UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                 --------------

                                    FORM 10-Q
(MARK ONE)
  X        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
                   OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SPETEMBER 30, 2003
                                       OR
 ___   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE

                         SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM _______________ TO _______________

COMMISSION FILE NUMBER 1-11316

                                OMEGA HEALTHCARE
                                 INVESTORS, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

        MARYLAND                                   38-3041398
(STATE OF INCORPORATION)               (I.R.S. EMPLOYER IDENTIFICATION NO.)

                9690 DEERECO ROAD, SUITE 100, TIMONIUM, MD 21093
                    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

                                 (410) 427-1700
                     (TELEPHONE NUMBER, INCLUDING AREA CODE)

     INDICATE  BY CHECK MARK  WHETHER THE  REGISTRANT  (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE  SECURITIES  EXCHANGE  ACT OF
1934  DURING  THE  PRECEDING  12 MONTHS  (OR FOR SUCH  SHORTER  PERIOD  THAT THE
REGISTRANT  WAS REQUIRED TO FILE SUCH  REPORTS) AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.

                      YES   X                             NO
                          -----                              -----

     INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN  ACCELERATED  FILER (AS
DEFINED IN RULE 12B-2 OF THE EXCHANGE ACT).

                      YES   X                             NO
                          -----                              -----

     INDICATE THE NUMBER OF SHARES  OUTSTANDING OF EACH OF THE ISSUER'S  CLASSES
OF COMMON STOCK AS OF SEPTEMBER 30, 2003.

     COMMON STOCK, $.10 PAR VALUE                      37,210,991
               (CLASS)                             (NUMBER OF SHARES)


                        OMEGA HEALTHCARE INVESTORS, INC.
                                    FORM 10-Q
                               SEPTEMBER 30, 2003

                                      INDEX
                                                                     Page No.
PART I   Financial Information

Item 1.  Consolidated Financial Statements:

         Balance Sheets
             September 30, 2003 (unaudited)
             and December 31, 2002....................................   2

         Statements of Operations (unaudited)
             Three and nine months ended
             September 30, 2003 and 2002..............................   3

         Statements of Cash Flows (unaudited)
             Nine months ended
             September 30, 2003 and 2002..............................   4

         Notes to Consolidated Financial Statements
             September 30, 2003 (unaudited)...........................   5

Item 2.  Management's Discussion and Analysis of
             Financial Condition and Results of Operations............  17

Item 3.  Quantitative and Qualitative Disclosures About Market Risk...  29

Item 4.  Controls and Procedures......................................  30

PART II  OTHER INFORMATION

Item 1.  Legal Proceedings............................................  31

Item 2.  Changes in Securities and Use of Proceeds ...................  31

Item 3.  Defaults Upon Senior Securities..............................  31

Item 4.  Submission of Matters to a Vote of Security Holders..........  31

Item 6.  Exhibits and Reports on Form 8-K.............................  31



PART 1 - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS
                        OMEGA HEALTHCARE INVESTORS, INC.
                           CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)


                                                                                        SEPTEMBER 30,       DECEMBER 31,
                                                                                            2003                2002
                                                                                        --------------------------------
                                                                                          (UNAUDITED)        (SEE NOTE)
                                                                                                           
                                     ASSETS
Real estate properties
   Land and buildings at cost...................................................         $ 709,825            $ 669,188
   Less accumulated depreciation................................................          (133,344)            (117,986)
                                                                                        --------------------------------
     Real estate properties - net...............................................           576,481              551,202
   Mortgage notes receivable - net..............................................           120,314              173,914
                                                                                        --------------------------------
                                                                                           696,795              725,116
Other investments - net.........................................................            26,491               36,887
                                                                                        --------------------------------
                                                                                           723,286              762,003
Assets held for sale - net......................................................             2,091                2,324
                                                                                        --------------------------------
   Total investments............................................................           725,377              764,327
Cash and cash equivalents.......................................................             6,079               14,340
Accounts receivable - net.......................................................             2,599                2,766
Interest rate cap...............................................................             5,280                7,258
Other assets....................................................................             7,600                5,597
Operating assets for owned properties...........................................                 -                9,721
                                                                                        --------------------------------
   Total assets.................................................................         $ 746,935            $ 804,009
                                                                                        ================================

            LIABILITIES AND STOCKHOLDERS EQUITY
Revolving lines of credit.......................................................         $ 190,545            $ 177,000
Unsecured borrowings............................................................           100,000              100,000
Other long-term borrowings......................................................             6,945               29,462
Accrued expenses and other liabilities..........................................            18,075               13,234
Operating liabilities for owned properties......................................                 -                4,612
Operating assets and liabilities for owned properties- net......................               957                    -
                                                                                        --------------------------------
   Total liabilities............................................................           316,522              324,308
                                                                                        --------------------------------

Preferred stock.................................................................           212,342              212,342
Common stock and additional paid-in capital.....................................           484,918              484,766
Cumulative net earnings.........................................................           169,092              151,245
Cumulative dividends paid.......................................................          (431,123)            (365,654)
Unamortized restricted stock awards.............................................                 -                 (116)
Accumulated other comprehensive loss............................................            (4,816)              (2,882)
                                                                                        --------------------------------
   Total stockholders equity....................................................           430,413              479,701
                                                                                        --------------------------------
   Total liabilities and stockholders equity....................................         $ 746,935            $ 804,009
                                                                                        ================================


NOTE - The balance sheet at December 31, 2002 has been derived from the audited
consolidated financial statements at that date, but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.

                See notes to consolidated financial statements.

                        OMEGA HEALTHCARE INVESTORS, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                    UNAUDITED
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


                                                                                 THREE MONTHS ENDED             NINE MONTHS ENDED
                                                                                    SEPTEMBER 30,                 SEPTEMBER 30,
                                                                                 2003           2002           2003           2002
                                                                                ---------------------         ---------------------
                                                                                                                  
REVENUES
  Rental income.................................................................$ 16,523    $ 16,472          $ 49,350    $ 47,569
  Mortgage interest income......................................................   3,465       5,301            11,346      15,899
  Other investment income - net.................................................     660       2,068             2,406       4,227
  Nursing home revenues of owned and operated assets............................       -       6,798                 -      40,756
  Litigation settlement.........................................................       -           -             2,187           -
  Miscellaneous.................................................................     278         243               990         759
                                                                                ---------------------         ----------------------
                                                                                  20,926      30,882            66,279     109,210
                                                                                ---------------------         ----------------------
EXPENSES
  Nursing home expenses of owned and operated assets............................       -      19,677                 -      56,862
  Nursing home revenues and expenses of owned and operated assets - net.........      19           -             1,457           -
  Depreciation and amortization.................................................   5,386       5,297            16,119      15,961
  Interest......................................................................   5,468       6,444            17,963      21,769
  General and administrative....................................................   1,493       1,576             4,425       5,065
  Legal.........................................................................     538         610             1,880       2,262
  State taxes...................................................................     153          54               472         270
  Provision for impairment......................................................   4,276       2,371             8,894       1,699
  Provision for uncollectible mortgages, notes and accounts receivable..........       -       5,219                 -       8,898
  Adjustment of derivatives to fair value.......................................       -        (348)                -        (946)
                                                                                ---------------------         ----------------------
                                                                                  17,333      40,900            51,210     111,840
                                                                                ---------------------         ----------------------

Income (loss) before gain on assets sold........................................   3,593     (10,018)           15,069      (2,630)
Gain on assets sold - net.......................................................       -       2,157             1,282       1,855
                                                                                ---------------------         ----------------------
Income (loss) from continuing operations........................................   3,593      (7,861)           16,351        (775)
Income (loss) from discontinued operations......................................   1,440          (1)            1,496      (3,170)
                                                                                ---------------------         ----------------------
Net income (loss)...............................................................   5,033      (7,862)           17,847      (3,945)
Preferred stock dividends.......................................................  (5,029)     (5,029)          (15,087)    (15,087)
                                                                                ---------------------         ----------------------
Net income (loss) available to common...........................................$      4    $(12,891)         $  2,760    $(19,032)
                                                                                =====================         ======================

Income (loss) per common share:
  Basic:
    Income (loss) from continuing operations....................................$  (0.04)   $  (0.35)         $   0.03    $  (0.47)
                                                                                =====================         ======================
    Net income (loss)...........................................................$      -    $  (0.35)         $   0.07    $  (0.56)
                                                                                =====================         ======================
  Diluted:
    Income (loss) from continuing operations....................................$  (0.04)   $  (0.35)         $   0.03    $  (0.47)
                                                                                =====================         ======================
    Net income (loss)...........................................................$      -    $  (0.35)         $   0.07    $  (0.56)
                                                                                =====================         ======================

Dividends declared per common share.............................................$   0.15    $      -          $   0.15    $      -
                                                                                =====================         ======================

Weighted-average shares outstanding, basic......................................  37,193      37,133            37,164      33,930
                                                                                =====================         ======================
Weighted-average shares outstanding, diluted....................................  38,617      37,133            38,587      33,930
                                                                                =====================         ======================

Components of other comprehensive income:
  Unrealized gain on Omega Worldwide, Inc.......................................$      -    $    411          $      -    $    969
                                                                                =====================         ======================
  Unrealized gain (loss) on hedging contracts...................................$  1,218    $ (1,318)         $ (1,934)   $   (952)
                                                                                =====================         ======================

Total comprehensive income......................................................$  6,251    $ (8,769)         $ 15,913    $ (3,928)
                                                                                =====================         ======================



                        OMEGA HEALTHCARE INVESTORS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                    UNAUDITED
                                 (IN THOUSANDS)


                                                                                         NINE MONTHS ENDED
                                                                                           SEPTEMBER 30,
                                                                                     --------------------------
                                                                                        2003            2002
                                                                                     --------------------------
                                                                                                   
OPERATING ACTIVITIES
   Net income (loss)............................................................     $  17,847       $  (3,945)
   Adjustment to reconcile net income to cash provided by operating activities:
     Depreciation and amortization..............................................        16,119          15,976
     Provision for impairment...................................................         8,894           4,854
     Provision for uncollectible mortgages, notes and accounts receivable.......             -           8,898
     Gain on assets sold - net..................................................        (2,778)         (1,855)
     Adjustment of derivatives to fair value....................................             -            (946)
     Other......................................................................         4,286           1,077
Net change in accounts receivable for owned and operated assets - net...........         5,415          16,205
Net change in accounts payable for owned and operated assets....................          (324)         (3,741)
Net change in other owned and operated assets and liabilities...................           898           3,326
Net change in operating assets and liabilities..................................        (7,121)         (1,957)
                                                                                     --------------------------

Net cash provided by operating activities.......................................        43,236          37,892
                                                                                     --------------------------

CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from new financing - net...............................................       190,545               -
Payments of credit line borrowings - net........................................      (177,000)         (3,889)
Proceeds from refinancing - net.................................................             -          13,409
Payments of long-term borrowings................................................       (22,517)        (97,981)
Payments for derivative instruments.............................................             -         (10,140)
Receipts from Dividend Reinvestment Plan........................................             3               4
Receipts from exercised options.................................................            82               -
Dividends paid..................................................................       (54,859)              -
Proceeds from rights offering and private placement - net.......................             -          44,600
Deferred financing costs paid...................................................        (7,203)         (5,604)
                                                                                     --------------------------

Net cash used in financing activities...........................................       (70,949)        (59,601)
                                                                                     --------------------------

CASH FLOW FROM INVESTING ACTIVITIES
Proceeds from sale of real estate investments - net.............................         3,549           1,045
Capital improvements and funding of other investments...........................        (1,307)           (299)
Proceeds from other assets......................................................        13,996           7,652
Collection of mortgage principal................................................         3,214          11,587
                                                                                     --------------------------
Net cash provided by investing activities.......................................        19,452          19,985
                                                                                     --------------------------

Decrease in cash and cash equivalents...........................................        (8,261)         (1,724)
Cash and cash equivalents at beginning of period................................        14,340           4,896
                                                                                     --------------------------
Cash and cash equivalents at end of period......................................     $   6,079       $   3,172
                                                                                     ==========================
Interest paid during the period.................................................     $  13,731       $  22,890
                                                                                     ==========================

                 See notes to consolidated financial statements.

                        OMEGA HEALTHCARE INVESTORS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                    UNAUDITED

                               SEPTEMBER 30, 2003

NOTE A - BASIS OF PRESENTATION

     The  accompanying  unaudited  consolidated  financial  statements for Omega
Healthcare  Investors,  Inc. have been prepared in  accordance  with  accounting
principles  generally  accepted  in  the  United  States  ("GAAP")  for  interim
financial  information and with the  instructions to Form 10-Q and Article 10 of
Regulation  S-X.  Accordingly,  they do not include all of the  information  and
footnotes  required by GAAP for complete financial  statements.  In our opinion,
all adjustments  (consisting of normal recurring accruals)  considered necessary
for a fair presentation have been included.  Certain reclassifications have been
made to the 2002 financial  statements  for  consistency  with the  presentation
adopted for 2003. Such  reclassifications  have no effect on previously reported
earnings or equity.

     In April 2002, the Financial  Accounting  Standards  Board ("FASB")  issued
Statement of Financial  Accounting Standard ("SFAS") No. 145, Rescission of FASB
Statements No. 4, 44, and 64,  Amendment of FASB Statement No. 13, and Technical
Corrections,  which stipulates that gains and losses from extinguishment of debt
generally will not be reported as extraordinary items effective for fiscal years
beginning  after May 15, 2002.  We adopted this  standard  effective  January 1,
2003.  SFAS No. 145 also  specifies that any gain or loss on  extinguishment  of
debt that was  classified as an  extraordinary  item in prior periods  presented
that does not meet the criteria in Accounting  Principles  Board ("APB") Opinion
No. 30, Reporting the Results of Operation's - Reporting the Effects of Disposal
of  a  Segment  of a  Business,  and  Extraordinary,  Unusual  and  Infrequently
Occurring Events and Transactions,  for  classification as an extraordinary item
shall be reclassified.  Therefore,  the $49 thousand loss on  extinguishment  of
debt previously reported for the nine-month period ended September 30, 2002, has
been  reclassified  to  interest  expense  in  our  Consolidated  Statements  of
Operations.

