<PAGE>

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                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

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

                                   FORM 10-K

<Table>
<C>          <S>
 (Mark One)
    [X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
             OF THE SECURITIES EXCHANGE ACT OF 1934



               FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
                                   OR




    [ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
             OF THE SECURITIES EXCHANGE ACT OF 1934
                    COMMISSION FILE NUMBER 000-33267
</Table>

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

                            ODYSSEY HEALTHCARE, INC.
             (Exact name of Registrant as specified in its charter)

<Table>
<S>                                            <C>
                   DELAWARE                                      43-1723043
       (State or other jurisdiction of              (IRS Employer Identification Number)
        incorporation or organization)

         717 N. HARWOOD, SUITE 1500,                               75201
                DALLAS, TEXAS                                    (Zip Code)
   (Address of principal executive offices)
</Table>

                                 (214) 922-9711
              (Registrant's telephone number, including area code)

          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

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

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

     At February 28, 2002, there were 15,356,356 shares of the Registrant's
Common Stock outstanding. As of the same date, 4,615,666 shares of the
Registrant's Common Stock were held by non-affiliates of the Registrant, having
an aggregate market value of $137.3 million (based on the last sale price of a
share of Common Stock on February 28, 2002 ($29.75), as reported on the Nasdaq
National Market).

                      DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Registrant's Proxy Statement to be furnished to
stockholders in connection with the Registrant's 2002 Annual Meeting of
Stockholders are incorporated by reference in Part III of this Form 10-K.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>

                                   FORM 10-K

                            ODYSSEY HEALTHCARE, INC.
                      FOR THE YEAR ENDED DECEMBER 31, 2001

                               TABLE OF CONTENTS

<Table>
<S>                                                           <C>
                              PART I
ITEM 1.  BUSINESS...........................................    2
ITEM 2.  PROPERTIES.........................................   32
ITEM 3.  LEGAL PROCEEDINGS..................................   33
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY
         HOLDERS............................................   33

                             PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
         STOCKHOLDER MATTERS................................   33
ITEM 6.  SELECTED CONSOLIDATED FINANCIAL AND OPERATING
         DATA...............................................   35
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
         CONDITION AND RESULTS OF OPERATIONS................   37
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
         MARKET RISK........................................   48
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........   48
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
         ACCOUNTING AND FINANCIAL DISCLOSURE................   48

                             PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE
          REGISTRANT........................................   48
ITEM 11.  EXECUTIVE COMPENSATION............................   48
ITEM 12.  SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND
          MANAGEMENT........................................   48
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....   48

                             PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
          REPORTS ON FORM 8-K...............................   49
</Table>
<PAGE>

                           FORWARD-LOOKING STATEMENTS

     This Annual Report on Form 10-K includes forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 (the "Securities Act")
and Section 21B of the Securities Exchange Act of 1934 (the "Exchange Act"). All
statements other than statements of historical facts contained in this report,
including statements regarding our future financial position, business strategy
and plans and objectives of management for future operations, are
forward-looking statements. The words "believe," "may," "will," "estimate,"
"continue," "anticipate," "intend," "expect" and similar expressions, as they
relate to us, are intended to identify forward-looking statements. We have based
these forward-looking statements largely on our current expectations and
projections about future events and financial trends that we believe may affect
our financial condition, results of operations, business strategy and financial
needs. These forward-looking statements are subject to a number of known and
unknown risks, uncertainties and assumptions described in "Item 1. Business" of
this Annual Report on Form 10-K, including, among other things:

     - the effect of reductions in amounts paid to us by the Medicare and
       Medicaid programs;

     - the effect of changes in healthcare licensure, regulation and payment
       methods;

     - our dependence on patient referrals;

     - our ability to develop new hospice locations in new markets or markets
       that we currently serve;

     - our ability to identify suitable hospices to acquire on favorable terms;

     - our ability to integrate effectively the operations of acquired hospices;

     - our ability to attract and retain key personnel and skilled employees;
       and

     - our ability to obtain additional capital to finance growth.

     In light of these risks, uncertainties and assumptions, the forward-looking
events and circumstances discussed in this Annual Report on Form 10-K may not
occur and actual results could differ materially from those anticipated or
implied in the forward-looking statements. Accordingly, readers are cautioned
not to place undue reliance on such forward-looking statements. We undertake no
obligation to update any such statements or publicly announce any updates or
revisions to any of the forward-looking statements contained herein to reflect
any change in our expectations with regard thereto or any change in events,
conditions, circumstances or assumptions underlying such statements.

                                     PART I

ITEM 1.  BUSINESS

OVERVIEW

     We are one of the largest providers of hospice care in the United States in
terms of both average daily census and number of locations. As a hospice care
provider, our goal is to improve the quality of life of terminally ill patients
and their families. We believe that our overriding focus on the delivery of
quality, responsive service differentiates us from other hospice care providers.

     We have grown rapidly since we opened our first hospice location in January
1996. Through a series of acquisitions and the development of new hospice
locations, we now have 43 hospice locations to serve patients and their families
in 21 states. During February, 2002, our average daily census was 3,669
patients, which represents a 43.6% increase over our average daily census in
February 2001 of 2,555 patients. Our net patient service revenue increased from
$1.0 million in 1996 to $130.2 million in 2001. Our net patient service revenue
of $130.2 million for 2001 represents an increase of 52.7% over our net patient
service revenue of $85.3 million for 2000. We intend to continue our growth
through internal growth, the development of new hospice locations and a
disciplined strategy of acquisitions.

                                        2
<PAGE>

HOSPICE CARE

     The first hospice in the United States opened in 1974. In 1982, Congress
enacted legislation creating the Medicare hospice program. Hospice care became a
covered benefit under the Medicare program in 1983, separate and distinct from
home health care and nursing home care. Unlike home health care, which focuses
on the curative treatment of patients, hospice care focuses primarily on
improving the quality of life of terminally ill patients and their families.

     A central concept of hospice care involves the creation of an
interdisciplinary team that provides comprehensive management of the healthcare
services and products needed by hospice patients and their families. An
interdisciplinary team is typically comprised of:

     - 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.

     We assign each of our hospice patients to an interdisciplinary team, which
assesses the clinical, psychosocial and spiritual needs of the patient and his
or her family, develops a plan of care, and delivers, monitors and coordinates
that plan with the goal of providing appropriate care for the patient and his or
her family. This interdisciplinary team approach offers significant benefits to
hospice patients, their families and payors including:

     - 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.

