEAR ENDED SEPTEMBER 30,
                                       -------------------------------------------------------------------------------------
                                               2001                           2000                           1999
                                       -----------------------       ------------------------       ------------------------
                                                      WEIGHTED                       WEIGHTED                       WEIGHTED
                                                      AVERAGE                         AVERAGE                        AVERAGE
                                                      EXERCISE                       EXERCISE                       EXERCISE
                                         OPTIONS        PRICE         OPTIONS          PRICE          OPTIONS         PRICE
                                       ----------    ---------       ----------      ---------      ----------      --------
<S>                                    <C>           <C>             <C>             <C>            <C>             <C>
Outstanding at beginning
     of year .................          3,999,936      $  9.67        4,624,264       $  9.14        7,091,957       $ 13.97
Granted ......................                 --           --               --            --        2,091,500          3.07
Exercised ....................                 --           --               --            --               --            --
Forfeited ....................         (1,888,190)     $ 16.35         (624,328)         5.74       (4,559,193)        13.87
                                       ----------      -------       ----------       -------       ----------       -------
Outstanding at end of
    year .....................          2,111,746      $  7.57        3,999,936       $  9.67        4,624,264       $  9.14
                                       ==========      =======       ==========       =======       ==========       =======
Exercisable at end of
    year .....................          1,441,371      $  8.39        2,691,311       $ 11.33        1,329,014       $ 10.99
                                       ==========      =======       ==========       =======       ==========       =======
                                          $0.75-                        $0.75-                        $0.84-
Price range ..................            $46.45                        $46.45                        $46.45
                                       ==========                    ==========                     ==========
Weighted average fair
   value of options
   granted during the year....                              --                             --                           2.12
                                                       =======                        =======                        =======
</TABLE>

<TABLE>
<CAPTION>
                                                                                                                         REMAINING
                                                                                                        AVERAGE          CONTRACTUAL
                                                                                                        EXERCISE            LIFE
                                                                                     OPTIONS             PRICE             (YEARS)
                                                                                    ---------           --------         -----------
<S>      <C>                                                                        <C>                 <C>              <C>
$ 0.75.........................................................................        30,000           $  0.75             7.71
$ 2.19 - $ 2.50................................................................       732,250           $  2.28             7.60
$ 4.44 - $ 5.40................................................................       346,280           $  4.60             7.13
$ 7.05 - $ 9.75................................................................       303,631           $  7.75             5.57
$11.20 - $16.35................................................................       649,924           $ 14.55             6.30
$18.06 - $46.45................................................................        49,661           $ 18.26             6.58
                                                                                    ---------
                                                                                    2,111,746
                                                                                    =========
</TABLE>

         For purposes of pro forma disclosures of net income (loss) and
earnings per share as required by SFAS 123, the estimated fair value of the
options is amortized to expense over the options' vesting period. The fair
value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1999: risk-free interest rates ranging from 4.61% to 6.11%; a
dividend yield of 0.0%; volatility factors of the expected market price of the
Company's common stock ranging from 0.42 to 1.21; and a weighted-average
expected life of the options ranging from three to eight years.

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


         As previously noted, the Company accounts for employee stock options in
accordance with APB 25 and related interpretations. Accordingly, the Company
recognizes no compensation expense for the stock option grants. In accordance
with SFAS 123, the Company's pro forma net income (loss) and earnings (loss) per
share, assuming the election had been made to recognize compensation expense on
stock-based awards, are as follows (in thousands of dollars, except for proforma
loss per share information):

<TABLE>
<CAPTION>
                                                                             FISCAL YEAR ENDED SEPTEMBER 30,
                                                                   -----------------------------------------------------
                                                                      2001                 2000                 1999
                                                                   -----------          -----------          -----------
<S>                                                                <C>                  <C>                  <C>
Pro forma net loss ....................................            $   (33,493)         $   (59,170)         $(1,778,494)
                                                                   ===========          ===========          ===========

Pro forma loss per share--basic and diluted ...........            $     (0.45)         $     (0.80)         $    (24.21)
                                                                   ===========          ===========          ===========
</TABLE>


NOTE 12  EMPLOYEE RETIREMENT PLANS

         The Company's employees are eligible to participate in various defined
contribution retirement plans sponsored by the Company. Company contributions to
these plans represent a matching percentage of certain employee contributions,
which for certain plans is subject to management's discretion based upon
consolidated financial performance. Total combined expense recognized by the
Company under all of its defined contribution


                                      F-29

<PAGE>

retirement plans was $3.1 million, $3.6 million, and $4.2 million for the fiscal
years ended September 30, 2001, 2000 and 1999, respectively.

         The Company does not provide post-retirement health care or life
insurance benefits to employees. Accordingly, the Company is not subject to the
requirements of Statement of Financial Accounting Standards No. 106, "Employers
Accounting for Post Retirement Benefits Other Than Pensions."

NOTE 13  PROVISION FOR BAD DEBTS

         During fiscal 1999, the Company's collection experience for its
services deteriorated principally due to the implementation of PPS, which
reduced the Company's cash flows and resulted in increased aging and
uncollectible accounts. The Company's accounts receivable also continued to
deteriorate during the year due to (i) the multiple complexities involved with
the change to Medicare PPS billing; (ii) system conversions and consolidation;
and (iii) turnover of billing and collection personnel. Accordingly, the
Company's provision for bad debts in fiscal 1999 was approximately $103.5
million.

