##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





Form 10-K


|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the fiscal year ended December 31, 2004                                                 
|          
|or        
|          
|o          |  | 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 000-33267





Odyssey HealthCare, Inc.


(Exact name of registrant as specified in its charter)


|                                                                                     |  |                                     
|------------------------------------------------------------------------------------ |  | ------------------------------------
|Delaware                                                                             |  | 43-1723043                          
|(State or other jurisdiction of
    incorporation or organization)                   |  | (IRS Employer Identification Number)
|                                                                                    
|717 N. Harwood, Suite 1500
    Dallas, Texas(Address of principal executive offices) |  | 75201(Zip Code)                     

(Registrants telephone number, including area code)


(214) 922-9711


Securities registered pursuant to Section 12(b) of the
Act:


None


Securities registered pursuant to Section 12(g) of the
Act:


Common Stock, par value $.001 per share


þ o


o


þ o






DOCUMENTS INCORPORATED BY REFERENCE












---










FORM 10-K


ODYSSEY HEALTHCARE, INC.


For the Year Ended December 31, 2004


TABLE OF CONTENTS


|                                                        |  |                                                                                                    |    |  |    | 
|------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------- | -- |  | -- | 
|PART I                                                 
|Item 1.                                                 |  | Business                                                                                           |    |  | 3  | 
|Item 2.                                                 |  | Properties                                                                                         |    |  | 21 | 
|Item 3.                                                 |  | Legal Proceedings                                                                                  |    |  | 21 | 
|Item 4.                                                 |  | Submission of Matters to a Vote of Security
    Holders                                            |    |  | 22 | 
|PART II                                                
|Item 5.                                                 |  | Market for Registrants Common Equity
    and Related Stockholder Matters                          |    |  | 23 | 
|Item 6.                                                 |  | Selected Financial Data                                                                            |    |  | 24 | 
|Item 7.                                                 |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations          |    |  | 26 | 
|Item 7A.                                                |  | Quantitative and Qualitative Disclosures
    About Market Risk                                     |    |  | 47 | 
|Item 8.                                                 |  | Financial Statements and Supplementary
    Data                                                    |    |  | 48 | 
|Item 9.                                                 |  | Changes in and Disagreements With
    Accountants On Accounting and Financial Disclosure           |    |  | 48 | 
|Item 9A.                                                |  | Controls and Procedures                                                                            |    |  | 48 | 
|                                                        |  |                                                                                                    |    |  |    | 
|PART III                                               
|Item 10.                                                |  | Directors and Executive Officers of the
    Registrant                                             |    |  | 50 | 
|Item 11.                                                |  | Executive Compensation                                                                             |    |  | 50 | 
|Item 12.                                                |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters |    |  | 50 | 
|Item 13.                                                |  | Certain Relationships and Related
    Transactions                                                 |    |  | 50 | 
|Item 14.                                                |  | Principal Accountant Fees and Services                                                             |    |  | 50 | 
|PART IV                                                
|Item 15.                                                |  | Exhibits and Financial Statement
    Schedules                                                     |    |  | 51 | 
|Signatures                                              |  |                                                                                                    | 53 | 
|Subsidiaries                                           
|Consent of Ernst & Young LLP                           
|Certification Required by Rule 13a-14(a) by CEO        
|Certification Required by Rule 13a-14(a) by CFO        
|Certification Required by Rule 13a-14(b) by CEO and CFO



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##### Table of Contents



FORWARD-LOOKING STATEMENTS






| |   |                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------
| |  | general market conditions;                                                                                                           
|
| |  | increases in inflation;                                                                                                              
|
| |  | our dependence on patient referral sources and potential adverse
    changes in patient referral practices of those referral sources;
|
| |  | adverse changes in the Medicare cap limits and increases in our
    Medicare cap accrual;                                            
|
| |  | adverse changes in reimbursement levels under Medicare and
    Medicaid programs;                                                    
|
| |  | effect of rising prices on labor, pharmacy, durable medical
    equipment and medical supplies;                                      
|
| |  | impact of expensing stock options;                                                                                                   
|
| |  | decline in patient census growth;                                                                                                    
|
| |  | challenges inherent in and potential changes in our growth and
    expansion strategy;                                               
|
| |  | our ability to attract and retain healthcare professionals and
    other key employees;                                              
|
| |  | changes in state or federal income, franchise or similar tax
    laws and regulations;                                               
|
| |  | adverse changes in the state and federal licensure and
    certification laws and regulations;                                       
|
| |  | adverse results of regulatory surveys;                                                                                               
|
| |  | delays in or loss of licensure and/or certification;                                                                                 
|
| |  | government and private party legal proceedings and
    investigations;                                                               
|
| |  | adverse changes in the competitive environment in which we
    operate;                                                              
|
| |  | our ability to implement a new integrated billing and clinical
    management and electronic medical records system; and             
|
| |  | our ability to obtain additional capital to finance growth and
    fund working capital.                                             



2



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##### Table of Contents






PART I







|        |         
|------- | --------
|Item 1. | Business

Overview and Business Strategy




| |         
| | --------
| | Overview











| |   |                                          
| | - | -----------------------------------------
| |  | a physician;                             
|
| |  | a patient care manager;                  
|
| |  | one or more registered nurses;           
|
| |  | one or more certified home health aides; 
|
| |  | a medical social worker;                 
|
| |  | a chaplain;                              
|
| |  | a homemaker; and                         
|
| |  | one or more specially trained volunteers.





| |   |                                                                                      
| | - | -------------------------------------------------------------------------------------
| |  | the provision of coordinated care and treatment;                                     
|
| |  | clear accountability for clinical outcomes and cost of
    services; and             
|
| |  | the potential reduction of stress and dysfunction of patients
    and their families.

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| |                  
| | -----------------
| | Business Strategy



Provide quality, responsive care:


Grow organically and through acquisitions:


|                     |  |                     |    | 
|-------------------- |  | ------------------- | -- | 
|                     |  | Number of Medicare- |   
|                     |  | Certified Hospice   |   
|                     |  | Programs at this    |   
|Daily Patient Census |  | Patient Census      |   
|                     |  |                     |   
|0-50                 |  |                     | 19 | 
|51-100               |  |                     | 17 | 
|101-200              |  |                     | 31 | 
|200+                 |  |                     | 7  | 



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Organic Growth: 5% of our average daily patient census
    growth was organic, that is, growth of our existing programs,
    growth in acquired programs since the date of acquisition and
    starting up hospice programs in new geographic areas. Each of
    our hospice programs has a team of community education
    representatives (CERs) who work with referral
    sources in the healthcare community  primarily
    physicians, nursing homes, assisted living facilities and
    hospitals  to educate them about hospice care in
    general and our services in particular. At December 31,
    2004, we had 226 CERs, who were supported by a centralized
    training and education department in our Support Center, the
    name for our corporate offices. Same store growth, that is, ADC
    growth of programs that have been Medicare certified for

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 12 months, was 7% in 2004. Since 1996, we have entered 24
    communities through our start-up initiatives, including six in
    2004.                                                                                                                                                                                                                                                                                                                                         
|
| | Growth through selectively acquiring other hospices: A
    dedicated acquisitions team identifies, evaluates and acquires
    hospices which complement our existing geographic footprint. In
    2003, approximately 2,450 hospices were in the United
    States, 56% of which were not-for-profit and 36% for profit. In
    2004, we acquired three hospice programs with a total average
    daily patient census of approximately 500 at the time of the
    acquisition.

Aggressively manage our costs:


Principal Office and State of Incorporation


www.odsyhealth.com


Hospice Services and Payment






| |   |                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Nursing care                                                                                                                                         
|
| |  | Medical social services                                                                                                                              
|
| |  | Physician services                                                                                                                                   
|
| |  | Patient counseling (dietary, spiritual and other)                                                                                                    
|
| |  | General inpatient care                                                                                                                               
|
| |  | Medical supplies and equipment                                                                                                                       
|
| |  | Drugs for pain control and symptom management                                                                                                        
|
| |  | Home health aide services                                                                                                                            
|
| |  | Homemaker services                                                                                                                                   
|
| |  | Therapy (physical, occupational and speech)                                                                                                          
|
| |  | Respite inpatient care (a limited period of relief for the
    primary caregivers by placing the patient in an inpatient
    setting or nursing home)
|
| |  | Family bereavement counseling                                                                                                                        





5



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|                       |  |                                                                                                                                                                                                                                                                                                                                                     |  |                         |                | 
|---------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | -------------- | 
|                       |  |                                                                                                                                                                                                                                                                                                                                                     |  | Our Current             |               
|                       |  |                                                                                                                                                                                                                                                                                                                                                     |  | Reimbursement Range     |               
|Level of Care          |  | Description of Care                                                                                                                                                                                                                                                                                                                                 |  | (dependent on location) |               
|                       |  |                                                                                                                                                                                                                                                                                                                                                     |  |                         |               
|Routine Home Care      |  | Hospice services provided in the patients home or other
    residence. Accounted for 98.1% of our total days of care in 2004.                                                                                                                                                                                                                      |  | $                       | 107.67-$168.82 | 
|Continuous Home Care   |  | Continuous care provided in the patients home or other
    residence during period of crisis to manage acute pain or other
    medical symptoms for a minimum of eight hours per day, with
    nursing care accounting for at least half of the care provided.
    Paid on hourly basis. Accounted for 0.2% of our total days of
    care in 2004. |  | $                       | 628.37-$985.31 | 
|General Inpatient Care |  | Care provided in a hospital or other inpatient facility to
    manage acute pain and other medical symptoms that cannot be
    managed effectively in a home setting. Accounted for 1.5% of our
    total days of care in 2004.                                                                                                                     |  | $                       | 483.29-$736.73 | 
|Respite Inpatient Care |  | Care provided for up to five days in a hospital or other
    inpatient facility to relieve the patients family or other
    caregivers. Accounted for 0.2% of our total days of care in 2004.                                                                                                                                                      |  | $                       | 114.51-$164.35 | 



|                                |  |                     |      | 
|------------------------------- |  | ------------------- | ---- | 
|Effective Date of Rate Increase |  | Percentage Increase |     
|                                |  |                     |     
|October 1, 2000                 |  |                     | 2.9% | 
|April 1, 2001                   |  |                     | 5.0% | 
|October 1, 2001                 |  |                     | 3.2% | 
|October 1, 2002                 |  |                     | 3.4% | 
|October 1, 2003                 |  |                     | 3.4% | 
|October 1, 2004                 |  |                     | 3.3% | 

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Hospice Utilization and Market Opportunity




Acceleration in Hospice Use:


Length of Stay:


Aging Population in the United States:


Our Hospice Services and Centralized Support Center




Caregivers:






7



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Community Education Representatives:


Increasing Our Patient Census:


Where We Provide Our Care:




Medicare-Covered Care:


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Diagnoses:


|                         |        |                      |    |     |      |  |    |      |   |  |    |     |  
|------------------------ | ------ | -------------------- | -- | --- | ---- |  | -- | ---- | - |  | -- | --- | -
|                         |        | Percentage of        |   
|                         |        | Patients Admitted    |   
|                         |        | by Primary Diagnosis |   
|                         |        |                      |   
|Primary Diagnosis        |        | 2002                 |    |     | 2003 |  |    | 2004 |  
|                         |        |                      |    |     |      |  |    |      |  
|Cancer                   |        |                      | 37 | %   |      |  | 35 | %    |   |  | 33 | %  
|End-stage heart disease  |        |                      | 19 |     |      |  | 20 |      |   |  | 21 |    
|Dementia                 |        |                      | 18 |     |      |  | 19 |      |   |  | 17 |    
|Debility                 |        |                      | 8  |     |      |  | 10 |      |   |  | 12 |    
|Lung disease             |        |                      | 7  |     |      |  | 8  |      |   |  | 8  |    
|End-stage kidney disease |        |                      | 3  |     |      |  | 3  |      |   |  | 3  |    
|End-stage liver disease  |        |                      | 2  |     |      |  | 2  |      |   |  | 2  |    
|Other                    |        |                      | 6  |     |      |  | 3  |      |   |  | 4  |    
|                         |        |                      |    |     |      |  |    |      |  
|                         | Totals |                      |    | 100 | %    |  |    | 100  | % |  |    | 100 | %

Hospice Programs, Inpatient Facilities and Support Center


Hospice Programs and Inpatient Facilities:


|                                                                                                                                                                                                                                                                                                                                                                                     |  |                                                                                                                                                                                                                                                                                                                                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                      
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|AlabamaBirmingham
    Mobile
    MontgomeryArizonaPhoenix (two inpatient facilities)(1)
    Tucson (one inpatient facility)(1)ArkansasLittle RockCaliforniaBakersfield
    Los Angeles (West Covina)
    Orange County (Garden Grove)
    Palm Springs (Rancho Mirage)
    San Bernardino
    San Diego
    San Jose (Campbell)ColoradoColorado Springs
    DenverDelawareWilmington |  | GeorgiaAthens
    Atlanta (one inpatient facility)(1)
    Savannah
    ValdostaIllinoisChicago (Arlington Heights)
    Chicago  South (Chicago)IndianaIndianapolisKansasWichitaLouisianaBaton Rouge
    Lake Charles
    New Orleans (Metairie)
    ShreveportMichiganDetroit (Southfield)MississippiGulf Coast (Gulfport)
    Jackson |  | MissouriKansas City
    St. LouisNebraskaOmahaNevadaLas Vegas (one inpatient facility)(1)New JerseyNew Jersey (Piscataway)New MexicoAlbuquerque
    Santa FeNorth DakotaFargo(2)OhioCincinnati (Blue Ash)
    Cleveland (Mayfield Heights)
    Columbus (Reynoldsburg)
    Toledo (Maumee)OklahomaOklahoma City
    TulsaOregonPortlandPennsylvaniaAllentown
    Philadelphia (Warminster)
    PittsburghRhode Island

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|                                                                                              |  |                                                                                                                                                                                                                                |  |                                                                                                                                                       
|--------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------
|Providence (Warwick)South CarolinaCharleston (North Charleston)TennesseeMemphis
    Nashville |  | TexasAmarillo (one inpatient facility)(1)
    Austin
    Baytown
    Beaumont
    Big Spring
    Brownsville
    Conroe
    Dallas
    El Paso
    Fort Worth
    Houston
    Odessa
    San Antonio
    Temple
    Waxahachie |  | UtahSalt Lake City (3) (Centerville)
    St. GeorgeVirginiaArlington (Vienna)
    Norfolk (Virginia Beach)
    RichmondWisconsinMilwaukee (West Allis)




|    |                                                                                                                                                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Each of our inpatient facilities has 11 beds, except for
    our facility in Las Vegas, Nevada, which has 22 beds and
    our facility in Amarillo, Texas, which has 7 beds.
|   
|(2) | We will cease operations in our Fargo, North Dakota in early
    2005.                                                                                                      
|   
|(3) | Salt Lake City, Utah has an alternate delivery site located in
    Ogden, Utah.                                                                                             

Support Center:




Government Regulation and Payment Structure




What are Medicare and Medicaid?


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Medicare Conditions of Participation.






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Governing Body. Each hospice must have a governing body
    that assumes full responsibility for the policies and the
    overall operation of the hospice and for ensuring that all
    services are provided in a manner consistent with accepted
    standards of practice. The governing body must designate one
    individual who is responsible for the day-to-day administrative
    operations of the hospice.                                                                                                                                                                                                                                                                                                       
|
| |  | Direct Provision of Core Services. Medicare limits those
    services for which the hospice may use individual independent
    contractors or contract agencies to provide care to patients.
    Specifically, substantially all nursing, social work and
    counseling services must be provided directly by hospice
    employees meeting specific educational and professional
    standards. During periods of peak patient loads or under
    extraordinary circumstances, the hospice may be permitted to use
    contract workers, but the hospice must agree in writing to
    maintain professional, financial and administrative
    responsibility for the services provided by those individuals or
    entities.
|
| |  | Medical Director. Each hospice must have a medical
    director who is a physician and who assumes responsibility for
    overseeing the medical component of the hospices patient
    care program.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Professional Management of Non-Core Services. A hospice
    may arrange to have non-core services such as therapy services,
    home health aide services, medical supplies or drugs provided by
    a non-employee or outside entity. If the hospice elects to use
    an independent contractor to provide non-core services, however,
    the hospice must retain professional management responsibility
    for the arranged services and ensure that the services are
    furnished in a safe and effective manner by qualified personnel,
    and in accordance with the patients plan of care.                                                                                                                        
|
| |  | Plan of Care. The patients attending physician, the
    medical director or designated hospice physician, and the
    interdisciplinary team must establish an individualized written
    plan of care prior to providing care to any hospice patient. The
    plan must assess the patients needs and identify services
    to be provided to meet those needs and must be reviewed and
    updated at specified intervals.                                                                                                                                                                                                                                                                                                
|
| |  | Continuation of Care. A hospice may not discontinue or
    reduce care provided to a Medicare beneficiary if the individual
    becomes unable to pay for that care.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Informed Consent. The hospice must obtain the informed
    consent of the hospice patient, or the patients
    representative, that specifies the type of care services that
    may be provided as hospice care.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Training. A hospice must provide ongoing training for its
    employees.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Quality Assurance. A hospice must conduct ongoing and
    comprehensive self-assessments of the quality and
    appropriateness of care it provides and that its contractors
    provide under arrangements to hospice patients.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | Interdisciplinary Team. A hospice must designate an
    interdisciplinary team to provide or supervise hospice care
    services. The interdisciplinary team develops and updates plans
    of care, and establishes policies governing the day-to-day
    provision of hospice services. The team must include at least a
    physician, registered nurse, social worker and spiritual or
    other counselor. A registered nurse must be designated to
    coordinate the plan of care.                                                                                                                                                                                                                                     

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| |   |                                                                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Volunteers. Hospice programs are required to recruit and
    train volunteers to provide patient care services or
    administrative services. Volunteer services must be provided in
    an amount equal to at least five percent of the total patient
    care hours provided by all paid hospice employees and contract
    staff.
|
| |  | Licensure. Each hospice and all hospice personnel must be
    licensed, certified or registered in accordance with applicable
    federal, state and local laws and regulations.                                                                                                                                                     
|
| |  | Central Clinical Records. Hospice programs must maintain
    clinical records for each hospice patient that are organized in
    such a way that they may be easily retrieved. The clinical
    records must be complete and accurate and protected against
    loss, destruction and unauthorized use.                              



Surveys.


Certificate of Need Laws and Other Restrictions.






12



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Limits on the Acquisition or Conversion of Non-Profit Health
Care Corporations.


Professional Licensure and Participation Agreements.


Overview of Government Payments






Medicare.