     In contrast, the treatment of terminally ill patients outside the hospice
setting often results in the patient receiving medical services from physicians,
hospitals, home health agencies, skilled nursing facilities, home infusion
therapy companies and/or pharmacies, with little or no effective coordination
among the providers. This lack of coordination often results in a lack of clear
accountability for clinical outcomes and the cost of services provided. In
addition, the provision of services in this uncoordinated fashion may cause
additional stress and dysfunction to patients and their families and result in
higher costs.

     Medicare-certified hospice providers must provide the following four
distinct levels of care:

     - Routine Home Care.  Routine home care is hospice care provided to
       patients and their families at home or in a long-term care facility where
       the patient resides. Routine home care involves regular visits by members
       of the interdisciplinary team. Routine home care is the largest component
       of services provided by hospice care providers.

     - General Inpatient Care.  General inpatient care is provided in instances
       where short-term inpatient care is required for pain control or symptom
       management that cannot feasibly be provided in other settings. These
       services are provided in either a free-standing inpatient facility, a
       hospital or a long-term care facility.

     - Continuous Home Care.  Continuous home care is provided during periods of
       crisis when a patient requires constant care, primarily nursing care, to
       achieve palliation or management of acute medical

                                        3
<PAGE>

       symptoms. To qualify for Medicare continuous home care payments, the care
       must be provided for a minimum of eight hours during a 24-hour day and
       nursing care must account for more than one-half of the care provided
       during the periods.

     - Respite Care.  Respite care is short-term inpatient care provided to a
       patient only when necessary to relieve the patient's family or other
       caregiver from the demands of providing care and support to hospice
       patients in their homes. These services are provided in inpatient
       facilities similar to those used to provide general inpatient care.

     For a complete description of our hospice services, see "-- Our Hospice
Services."

THE HOSPICE INDUSTRY AND MARKET OPPORTUNITY

     THE HOSPICE INDUSTRY

     The Medicare program, which is the largest payor for hospice services, pays
hospice providers fixed daily or hourly amounts based on the level of care
provided to hospice patients and their families. In addition to Medicare,
hospice care is covered by Medicaid in 43 states and the District of Columbia
and by most private insurance plans.

     According to the Centers for Medicare and Medicaid Services, formerly known
as the Health Care Financing Administration, Medicare payments for hospice
services increased from approximately $118 million in 1988 to approximately $2.9
billion in 2000. According to the United States General Accounting Office,
referred to in this prospectus as the "GAO," the number of Medicare
beneficiaries electing hospice care increased over 150% between 1992 and 1998.
We believe that these significant increases are due in large part to increasing
public awareness and acceptance of hospice care and the benefits it provides to
hospice patients and their families and payors.

     Despite the rapid growth of the Medicare hospice program, hospice services
represented only approximately one percent of total Medicare spending in 2000.
Although hospice services represent only a small portion of the total annual
Medicare budget, they generate significant savings for the Medicare program:

     - A 1995 industry study conducted by Lewin-VHI, Inc. for the National
       Hospice and Palliative Care Organization concluded that Medicare
       beneficiaries who elected hospice care incurred $3,192 less cost in the
       last month of life than those beneficiaries who did not elect hospice
       care.

     - The same 1995 industry study estimated that for every dollar Medicare
       spends on hospice care, Medicare saves $1.52 in Medicare expenditures.

     In the past decade, the number of hospice providers and beneficiaries in
the United States has increased significantly. According to the GAO, 1,208
Medicare-certified hospices operated in the United States in 1992, serving more
than 143,000 Medicare beneficiaries who elected hospice care. By 1998, the
number of Medicare-certified hospices increased to 2,196, serving nearly 360,000
Medicare beneficiaries. Approximately 63% of these hospices are not-for-profit
hospices.

     As the hospice industry has grown significantly, the types of medical
conditions of patients who have chosen hospice care have broadened. In 1992,
according to the GAO, 75.6% of the Medicare beneficiaries electing hospice care
had conditions related to cancer. By 1998, the percentage of Medicare
beneficiaries electing hospice care who had conditions related to cancer
declined to 57.4%. According to the GAO, from 1992 to 1998, hospice enrollment
by Medicare beneficiaries with cancer increased 90.5%, while enrollment by
beneficiaries with all other conditions increased 338.0%. Our total admissions
for 2001 increased 210.4% over our total admissions for 1998, with cancer
admissions and non-cancer admissions representing 35.4% and 64.6%, respectively,
of total growth. In 1998, our cancer admissions and non-cancer admissions
represented 45.0% and 55.0%, respectively, of all admissions. In 2001, cancer
admissions decreased to 38.5% of all admissions and non-cancer admissions
increased to 61.5% of all admissions. We believe that the increasing diversity
of the medical conditions of the hospice patient population represents a growing
acceptance and understanding of hospice care by the general public and
healthcare practitioners. We believe that the trend in

                                        4
<PAGE>

increasing diversity of the medical conditions of the hospice patient population
is continuing. We have not experienced any significant increase in our costs of
providing hospice services from this increasing diversity of medical conditions.
Common conditions of hospice patients industry-wide, and the approximate
percentage of Medicare beneficiaries electing hospice care in 1998 with those
conditions, are as follows:

<Table>
<Caption>
PRIMARY DIAGNOSIS                                              PERCENT
-----------------                                              -------
<S>                                                            <C>
Cancer......................................................     57.4%
Congestive heart failure....................................      6.8
Chronic obstructive pulmonary disease.......................      4.4
Stroke......................................................      3.7
Alzheimer's disease.........................................      3.3
Other (including dementia, ALS, renal disease and liver
  disease)..................................................     24.4
                                                                -----
     Total..................................................    100.0%
                                                                =====
</Table>

     The hospice industry has experienced declining average lengths of stay over
the past several years. Although more Medicare beneficiaries choose hospice
care, many are doing so closer to the time of death. According to the GAO, the
average hospice length of stay declined from 74 days in 1992 to 59 days in 1998.
Decisions about whether and when to use hospice care depend on physician
preferences and practices, patient choice and diagnosis, and public and
professional awareness of the Medicare hospice benefit. Along with these
factors, increases in regulatory scrutiny of compliance with Medicare program
eligibility requirements may have contributed to declines in the average length
of stay of hospice patients. In response to this decline, the Centers for
Medicare and Medicaid Services sent a letter to all Medicare-certified hospices
in September 2000 reaffirming that Medicare hospice beneficiaries are not
limited to six months of coverage and that there is no limit on how long a
Medicare beneficiary can receive hospice benefits and services, provided that
the beneficiary continues to meet the eligibility criteria under the Medicare
hospice program. See "-- Government Regulation -- Overview of Government
Payments."