NOTE 14  IMPAIRMENT OF LONG-LIVED ASSETS

         SFAS 121 requires impairment losses to be recognized for long-lived
assets when indicators of impairment are present and the undiscounted cash flows
are not sufficient to recover the assets' carrying amount. The revenues recorded
by the Company in its nursing facilities under PPS are substantially less than
the cost-based reimbursement it received previously. The implementation of PPS
resulted in a greater than expected decline in reimbursement for nursing home
services, and in the demand and market rates for the Company's pharmacy
services. Management determined that these revenue declines were other than
temporary and were expected to have a material adverse effect on future revenues
and cash flow.

         In the fourth quarter of fiscal year 2000, the Company recorded an
impairment charge based on a detailed analysis of the Company's long-lived
assets and their estimated cash flows. This analysis resulted in the
identification and measurement of an impairment loss of approximately $19.4
million relating principally to several nursing facilities with cash flow losses
or where projected cash flows were not sufficient to recover the carrying amount
of the long-lived assets. The impairment loss was comprised of $12.1 million of
goodwill and $7.3 million of property and equipment.

         As a result of indicators discussed above, in the fourth quarter of
fiscal year 1999, a detailed analysis of the Company's long-lived assets and
their estimated future cash flows was completed. The analysis resulted in the
identification and measurement of an impairment loss of $875.1 million
principally related to the Company's SNFs that experienced either cash flow
losses or where projected cash flow was not sufficient to recover the carrying
amount of their goodwill, property and equipment, and other intangible assets,
which primarily include leasehold rights. The impairment loss was comprised of
$530.2 million of goodwill, $306.8 million of property and equipment, and $38.1
million of other intangible assets.

         Each analysis included management's estimate of the undiscounted cash
flows to be generated by these assets with a comparison to their carrying
values. If the undiscounted future cash flow estimates were less than the
carrying value of the asset, then the carrying value was written down to
estimated fair value. Goodwill associated with an impaired asset was included
with the carrying value of that asset in performing both the impairment test and
in measuring the amount of impairment loss related to the asset. Fair value was
estimated based on either management's estimate of fair value, present value of
future cash flows, or market value less estimated cost to sell for certain
facilities to be disposed.

NOTE 15  RECAPITALIZATION, INDIRECT MERGER, AND OTHER EXPENSES

         For the fiscal year ended September 30, 2000, recapitalization,
indirect merger, and other expenses totaled approximately $8.6 million and
included approximately $5.5 million of costs incurred to outside professionals
related to the Company's defaults in connection with its indebtedness prior to
the Petition Date, approximately $2.8 million of costs incurred related to the
closure of its therapy business and $0.3 million of other expenses.

         For the fiscal year ended September 30, 1999, recapitalization,
indirect merger, and other expenses totaled approximately $61.9 million and
included approximately $15.6 million of costs related to acquisitions,


                                      F-30

<PAGE>

approximately $15.1 million of costs incurred to outside professionals related
to the Company's defaults in connection with its indebtedness and approximately
$31.2 million of other expenses.

NOTE 16  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>
                                                                                  FISCAL YEAR ENDED SEPTEMBER 30,
                                                                     ------------------------------------------------------
                                                                        2001                  2000                 1999
                                                                     -----------          -----------          ------------
<S>                                                                  <C>                  <C>                  <C>
Numerator for basic and diluted income (loss) per share:
    Loss from continuing operations ........................         $   (34,062)         $   (56,280)         $ (1,617,986)
    Discontinued operations:
       Income (loss) from operations of discontinued
          pharmacy operations ..............................                 667               (2,705)             (160,296)
                                                                     -----------          -----------          ------------
    Net loss ...............................................         $   (33,395)         $   (58,985)         $ (1,778,282)
                                                                     ===========          ===========          ============

Denominator:
    Denominator for basic income (loss) per share--
        weighted average shares ............................              73,688               73,688                73,459
    Effect of dilutive securities--stock options ...........                  --                   --                    --
                                                                     -----------          -----------          ------------
    Denominator for diluted income (loss) per share--
        adjusted weighted average shares and
        assumed conversions ................................              73,688               73,688                73,459
                                                                     ===========          ===========          ============

Earnings (loss) per share--basic and diluted:
    Loss from continuing operations ........................         $     (0.46)         $     (0.76)         $     (22.03)
    Discontinued operations:
       Earnings (loss) from operations of discontinued
          pharmacy operations ..............................                0.01                (0.04)                (2.18)
                                                                     -----------          -----------          ------------
    Net loss per share .....................................         $     (0.45)         $     (0.80)         $     (24.21)
                                                                     ===========          ===========          ============
</TABLE>

         The effect of dilutive securities for all periods presented have been
excluded because the effect is antidilutive as a result of the net loss for the
periods.