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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Medicare Cap. Various provisions were included in the
    legislation creating the Medicare hospice benefit to manage the
    cost to the Medicare program for hospice, including the
    patients waiver of curative care requirement, the
    six-month terminal prognosis requirement and the Medicare
    payment caps. The Medicare hospice benefit includes two fixed
    annual caps on payment, both of which are assessed on a
    program-by-program basis. One cap is an absolute dollar amount;
    the other limits the number of days of inpatient care. We had
    74 Medicare-certified hospice programs at December 31,
    2004. The caps are calculated from November 1 through
    October 31 of the following year.
|
| | Dollar Amount Cap. The Medicare revenue paid to a hospice
    program from November 1 to October 31 of the following
    year may not exceed the annual cap amount which is calculated by
    using the following formula:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | Number of admissions to the program by patients who are electing
    to receive their Medicare hospice benefit for the first time
    multiplied by a factor which for the November 1, 2003
    through October 31, 2004 Medicare cap year is $19,636.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| | The multiplier factor is reduced proportionally for patients who
    transferred in or out of our hospice services. If Medicare
    follows its schedule of prior years, the multiplier factor for
    the November 1, 2004 to October 31, 2005 Medicare cap
    year will be provided during the summer of 2005. The following
    table shows the multiplier factor for the past three years. The
    multiplier factor is not adjusted for geographic differences in
    wage levels, although hospice per diem payment rates are wage
    indexed.                                                                                                                                                                                       

|             |  |                   |        | 
|------------ |  | ----------------- | ------ | 
|Medicare Cap |  | Multiplier Factor |       
|Year Ending  |  | or Cap Amount     |       
|             |  |                   |       
|2002         |  | $                 | 17,391 | 
|2003         |  | $                 | 18,661 | 
|2004         |  | $                 | 19,636 | 



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We first exceeded this cap in 2003 and refunded approximately
    $0.5 million, or 0.2%, of our total net patient service
    revenue received during the November 1, 2002 to
    October 31, 2003, Medicare cap year. Since 2003 we have
    made accruals as appropriate each quarter based on revenues and
    admissions for each of our hospice programs. In 2004, we accrued
    $2.1 million, or 0.6%, of our total net patient service
    revenue. While we make quarterly accruals of amounts we believe
    are appropriate, the final cap calculation is based on
    admissions and revenue for the 12-month Medicare cap year so
    that a hospice program that exceeds the cap in one quarter could
    potentially have no cap exposure for the entire Medicare cap
    year. For the November 1, 2003 to October 31, 2004
    Medicare cap year, we accrued approximately $1.8 million,
    or 0.1%, of our total net patient service revenue. The annual
    audit of our programs for cap by the fiscal intermediaries
    (essentially Medicare payment processing agents) generally
    occurs in the first half of the calendar year for the Medicare
    cap year that ended on the prior October 31st. See
    Item 7. Managements Analysis of Financial
    Condition and Results of Operations  Medicare
    Regulation.
|
| | Inpatient Care Cap. A hospice programs inpatient
    care days, either general inpatient or respite care and
    regardless of setting, may not exceed 20% of its total patient
    care days in the Medicare cap year. None of our hospice programs
    has exceeded the inpatient care cap.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         



Fiscal Intermediary Reviews.


14



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##### Table of Contents







Medicare Six-Month Eligibility Rule.


Medicaid.


Long-Term Care Facility Residents.


Other Healthcare Regulations


Fraud and Abuse Laws.




15



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##### Table of Contents









HIPAA Fraud and Abuse Provisions.


Civil Monetary Penalties Statute.


False Claims Act.


16



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##### Table of Contents



The Stark Law and State Physician Self-Referral Laws.






Corporate Practice of Medicine and Fee-Splitting.






| |                                                                                
| | -------------------------------------------------------------------------------
| | Regulation Governing the Privacy and Transmission of
    Healthcare Information





| |   |                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------
| |  | standardization of certain electronic patient health,
    administrative and financial data;                                                
|
| |  | privacy standards protecting the privacy of individually
    identifiable health information; and                                           
|
| |  | security standards protecting the confidentiality and integrity
    of electronically held individually identifiable health
    information.



17



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##### Table of Contents







Additional Federal and State Laws.










18



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##### Table of Contents



Compliance and Continuous Quality Improvement Programs


Compliance Program:




| |   |                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------
| |  | the appointment of a compliance officer and committee;                                             
|
| |  | adoption of a corporate code of business conduct and ethics;                                       
|
| |  | employee education and training;                                                                   
|
| |  | implementation of an internal system for reporting concerns on a
    confidential, anonymous basis;
|
| |  | ongoing internal auditing and monitoring programs; and                                             
|
| |  | a means for enforcing the compliance program policies.                                             



Continuous Quality Improvement:




| |   |                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | on-going education of staff and quarterly continuous quality
    improvement meetings at each of our hospice programs and at our
    Support Center;
|
| |  | quarterly comprehensive audits of patient charts performed by
    each of our hospice programs; and                                                 
|
| |  | at least once a year, a comprehensive audit of patient charts
    performed on each of our hospice programs by our clinical
    compliance staff.   





Competition






19



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Insurance






Employees




Available Information


http://www.sec.gov


http://www.odsyhealth.com http://www.odsyhealth.com


20



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|        |           
|------- | ----------
|Item 2. | Properties








|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings





21



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



22



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PART II







|        |                                                                          
|------- | -------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity and Related
    Stockholder Matters

Market for Common Stock.


|     |                |      |   |       |     |  |   |       | 
|---- | -------------- | ---- | - | ----- | --- |  | - | ----- | 
|     |                | High |   |       | Low | 
|     |                |      |   |       |     | 
|2003 |                |      |   |       |     |  |   |      
|     | First Quarter  |      | $ | 16.94 |     |  | $ | 13.47 | 
|     | Second Quarter |      | $ | 24.67 |     |  | $ | 15.22 | 
|     | Third Quarter  |      | $ | 34.84 |     |  | $ | 24.16 | 
|     | Fourth Quarter |      | $ | 37.35 |     |  | $ | 27.00 | 
|2004 |                |      |   |       |     |  |   |      
|     | First Quarter  |      | $ | 31.65 |     |  | $ | 17.50 | 
|     | Second Quarter |      | $ | 21.85 |     |  | $ | 15.70 | 
|     | Third Quarter  |      | $ | 19.69 |     |  | $ | 16.44 | 
|     | Fourth Quarter |      | $ | 18.30 |     |  | $ | 7.13  | 

Dividends.








| |   |                                                                                   
| | - | ----------------------------------------------------------------------------------
| |  | any applicable contractual restrictions limiting our ability to
    pay dividends;
|
| |  | our earnings;                                                                     
|
| |  | our financial condition;                                                          
|
| |  | our ability to fund capital requirements; and                                     
|
| |  | other factors our board of directors deems relevant.                              



Recent Sales of Unregistered Securities.


Repurchases of Common Stock.


23



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|                       |  |              |           |  |            |     |       |                   |             |  |                  |  |  |  |            | 
|---------------------- |  | ------------ | --------- |  | ---------- | --- | ----- | ----------------- | ----------- |  | ---------------- |  |  |  | ---------- | 
|                       |  |              |           |  |            |     |       | (d)               |            
|                       |  |              |           |  |            |     |       | Maximum           |            
|                       |  |              |           |  |            | (c) |       |                   | Approximate | 
|                       |  | (a)          |           |  | (b)        |     |       | Total Shares      |             |  | Dollar Value of  | 
|                       |  | Total Number |           |  | Average    |     |       | Purchased as Part |             |  | Shares that May  | 
|                       |  | of Shares    |           |  | Price Paid |     |       | of Publicly       |             |  | Yet be Purchased | 
|Period                 |  | Purchased    |           |  | per Share  |     |       | Announced Plans   |             |  | Under the Plan   | 
|                       |  |              |           |  |            |     |       |                   |             |  |                  | 
|October 1-October 31   |  |              |          |  |            |     |      |                   |             |  |                 |  |  |  |           | 
|November 1-November 30 |  |              | 943,600   |  |            | $   | 11.27 |                   |             |  | 943,600          |  |  |  | 19,367,860 | 
|December 1-December 31 |  |              | 705,000   |  |            | $   | 13.67 |                   |             |  | 705,000          |  |  |  | 9,733,036  | 
|                       |  |              |           |  |            |     |       |                   |             |  |                  | 
|Total                  |  |              | 1,648,600 |  |            | $   | 12.29 |                   |             |  | 1,648,600        |  |  |  |            | 
|                       |  |              |           |  |            |     |       |                   |             |  |                  | 

Equity-Based Compensation Plans.


EQUITY COMPENSATION PLAN INFORMATION


|                                                       |  |                                               |       |     |             |            |           |                 |  |  |     | 
|------------------------------------------------------ |  | --------------------------------------------- | ----- | --- | ----------- | ---------- | --------- | --------------- |  |  | --- | 
|                                                       |  |                                               |       |     |             | (c)        |          
|                                                       |  |                                               |       |     |             | Number of  |          
|                                                       |  |                                               |       |     |             | Securities |          
|                                                       |  | (a)                                           |       |     |             |            | Remaining |                
|                                                       |  | Number of                                     |       |     | (b)         |            |           | Available for   | 
|                                                       |  | Securities to be                              |       |     | Weighted-   |            |           | Future Issuance | 
|                                                       |  | Issued Upon                                   |       |     | Average     |            |           | Under Equity    | 
|                                                       |  | Exercise of                                   |       |     | Exercise    |            |           | Compensation    | 
|                                                       |  | Outstanding                                   |       |     | Price of    |            |           | Plans           | 
|                                                       |  | Options,                                      |       |     | Outstanding |            |           | (Excluding      | 
|                                                       |  | Warrants,                                     |       |     | Options,    |            |           | Securities      | 
|                                                       |  | Awards and                                    |       |     | Warrants,   |            |           | Reflected       | 
|Plan Category                                          |  | Rights                                        |       |     | and Rights  |            |           | in Column(a))   | 
|                                                       |  |                                               |       |     |             |            |           |                 | 
|                                                       |  | (In thousands, except average exercise price) |      
|Equity Compensation Plans Approved by Stockholders     |  |                                               | 3,583 | (1) |             | $          | 15.57     |                 |  |  | 366 | 
|Equity Compensation Plans Not Approved by Stockholders |  |                                               |      |     |             |            |          |                 |  |  |    | 
|                                                       |  |                                               |       |     |             |            |           |                 | 
|Total                                                  |  |                                               | 3,583 |     |             | $          | 15.57     |                 |  |  | 366 | 
|                                                       |  |                                               |       |     |             |            |           |                 | 






|    |                                                                                                                                                                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes 175,000 restricted stock awards granted to certain
    executive officers on November 18, 2004. Restricted stock
    awards are not included in the calculation of the
    weighted-average exercise price since there is no exercise price
    attached to the award.






|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data



24



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|                                              |                                      |                                          |        |        |      |   |         |        |   |   |         |        |   |      |         |         |   |   |         |         |  
|--------------------------------------------- | ------------------------------------ | ---------------------------------------- | ------ | ------ | ---- | - | ------- | ------ | - | - | ------- | ------ | - | ---- | ------- | ------- | - | - | ------- | ------- | -
|                                              |                                      | Year Ended December 31,                  |       
|                                              |                                      |                                          |       
|                                              |                                      | 2000                                     |        |        | 2001 |   |         | 2002   |   |   | 2003    |        |   | 2004 |        
|                                              |                                      |                                          |        |        |      |   |         |        |   |   |         |        |   |      |        
|                                              |                                      | (In thousands, except per share amounts) |       
|Statements of Operations Data:                |                                      |                                          |        |        |      |   |         |        |   |   |         |        |   |      |         |         |   |   |         |        
|Net patient service revenue                   |                                      | $                                        | 85,271 |        |      | $ | 130,181 |        |   | $ | 194,459 |        |   | $    | 274,309 |         |   | $ | 350,276 |        
|Operating expenses:                           |                                      |                                          |        |        |      |   |         |        |   |   |         |        |   |      |         |         |   |   |         |        
|                                              | Direct hospice care                  |                                          |        | 46,770 |      |   |         | 66,570 |   |   |         | 99,919 |   |      |         | 143,738 |   |   |         | 187,891 |  
|                                              | General and administrative           |                                          |        | 26,569 |      |   |         | 38,742 |   |   |         | 55,439 |   |      |         | 72,809  |   |   |         | 93,830  |  
|                                              | Stock-based compensation charges     |                                          |        | 1,113  |      |   |         | 1,112  |   |   |         | 685    |   |      |         | 409     |   |   |         | 287     |  
|                                              | Provision for uncollectible accounts |                                          |        | 2,708  |      |   |         | 3,207  |   |   |         | 2,952  |   |      |         | 4,015   |   |   |         | 8,119   |  
|                                              | Depreciation and amortization        |                                          |        | 1,656  |      |   |         | 2,211  |   |   |         | 1,509  |   |      |         | 2,542   |   |   |         | 4,061   |  
|                                              |                                      |                                          |        |        |      |   |         |        |   |   |         |        |   |      |        
|Total operating expenses                      |                                      |                                          | 78,816 |        |      |   | 111,842 |        |   |   | 160,504 |        |   |      | 223,513 |         |   |   | 294,188 |        
|                                              |                                      |                                          |        |        |      |   |         |        |   |   |         |        |   |      |        
|Income from operations                        |                                      |                                          | 6,455  |        |      |   | 18,339  |        |   |   | 33,955  |        |   |      | 50,796  |         |   |   | 56,088  |        
|Other income (expense):                       |                                      |                                          |        |        |      |   |         |        |   |   |         |        |   |      |         |         |   |   |         |        
|                                              | Minority interest                    |                                          |        | (46    | )    |   |         | (150   | ) |   |         | 50     |   |      |         |        |   |   |         |        |  
|                                              | Interest income                      |                                          |        | 31     |      |   |         | 239    |   |   |         | 544    |   |      |         | 390     |   |   |         | 359     |  
|                                              | Interest expense                     |                                          |        | (2,931 | )    |   |         | (2,512 | ) |   |         | (269   | ) |      |         | (140    | ) |   |         | (118    | )
|                                              |                                      |                                          |        |        |      |   |         |        |   |   |         |        |   |      |        
|                                              |                                      |                                          | (2,946 | )      |      |   | (2,423  | )      |   |   | 325     |        |   |      | 250     |         |   |   | 241     |        
|                                              |                                      |                                          |        |        |      |   |         |        |   |   |         |        |   |      |        
|Income before provision for income taxes      |                                      |                                          | 3,509  |        |      |   | 15,916  |        |   |   | 34,280  |        |   |      | 51,046  |         |   |   | 56,329  |        
|Provision for income taxes                    |                                      |                                          | 417    |        |      |   | 3,020   |        |   |   | 13,140  |        |   |      | 19,839  |         |   |   | 21,333  |        
|                                              |                                      |                                          |        |        |      |   |         |        |   |   |         |        |   |      |        
|Net income                                    |                                      |                                          | 3,092  |        |      |   | 12,896  |        |   |   | 21,140  |        |   |      | 31,207  |         |   |   | 34,996  |        
|Preferred stock dividends                     |                                      |                                          | (1,302 | )      |      |   | (1,097  | )      |   |   |        |        |   |      |        |         |   |   |        |        
|Gain on conversion of preferred securities(1) |                                      |                                          |       |        |      |   | 5,755   |        |   |   |        |        |   |      |        |         |   |   |        |        
|                                              |                                      |                                          |        |        |      |   |         |        |   |   |         |        |   |      |        
|Net income available to common stockholders   |                                      | $                                        | 1,790  |        |      | $ | 17,554  |        |   | $ | 21,140  |        |   | $    | 31,207  |         |   | $ | 34,996  |        
|                                              |                                      |                                          |        |        |      |   |         |        |   |   |         |        |   |      |        
|Net income per common share:                  |                                      |                                          |        |        |      |   |         |        |   |   |         |        |   |      |         |         |   |   |         |        
|Basic net income per common share             |                                      | $                                        | 0.41   |        |      | $ | 1.83    |        |   | $ | 0.61    |        |   | $    | 0.87    |         |   | $ | 0.96    |        
|                                              |                                      |                                          |        |        |      |   |         |        |   |   |         |        |   |      |        
|Diluted net income per common share           |                                      | $                                        | 0.11   |        |      | $ | 0.45    |        |   | $ | 0.58    |        |   | $    | 0.84    |         |   | $ | 0.93    |        
|                                              |                                      |                                          |        |        |      |   |         |        |   |   |         |        |   |      |        
|Weighted average shares outstanding:          |                                      |                                          |        |        |      |   |         |        |   |   |         |        |   |      |         |         |   |   |         |        
|                                              | Basic                                |                                          |        | 4,380  |      |   |         | 9,553  |   |   |         | 34,782 |   |      |         | 35,945  |   |   |         | 36,445  |  
|                                              | Diluted                              |                                          |        | 26,596 |      |   |         | 28,621 |   |   |         | 36,691 |   |      |         | 37,256  |   |   |         | 37,551  |  

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|                                                      |  |                         |         |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|----------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | --------- | ---- |  | - | --------- | - |  | ---- | --------- | - |  | - | --------- | -
|                                                      |  | Year Ended December 31, |        
|                                                      |  |                         |        
|                                                      |  | 2000                    |         |   | 2001 |   |           | 2002 |  |   | 2003      |   |  | 2004 |          
|                                                      |  |                         |         |   |      |   |           |      |  |   |           |   |  |      |          
|                                                      |  | (Unaudited)             |        
|                                                      |  | (Dollars in thousands)  |        
|Operating Data:                                       |  |                         |         |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Number of Medicare-certified hospice programs(2)      |  |                         | 29      |   |      |   | 30        |      |  |   | 50        |   |  |      | 66        |   |  |   | 74        |  
|Admissions(3)                                         |  |                         | 12,965  |   |      |   | 15,969    |      |  |   | 22,062    |   |  |      | 26,763    |   |  |   | 31,231    |  
|Days of care(4)                                       |  |                         | 737,088 |   |      |   | 1,111,168 |      |  |   | 1,608,556 |   |  |      | 2,197,110 |   |  |   | 2,782,954 |  
|Average daily census(5)                               |  |                         | 2,014   |   |      |   | 3,044     |      |  |   | 4,407     |   |  |      | 6,019     |   |  |   | 7,604     |  
|Cash flows provided by operating activities           |  | $                       | 3,520   |   |      | $ | 14,956    |      |  | $ | 18,732    |   |  | $    | 27,605    |   |  | $ | 47,180    |  
|Cash flows used in investing activities               |  | $                       | (1,503  | ) |      | $ | (33,156   | )    |  | $ | (975      | ) |  | $    | (27,255   | ) |  | $ | (41,226   | )
|Cash flows (used in) provided by financing activities |  | $                       | (2,293  | ) |      | $ | 36,019    |      |  | $ | (2,724    | ) |  | $    | 4,983     |   |  | $ | (19,387   | )

|                                                |  |                        |         |   |      |   |        |      |  |   |         |  |  |      |         |  |  |   |         | 
|----------------------------------------------- |  | ---------------------- | ------- | - | ---- | - | ------ | ---- |  | - | ------- |  |  | ---- | ------- |  |  | - | ------- | 
|                                                |  | As of December 31,     |        
|                                                |  |                        |        
|                                                |  | 2000                   |         |   | 2001 |   |        | 2002 |  |   | 2003    |  |  | 2004 |        
|                                                |  |                        |         |   |      |   |        |      |  |   |         |  |  |      |        
|                                                |  | (Dollars in thousands) |        
|Balance Sheet Data:                             |  |                        |         |   |      |   |        |      |  |   |         |  |  |      |         |  |  |   |         | 
|Working capital (deficit)                       |  | $                      | (1,691  | ) |      | $ | 50,363 |      |  | $ | 51,498  |  |  | $    | 72,806  |  |  | $ | 63,259  | 
|Total assets                                    |  |                        | 38,845  |   |      |   | 98,216 |      |  |   | 125,414 |  |  |      | 180,802 |  |  |   | 204,091 | 
|Total long-term debt, including current portion |  |                        | 20,311  |   |      |   | 3,480  |      |  |   | 274     |  |  |      | 17      |  |  |   | 14      | 
|Total convertible preferred stock               |  |                        | 21,162  |   |      |   |       |      |  |   |        |  |  |      |        |  |  |   |        | 
|Stockholders equity (deficit)                  |  |                        | (13,746 | ) |      |   | 77,635 |      |  |   | 100,933 |  |  |      | 144,725 |  |  |   | 162,080 | 






|    |                                                                                                                                                                                                                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The accumulated dividends on our Series A convertible
    preferred stock, Series B convertible preferred stock and
    Series C convertible preferred stock were reversed in
    connection with the conversion of preferred stock upon
    completion of our initial public offering and recognized as a
    gain to common stockholders.
|   
|(2) | Number of Medicare-certified hospice programs at end of each
    respective year.                                                                                                                                                                                                                                                          
|   
|(3) | Represents the total number of patients admitted into our
    hospice programs during the period.                                                                                                                                                                                                                                          
|   
|(4) | Represents the total days of care provided to our patients
    during the period.                                                                                                                                                                                                                                                          
|   
|(5) | Represents the average number of patients for whom we provided
    hospice care each day during the period and is computed by
    dividing days of care by the number of days during the period.                                                                                                                                           