     Due to the  decrease  in size of the  owned  and  operated  portfolio  (one
facility as of September 30, 2003),  the  operations of such  facilities and the
net assets  employed  therein  are no longer  considered  a separate  reportable
segment.  Accordingly,  commencing  January 1, 2003, the operating  revenues and
expenses and related  operating assets and liabilities of the owned and operated
facilities are shown on a net basis in our Consolidated Statements of Operations
and Consolidated Balance Sheets, respectively.

     Operating results for the three- and nine-month periods ended September 30,
2003 are not necessarily  indicative of the results that may be expected for the
year ending December 31, 2003. For further  information,  refer to the financial
statements and footnotes included in our annual report on Form 10-K for the year
ended December 31, 2002.

NOTE B - PROPERTIES

     In the ordinary course of our business activities, we periodically evaluate
investment  opportunities  and extend  credit to  customers.  We also  regularly
engage in lease and loan extensions and modifications. Additionally, we actively
monitor and manage our  investment  portfolio  with the  objectives of improving
credit quality and increasing returns. In connection with portfolio  management,
we engage in various collection and foreclosure activities.

     When we acquire real estate pursuant to a foreclosure, lease termination or
bankruptcy  proceeding  and  do  not  immediately  sell  the  properties  to new
operators,  the  assets  are  included  on the  balance  sheet as  "real  estate
properties,"  and the value of such  assets is  reported at the lower of cost or
estimated fair value.  (See "Owned and Operated  Assets"  below).  Additionally,
when a formal  plan to sell real estate is adopted  and is under  contract,  the
real  estate is  classified  as "Assets  Held for Sale,"  with the net  carrying
amount  adjusted to the lower of cost or estimated  fair value,  less  estimated
costs of disposal.

     Upon adoption of SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived  Assets, as of January 1, 2002,  long-lived assets sold or designated
as held for sale after January 1, 2002 are reported as  discontinued  operations
in our financial statements. Long-lived assets designated as held for sale prior
to January 1, 2002 are subject to SFAS No. 121, Accounting for the Impairment of
Long-Lived  Assets and for  Long-Lived  Assets to be Disposed  of.  During 2003,
certain properties were sold and $3.2 million of the impairment loss recorded in
2002 is now reflected in discontinued  operations.  (See "Mortgages  Receivable,
Closed Facilities and Assets Held for Sale" below).

     The table below  summarizes  our number of  properties  and  investment  by
category for the quarter ended September 30, 2003:


                                                                                                                 ASSETS
                                                                                                     TOTAL        HELD
                                           PURCHASE /    MORTGAGES      OWNED &      CLOSED        HEALTHCARE     FOR
          FACILITY COUNT                   LEASEBACK     RECEIVABLE    OPERATED     FACILITIES     FACILITIES     SALE       TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
                                                                                                          
Balance at June 30, 2003...............        155           52              1          13            221            3         224
Properties closed......................          -            -              -           -              -            -           -
Properties sold/mortgages paid.........          -           (1)             -          (4)            (5)          (2)         (7)
Transition leasehold interest..........          -            -              -           -              -            -           -
Properties leased/mortgages placed.....          -            -              -           -              -            -           -
Properties transferred to
  purchase/leaseback...................          -            -              -           -              -            -           -
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2003..........        155           51              1           9            216            1         217
====================================================================================================================================

         INVESTMENT ($000'S)
- ---------------------------------------
Balance at June 30, 2003...............   $702,483     $120,912       $  5,295     $  8,070       $836,760     $  2,227    $838,987
Properties transferred to assets
  held for sale........................          -            -              -            -              -            -           -
Properties closed......................          -            -              -            -              -            -           -
Properties sold/mortgages paid.........          -          (73)             -       (1,902)        (1,975)        (136)     (2,111)
Transition leasehold interest..........          -            -              -            -              -            -           -
Properties leased/mortgages placed.....          -            -              -            -              -            -           -
Properties transferred to
  purchase/leaseback...................          -            -              -            -              -            -           -
Impairment on properties...............     (4,276)           -              -            -         (4,276)           -      (4,276)
Capex and other........................        155         (525)             -            -           (370)           -        (370)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2003..........   $698,362     $120,314       $  5,295     $  6,168       $830,139     $  2,091    $832,230
====================================================================================================================================


PURCHASE/LEASEBACK

     During the  three-month  period ended September 30, 2003, we re-leased five
former Sun Healthcare Group, Inc. ("Sun") skilled nursing facilities ("SNFs") to
three separate operators. (See Note J - Subsequent Events).

     Specifically,  we re-leased the five former Sun SNFs in the following three
separate  lease  transactions:  (i) a  Master  Lease  of two  SNFs  in  Florida,
representing 350 beds, which Master Lease has a ten-year term and has an initial
annual  lease rate of $1.3  million;  (ii) a Master  Lease of two SNFs in Texas,
representing 256 beds, which Master Lease has a ten-year term and has an initial
annual lease rate of $0.8  million;  and (iii) a lease of one SNF in  Louisiana,
representing  131 beds,  which lease has a ten-year term and requires an initial
annual lease rate of $0.4 million. Aggregate monthly contractual lease payments,
under all three  transactions,  total  approximately  $0.2 million and commenced
July 1, 2003.

     As a result of the  above  mentioned  transitions  of the five  former  Sun
facilities,  Sun's contractual  monthly rent, starting in July, was reduced $0.2
million from approximately  $2.2 million to approximately $2.0 million.  For the
three-month  period ended  September 30, 2003, Sun remitted  approximately  $4.5
million in lease  payments  versus $3.8 million for the second  quarter of 2003.
However,  during  the  second  quarter,  we applied  $1.4  million  of  security
deposits, which exhausted all remaining security deposits associated with Sun.

     During the third  quarter  of 2003,  we  amended  our  Master  Lease with a
subsidiary of Alterra Healthcare  Corporation  ("Alterra") whereby the number of
leased facilities was reduced from eight to five. The amended Master Lease has a
remaining  term of  approximately  ten years with an annual rent  requirement of
approximately  $1.5  million.  We are in the  process of  negotiating  terms and
conditions for the re-lease of the remaining three  properties.  In the interim,
Alterra will continue to operate the  facilities.  The Amended  Master Lease was
approved by the U.S. Bankruptcy Court in the District of Delaware. (See Note J -
Subsequent Events).

     Also during the third quarter of 2003, Claremont Health Care Holdings, Inc.
("Claremont")  (formerly  Lyric Health Care, LLC) failed to pay base rent in the
amount of $1.5  million.  Therefore,  we drew on a letter of credit  (posted  by
Claremont  as a  security  deposit)  in  the  amount  of  $1.5  million  to  pay
Claremont's  third quarter rent payments and we demanded that Claremont  restore
the $1.5 million letter of credit. We are recognizing  revenue from Claremont on
a cash-basis as it is received.  (See Note J - Subsequent  Events). In addition,
we  permitted  Claremont to close one  facility.  As a result,  a provision  for
impairment  of $4.3  million was  recorded in the third  quarter,  reducing  the
carrying  value of the facility in the process of being closed to its  estimated
fair value less estimated costs to dispose.

     During the  three-month  period  ended March 31, 2003,  we  re-leased  nine
facilities  formerly  operated by  Integrated  Health  Services,  Inc.  ("IHS").
Accordingly, eight SNFs on which we held mortgages, and one SNF, which we leased
to IHS, have been re-leased to various unaffiliated third parties. Titles to the
eight   properties  on  which  we  held  mortgages  have  been   transferred  to
wholly-owned subsidiaries of ours by Deeds in Lieu of Foreclosure.

     Specifically,  during the quarter ended March 31, 2003, we leased nine SNFs
to  four   unaffiliated   third-party   operators  as  part  of  four   separate
transactions.  Each  of the  nine  facilities  had  formerly  been  operated  by
subsidiaries of IHS. The four transactions  included: (i) a Master Lease of five
SNFs in Florida  representing  600 beds to  affiliates  of  Seacrest  Healthcare
Management,  LLC, which lease has a ten-year term and has an initial annual rent
of $2.5 million;  (ii) a month-to-month  lease  (following a minimum  four-month
term) on two SNFs in  Georgia  representing  304 beds to  subsidiaries  of Triad
Health  Management of Georgia,  LLC, which lease provides for annualized rent of
$1.3 million;  (iii) a lease of one SNF in Texas,  representing  130 beds, to an
affiliate  of Senior  Management  Services of America,  Inc.,  which lease has a
ten-year term and has various rent  step-ups,  reaching  $384,000 by year three,
thereafter,  increasing  by the lesser of CPI or 2.5%;  and (iv)  re-leased  one
159-bed SNF,  located in the state of Washington to a subsidiary of Sun, with an
initial lease term of eight years and initial annual rent of $0.5 million.

     In an unrelated transaction during the first quarter of 2003, we recorded a
provision for impairment of $4.6 million  associated  with one closed  facility,
located in the state of Washington,  previously leased to a subsidiary of Sun as
part of a Master  Lease.  The $4.6 million  provision was recorded to reduce the
value of the  investment  to its  estimated  fair value.  We intend to sell this
closed facility as soon as practicable;  however,  there can be no assurance if,
or when, this sale will be completed.

     Also  during  the  first  quarter  of 2003,  we  completed  a  restructured
transaction  with Claremont  whereby nine  facilities  formerly leased under two
Master  Leases were combined  into one new ten-year  Master  Lease.  Annual rent
under the new lease is $6.0 million,  the same amount of rent recognized in 2002
for these properties. (See Note J - Subsequent Events).

MORTGAGES RECEIVABLE

     Mortgage  interest  income is  recognized  as earned  over the terms of the
related mortgage notes. Reserves are taken against earned revenues from mortgage
interest when collection of amounts due become questionable or when negotiations
for restructurings of troubled  operators lead to lower  expectations  regarding
ultimate collection.  When collection is uncertain,  mortgage interest income on
impaired  mortgage  loans is  recognized  as received  after taking into account
application of security deposits.

     During the three months ended September 30, 2003, one facility,  located in
Indiana,  was  removed  from an  existing  mortgage  and sold on  behalf  of the
mortgagor.  Net sales proceeds of approximately  $73 thousand were used to repay
principal on the existing mortgage.

     During the three months ended June 30,  2003,  fee-simple  ownership of two
closed  facilities on which we held mortgages were  transferred to us by Deed in
Lieu of Foreclosure. These facilities have been transferred to closed facilities
and are included in our Consolidated  Balance Sheet under "Land and buildings at
cost."  We  intend  to sell  these  closed  facilities  as soon as  practicable;
however, there can be no assurance if, or when, these sales will be completed.

     During the three months ended March 31, 2003, fee-simple ownership of eight
facilities were  transferred to us as discussed above (see  "Purchase/Leaseback"
above).  In  addition,  in  an  unrelated  transaction  with  IHS,  we  received
fee-simple  ownership  to one  closed  property,  which we  previously  held the
mortgage on, by Deed in Lieu of  Foreclosure.  This facility was  transferred to
closed facilities and is included in our Consolidated  Balance Sheet under "Land
and buildings at cost."

     No provision for loss on mortgages or notes  receivable was recorded during
the three- and nine-month periods ended September 30, 2003 as compared with $4.9
million for the same periods in 2002. The $4.9 million  provision was associated
with the write-down of two mortgage loans to bankrupt operators.

OWNED AND OPERATED ASSETS

     At September 30, 2003,  we own one,  128-bed  facility that was  previously
recovered  from a customer  and is operated  for our own  account.  We intend to
operate the remaining  owned and operated asset for our own account until we are
able to re-lease,  sell or close the facility.  The facility and its  respective
operations are presented on a consolidated basis in our financial statements.

     Nursing  home  revenues,  nursing  home  expenses,  assets and  liabilities
included in our consolidated financial statements which relate to such owned and
operated  asset are set forth in the tables  below.  Nursing home  revenues from
this owned and  operated  asset are  recognized  as services are  provided.  The
amounts shown in the consolidated  financial  statements are not comparable,  as
the number of owned and operated  facilities and the timing of the  foreclosures
and re-leasing  activities  have occurred at different  times during the periods
presented.  For 2003,  nursing home revenues,  nursing home expenses,  operating
assets and operating liabilities for our owned and operated properties are shown
on a net basis on the face of our consolidated  financial statements.  For 2002,
nursing home  revenues,  nursing home expenses,  operating  assets and operating
liabilities for our owned and operated  properties are shown on a gross basis on
the face of our consolidated financial statements.