NOTE 17  INCOME TAXES

         The provision (benefit) for income taxes is presented in the table
below (in thousands of dollars):

<TABLE>
<CAPTION>
                                                                                 FISCAL YEAR ENDED SEPTEMBER 30,
                                                                     ------------------------------------------------------
                                                                        2001                  2000                 1999
                                                                     -----------          -----------          ------------
<S>                                                                  <C>                  <C>                  <C>
Current:
       Federal .............................................         $    (7,607)         $   (19,374)         $         --
       State and local .....................................               2,800                   --                    --
                                                                     -----------          -----------          ------------
                                                                          (4,807)             (19,374)                   --
Deferred: taxes:
       Federal .............................................                  --                   --                    --
       State and local .....................................                  --                   --                    --
                                                                     -----------          -----------          ------------
Total ......................................................         $    (4,807)         $   (19,374)         $         --
                                                                     ===========          ===========          ============
</TABLE>


                                      F-31

<PAGE>

         The provision (benefit) for income taxes varies from the amount
determined by applying the Federal statutory rate to pre-tax income as a result
of the following:

<TABLE>
<CAPTION>
                                                                              FISCAL YEAR ENDED SEPTEMBER 30,
                                                                     ------------------------------------------------
                                                                      2001                 2000                 1999
                                                                     ------               ------               ------
<S>                                                                  <C>                  <C>                  <C>
Federal statutory income tax rate ..........................          (35.0)%              (35.0)%              (35.0)%
Increase (decrease) in taxes resulting from:
       State & local taxes, net of federal tax benefits ....            5.9                 (1.6)                (1.0)
       Permanent book/tax differences, primarily resulting
          from goodwill amortization .......................            7.7                  0.0                  0.6
       Goodwill disposal ...................................            0.0                  0.0                  3.8
       Impairment of assets ................................            0.0                  5.5                 12.3
       Other permanent items ...............................            2.0                  1.6                  0.1
Realization of benefit from carryback ......................          (19.9)               (24.8)                 0.0
Change in valuation allowance ..............................           26.8                 29.5                 19.2
                                                                     ------               ------               ------
Effective tax rate .........................................          (12.5)%              (24.8)%                0.0%
                                                                     ======               ======               ======
</TABLE>

         The components of the net deferred tax assets are as follows (in
thousands of dollars):

<TABLE>
<CAPTION>
                                                                                        SEPTEMBER 30,
                                                                             -----------------------------------
                                                                                 2001                    2000
                                                                             -----------             -----------
<S>                                                                          <C>                     <C>
Deferred tax liabilities:
       Insurance ................................................            $        --             $    (4,473)

Deferred tax assets:
       Asset valuation ..........................................                 44,375                  58,437
       Amounts relating to property and equipment ...............                 71,995                  53,921
       Payroll and benefits .....................................                 16,045                  14,669
       Intangibles ..............................................                 16,743                  33,072
       NOL carryforwards ........................................                316,610                 297,415
       Accrued expenses .........................................                  7,542                  17,629
       Tax credits ..............................................                 14,013                  13,092
       Insurance ................................................                 24,852                      --
       Medicare timing differences ..............................                  8,272                   2,063
       Other miscellaneous ......................................                  4,629                  35,814
                                                                             -----------             -----------
Total deferred tax assets .......................................                525,076                 526,112
Less valuation allowance ........................................               (525,076)               (521,639)
                                                                             -----------             -----------
Net deferred tax assets .........................................            $        --             $        --
                                                                             ===========             ===========
</TABLE>

         The Company has established a valuation allowance which completely
offsets all net deferred tax assets generated from the Company's net losses. The
net change in the valuation allowance for deferred tax assets was an increase of
$3.4 million and $51.1 million for the fiscal years ended September 30, 2001 and
2000, respectively. The realization of prior year net operating loss ("NOL")
carryback and further analysis of prior year acquisition items and asset
valuation resulted in the addition of deferred taxes and corresponding valuation
allowance in the amount of $28.2 million and $58.2 million during the fiscal
years ended September 30, 2000 and 1999, respectively.

         The Company has NOL carryforwards of $810.3 million expiring at various
dates through 2021. The net operating losses are subject to various limitations
due to changes in ownership of the Company's subsidiary corporations during the
year the associated losses were generated.

NOTE 18  COMMITMENTS AND CONTINGENCIES

     LEASES

         Certain of the Company's facilities are held under operating or capital
leases. Expiration dates for most of the capital leases range from 2004 to 2009.
Most of the Mariner Health capital leases expire during 2004 and have multiple
five year renewal terms. Certain of these leases also contain provisions
allowing the Company to purchase the leased


                                      F-32

<PAGE>

assets during the term or at the expiration of the lease, at fair market value.
Facilities operating under capital leases are summarized as follows (in
thousands):

<TABLE>
<CAPTION>
                                                                                        SEPTEMBER 30,
                                                                             -----------------------------------
                                                                                2001                    2000
                                                                             -----------             -----------
<S>                                                                          <C>                     <C>
Facilities operating under capital leases .......................            $    41,152             $    41,035
Less accumulated amortization ...................................                (12,996)                (11,723)
                                                                             -----------             -----------
                                                                             $    28,156             $    29,312
                                                                             ===========             ===========
</TABLE>