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




Overview




26



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Developed Hospices














Acquisitions








27



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|        |                         |                     |  |     | 
|------- | ----------------------- | ------------------- |  | --- | 
|        |                         | Patient Census on   | 
|Hospice |                         | Date of Acquisition | 
|        |                         |                     | 
|2002    |                         |                     |  |    
|        | Baton Rouge, Louisiana  |                     |  | 50  | 
|        | New Orleans, Louisiana  |                     |  | 56  | 
|        | Shreveport, Louisiana   |                     |  | 104 | 
|        | Columbus, Ohio          |                     |  | 19  | 
|        | Bakersfield, California |                     |  | 11  | 
|        | Wichita, Kansas         |                     |  | 0   | 
|        | Gulf Coast, Mississippi |                     |  | 38  | 
|        | Albuquerque, New Mexico |                     |  | 80  | 
|        | Omaha, Nebraska         |                     |  | 3   | 
|        | Lake Charles, Louisiana |                     |  | 101 | 
|        | La Grange, Texas(1)     |                     |  | 20  | 
|        | Round Rock, Texas(2)    |                     |  | 60  | 
|2003    |                         |                     |  |    
|        | Waxahachie, Texas       |                     |  | 104 | 
|        | Valdosta, Georgia       |                     |  | 16  | 
|        | Memphis, Tennessee      |                     |  | 8   | 
|        | Wilmington, Delaware    |                     |  | 15  | 
|        | Brownsville, Texas      |                     |  | 60  | 
|        | Salt Lake City, Utah    |                     |  | 280 | 
|        | Omaha, Nebraska         |                     |  | 35  | 
|        | San Antonio, Texas(3)   |                     |  | 100 | 
|2004    |                         |                     |  |    
|        | Amarillo, Texas         |                     |  | 204 | 
|        | Conroe, Texas           |                     |  | 221 | 
|        | Tulsa, Oklahoma(4)      |                     |  | 79  | 

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|    |                                                                                                                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Operations of our LaGrange, Texas hospice program were merged
    with our Austin, Texas hospice program, which we opened in 2002.                                                                                                                                                   
|   
|(2) | Patients of our Round Rock, Texas hospice were relocated to our
    Austin, Texas hospice program, which we opened in 2002. The
    provider number for our Round Rock location was transferred to
    Temple, Texas in order for us to initiate a hospice program
    there in 2003.
|   
|(3) | Operations of our San Antonio, Texas hospice program
    acquired in 2003 were transferred to our existing
    San Antonio, Texas program opened in 1998.                                                                                                                            
|   
|(4) | Operations of our Tulsa, Oklahoma hospice program acquired in
    2004 were integrated into our existing Tulsa, Oklahoma program.                                                                                                                                                    

Net Patient Service Revenue










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Expenses










|                                     |                                                                              |              |  |      |      |   |  |      |      |   |  |      |      |  
|------------------------------------ | ---------------------------------------------------------------------------- | ------------ |  | ---- | ---- | - |  | ---- | ---- | - |  | ---- | ---- | -
|                                     |                                                                              | Year Ended   | 
|                                     |                                                                              | December 31, | 
|                                     |                                                                              |              | 
|                                     |                                                                              | 2002         |  |      | 2003 |   |  | 2004 |     
|                                     |                                                                              |              |  |      |      |   |  |      |     
|Direct hospice care expenses:        |                                                                              |              |  |      |      |   |  |      |      |   |  |     
|                                     | Salaries, benefits and payroll taxes                                         |              |  | 30.6 | %    |   |  | 31.2 | %    |   |  | 32.8 | %   
|                                     | Pharmaceuticals                                                              |              |  | 6.9  |      |   |  | 6.9  |      |   |  | 6.7  |     
|                                     | Medical equipment and supplies                                               |              |  | 6.1  |      |   |  | 6.0  |      |   |  | 5.8  |     
|                                     | Inpatient costs                                                              |              |  | 2.4  |      |   |  | 3.0  |      |   |  | 2.6  |     
|                                     | Other (including nursing home costs, net)                                    |              |  | 5.4  |      |   |  | 5.3  |      |   |  | 5.7  |     
|                                     |                                                                              |              |  |      |      |   |  |      |     
|                                     |                                                                              | Total        |  |      | 51.4 | % |  |      | 52.4 | % |  |      | 53.6 | %
|                                     |                                                                              |              |  |      |      |   |  |      |     
|General and administrative expenses: |                                                                              |              |  |      |      |   |  |      |      |   |  |     
|                                     | Salaries, benefits and payroll taxes                                         |              |  | 16.4 | %    |   |  | 15.9 | %    |   |  | 16.5 | %   
|                                     | Leases                                                                       |              |  | 2.7  |      |   |  | 2.5  |      |   |  | 2.6  |     
|                                     | Other (including travel, office supplies, printing and equipment
    rental) |              |  | 9.4  |      |   |  | 8.1  |      |   |  | 7.7  |     
|                                     |                                                                              |              |  |      |      |   |  |      |     
|                                     |                                                                              | Total        |  |      | 28.5 | % |  |      | 26.5 | % |  |      | 26.8 | %
|                                     |                                                                              |              |  |      |      |   |  |      |     

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Stock-Based Compensation Charges








Provision for Income Taxes




Critical Accounting Policies






| |                                                                         
| | ------------------------------------------------------------------------
| | Net Patient Service Revenue and Allowance for
    Uncollectible Accounts





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| |                    
| | -------------------
| | Medicare Regulation







Medicare Cap Accrual as of December 31, 2004


|                                               |  |                |      |      |              |   |       |              |  |   |       |  |  |   |       |  
|---------------------------------------------- |  | -------------- | ---- | ---- | ------------ | - | ----- | ------------ |  | - | ----- |  |  | - | ----- | -
|                                               |  | Medicare Cap   |      |      | Medicare Cap |   |       | Medicare Cap |  |   |      
|                                               |  | Year Ended     |      |      | Year Ended   |   |       | Year Ended   |  |   |      
|                                               |  | October 2003   |      |      | October 2004 |   |       | October 2005 |  |   | Total | 
|                                               |  |                |      |      |              |   |       |              |  |   |       | 
|                                               |  | (In thousands) |     
|Medicare Cap Accrual                           |  | $              | 657  |      |              | $ | 1,798 |              |  | $ | 1,117 |  |  | $ | 3,572 |  
|Medicare Settlement                            |  |                | (160 | )(1) |              |   |      | (2)          |  |   |      |  |  |   | (160  | )
|Payments to Medicare for revenue exceeding cap |  |                | (497 | )    |              |   |      |              |  |   |      |  |  |   | (497  | )
|                                               |  |                |      |      |              |   |       |              |  |   |       | 
|Medicare Cap Accrual Balance                   |  | $              |     |      |              | $ | 1,798 |              |  | $ | 1,117 |  |  | $ | 2,915 |  
|                                               |  |                |      |      |              |   |       |              |  |   |       | 






|    |                                                                                                                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Changes in accruals to satisfy cap repayment as determined by
    Medicare fiscal intermediary audits. Accruals in excess of
    Medicare settlement applied to estimate for subsequent Medicare
    cap year.
|   
|(2) | Medicare fiscal intermediary audit not yet complete.                                                                                                                                                          





| |                
| | ---------------
| | Insurance Risks



32



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| |         
| | --------
| | Goodwill



Results of Operations




|                            |                                      |              |      |      |      |  |      |      |  |  |      |      | 
|--------------------------- | ------------------------------------ | ------------ | ---- | ---- | ---- |  | ---- | ---- |  |  | ---- | ---- | 
|                            |                                      | Year Ended   |     
|                            |                                      | December 31, |     
|                            |                                      |              |     
|                            |                                      | 2002         |      |      | 2003 |  |      | 2004 | 
|                            |                                      |              |      |      |      |  |      |      | 
|Net patient service revenue |                                      |              | 100  | %    |      |  | 100  | %    |  |  | 100  | %   
|Operating expenses:         |                                      |              |      |      |      |  |      |      |  |  |      |     
|                            | Direct hospice care                  |              |      | 51.4 |      |  |      | 52.4 |  |  |      | 53.6 | 
|                            | General and administrative           |              |      | 28.5 |      |  |      | 26.5 |  |  |      | 26.8 | 
|                            | Stock-based compensation charges     |              |      | 0.3  |      |  |      | 0.1  |  |  |      | 0.1  | 
|                            | Provision for uncollectible accounts |              |      | 1.5  |      |  |      | 1.5  |  |  |      | 2.3  | 
|                            | Depreciation and amortization        |              |      | 0.8  |      |  |      | 1.0  |  |  |      | 1.2  | 
|                            |                                      |              |      |      |      |  |      |      | 
|                            |                                      |              | 82.5 |      |      |  | 81.5 |      |  |  | 84.0 |     
|                            |                                      |              |      |      |      |  |      |      | 
|Income from operations      |                                      |              | 17.5 |      |      |  | 18.5 |      |  |  | 16.0 |     
|Other income (expense), net |                                      |              | 0.2  |      |      |  | 0.1  |      |  |  | 0.1  |     
|                            |                                      |              |      |      |      |  |      |      | 
|Income before income taxes  |                                      |              | 17.7 |      |      |  | 18.6 |      |  |  | 16.1 |     
|Provision for income taxes  |                                      |              | 6.8  |      |      |  | 7.2  |      |  |  | 6.1  |     
|                            |                                      |              |      |      |      |  |      |      | 
|Net income                  |                                      |              | 10.9 | %    |      |  | 11.4 | %    |  |  | 10.0 | %   
|                            |                                      |              |      |      |      |  |      |      | 

33



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| |                                                                          
| | -------------------------------------------------------------------------
| | Year Ended December 31, 2004 Compared to Year Ended
    December 31, 2003



|                            |                                      |                                 |         |         |      |   |         |          |  |   |          |        |   |  |      |       |   
|--------------------------- | ------------------------------------ | ------------------------------- | ------- | ------- | ---- | - | ------- | -------- |  | - | -------- | ------ | - |  | ---- | ----- | --
|                            |                                      | Year Ended December 31,         |        
|                            |                                      |                                 |        
|                            |                                      | 2003                            |         |         | 2004 |   |         | $ Change |  |   | % Change |       
|                            |                                      |                                 |         |         |      |   |         |          |  |   |          |       
|                            |                                      | (In thousands, except % change) |        
|Net patient service revenue |                                      | $                               | 274,309 |         |      | $ | 350,276 |          |  | $ | 75,967   |        |   |  | 27.7 | %    
|Operating expenses:         |                                      |                                 |         |         |      |   |         |          |  |   |          |        |   |  |      |      
|                            | Direct hospice care                  |                                 |         | 143,738 |      |   |         | 187,891  |  |   |          | 44,153 |   |  |      | 30.7  | % 
|                            | General and administrative           |                                 |         | 72,809  |      |   |         | 93,830   |  |   |          | 21,021 |   |  |      | 28.9  | % 
|                            | Stock-based compensation charges     |                                 |         | 409     |      |   |         | 287      |  |   |          | (122   | ) |  |      | (29.8 | )%
|                            | Provision for uncollectible accounts |                                 |         | 4,015   |      |   |         | 8,119    |  |   |          | 4,104  |   |  |      | 102.2 | % 
|                            | Depreciation and amortization        |                                 |         | 2,542   |      |   |         | 4,061    |  |   |          | 1,519  |   |  |      | 59.8  | % 
|                            |                                      |                                 |         |         |      |   |         |          |  |   |          |       
|                            |                                      |                                 | 223,513 |         |      |   | 294,188 |          |  |   | 70,675   |        |   |  | 31.6 | %    
|Income from operations      |                                      |                                 | 50,796  |         |      |   | 56,088  |          |  |   | 5,292    |        |   |  | 10.4 | %    
|Other income (expense)      |                                      |                                 | 250     |         |      |   | 241     |          |  |   | (9       | )      |   |  | (3.6 | )%   
|Provision for income taxes  |                                      |                                 | 19,839  |         |      |   | 21,333  |          |  |   | 1,494    |        |   |  | 7.5  | %    
|                            |                                      |                                 |         |         |      |   |         |          |  |   |          |       
|Net income                  |                                      | $                               | 31,207  |         |      | $ | 34,996  |          |  | $ | 3,789    |        |   |  | 12.1 | %    
|                            |                                      |                                 |         |         |      |   |         |          |  |   |          |       



| |                            
| | ---------------------------
| | Net Patient Service Revenue





| |                             
| | ----------------------------
| | Direct Hospice Care Expenses





| |                                    
| | -----------------------------------
| | General and Administrative Expenses



34



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| |                                 
| | --------------------------------
| | Stock-Based Compensation Charges





| |                                     
| | ------------------------------------
| | Provision for Uncollectible Accounts





| |                                      
| | -------------------------------------
| | Depreciation and Amortization Expense





| |                       
| | ----------------------
| | Other Income (Expense)





| |                           
| | --------------------------
| | Provision for Income Taxes



35



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| |                                                                          
| | -------------------------------------------------------------------------
| | Year Ended December 31, 2003 Compared to Year Ended
    December 31, 2002



|                            |                                      |                                 |         |        |      |   |         |          |  |   |          |        |   |  |       |       |   
|--------------------------- | ------------------------------------ | ------------------------------- | ------- | ------ | ---- | - | ------- | -------- |  | - | -------- | ------ | - |  | ----- | ----- | --
|                            |                                      | Year Ended December 31,         |        
|                            |                                      |                                 |        
|                            |                                      | 2002                            |         |        | 2003 |   |         | $ Change |  |   | % Change |       
|                            |                                      |                                 |         |        |      |   |         |          |  |   |          |       
|                            |                                      | (in thousands, except % change) |        
|Net patient service revenue |                                      | $                               | 194,459 |        |      | $ | 274,309 |          |  | $ | 79,850   |        |   |  | 41.1  | %    
|Operating expenses:         |                                      |                                 |         |        |      |   |         |          |  |   |          |        |   |  |       |      
|                            | Direct hospice care                  |                                 |         | 99,919 |      |   |         | 143,738  |  |   |          | 43,819 |   |  |       | 43.9  | % 
|                            | General and administrative           |                                 |         | 55,439 |      |   |         | 72,809   |  |   |          | 17,370 |   |  |       | 31.3  | % 
|                            | Stock-based compensation charges     |                                 |         | 685    |      |   |         | 409      |  |   |          | (276   | ) |  |       | (40.3 | )%
|                            | Provision for uncollectible accounts |                                 |         | 2,952  |      |   |         | 4,015    |  |   |          | 1,063  |   |  |       | 36.0  | % 
|                            | Depreciation and amortization        |                                 |         | 1,509  |      |   |         | 2,542    |  |   |          | 1,033  |   |  |       | 68.5  | % 
|                            |                                      |                                 |         |        |      |   |         |          |  |   |          |       
|                            |                                      |                                 | 160,504 |        |      |   | 223,513 |          |  |   | 63,009   |        |   |  | 39.3  | %    
|Income from operations      |                                      |                                 | 33,955  |        |      |   | 50,796  |          |  |   | 16,841   |        |   |  | 49.6  | %    
|Other income (expense)      |                                      |                                 | 325     |        |      |   | 250     |          |  |   | (75      | )      |   |  | (23.1 | )%   
|Provision for income taxes  |                                      |                                 | 13,140  |        |      |   | 19,839  |          |  |   | 6,699    |        |   |  | 51.0  | %    
|                            |                                      |                                 |         |        |      |   |         |          |  |   |          |       
|Net income                  |                                      | $                               | 21,140  |        |      | $ | 31,207  |          |  | $ | 10,067   |        |   |  | 47.6  | %    
|                            |                                      |                                 |         |        |      |   |         |          |  |   |          |       



| |                            
| | ---------------------------
| | Net Patient Service Revenue





| |                             
| | ----------------------------
| | Direct Hospice Care Expenses





| |                                    
| | -----------------------------------
| | General and Administrative Expenses



36



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| |                                 
| | --------------------------------
| | Stock-Based Compensation Charges





| |                                     
| | ------------------------------------
| | Provision for Uncollectible Accounts





| |                                      
| | -------------------------------------
| | Depreciation and Amortization Expense





| |                       
| | ----------------------
| | Other Income (Expense)





| |                           
| | --------------------------
| | Provision for Income Taxes



Liquidity and Capital Resources








37



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38



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Contractual Obligations




|                              |  |                        |        |           |        |   |       |           |       |   |           |  |  |         |       |  |  |   |       | 
|----------------------------- |  | ---------------------- | ------ | --------- | ------ | - | ----- | --------- | ----- | - | --------- |  |  | ------- | ----- |  |  | - | ----- | 
|                              |  | Payments Due by Period |       
|                              |  |                        |       
|                              |  |                        |        | Less Than |        |   |       |           | After |  
|                              |  | Total                  |        |           | 1 Year |   |       | 1-3 Years |       |   | 4-5 Years |  |  | 5 Years |      
|                              |  |                        |        |           |        |   |       |           |       |   |           |  |  |         |      
|                              |  | (In thousands)         |       
|Long-Term Debt                |  | $                      | 14     |           |        | $ | 5     |           |       | $ | 7         |  |  | $       | 2     |  |  | $ |      | 
|Operating Leases              |  |                        | 33,172 |           |        |   | 8,473 |           |       |   | 12,970    |  |  |         | 6,364 |  |  |   | 5,365 | 
|                              |  |                        |        |           |        |   |       |           |       |   |           |  |  |         |      
|Total Contractual Obligations |  | $                      | 33,186 |           |        | $ | 8,478 |           |       | $ | 12,977    |  |  | $       | 6,366 |  |  | $ | 5,365 | 
|                              |  |                        |        |           |        |   |       |           |       |   |           |  |  |         |      



Off-Balance Sheet Arrangements




Interest Rate and Foreign Exchange Risk


Interest Rate Risk.