     Nursing  home  revenues  and  nursing  home  expenses  in our  consolidated
financial  statements  which  relate  to our owned and  operated  assets  are as
follows:

                                       THREE MONTHS ENDED     NINE MONTHS ENDED
                                          SEPTEMBER 30,          SEPTEMBER 30,
                                       ------------------     ------------------
                                        2003       2002        2003       2002
                                       ------------------     ------------------
                                         (IN THOUSANDS)         (IN THOUSANDS)
NURSING HOME REVENUES (1)
  Medicaid............................. $  604    $ 3,908      $ 2,073  $24,899
  Medicare.............................    193      1,591          645    8,662
  Private & other......................    280      1,299          943    7,195
                                       ------------------     ------------------
    Total nursing home revenues (2)....  1,077      6,798        3,661   40,756
                                       ------------------     ------------------

NURSING HOME EXPENSES
  Patient care expenses................    597      7,854        2,020   30,964
  Administration.......................    351      3,170        1,952   12,213
  Property & related...................     67      1,070          327    3,545
  Leasehold buyout expense.............      -      1,670          582    1,670
  Management fees......................     81        414          209    2,292
  Rent.................................      -        480           28    1,957
  Provision for uncollectible accounts.      -      5,019            -    4,221
                                       ------------------     ------------------
    Total nursing home expenses (2)....  1,096     19,677        5,118   56,862
                                       ------------------     ------------------
Nursing home revenues and expenses of
  owned and operated assets - net (2).. $  (19)   $     -      $(1,457) $    -
                                       ==================     ==================

     (1)  Nursing  home  revenues  from  these  owned and  operated  assets  are
          recognized as services are provided.

     (2)  Nursing home  revenues  and expenses of owned and operated  assets for
          the three- and nine-months ended September 30, 2003 are shown on a net
          basis on the face of our Consolidated Statements of Operations and are
          shown on a gross basis for the three- and nine-months  ended September
          30, 2002.

     Accounts  receivable  for owned and operated  assets is net of an allowance
for doubtful  accounts of  approximately  $5.5 million at September 30, 2003 and
$10.8  million  at  September  30,  2002.  The  following  table is a summary of
allowance for doubtful accounts:

                                                          SEPTEMBER 30,
                                                      -----------------------
                                                        2003        2002
                                                      ---------- ------------
                                                          (IN THOUSANDS)
             Beginning balance.....................    $ 12,171    $   8,335
             Provision charged/(recovery)..........           -        4,269
             Provision applied.....................      (7,666)      (1,823)
             Collection of accounts receivable
               previously written off..............       1,008            -
                                                      ---------- ------------
             Ending balance........................    $  5,513    $  10,781
                                                      ========== ============

      The assets and liabilities in our consolidated financial statements which
relate to our owned and operated assets are as follows:

                                                 SEPTEMBER 30,    DECEMBER 31,
                                                     2003            2002
                                                 -----------------------------
                                                        (IN THOUSANDS)
                           ASSETS
Cash .........................................    $   331         $   838
Accounts receivable-net.......................      1,997           7,491
Other current assets .........................        294           1,207
                                                 -----------------------------
   Total current assets (1)...................      2,622           9,536
                                                 -----------------------------

Investment in leasehold-net (1)...............          -             185

Land and buildings............................      5,295           5,571
Less accumulated depreciation.................       (643)           (675)
                                                 -----------------------------
Land and buildings-net........................      4,652           4,896
                                                 -----------------------------
Assets held for sale-net......................      2,091           2,324
                                                 -----------------------------
  Total assets................................    $ 9,365         $16,941
                                                 =============================

                   LIABILITIES
Accounts payable..............................    $    65         $   389
Other current liabilities.....................      3,514           4,223
                                                 -----------------------------
   Total current liabilities..................      3,579           4,612
                                                 -----------------------------
Total liabilities (1).........................    $ 3,579         $ 4,612
                                                 =============================
Operating assets and liabilities for owned
   properties-net (1).........................    $  (957)        $     -
                                                 =============================

     (1)  Operating  assets and liabilities for owned properties as of September
          30,  2003  are  shown on a net  basis on the face of our  Consolidated
          Balance Sheet and are shown on a gross basis as of December 31, 2002.

CLOSED FACILITIES

     During  the  quarter  ended   September  30,  2003,  we  sold  four  closed
facilities.  We sold one facility located in Texas,  realizing  proceeds of $1.0
million,  net of  closing  costs,  resulting  in a gain  of  approximately  $0.6
million.  We sold one facility  located in  Connecticut,  realizing  proceeds of
approximately  $1.2  million,  net of  closing  costs,  resulting  in a gain  of
approximately  $0.8 million.  One facility  located in  Massachusetts  was sold,
realizing proceeds of $0.9 million, net of closing costs, resulting in a gain of
approximately $0.3 million.  Finally,  one facility located in Florida was sold,
realizing proceeds of $0.6 million, net of closing costs, resulting in a loss of
approximately  $0.3 million.  In accordance  with SFAS No. 144, the $1.4 million
realized net gain for the nine months ended  September  30, 2003 is reflected in
our Consolidated Statements of Operations as discontinued operations.

     During the quarter ended June 30, 2003, two facilities were  transferred to
closed  facilities.   Both  facilities  were  transferred  from  mortgage  notes
receivable after we received a Deed in Lieu of Foreclosure.

     During the quarter ended March 31, 2003,  three facilities were transferred
to closed facilities. One facility was transferred from purchase leaseback and a
non-cash  impairment  of $4.6  million  was  recorded to reduce the value of the
investment to its estimated fair value.  Another  facility was transferred  from
mortgage  notes  receivable  after we  received  a Deed in Lieu of  Foreclosure.
Finally,  we transferred one facility from our owned and operated portfolio into
closed  facilities.  No provisions for impairments were needed on the latter two
investments.

     At September  30, 2003,  there are nine closed  properties of which two are
currently  under either a letter of intent or contract of sale.  At this time it
was  determined  that no  provisions  for  impairments  were  needed on the nine
remaining investments.  We intend to sell the facilities as soon as practicable;
however, there can be no assurance if, or when, these sales will be completed on
terms  that  allow  us to  realize  the  carrying  value  of the  assets.  These
properties  are  included in "Land and  buildings  at cost" in our  Consolidated
Balance Sheet.  (See Note J - Subsequent Events).

ASSETS HELD FOR SALE

     During the three-month  period ended September 30, 2003, we sold two closed
buildings located in Indiana, realizing proceeds of $0.3 million, net of closing
costs, resulting in a gain of approximately $92 thousand. There were no sales or
transfers  of real estate  assets held for sale  during the  three-month  period
ended  September  30, 2002.  In  accordance  with SFAS No. 144, the $0.1 million
realized  gain for the nine months ended  September 30, 2003 is reflected in our
Consolidated Statements of Operations as discontinued operations.

     During  the  three-month  period  ended June 30,  2003,  we sold one closed
building located in Indiana,  realizing proceeds of $0.2 million, net of closing
costs, resulting in a gain of $56 thousand.  During the three-month period ended
June 30, 2002, we sold one closed building located in Texas,  realizing proceeds
of $1.0  million,  net of closing  costs,  resulting in a loss of $0.3  million.
There were no sales or transfers of real estate  assets held for sale during the
three-month  period ended March 31, 2003.  During the  three-month  period ended
March  31,  2002,  we  realized  gross  disposition  proceeds  of  $0.1  million
associated with the sale of beds from two facilities.

     At September 30, 2003, the carrying  value of the remaining  asset held for
sale totaled $2.1 million (net of impairment  reserves of $2.1  million).  There
can be no  assurance  if, or when,  such sale will be  completed or whether such
sale will be completed  on terms that allow us to realize the carrying  value of
the assets.  (See Note J - Subsequent Events).

OTHER NON-CORE ASSETS

     There were no non-core  real  estate  transactions  during the  three-month
period ended September 30, 2003;  however,  during the three-month  period ended
June 30, 2003, we sold an investment in a Baltimore,  Maryland asset,  leased by
the United States Postal Service, for approximately $19.6 million. The purchaser
paid us gross  proceeds  of $1.95  million  and  assumed  the first  mortgage of
approximately  $17.6 million.  As a result,  we recorded a gain of $1.3 million,
net of closing costs and other expenses.

     During the three-month period ended June 30, 2002, a charge of $3.7 million
for provision for  uncollectible  mortgages,  notes and accounts  receivable was
recognized. This charge was primarily related to the restructuring and reduction
of debt owed by Madison/OHI Liquidity Investors, LLC ("Madison"), as part of the
compromise and settlement of a lawsuit with Madison. (See Note G - Litigation).

NOTE C - CONCENTRATION OF RISK

     As of September 30, 2003, our portfolio of domestic  investments  consisted
of  216  healthcare  facilities,  located  in  28  states  and  operated  by  34
third-party  operators.  Our  gross  investment  in  these  facilities,  net  of
impairments,  totaled  $830.1  million at September 30, 2003,  with 97.2% of our
real estate investments related to long-term care facilities.  This portfolio is
made up of 153 long-term healthcare facilities and two rehabilitation  hospitals
owned  and  leased  to third  parties,  fixed  rate  mortgages  on 51  long-term
healthcare facilities, one long-term healthcare facility that was recovered from
a customer and is currently operated through a third-party  management  contract
for our own account and nine long-term healthcare facilities that were recovered
from  customers  and are currently  closed.  At September 30, 2003, we also held
miscellaneous  investments  and  assets  held  for sale of  approximately  $28.6
million,  including a $1.3 million  investment in Principal  Healthcare  Finance
Trust and $18.1 million of notes receivable, net of allowance.

     Approximately  45.9% of our real estate  investments  are  operated by four
public companies: Sun Healthcare Group, Inc. (22.8%),  Advocat, Inc. ("Advocat")
(12.6%),  Mariner Health Care, Inc.  ("Mariner")  (7.2%), and Alterra Healthcare
Corporation (3.3%). The three largest private operators represent 9.9%, 6.6% and
3.8%, respectively,  of our investments.  No other operator represents more than
2.8%  of our  investments.  The  three  states  in  which  we have  our  highest
concentration of investments are Florida (15.4%), California (8.0%) and Illinois
(8.0%). (See Note J - Subsequent Events).

NOTE D - DIVIDENDS

     In order to qualify as a real  estate  investment  trust  ("REIT"),  we are
required to  distribute  dividends  (other than capital gain  dividends)  to our
stockholders  in an amount at least equal to (A) the sum of (i) 90% of our "REIT
taxable income" (computed without regard to the dividends paid deduction and our
net  capital  gain) and (ii) 90% of the net income  (after  tax),  if any,  from
foreclosure property,  minus (B) the sum of certain items of non-cash income. In
addition,  if we dispose of any built-in gain asset during a recognition period,
we will be required to distribute at least 90% of the built-in gain (after tax),
if any,  recognized on the disposition of such asset. Such distributions must be
paid in the taxable year to which they relate,  or in the following taxable year
if  declared  before we timely  file our tax return for such year and paid on or
before the first regular dividend payment after such  declaration.  In addition,
such  distributions  are required to be made pro rata, with no preference to any
share of stock as  compared  with other  shares of the same  class,  and with no
preference  to one class of stock as compared  with another  class except to the
extent that such class is entitled to such a  preference.  To the extent that we
do not distribute all of our net capital gain or do distribute at least 90%, but
less than 100% of our "REIT taxable income," as adjusted,  we will be subject to
tax thereon at regular ordinary and capital gain corporate tax rates.

     On  February  1,  2001,  we  announced  the  suspension  of all  common and
preferred dividends. Due to our 2002 taxable loss, no distribution was necessary
to maintain our REIT status for 2002. Net operating loss carry-forwards  through
2002 of  approximately  $21.9  million,  which  is  comprised  of  $7.3  million
associated  with our REIT and $14.6  million  associated  with our taxable  REIT
subsidiary, are available to help offset taxable income.

     In  July  2003,  our  Board  of  Directors  declared  a  full  catch-up  of
cumulative,  unpaid  dividends  for all  classes of  preferred  stock to be paid
August  15,  2003 to  preferred  stockholders  of record on August 5,  2003.  In
addition,  our Board declared the regular quarterly  dividend for all classes of
preferred  stock to be paid on August  15,  2003 to  preferred  stockholders  of
record on August 5, 2003. As a result,  for the nine months ended  September 30,
2003,  preferred  cash  dividend  payments  totaling  $54.9  million  were paid;
however,  no preferred  cash  dividends were paid during the twelve months ended
December 31, 2002 and 2001.

     Series A and Series B  preferred  stockholders  of record on August 5, 2003
were paid dividends in the amount of approximately $6.36 and $5.93 per preferred
share, respectively, on August 15, 2003. Our Series C preferred stockholder were
paid dividends of  approximately  $27.31 per Series C preferred  share on August
15, 2003. The  liquidation  preference for our Series A, B and C preferred stock
is $25.00,  $25.00 and $100.00  per share,  respectively,  excluding  cumulative
unpaid  dividends.  Total  August  2003  dividend  payments  for all  classes of
preferred stock were approximately $54.9 million.

     Cumulative  unpaid dividends  represent  unpaid  dividends  accrued for the
period from November 1, 2000 through April 30, 2003. Regular quarterly dividends
represent  dividends  for the  period  May 1, 2003  through  July 31,  2003.  In
aggregate,  preferred  dividends  continue to accumulate at  approximately  $5.0
million per quarter.

     No common cash dividends  were paid during the nine months ended  September
30, 2003 or the twelve  months  ended  December 31, 2002 and 2001.  However,  in
September 2003, our Board of Directors  declared the reinstatement of its common
dividend  to be paid  November  17,  2003 to  common  shareholders  of record on
October  31,  2003 in the  amount of $0.15 per  share.  In  addition,  our Board
declared its regular  quarterly  dividends for all classes of preferred stock to
be paid  November  17, 2003 to preferred  stockholders  of record on October 31,
2003.

     Series A and Series B preferred  stockholders of record on October 31, 2003
will be paid  dividends  in the  amount of  approximately  $0.578 and $0.539 per
preferred  share,  respectively,  on November 17,  2003.  Our Series C preferred
stockholder  will be paid  dividends  of $2.50 per Series C  preferred  share on
November  17,  2003.  The  liquidation  preference  for  our  Series  A, B and C
preferred stock is $25.00, $25.00 and $100.00 per share,  respectively.  Regular
quarterly  dividends  represent  dividends for the period August 1, 2003 through
October 31, 2003. Total dividend payments for all classes of preferred stock are
approximately $5.0 million.