         The Company previously entered into a $100.0 million leasing program
(the "Synthetic Lease") to be used as a funding mechanism for future assisted
living and skilled nursing facility construction, lease conversions, and other
facility acquisitions. The Synthetic Lease is an unconditional "triple net"
lease for a period of seven years (beginning in September 1996) with the annual
lease obligation a function of the amount spent by the lessor to acquire or
construct the project, a variable interest rate, and commitment and other fees.
The Company guarantees a minimum of approximately 83% of the residual value of
the leased property and also has an option to purchase the properties at any
time prior to the maturity date at a price sufficient to pay the entire amount
financed, accrued interest, and certain expenses. At September 30, 2001,
approximately $65.4 million of the Synthetic Lease was utilized. The Synthetic
Lease is accounted for as an operating lease. The Synthetic Lease was amended
on December 23, 1998 to mirror certain changes made to the Senior Credit
Facility and subsequently amended in May 1999 to reduce the commitment from
$100.0 million to $80.0 million. The Synthetic Lease Facility contains
customary covenants which, among other things, require maintenance of certain
financial ratios and limit amounts of additional debt and repurchases of common
stock. Since September 30, 1999, the Company has been in violation of certain
of these financial covenants and as a result cannot currently make additional
borrowings under the Synthetic Lease Facility. The Company ceased making rent
payments under the Synthetic Lease in November 1999. The automatic stay
protection afforded by the Chapter 11 Filings prevents any action from being
taken outside the Chapter 11 Cases with respect to any defaults that may exist
under the Synthetic Lease unless otherwise determined by the Bankruptcy Court.
One consequence of the defaults under the Synthetic Lease documents was that
the lessor under the Synthetic Lease, FBTC Leasing Corp., has been unable to
make additional borrowings under the related credit facility and make such
proceeds available for the completion of the five facilities currently under
construction. Under the terms of the Company DIP Financing, the Company is
permitted to borrow and spend up to $8.8 million to complete such facilities.

         Rental expense, net of sublease rental income and amortization of
unfavorable lease obligations, for all operating leases was $62.8 million, $80.6
million and $98.9 million for the fiscal years ended September 30, 2001, 2000
and 1999, respectively. Certain of the capital and operating leases contain at
least one renewal option (which could extend the term of the leases by five to
twenty years), purchase options, and provisions for payments by the Company of
real estate taxes, insurance and maintenance costs. Certain leases also contain
increases based on the Consumer Price Index, Medicaid reimbursement rates, or at
amounts specified in the lease agreement. Sublease rental income was $4.6
million, $6.1 million and $7.6 million for the fiscal years ended September 30,
2001, 2000 and 1999, respectively. Contingent rent based primarily on revenues
was $2.1 million, $3.4 million and $3.2 million for the fiscal years ended
September 30, 2001, 2000 and 1999, respectively.


                                      F-33

<PAGE>

         The table below presents a schedule of future minimum rental
commitments and sublease income under noncancelable leases as of September 30,
2001 (in thousands of dollars):

<TABLE>
<CAPTION>
                                                                                          SUBLEASE
                                                                     OPERATING             INCOME               CAPITAL
                                                                     ---------            ---------            ---------
<S>                                                                  <C>                  <C>                  <C>
2002 .......................................................         $  45,450            $  (3,388)           $   8,252
2003 .......................................................            39,263               (3,357)              15,749
2004 .......................................................            34,359               (2,848)              45,299
2005 .......................................................            29,581               (2,228)                 138
2006 .......................................................            23,133               (1,920)                 130
Subsequent years ...........................................            63,406              (10,244)                 335
                                                                     ---------            ---------            ---------
Total minimum rental obligations ...........................         $ 235,192            $ (23,985)              69,903
                                                                     =========            =========
Less amount representing interest ..........................                                                      (8,854)
                                                                                                               ---------
Present value of capital leases ............................                                                   $  61,049
                                                                                                               =========
</TABLE>

     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 plaintiff's 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 the patients in its
facilities and materially complies with all applicable regulatory requirements,
given the Company's current financial difficulties and lack of liquidity, 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, and without
giving effect to the discharge of certain of these claims in the Company's
Chapter 11 Cases under the Bankruptcy Code upon confirmation of the Joint Plan,
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, given the
Company's current financial condition, lack of liquidity and change in the
Company's GL/PL insurance policies, 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 an agreement in principle
on the following terms 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


                                      F-34

<PAGE>

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 description of the principal terms set forth herein is intended to
reflect the material concepts that have been part of the negotiations between
the Company and the United States. The Company and the United States are
working together to draft a mutually-acceptable settlement agreement and obtain
all necessary approvals for the settlement to be effective. Any settlement
agreement will be subject to Bankruptcy Court approval and become effective
upon the Effective Date of the Joint Plan (if confirmed) and is anticipated to
include that: (i) all Medicare Claims and debts arising prior to the Petition
Date will be released as between CMS and the Company; (ii) the United States
will approve a settlement of Medicare administrative appeals related to
disallowances under the prudent buyer principle ("Prudent Buyer Settlement");
the Company will waive its rights to collect any amounts due pursuant to the
Prudent Buyer Settlement; CMS will adjust certain SNF 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 will release 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 will be responsible for any
attorney fees sought by qui tam relators' counsel and will be negotiated by
Company counsel; (vi) the United States will waive any claims for Medicare
reimbursement for two voluntary disclosures made by the Company to the United
States; the United States will also waive any Claims for Medicare reimbursement
related to an OIG investigation; (vii) the Company will enter into a corporate
integrity agreement ("CIA") with the OIG; this agreement is also under
negotiation; (viii) the Company will reject and terminate certain provider
agreements for discontinued operations in the home health and rehabilitation
businesses; (ix) the Company and the United States will agree 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) will be fully and
finally resolved by the settlement; accordingly, the Company will withdraw 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.