Foreign Exchange.


Recent Accounting Pronouncements


Share
Based Payments, Accounting
for Stock Issued to Employees,


Payment, Legislative and Regulatory Changes




39



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Inflation




Some Risks Related to Our Business






| |                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We are highly dependent on payments from Medicare and
    Medicaid. If there are changes in the rates or methods governing
    these payments for our services, our net patient service revenue
    and profits could materially decline.





| |                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We are subject to a Medicare cap amount which is
    calculated by Medicare. Our net patient service revenue and
    profitability could be adversely affected by limitations on
    Medicare payments and Medicare cap calculations.



40



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| |                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We operate in an industry that is subject to extensive
    federal, state and local regulation, and changes in law and
    regulatory interpretations could reduce our net patient service
    revenue and profitability.





| |   |                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | payment for services;                                                                                                                                                                 
|
| |  | conduct of operations, including fraud and abuse, anti-kickback
    prohibitions, physician self-referral prohibitions and false
    claims;                                          
|
| |  | privacy and security of medical records;                                                                                                                                              
|
| |  | employment practices; and                                                                                                                                                             
|
| |  | facility and professional licensure, including certificates of
    need, surveys, certification and recertification requirements,
    and corporate practice of medicine prohibitions.











| |                                                                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Almost half of our hospice patients reside in nursing
    homes. Changes in the laws and regulations regarding payments
    for hospice services and room and board provided to
    our hospice patients residing in nursing homes could reduce our
    net patient service revenue and profitability.



41



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| |                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to maintain relationships with existing
    patient referral sources or to establish new referral sources,
    our growth and profitability could be adversely affected.





| |                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our growth strategy to develop new hospice locations in
    new and existing markets may not be successful, which could
    adversely impact our growth and profitability.





| |   |                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------
| |  | identify markets that meet our selection criteria for new
    hospice programs;                         
|
| |  | hire and retain a qualified management team to operate each of
    our new hospice programs;            
|
| |  | manage a large and geographically diverse group of hospice
    programs;                                
|
| |  | become Medicare and Medicaid certified in new markets;                                                  
|
| |  | transfer provider numbers between hospice programs in a timely
    manner;                              
|
| |  | generate sufficient hospice admissions in new markets to operate
    profitably in these new markets; or
|
| |  | compete effectively with existing programs in new markets.                                              



| |                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our growth strategy to acquire other hospices may not be
    successful and the integration of future acquisitions may be
    difficult and disruptive to our ongoing business.



42



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| |   |                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our ability to identify suitable acquisition candidates;                                                                                                               
|
| |  | our ability to negotiate favorable acquisition terms, including
    purchase price, which may be adversely affected due to increased
    competition with other buyers;
|
| |  | the availability of financing on terms favorable to us, or at
    all;                                                                                                 
|
| |  | our ability to integrate effectively the systems and operations
    of acquired hospices;                                                                              
|
| |  | our ability to retain key personnel of acquired
    hospices; and                                                                                                      
|
| |  | our ability to obtain required regulatory approvals.                                                                                                                   







| |                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our loss of key management personnel or our inability to
    hire and retain skilled employees at a reasonable cost could
    adversely affect our business and our ability to increase
    patient referrals.







| |                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A nationwide shortage of qualified nurses could adversely
    affect our profitability and our ability to grow and continue to
    provide quality, responsive hospice services to our patients as
    nursing wages and benefits increase.



43



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| |                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Medical reviews and audits by governmental and private
    payors could result in material payment recoupments and payment
    denials, which could negatively impact our business.





| |                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If any of our hospice programs fails to comply with the
    Medicare conditions of participation, that program could be
    terminated from Medicare hospice reimbursement, thereby
    adversely affecting our net patient service revenue and
    profitability.





| |                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Many states have certificate of need laws or other
    regulatory provisions that may adversely impact our ability to
    expand into new markets and thereby limit our ability to grow
    and to increase our net patient service revenue.





| |                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may not be able to compete successfully against other
    hospice providers, and competitive pressures may limit our
    ability to maintain or increase our market position and
    adversely affect our profitability.





| |   |                                   
| | - | ----------------------------------
| |  | community-based hospice providers;
|
| |  | national and regional companies;  

44



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##### Table of Contents





| |   |                                                     
| | - | ----------------------------------------------------
| |  | hospital-based hospice and palliative care programs;
|
| |  | nursing homes; and                                  
|
| |  | home health agencies.                               





| |                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If our costs were to increase more rapidly than the fixed
    payment adjustments we receive for our hospice services from
    Medicare and Medicaid, our profitability could be negatively
    impacted.





| |                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | New federal and state legislative and regulatory
    initiatives relating to patient privacy could require us to
    expend substantial sums on acquiring and implementing new
    information systems.





| |                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our net patient service revenue and profitability may be
    constrained by cost containment initiatives undertaken by
    insurers and managed care companies.



45



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##### Table of Contents







| |                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------
| | A significant reduction in the carrying value of our
    goodwill could have a material adverse effect on our
    profitability.





| |                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Professional and general liability claims may have an
    adverse effect on us either because our insurance coverage may
    be inadequate to cover the losses or because claims against us,
    regardless of merit or eventual outcome, may adversely affect
    our reputation, our ability to obtain patient referrals or our
    ability to expand our business.





| |                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may need additional capital to fund our operations and
    finance our growth, and we may not be able to obtain it on terms
    acceptable to us, or at all.





| |                                                                                                          
| | ---------------------------------------------------------------------------------------------------------
| | We are dependent on proper functioning of our information
    systems to efficiently manage our business.



46



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##### Table of Contents





| |                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may experience difficulties in implementing a new
    integrated billing and clinical management and electronic
    medical records system which we anticipate acquiring in
    2005.







| |                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Provisions in our charter documents, under Delaware law,
    and in our stockholder rights plan could discourage a takeover
    that stockholders may consider favorable.





| |   |                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | authorize the issuance by the board of directors of preferred
    stock without the requirement of stockholder approval, which
    could make it more difficult for a third party to acquire a
    majority of our outstanding voting stock;
|
| |  | provide for a classified board of directors with staggered,
    three-year terms;                                                                                                                                                           
|
| |  | prohibit cumulative voting in the election of directors;                                                                                                                                                                                    
|
| |  | prohibit our stockholders from acting by written consent;                                                                                                                                                                                   
|
| |  | limit the persons who may call special meetings of stockholders;                                                                                                                                                                            
|
| |  | prohibit our stockholders from amending our bylaws unless the
    amendment is approved by the holders of at least 80% of our
    shares of common stock; and                                                                               
|
| |  | establish advance notice requirements for nominations for
    election to the board of directors or for proposing matters to
    be approved by stockholders at stockholder meetings.                                                       














|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures About Market
    Risk



47



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##### Table of Contents








|        |                                            
|------- | -------------------------------------------
|Item 8. | Financial Statements and Supplementary Data






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









|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures



Managements Report on Internal Control over Financial
Reporting.






Internal
Control Integrated Framework.




48



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##### Table of Contents



Report of Independent Registered Public Accounting Firm




















| |                      
| | ---------------------
| | /s/ Ernst & Young LLP





49



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##### Table of Contents






PART III







|         |                                                   
|-------- | --------------------------------------------------
|Item 10. | Directors and Executive Officers of the Registrant








|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation








|         |                                                                                                   
|-------- | --------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial Owners and
    Management and Related Stockholder Matters










|         |                                               
|-------- | ----------------------------------------------
|Item 13. | Certain Relationships and Related Transactions








|         |                                       
|-------- | --------------------------------------
|Item 14. | Principal Accountant Fees and Services



50



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##### Table of Contents






PART IV







|         |                                           
|-------- | ------------------------------------------
|Item 15. | Exhibits and Financial Statement Schedules





| |                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) The financial statements filed as part of this Annual
    Report on Form 10-K are listed in the Index to Consolidated
    Financial Statements on page F-1 of this Annual Report on
    Form 10-K.
|
| | (2) All financial statement schedules are omitted because
    the required information is not present, not present in material
    amounts or is presented within the financial statements.           
|
| | (3) The following documents are filed or incorporated by
    reference as exhibits to this Annual Report on Form 10-K:                                                                                

|        |    |      |  |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|------- | -- | ---- |  | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |      |  |            
|Number  |    |      |  | Description
|        |    |      |  |            
|        | 2  | .1   |  |            |  | Asset Purchase Agreement, dated as of January 9, 2004, by
    and among Odyssey HealthCare Operating A, LP, Crown of Texas
    Hospice, Amarillo, Ltd., Crown of Texas Hospice, Southeast,
    Ltd., and certain other individuals named therein (incorporated
    by reference to Exhibit 2.1 to the Companys Current
    Report on Form 8-K as filed with the Commission on
    January 15, 2004)                                                                                                                                             
|        | 3  | .1   |  |            |  | Fifth Amended and Restated Certificate of Incorporation
    (incorporated by reference to Exhibit 3.1 to the
    Companys Amendment No. 2 to Registration Statement on
    Form S-1 (Registration No. 333-51522) as filed with
    the Commission on September 13, 2001)                                                                                                                                                                                                                                                                        
|        | 3  | .2   |  |            |  | Second Amended and Restated Bylaws (incorporated by reference to
    Exhibit 3.2 to the Companys Registration Statement on
    Form S-1 (Registration No. 333-51522) as filed with
    the Commission on December 8, 2000)                                                                                                                                                                                                                                                                                                                      
|        | 4  | .1   |  |            |  | Form of Common Stock Certificate (incorporated by reference to
    Exhibit 4.1 to the Companys Amendment No. 1 to
    Registration Statement on Form S-1 (Registration
    No. 333-51522) as filed with the Commission on
    August 2, 2001)                                                                                                                                                                                                                                                                                                   
|        | 4  | .2   |  |            |  | Second Amended and Restated Registration Rights Agreement, dated
    July 1, 1998, by and among Odyssey HealthCare, Inc. and the
    security holders named therein (incorporated by reference to
    Exhibit 4.3 to the Companys Registration Statement on
    Form S-1 (Registration No. 333-51522) as filed with
    the Commission on December 8, 2000)                                                                                                                                                                                     
|        | 4  | .3   |  |            |  | Rights Agreement (the Rights Agreement) dated
    November 5, 2001, between Odyssey HealthCare, Inc. and
    Rights Agent (incorporated by reference to Exhibit 4.1 to
    the Companys Registration Statement on Form 8-A as
    filed with the Commission on December 8, 2001)                                                                                                                                                                                                                                                              
|        | 4  | .4   |  |            |  | Form of Certificate of Designation of Series A Junior
    Participating Preferred Stock (included as Exhibit A to the
    Rights Agreement (Exhibit 4.3 hereto))                                                                                                                                                                                                                                                                                                                                                                                 
|        | 10 | .1.1 |  |            |  | Credit Agreement, dated May 14, 2004, among Odyssey
    HealthCare Operating A, LP, Odyssey HealthCare
    Operating B, LP and Hospice of the Palm Coast, Inc. as
    borrowers, Odyssey HealthCare Inc. as a credit party and the
    other credit parties signatory thereto, General Electric Capital
    Corporation as agent and lender, and the other lenders signatory
    thereto from to time (incorporated by reference to
    Exhibit 2.1 to the Companys Current Report on
    Form 8-K as filed with the Commission on May 26, 2004)
|        | 10 | .1.2 |  |            |  | Consent and Amendment No. 1 to Credit Agreement dated
    November 1, 2004. (incorporated by reference to
    Exhibit 10.1 to the Companys Quarterly Report on
    Form 10-Q as filed with the Commission on November 9,
    2004                                                                                                                                                                                                                                                                                                               
|        | 10 | .2   |  |            |  | Employment Agreement, dated as of January 1, 2004, by and
    between Odyssey HealthCare, Inc. and William F. Ward
    (incorporated by reference to Exhibit 10.2 to the
    Companys Quarterly Report on Form 10-Q as filed with
    the Commission on May 5, 2004)                                                                                                                                                                                                                                                                            
|        | 10 | .3   |  |            |  | Amended and Restated Employment Agreement, effective as of
    February 28, 2002, by and between Odyssey HealthCare, Inc.
    and Richard R. Burnham (incorporated by reference to
    Exhibit 10.2 to the Companys Annual Report on
    Form 10-K as filed with the Commission on March 20,
    2002)                                                                                                                                                                                                                                          

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|        |    |       |  |   |             |                                                                                                                                                                                                                                                                                                                                             
|------- | -- | ----- |  | - | ----------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |       |  |   |            
|Number  |    |       |  |   | Description
|        |    |       |  |   |            
|        | 10 | .4    |  |  |             | Amended and Restated Employment Agreement, effective as of
    February 28, 2002, by and between Odyssey HealthCare, Inc.
    and David C. Gasmire (incorporated by reference to
    Exhibit 10.3 to the Companys Annual Report on
    Form 10-K as filed with the Commission on March 20,
    2002)                                       
|        | 10 | .5    |  |  |             | Amended and Restated Employment Agreement, effective as of
    February 28, 2002, by and between Odyssey HealthCare, Inc.
    and Douglas B. Cannon (incorporated by reference to
    Exhibit 10.4 to the Companys Annual report on
    Form 10-K as filed with the Commission on March 20,
    2002)                                      
|        | 10 | .6.1  |  |  |             | Odyssey HealthCare, Inc. Stock Option Plan (the Stock
    Option Plan) (incorporated by reference to
    Exhibit 10.5 to the Companys Registration Statement
    on Form S-1 (Registration No. 333-51522) as filed with
    the Commission on December 8, 2000)                                                                          
|        | 10 | .6.2  |  |  |             | First Amendment to the Stock Option Plan, dated January 31,
    2001 (incorporated by reference to Exhibit 10.5.2 to the
    Companys Amendment No. 2 to Registration Statement on
    Form S-1 (Registration No. 333-51522) as filed with
    the Commission on September 13, 2001)                                                       
|        | 10 | .7    |  |  |             | 2001 Equity-Based Compensation Plan (incorporated by reference
    to Exhibit 10.6 to the Companys Amendment No. 2
    to Registration Statement on Form S-1 (Registration
    No. 333-51522) as filed with the Commission on
    September 13, 2001)                                                                                      
|        | 10 | .8.1  |  |  |             | Employee Stock Purchase Plan (incorporated by reference to
    Exhibit 10.7 to the Companys Amendment No. 2 to
    Registration Statement on Form S-1 (Registration
    No. 333-51522) as filed with the Commission on
    September 13, 2001)                                                                                             
|        | 10 | .8.2  |  |  |             | First Amendment to Employee Stock Purchase Plan, dated
    March 6, 2002 (incorporated by reference to
    Exhibit 10.7.2 to the Companys Annual Report on
    Form 10-K as filed with the Commission on March 20,
    2002)                                                                                                               
|        | 10 | .9    |  |  |             | Form of Indemnification Agreement between Odyssey HealthCare,
    Inc. and its directors and officers (incorporated by reference
    to Exhibit 10.8 to the Companys Registration
    Statement on Form S-1 (Registration No. 333-51522) as
    filed with the Commission on December 8, 2000)                                             
|        | 10 | .10.1 |  |  |             | Promissory Note and Warrant Purchase Agreement, dated
    May 22, 1998, by and among Odyssey HealthCare, Inc. and the
    other parties thereto (incorporated by reference to
    Exhibit 10.10.1 to the Companys Registration
    Statement on Form S-1 (Registration No. 333-51522) as
    filed with the Commission on December 8, 2000)
|        | 10 | .10.2 |  |  |             | Form of Warrant, dated May 22, 1998 (incorporated by
    reference to Exhibit 10.10.2 to the Companys
    Registration Statement on Form S-1 (Registration
    No. 333-51522) as filed with the Commission on
    December 8, 2000)                                                                                                        
|        | 10 | .10.3 |  |  |             | First Amendment to Warrants, dated December 6, 2000
    (incorporated by reference to Exhibit 10.10.3 to the
    Companys Amendment No. 1 to Registration Statement on
    Form S-1 (Registration No. 333-51522) as filed with
    the Commission on August 2, 2001)                                                                       
|        | 21 |       |  |  |             | Subsidiaries of Odyssey HealthCare, Inc.*                                                                                                                                                                                                                                                                                                   
|        | 23 | .1    |  |  |             | Consent of Ernst & Young LLP*                                                                                                                                                                                                                                                                                                               
|        | 31 | .1    |  |  |             | Certification required by Rule 13a-14(a), dated
    March 14, 2005, by Richard R. Burnham, Chief Executive
    Officer*                                                                                                                                                                                                                     
|        | 31 | .2    |  |  |             | Certification required by Rule 13a-14(a), dated
    March 14, 2005, by Douglas B. Cannon, Chief Financial
    Officer*                                                                                                                                                                                                                      
|        | 32 |       |  |  |             | Certification required by Rule 13a-14(b), dated
    March 14, 2005, by Richard R. Burnham, Chief Executive
    Officer, and Douglas B. Cannon, Chief Financial Officer**                                                                                                                                                                    






| |   |                
| | - | ---------------
| | * | Filed herewith.



|   |                   
|-- | ------------------
|** | Furnished herewith

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##### Table of Contents






SIGNATURES






| |                         
| | ------------------------
| | ODYSSEY HEALTHCARE, INC.



| |     |                       
| | --- | ----------------------
| | By: | /s/ RICHARD R. BURNHAM

| |                                      
| | -------------------------------------
| |                                      
| | Richard R. Burnham                   
| | President and Chief Executive Officer





|                                             |  |                                                                                                                                        |  |                |  | 
|-------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- |  | 
|Signature                                    |  | Title                                                                                                                                  |  | Date          
|                                             |  |                                                                                                                                        |  |               
|                                            
|/s/ RICHARD R. BURNHAMRichard
    R. Burnham |  | Chairman of the Board, President & Chief Executive
    Officer                                                                         |  | March 14, 2005
|                                            
|/s/ DOUGLAS B. CANNONDouglas
    B. Cannon   |  | Senior Vice President, Chief Financial Officer, Assistant
    Secretary and Treasurer (Principal Financial and Accounting
    Officer) |  | March 14, 2005
|                                            
|/s/ JOHN K. CARLYLEJohn
    K. Carlyle       |  | Director                                                                                                                               |  | March 14, 2005
|                                            
|/s/ DAVID W. CROSSDavid
    W. Cross         |  | Director                                                                                                                               |  | March 14, 2005
|                                            
|/s/ PAUL J. FELDSTEINPaul
    J. Feldstein   |  | Director                                                                                                                               |  | March 14, 2005
|                                            
|/s/ MARTIN S. RASHMartin
    S. Rash         |  | Director                                                                                                                               |  | March 14, 2005
|                                            
|/s/ SHAWN S. SCHABELShawn
    S. Schabel     |  | Director                                                                                                                               |  | March 14, 2005
|                                            
|/s/ DAVID L. STEFFYDavid
    L. Steffy       |  | Director                                                                                                                               |  | March 14, 2005