     MARKET OPPORTUNITY

     We believe that a number of factors will drive growth in the hospice
industry. We believe that we are well positioned to take advantage of these
growth opportunities:

     - Aging Population in the United States.  Over 90.0% of our patients are at
       age 65 and over. According to the 2000 census conducted by the United
       States Census Bureau, an estimated 35.0 million persons, or approximately
       12.4% of the total United States population, were age 65 and over. The
       United States Census Bureau projects that the population of persons age
       65 and over will rise to an estimated 53.7 million persons, or
       approximately 16.5% of the total United States population, by the year
       2020.

     - Underserved Hospice Market.  In 1998, approximately 2.3 million persons
       died in the United States. Of these, approximately 1.7 million were age
       65 and over. According to the GAO, only approximately 19% of Medicare
       beneficiaries who died in 1998 received hospice care. We believe that a
       significant percentage of Medicare beneficiaries who do not receive
       hospice services would be appropriate for hospice care. As of December
       31, 2001, approximately one-half of our hospice patients resided in
       nursing homes and other long-term care facilities. According to an
       article published in the Journal of the American Medical Association,
       nearly half of all persons in the United States who live to age 65 will
       enter a nursing home before they die. Many nursing home patients have
       medical conditions that may make them appropriate for hospice care.
       However, only an estimated one percent of the nursing home population
       enrolls in hospice care. We believe that the relatively low level of
       hospice care penetration and the growing population of persons age 65 and
       over demonstrate that the market for hospice care services is
       substantially underserved.

     - Cost Savings of Hospice Care to the Medicare Program.  According to the
       Centers for Medicare and Medicaid Services, Medicare beneficiaries incur
       an estimated 28% of all Medicare costs in their last year of life, with
       an estimated 50% of that total incurred in the last two months of life.
       Studies have

                                        5
<PAGE>

       demonstrated that hospice care generates significant savings to the
       Medicare program. These Medicare savings are generated because patients
       are typically treated in their residence throughout their illness without
       the need for treatment in expensive acute care facilities. We believe
       that the cost savings related to hospice care, combined with the
       projected substantial increase in Medicare beneficiaries, further enhance
       the potential growth of the hospice industry.

     - Fragmented Hospice Market.  The hospice industry is highly fragmented,
       consisting of over 2,000 hospice locations throughout the country, most
       of which are small- and medium-sized providers. According to the GAO, in
       1999 approximately 56.7% and 37.2% of the Medicare-certified hospices
       were small- and medium-sized providers, respectively. In its study, the
       GAO included all Medicare-certified hospice providers with less than 100
       patient admissions in 1999 as small providers and included all
       Medicare-certified hospice providers with at least 100, but less than
       500, patient admissions in 1999 as medium-sized providers. We believe
       that the fragmentation of the hospice industry provides significant
       opportunities for consolidation in the hospice industry.

     - Increasing Public Awareness and Acceptance of Hospice Care.  Between 1992
       and 1998 the number of Medicare beneficiaries electing hospice care
       increased over 150% and the diversification of medical conditions of
       patients electing hospice care also increased significantly. Public and
       professional awareness and acceptance of hospice care significantly
       influences the use of hospice care. The need for greater public and
       professional understanding of options for end-of-life care, including
       hospice, has been highlighted in congressional hearings and other public
       forums and by medical societies, patient advocacy groups and the hospice
       industry. We believe that public awareness and acceptance of hospice care
       is increasing and is likely to continue to increase in the future.

OUR COMPETITIVE ADVANTAGES

     We have grown rapidly and achieved profitability as a result of the
following competitive advantages:

     WE ARE ONE OF THE LARGEST PROVIDERS OF HOSPICE CARE

     We are one of the largest providers of hospice care in the United States in
terms of both average daily census and number of locations. Our average daily
census for February, 2002 was 3,669 patients, and we currently have 43 hospice
locations to serve patients and their families in 21 states. We believe that our
size provides us with numerous operating advantages over small hospices, which
make up most of the hospice industry, including:

     - Professionally Trained Marketing Team.  We maintain a professionally
       trained team of over 115 employed marketing representatives who regularly
       educate new and existing patient referral sources about the benefits of
       hospice care and the services that we provide. Our team of marketing
       representatives has enabled us to develop a significant base of patient
       referral sources in our markets. Unlike most hospice care providers, we
       have the resources to maintain this dedicated marketing staff.

     - Active Cost Management and Centralized Corporate Services.  We actively
       manage and monitor several daily indicators to track performance across
       our multiple hospice locations, which enables us to develop best
       practices, improve efficiencies, manage costs and increase operating
       margins. A key aspect of our patient care cost management is our
       acuity-based management model, which optimizes patient care in a cost
       appropriate manner. In addition, we have centralized many of our
       administrative functions, thereby enabling us to spread administrative
       costs over our multiple hospice locations. We also believe that our size
       and local market presence allow us to negotiate more favorable purchasing
       arrangements with suppliers of drugs, durable medical equipment and
       disposable medical supplies. For example, we have a national contract for
       medical supplies that provides for greater discounts as purchasing volume
       increases. In addition, we have also successfully negotiated local
       purchasing contracts that provide for discounts and in some instances per
       diem arrangements, rather than the more typical fee-for-service
       arrangements.

                                        6
<PAGE>

     - Comprehensive Compliance and Continuous Quality Improvement Programs.  We
       have developed, implemented and maintain comprehensive compliance and
       continuous quality improvement programs as part of our provision of
       centralized corporate services to our 43 hospice locations. We believe
       this provides a competitive advantage because it facilitates the delivery
       of consistent and quality service to our patients and their families,
       allows us staffing and oversight for compliance purposes which
       facilitates ongoing growth, and ensures that our employees are well
       trained. For a more detailed discussion of our compliance and continuous
       quality improvement programs, see "-- Compliance and Continuous Quality
       Improvement Programs."

     WE HAVE A PROVEN TRACK RECORD IN GROWING OUR BUSINESS THROUGH A BALANCED
     GROWTH STRATEGY

     We have grown rapidly through internal growth, development of new hospice
locations and a focused strategy of acquisitions. Since we began our operations,
our net patient service revenue has increased from $1.0 million in 1996 to
$130.2 million in 2001. We reported net income of $3.1 million and $12.9 million
in 2000 and 2001, respectively.