NOTE E - EARNINGS PER SHARE

     The  computation  of basic  earnings per share is  determined  based on the
weighted-average  number of common  shares  outstanding  during  the  respective
periods.  Diluted  earnings per share  reflect the dilutive  effect,  if any, of
stock options and the assumed conversion of the Series C preferred stock.

     For the three- and  nine-month  periods  ended  September  30, 2003,  stock
options that were  in-the-money  had a dilutive  effect of $0.0001 per share and
$0.003  per  share,  respectively.  There were no  dilutive  effects  from stock
options in-the-money for the same periods in 2002.

NOTE F - STOCK-BASED COMPENSATION

     We account for stock options using the intrinsic value method as defined by
APB Opinion No. 25, Accounting for Stock Issued to Employees. Under the terms of
the 2000 Stock Incentive Plan ("Incentive  Plan"), we reserved  3,500,000 shares
of common  stock for  grants  to be issued  during a period of up to ten  years.
Options are  exercisable  at the market price at the date of grant,  expire five
years  after  date of grant for over 10%  owners  and ten years from the date of
grant for less than 10%  owners.  Directors'  shares vest over three years while
other grants vest over five years or as defined in an  employee's  contract.  At
September  30, 2003,  there were  2,352,835  outstanding  options  granted to 21
eligible  participants.  Additionally,  342,124 shares of restricted  stock have
been granted under the provisions of the Incentive Plan. The market value of the
restricted   shares  on  the  date  of  the  award  was   recorded  as  unearned
compensation-restricted  stock, with the unamortized balance shown as a separate
component of stockholders equity.  Unearned compensation is amortized to expense
generally over the vesting period.

     Statement  of  Financial   Accounting  Standard  No.  148,  Accounting  for
Stock-Based  Compensation  -  Transition  and  Disclosure,  which was  effective
January  1,  2003,  requires  certain  disclosures  related  to our  stock-based
compensation arrangements. The following table presents the effect on net income
and earnings per share if we had applied the fair value  recognition  provisions
of SFAS No. 123,  Accounting for  Stock-Based  Compensation,  to our stock-based
compensation.


                                                                                 THREE MONTHS ENDED            NINE MONTHS ENDED
                                                                                    SEPTEMBER 30,                 SEPTEMBER 30,
                                                                                 2003           2002           2003           2002
                                                                                ---------------------         ---------------------
                                                                                (IN THOUSANDS, EXCEPT         (IN THOUSANDS, EXCEPT
                                                                                  PER SHARE AMOUNTS)            PER SHARE AMOUNTS)
                                                                                                                  

Net income (loss) to common stockholders....................................    $     4    $(12,891)           $ 2,760    $(19,032)
Add:  Stock-based compensation expense included in net income (loss) to
      common stockholders...................................................          -           -                  -           -
                                                                                ---------------------          --------------------
                                                                                      4     (12,891)             2,760     (19,032)
Less:  Stock-based compensation expense determined under the fair value
       based method for all awards..........................................         26          19                 66          58
                                                                                ---------------------          --------------------
Pro forma net (loss) income to common stockholders..........................    $   (22)   $(12,910)           $ 2,694    $(19,090)
                                                                                =====================          ====================

Earnings per share:
Basic, as reported..........................................................    $  0.00    $  (0.35)           $  0.07    $  (0.56)
                                                                                =====================          ====================
Basic, pro forma............................................................    $  0.00    $  (0.35)           $  0.07    $  (0.56)
                                                                                =====================          ====================
Diluted, as reported........................................................    $  0.00    $  (0.35)           $  0.07    $  (0.56)
                                                                                =====================          ====================
Diluted, pro forma..........................................................    $  0.00    $  (0.35)           $  0.07    $  (0.56)
                                                                                =====================          ====================


     At September  30, 2003,  options  currently  exercisable  (810,458)  have a
weighted-average  exercise  price of $3.622,  with exercise  prices ranging from
$2.32 to $37.20.  There are 574,486  shares  available  for future  grants as of
September 30, 2003.

     The following is a summary of quarterly activity through September 30, 2003
under the plan.

                                                    STOCK OPTIONS
                                     -------------------------------------------
                                                                       WEIGHTED-
                                      NUMBER OF                      AVERAGE
                                        SHARES    EXERCISE PRICE      PRICE
- --------------------------------------------------------------------------------
Outstanding at December 31, 2002....  2,394,501   $1.590 - $37.205    $3.267
  Granted during 1st quarter 2003...          -          -                 -
  Exercised.........................          -          -                 -
  Canceled..........................          -          -                 -
- --------------------------------------------------------------------------------
Outstanding at March 31, 2003.......  2,394,501   $1.590 - $37.205    $3.267
  Granted during 2nd quarter 2003...      9,000    3.740 -   3.740     3.740
  Exercised.........................          -          -                 -
  Canceled..........................          -          -                 -
- --------------------------------------------------------------------------------
Outstanding at June 30, 2003........  2,403,501   $1.590 - $37.205    $3.152
  Granted during 3rd quarter 2003...          -          -                 -
  Exercised.........................    (50,666)   1.590 -   3.813     1.619
  Canceled..........................          -          -                 -
- --------------------------------------------------------------------------------
Outstanding at September 30, 2003...  2,352,835   $2.320 - $37.205    $3.198
================================================================================

NOTE G - LITIGATION

     We are  subject  to various  legal  proceedings,  claims and other  actions
arising out of the normal  course of  business.  While any legal  proceeding  or
claim has an element of  uncertainty,  management  believes  that the outcome of
each lawsuit claim or legal proceeding that is pending or threatened,  or all of
them  combined,  will not have a  material  adverse  effect on our  consolidated
financial position or results of operations.

     On June 21,  2000,  we were  named as a  defendant  in  certain  litigation
brought  against  us in the U.S.  District  Court for the  Eastern  District  of
Michigan,  Detroit Division, by Madison/OHI  Liquidity Investors,  LLC , for the
breach and/or  anticipatory  breach of a revolving  loan  commitment.  Ronald M.
Dickerman  and Bryan  Gordon are  partners  in Madison  and  limited  guarantors
("Guarantors")  of Madison's  obligations  to us.  Effective as of September 30,
2002, the parties settled all claims in the suit in  consideration  of Madison's
payment of the sum of $5.4 million consisting of a $0.4 million cash payment for
our attorneys' fees, with the balance evidenced by the amendment of the existing
promissory  note from  Madison to us. The note  reflects a principal  balance of
$5.0 million,  with interest accruing at 9% per annum,  payable over three years
upon  liquidation  of the  collateral  securing the note. The note is also fully
guaranteed by the Guarantors;  provided that if all accrued  interest and 75% of
original  principal has been repaid  within 18 months,  the  Guarantors  will be
released.  Accordingly, a reserve of $1.25 million was recorded in 2002 relating
to this note. As of September 30, 2003,  the principal  balance on this note was
$2.2 million prior to reserves.

     In 2000, we filed suit against a title company  (later adding a law firm as
a  defendant),  seeking  damages  based on  claims of  breach  of  contract  and
negligence,  among  other  things,  as a result of the  alleged  failure to file
certain Uniform  Commercial Code ("UCC")  financing  statements in our favor. We
filed a subsequent suit seeking recovery under title insurance  policies written
by the  title  company.  The  defendants  denied  the  allegations  made  in the
lawsuits.  In settlement of our claims against the defendants,  we agreed in the
first  quarter of 2003 to accept a lump sum cash  payment of $3.2  million.  The
cash proceeds were offset by related expenses incurred of $1.0 million resulting
in a net gain of $2.2 million.

     We  and  several  of our  wholly-owned  subsidiaries  have  been  named  as
defendants in  professional  liability  claims related to our owned and operated
facilities. Other third-party managers responsible for the day-to-day operations
of these facilities have also been named as defendants in these claims. In these
suits, patients of certain previously owned and operated facilities have alleged
significant  damages,  including  punitive  damages against the defendants.  The
lawsuits  are in various  stages of  discovery  and we are unable to predict the
likely  outcome at this time. We continue to vigorously  defend these claims and
pursue all rights we may have against the managers of the facilities,  under the
terms of the management  agreements.  We have insured these matters,  subject to
self-insured retentions of various amounts.

NOTE H - BORROWING ARRANGEMENTS

     At September 30, 2003, we had $190.5 million of borrowings  outstanding and
$12.1 million of letters of credit  outstanding,  leaving  availability of $22.0
million  under  our  $225  million  Senior  Secured  Credit  Facility   ("Credit
Facility"). The $190.5 million of outstanding borrowings had an interest rate of
6.00% at September 30, 2003. In addition,  during the quarter, we paid off three
Industrial Revenue Bonds totaling approximately $4.4 million with a blended rate
of 9.26% at the payoff date.

     In June 2003, we completed the new $225 million  Credit  Facility  arranged
and syndicated by GE Healthcare Financial Services.  At the closing, we borrowed
$187.1 million under the new Credit Facility to repay  borrowings  under our two
previous credit facilities and replace letters of credit. In addition,  proceeds
from the loan  were  permitted  to be used to pay  cumulative  unpaid  preferred
dividends, and are permitted to be used for general corporate purposes.

     The new Credit Facility includes a $125 million term loan ("Term Loan") and
a $100  million  revolving  line of credit  ("Revolver")  collateralized  by 121
facilities representing approximately half of our invested assets. Both the Term
Loan and Revolver  have a four-year  maturity  with a one-year  extension at our
option.  The Term  Loan  amortizes  on a  25-year  basis and is priced at London
Interbank  Offered Rate ("LIBOR") plus a spread of 3.75%, with a floor of 6.00%.
The Revolver is also priced at LIBOR plus a 3.75% spread, with a 6.00% floor.

     Borrowings  under  our  $160.0  million  secured  revolving  line of credit
facility of $112.0  million were paid in full upon the closing of our new Credit
Facility.   Additionally,   $12.5  million  of  letters  of  credit   previously
outstanding  against this credit  facility  were  reissued  under the new Credit
Facility.  LIBOR-based  borrowings  under this  previous  credit  facility had a
weighted-average interest rate of approximately 4.5% at the payoff date.

     Borrowings under our $65.0 million line of credit facility, which was fully
drawn,  were  paid  in  full  upon  the  closing  of our  new  Credit  Facility.
LIBOR-based   borrowings   under   this   previous   credit   facility   had   a
weighted-average interest rate of approximately 4.6% at the payoff date.

     As a result of the new  Credit  Facility,  for the  three-  and  nine-month
periods ended  September  30, 2003,  our interest  expense  includes $0 and $2.6
million, respectively, of non-cash interest expense (financing costs) related to
the termination of our two previous credit facilities.

NOTE I - ACCOUNTING FOR DERIVATIVES

     We utilize  interest rate swaps and caps to fix interest  rates on variable
rate debt and reduce certain exposures to interest rate fluctuations.  We do not
use  derivatives for trading or speculative  purposes.  We have a policy of only
entering  into  contracts  with major  financial  institutions  based upon their
credit ratings and other factors. When viewed in conjunction with the underlying
and offsetting  exposure that the derivatives are designed to hedge, we have not
sustained  a  material  loss from those  instruments  nor do we  anticipate  any
material  adverse  effect on our net income or financial  position in the future
from the use of derivatives.

     To manage  interest rate risk, we may employ  options,  forwards,  interest
rate swaps, caps and floors or a combination thereof depending on the underlying
exposure. We may employ swaps, forwards or purchased options to hedge qualifying
forecasted  transactions.  Gains and losses  related to these  transactions  are
deferred and recognized in net income as interest  expense in the same period or
periods  that  the  underlying  transaction  occurs,  expires  or  is  otherwise
terminated.  In June 1998, the Financial  Accounting Standards Board issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities, which was
required to be adopted in years  beginning  after June 15, 2000.  We adopted the
new Statement  effective January 1, 2001. The Statement requires us to recognize
all  derivatives  on the balance sheet at fair value.  Derivatives  that are not
hedges must be adjusted to fair value  through  income.  If the  derivative is a
hedge,  depending  on the  nature of the  hedge,  changes  in the fair  value of
derivatives will either be offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings or recognized in Other
Comprehensive  Income  until the hedged  item is  recognized  in  earnings.  The
ineffective  portion of a derivative's  change in fair value will be immediately
recognized in earnings.

     In September 2002, we entered into a 61-month, $200.0 million interest rate
cap with a strike of 3.50% that has been designated as a cash flow hedge.  Under
the terms of the cap agreement,  when LIBOR exceeds 3.50%, the counterparty will
pay us $200.0 million multiplied by the difference between LIBOR and 3.50% times
the number of days when LIBOR exceeds  3.50%.  The  unrealized  gain/loss in the
fair  value  of  cash  flow  hedges  are  reported  on the  balance  sheet  with
corresponding   adjustments  to  accumulated  Other  Comprehensive   Income.  On
September 30, 2003, the derivative  instrument was reported at its fair value of
$5.3 million as compared to its fair value at December 31, 2002 of $7.3 million.
An  adjustment  of  $1.2  million  (gain)  and  $1.9  million  (loss)  to  Other
Comprehensive  Income  was made for the  change in fair value of this cap during
the three- and nine-month periods ended September 30, 2003,  respectively.  Over
the term of the interest  rate cap, the $10.1  million cost will be amortized to
earnings  based on the  specific  portion of the total cost  attributed  to each
monthly settlement period. Over the twelve months ending December 31, 2003, $0.1
million  is  expected  to be  amortized.  The  amortization  for the  three- and
nine-month   periods   ended   September  30,  2003  was  $37,000  and  $44,000,
respectively, as compared to $0 for the same periods in 2002.