         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 agreed to a negotiated settlement and compromise of
the United States Claims. As a result, 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. In connection with
this Global Settlement, certain of the matters described and identified below
will be resolved.

         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. The complaint has been unsealed and the
Company has been advised that the government has declined to intervene in this
matter under the Federal False Claims Act. 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. This action is
expected to be settled as part of the Global Settlement.

         On August 25, 1998, a complaint was filed by the United States against
the Company's GranCare and International X-Ray subsidiaries and certain other
parties under the Civil False Claims Act and in common law and equity. The
lawsuit, U.S. v. Sentry X-Ray, Ltd., et al., civil action no. 98-73722, was
filed in United States District Court for the Eastern District of Michigan.
Valley X-Ray operates a mobile X-Ray company in Michigan. A Company subsidiary,
International X-Ray, Inc., owns a minority partnership interest in defendant
Valley X-Ray.


                                      F-35

<PAGE>

The case asserts five claims for relief, including two claims for violation of
the Civil False Claims Act, two alternative claims of common law fraud and
unjust enrichment, and one request for application of the Federal Debt
Collection Procedures Act. The two primary allegations of the complaint are that
(i) the X-Ray company received Medicare overpayments for transportation costs in
the amount of $657,767; and (ii) the X-Ray company "upcoded" Medicare claims for
EKG services in the amount of $631,090. The United States has requested treble
damages as well as civil penalties of $5,000 to $10,000 for each of the alleged
388 submitted Medicare claims. The total damages sought varies from $5.3 million
to $7.2 million. As the result of a motion filed by the Company on November 23,
1998, GranCare was dismissed from the case. 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. This action
was settled on March 30, 2001 at no cost to the Company. The United States is no
longer pursuing this action and Valley X-Ray is in the process of winding up its
affairs.

         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. To date, the Government has declined to intervene. The complaint
which was unsealed, has been amended to add additional relators and allegations
under the Federal False Claims Act. In response to the Notice of Stay submitted
under 11 U.S.C. ss. 362, the District Court, on January 26, 2000, dismissed the
plaintiffs' claims against defendants subject to reinstatement within thirty
(30) days after the stay is discontinued. This action is expected to be settled
as part of the Global Settlement.

         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. After conducting an
investigation in which the Company cooperated by producing documents responsive
to an administrative subpoena and allowing certain employee interviews, the
United States Department of Justice elected not to intervene. The district court
unsealed the Complaint on October 15, 1999. On December 14, 1999, the Company
filed a motion to dismiss the relators' complaint. 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.
This action is expected to be settled as part of the Global Settlement.

         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



                                      F-36

<PAGE>

False Claims Act against a Company subsidiary and another health care provider.
The United States has not yet made its intervention decision in the case. The
complaint alleges that the 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 principle and interest had been made. False statements were
allegedly submitted and fraudulent records created during the years 1992 through
1996. This action is expected to be settled as part of the Global Settlement.

         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 are expected to be 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. The Company is cooperating with the
investigation and has retained experienced counsel to assist in responding to
the subpoenas and to advise the Company with respect to this investigation. This
investigation is expected to be 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 United States had not yet made
its intervention decision. 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. The allegations cover all claims for reimbursement made
by certain of the Company's facilities from the federal government during
calendar years 1992 through 1999. The complaint seeks treble damages and
penalties under the Federal Civil False Claims Act, and attorneys fees and
costs. This action is expected to be settled as part of the Global Settlement.

         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 United States had not yet made
its intervention decision in either case when stays were entered, and the
matters remain sealed. 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 skilled nursing facilities during the cost report
years 1992 through 1999. The complaint seeks treble damages and penalties under
the federal Civil False Claims Act, and attorneys fees and costs. These actions
are expected to be settled as part of the Global Settlement.

         On October 5, 2000, NovaCare Holdings, Inc. ("NCH") filed a complaint
(the "NCH Complaint") in the Chapter 11 Cases commencing Adversary Proceeding
No. 00-1577 (MFW), NovaCare Holdings, Inc. v. Mariner Post-Acute Network, Inc.,
et al. The Company and various subsidiaries (the "defendant subsidiaries") are
named as defendants in the NCH Complaint. In the NCH Complaint, NCH alleges that
its predecessors in interest (hereinafter also referred to as "NCH") were party
to contracts with various subsidiaries of the Company under which NCH provided
services to patients at various facilities of such subsidiaries. It further
alleges that pursuant to these contracts, NCH provided certain services for
which it was paid, but with respect to which HCFA (now CMS) disallowed the
facilities' claims for reimbursement (the "NCH HCFA Disallowances"). After the
NCH HCFA Disallowances, NCH allegedly provided credits to the facilities equal
to the amount of the NCH HCFA Disallowances. Appeals of the NCH HCFA
Disallowances were filed, and NCH alleges that it holds a constructive trust or
equitable lien on any amounts which may be recovered from HCFA as a result of
such appeals. In the alternative, NCH alleges that it holds an administrative
priority claim for any such amounts that are paid by HCFA


                                      F-37

<PAGE>

and not turned over to NCH. The aggregate amount of the credits that are related
to the NCH HCFA Disallowances, and with respect to which NCH asserts a
constructive trust, an equitable lien, and/or an administrative priority claim,
is approximately $8.2 million. In addition, NCH asserts administrative priority
claims as well as claims for an equitable lien and constructive trust for
attorneys fees and expenses relating to the appeals of other disallowance
decisions by HCFA (the "Other HCFA Disallowances"); the NCH Complaint states
that NCH has incurred at least $275,000 of such expenses.