     We have developed twelve new hospice locations, and we are currently
developing four additional locations. When developing a new hospice location, we
utilize our standardized operating model that includes daily cost management and
marketing programs to increase patient referrals. Applying our standardized
development approach, on average, we have reached breakeven, as measured by
EBITDA excluding corporate overhead allocations, at our new locations within
approximately ten months from the date we began development.

     We have acquired 34 hospice locations since beginning our operations in
1996. Six of these locations were combined with other locations and one location
was subsequently closed. We have successfully integrated our acquired hospice
locations into our operations by implementing our standardized operating model
that focuses on minimizing costs while growing patient census.

     We have successfully increased our patient referrals in substantially all
of the markets in which we operate by utilizing our marketing representatives to
establish and develop referral sources, as well as by providing responsive,
quality service.

     WE ARE A RESPONSIVE, COMPREHENSIVE PROVIDER OF QUALITY HOSPICE SERVICES

     We focus on the prompt and efficient delivery of services to our patients
and their families by adhering to our 14 service standards, which stress:

     - patient admissions within three hours after receiving a physician's order
       for hospice care;

     - daily contact with our patients and their families to assess their needs;

     - prompt, responsive and comprehensive service for our patients and their
       families at all times; and

     - satisfaction of individualized patient and family needs.

     We believe that our ability to consistently provide responsive, quality
service to our patients and their families has been a key factor in our ability
to increase patient referrals. We also believe that our commitment to provide
comprehensive hospice care is an important factor in increasing patient
referrals.

     WE HAVE A STANDARDIZED AND EFFICIENT OPERATING MODEL

     We operate in a fixed payment environment, with payments based on the level
of care that we provide to our patients and their families. Accordingly,
controlling our costs is essential to maintaining our profitability.

     We actively manage and monitor several day-to-day indicators, including
admissions, discharges by type of discharge, admission conversions and
appropriate utilization of services on a daily basis. We also track on a regular
basis various key measures of our costs per day of care, including costs of
labor, medication, durable medical equipment, medical supplies and patient care
mileage expense. These measurement tools assist us in

                                        7
<PAGE>

tracking the performance of our business and efficiently providing quality,
responsive care to our patients and their families. We believe that most hospice
providers do not have the resources to implement systems to effectively monitor
and manage the cost of providing hospice care.

     Each of our hospice locations is supported by our corporate office in
Dallas, Texas, which provides coordination, centralized resources and corporate
services to each of our hospice locations. The support services that our
corporate office provides allows us to reduce our administrative overhead and
should allow us to gain additional operating efficiencies as we grow.

     We can apply our standardized operating model at acquired and start-up
hospice locations quickly and efficiently. Our standardized operating model and
our centralized corporate services enable us to quickly control costs at our
hospice locations, while providing prompt, responsive and comprehensive quality
service to our patients and their families.

     WE HAVE AN EXPERIENCED MANAGEMENT TEAM

     Our ability to grow profitably, deliver quality services and implement our
operating model has been in large part the result of our senior management team.
Our six executive officers have over 40 years of combined experience in the
hospice industry. In addition, four of our executive officers, including our
chief executive officer and chief operating officer, have worked together
previously for another for-profit hospice provider. Our senior management team
operates as a cohesive, complementary group, reflecting extensive marketing
experience, as well as operating knowledge and understanding of the regulatory
environment in which we operate. We believe that our management team
differentiates us from small hospice providers, which generally lack the
resources to attract and maintain an experienced management team.

OUR BUSINESS STRATEGY

     Our goal is to become the leading provider of hospice care in the United
States. To achieve this goal, we have adopted the following strategies:

     ACTIVELY SEEK TO INCREASE PATIENT REFERRALS

     We actively seek to increase patient referrals at all locations by both
increasing patient referrals from existing referral sources and establishing new
referral sources. Our referrals originate from:

     - physicians;

     - long-term care facilities, including nursing homes, assisted living
       facilities and adult care centers;

     - hospitals;

     - managed care companies; and

     - insurance companies.

     In each of our markets, we have implemented a marketing plan designed to
address the specific needs of the patient referral sources in that market and to
promote the quality, responsive and comprehensive service we provide to our
patients and their families. We utilize three or more dedicated marketing
representatives in each of our markets and currently employ approximately 115
marketing representatives company-wide. Each marketing representative seeks to
develop relationships with patient referral sources located in the marketing
representative's territory by regularly calling on these referral sources and
educating groups of physicians, social workers, nurses and nursing home
personnel regarding hospice care generally and our services specifically. As
part of a marketing representative's ongoing contact with a patient referral
source, the marketing representative assists the referral source in identifying
patients and families who are appropriate for hospice care and provides periodic
information on a referred patient's status.

     At each of our locations, our general manager, patient care manager and
marketing representatives coordinate their efforts to obtain contracts with
nursing homes, managed care companies and insurance

                                        8
<PAGE>

companies. In addition, in many of the markets we serve, we conduct local public
relations campaigns that promote hospice care. We also actively participate in
community-related projects to increase public awareness of hospice care.

     We believe that our marketing efforts, combined with our quality,
responsive and comprehensive service, will enable us to continue to increase
patient referrals.

     EXPAND OUR BUSINESS IN NEW AND EXISTING MARKETS BY DEVELOPING NEW HOSPICE
     LOCATIONS

     We intend to expand our business by actively pursuing the development of
new hospice locations in new and existing markets throughout the United States.
In identifying markets in which to develop a new hospice, we consider the
following criteria, among others:

     - demographics evidencing a significant and growing population of persons
       age 65 and older;

     - the number of nursing home beds located in the market and the receptivity
       to hospice care by these nursing homes;

     - the level of competition in the market, with emphasis on the market share
       of existing hospice providers and their quality of care and reputation;
       and

     - the regulatory environment.

     After we identify a market in which to develop a new hospice location, we
utilize our standardized approach to the development of the new location,
beginning with the identification and recruitment of a general manager who is
familiar with the local market, the hiring of other key personnel and the
leasing of office space. We then begin training key personnel and preparing for
the initial Medicare survey. During this phase, we also hire three or more
marketing representatives to allow time for extensive training and the
development of relationships in the community. This approach has been successful
in increasing patient census at our new locations. We also begin establishing
contractual arrangements with local suppliers, nursing homes, assisted living
facilities, adult care centers and managed care companies. During the next phase
of the start-up model, which generally occurs during the third month of the
development of a new location, we seek to admit our first patients, at which
time we request the Medicare survey. After we complete the initial Medicare
survey and become certified, we aggressively expand marketing and admissions
activities and begin billing for our services.