NOTE J - SUBSEQUENT EVENTS

     Alterra  Healthcare  Corporation.  On November 1, 2003,  we  re-leased  one
assisted  living  facility  ("ALF")  formerly  leased  by  Alterra,  located  in
Washington and representing 52 beds, to a new operator under a Lease,  which has
a ten-year term and has an initial annual lease rate of $0.2 million.  We are in
the  process  of  negotiating  terms  and  conditions  for the  re-lease  of the
remaining two properties.  In the interim,  Alterra will continue to operate the
two facilities.

     Sun  Healthcare  Group Inc.  On  November 1, 2003,  we  re-leased  two SNFs
formerly leased by Sun,  located in California and  representing  185 beds, to a
new operator under a Master Lease,  which has a ten-year term and has an initial
annual lease rate of $0.6 million. In addition, on October 1, 2003, we re-leased
three SNFs formerly leased by Sun,  located in California and  representing  271
beds, to a new operator  under a Master Lease,  which has a 15-year term and has
an initial annual lease rate of $1.24 million.

     Separately,  we continue our ongoing restructuring discussions with Sun. At
the time of this  filing,  we cannot  determine  the  timing or outcome of these
discussions. There can be no assurance that Sun will continue to pay rent at any
level,  although,  we believe that  alternative  operators would be available to
lease or buy the remaining Sun  facilities  if an  appropriate  agreement is not
completed with Sun. However,  as a result of the above mentioned  transitions of
the five former Sun  facilities,  Sun's  contractual  monthly rent,  starting in
November,  was reduced  approximately  $0.15  million from  approximately  $2.00
million to approximately $1.85 million. For the month of November,  Sun remitted
approximately  $1.51  million  in lease  payments  (or $18.1  million  annually)
similar to what was paid on a monthly  basis  during the third  quarter of 2003.
Rent received in November  from the ten former Sun  facilities  (five  mentioned
above,  plus  five  facilities  re-leased  in  July - see  Note B -  Properties;
Purchase/Leaseback)   totaled  approximately  $0.35  million  or  $4.22  million
annually.

     Claremont  Healthcare  Holdings,   Inc.  Effective  November  7,  2003,  we
re-leased  two  SNFs  formerly   leased  by  Claremont,   located  in  Ohio  and
representing  279 beds,  to a new  operator  under a Master  Lease,  which has a
ten-year term and has an initial annual lease rate of $1.2 million.

     Claremont  failed to pay base rent due on November 1, 2003 in the amount of
$0.5 million.  On November 10, 2003, we applied a security deposit in the amount
of $0.5 million to pay  Claremont's  November  rent payment and we demanded that
Claremont  restore the $0.5  million  security  deposit.  As of the date of this
filing,  we  have  no  additional  security  deposits  with  Claremont.  We  are
recognizing revenue from Claremont on a cash-basis as it is received.

     Other Assets.  On November 4, 2003, we sold one closed facility  located in
Iowa for its approximate net book value. On October 31, 2003, we sold one closed
facility located in Florida,  realizing proceeds of $2.6 million, net of closing
costs, resulting in a gain of $1.5 million. These two facilities are part of the
nine closed  facilities  at  September  30,  2003 and are  included in "Land and
buildings at cost" in our Consolidated  Balance Sheet. (See Note B - Properties;
Closed Facilities). In addition, on October 31, 2003, we sold our remaining held
for sale facility located in Texas,  realizing proceeds of $1.5 million,  net of
closing  costs,  resulting in a loss of $0.8 million.  (See Note B - Properties;
Assets Held for Sale).


ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

     As of September 30, 2003, our portfolio of domestic  investments  consisted
of  216  healthcare  facilities,  located  in  28  states  and  operated  by  34
third-party  operators.  Our  gross  investment  in  these  facilities,  net  of
impairments,  totaled  $830.1  million at September 30, 2003,  with 97.2% of our
real estate investments related to long-term care facilities.  This portfolio is
made up of 153 long-term healthcare facilities and two rehabilitation  hospitals
owned  and  leased  to third  parties,  fixed  rate  mortgages  on 51  long-term
healthcare facilities, one long-term healthcare facility that was recovered from
a customer and is currently operated through a third-party  management  contract
for our own account and nine long-term healthcare facilities that were recovered
from  customers  and are currently  closed.  At September 30, 2003, we also held
miscellaneous  investments  and  assets  held  for sale of  approximately  $28.6
million,  including a $1.3 million  investment in Principal  Healthcare  Finance
Trust and $18.1 million of notes  receivable,  net of  allowance.  (See Note J -
Subsequent Events).

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

     The  preparation  of financial  statements in  conformity  with GAAP in the
United States requires  management to make estimates and assumptions that affect
the reported  amounts of assets and  liabilities,  the  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.

     We  have  identified  six  significant   accounting  policies  as  critical
accounting policies.  These critical accounting policies are those that have the
most impact on the  reporting of our  financial  condition  and those  requiring
significant  judgments and estimates.  With respect to these critical accounting
policies,   we  believe  the   application  of  judgments  and   assessments  is
consistently applied and produces financial information that fairly presents the
results of operations  for all periods  presented.  The six critical  accounting
policies are:

     Revenue  Recognition.  Rental  income  and  mortgage  interest  income  are
recognized  as earned over the terms of the related  Master  Leases and mortgage
notes,   respectively.   Such  income  includes  periodic   increases  based  on
pre-determined  formulas (i.e.,  such as increases in the CPI) as defined in the
Master Leases and mortgage loan  agreements.  Reserves are taken against  earned
revenues  from  leases and  mortgages  when  collection  of  amounts  due become
questionable or when negotiations for  restructurings of troubled operators lead
to  lower  expectations  regarding  ultimate  collection.   When  collection  is
uncertain,  lease  revenues are recorded as received,  after taking into account
application of security deposits.  Interest income on impaired mortgage loans is
recognized  as  received  after  taking  into  account  application  of security
deposits.

     Nursing home revenues from owned and operated assets  (primarily  Medicare,
Medicaid and other third-party insurance) are recognized as patient services are
provided.

     Impairment of Assets. We periodically  evaluate our real estate investments
for impairment  indicators.  The judgment  regarding the existence of impairment
indicators are based on factors such as market conditions,  operator performance
and legal  structure.  If indicators of impairment are present,  we evaluate the
carrying  value of the related real estate  investments in  relationship  to the
future  undiscounted  cash flows of the  underlying  facilities.  Provisions for
impairment  losses  related to long-lived  assets are  recognized  when expected
future cash flows are less than the carrying values of the assets. If the sum of
the expected future cash flow,  including sales proceeds,  is less than carrying
value,  we then adjust the net  carrying  value of leased  properties  and other
long-lived assets to the present value of expected future cash flows.

     Loan  Impairment  Policy.  When  management  identifies  an  indication  of
potential  loan  impairment,  such as  non-payment  under the loan  documents or
impairment of the underlying collateral, the loan is written down to the present
value of the expected  future cash flows.  In cases where  expected  future cash
flows  cannot be  estimated,  the loan is written  down to the fair value of the
collateral.

     Accounts  Receivable.  Accounts  receivable consists primarily of lease and
mortgage interest  payments.  Amounts recorded include estimated  provisions for
loss related to  uncollectible  accounts and disputed items. On a monthly basis,
we review the  contractual  payment versus actual cash payment  received and the
contractual  payment  due date  versus  actual  receipt  date.  When  management
identifies  delinquencies,  a judgment is made as to the amount of provision, if
any, that is needed.

     Accounts  Receivable-Owned  and Operated Assets.  Accounts  receivable from
owned and  operated  assets  consist of amounts due from  Medicare  and Medicaid
programs,  other  government  programs,  managed care health  plans,  commercial
insurance companies and individual patients.  Amounts recorded include estimated
provisions for loss related to uncollectible accounts and disputed items.

     Owned and  Operated  Assets and Assets Held for Sale.  When we acquire real
estate  pursuant to a  foreclosure  proceeding,  it is  designated as "owned and
operated  assets"  and is  recorded  at the  lower of cost or fair  value and is
included in real estate properties on our Consolidated  Balance Sheet. For 2003,
operating assets and operating liabilities for our owned and operated properties
are  shown on a net basis on the face of our  Consolidated  Balance  Sheet.  For
2002,  operating  assets and  operating  liabilities  for our owned and operated
properties  are shown on a gross basis on the face of our  Consolidated  Balance
Sheet and are detailed in Note B - Properties;  Owned and Operated  Assets.  The
consolidation  in 2003 is due to the  decrease  in the  size  of the  owned  and
operated portfolio (currently one facility).

     When a formal  plan to sell real  estate is adopted  and we hold a contract
for sale,  the real estate is classified as "assets held for sale," with the net
carrying amount adjusted to the lower of cost or estimated fair value, less cost
of disposal.  Depreciation of the facilities is excluded from  operations  after
management has committed to a plan to sell the asset.  Upon adoption of FASB 144
as of January 1, 2002,  long-lived  assets sold or  designated  as held for sale
after January 1, 2002 are reported as  discontinued  operations in our financial
statements.

RESULTS OF OPERATIONS

     The following is a discussion of our  consolidated  results of  operations,
financial  position and liquidity and capital  resources which should be read in
conjunction with the consolidated  financial  statements and accompanying notes.
(See Note B - Properties).

     Revenues for the three- and  nine-month  periods  ended  September 30, 2003
totaled  $20.9  million  and $66.3  million,  respectively,  a decrease of $10.0
million and $42.9  million,  respectively,  from the same periods in 2002.  When
excluding nursing home revenues of owned and operated assets, revenues decreased
$3.2 million and $2.2 million  versus the three- and  nine-month  periods  ended
September 30, 2002, respectively.  The decrease during the quarter was primarily
the result of operator restructurings. The decrease for the nine-month period is
primarily  due to operator  restructurings  and the second  quarter  sale of our
investment in a Baltimore,  Maryland  asset,  offset by a legal  settlement (see
below).

     Rental income for the three- and  nine-month  periods  ended  September 30,
2003 were $16.5 million and $49.4 million,  respectively,  an increase of $0 and
$1.8 million from the same  periods in 2002.  The $1.8 million  increase for the
nine-month  period is due to $1.7 million  relating to contractual  increases in
rents that  became  effective  in the  second  half of 2002 and in 2003 and $0.4
million in net new leases (new lease revenue offset by the loss of lease revenue
due to operator foreclosures,  bankruptcies and restructurings),  offset by $0.3
million due to deferral for non-payment.

     Mortgage  interest  income  for the  three- and  nine-month  periods  ended
September  30, 2003  totaled  $3.5 million and $11.3  million,  respectively,  a
decrease of $1.8 million and $4.6  million  from the same  periods in 2002.  The
$1.8  million   three-month   decrease  is  primarily  the  result  of  operator
bankruptcies and  restructurings of $1.5 million and mortgage payoffs and normal
amortization of $0.3 million.  The $4.6 million nine-month  decrease versus 2002
is primarily  the result of operator  bankruptcies  and  restructurings  of $3.5
million and mortgage payoffs and normal amortization of $1.1 million.

     Other  investment  income  for the  three-  and  nine-month  periods  ended
September  30, 2003  totaled  $0.7  million and $2.4  million,  respectively,  a
decrease of $1.4 million and $1.8  million  from the same  periods in 2002.  The
decrease  in both the three- and  nine-month  periods  is  primarily  due to the
second quarter 2003 sale of a Baltimore,  Maryland  asset,  leased by the United
States Postal Service.

     In 2000, we filed suit against a title company  (later adding a law firm as
a  defendant),  seeking  damages  based on  claims of  breach  of  contract  and
negligence,  among  other  things,  as a result of the  alleged  failure to file
certain  UCC  financing  statements  in our favor.  We filed a  subsequent  suit
seeking  recovery under title insurance  policies  written by the title company.
The defendants denied the allegations made in the lawsuits. In settlement of our
claims against the defendants,  we agreed in the first quarter of 2003 to accept
a lump sum cash  payment  of $3.2  million.  The cash  proceeds  were  offset by
related  expenses  incurred  of $1.0  million  resulting  in a net  gain of $2.2
million.

     Expenses for the three- and  nine-month  periods  ended  September 30, 2003
totaled  $17.3  million  and $51.2  million,  respectively,  a decrease of $23.6
million and $60.6 million from the same periods in 2002. When excluding  nursing
home  expenses of owned and operated  assets,  expenses  were $17.3  million and
$49.8  million,  respectively,  for the  three-  and  nine-month  periods  ended
September  30, 2003 versus $21.2  million and $55.0 million for the same periods
in 2002. The $3.9 million  decrease for the  three-month  period ended September
30,  2003  primarily  resulted  from a $4.3  million  provision  for  impairment
recorded during the third quarter of 2003 compared to a provision for impairment
of $2.4 million and a provision for uncollectible mortgages,  notes and accounts
receivable  of $5.2  million,  both  taken in the  third  quarter  of  2002.  In
addition,  interest  expense  decreased  approximately  $0.9  million  from $6.4
million for the third quarter of 2002 to $5.5 million for the three-month period
ended  September 30, 2003. The $5.2 million  decrease for the nine-month  period
ended  September 30, 2003 is primarily due to $3.8 million of interest  savings,
$1.0  million  favorable  reduction  in  general  and  administrative  and legal
expenses,  $8.9  million  favorable  reduction in  provision  for  uncollectible
mortgages, notes and accounts receivable, off set by an increase of $7.2 million
in provision for  impairment  and $1.0 million in  adjustments of derivatives to
fair value.  We believe that the  presentation  of our  revenues  and  expenses,
excluding  nursing home owned and operated assets,  provides a useful measure of
the  operating  performance  of our  core  portfolio  as a REIT  in  view of the
disposition of all but one of our owned and operated assets.