         On December 13, 2001, the Company filed a motion to approve a
settlement agreement with NCH, pursuant to which, among other things, (i) the
Company would pay NCH $3.3 million in cash; (ii) the NCH Complaint and all other
pleadings associated with the adversary proceeding would be dismissed, with
prejudice; (iii) NCH would withdraw any proofs of claim that it has filed
against the Company and any of its subsidiaries, which include a bankruptcy
claim of at least $9.5 million in the Company's Chapter 11 Cases (which consists
of an allegedly secured claim of at least $8.2 million and an alleged unsecured
claim of at least $1.2 million), and an allegedly secured claim of at least $0.7
million in the Mariner Health Chapter 11 Cases; and (iv) NCH, on the one hand,
and the Company and its subsidiaries, on the other, would exchange mutual
releases. The NCH Settlement Motion is scheduled to be heard by the Bankruptcy
Court on January 3, 2002.

         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 GL/PL
insurance issued to the Company's MHG subsidiary 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; (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. The
parties intend that the notices of withdrawal will be filed with the Bankruptcy
Court shortly. 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 an agreement in principle with the State of Texas to resolve the claims
of the Texas Department of Human Services ("TDHS") and Office of Attorney
General ("TOAG"), including those for civil penalties and administrative
penalties. The following description reflects the main terms of the agreement
between the Company and the State of Texas, which is subject to Bankruptcy Court
approval. A motion to approve the settlement, which will attach a copy of the
settlement agreement ("Texas Settlement Agreement"), will be filed with the
Bankruptcy Court in advance of the confirmation hearing to confirm the Company's
Plan of Reorganization.

         The settlement provides that all prepetition claims of TDHS and TOAG
related to civil penalties and administrative penalties will be satisfied in
full by allowing TDHS/TOAG an unsecured claim in the Company's Chapter 11 Cases
in the amount of $1.6 million which claim will be subordinated to all other
general unsecured


                                      F-38

<PAGE>

claims, and by payment to TDHS/TOAG of $0.6 million in cash within twenty (20)
business days after entry of the Bankruptcy Court's order approving the Texas
Settlement Agreement. With respect to postpetition TDHS Claims based on
administrative penalties, subject to certain exceptions: (i) all claims for
$1,500 or less will be settled for $0 and no findings of fact; (ii) all claims
in excess of $75,000 will not be resolved by virtue of the Texas Settlement
Agreement, but rather will be resolved on an individual basis or tried in the
ordinary course of the Company's business; and (iii) all postpetition claims
between $1,500 and $75,000 will be settled in full by payment by the Company of
sixty-five percent (65%) of the imposed administrative penalty that is the basis
for the claim within twenty (20) business days after entry of the Bankruptcy
Court's order approving the Texas Settlement Agreement. Postpetition TOAG Claims
for civil penalties will not be resolved by virtue of the Texas Settlement
Agreement, but rather will be resolved on an individual basis or tried in the
ordinary course of the Company's business. The Company will agree not to contest
certain survey findings of fact that support the relevant penalty claims, but
reserves the right to contest survey findings of fact unrelated to the penalty
claims, as well as the legal conclusion resulting from the facts and the
application and use of the findings of fact. Upon compliance with the Texas
Settlement Agreement, the Company will receive a release of all prepetition
claims of TDHS and TOAG related to civil penalties and administrative penalties.

NOTE 19  DISCLOSURES REGARDING FAIR VALUE OF FINANCIAL INSTRUMENTS

         The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value:

     CASH AND CASH EQUIVALENTS

         The carrying amount approximates fair value because of the short
maturity of these instruments.

     RESTRICTED INVESTMENTS

         Fair values for the Company's restricted investments were based on
quoted market rates.

     LONG-TERM DEBT

         Due to the commencement of the Chapter 11 Cases, fair values at
September 30, 2000 and 2001 for the outstanding debt instruments was unable to
be estimated. At September 30, 2001 and 2000, all long-term debt is classified
as liabilities subject to compromise.

         The estimated values of the Company's financial instruments at
September 30, 2001 and 2000 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                                           SEPTEMBER 30,
                                                                       ------------------------------------------------------
                                                                                 2001                         2000
                                                                       ------------------------     -------------------------
                                                                        CARRYING         FAIR       CARRYING         FAIR
                                                                         AMOUNT         VALUE        AMOUNT          VALUE
                                                                       ----------      --------     ----------      ---------
<S>                                                                    <C>             <C>          <C>             <C>
Cash and cash equivalents ...........................................  $   209,050     $ 209,050    $   170,468     $ 170,468
Restricted investments ..............................................  $    32,831     $  32,831    $    35,671     $  35,671
Long-term debt ......................................................  $ 2,116,755     $     N/A    $ 2,147,756     $     N/A
</TABLE>