     EXPAND OUR BUSINESS IN NEW AND EXISTING MARKETS BY SELECTIVELY ACQUIRING
     HOSPICES

     We intend to expand our business by actively pursuing strategic
acquisitions of hospices in new and existing markets throughout the United
States. We believe that significant opportunities exist for growth through
acquisitions of hospices. The hospice industry consists of over 2,000 hospice
locations, most of which are operated by small- and medium-sized providers. The
current healthcare environment presents these providers with several challenges,
such as changing regulatory requirements and increasing cost pressures. We
believe that the fragmented nature of the hospice industry, combined with these
other factors, provides us with significant opportunities to grow our business
through acquisitions. To take advantage of acquisition opportunities, we have
developed a focused acquisitions program that is overseen and coordinated by our
director of business development. We identify new and existing markets in which
to acquire a hospice by employing the same criteria utilized in identifying
markets for development.

     Before completing an acquisition, we actively seek to retain employees of
the acquired hospice by emphasizing our compensation and benefits programs, our
corporate philosophy and their future responsibilities with us. After we acquire
a hospice, we:

     - continue to seek to retain employees and maintain the existing patient
       referral base of the hospice;

     - improve operations by implementing our efficient operating model,
       appropriate expense controls and service standards at the hospice;

                                        9
<PAGE>

     - implement our marketing program to increase patient referrals by, among
       other things, hiring marketing representatives; and

     - conduct extensive marketing and clinical training, including customer
       service and quality assurance, at the hospice.

     ACTIVELY MANAGE PATIENT CARE COSTS BY APPLYING OUR ACUITY-BASED CASE
     MANAGEMENT MODEL

     Because we operate in a fixed payment environment, controlling costs is
critical to our profitability. We actively manage our patient care costs through
an acuity-based case management model. This model allows us to efficiently
allocate our resources, including staffing, to optimize patient care in a
cost-appropriate manner. We devised our acuity-based case management model to
provide the best care for patients and their families and to ensure that the
appropriate resources are utilized at the appropriate time. Our model focuses on
providing services to patients and their families at each phase along the care
continuum by tailoring our care to their individualized and changing needs. We
allocate our resources to patients and their families according to their
changing needs, as determined by our patients and their families and physicians
in consultation with an interdisciplinary team, rather than providing all
services at all times. Along a patient's care continuum, the patient and his or
her family may have greater psychosocial and spiritual needs initially and later
have greater medical needs.

OUR HOSPICE SERVICES

     When a patient is referred to us, one of our admissions coordinators
contacts the referral source to obtain the necessary patient information and
physician approvals. We then contact the patient and his or her family to set up
an appointment, at which time we explain our hospice program and the services we
provide in greater detail and obtain all necessary patient and family consents
and forms. In order to qualify for the Medicare hospice benefit, the patient's
treating physician and our medical director must certify that the patient has
less than six months to live if the disease runs its normal course in the best
judgment of the physician or medical director, and the patient must sign an
elective statement indicating that the patient understands the nature of the
illness and of hospice care. By signing the statement, the patient surrenders
any rights to other Medicare benefits related to the patient's terminal illness
while receiving hospice care. Once all of the paperwork is obtained, a full
nursing assessment is performed by one of our nurses, and we assign the patient
to an interdisciplinary team that assumes responsibility for developing and
delivering the patient's plan of care.

     In keeping with the hospice concept, we provide intensive treatment of the
physical and emotional pain and symptoms associated with terminally ill
patients. This palliative care focuses primarily on enhancing a patient's
comfort and overall quality of life and is generally provided in the patient's
home, a nursing home or a hospital. Our services are available 24 hours a day,
seven days a week and include, among others:

     - Nursing Care.  Registered nurses coordinate the care for every patient,
       provide direct patient care and check symptoms and medications.

     - Home Care Aide and Homemaker Services.  Home care aides provide personal
       care to patients, such as bathing, feeding and dressing. Homemaker
       services include light housekeeping and assistance with daily living.

     - Spiritual Support and Counseling.  Clergy and other counselors provide
       spiritual support and counseling to patients and their families.

     - Medical Social Services.  Social workers provide advice and counseling to
       patients and their families.

     - Physical, Occupational and Speech Therapy Services.  Professional
       therapists provide therapy to patients to assist them in remaining
       independent.

     - Medications, Equipment and Supplies.  We provide drugs, equipment and
       supplies to patients to treat physical pain and symptoms and to enable
       patients to receive hospice care where they reside.

                                        10
<PAGE>

     - Continuous Home Care.  During periods of crisis, we provide continuous
       home care to our patients and their families. This care is predominantly
       nursing care and is provided in increments of at least eight hours in a
       24-hour period. We provide continuous care when, because of the need for
       pain and symptom management, constant monitoring and support are
       required, but inpatient care is not yet needed.

     - Respite Care.  We provide or arrange for short-term care to patients in
       inpatient facilities to provide respite to family members caring for the
       hospice patient.

     - Hospice Inpatient Care.  We provide or arrange for short-term hospice
       inpatient care when adequate care is not feasible in the patient's home
       due to the patient's condition.

     - Volunteer Services and Support.  Trained volunteers assist with everyday
       tasks, such as shopping, and provide support and companionship, respite
       sitting, personal care services and certain professional services.

     - Financial Counseling.  We provide financial counseling to hospice
       patients and their families to assist them in handling the financial
       issues associated with a terminal illness.

     - Bereavement Care and Counseling.  We provide, at our cost, counseling
       services to family members for a period of up to one year following the
       patient's death.

     We provide most hospice services to our patients and their families where
they reside. We provide or arrange for inpatient and respite care and services
in one of three settings:

     - long-term care facilities and hospitals under contractual relationships;

     - free-standing inpatient facilities operated by us; or

     - inpatient units leased from hospitals and operated by us.

     We currently operate four free-standing inpatient hospice facilities. We
have two inpatient facilities in Phoenix, Arizona, and one each in Tucson,
Arizona, and Las Vegas, Nevada. The Phoenix and Tucson facilities each have
eleven beds. The Las Vegas facility has twenty-two beds.