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ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


|                                                                                                         |  |      |     | 
|-------------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                                         |  | Page |    
|                                                                                                         |  |      |    
|Odyssey HealthCare, Inc.                                                                                 |  |      |     | 
|Report of Ernst & Young LLP, Independent Registered
    Public Accounting Firm                           |  |      | F-2 | 
|Consolidated Balance Sheets as of December 31, 2003 and 2004                                             |  |      | F-3 | 
|Consolidated Statements of Operations for the years ended
    December 31, 2002, 2003 and 2004           |  |      | F-4 | 
|Consolidated Statements of Stockholders Equity for the
    years ended December 31, 2002, 2003 and 2004 |  |      | F-5 | 
|Consolidated Statements of Cash Flows for the years ended
    December 31, 2002, 2003 and 2004           |  |      | F-6 | 
|Notes to Consolidated Financial Statements                                                               |  |      | F-7 | 

F-1



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##### Table of Contents



Report of Independent Registered Public Accounting Firm


















| |                      
| | ---------------------
| | /s/ Ernst & Young LLP





F-2



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##### Table of Contents



ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS


|                                        |                                                                                                                                                                 |                                                                                                                                            |                                            |        |      |         |        |         |    |         | 
|--------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | ------ | ---- | ------- | ------ | ------- | -- | ------- | 
|                                        |                                                                                                                                                                 | December 31,                                                                                                                               |                                           
|                                        |                                                                                                                                                                 |                                                                                                                                            |                                           
|                                        |                                                                                                                                                                 | 2003                                                                                                                                       |                                            |        | 2004 |        
|                                        |                                                                                                                                                                 |                                                                                                                                            |                                            |        |      |        
|                                        |                                                                                                                                                                 | (In thousands, except                                                                                                                      |                                           
|                                        |                                                                                                                                                                 | share and per share                                                                                                                        |                                           
|                                        |                                                                                                                                                                 | amounts)                                                                                                                                   |                                           
|ASSETS                                 
|Current assets:                         |                                                                                                                                                                 |                                                                                                                                            |                                            |        |      |         |        |        
|                                        | Cash and cash equivalents                                                                                                                                       |                                                                                                                                            | $                                          | 38,284 |      |         | $      | 24,851  |   
|                                        | Short-term investments                                                                                                                                          |                                                                                                                                            |                                            | 690    |      |         |        | 8,407   |   
|                                        | Accounts receivable from patient services, net of allowance for
    uncollectible accounts of $3,913 and $3,862 at December 31,
    2003 and 2004, respectively |                                                                                                                                            |                                            | 58,895 |      |         |        | 59,376  |   
|                                        | Deferred tax assets                                                                                                                                             |                                                                                                                                            |                                            | 1,170  |      |         |        | 30      |   
|                                        | Income taxes receivable                                                                                                                                         |                                                                                                                                            |                                            | 1,961  |      |         |        | 1,679   |   
|                                        | Other current assets                                                                                                                                            |                                                                                                                                            |                                            | 3,584  |      |         |        | 3,823   |   
|                                        |                                                                                                                                                                 |                                                                                                                                            |                                            |        |      |        
|                                        |                                                                                                                                                                 |                                                                                                                                            | Total current assets                       |        |      | 104,584 |        |         |    | 98,166  | 
|Property and equipment, net             |                                                                                                                                                                 |                                                                                                                                            | 6,435                                      |        |      |         | 7,490  |        
|Goodwill                                |                                                                                                                                                                 |                                                                                                                                            | 66,678                                     |        |      |         | 93,933 |        
|Intangibles, net                        |                                                                                                                                                                 |                                                                                                                                            | 3,105                                      |        |      |         | 4,502  |        
|                                        |                                                                                                                                                                 |                                                                                                                                            |                                            |        |      |        
|                                        |                                                                                                                                                                 |                                                                                                                                            | Total assets                               |        | $    | 180,802 |        |         | $  | 204,091 | 
|                                        |                                                                                                                                                                 |                                                                                                                                            |                                            |        |      |        
|LIABILITIES AND STOCKHOLDERS EQUITY   
|Current liabilities:                    |                                                                                                                                                                 |                                                                                                                                            |                                            |        |      |         |        |        
|                                        | Accounts payable                                                                                                                                                |                                                                                                                                            | $                                          | 5,414  |      |         | $      | 3,664   |   
|                                        | Accrued compensation                                                                                                                                            |                                                                                                                                            |                                            | 9,647  |      |         |        | 10,331  |   
|                                        | Accrued nursing home costs                                                                                                                                      |                                                                                                                                            |                                            | 9,585  |      |         |        | 9,932   |   
|                                        | Other accrued expenses                                                                                                                                          |                                                                                                                                            |                                            | 7,128  |      |         |        | 10,975  |   
|                                        | Current maturities of long-term debt                                                                                                                            |                                                                                                                                            |                                            | 4      |      |         |        | 5       |   
|                                        |                                                                                                                                                                 |                                                                                                                                            |                                            |        |      |        
|                                        |                                                                                                                                                                 |                                                                                                                                            | Total current liabilities                  |        |      | 31,778  |        |         |    | 34,907  | 
|Long-term debt, less current maturities |                                                                                                                                                                 |                                                                                                                                            | 13                                         |        |      |         | 9      |        
|Deferred tax liability                  |                                                                                                                                                                 |                                                                                                                                            | 4,286                                      |        |      |         | 7,095  |        
|Commitments and contingencies           |                                                                                                                                                                 |                                                                                                                                            |                                           |        |      |         |       |        
|                                        | Stockholders equity:                                                                                                                                           |                                                                                                                                            |                                            |        |      |         |        |         |   
|                                        | Common stock, $.001 par value:                                                                                                                                  |                                                                                                                                            |                                            |        |      |         |        |         |   
|                                        |                                                                                                                                                                 | Authorized shares  75,000,000 issued and outstanding
    shares  36,547,132 at December 31, 2003 and
    36,750,917 at December 31, 2004 |                                            |        | 37   |         |        |         | 37 |        
|                                        | Additional paid-in capital                                                                                                                                      |                                                                                                                                            |                                            | 91,365 |      |         |        | 95,822  |   
|                                        | Deferred compensation                                                                                                                                           |                                                                                                                                            |                                            | (317   | )    |         |        | (2,148  | ) 
|                                        | Retained earnings                                                                                                                                               |                                                                                                                                            |                                            | 53,640 |      |         |        | 88,636  |   
|                                        | Treasury stock, at cost, 1,648,600 shares outstanding at
    December 31, 2004                                                                                  |                                                                                                                                            |                                            |       |      |         |        | (20,267 | ) 
|                                        |                                                                                                                                                                 |                                                                                                                                            |                                            |        |      |        
|                                        |                                                                                                                                                                 |                                                                                                                                            | Total stockholders equity                 |        |      | 144,725 |        |         |    | 162,080 | 
|                                        |                                                                                                                                                                 |                                                                                                                                            |                                            |        |      |        
|                                        |                                                                                                                                                                 |                                                                                                                                            | Total liabilities and stockholders equity |        | $    | 180,802 |        |         | $  | 204,091 | 
|                                        |                                                                                                                                                                 |                                                                                                                                            |                                            |        |      |        



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##### Table of Contents



ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF OPERATIONS


|                                         |                                      |                         |         |        |      |   |         |         |   |   |         |         |  
|---------------------------------------- | ------------------------------------ | ----------------------- | ------- | ------ | ---- | - | ------- | ------- | - | - | ------- | ------- | -
|                                         |                                      | Year Ended December 31, |        
|                                         |                                      |                         |        
|                                         |                                      | 2002                    |         |        | 2003 |   |         | 2004    |  
|                                         |                                      |                         |         |        |      |   |         |         |  
|                                         |                                      | (In thousands, except   |        
|                                         |                                      | per share amounts)      |        
|Net patient service revenue              |                                      | $                       | 194,459 |        |      | $ | 274,309 |         |   | $ | 350,276 |        
|Operating expenses:                      |                                      |                         |         |        |      |   |         |         |   |   |         |        
|                                         | Direct hospice care                  |                         |         | 99,919 |      |   |         | 143,738 |   |   |         | 187,891 |  
|                                         | General and administrative           |                         |         | 55,439 |      |   |         | 72,809  |   |   |         | 93,830  |  
|                                         | Stock-based compensation charges     |                         |         | 685    |      |   |         | 409     |   |   |         | 287     |  
|                                         | Provision for uncollectible accounts |                         |         | 2,952  |      |   |         | 4,015   |   |   |         | 8,119   |  
|                                         | Depreciation                         |                         |         | 1,468  |      |   |         | 2,181   |   |   |         | 3,371   |  
|                                         | Amortization                         |                         |         | 41     |      |   |         | 361     |   |   |         | 690     |  
|                                         |                                      |                         |         |        |      |   |         |         |  
|                                         |                                      |                         | 160,504 |        |      |   | 223,513 |         |   |   | 294,188 |        
|                                         |                                      |                         |         |        |      |   |         |         |  
|Income from operations                   |                                      |                         | 33,955  |        |      |   | 50,796  |         |   |   | 56,088  |        
|Other income (expense):                  |                                      |                         |         |        |      |   |         |         |   |   |         |        
|                                         | Minority interest                    |                         |         | 50     |      |   |         |        |   |   |         |        |  
|                                         | Interest income                      |                         |         | 544    |      |   |         | 390     |   |   |         | 359     |  
|                                         | Interest expense                     |                         |         | (269   | )    |   |         | (140    | ) |   |         | (118    | )
|                                         |                                      |                         |         |        |      |   |         |         |  
|                                         |                                      |                         | 325     |        |      |   | 250     |         |   |   | 241     |        
|                                         |                                      |                         |         |        |      |   |         |         |  
|Income before provision for income taxes |                                      |                         | 34,280  |        |      |   | 51,046  |         |   |   | 56,329  |        
|Provision for income taxes               |                                      |                         | 13,140  |        |      |   | 19,839  |         |   |   | 21,333  |        
|                                         |                                      |                         |         |        |      |   |         |         |  
|Net income                               |                                      | $                       | 21,140  |        |      | $ | 31,207  |         |   | $ | 34,996  |        
|                                         |                                      |                         |         |        |      |   |         |         |  
|Net income per common share:             |                                      |                         |         |        |      |   |         |         |   |   |         |        
|                                         | Basic net income per common share    |                         | $       | 0.61   |      |   | $       | 0.87    |   |   | $       | 0.96    |  
|                                         |                                      |                         |         |        |      |   |         |         |  
|                                         | Diluted net income per common share  |                         | $       | 0.58   |      |   | $       | 0.84    |   |   | $       | 0.93    |  
|                                         |                                      |                         |         |        |      |   |         |         |  
|Weighted average shares outstanding:     |                                      |                         |         |        |      |   |         |         |   |   |         |        
|                                         | Basic                                |                         |         | 34,782 |      |   |         | 35,945  |   |   |         | 36,445  |  
|                                         | Diluted                              |                         |         | 36,691 |      |   |         | 37,256  |   |   |         | 37,551  |  



F-4



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##### Table of Contents



ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY


|                                                         |  |                        |        |  |            |   |    |          |  |   |              |   |  |          |        |   |               |   |        |        |  |   |         |   |  |   |         |  
|-------------------------------------------------------- |  | ---------------------- | ------ |  | ---------- | - | -- | -------- |  | - | ------------ | - |  | -------- | ------ | - | ------------- | - | ------ | ------ |  | - | ------- | - |  | - | ------- | -
|                                                         |  | Common Stock           |        |  | Additional |   |    |          |  |   |              |   |  | Total    |       
|                                                         |  |                        |        |  | Paid-in    |   |    | Deferred |  |   | Retained     |   |  | Treasury |        |   | Stockholders |  
|                                                         |  | Shares                 |        |  | Amount     |   |    | Capital  |  |   | Compensation |   |  | Earnings |        |   | Stock         |   |        | Equity | 
|                                                         |  |                        |        |  |            |   |    |          |  |   |              |   |  |          |        |   |               |   |        |        | 
|                                                         |  | (Amounts in thousands) |       
|Balance at January 1, 2002                               |  |                        | 34,322 |  |            | $ | 35 |          |  | $ | 77,718       |   |  | $        | (1,411 | ) |               | $ | 1,293  |        |  | $ | 0       |   |  | $ | 77,635  |  
|Expense related to Initial Public Offering               |  |                        |       |  |            |   |   |          |  |   | (37          | ) |  |          |       |   |               |   |       |        |  |   |        |   |  |   | (37     | )
|Amortization of deferred compensation                    |  |                        |       |  |            |   |   |          |  |   |             |   |  |          | 685    |   |               |   |       |        |  |   |        |   |  |   | 685     |  
|Tax benefit related to stock option exercise             |  |                        |       |  |            |   |   |          |  |   | 891          |   |  |          |       |   |               |   |       |        |  |   |        |   |  |   | 891     |  
|Exercise of stock options                                |  |                        | 676    |  |            |   |   |          |  |   | 581          |   |  |          |       |   |               |   |       |        |  |   |        |   |  |   | 581     |  
|Exercise of stock warrants                               |  |                        | 69     |  |            |   |   |          |  |   | 38           |   |  |          |       |   |               |   |       |        |  |   |        |   |  |   | 38      |  
|Net income                                               |  |                        |       |  |            |   |   |          |  |   |             |   |  |          |       |   |               |   | 21,140 |        |  |   |        |   |  |   | 21,140  |  
|                                                         |  |                        |        |  |            |   |    |          |  |   |              |   |  |          |        |   |               |   |        |        | 
|Balance at December 31, 2002                             |  |                        | 35,067 |  |            |   | 35 |          |  |   | 79,191       |   |  |          | (726   | ) |               |   | 22,433 |        |  |   |        |   |  |   | 100,933 |  
|Amortization of deferred compensation                    |  |                        |       |  |            |   |   |          |  |   |             |   |  |          | 409    |   |               |   |       |        |  |   |        |   |  |   | 409     |  
|Tax benefit related to stock option exercise             |  |                        |       |  |            |   |   |          |  |   | 6,936        |   |  |          |       |   |               |   |       |        |  |   |        |   |  |   | 6,936   |  
|Exercise of stock options                                |  |                        | 1,450  |  |            |   | 2  |          |  |   | 5,238        |   |  |          |       |   |               |   |       |        |  |   |        |   |  |   | 5,240   |  
|Employee Stock Purchase Plan                             |  |                        | 30     |  |            |   |   |          |  |   |             |   |  |          |       |   |               |   |       |        |  |   |        |   |  |   |        |  
|Net income                                               |  |                        |       |  |            |   |   |          |  |   |             |   |  |          |       |   |               |   | 31,207 |        |  |   |        |   |  |   | 31,207  |  
|                                                         |  |                        |        |  |            |   |    |          |  |   |              |   |  |          |        |   |               |   |        |        | 
|Balance at December 31, 2003                             |  |                        | 36,547 |  |            |   | 37 |          |  |   | 91,365       |   |  |          | (317   | ) |               |   | 53,640 |        |  |   |        |   |  |   | 144,725 |  
|Amortization of deferred compensation                    |  |                        |       |  |            |   |   |          |  |   |             |   |  |          | 287    |   |               |   |       |        |  |   |        |   |  |   | 287     |  
|Deferred compensation related to restricted stock awards |  |                        |       |  |            |   |   |          |  |   | 2,118        |   |  |          | (2,118 | ) |               |   |       |        |  |   |        |   |  |   |        |  
|Tax benefit related to stock option exercise             |  |                        |       |  |            |   |   |          |  |   | 1,129        |   |  |          |       |   |               |   |       |        |  |   |        |   |  |   | 1,129   |  
|Exercise of stock options                                |  |                        | 159    |  |            |   |   |          |  |   | 608          |   |  |          |       |   |               |   |       |        |  |   |        |   |  |   | 608     |  
|Employee Stock Purchase Plan                             |  |                        | 45     |  |            |   |   |          |  |   | 602          |   |  |          |       |   |               |   |       |        |  |   |        |   |  |   | 602     |  
|Purchase of treasury stock, at cost                      |  |                        |       |  |            |   |   |          |  |   |             |   |  |          |       |   |               |   |       |        |  |   | (20,267 | ) |  |   | (20,267 | )
|Net income                                               |  |                        |       |  |            |   |   |          |  |   |             |   |  |          |       |   |               |   | 34,996 |        |  |   |        |   |  |   | 34,996  |  
|                                                         |  |                        |        |  |            |   |    |          |  |   |              |   |  |          |        |   |               |   |        |        | 
|Balance at December 31, 2004                             |  |                        | 36,751 |  |            | $ | 37 |          |  | $ | 95,822       |   |  | $        | (2,148 | ) |               | $ | 88,636 |        |  | $ | (20,267 | ) |  | $ | 162,080 |  
|                                                         |  |                        |        |  |            |   |    |          |  |   |              |   |  |          |        |   |               |   |        |        | 