NOTE 20  CONCENTRATIONS OF RISK

         A significant portion of the Company's revenues are received from the
Medicare and Medicaid programs. The health care industry is experiencing the
effects of the federal and state governments' trend toward cost containment as
government and other third-party payors seek to impose lower reimbursement and
utilization rates as well as negotiate reduced payment schedules with providers.
These cost containment measures, combined with the increasing influence of
managed care and competition for patients, generally have resulted in reduced
rates of reimbursement for services to be provided by the Company. In recent
years, several significant actions have been taken with respect to Medicare and
Medicaid reimbursement, including the adoption of PPS reimbursement pursuant to
the Balanced Budget Act, as modified by the BBRA, and the repeal of the "Boren
Amendment" federal payment standard for Medicaid payments to nursing facilities
(see Note 6). In addition to the above actions, there have been, and the Company
expects that there will continue to be, a number of additional proposals to
limit reimbursements to


                                      F-39

<PAGE>

long-term care facilities under the Medicare and Medicaid programs. The Company
cannot predict whether any of these additional proposals will be adopted, or if
adopted and implemented, what effect such proposals would have on the Company.

         Approximately 79.5%, 78.3% and 74.4% of the Company's total revenues
for the fiscal years ended September 30, 2001, 2000 and 1999, respectively, are
from the Medicare and Medicaid programs. In addition, the Company has
significant accounts receivable whose collectibility is dependent upon the
performance of these governmental programs. The Company also operates long-term
care facilities in 24 states, 202 of which are located in Texas, Florida, North
Carolina, California and Colorado. The Company does not believe there are
significant credit risks associated with these governmental programs and that an
adequate provision has been made for the possibility of these receivables
proving uncollectible, which is continually monitored and adjusted as necessary.
However, as laws and regulations governing the Medicare and Medicaid programs
are extremely complex and subject to interpretation, there is at least a
reasonable possibility that recorded estimates may change by a material amount
in the near term.

         The Company maintains its cash in bank deposit accounts which, at
times, may exceed federally insured limits. The Company has not experienced any
losses in such accounts and believes that it is not exposed to any significant
credit risk on cash and cash equivalents.

NOTE 21  SEGMENT INFORMATION

     DESCRIPTION OF THE TYPES OF PRODUCTS AND SERVICES FROM WHICH EACH OPERATING
         SEGMENT DERIVES ITS REVENUES

         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. Prior to
September 30, 1999, the Company also operated a large contract rehabilitation
therapy business that provided, among other services, physical, occupational,
speech and respiratory therapy programs and services to affiliated and
nonaffiliated skilled nursing facilities. The operations relating to the therapy
segment were divested or closed during fiscal year 1999 (see Note 5).

     MEASUREMENT OF SEGMENT PROFIT OR LOSS AND SEGMENT ASSETS

         The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies (see Note 2). 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 recorded in connection with
SFAS 121, legal and regulatory matters and restructuring costs are also excluded
from operating margin and not considered in the evaluation of segment
performance. The Company accounts for intersegment revenues and provision of
services at market prices. Asset information by segment, including capital
expenditures, and net income (loss) beyond operating margins are not provided to
the Company's chief operating decision maker.

     FACTORS MANAGEMENT USED TO IDENTIFY THE ENTERPRISE'S REPORTABLE SEGMENTS

         The Company's reportable segments are strategic business units that
offer different products and services. They are each managed separately because
each business has different marketing strategies due to differences in types of
customers, different distribution channels and different capital resource needs.


                                      F-40

<PAGE>

         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 fiscal years ended September 30, 2001,
2000 and 1999 (in thousands of dollars):

<TABLE>
<CAPTION>
                                                   NURSING HOME                         THERAPY SERVICES
                                                    SERVICES          OTHER            (DISPOSED SEGMENT)      TOTAL
                                                  -----------       ---------          ------------------   -----------
<S>                                               <C>               <C>                <C>                  <C>
2001
Revenues from external customers ............     $ 1,759,865       $ 112,270             $      --         $ 1,872,135
Intersegment revenues .......................              --              --                    --                  --
Operating margin ............................         153,706         (95,829)                   --              57,877
Depreciation and amortization ...............          37,454          11,945                    --              49,399

2000
Revenues from external customers ............     $ 1,768,688       $ 110,619             $      --         $ 1,879,307
Intersegment revenues .......................              --              --                    --                  --
Operating margin ............................         221,648        (147,277)                   --              74,374
Depreciation and amortization ...............          39,552           9,683                    --              49,235

1999
Revenues from external customers ............     $ 1,697,029       $  88,467             $ 205,367         $ 1,990,863
Intersegment revenues .......................              --        (101,265)              101,265                  --
Operating margin ............................          21,047        (453,659)              296,262            (136,350)
Depreciation and amortization ...............          55,619          41,523                10,364             107,506
</TABLE>

NOTE 22  RELATED PARTY TRANSACTIONS

         The Company, through its Mariner Health subsidiary, currently leases 13
SNFs under operating and capital leases from certain organization in which a
former board member of the Company, who resigned effective August 31, 2000, has
a significant interest. Mariner Health originally entered into leases for 14
facilities and on March 30, 2000, the Bankruptcy Court approved the rejection
and termination of one of the leases. The Company made cash payments on such
lease obligations of approximately $7.0 million, $6.9 million and $7.5 million
for the fiscal years ended September 30, 2001, 2000 and 1999, respectively.