     We also operate one inpatient hospice unit that we lease from DeKalb
Medical Center located in the Atlanta, Georgia metropolitan area. DeKalb Medical
Center provides us and our patients with dedicated space, housekeeping and
dietary services and other ancillary services. We provide the administrative and
clinical staff to operate the inpatient unit at DeKalb Medical Center.

     In markets in which we do not operate free-standing inpatient hospice
facilities or inpatient units at hospitals, we contract with hospitals and
long-term care facilities to provide inpatient hospice care on an as-needed
basis. Under these arrangements, our interdisciplinary team implements and
provides hospice services through the hospital's or long-term care facility's
employees. Our interdisciplinary team remains ultimately responsible for the
patient and the quality of the services provided to the patient. In addition, we
provide all hospice services that the hospital or long-term care facility does
not provide.

     We often provide hospice care to patients residing in nursing homes,
assisted living facilities and other similar long-term care facilities, treating
the facility essentially as the patient's home. We have entered into agreements
with these facilities to render hospice care to patients residing in these
facilities. During 2000 and 2001, approximately 47.9% and 47.0%, respectively,
of our days of care were attributable to patients who resided in long-term care
facilities.

MARKETING

     Our patient referral sources are physicians, hospitals, nursing homes,
assisted living facilities, adult care centers, managed care companies and
insurance companies. We have an employed staff of approximately 115 dedicated
marketing representatives who seek to develop relationships with patient
referral sources located in their respective markets by regularly calling on
these referral sources and educating groups of

                                        11
<PAGE>

physicians, social workers, nurses, and staff at nursing homes and other
long-term care facilities regarding hospice care generally and our services
specifically. As part of a marketing representative's ongoing contact with a
patient referral source, the marketing representative assists the referral
source in identifying patients and families who are appropriate for hospice care
and provides periodic information on referred patients' status. In addition to
our marketing representatives, our more than 1,300 caregivers, who routinely
have contact with our referral sources, regularly assist our referral sources in
identifying patients who are appropriate for hospice care.

     When we acquire a hospice, we hire additional marketing representatives as
needed. In each start-up location, we hire three or more marketing
representatives prior to the planned opening of the location to allow time for
extensive training and the development of relationships in the community.

     We have also developed tailored marketing plans to meet the specific needs
of each of our patient referral sources:

     - Physicians.  Our marketing representatives target a broad variety of
       physicians, including primary care physicians and specialists, who
       regularly see a high number of patients potentially eligible for hospice
       care. We have developed disease specific marketing materials that we
       provide to these physicians. We update each physician who refers a
       patient to us on the patient's condition on a regular basis according to
       each physician's instructions. We actively involve the local physician
       community in assisting us in creating the type of hospice programs that
       best meet its needs as well as those of patients and their families.

     - Hospitals.  Our marketing representatives call on physicians, patient
       discharge planners and social workers at hospitals. We utilize our
       disease specific marketing materials when marketing to the various
       hospital departments, including oncology and cardiology. We educate
       hospital staff on the benefits and cost advantages of hospice care over
       traditional inpatient care for those patients who are candidates for
       hospice care.

     - Long-Term Care Facilities.  We negotiate contracts with nursing homes and
       have arrangements with assisted living facilities and adult care centers
       to provide routine home care, inpatient care and respite care at these
       facilities. Our marketing representatives regularly call on nurses,
       social workers, directors of nursing, administrators and other staff
       members at these facilities who are in a position to identify or refer
       hospice patients. In addition, our marketing representatives conduct
       regular training programs for the staff of these facilities to educate
       them on hospice care and its benefits.

     - Managed Care Companies and Insurance Companies.  Our marketing
       representatives regularly call on case managers for managed care
       companies and insurance companies to remind them of the advantages of our
       hospice services. We regularly conduct training programs to educate case
       managers of the benefits of hospice care, including potential cost
       savings. Our general managers and marketing representatives coordinate
       their efforts to obtain contracts with managed care companies and
       insurance companies. Because managed care companies and insurance
       companies often have special needs, we strive to meet their requirements
       by providing them with individualized patient reports.

     In many of the markets that we serve, we also conduct local public
relations campaigns to promote hospice awareness.

CENTRALIZED OPERATIONS AND INFORMATION SYSTEMS

     CENTRALIZED OPERATIONS

     We have designed our organizational structure to achieve a high level of
patient and family satisfaction, provide quality care, permit our hospice
locations to continue to grow and develop, and minimize overhead.

                                        12
<PAGE>

Our corporate office in Dallas, Texas supports each of our hospice locations by
providing coordination, centralized resources and corporate services to each of
our hospice locations, including:

     - financial accounting systems, including billing, accounts receivable,
       accounts payable and payroll;

     - information and telecommunications systems;

     - clinical support services;

     - human resources administration;

     - regulatory compliance and quality assurance;

     - marketing and educational materials; and

     - training and development.

     We process all billing electronically at our corporate office. Our
corporate office bills Medicare monthly and generally receives payment
electronically within fourteen working days. Our corporate accounting personnel
prepare monthly operating statements for each of our locations and review these
statements for operating trends and compliance with budget forecasts. We prepare
annual operating budgets for each of our hospice locations. We also provide
centralized cash management and accounts payable and payroll processing.

     INFORMATION SYSTEMS

     We utilize a server-based system and laptop and desktop computers to
connect all of our locations to one another electronically. We utilize a
server-based billing system, which we installed in April 2000. Each local office
enters all initial patient registration information and updates to the billing
status through our intranet system. Our new billing system and the use of our
intranet system has resulted in greater accuracy and more rapid collections. We
continue to seek ways to implement relevant technology to enhance business
processes, thereby increasing efficiency. We have appointed a task force to
direct our compliance with proposed federal regulations regarding the privacy
and security of patient medical information. See "-- Government Regulation."

HOSPICE OFFICES AND INPATIENT FACILITIES

     Below is a listing of our current locations by city and average daily
census of each location.