     Nursing home expenses, net of nursing home revenues, for owned and operated
assets for the three- and nine-month  periods ended  September 30, 2003 were $19
thousand and $1.5 million,  respectively,  a decrease of $12.9 million and $14.6
million from the same periods in 2002. The decrease was a result of the decrease
in the number of owned and operated  facilities from eight at September 30, 2002
to one at September 30, 2003.

      Interest expense for the three- and nine-month periods ended September 30,
2003 was $5.5 million and $18.0 million, respectively, compared to $6.4 million
and $21.8 million for the same periods in 2002. The decrease for the three- and
nine-month periods is primarily due to a $22.0 million reduction of total
outstanding debt versus the same periods in 2002.

     General and administrative and legal expenses for the three- and nine-month
periods  ended  September  30,  2003,  totaled  $2.0  million and $6.3  million,
respectively,  compared  with $2.2 million and $7.3 million for the same periods
in 2002. The $0.2 million  decrease for the  three-month  period ended September
30, 2003 is primarily  due to a reduction in  consulting  costs  relating to the
reduction in the number of our owned and operated  facilities.  The $1.0 million
decrease for the nine-month  period ended September 30, 2003 is primarily due to
a reduction  in legal and  consulting  costs  relating to the  reduction  in the
number of our owned and operated facilities.

     A provision  for  impairment  of $4.3 million and $8.9 million was recorded
for the three- and nine-month periods ended September 30, 2003. The $4.3 million
provision  reduced  the  carrying  value of a facility  in the  process of being
closed to its estimated fair value less estimated costs to dispose.  A provision
for impairment of $4.6 million,  taken in the first quarter of 2003, reduced the
carrying  value of a closed  building to its estimated fair value less estimated
costs to dispose.  The buildings are being actively marketed for sale;  however,
there can be no assurance  if, or when,  such sales will be completed or whether
such sales will be  completed  on terms  that allow us to realize  the  carrying
value of the assets. A provision for impairment of $2.4 million and $1.7 million
was recorded for the three- and  nine-month  periods  ended  September 30, 2002,
respectively. The $2.4 million provision was to reduce the carrying value of one
owned and operated building and three core buildings that were closed during the
third  quarter of 2003 to their  estimated  fair value less  estimated  costs to
dispose.  The $1.7  million  provision  was to reduce the value of three  closed
owned and operated  buildings and three closed core buildings to their estimated
fair value less estimated costs to dispose. (See Note B - Properties;  Owned and
Operated Assets and Closed Facilities).

     There were no charges recognized for provision for uncollectible mortgages,
notes and  accounts  receivable  during the three- and  nine-month  period ended
September  30, 2003.  Charges of $5.2 million and $8.9 million for provision for
uncollectible  mortgages,  notes and accounts  receivable were recognized during
the three- and nine-month  period ended  September 30, 2002,  respectively.  The
$5.2 million  charge was  primarily  related to the  write-down of one loan to a
bankrupt  operator  during the third quarter of 2002. The $8.9 million  consists
primarily of the  write-down  of the  aforementioned  loan during the quarter as
well as the restructuring and reduction of debt owed by Madison,  as part of the
compromise and settlement of a lawsuit with Madison. (See Note G - Litigation).

     During the three-month period ended September 30, 2003, we sold four closed
facilities.  We sold one facility located in Texas,  realizing  proceeds of $1.0
million,  net of  closing  costs,  resulting  in a gain  of  approximately  $0.6
million.  We sold one facility  located in  Connecticut,  realizing  proceeds of
approximately  $1.2  million,  net of  closing  costs,  resulting  in a gain  of
approximately  $0.8 million.  One facility  located in  Massachusetts  was sold,
realizing proceeds of $0.9 million, net of closing costs, resulting in a gain of
approximately $0.3 million.  Finally,  one facility located in Florida was sold,
realizing proceeds of $0.6 million, net of closing costs, resulting in a loss of
approximately  $0.3  million.  We also  sold  two  closed  assets  held for sale
buildings in Indiana,  realizing proceeds of $0.3 million, net of closing costs,
resulting in a gain of  approximately  $0.1  million.  (See Note B - Properties;
Closed Facilities and Assets Held for Sale). During the three-month period ended
September  30,  2002,  we sold our  investments  in Omega  Worldwide,  Inc.  and
Principal  Healthcare  Finance  Limited,  realizing  proceeds of $10.2  million,
resulting in a gain of $2.2 million.

     During the three-month period ended June 30, 2003, we sold an investment in
a Baltimore,  Maryland asset,  leased by the United States Postal  Service,  for
approximately  $19.6  million.  The  purchaser  paid us gross  proceeds of $1.95
million and assumed the first  mortgage of  approximately  $17.6  million.  As a
result,  we  recorded a gain of $1.3  million,  net of  closing  costs and other
expenses.  Also during the second  quarter of 2003, we sold one closed  building
located in Indiana,  realizing proceeds,  net of closing costs, of $0.2 million,
resulting in a gain of approximately $0.1 million.

     The table below reconciles  reported  revenues and expenses to revenues and
expenses  excluding  nursing  home  revenues  and expenses of owned and operated
assets.  Nursing home revenues and expenses of owned and operated assets for the
three- and nine-month  periods ended September 30, 2003 are shown on a net basis
on the face of our  Consolidated  Statements  of  Operations  and are shown on a
gross basis for the three- and  nine-month  periods  ended  September  30, 2002.
Since nursing home revenues are not included in reported revenues for the three-
and nine-month  periods ended  September 30, 2003, no adjustment is necessary to
exclude nursing home revenues.

                                       THREE MONTHS ENDED     NINE MONTHS ENDED
                                          SEPTEMBER 30,          SEPTEMBER 30,
                                       ------------------     ------------------
                                        2003       2002        2003       2002
                                       ------------------     ------------------
                                         (IN THOUSANDS)         (IN THOUSANDS)

Total revenues......................... $20,926   $30,882     $66,279  $109,210
Nursing home revenues of owned and
  operated assets......................       -     6,798           -    40,756
                                       ------------------     ------------------
  REVENUES EXCLUDING NURSING HOME
    REVENUES OF OWNED AND OPERATED
    ASSETS............................. $20,926   $24,084     $66,279  $ 68,454
                                       ==================     ==================

Total expenses......................... $17,333   $40,900     $51,210  $111,840
Nursing home expenses of owned and
  operated assets......................       -    19,677           -    56,862
Nursing home revenues and expenses of
  owned and operated assets - net......      19         -       1,457         -
                                       ------------------     ------------------
  EXPENSES EXCLUDING NURSING HOME
    EXPENSES OF OWNED AND OPERATED
    ASSETS............................. $17,314   $21,223     $49,753  $ 54,978
                                       ==================     ==================

PORTFOLIO DEVELOPMENTS

     Alterra Healthcare Corporation.  Alterra announced during the first quarter
of 2003,  that, in order to facilitate  and complete its on-going  restructuring
initiatives,  they had filed a voluntary petition with the U.S. Bankruptcy Court
for the  District  of  Delaware  to  reorganize  under  Chapter  11 of the  U.S.
Bankruptcy  Code. At that time, we leased eight assisted living  facilities (325
units) located in seven states to subsidiaries of Alterra.

     Effective  July 7, 2003,  we amended our Master Lease with a subsidiary  of
Alterra whereby the number of leased  facilities was reduced from eight to five.
The amended Master Lease has a remaining term of approximately ten years with an
annual rent requirement of approximately $1.5 million. This compares to the 2002
annualized  revenue of $2.6  million.  On November 1, 2003, we re-leased one ALF
formerly leased by Alterra, located in Washington and representing 52 beds, to a
new operator under a Lease,  which has a ten-year term and has an initial annual
lease  rate of $0.2  million.  We are in the  process of  negotiating  terms and
conditions  for the re-lease of the  remaining two  properties.  In the interim,
Alterra will  continue to operate the two  facilities.  (See Note J - Subsequent
Events).  The Amended Master Lease was approved by the U.S.  Bankruptcy Court in
the District of Delaware.

     Claremont  Healthcare  Holdings,   Inc.  Effective  November  7,  2003,  we
re-leased  two  SNFs  formerly   leased  by  Claremont,   located  in  Ohio  and
representing  279 beds,  to a new  operator  under a Master  Lease,  which has a
ten-year term and has an initial annual lease rate of $1.2 million.

     Claremont  failed to pay base rent due on November 1, 2003 in the amount of
$0.5 million.  On November 10, 2003, we applied a security deposit in the amount
of $0.5 million to pay  Claremont's  November  rent payment and we demanded that
Claremont  restore the $0.5  million  security  deposit.  As of the date of this
filing, we have no additional  security deposits with Claremont.  We continue to
recognize revenue from Claremont on a cash-basis as it is received.  (See Note J
- - Subsequent Events).

     Sun Healthcare Group, Inc. Effective July 1, 2003, we re-leased five former
Sun SNFs in the following three separate lease transactions:  (i) a Master Lease
of two SNFs in Florida, representing 350 beds, which Master Lease has a ten-year
term and has an initial  annual lease rate of $1.3 million;  (ii) a Master Lease
of two SNFs in Texas,  representing  256 beds, which Master Lease has a ten-year
term and has an initial annual lease rate of $800,000;  and (iii) a lease of one
SNF in  Louisiana,  representing  131 beds,  which lease has a ten-year term and
requires an initial annual lease rate of $400,000. Aggregate monthly contractual
lease payments,  under all three transactions,  total approximately $208,000 and
commenced July 1, 2003.

     On October 1, 2003, we re-leased three SNFs formerly leased by Sun, located
in California and representing 271 beds, to a new operator under a Master Lease,
which has a 15-year term and has an initial annual lease rate of $1.24 million.

     As a result of the transitions  mentioned above, Sun's contractual  monthly
rent,  starting  in  October,  was  reduced  approximately  $0.15  million  from
approximately  $2.00 million to  approximately  $1.85 million.  For the month of
November,  Sun remitted  approximately $1.51 million in lease payments (or $18.1
million  annually)  similar to what was paid on a monthly basis during the third
quarter of 2003.  Revenue from Sun continues to be recognized on a cash-basis as
it is received.  Rent  received in November  from the ten former Sun  facilities
mentioned above totaled approximately $0.35 million or $4.22 million annually.

     On November 1, 2003, we re-leased two SNFs formerly leased by Sun,  located
in California and representing 185 beds, to a new operator under a Master Lease,
which has a ten-year term and has an initial  annual lease rate of $0.6 million.
(See Note J - Subsequent Events).

     Separately,  we continue our ongoing restructuring discussions with Sun and
have entered into letters of intent with respect to many of the Sun  properties.
At the time of this filing,  we cannot  determine the timing or outcome of these
discussions. There can be no assurance that Sun will continue to pay rent at any
level,  although,  we believe that  alternative  operators would be available to
lease or buy the remaining Sun  facilities  if an  appropriate  agreement is not
completed  with Sun.  (See  "Reimbursement  Issues and Other  Factors  Affecting
Future Results" below).

     Other Assets.  On November 4, 2003, we sold one closed facility  located in
Iowa for its  approximate  net book value.  October 31, 2003, we sold one closed
facility located in Florida,  realizing proceeds of $2.6 million, net of closing
costs, resulting in a gain of $1.5 million. These two facilities are part of the
nine closed  facilities  at  September  30,  2003 and are  included in "Land and
buildings at cost" in our Consolidated  Balance Sheet. (See Note B - Properties;
Closed Facilities and Note J - Subsequent Events).  In addition,  on October 31,
2003, we sold our remaining held for sale facility  located in Texas,  realizing
proceeds of $1.5  million,  net of closing  costs,  resulting  in a loss of $0.8
million. (See Note B - Properties;  Assets Held for Sale and Note J - Subsequent
Events).

LIQUIDITY AND CAPITAL RESOURCES

     At September 30, 2003, we had total assets of $746.9 million,  stockholders
equity of $430.4 million and debt of $297.5 million,  representing approximately
40.9% of total capitalization.

BANK CREDIT AGREEMENTS

     In June  2003,  we  completed  a new $225  million  Senior  Secured  Credit
Facility  arranged and syndicated by GE Healthcare  Financial  Services.  At the
closing,  we  borrowed  $187.1  million  under the new Credit  Facility to repay
borrowings  under our two  previous  credit  facilities  and replace  letters of
credit.  In addition,  proceeds  from the loan were  permitted to be used to pay
cumulative unpaid preferred dividends,  and are permitted to be used for general
corporate purposes.

     The new  Credit  Facility  includes  a $125  million  term  loan and a $100
million  revolving line of credit fully secured by 121  facilities  representing
approximately  half of the our invested assets.  Both the Term Loan and Revolver
have a four-year maturity with a one-year extension at our option. The Term Loan
amortizes on a 25-year basis and is priced at London Interbank Offered Rate plus
a spread of 3.75%,  with a floor of 6.00%.  The Revolver is also priced at LIBOR
plus a 3.75% spread, with a 6.00% floor.

     At September 30, 2003, we had $190.5 million of Credit Facility  borrowings
outstanding  and  $12.1  million  of  letters  of  credit  outstanding,  leaving
availability of $22.0 million. The $190.5 million of outstanding  borrowings had
an  interest  rate of 6.00% at  September  30,  2003.  (See  Note H -  Borrowing
Arrangements).