                                      F-41

<PAGE>

NOTE 23  QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

         The following tables summarize unaudited quarterly financial data for
the fiscal years ended September 30, 2001 and 2000 (in thousands, except per
share amounts):

<TABLE>
<CAPTION>
                                                     FOURTH           THIRD           SECOND            FIRST
                                                     QUARTER         QUARTER          QUARTER          QUARTER
                                                   ----------       ----------       ----------       ----------
<S>                                                <C>              <C>              <C>              <C>
2001
Net revenues ................................      $  470,825      $   463,291       $  469,828       $  468,191
Total costs and expenses ....................         504,547          453,724          456,856          448,530
                                                   ----------       ----------       ----------       ----------
Operating income (loss) .....................         (33,722)           9,567           12,972           19,661
Other income (expenses), net ................         (16,573)         (21,843)           1,202          (10,133)
                                                   ----------       ----------       ----------       ----------
Income (loss) from continuing
   operations before income taxes ...........         (50,295)         (12,276)          14,174            9,528
Benefit for income taxes ....................          (4,807)              --               --               --
                                                   ----------       ----------       ----------       ----------
Income (loss) from continuing
   operations ...............................         (45,488)         (12,276)          14,174            9,528
Discontinued operations:
    Income (loss) from operations of
      discontinued pharmacy division ........             308              494             (517)             382
                                                   ----------       ----------       ----------       ----------
Net income (loss) ...........................      $  (45,180)      $  (11,782)      $   13,657       $    9,910
                                                   ==========       ==========       ==========       ==========
Earnings (loss) per share -- basic and
    diluted:
    Income (loss) from continuing
       operations ...........................      $    (0.62)      $    (0.17)      $     0.19       $     0.13
    Income (loss) from discontinued
       operations ...........................            0.00             0.01            (0.01)            0.01
                                                   ----------       ----------       ----------       ----------
    Net income (loss) .......................      $    (0.61)      $    (0.16)      $     0.19       $     0.13
                                                   ==========       ==========       ==========       ==========
Shares used in computing earnings
   (loss) per share -- basic and diluted ....          73,688           73,688           73,688           73,688
                                                   ==========       ==========       ==========       ==========

2000
Net revenues ................................      $  463,973       $  472,554       $  471,417       $  471,363
Total costs and expenses ....................         408,459          525,910          483,406          468,092
                                                   ----------       ----------       ----------       ----------
Operating income (loss) .....................          55,514          (53,356)         (11,989)           3,271
Other income (expenses), net ................         (10,681)           1,802           (7,977)         (52,238)
                                                   ----------       ----------       ----------       ----------
Income (loss) from continuing
   operations before income taxes ...........          44,833          (51,554)         (19,966)         (48,967)
Benefit for income taxes ....................         (19,374)              --               --               --
                                                   ----------       ----------       ----------       ----------
Income (loss) from continuing
   operations ...............................          64,207          (51,554)         (19,966)         (48,967)
Discontinued operations:
    Income (loss) from operations of
        discontinued pharmacy division ......         (59,524)          60,156            5,736           (9,073)
                                                   ----------       ----------       ----------       ----------
Net income (loss) ...........................      $    4,683       $    8,602       $  (14,230)      $  (58,040)
                                                   ==========       ==========       ==========       ==========
Earnings (loss) per share -- basic and
    diluted:
    Income (loss) from continuing
       operations ...........................      $     0.87       $    (0.70)      $    (0.27)      $    (0.66)
    Income (loss) from discontinued
       operations ...........................           (0.81)            0.82             0.08            (0.12)
                                                   ----------       ----------       ----------       ----------
    Net income (loss) .......................      $     0.06       $     0.12       $    (0.19)      $    (0.79)
                                                   ==========       ==========       ==========       ==========

Shares used in computing earnings
   (loss) per share -- basic and diluted.....          73,688           73,688           73,688           73,688
                                                   ==========       ==========       ==========       ==========
</TABLE>



                                      F-42

<PAGE>



                                                                     SCHEDULE II


                 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
                        MARINER POST-ACUTE NETWORK, INC.
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                         OTHER
                                        BALANCE                                        ADDITIONS      BALANCE
                                      BEGINNING OF     CHARGED TO      DEDUCTION          FROM         END OF
                                         PERIOD          INCOME       FROM RESERVE    ACQUISITIONS     PERIOD
                                      ------------     ----------     ------------    ------------   ---------
<S>                                   <C>              <C>            <C>             <C>            <C>

Fiscal Year 2001:
Allowance for doubtful accounts ...     $ 44,624         28,140         (19,478)             --       $ 53,286
                                        ========        =======         =======          ======       ========
Valuation allowance ...............     $521,639          3,437              --              --       $525,076
                                        ========        =======         =======          ======       ========

Fiscal Year 2000:
Allowance for doubtful accounts ...     $ 65,274         30,166         (50,816)             --       $ 44,624
                                        ========        =======         =======          ======       ========
Valuation allowance ...............     $470,557         51,082              --              --       $521,639
                                        ========        =======         =======          ======       ========

Fiscal Year 1999:
Allowance for doubtful accounts ...     $ 60,767        103,512         (99,005)             --       $ 65,274
                                        ========        =======         =======          ======       ========
Valuation allowance ...............     $ 70,252        400,305              --              --       $470,557
                                        ========        =======         =======          ======       ========
</TABLE>