<Table>
<Caption>
                                                                                                  AVERAGE
                                                                                                   DAILY
                                                        ACQUIRED/                                 CENSUS
LOCATION                             LOCATION TYPE      DEVELOPED   YEAR ACQUIRED/DEVELOPED   (FEBRUARY 2002)
--------                           ------------------   ---------   -----------------------   ---------------
<S>                                <C>                  <C>         <C>                       <C>
ALABAMA
  Birmingham.....................  Hospice Office       Developed         1998                      160
  Montgomery.....................  Hospice Office       Developed         2002                      N/A(1)
ARIZONA
  Phoenix (Mesa).................  Inpatient Facility   Acquired          1999                        8(2)
  Phoenix (Peoria)...............  Inpatient Facility   Acquired          1999                        7(2)
  Phoenix........................  Hospice Office       Acquired       1997/1999                    189(3)
  Tucson.........................  Inpatient Facility   Acquired          1999                        9(2)
  Tucson.........................  Hospice Office       Acquired          1999                      156
ARKANSAS
  Little Rock....................  Hospice Office       Acquired          2001                       79
</Table>

                                        13
<PAGE>

<Table>
<Caption>
                                                                                                  AVERAGE
                                                                                                   DAILY
                                                        ACQUIRED/                                 CENSUS
LOCATION                             LOCATION TYPE      DEVELOPED   YEAR ACQUIRED/DEVELOPED   (FEBRUARY 2002)
--------                           ------------------   ---------   -----------------------   ---------------
<S>                                <C>                  <C>         <C>                       <C>
CALIFORNIA
  Orange County (Garden Grove)...  Hospice Office       Acquired          1999                      131
  Los Angeles (Culver City)......  Hospice Office       Acquired          2000                       44
  Palm Springs...................  Hospice Office       Acquired          2001                       28(4)
  San Bernardino.................  Hospice Office       Acquired          1999                       94(4)
  San Diego......................  Hospice Office       Acquired          1999                      122
  San Jose.......................  Hospice Office       Acquired          1998                       54
COLORADO
  Denver.........................  Hospice Office       Acquired          1998                       58
  Colorado Springs...............  Hospice Office       Acquired          2001                       65
GEORGIA
  Atlanta........................  Hospice Office       Developed         1997                      107
  Atlanta (DeKalb)...............  Inpatient Facility   Developed         1999                        7(2)
ILLINOIS
  Chicago (Arlington Heights)....  Hospice Office       Developed         2000                       49
  Chicago South..................  Hospice Office       Developed         2001                      N/A(1)
INDIANA
  Indianapolis...................  Hospice Office       Developed         1996                       99
LOUISIANA
  New Orleans (Metairie).........  Hospice Office       Acquired          1998                      173
MICHIGAN
  Detroit (Novi).................  Hospice Office       Acquired          1998                      138
MISSOURI/KANSAS
  Kansas City....................  Hospice Office       Acquired          1998                      208
NEVADA
  Las Vegas......................  Hospice Office       Acquired          1997                      152
  Las Vegas......................  Inpatient Facility   Developed         1997                       23(2)
NEW JERSEY
  Edison.........................  Hospice Office       Developed         1997                       59
OKLAHOMA
  Oklahoma City..................  Hospice Office       Acquired          1998                      143
  Tulsa..........................  Hospice Office       Developed         2001                      N/A(1)
PENNSYLVANIA
  Pittsburgh.....................  Hospice Office       Developed      1996/2001                    174(5)
SOUTH CAROLINA
  Charleston.....................  Hospice Office       Acquired          2001                       36
TENNESSEE
  Nashville......................  Hospice Office       Acquired          1998                      119
</Table>

                                        14
<PAGE>

<Table>
<Caption>
                                                                                                  AVERAGE
                                                                                                   DAILY
                                                        ACQUIRED/                                 CENSUS
LOCATION                             LOCATION TYPE      DEVELOPED   YEAR ACQUIRED/DEVELOPED   (FEBRUARY 2002)
--------                           ------------------   ---------   -----------------------   ---------------
<S>                                <C>                  <C>         <C>                       <C>
TEXAS
  Austin.........................  Hospice Office       Developed         2001                      N/A(1)
  Beaumont.......................  Hospice Office       Acquired          2001                       74
  Dallas.........................  Hospice Office       Acquired          1997                      222
  El Paso........................  Hospice Office       Developed         2000                       43
  Fort Worth.....................  Hospice Office       Developed         1997                      115
  Houston (Baytown)..............  Hospice Office       Acquired          1998                       64
  Houston (Bellaire).............  Hospice Office       Acquired          1998                       74
  Odessa.........................  Hospice Office       Acquired          2001                      116
  San Antonio....................  Hospice Office       Developed         1997                      122
VIRGINIA
  Norfolk........................  Hospice Office       Developed         2001                        3
WISCONSIN
  Milwaukee......................  Hospice Office       Acquired          1998                      145
</Table>

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

(1) We are currently developing a new hospice location in each of Montgomery,
    Alabama, Chicago, Illinois, Tulsa, Oklahoma and Austin, Texas. We anticipate
    admitting our first hospice patients at these new locations in the second
    and third quarters of 2002.

(2) Each of our inpatient facilities has 11 beds, except for our facility in Las
    Vegas, Nevada, which has 22 beds.

(3) We transferred the operations of our Phoenix, Arizona hospice acquired in
    1999 to our Phoenix, Arizona hospice acquired in 1997.

(4) Operations of our Riverside, California hospice, which we acquired in 1999,
    were relocated to our San Bernardino, California hospice location, which we
    acquired in 2001. In connection with the relocation of our Riverside
    hospice, we transferred 37 hospice patients from our San Bernardino hospice
    to our Riverside hospice. In 2001, we also relocated the remaining
    operations of our San Bernardino hospice to a new location in Palm Springs,
    California.

(5) We transferred the operations of our Pittsburgh, Pennsylvania hospice
    acquired on June 1, 2001 to our Pittsburgh, Pennsylvania hospice opened in
    1996.

GOVERNMENT REGULATION

     GENERAL

     The healthcare industry and our hospices are subject to extensive federal
and state regulation. Our hospice agencies are licensed as required under state
law as either hospices or home health agencies, or both, depending on the
regulatory requirements of each particular state. In addition, our hospices are
required to meet participation conditions to be eligible to receive payments
under the Medicare and Medicaid programs. All of our hospice locations, other
than our locations currently in development, are certified for participation in
the Medicare program and are also eligible to receive payments as hospices in
the Medicaid programs of the states in which we operate that offer a Medicaid
hospice benefit. Our hospices are subject to periodic survey by governmental
authorities to assure compliance with both state licensing and certification
requirements.