DIVIDENDS

     In order to qualify as a REIT,  we are  required  to  distribute  dividends
(other than capital gain  dividends) to our  stockholders  in an amount at least
equal to (A) the sum of (i) 90% of our "REIT taxable income"  (computed  without
regard to the dividends paid deduction and our net capital gain) and (ii) 90% of
the net income (after tax), if any, from foreclosure property, minus (B) the sum
of certain items of non-cash income. In addition,  if we dispose of any built-in
gain asset during a  recognition  period,  we will be required to  distribute at
least  90%  of  the  built-in  gain  (after  tax),  if  any,  recognized  on the
disposition of such asset. Such  distributions  must be paid in the taxable year
to which they relate,  or in the  following  taxable year if declared  before we
timely file our tax return for such year and paid on or before the first regular
dividend payment after such  declaration.  In addition,  such  distributions are
required  to be made  pro  rata,  with no  preference  to any  share of stock as
compared  with other  shares of the same class,  and with no  preference  to one
class of stock as compared  with  another  class  except to the extent that such
class is entitled to such a preference.  To the extent that we do not distribute
all of our net capital gain or do distribute at least 90%, but less than 100% of
our "REIT  taxable  income," as  adjusted,  we will be subject to tax thereon at
regular ordinary and capital gain corporate tax rates.

     In prior years,  we have  historically  distributed to stockholders a large
portion of the cash available from operations. On February 1, 2001, we announced
the suspension of all common and preferred dividends.  Prior to recommencing the
payment of dividends on our common  stock,  all accrued and unpaid  dividends on
our  Series A, B and C  preferred  stock  must be paid in full.  Due to our 2002
taxable  loss,  no  distribution  was  necessary to maintain our REIT status for
2002.  Net operating loss  carry-forwards  through 2002 of  approximately  $21.9
million,  which is comprised of $7.3 million  associated with our REIT and $14.6
million  associated  with our taxable  REIT  subsidiary,  are  available to help
offset taxable income.

     In  July  2003,  our  Board  of  Directors  declared  a  full  catch-up  of
cumulative,  unpaid  dividends  for all  classes of  preferred  stock to be paid
August  15,  2003 to  preferred  stockholders  of record on August 5,  2003.  In
addition,  our Board declared the regular quarterly  dividend for all classes of
preferred  stock to be paid on August  15,  2003 to  preferred  stockholders  of
record on August 5, 2003. As a result,  for the nine months ended  September 30,
2003,  preferred  cash  dividend  payments  totaling  $54.9  million  were paid;
however,  no preferred  cash  dividends were paid during the twelve months ended
December 31, 2002 and 2001.

     Series A and Series B  preferred  stockholders  of record on August 5, 2003
were paid dividends in the amount of approximately $6.36 and $5.93 per preferred
share, respectively, on August 15, 2003. Our Series C preferred stockholder were
paid dividends of  approximately  $27.31 per Series C preferred  share on August
15, 2003. The  liquidation  preference for our Series A, B and C preferred stock
is $25.00,  $25.00 and $100.00  per share,  respectively,  excluding  cumulative
unpaid  dividends.  Total  August  2003  dividend  payments  for all  classes of
preferred stock were approximately $54.9 million.

     Cumulative  unpaid dividends  represent  unpaid  dividends  accrued for the
period from November 1, 2000 through April 30, 2003. Regular quarterly dividends
represent  dividends  for the  period  May 1, 2003  through  July 31,  2003.  In
aggregate,  preferred  dividends  continue to accumulate at  approximately  $5.0
million per quarter.

     No common cash dividends  were paid during the nine months ended  September
30, 2003 or the twelve  months  ended  December 31, 2002 and 2001.  However,  in
September 2003, our Board of Directors  declared the reinstatement of its common
dividend  to be paid  November  17,  2003 to  common  shareholders  of record on
October  31,  2003 in the  amount of $0.15 per  share.  In  addition,  our Board
declared its regular  quarterly  dividends for all classes of preferred stock to
be paid  November  17, 2003 to preferred  stockholders  of record on October 31,
2003. (See Note D - Dividends).

     Series A and Series B preferred  stockholders of record on October 31, 2003
will be paid  dividends  in the  amount of  approximately  $0.578 and $0.539 per
preferred  share,  respectively,  on November 17,  2003.  Our Series C preferred
stockholder  will be paid  dividends  of $2.50 per Series C  preferred  share on
November  17,  2003.  The  liquidation  preference  for  our  Series  A, B and C
preferred stock is $25.00, $25.00 and $100.00 per share,  respectively.  Regular
quarterly  dividends  represent  dividends for the period August 1, 2003 through
October 31, 2003. Total dividend payments for all classes of preferred stock are
approximately $5.0 million. (See Note D - Dividends).

LIQUIDITY

     We  believe  our  liquidity  and  various  sources  of  available  capital,
including funds from operations,  expected proceeds from planned asset sales and
availability  under our new Credit Facility are adequate to finance  operations,
meet recurring debt service requirements and fund future investments through the
next 12 months.

REIMBURSEMENT ISSUES AND OTHER FACTORS AFFECTING FUTURE RESULTS

     This document contains  forward-looking  statements,  including  statements
regarding  potential asset sales,  potential future changes in reimbursement and
the future effect of the "Medicare  cliff" on our  operators.  These  statements
relate to our  expectations,  beliefs,  intentions,  plans,  objectives,  goals,
strategies,  future events,  performance  and underlying  assumptions  and other
statements  other than statements of historical  facts.  In some cases,  you can
identify  forward-looking  statements by the use of forward-looking  terminology
including  "may,"  "will,"  "anticipates,"   "expects,"  "believes,"  "intends,"
"should" or comparable terms or the negative thereof. These statements are based
on  information  available  on the date of this  filing and only speak as to the
date hereof and no obligation to update such  forward-looking  statements should
be assumed. Our actual results may differ materially from those reflected in the
forward-looking statements contained herein as a result of a variety of factors,
including,  among other things:  (i) those items discussed in Item 1 above; (ii)
regulatory  changes in the  healthcare  sector,  including  without  limitation,
changes in Medicare  reimbursement;  (iii) changes in the financial  position of
our operators; (iv) uncertainties relating to the restructure of Sun's remaining
obligations  and payment of contractual  rents;  (v) the ability of operators in
bankruptcy  to  reject  unexpired  lease  obligations,  modify  the terms of our
mortgages,  and impede our ability to collect unpaid rent or interest during the
pendency  of a  bankruptcy  proceeding  and  retain  security  deposits  for the
debtor's  obligations;  (vi) our ability to dispose of assets held for sale on a
timely basis and at  appropriate  prices;  (vii)  uncertainties  relating to the
operation  of our  owned  and  operated  assets,  including  those  relating  to
reimbursement by third-party  payors,  regulatory  matters and occupancy levels;
(viii) our ability to manage,  re-lease or sell owned and operated assets;  (ix)
the  availability  and cost of capital;  and (x) competition in the financing of
healthcare facilities.

     MEDICARE REIMBURSEMENT. Nearly all of our properties are used as healthcare
facilities;  therefore, we are directly affected by the risk associated with the
healthcare industry.  Our lessees and mortgagors,  as well as the facility owned
and  operated  for our own account,  derive a  substantial  portion of their net
operating revenues from third-party payors,  including the Medicare and Medicaid
programs.  These programs are highly regulated by federal, state and local laws,
rules and  regulations  and  subject to frequent  and  substantial  change.  The
Balanced  Budget  Act of 1997  ("Balanced  Budget  Act")  significantly  reduced
spending   levels  for  the  Medicare  and   Medicaid   programs.   Due  to  the
implementation of the terms of the Balanced Budget Act,  effective July 1, 1998,
the  majority of skilled  nursing  facilities  shifted  from  payments  based on
reasonable  cost to a  prospective  payment  system  for  services  provided  to
Medicare  beneficiaries.  Under the prospective payment system,  skilled nursing
facilities are paid on a per diem  prospective  case-mix  adjusted payment basis
for all covered services.  Implementation of the prospective  payment system has
affected each long-term care facility to a different degree,  depending upon the
amount of revenue it derives from Medicare  patients.  Long-term care facilities
have had to attempt to restructure their operations to operate  profitably under
the new Medicare prospective payment system reimbursement policies.

     Legislation adopted in 1999 and 2000 increased Medicare payments to nursing
facilities and specialty care facilities on an interim basis. Section 101 of the
Balanced Budget Relief Act of 1999 ("Balanced Budget Relief Act") included a 20%
increase for 15 patient acuity categories (known as Resource  Utilization Groups
("RUGS"))  and a 4% across the board  increase of the adjusted  federal per diem
payment rate. The 20% increase was  implemented in April 2000 and will remain in
effect  until the  implementation  of  refinements  in the current RUG  case-mix
classification  system  to more  accurately  estimate  the  cost of  non-therapy
ancillary  services.  The 4% increase was  implemented in April 2000 and expired
October 1, 2002.

     The Benefits Improvement and Protection Act of 2000 ("Benefits  Improvement
and Protection  Act") included a 16.7% increase in the nursing  component of the
case-mix  adjusted  federal  periodic payment rate and a 6.7% increase in the 14
RUG  payments  for  rehabilitation  therapy  services.  The 16.7%  increase  was
implemented  in April 2000 and expired  October 1, 2002. The 6.7% increase is an
adjustment  to the 20%  increase  granted in the Balance  Budget  Relief Act and
spreads  the  funds  directed  at three of  those  15 RUGs to an  additional  11
rehabilitation  RUGs. The increase was implemented in April 2001 and will remain
in effect until the  implementation  of  refinements in the current RUG case-mix
classification system.

     The  expiration of the 4% and 16.7%  increases  under these  statutes as of
October 1, 2002 has had an adverse  impact on the  revenues of the  operators of
nursing  facilities  and has  negatively  impacted  some  operators'  ability to
satisfy their monthly lease or debt payments to us. Medicare reimbursement could
be further  reduced  when the Centers for Medicare & Medicaid  Services  ("CMS")
completes its RUG refinement, thereby triggering the sunset of the temporary 20%
and 6.7% increases also established under these statutes.

     On August 4, 2003,  CMS  published  the payment  rates for SNFs for federal
fiscal year 2004  (effective  on October 1, 2003).  CMS  announced  that the SNF
update would be a 3.0%  increase in Medicare  payments  for federal  fiscal year
2004. In addition,  CMS announced that the two temporary payment increases - the
20% and 6.7%  add-ons  for  certain  payment  categories  - will  continue to be
effective for federal fiscal year 2004.

     Also in the August 4, 2003  announcement,  CMS  confirmed  its intention to
incorporate a forecast error  adjustment that takes into account previous years'
update errors.  According to CMS,  there was a cumulative SNF market basket,  or
inflation  adjustment,  forecast  error of 3.26% for federal  fiscal  years 2000
through  2002. As a result,  CMS has  increased the national  payment rate by an
additional 3.26% above the 3.0% increase for federal fiscal year 2004.

     Due to  the  temporary  nature  of  the  20%  and  6.7%  payment  increases
established  under the Balanced  Budget Relief Act and Benefits  Improvement and
Protection Act, we cannot be assured that the federal  reimbursement will remain
at levels  comparable  to  present  levels and that such  reimbursement  will be
sufficient  for our lessees or mortgagors to cover all operating and fixed costs
necessary to care for Medicare and Medicaid patients.  We also cannot be assured
that there will be any future  legislation to increase payment rates for skilled
nursing  facilities.  If payment rates for skilled  nursing  facilities  are not
increased in the future,  some of our lessees and mortgagors may have difficulty
meeting their payment obligations to us.

     MEDICAID  AND  OTHER  THIRD-PARTY  REIMBURSEMENT.  Each  state  has its own
Medicaid  program  that is funded  jointly by the state and federal  government.
Federal law governs how each state  manages its Medicaid  program,  but there is
wide  latitude  for states to customize  Medicaid  programs to fit the needs and
resources of its citizens.

     Rising  Medicaid  costs and  decreasing  state  revenues  caused by current
economic  conditions  have  prompted  an  increasing  number of states to cut or
consider reductions in Medicaid funding as a means of balancing their respective
state budgets.  Existing and future initiatives affecting Medicaid reimbursement
may  reduce  utilization  of (and  reimbursement  for)  services  offered by the
operators of our  properties.  In early 2003,  many states  announced  actual or
potential budget shortfalls. As a result of these budget shortfalls, many states
have announced that they are implementing or considering  implementing "freezes"
or cuts in Medicaid  reimbursement rates, including rates paid to SNF providers,
or reductions in Medicaid enrollee benefits,  including long-term care benefits.
We cannot  predict the extent to which  Medicaid rate freezes or cuts or benefit
reductions will ultimately be adopted, the number of states that will adopt them
nor the impact of such adoption on our operators.  However,  extensive  Medicaid
rate cuts or freezes or benefit  reductions could have a material adverse effect
on our  operators'  liquidity,  financial  condition and results of  operations,
which could affect adversely their ability to make rental payments to us.

     On May 28, 2003, the federal Jobs and Growth Tax Relief  Reconciliation Act
("Tax Relief Act") was signed into law,  which  included an increase in Medicaid
federal  funding for five fiscal quarters (April 1, 2003 through June 30, 2004).
In addition,  the Tax Relief Act provides state fiscal relief for federal fiscal
years 2003 and 2004 to assist states with funding shortfalls.  It is anticipated
that these temporary  federal funding  provisions  could mitigate state Medicaid
funding reductions through federal fiscal year 2004.

     In  addition,   private  payors,   including   managed  care  payors,   are
increasingly   demanding   discounted  fee  structures  and  the  assumption  by
healthcare  providers of all or a portion of the  financial  risk of operating a
healthcare facility. Efforts to impose greater discounts and more stringent cost
controls are expected to continue.  Any changes in reimbursement  policies which
reduce  reimbursement  levels could adversely affect the revenues of our lessees
and  mortgagors  and thereby  adversely  affect those  lessees' and  mortgagors'
abilities to make their monthly lease or debt payments to us.