F-5



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##### Table of Contents



ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                                     |                                                                                       |                                                                   |                                                                             |         |       |         |        |         |       |         |         |         |       |         |  
|---------------------------------------------------- | ------------------------------------------------------------------------------------- | ----------------------------------------------------------------- | --------------------------------------------------------------------------- | ------- | ----- | ------- | ------ | ------- | ----- | ------- | ------- | ------- | ----- | ------- | -
|                                                     |                                                                                       | Year Ended December 31,                                           |                                                                            
|                                                     |                                                                                       |                                                                   |                                                                            
|                                                     |                                                                                       | 2002                                                              |                                                                             |         | 2003  |         |        | 2004    |      
|                                                     |                                                                                       |                                                                   |                                                                             |         |       |         |        |         |      
|                                                     |                                                                                       | (In thousands)                                                    |                                                                            
|Operating Activities:                                |                                                                                       |                                                                   |                                                                             |         |       |         |        |         |       |         |         |        
|                                                     | Net income                                                                            |                                                                   | $                                                                           | 21,140  |       |         | $      | 31,207  |       |         | $       | 34,996  |      
|                                                     | Adjustments to reconcile net income to net cash provided by
    operating activities: |                                                                   |                                                                             |         |       |         |        |         |       |         |         |         |      
|                                                     |                                                                                       | Depreciation and amortization                                     |                                                                             |         | 1,509 |         |        |         | 2,542 |         |         |         | 4,061 |        
|                                                     |                                                                                       | Amortization of deferred charges and debt discount                |                                                                             |         | 34    |         |        |         | 25    |         |         |         | 68    |        
|                                                     |                                                                                       | Stock-based compensation                                          |                                                                             |         | 685   |         |        |         | 409   |         |         |         | 287   |        
|                                                     |                                                                                       | Minority interest                                                 |                                                                             |         | (50   | )       |        |         |      |         |         |         |      |        
|                                                     |                                                                                       | Deferred tax expense                                              |                                                                             |         | 350   |         |        |         | 3,089 |         |         |         | 3,949 |        
|                                                     |                                                                                       | Tax benefit realized for stock option exercises                   |                                                                             |         | 891   |         |        |         | 6,936 |         |         |         | 1,129 |        
|                                                     |                                                                                       | Provision for uncollectible accounts                              |                                                                             |         | 2,952 |         |        |         | 4,015 |         |         |         | 8,119 |        
|                                                     |                                                                                       | Changes in operating assets and liabilities, net of acquisitions: |                                                                             |         |       |         |        |         |       |         |         |         |       |        
|                                                     |                                                                                       |                                                                   | Accounts receivable                                                         |         |       | (13,561 | )      |         |       | (27,585 | )       |         |       | (8,600  | )
|                                                     |                                                                                       |                                                                   | Other current assets                                                        |         |       | (1,275  | )      |         |       | (2,706  | )       |         |       | 43      |  
|                                                     |                                                                                       |                                                                   | Accounts payable, accrued nursing home costs and other accrued
    expenses |         |       | 6,057   |        |         |       | 9,673   |         |         |       | 3,128   |  
|                                                     |                                                                                       |                                                                   |                                                                             |         |       |         |        |         |      
|                                                     |                                                                                       |                                                                   | Net cash provided by operating activities                                   |         |       | 18,732  |        |         |       | 27,605  |         |         |       | 47,180  |  
|Investing Activities:                                |                                                                                       |                                                                   |                                                                             |         |       |         |        |         |       |         |         |        
|                                                     | Cash paid for acquisitions and procurement of licenses                                |                                                                   |                                                                             | (21,269 | )     |         |        | (22,469 | )     |         |         | (29,106 | )    
|                                                     | Decrease (increase) in short-term investments                                         |                                                                   |                                                                             | 22,894  |       |         |        | (11     | )     |         |         | (7,717  | )    
|                                                     | Purchases of property and equipment                                                   |                                                                   |                                                                             | (2,600  | )     |         |        | (4,775  | )     |         |         | (4,403  | )    
|                                                     |                                                                                       |                                                                   |                                                                             |         |       |         |        |         |      
|                                                     |                                                                                       |                                                                   | Net cash used in investing activities                                       |         |       | (975    | )      |         |       | (27,255 | )       |         |       | (41,226 | )
|Financing Activities:                                |                                                                                       |                                                                   |                                                                             |         |       |         |        |         |       |         |         |        
|                                                     | Proceeds from issuance of common stock                                                |                                                                   |                                                                             | 581     |       |         |        | 5,240   |       |         |         | 1,210   |      
|                                                     | Purchases of treasury stock                                                           |                                                                   |                                                                             |        |       |         |        |        |       |         |         | (20,267 | )    
|                                                     | Distributions to minority partners                                                    |                                                                   |                                                                             | (100    | )     |         |        |        |       |         |         |        |      
|                                                     | Proceeds from issuance of debt                                                        |                                                                   |                                                                             | 15      |       |         |        | 13      |       |         |         |        |      
|                                                     | Payments of debt issue costs                                                          |                                                                   |                                                                             |        |       |         |        |        |       |         |         | (327    | )    
|                                                     | Payments on debt                                                                      |                                                                   |                                                                             | (3,220  | )     |         |        | (270    | )     |         |         | (3      | )    
|                                                     |                                                                                       |                                                                   |                                                                             |         |       |         |        |         |      
|                                                     |                                                                                       |                                                                   | Net cash (used in) provided by financing activities                         |         |       | (2,724  | )      |         |       | 4,983   |         |         |       | (19,387 | )
|                                                     |                                                                                       |                                                                   |                                                                             |         |       |         |        |         |      
|Net increase (decrease) in cash and cash equivalents |                                                                                       |                                                                   | 15,033                                                                      |         |       |         | 5,333  |         |       |         | (13,433 | )      
|Cash and cash equivalents, beginning of period       |                                                                                       |                                                                   | 17,918                                                                      |         |       |         | 32,951 |         |       |         | 38,284  |        
|                                                     |                                                                                       |                                                                   |                                                                             |         |       |         |        |         |      
|Cash and cash equivalents, end of period             |                                                                                       | $                                                                 | 32,951                                                                      |         |       | $       | 38,284 |         |       | $       | 24,851  |        
|                                                     |                                                                                       |                                                                   |                                                                             |         |       |         |        |         |      
|Supplemental cash flow information                   |                                                                                       |                                                                   |                                                                             |         |       |         |        |         |       |         |         |        
|                                                     | Cash interest paid                                                                    |                                                                   | $                                                                           | 341     |       |         | $      | 125     |       |         | $       | 34      |      
|                                                     | Income taxes paid                                                                     |                                                                   | $                                                                           | 13,353  |       |         | $      | 11,513  |       |         | $       | 15,976  |      



F-6



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##### Table of Contents



ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Years Ended December 31, 2002, 2003 and 2004




|   |                                                                
|-- | ---------------------------------------------------------------
|1. | Organization and Summary of Significant Accounting
    Policies



| |             
| | ------------
| | Organization







| |                            
| | ---------------------------
| | Principles of Consolidation





| |                                                         
| | --------------------------------------------------------
| | Cash and Cash Equivalents and Short-Term
    Investments





| |                                    
| | -----------------------------------
| | Fair Value of Financial Instruments





| |                    
| | -------------------
| | Accounts Receivable





F-7



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##### Table of Contents



ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)






| |                                          
| | -----------------------------------------
| | Goodwill and Other Non-Amortizable Assets





| |                            
| | ---------------------------
| | Net Patient Service Revenue







F-8



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##### Table of Contents



ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




Medicare Cap Accrual as of December 31, 2004


|                                               |  |                |      |      |              |   |       |              |  |   |       |  |  |   |       |  
|---------------------------------------------- |  | -------------- | ---- | ---- | ------------ | - | ----- | ------------ |  | - | ----- |  |  | - | ----- | -
|                                               |  | Medicare Cap   |      |      | Medicare Cap |   |       | Medicare Cap |  |   |      
|                                               |  | Year Ended     |      |      | Year Ended   |   |       | Year Ended   |  |   |      
|                                               |  | October 2003   |      |      | October 2004 |   |       | October 2005 |  |   | Total | 
|                                               |  |                |      |      |              |   |       |              |  |   |       | 
|                                               |  | (In thousands) |     
|Medicare Cap Accrual                           |  | $              | 657  |      |              | $ | 1,798 |              |  | $ | 1,117 |  |  | $ | 3,571 |  
|Medicare Settlement                            |  |                | (160 | )(1) |              |   |      | (2)          |  |   |      |  |  |   | (160  | )
|Payments to Medicare for revenue exceeding cap |  |                | (497 | )    |              |   |      |              |  |   |      |  |  |   | (497  | )
|                                               |  |                |      |      |              |   |       |              |  |   |       | 
|Medicare Cap Accrual Balance                   |  | $              |     |      |              | $ | 1,798 |              |  | $ | 1,117 |  |  | $ | 2,915 |  
|                                               |  |                |      |      |              |   |       |              |  |   |       | 






|    |                                                                                                                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Changes in accruals to satisfy cap repayment as determined by
    Medicare fiscal intermediary audits. Accruals in excess of
    Medicare settlement applied to estimate for subsequent Medicare
    cap year.
|   
|(2) | Medicare fiscal intermediary audit not yet complete.                                                                                                                                                          







| |             
| | ------------
| | Charity Care







| |                             
| | ----------------------------
| | Direct Hospice Care Expenses



F-9



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##### Table of Contents



ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




| |                                                   
| | --------------------------------------------------
| | Property and Equipment and Other Intangible Assets











| |                         
| | ------------------------
| | Stock-Based Compensation





F-10



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##### Table of Contents



ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)






| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | A modified prospective method in which compensation
    cost is recognized beginning with the effective date
    (a) based on the requirements of Statement 123R for
    all share-based payments granted after the effective date and
    (b) based on the requirement of Statement 123 for all
    awards granted to employees prior to the effective date of
    Statement 123R that remain unvested on the effective date.
|
| | 2. | A modified retrospective method which included the
    requirements of the modified prospective method described above,
    but also permits companies to restate based on the amounts
    previously recognized under Statement 123 for purposes of
    pro forma disclosures either (a) all prior periods
    presented or (b) prior interim periods of the year of
    adoption.                                           







| |                            
| | ---------------------------
| | Net Income Per Common Share





| |             
| | ------------
| | Income Taxes





| |                                             
| | --------------------------------------------
| | General and Professional Liability Insurance



F-11



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##### Table of Contents



ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




| |                   
| | ------------------
| | Nursing Home Costs





| |                  
| | -----------------
| | Advertising Costs





| |                        
| | -----------------------
| | Deferred Rent Liability





| |                 
| | ----------------
| | Use of Estimates





| |                 
| | ----------------
| | Reclassification





|   |             
|-- | ------------
|2. | Acquisitions



| |     
| | ----
| | 2002





F-12



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##### Table of Contents



ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


















| |     
| | ----
| | 2003









F-13



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##### Table of Contents



ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)














| |     
| | ----
| | 2004









|                                       |         |                           |         |      |      |   |         |      |  |   |         |      | 
|-------------------------------------- | ------- | ------------------------- | ------- | ---- | ---- | - | ------- | ---- |  | - | ------- | ---- | 
|                                       |         | Year Ended December 31,   |        
|                                       |         |                           |        
|                                       |         | 2002                      |         |      | 2003 |   |         | 2004 | 
|                                       |         |                           |         |      |      |   |         |      | 
|                                       |         | (In thousands,            |        
|                                       |         | except per share amounts) |        
|Pro forma net patient service revenue  |         | $                         | 231,611 |      |      | $ | 314,419 |      |  | $ | 352,695 |     
|Pro forma net income                   |         |                           | 23,441  |      |      |   | 34,400  |      |  |   | 35,248  |     
|Pro forma net income per common share: |         |                           |         |      |      |   |         |      |  |   |         |     
|                                       | Basic   |                           | $       | 0.67 |      |   | $       | 0.96 |  |   | $       | 0.97 | 
|                                       |         |                           |         |      |      |   |         |      | 
|                                       | Diluted |                           | $       | 0.64 |      |   | $       | 0.92 |  |   | $       | 0.94 | 
|                                       |         |                           |         |      |      |   |         |      | 

F-14



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##### Table of Contents



ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




|   |                  
|-- | -----------------
|3. | Intangible Assets



|                  |  |           |       |  |           |   |     |         |  |   |       |  |  |         |        |  |       |   |       |          |  |   |        |  |  |           |        |  |       |   |       |  |  |   |      |   |  |   |        | 
|----------------- |  | --------- | ----- |  | --------- | - | --- | ------- |  | - | ----- |  |  | ------- | ------ |  | ----- | - | ----- | -------- |  | - | ------ |  |  | --------- | ------ |  | ----- | - | ----- |  |  | - | ---- | - |  | - | ------ | 
|                  |  | Northeast |       |  | Southeast |   |     | Central |  |   | South |  |  | Midwest |        |  | Texas |   |       | Mountain |  |   | West   |  |  | Corporate |        |  | Total |  
|                  |  |           |       |  |           |   |     |         |  |   |       |  |  |         |        |  |       |   |       |          |  |   |        |  |  |           |        |  |       |  
|January 1, 2003   |  | $         | 2,379 |  |           | $ | 703 |         |  | $ | 3,916 |  |  | $       | 14,970 |  |       | $ | 2,590 |          |  | $ | 7,814  |  |  | $         | 8,739  |  |       | $ | 5,296 |  |  | $ | 120  |   |  | $ | 46,527 | 
|Acquisitions      |  |           | 316   |  |           |   | 290 |         |  |   | 237   |  |  |         | 741    |  |       |   |      |          |  |   | 7,270  |  |  |           | 11,297 |  |       |   |      |  |  |   |     |   |  |   | 20,151 | 
|                  |  |           |       |  |           |   |     |         |  |   |       |  |  |         |        |  |       |   |       |          |  |   |        |  |  |           |        |  |       |  
|December 31, 2003 |  |           | 2,695 |  |           |   | 993 |         |  |   | 4,153 |  |  |         | 15,711 |  |       |   | 2,590 |          |  |   | 15,084 |  |  |           | 20,036 |  |       |   | 5,296 |  |  |   | 120  |   |  |   | 66,678 | 
|Acquisitions      |  |           |      |  |           |   |    |         |  |   | 5,810 |  |  |         |       |  |       |   |      |          |  |   | 21,445 |  |  |           |       |  |       |   |      |  |  |   |     |   |  |   | 27,255 | 
|Reclasses         |  |           |      |  |           |   |    |         |  |   |      |  |  |         |       |  |       |   |      |          |  |   |       |  |  |           | 92     |  |       |   | 28    |  |  |   | (120 | ) |  |   |       | 
|                  |  |           |       |  |           |   |     |         |  |   |       |  |  |         |        |  |       |   |       |          |  |   |        |  |  |           |        |  |       |  
|December 31, 2004 |  | $         | 2,695 |  |           | $ | 993 |         |  | $ | 9,963 |  |  | $       | 15,711 |  |       | $ | 2,590 |          |  | $ | 36,529 |  |  | $         | 20,128 |  |       | $ | 5,324 |  |  | $ |     |   |  | $ | 93,933 | 
|                  |  |           |       |  |           |   |     |         |  |   |       |  |  |         |        |  |       |   |       |          |  |   |        |  |  |           |        |  |       |  













|   |             
|-- | ------------
|4. | Common Stock





F-15



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##### Table of Contents



ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)






|   |                                              
|-- | ---------------------------------------------
|5. | Series B Convertible Preferred Stock Warrants





|   |                                          
|-- | -----------------------------------------
|6. | Stock Options and Restricted Stock Awards









F-16



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##### Table of Contents



ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




|                                         |           |                       |       |       |         |  |       |        |  
|---------------------------------------- | --------- | --------------------- | ----- | ----- | ------- |  | ----- | ------ | -
|                                         |           | Weighted              |       |       |        
|                                         |           | Average               |       |       |        
|                                         |           | Exercise Price        |       |       | Options | 
|                                         |           |                       |       |       |         | 
|                                         |           | (In thousands, except |      
|                                         |           | dollar amounts)       |      
|Options outstanding at January 1, 2002   |           | $                     | 2.43  |       |         |  | 3,147 |       
|                                         | Granted   |                       |       | 12.39 |         |  |       | 597    |  
|                                         | Canceled  |                       |       | 6.19  |         |  |       | (210   | )
|                                         | Exercised |                       |       | 0.79  |         |  |       | (676   | )
|                                         |           |                       |       |       |         | 
|Options outstanding at December 31, 2002 |           |                       | 4.51  |       |         |  | 2,858 |       
|                                         |           |                       |       |       |         | 
|                                         | Granted   |                       |       | 19.81 |         |  |       | 1,528  |  
|                                         | Cancelled |                       |       | 13.42 |         |  |       | (194   | )
|                                         | Exercised |                       |       | 3.04  |         |  |       | (1,450 | )
|                                         |           |                       |       |       |         | 
|Options outstanding at December 31, 2003 |           |                       | 12.85 |       |         |  | 2,742 |       
|                                         |           |                       |       |       |         | 
|                                         | Granted   |                       |       | 21.35 |         |  |       | 1,032  |  
|                                         | Cancelled |                       |       | 19.11 |         |  |       | (207   | )
|                                         | Exercised |                       |       | 3.89  |         |  |       | (159   | )
|                                         |           |                       |       |       |         | 
|Options outstanding at December 31, 2004 |           | $                     | 15.57 |       |         |  | 3,408 |       
|                                         |           |                       |       |       |         | 

F-17



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##### Table of Contents



ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




|               |  |                                                        |       |           |              |  |        |             |        |          |             |  |  |  |       | 
|-------------- |  | ------------------------------------------------------ | ----- | --------- | ------------ |  | ------ | ----------- | ------ | -------- | ----------- |  |  |  | ----- | 
|               |  |                                                        |       | Weighted  |              |  |        |             |       
|               |  |                                                        |       | Average   |              |  |        |             | Number |         
|               |  |                                                        |       | Remaining |              |  | Number |             |        | Unvested |            
|               |  | Number                                                 |       |           | Contractual  |  |        | Vested and  |        |          | and Not     | 
|Exercise Price |  | Outstanding                                            |       |           | Life (Years) |  |        | Exercisable |        |          | Exercisable | 
|               |  |                                                        |       |           |              |  |        |             |        |          |             | 
|               |  | (Amounts in thousands, except dollar and year amounts) |      
|$ 0.04         |  |                                                        | 1     |           |              |  | 1.91   |             |        |          | 1           |  |  |  |      | 
|0.44           |  |                                                        | 201   |           |              |  | 3.77   |             |        |          | 189         |  |  |  | 12    | 
|1.38           |  |                                                        | 208   |           |              |  | 5.86   |             |        |          | 144         |  |  |  | 64    | 
|2.07           |  |                                                        | 1     |           |              |  | 6.08   |             |        |          |            |  |  |  | 1     | 
|3.11           |  |                                                        | 23    |           |              |  | 6.33   |             |        |          | 9           |  |  |  | 14    | 
|5.78           |  |                                                        | 35    |           |              |  | 6.67   |             |        |          | 11          |  |  |  | 24    | 
|7.19           |  |                                                        | 420   |           |              |  | 6.92   |             |        |          | 302         |  |  |  | 118   | 
|11.28          |  |                                                        | 118   |           |              |  | 7.58   |             |        |          | 88          |  |  |  | 30    | 
|11.69          |  |                                                        | 108   |           |              |  | 7.08   |             |        |          | 37          |  |  |  | 71    | 
|12.10          |  |                                                        | 373   |           |              |  | 9.88   |             |        |          |            |  |  |  | 373   | 
|15.15          |  |                                                        | 411   |           |              |  | 7.92   |             |        |          | 235         |  |  |  | 176   | 
|15.25          |  |                                                        | 129   |           |              |  | 8.08   |             |        |          | 30          |  |  |  | 99    | 
|15.53          |  |                                                        | 81    |           |              |  | 7.92   |             |        |          | 39          |  |  |  | 42    | 
|16.87          |  |                                                        | 36    |           |              |  | 9.33   |             |        |          |            |  |  |  | 36    | 
|17.00          |  |                                                        | 20    |           |              |  | 9.58   |             |        |          |            |  |  |  | 20    | 
|17.54          |  |                                                        | 1     |           |              |  | 7.08   |             |        |          |            |  |  |  | 1     | 
|17.78          |  |                                                        | 50    |           |              |  | 9.58   |             |        |          |            |  |  |  | 50    | 
|18.76          |  |                                                        | 31    |           |              |  | 8.42   |             |        |          | 16          |  |  |  | 15    | 
|18.82          |  |                                                        | 29    |           |              |  | 9.33   |             |        |          |            |  |  |  | 29    | 
|20.00          |  |                                                        | 43    |           |              |  | 8.42   |             |        |          | 11          |  |  |  | 32    | 
|21.86          |  |                                                        | 31    |           |              |  | 9.17   |             |        |          |            |  |  |  | 31    | 
|22.33          |  |                                                        | 443   |           |              |  | 8.50   |             |        |          | 122         |  |  |  | 321   | 
|27.96          |  |                                                        | 9     |           |              |  | 8.50   |             |        |          | 2           |  |  |  | 7     | 
|28.48          |  |                                                        | 171   |           |              |  | 8.50   |             |        |          | 43          |  |  |  | 128   | 
|30.64          |  |                                                        | 435   |           |              |  | 9.08   |             |        |          | 150         |  |  |  | 285   | 
|               |  |                                                        |       |           |              |  |        |             |        |          |             | 
|               |  |                                                        | 3,408 |           |              |  |        |             |        |          | 1,429       |  |  |  | 1,979 | 
|               |  |                                                        |       |           |              |  |        |             |        |          |             | 



|   |                         
|-- | ------------------------
|7. | Stock-Based Compensation



F-18



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##### Table of Contents



ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)








|                                                                             |  |                        |        |   |      |   |        |      |  |   |        |  
|---------------------------------------------------------------------------- |  | ---------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                             |  | Year Ended December 31 |       
|                                                                             |  |                        |       
|                                                                             |  | 2002                   |        |   | 2003 |   |        | 2004 | 
|                                                                             |  |                        |        |   |      |   |        |      | 
|                                                                             |  | (In thousands)         |       
|Net income available to common stockholders, as reported                     |  | $                      | 21,140 |   |      | $ | 31,207 |      |  | $ | 34,996 |  
|Add: Stock-based employee compensation expense recorded, net of
    tax      |  |                        | 425    |   |      |   | 249    |      |  |   | 178    |  
|Deduct: Fair value stock-based employee compensation expense,
    net of tax |  |                        | (1,285 | ) |      |   | (2,366 | )    |  |   | (4,238 | )
|                                                                             |  |                        |        |   |      |   |        |      | 
|Pro forma net income available to common stockholders                        |  | $                      | 20,280 |   |      | $ | 29,090 |      |  | $ | 30,936 |  
|                                                                             |  |                        |        |   |      |   |        |      | 
|Earnings per share:                                                          |  |                        |        |   |      |   |        |      |  |   |        |  
|Basic  as reported                                                          |  | $                      | 0.61   |   |      | $ | 0.87   |      |  | $ | 0.96   |  
|Add: Stock-based employee compensation expense recorded, net of
    tax      |  |                        | 0.01   |   |      |   | 0.01   |      |  |   | 0.01   |  
|Deduct: Fair value stock-based employee compensation expense,
    net of tax |  |                        | (0.04  | ) |      |   | (0.07  | )    |  |   | (0.12  | )
|                                                                             |  |                        |        |   |      |   |        |      | 
|Basic  pro forma                                                            |  | $                      | 0.58   |   |      | $ | 0.81   |      |  | $ | 0.85   |  
|                                                                             |  |                        |        |   |      |   |        |      | 
|Diluted  as reported                                                        |  | $                      | 0.58   |   |      | $ | 0.84   |      |  | $ | 0.93   |  
|Add: Stock-based employee compensation expense recorded, net of
    tax      |  |                        | 0.01   |   |      |   | 0.00   |      |  |   | 0.00   |  
|Deduct: Fair value stock-based employee compensation expense,
    net of tax |  |                        | (0.04  | ) |      |   | (0.06  | )    |  |   | (0.11  | )
|                                                                             |  |                        |        |   |      |   |        |      | 
|Diluted  pro forma                                                          |  | $                      | 0.55   |   |      | $ | 0.78   |      |  | $ | 0.82   |  
|                                                                             |  |                        |        |   |      |   |        |      | 



|                        |  |      |             |   |      |  |          |      |  |  |          |  
|----------------------- |  | ---- | ----------- | - | ---- |  | -------- | ---- |  |  | -------- | -
|                        |  | 2002 |             |   | 2003 |  |          | 2004 | 
|                        |  |      |             |   |      |  |          |      | 
|Risk free interest rate |  |      | 3.44%- 4.55 | % |      |  | 3.50     | %    |  |  | 3.44     | %
|Expected life           |  |      | 5 years     |   |      |  | 5  years |      |  |  | 5  years |  
|Expected volatility     |  |      | 0.715       |   |      |  | 1.558    |      |  |  | 0.603    |  
|Expected dividend yield |  |      |            |   |      |  |         |      |  |  |         |  

F-19



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##### Table of Contents



ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)






|   |                            
|-- | ---------------------------
|8. | Net Income Per Common Share



|                             |                                                                                                                           |                                                                   |   |        |       |  |   |        |       |  |   |        |       | 
|---------------------------- | ------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------- | - | ------ | ----- |  | - | ------ | ----- |  | - | ------ | ----- | 
|                             |                                                                                                                           | Year Ended December 31,                                           |  
|                             |                                                                                                                           |                                                                   |  
|                             |                                                                                                                           | 2002                                                              |   |        | 2003  |  |   | 2004   |      
|                             |                                                                                                                           |                                                                   |   |        |       |  |   |        |      
|                             |                                                                                                                           | (In thousands, except per share                                   |  
|                             |                                                                                                                           | amounts)                                                          |  
|Numerator                    |                                                                                                                           |                                                                   |   |        |       |  |   |        |       |  |   |       
|                             | Numerator for basic and diluted net income per share 
    net income available to common stockholders                    |                                                                   | $ | 21,140 |       |  | $ | 31,207 |       |  | $ | 34,996 |      
|                             |                                                                                                                           |                                                                   |   |        |       |  |   |        |      
|Denominator                  |                                                                                                                           |                                                                   |   |        |       |  |   |        |       |  |   |       
|                             | Denominator for basic net income per share  weighted
    average shares outstanding                                      |                                                                   |   | 34,782 |       |  |   | 35,945 |       |  |   | 36,445 |      
|                             | Effect of dilutive securities:                                                                                            |                                                                   |   |        |       |  |   |        |       |  |   |        |      
|                             |                                                                                                                           | Employee stock options and restricted stock awards                |   |        | 1,881 |  |   |        | 1,281 |  |   |        | 1,076 | 
|                             |                                                                                                                           | Series B Preferred Stock Warrants convertible to common
    stock |   |        | 28    |  |   |        | 30    |  |   |        | 30    | 
|                             |                                                                                                                           |                                                                   |   |        |       |  |   |        |      
|                             | Denominator for diluted net income per share 
    adjusted weighted average shares and assumed or actual
    conversions |                                                                   |   | 36,691 |       |  |   | 37,256 |       |  |   | 37,551 |      
|                             |                                                                                                                           |                                                                   |   |        |       |  |   |        |      
|Net income per common share: |                                                                                                                           |                                                                   |   |        |       |  |   |        |       |  |   |       
|                             | Basic                                                                                                                     |                                                                   | $ | 0.61   |       |  | $ | 0.87   |       |  | $ | 0.96   |      
|                             |                                                                                                                           |                                                                   |   |        |       |  |   |        |      
|                             | Diluted                                                                                                                   |                                                                   | $ | 0.58   |       |  | $ | 0.84   |       |  | $ | 0.93   |      
|                             |                                                                                                                           |                                                                   |   |        |       |  |   |        |      





|   |                                     
|-- | ------------------------------------
|9. | Allowance for Uncollectible Accounts



|                             |  |                |       |  |               |   |       |             |  |   |            |   |  |   |       | 
|---------------------------- |  | -------------- | ----- |  | ------------- | - | ----- | ----------- |  | - | ---------- | - |  | - | ----- | 
|                             |  | Balance at     |       |  | Provision for |   |       | Write-Offs, |  |   | Balance at |  
|                             |  | Beginning of   |       |  | Uncollectible |   |       | Net of      |  |   | End of     |  
|                             |  | Year           |       |  | Accounts      |   |       | Recoveries  |  |   | Year       |  
|                             |  |                |       |  |               |   |       |             |  |   |            |  
|                             |  | (In thousands) |      
|Year ended December 31, 2002 |  | $              | 3,394 |  |               | $ | 2,952 |             |  | $ | (3,384     | ) |  | $ | 2,962 | 
|Year ended December 31, 2003 |  | $              | 2,962 |  |               | $ | 4,015 |             |  | $ | (3,064     | ) |  | $ | 3,913 | 
|Year ended December 31, 2004 |  | $              | 3,913 |  |               | $ | 8,119 |             |  | $ | (8,170     | ) |  | $ | 3,862 | 

F-20



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##### Table of Contents



ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




|    |                       
|--- | ----------------------
|10. | Property and Equipment



|                                               |  |                |        |  |      |   |        | 
|---------------------------------------------- |  | -------------- | ------ |  | ---- | - | ------ | 
|                                               |  | December 31,   |       
|                                               |  |                |       
|                                               |  | 2003           |        |  | 2004 |  
|                                               |  |                |        |  |      |  
|                                               |  | (In thousands) |       
|Office furniture                               |  | $              | 2,504  |  |      | $ | 4,030  | 
|Computer hardware                              |  |                | 3,310  |  |      |   | 3,940  | 
|Computer software                              |  |                | 2,365  |  |      |   | 3,042  | 
|Equipment                                      |  |                | 802    |  |      |   | 968    | 
|Motor vehicles                                 |  |                | 97     |  |      |   | 97     | 
|Leasehold improvements                         |  |                | 2,691  |  |      |   | 3,776  | 
|                                               |  |                |        |  |      |  
|                                               |  |                | 11,769 |  |      |   | 15,853 | 
|Less accumulated depreciation and amortization |  |                | 5,334  |  |      |   | 8,363  | 
|                                               |  |                |        |  |      |  
|                                               |  | $              | 6,435  |  |      | $ | 7,490  | 
|                                               |  |                |        |  |      |  



|    |                       
|--- | ----------------------
|11. | Other Accrued Expenses



|                                               |  |                |       |  |      |   |        | 
|---------------------------------------------- |  | -------------- | ----- |  | ---- | - | ------ | 
|                                               |  | December 31,   |      
|                                               |  |                |      
|                                               |  | 2003           |       |  | 2004 |  
|                                               |  |                |       |  |      |  
|                                               |  | (In thousands) |      
|Medicare cap                                   |  | $              | 1,244 |  |      | $ | 2,915  | 
|Workers compensation                          |  |                | 853   |  |      |   | 2,274  | 
|Inpatient                                      |  |                | 1,383 |  |      |   | 1,685  | 
|Rent                                           |  |                | 683   |  |      |   | 1,211  | 
|Pharmacy                                       |  |                | 1,334 |  |      |   | 1,038  | 
|Medical supplies and durable medical equipment |  |                | 897   |  |      |   | 881    | 
|Property taxes                                 |  |                | 127   |  |      |   | 189    | 
|Medical director                               |  |                | 201   |  |      |   | 144    | 
|Professional fees                              |  |                | 75    |  |      |   | 121    | 
|Other                                          |  |                | 331   |  |      |   | 517    | 
|                                               |  |                |       |  |      |  
|                                               |  | $              | 7,128 |  |      | $ | 10,975 | 
|                                               |  |                |       |  |      |  



|    |                                  
|--- | ---------------------------------
|12. | Line of Credit and Long-Term Debt



|                                                                                        |  |                |    |  |      |   |    | 
|--------------------------------------------------------------------------------------- |  | -------------- | -- |  | ---- | - | -- | 
|                                                                                        |  | December 31,   |   
|                                                                                        |  |                |   
|                                                                                        |  | 2003           |    |  | 2004 |  
|                                                                                        |  |                |    |  |      |  
|                                                                                        |  | (In thousands) |   
|Leasehold improvement loans due between 2004 and 2008; interest
    at 6.50% and 10.37% |  |                | 17 |  |      |   | 14 | 
|Less current maturities                                                                 |  |                | 4  |  |      |   | 5  | 
|                                                                                        |  |                |    |  |      |  
|                                                                                        |  | $              | 13 |  |      | $ | 9  | 
|                                                                                        |  |                |    |  |      |  

F-21



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##### Table of Contents



ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)








|     |  |           |        | 
|---- |  | --------- | ------ | 
|     |  | Principal |       
|     |  | Repayment |       
|Year |  | Amount    |       
|     |  |           |       
|2005 |  | $         | 5,000  | 
|2006 |  |           | 5,000  | 
|2007 |  |           | 2,000  | 
|2008 |  |           | 2,000  | 
|     |  |           |       
|     |  | $         | 14,000 | 
|     |  |           |       

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##### Table of Contents



ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




|    |             
|--- | ------------
|13. | Income Taxes



|                          |                                    |                              |        |        |        |   |        |        |        |  
|------------------------- | ---------------------------------- | ---------------------------- | ------ | ------ | ------ | - | ------ | ------ | ------ | -
|                          |                                    | December 31,                 |       
|                          |                                    |                              |       
|                          |                                    | 2003                         |        |        | 2004   |  
|                          |                                    |                              |        |        |        |  
|                          |                                    | (In thousands)               |       
|Deferred tax assets:      |                                    |                              |        |        |        |   |        |       
|                          | Accounts receivable                |                              | $      | (221   | )      |   | $      | (966   | )     
|                          | Insurance                          |                              |        | (98    | )      |   |        | (606   | )     
|                          | Accrued compensation               |                              |        | 851    |        |   |        | 727    |       
|                          | Workers compensation              |                              |        | 638    |        |   |        | 875    |       
|                          |                                    |                              |        |        |        |  
|                          |                                    |                              | 1,170  |        |        |   | 30     |       
|Deferred tax liabilities: |                                    |                              |        |        |        |   |        |       
|                          | Accounts receivable                |                              |        |       |        |   |        |       |       
|                          | Amortizable and depreciable assets |                              |        | (3,871 | )      |   |        | (6,931 | )     
|                          | Other                              |                              |        | (415   | )      |   |        | (164   | )     
|                          |                                    |                              |        |        |        |  
|                          |                                    |                              | (4,286 | )      |        |   | (7,095 | )     
|                          |                                    |                              |        |        |        |  
|                          |                                    | Net deferred tax liabilities |        | $      | (3,116 | ) |        | $      | (7,065 | )
|                          |                                    |                              |        |        |        |  



|          |         |                         |        |        |      |   |        |        |  |   |        |        | 
|--------- | ------- | ----------------------- | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|          |         | Year Ended December 31, |       
|          |         |                         |       
|          |         | 2002                    |        |        | 2003 |   |        | 2004   | 
|          |         |                         |        |        |      |   |        |        | 
|          |         | (In thousands)          |       
|Current:  |         |                         |        |        |      |   |        |        |  |   |        |       
|          | Federal |                         | $      | 10,704 |      |   | $      | 14,914 |  |   | $      | 14,968 | 
|          | State   |                         |        | 2,086  |      |   |        | 1,836  |  |   |        | 2,416  | 
|          |         |                         |        |        |      |   |        |        | 
|          |         |                         | 12,790 |        |      |   | 16,750 |        |  |   | 17,384 |       
|Deferred: |         |                         |        |        |      |   |        |        |  |   |        |       
|          | Federal |                         |        | 298    |      |   |        | 2,629  |  |   |        | 3,357  | 
|          | State   |                         |        | 52     |      |   |        | 460    |  |   |        | 592    | 
|          |         |                         |        |        |      |   |        |        | 
|          |         | $                       | 13,140 |        |      | $ | 19,839 |        |  | $ | 21,333 |       
|          |         |                         |        |        |      |   |        |        | 



|                                         |  |                         |        |   |         |  |    |        |  |   |         |   |  |        |    |   |         |   |        |   |  |  |    |  
|---------------------------------------- |  | ----------------------- | ------ | - | ------- |  | -- | ------ |  | - | ------- | - |  | ------ | -- | - | ------- | - | ------ | - |  |  | -- | -
|                                         |  | Year Ended December 31, |       
|                                         |  |                         |       
|                                         |  | 2002                    |        |   | 2003    |  |    | 2004   | 
|                                         |  |                         |        |   |         |  |    |        | 
|                                         |  | Amount                  |        |   | Percent |  |    | Amount |  |   | Percent |   |  | Amount |    |   | Percent |  
|                                         |  |                         |        |   |         |  |    |        |  |   |         |   |  |        |    |   |         |  
|                                         |  | (Dollars in thousands)  |       
|Tax at federal statutory rate            |  | $                       | 11,998 |   |         |  | 35 | %      |  | $ | 17,866  |   |  |        | 35 | % |         | $ | 19,715 |   |  |  | 35 | %
|State income tax, net of federal benefit |  |                         | 1,064  |   |         |  | 3  |        |  |   | 1,452   |   |  |        | 3  |   |         |   | 1,955  |   |  |  | 3  |  
|Stock-based compensation charges         |  |                         | 142    |   |         |  | 1  |        |  |   | (94     | ) |  |        |   |   |         |   | 101    |   |  |  |   |  
|Non-deductible expenses and other        |  |                         | (64    | ) |         |  | (1 | )      |  |   | 615     |   |  |        | 1  |   |         |   | (438   | ) |  |  |   |  
|                                         |  |                         |        |   |         |  |    |        |  |   |         |   |  |        |    |   |         |  
|                                         |  | $                       | 13,140 |   |         |  | 38 | %      |  | $ | 19,839  |   |  |        | 39 | % |         | $ | 21,333 |   |  |  | 38 | %
|                                         |  |                         |        |   |         |  |    |        |  |   |         |   |  |        |    |   |         |  

F-23



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##### Table of Contents



ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




|    |                
|--- | ---------------
|14. | Retirement Plan





|    |                              
|--- | -----------------------------
|15. | Commitments and Contingencies



| |       
| | ------
| | Leases





|           |  |   |        | 
|---------- |  | - | ------ | 
|2005       |  | $ | 8,473  | 
|2006       |  |   | 7,341  | 
|2007       |  |   | 5,629  | 
|2008       |  |   | 3,935  | 
|2009       |  |   | 2,429  | 
|Thereafter |  |   | 5,365  | 
|           |  |   |       
|           |  | $ | 33,172 | 
|           |  |   |       



| |              
| | -------------
| | Contingencies



F-24



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##### Table of Contents



ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)










F-25



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##### Table of Contents



ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




|    |                  
|--- | -----------------
|16. | Segment Reporting



|                              |           |                         |         |        |      |   |         |        |   |   |         |        |  
|----------------------------- | --------- | ----------------------- | ------- | ------ | ---- | - | ------- | ------ | - | - | ------- | ------ | -
|                              |           | Year Ended December 31, |        
|                              |           |                         |        
|                              |           | 2002                    |         |        | 2003 |   |         | 2004   |  
|                              |           |                         |         |        |      |   |         |        |  
|                              |           | (In thousands)          |        
|Net patient service revenue:  |           |                         |         |        |      |   |         |        |   |   |         |       
|                              | Northeast |                         | $       | 11,992 |      |   | $       | 15,730 |   |   | $       | 16,885 |  
|                              | Southeast |                         |         | 8,862  |      |   |         | 12,426 |   |   |         | 16,888 |  
|                              | Central   |                         |         | 16,793 |      |   |         | 23,051 |   |   |         | 26,550 |  
|                              | South     |                         |         | 29,014 |      |   |         | 41,073 |   |   |         | 49,320 |  
|                              | Midwest   |                         |         | 20,376 |      |   |         | 25,345 |   |   |         | 34,111 |  
|                              | Texas     |                         |         | 41,626 |      |   |         | 61,193 |   |   |         | 90,340 |  
|                              | Mountain  |                         |         | 38,292 |      |   |         | 57,360 |   |   |         | 69,138 |  
|                              | West      |                         |         | 27,504 |      |   |         | 38,131 |   |   |         | 47,059 |  
|                              | Corporate |                         |         |       |      |   |         |       |   |   |         | (15    | )
|                              |           |                         |         |        |      |   |         |        |  
|                              |           | $                       | 194,459 |        |      | $ | 274,309 |        |   | $ | 350,276 |       
|                              |           |                         |         |        |      |   |         |        |  
|Direct hospice care expenses: |           |                         |         |        |      |   |         |        |   |   |         |       
|                              | Northeast |                         | $       | 5,669  |      |   | $       | 8,051  |   |   | $       | 9,795  |  
|                              | Southeast |                         |         | 4,522  |      |   |         | 6,349  |   |   |         | 8,906  |  
|                              | Central   |                         |         | 8,099  |      |   |         | 11,740 |   |   |         | 15,460 |  
|                              | South     |                         |         | 14,918 |      |   |         | 21,208 |   |   |         | 25,016 |  
|                              | Midwest   |                         |         | 9,477  |      |   |         | 13,175 |   |   |         | 16,953 |  
|                              | Texas     |                         |         | 23,912 |      |   |         | 34,932 |   |   |         | 50,727 |  
|                              | Mountain  |                         |         | 19,392 |      |   |         | 29,249 |   |   |         | 36,957 |  
|                              | West      |                         |         | 13,857 |      |   |         | 19,629 |   |   |         | 24,054 |  
|                              | Corporate |                         |         | 73     |      |   |         | (595   | ) |   |         | 23     |  
|                              |           |                         |         |        |      |   |         |        |  
|                              |           | $                       | 99,919  |        |      | $ | 143,738 |        |   | $ | 187,891 |       
|                              |           |                         |         |        |      |   |         |        |  