     POTENTIAL RISKS FROM  BANKRUPTCIES.  Our lease  arrangements with operators
who operate more than one of our  facilities  are  generally  made pursuant to a
single master lease ("Master Lease") covering all of that operator's facilities.
Although  each lease or Master Lease  provides  that we may terminate the Master
Lease upon the bankruptcy or insolvency of the tenant, the Bankruptcy Reform Act
of 1978, as amended,  ("Bankruptcy Act") provides that a trustee in a bankruptcy
or reorganization proceeding under the Bankruptcy Act, or a debtor-in-possession
in a  reorganization,  has the  power and the  option  to  assume or reject  the
unexpired lease obligations of a debtor-lessee.  In the event that the unexpired
lease is assumed  on behalf of the  debtor-lessee,  all the  rental  obligations
generally would be entitled to a priority over other unsecured claims.  However,
the  court  also has the  power  to  modify  a lease  if a  debtor-lessee,  in a
reorganization,  were required to perform certain provisions of a lease that the
court  determined  to be unduly  burdensome.  It is not possible to determine at
this time  whether or not any of our leases or Master  Leases  contains any such
provision.  If a lease is  rejected,  the lessor has a general  unsecured  claim
limited to any unpaid rent already due plus an amount equal to the rent reserved
under the lease, without acceleration, for the greater of one year or 15% of the
remaining term of such lease, not to exceed three years.

     Generally,  with  respect  to our  mortgage  loans,  the  imposition  of an
automatic stay under the Bankruptcy Act precludes us from exercising foreclosure
or other remedies against the debtor.  Pre-petition  creditors  generally do not
have rights to the cash flows from the properties underlying the mortgages.  The
timing of the collection from mortgagors in bankruptcy depends on negotiating an
acceptable  settlement  with the  mortgagor  (and  subject  to  approval  of the
bankruptcy court) or the order of the bankruptcy court in the event a negotiated
settlement  cannot be achieved.  A mortgagee also is treated  differently from a
landlord  in three key  respects.  First,  the  mortgage  loan is not subject to
assumption  or  rejection  because it is not an  executory  contract or a lease.
Second,  the  mortgagee's  loan may be divided  into (1) a secured  loan for the
portion of the mortgage  debt that does not exceed the value of the property and
(2) a general  unsecured  loan for the portion of the mortgage debt that exceeds
the value of the property.  A secured  creditor such as ourselves is entitled to
the recovery of interest and costs only if, and to the extent that, the value of
the collateral  exceeds the amount owed. If the value of the collateral  exceeds
the amount of the debt,  interest  and allowed  costs may not be paid during the
bankruptcy proceeding, but accrue until confirmation of a plan of reorganization
or such other time as the court orders. If the value of the collateral held by a
senior creditor is less than the secured debt, interest on the loan for the time
period  between  the  filing  of the case and  confirmation  may be  disallowed.
Finally, while a lease generally would either be rejected or assumed with all of
its benefits and burdens intact, the terms of a mortgage,  including the rate of
interest and timing of principal payments, may be modified if the debtor is able
to affect a "cramdown" under the Bankruptcy Act.

     The receipt of liquidation  proceeds or the replacement of an operator that
has  defaulted on its lease or loan could be delayed by the approval  process of
any federal, state or local agency necessary for the transfer of the property or
the  replacement of the operator  licensed to manage the facility.  In addition,
some significant  expenditures  associated with real estate investment,  such as
real  estate  taxes and  maintenance  costs,  are  generally  not  reduced  when
circumstances  cause a  reduction  in income  from the  investment.  In order to
protect our  investments,  we may take  possession  of a property or even become
licensed  as an  operator,  which  might  expose us to  successor  liability  to
government programs or require us to indemnify  subsequent  operators to whom we
might  transfer the operating  rights and licenses.  Third party payors may also
suspend  payments to us  following  foreclosure  until we receive  the  required
licenses to operate the  facilities.  Should such events  occur,  our income and
cash flow from operations would be adversely affected.

     CONCENTRATION OF RISK.  Approximately  45.9% of our real estate investments
are operated by four public  companies:  Sun (22.8%),  Advocat (12.6%),  Mariner
(7.2%), and Alterra (3.3%). The three largest private operators  represent 9.9%,
6.6% and 3.8%,  respectively,  of our investments.  No other operator represents
more than 2.8% of our investments. The three states in which we have our highest
concentration of investments are Florida (15.4%), California (8.0%) and Illinois
(8.0%).

     HEALTHCARE INVESTMENT RISKS. The possibility that the healthcare facilities
will not generate  income  sufficient to meet  operating  expenses or will yield
returns lower than those available through investments in comparable real estate
or other  investments  are additional  risks of investing in  healthcare-related
real  estate.  Income  from  properties  and  yields  from  investments  in such
properties may be affected by many factors,  including  changes in  governmental
regulation (such as zoning laws),  general or local economic conditions (such as
fluctuations in interest rates and employment  conditions),  the available local
supply and demand for improved real estate,  a reduction in rental income as the
result of an inability to maintain occupancy levels,  natural disasters (such as
earthquakes and floods) or similar factors.

     GENERAL REAL ESTATE RISKS. Real estate investments are relatively  illiquid
and,  therefore,  tend to limit our  ability to vary our  portfolio  promptly in
response to changes in economic or other  conditions.  Thus, if the operation of
any  of  our  properties  becomes  unprofitable  due  to  competition,   age  of
improvements or other factors such that the lessee or borrower becomes unable to
meet its obligations on the lease or mortgage loan, the liquidation value of the
property may be substantially less, particularly relative to the amount owing on
any related  mortgage loan,  than would be the case if the property were readily
adaptable to other uses.

     RISKS  RELATED  TO OWNED  AND  OPERATED  ASSETS.  As a  consequence  of the
financial difficulties  encountered by a number of our operators,  over the last
several years we recovered various long-term care assets,  pledged as collateral
for the operators'  obligations,  either in connection with a  restructuring  or
settlement with certain operators or pursuant to foreclosure proceedings. We are
typically  required to hold  applicable  licenses  and are  responsible  for the
regulatory  compliance  at our owned and operated  facilities.  At September 30,
2003, we had one facility,  managed  under a third-party  management  agreement,
classified as owned and operated.  Our management contract with this third-party
operator  provides that the  third-party  operator is responsible for regulatory
compliance, but we could be sanctioned for violation of regulatory requirements.
In general,  the risks of  third-party  claims such as patient care and personal
injury  claims are higher  with  respect to our owned and  operated  property as
compared with our leased and mortgaged assets.

     We  and  several  of our  wholly-owned  subsidiaries  have  been  named  as
defendants in  professional  liability  claims related to our owned and operated
facilities. Other third-party managers responsible for the day-to-day operations
of these facilities have also been named as defendants in these claims. In these
suits, patients of certain previously owned and operated facilities have alleged
significant  damages,  including  punitive  damages against the defendants.  The
lawsuits  are in various  stages of  discovery  and we are unable to predict the
likely  outcome at this time. We continue to vigorously  defend these claims and
pursue all rights we may have against the managers of the facilities,  under the
terms of the management  agreements.  We have insured these matters,  subject to
self-insured retentions of various amounts.


ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

     We are  exposed to various  market  risks,  including  the  potential  loss
arising from adverse changes in interest rates. We do not enter into derivatives
or other financial instruments for trading or speculative purposes,  but we seek
to mitigate the effects of  fluctuations  in interest rates by matching the term
of new  investments  with new  long-term  fixed  rate  borrowing  to the  extent
possible.

     The market value of our long-term  fixed rate  borrowings and mortgages are
subject  to  interest  rate  risk.  Generally,  the  market  value of fixed rate
financial  instruments  will  decrease  as interest  rates rise and  increase as
interest rates fall. The estimated fair value of our total long-term  borrowings
at September 30, 2003 was $287.0  million.  A  one-percent  increase in interest
rates would  result in a decrease in the fair value of long-term  borrowings  by
approximately $2.7 million.

     We utilize  interest rate swaps and caps to fix interest  rates on variable
rate debt and reduce certain exposures to interest rate fluctuations.  We do not
use  derivatives for trading or speculative  purposes.  We have a policy of only
entering  into  contracts  with major  financial  institutions  based upon their
credit ratings and other factors. When viewed in conjunction with the underlying
and offsetting  exposure that the derivatives are designed to hedge, we have not
sustained  a  material  loss from those  instruments  nor do we  anticipate  any
material  adverse  effect on our net income or financial  position in the future
from the use of derivatives.

     To manage  interest rate risk, we may employ  options,  forwards,  interest
rate swaps, caps and floors or a combination thereof depending on the underlying
exposure. We may employ swaps, forwards or purchased options to hedge qualifying
forecasted  transactions.  Gains and losses  related to these  transactions  are
deferred and recognized in net income as interest  expense in the same period or
periods  that  the  underlying  transaction  occurs,  expires  or  is  otherwise
terminated.  In June 1998,  the  Financial  Accounting  Standards  Board  issued
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities,
which was  required to be adopted in years  beginning  after June 15,  2000.  We
adopted the new Statement  effective January 1, 2001. The Statement  requires us
to recognize all  derivatives  on the balance  sheet at fair value.  Derivatives
that are not hedges  must be  adjusted  to fair  value  through  income.  If the
derivative is a hedge, depending on the nature of the hedge, changes in the fair
value of  derivatives  will either be offset against the change in fair value of
the  hedged  assets,  liabilities,  or  firm  commitments  through  earnings  or
recognized in Other  Comprehensive  Income until the hedge item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings.

     In September 2002, we entered into a 61-month, $200.0 million interest rate
cap with a strike of 3.50% that has been designated as a cash flow hedge.  Under
the terms of the cap agreement,  when LIBOR exceeds 3.50%, the counterparty will
pay us $200.0 million multiplied by the difference between LIBOR and 3.50% times
the number of days when LIBOR exceeds  3.50%.  The  unrealized  gain/loss in the
fair  value  of  cash  flow  hedges  are  reported  on the  balance  sheet  with
corresponding   adjustments  to  accumulated  Other  Comprehensive   Income.  On
September 30, 2003, the derivative  instrument was reported at its fair value of
$5.3 million as compared to its fair value at December 31, 2002 of $7.3 million.
An  adjustment  of  $1.2  million  (gain)  and  $1.9  million  (loss)  to  Other
Comprehensive  Income  was made for the  change in fair value of this cap during
the three- and nine-month periods ended September 30, 2003,  respectively.  Over
the term of the interest  rate cap, the $10.1  million cost will be amortized to
earnings  based on the  specific  portion of the total cost  attributed  to each
monthly settlement period. Over the twelve months ending December 31, 2003, $0.1
million  is  expected  to be  amortized.  The  amortization  for the  three- and
nine-month   periods   ended   September  30,  2003  was  $37,000  and  $44,000,
respectively, as compared to $0 for the same periods in 2002.


ITEM 4 - CONTROLS AND PROCEDURES

     Under  the  supervision  and  with  the  participation  of our  management,
including our principal  executive officer and principal  financial officer,  we
evaluated  the  effectiveness  of the design  and  operation  of our  disclosure
controls and  procedures as of the end of the period covered by this report and,
based  on  that  evaluation,  our  principal  executive  officer  and  principal
financial  officer  have  concluded  that  these  controls  and  procedures  are
effective. There have been no significant changes in our internal controls or in
other factors that have materially affected, or are reasonably likely to affect,
our internal  control over  financial  reporting  during the most recent  fiscal
quarter.

     Disclosure  controls and procedures  are the controls and other  procedures
designed  to ensure  that  information  that we are  required to disclose in our
reports under the Exchange Act is recorded,  processed,  summarized and reported
within the time periods required.  Disclosure  controls and procedures  include,
without limitation,  controls and procedures designed to ensure that information
we are  required to disclose in the reports  that we file under the Exchange Act
is  accumulated  and  communicated  to our  management,  including our principal
executive  officer and principal  financial  officer,  as  appropriate  to allow
timely decisions regarding required disclosure.


PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

     See Note G - Litigation to the Consolidated Financial Statements in PART I,
Item 1 hereto,  which is hereby  incorporated  by  reference in response to this
item.

ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS

     None this period.

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

     None this period.

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

     None this period.

ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K

     (a)  Exhibits - The following Exhibits are filed herewith:

     Exhibit     Description

     10.1        2000 Stock Incentive Plan (as amended January 1, 2001).

     31.1        Certification of the Chief Executive  Officer under Section 302
                 of the Sarbanes-Oxley Act of 2002.

     31.2        Certification of the Chief Financial  Officer under Section 302
                 of the Sarbanes-Oxley Act of 2002.

     32.1        Certification of the Chief Executive  Officer under Section 906
                 of the Sarbanes - Oxley Act of 2002.

     32.2        Certification of the Chief Financial  Officer under Section 906
                 of the Sarbanes - Oxley Act of 2002.

     (b)  Reports on Form 8-K

     The  following  reports  on Form 8-K were  filed or  furnished  during  the
quarter ended September 30, 2003:

          On July 25, 2003, Omega Healthcare Investors, Inc. furnished a Current
     Report on Form 8-K pursuant to Item 9 announcing  its results of operations
     and  financial  condition as of and for the quarter ended June 30, 2003 and
     the reinstatement of preferred dividends.


                                   SIGNATURES

     Pursuant to the  requirements  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.

                        OMEGA HEALTHCARE INVESTORS, INC.
                                   Registrant


Date:  November 10, 2003           By:  /s/  C. TAYLOR PICKETT
                                        ------------------------------
                                             C. Taylor Pickett
                                             Chief Executive Officer

Date:  November 10, 2003           By:  /s/  ROBERT O. STEPHENSON
                                        ------------------------------
                                             Robert O. Stephenson
                                             Chief Financial Officer