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##### Table of Contents



ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


|                               |           |                         |        |         |      |   |        |         |   |   |        |         |  
|------------------------------ | --------- | ----------------------- | ------ | ------- | ---- | - | ------ | ------- | - | - | ------ | ------- | -
|                               |           | Year Ended December 31, |       
|                               |           |                         |       
|                               |           | 2002                    |        |         | 2003 |   |        | 2004    |  
|                               |           |                         |        |         |      |   |        |         |  
|                               |           | (In thousands)          |       
|Income (loss) from operations: |           |                         |        |         |      |   |        |         |   |   |        |        
|                               | Northeast |                         | $      | 3,619   |      |   | $      | 3,984   |   |   | $      | 1,648   |  
|                               | Southeast |                         |        | 2,594   |      |   |        | 3,525   |   |   |        | 3,395   |  
|                               | Central   |                         |        | 5,163   |      |   |        | 6,327   |   |   |        | 4,616   |  
|                               | South     |                         |        | 8,462   |      |   |        | 11,678  |   |   |        | 13,756  |  
|                               | Midwest   |                         |        | 6,495   |      |   |        | 5,999   |   |   |        | 9,521   |  
|                               | Texas     |                         |        | 9,805   |      |   |        | 14,902  |   |   |        | 23,253  |  
|                               | Mountain  |                         |        | 10,886  |      |   |        | 18,227  |   |   |        | 18,861  |  
|                               | West      |                         |        | 7,352   |      |   |        | 10,845  |   |   |        | 13,522  |  
|                               | Corporate |                         |        | (20,421 | )    |   |        | (24,691 | ) |   |        | (32,484 | )
|                               |           |                         |        |         |      |   |        |         |  
|                               |           | $                       | 33,955 |         |      | $ | 50,796 |         |   | $ | 56,088 |        
|                               |           |                         |        |         |      |   |        |         |  

|                      |           |                         |       |     |      |  |       |       |  |  |       |       | 
|--------------------- | --------- | ----------------------- | ----- | --- | ---- |  | ----- | ----- |  |  | ----- | ----- | 
|                      |           | Year Ended December 31, |      
|                      |           |                         |      
|                      |           | 2002                    |       |     | 2003 |  |       | 2004  | 
|                      |           |                         |       |     |      |  |       |       | 
|Average Daily Census: |           |                         |       |     |      |  |       |       |  |  |       |      
|                      | Northeast |                         |       | 274 |      |  |       | 346   |  |  |       | 362   | 
|                      | Southeast |                         |       | 181 |      |  |       | 259   |  |  |       | 365   | 
|                      | Central   |                         |       | 431 |      |  |       | 566   |  |  |       | 657   | 
|                      | South     |                         |       | 749 |      |  |       | 1,019 |  |  |       | 1,188 | 
|                      | Midwest   |                         |       | 467 |      |  |       | 559   |  |  |       | 733   | 
|                      | Texas     |                         |       | 997 |      |  |       | 1,440 |  |  |       | 2,043 | 
|                      | Mountain  |                         |       | 745 |      |  |       | 1,094 |  |  |       | 1,379 | 
|                      | West      |                         |       | 563 |      |  |       | 736   |  |  |       | 877   | 
|                      |           |                         |       |     |      |  |       |       | 
|                      |           |                         | 4,407 |     |      |  | 6,019 |       |  |  | 7,604 |      
|                      |           |                         |       |     |      |  |       |       | 

|              |           |                         |         |        |      |   |         |        | 
|------------- | --------- | ----------------------- | ------- | ------ | ---- | - | ------- | ------ | 
|              |           | Year Ended December 31, |        
|              |           |                         |        
|              |           | 2003                    |         |        | 2004 |  
|              |           |                         |         |        |      |  
|              |           | (In thousands)          |        
|Total Assets: |           |                         |         |        |      |   |         |       
|              | Northeast |                         | $       | 5,825  |      |   | $       | 6,192  | 
|              | Southeast |                         |         | 4,458  |      |   |         | 4,773  | 
|              | Central   |                         |         | 9,319  |      |   |         | 14,480 | 
|              | South     |                         |         | 26,637 |      |   |         | 24,689 | 
|              | Midwest   |                         |         | 11,521 |      |   |         | 11,561 | 
|              | Texas     |                         |         | 28,896 |      |   |         | 52,088 | 
|              | Mountain  |                         |         | 34,834 |      |   |         | 33,971 | 
|              | West      |                         |         | 12,493 |      |   |         | 14,627 | 
|              | Corporate |                         |         | 46,819 |      |   |         | 41,710 | 
|              |           |                         |         |        |      |  
|              |           | $                       | 180,802 |        |      | $ | 204,091 |       
|              |           |                         |         |        |      |  

F-27



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##### Table of Contents



ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




|    |                                     
|--- | ------------------------------------
|17. | Fair Values of Financial Instruments





| |                                                         
| | --------------------------------------------------------
| | Cash and Cash Equivalents and Short-term
    Investments





| |                                                                     
| | --------------------------------------------------------------------
| | Line of Credit and Long-term Debt (Including Current
    Maturities)





|                                              |  |                |        |  |       |   |        |          |  |   |        |  |  |   |        | 
|--------------------------------------------- |  | -------------- | ------ |  | ----- | - | ------ | -------- |  | - | ------ |  |  | - | ------ | 
|                                              |  | 2003           |        |  | 2004  |  
|                                              |  |                |        |  |       |  
|                                              |  | Carrying       |        |  | Fair  |   |        | Carrying |  |   | Fair   | 
|                                              |  | Amount         |        |  | Value |   |        | Amount   |  |   | Value  | 
|                                              |  |                |        |  |       |   |        |          |  |   |        | 
|                                              |  | (In thousands) |       
|Cash and cash equivalents                     |  | $              | 38,284 |  |       | $ | 38,284 |          |  | $ | 24,851 |  |  | $ | 24,851 | 
|Short-term investments                        |  | $              | 690    |  |       | $ | 690    |          |  | $ | 8,407  |  |  | $ | 8,407  | 
|Long-term debt (including current maturities) |  | $              | 17     |  |       | $ | 17     |          |  | $ | 14     |  |  | $ | 14     | 



|    |                                          
|--- | -----------------------------------------
|18. | Unaudited Quarterly Financial Information



|                                              |  |                                          |        |  |        |   |        |       |  |   |        |  |  |   |        | 
|--------------------------------------------- |  | ---------------------------------------- | ------ |  | ------ | - | ------ | ----- |  | - | ------ |  |  | - | ------ | 
|                                              |  | 2004 Calendar Quarters                   |       
|                                              |  |                                          |       
|                                              |  | First                                    |        |  | Second |   |        | Third |  |   | Fourth | 
|                                              |  |                                          |        |  |        |   |        |       |  |   |        | 
|                                              |  | (In thousands, except per share amounts) |       
|Total net revenues                            |  | $                                        | 84,690 |  |        | $ | 86,818 |       |  | $ | 87,462 |  |  | $ | 91,306 | 
|Net income                                    |  | $                                        | 7,903  |  |        | $ | 9,310  |       |  | $ | 9,003  |  |  | $ | 8,780  | 
|Net income per share  Basic                  |  | $                                        | 0.22   |  |        | $ | 0.25   |       |  | $ | 0.25   |  |  | $ | 0.24   | 
|Net income per share  Diluted                |  | $                                        | 0.21   |  |        | $ | 0.25   |       |  | $ | 0.24   |  |  | $ | 0.24   | 
|Weighted average shares outstanding  Basic   |  |                                          | 36,559 |  |        |   | 36,608 |       |  |   | 36,653 |  |  |   | 35,963 | 
|Weighted average shares outstanding  Diluted |  |                                          | 37,882 |  |        |   | 37,586 |       |  |   | 37,586 |  |  |   | 36,637 | 

F-28



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##### Table of Contents



ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


|                                              |  |                                          |        |  |        |   |        |       |  |   |        |  |  |   |        | 
|--------------------------------------------- |  | ---------------------------------------- | ------ |  | ------ | - | ------ | ----- |  | - | ------ |  |  | - | ------ | 
|                                              |  | 2003 Calendar Quarters                   |       
|                                              |  |                                          |       
|                                              |  | First                                    |        |  | Second |   |        | Third |  |   | Fourth | 
|                                              |  |                                          |        |  |        |   |        |       |  |   |        | 
|                                              |  | (In thousands, except per share amounts) |       
|Total revenues                                |  | $                                        | 60,060 |  |        | $ | 64,896 |       |  | $ | 71,049 |  |  | $ | 78,304 | 
|Net income                                    |  | $                                        | 7,208  |  |        | $ | 7,567  |       |  | $ | 7,847  |  |  | $ | 8,585  | 
|Net income per share  Basic                  |  | $                                        | 0.20   |  |        | $ | 0.21   |       |  | $ | 0.22   |  |  | $ | 0.24   | 
|Net income per share  Diluted                |  | $                                        | 0.20   |  |        | $ | 0.20   |       |  | $ | 0.21   |  |  | $ | 0.23   | 
|Weighted average shares outstanding  Basic   |  |                                          | 35,423 |  |        |   | 35,643 |       |  |   | 36,063 |  |  |   | 36,392 | 
|Weighted average shares outstanding  Diluted |  |                                          | 36,869 |  |        |   | 37,194 |       |  |   | 37,791 |  |  |   | 37,990 | 

F-29



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##### Table of Contents



EXHIBIT INDEX


|        |    |      |  |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|------- | -- | ---- |  | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |      |  |            
|Number  |    |      |  | Description
|        |    |      |  |            
|        | 2  | .1   |  |            |  | Asset Purchase Agreement, dated as of January 9, 2004, by
    and among Odyssey HealthCare Operating A, LP, Crown of Texas
    Hospice, Amarillo, Ltd., Crown of Texas Hospice, Southeast,
    Ltd., and certain other individuals named therein (incorporated
    by reference to Exhibit 2.1 to the Companys Current
    Report on Form 8-K as filed with the Commission on
    January 15, 2004)                                                                                                                                             
|        | 3  | .1   |  |            |  | Fifth Amended and Restated Certificate of Incorporation
    (incorporated by reference to Exhibit 3.1 to the
    Companys Amendment No. 2 to Registration Statement on
    Form S-1 (Registration No. 333-51522) as filed with
    the Commission on September 13, 2001)                                                                                                                                                                                                                                                                        
|        | 3  | .2   |  |            |  | Second Amended and Restated Bylaws (incorporated by reference to
    Exhibit 3.2 to the Companys Registration Statement on
    Form S-1 (Registration No. 333-51522) as filed with
    the Commission on December 8, 2000)                                                                                                                                                                                                                                                                                                                      
|        | 4  | .1   |  |            |  | Form of Common Stock Certificate (incorporated by reference to
    Exhibit 4.1 to the Companys Amendment No. 1 to
    Registration Statement on Form S-1 (Registration
    No. 333-51522) as filed with the Commission on
    August 2, 2001)                                                                                                                                                                                                                                                                                                   
|        | 4  | .2   |  |            |  | Second Amended and Restated Registration Rights Agreement, dated
    July 1, 1998, by and among Odyssey HealthCare, Inc. and the
    security holders named therein (incorporated by reference to
    Exhibit 4.3 to the Companys Registration Statement on
    Form S-1 (Registration No. 333-51522) as filed with
    the Commission on December 8, 2000)                                                                                                                                                                                     
|        | 4  | .3   |  |            |  | Rights Agreement (the Rights Agreement) dated
    November 5, 2001, between Odyssey HealthCare, Inc. and
    Rights Agent (incorporated by reference to Exhibit 4.1 to
    the Companys Registration Statement on Form 8-A as filed
    with the Commission on December 8, 2001)                                                                                                                                                                                                                                                              
|        | 4  | .4   |  |            |  | Form of Certificate of Designation of Series A Junior
    Participating Preferred Stock (included as Exhibit A to the
    Rights Agreement (Exhibit 4.3 hereto))                                                                                                                                                                                                                                                                                                                                                                                 
|        | 10 | .1.1 |  |            |  | Credit Agreement, dated May 14, 2004, among Odyssey
    HealthCare Operating A, LP, Odyssey HealthCare
    Operating B, LP and Hospice of the Palm Coast, Inc. as
    borrowers, Odyssey HealthCare Inc. as a credit party and the
    other credit parties signatory thereto, General Electric Capital
    Corporation as agent and lender, and the other lenders signatory
    thereto from to time (incorporated by reference to
    Exhibit 2.1 to the Companys Current Report on
    Form 8-K as filed with the Commission on May 26, 2004)
|        | 10 | .1.2 |  |            |  | Consent and Amendment No. 1 to Credit Agreement dated
    November 1, 2004 (incorporated by reference to
    Exhibit 10.1 to the Companys Quarterly Report on Form
    10-Q as filed with the Commission on November 7, 2004                                                                                                                                                                                                                                                                                                                    
|        | 10 | .2   |  |            |  | Employment Agreement, dated as of January 1, 2004, by and
    between Odyssey HealthCare, Inc. and William F. Ward
    (incorporated by reference to Exhibit 10.2 to the
    Companys Quarterly Report on Form 10-Q as filed with
    the Commission on May 5, 2004)                                                                                                                                                                                                                                                                            
|        | 10 | .3   |  |            |  | Amended and Restated Employment Agreement, effective as of
    February 28, 2002, by and between Odyssey HealthCare, Inc.
    and Richard R. Burnham (incorporated by reference to
    Exhibit 10.2 to the Companys Annual Report on Form
    10-K as filed with the Commission on March 20, 2002)                                                                                                                                                                                                                                              
|        | 10 | .4   |  |            |  | Amended and Restated Employment Agreement, effective as of
    February 28, 2002, by and between Odyssey HealthCare, Inc.
    and David C. Gasmire (incorporated by reference to
    Exhibit 10.3 to the companys Annual Report on Form
    10-K as filed with the Commission on March 20, 2002)                                                                                                                                                                                                                                                
|        | 10 | .5   |  |            |  | Amended and Restated Employment Agreement, effective as of
    February 28, 2002, by and between Odyssey HealthCare, Inc.
    and Douglas B. Cannon (incorporated by reference to
    Exhibit 10.4 to the Companys Annual report on Form
    10-K as filed with the Commission on March 20, 2002)                                                                                                                                                                                                                                               
|        | 10 | .6.1 |  |            |  | Odyssey HealthCare, Inc. Stock Option Plan (the Stock
    Option Plan) (incorporated by reference to
    Exhibit 10.5 to the Companys Registration Statement
    on Form S-1 (Registration No. 333-51522) as filed with
    the Commission on December 8, 2000)                                                                                                                                                                                                                                                                               
|        | 10 | .6.2 |  |            |  | First Amendment to the Stock Option Plan, dated January 31,
    2001 (incorporated by reference to Exhibit 10.5.2 to the
    Companys Amendment No. 2 to Registration Statement on
    Form S-1 (Registration No. 333-51522) as filed with
    the Commission on September 13, 2001)                                                                                                                                                                                                                                                            



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##### Table of Contents



|        |    |       |  |   |             |                                                                                                                                                                                                                                                                                                                                             
|------- | -- | ----- |  | - | ----------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |       |  |   |            
|Number  |    |       |  |   | Description
|        |    |       |  |   |            
|        | 10 | .7    |  |  |             | 2001 Equity-Based Compensation Plan (incorporated by reference
    to Exhibit 10.6 to the Companys Amendment No. 2
    to Registration Statement on Form S-1 (Registration
    No. 333-51522) as filed with the Commission on
    September 13, 2001)                                                                                      
|        | 10 | .8.1  |  |  |             | Employee Stock Purchase Plan (incorporated by reference to
    Exhibit 10.7 to the Companys Amendment No. 2 to
    Registration Statement on Form S-1 (Registration
    No. 333-51522) as filed with the Commission on
    September 13, 2001)                                                                                             
|        | 10 | .8.2  |  |  |             | First Amendment to Employee Stock Purchase Plan, dated
    March 6, 2002 (incorporated by reference to
    Exhibit 10.7.2 to the Companys annual Report on Form
    10-K as filed with the Commission on March 20, 2002)                                                                                                                   
|        | 10 | .9    |  |  |             | Form of Indemnification Agreement between Odyssey HealthCare,
    Inc. and its directors and officers (incorporated by reference
    to Exhibit 10.8 to the Companys Registration
    Statement on Form S-1 (Registration No. 333-51522) as
    filed with the Commission on December 8, 2000)                                             
|        | 10 | .10.1 |  |  |             | Promissory Note and Warrant Purchase Agreement, dated
    May 22, 1998, by and among Odyssey HealthCare, Inc. and the
    other parties thereto (incorporated by reference to
    Exhibit 10.10.1 to the Companys Registration
    Statement on Form S-1 (Registration No. 333-51522) as
    filed with the Commission on December 8, 2000)
|        | 10 | .10.2 |  |  |             | Form of Warrant, dated May 22, 1998 (incorporated by
    reference to Exhibit 10.10.2 to the Companys
    Registration Statement on Form S-1 (Registration
    No. 333-51522) as filed with the Commission on
    December 8, 2000)                                                                                                        
|        | 10 | .10.3 |  |  |             | First Amendment to Warrants, dated December 6, 2000
    (incorporated by reference to Exhibit 10.10.3 to the
    Companys Amendment No. 1 to Registration Statement on
    Form S-1 (Registration No. 333-51522) as filed with
    the Commission on August 2, 2001)                                                                       
|        | 21 |       |  |  |             | Subsidiaries of Odyssey HealthCare, Inc.*                                                                                                                                                                                                                                                                                                   
|        | 23 | .1    |  |  |             | Consent of Ernst & Young LLP*                                                                                                                                                                                                                                                                                                               
|        | 31 | .1    |  |  |             | Certification required by Rule 13a-14(a), dated March 14,
    2005, by Richard R. Burnham, Chief Executive Officer*                                                                                                                                                                                                                         
|        | 31 | .2    |  |  |             | Certification required by Rule 13a-14(a), dated March 14,
    2005, by Douglas B. Cannon, Chief Financial Officer*                                                                                                                                                                                                                          
|        | 32 |       |  |  |             | Certification required by Rule 13a-14(b), dated March 14,
    2005, by Richard R. Burnham, Chief Executive Officer, and
    Douglas B. Cannon, Chief Financial Officer**                                                                                                                                                                    






|  |                
|- | ---------------
|* | Filed herewith.



|   |                   
|-- | ------------------
|** | Furnished herewith