     Medicare is a federally funded and administered health insurance program,
primarily for individuals entitled to social security benefits who are 65 years
of age or older or who are disabled. Medicaid is a health insurance program
jointly funded by state and federal governments that provides medical assistance
to qualifying low income persons. Each state Medicaid program has the option to
provide payment for hospice services. Nineteen of the 21 states in which we
currently operate cover Medicaid hospice services; however, we cannot assure you
that these states will continue to cover hospice services or that states into
which we expand our operations may cover or continue to cover hospice services.
We have not been adversely affected by the

                                        15
<PAGE>

absence of a Medicaid benefit in the two states in which we currently operate
that do not have a Medicaid benefit.

     Medicare Conditions of Participation.  The Medicare program requires each
of our hospice locations to satisfy prescribed conditions to be eligible to
receive payments, including the following:

     - Governing Body.  Each hospice must have a governing body that is
       responsible for the overall operation of the hospice and for ensuring
       that all services are provided 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.

     - Medical Director.  Each hospice must have a medical director who is
       responsible for the medical component of patient care.

     - Professional Management.  A hospice may arrange for the provision of
       non-core services by another individual or entity. The hospice must,
       however, retain professional management responsibility for arranged
       services and ensure that these services are furnished safely and
       effectively by qualified personnel in accordance with the patient's plan
       of care.

     - Plan of Care.  The patient's attending physician, the medical director
       and the interdisciplinary team must establish a written plan of care
       prior to providing care to the patient.

     - Continuation of Care.  A hospice cannot discontinue or reduce care
       provided to a Medicare beneficiary because of the beneficiary's inability
       to pay for that care.

     - Informed Consent.  The hospice must obtain from either the hospice
       patient or a family member an informed consent form that specifies the
       type of care and services that may be provided as hospice care during the
       illness.

     - In-Service Training.  A hospice must provide an ongoing training program
       for its employees.

     - Quality Assurance.  A hospice must provide an ongoing, comprehensive,
       integrated self-assessment of the quality and appropriateness of care.
       See "-- Compliance and Quality Improvement Programs."

     - Interdisciplinary Team.  A hospice must have an interdisciplinary team
       that establishes policies and supervises the provision of hospice care
       and services. The team must include at least a physician, registered
       nurse, social worker and pastoral or other counselor. All of the members
       of the team must be employees of the hospice with the exception of the
       physician, who may be under contract with the hospice.

     - Volunteers.  Hospices must recruit and train volunteers to provide care
       and services under the supervision of hospice employees. These volunteers
       must provide administrative or direct patient care in an amount that, at
       a minimum, equals 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 state laws and
       regulations.

     - Central Clinical Records.  Hospices must maintain centralized clinical
       records for each hospice patient. The records must meet standards
       relating to content and protection.

     - Furnishing Core Services.  Substantially all "core services" must be
       provided directly by hospice employees. "Core services" include nursing,
       medical, social, physician and counseling services. The hospice may use
       contracted staff to perform core services during periods of peak patient
       loads or under extraordinary circumstances, but the hospice must maintain
       professional, financial and administrative responsibility for the
       services.

     In addition to the above conditions of participation, Medicare regulations
also establish additional conditions of participation related to the provision
of other hospice care services and supplies, including physical therapy,
occupational therapy, speech therapy, home health aide and homemaker services,
medical

                                        16
<PAGE>

supplies, short-term inpatient care and direct inpatient care. Each of our
hospices, other than our locations currently in development, is certified for
participation in the Medicare program and is eligible to receive payment as a
hospice in the Medicaid hospice program, if any, of the state in which it
operates. We anticipate that our hospices under development will be Medicare
certified and Medicaid eligible during the second and third quarters of 2002. We
believe that we are in material compliance with all conditions of participation
for the Medicare programs and all eligibility requirements for the Medicaid
program.

     Surveys and Audits.  Each of our hospices is subject to periodic survey by
federal and state governmental authorities to assure compliance with both state
licensing and certification requirements. From time to time, we receive survey
reports containing statements of deficiencies for alleged failure to comply with
the various regulatory requirements. These survey reports and statements of
deficiencies are common in the healthcare industry. We review these reports,
prepare responses, and take appropriate corrective action, if required. The
reviewing agency is generally authorized to take various adverse actions against
a hospice found to be in non-compliance, including the imposition of fines or
suspension or revocation of a hospice's license. If this adverse action were
taken against any of our hospices, this action could materially adversely affect
that hospice's ability to continue to operate and to participate in the Medicare
and Medicaid programs. This could materially adversely affect our net patient
service revenue and profitability. None of our hospices has been suspended at
any time from participation in the Medicare or Medicaid programs or had its
state licensure suspended or revoked. We believe that each of our hospices is in
material compliance with these licensing and certification requirements.

     Certificate of Need Laws and Other Restrictions.  Many states have enacted
certificate of need laws that require state approval prior to opening new
healthcare facilities or expanding services at existing healthcare facilities.
Approval under the certificate of need laws is generally conditioned on the
showing of a demonstrable need for services in the community. Certificate of
need laws in some states apply to hospice services. Many states with certificate
of need requirements permit the transfer of a certificate of need from an
existing provider to a new provider. Our hospices in Tennessee and Arkansas are
our only hospices located in states that have a certificate of need law in
effect; however, in the future we may seek to develop or acquire hospices in
other states that may have certificate of need laws. While several states have
abolished certificate of need laws, and other states do not apply them to
hospice services, these laws could affect our ability to expand services at our
existing hospices or to make acquisitions or develop hospices in new or existing
geographic markets.

     In addition, a few states have additional laws that restrict the
development and expansion of hospices. For example, Florida does not permit the
operation of a hospice by a for-profit corporation, except in limited
circumstances. Under Florida law, a for-profit hospice incorporated on or before
July 1, 1978 is exempt from the restriction and may continue to operate as a
for-profit hospice. In addition, under Florida law an exempt hospice may
transfer its operations and license to another for-profit entity. Under New York
law, a hospice cannot be owned by a corporation that has another corporation as
a stockholder. These additional state restrictions could affect our ability to
expand into these states and other jurisdictions with similar restrictions.

     OVERVIEW OF GOVERNMENT PAYMENTS

     Substantially all of our net patient service revenue is attributable to
payments received from the Medicare and Medicaid programs. 95.6% and 97.2% of
our net patient service revenue for the years ended December 31, 2000 and 2001,
respectively, were attributable to Medicare and Medicaid payments. Payment from
Medicare and Medicaid is affected by budgetary pressures and is subject to
changes in legislation and regulation. Our revenues and profitability, similar
to other healthcare companies, are subject to the effect of such legislative or
regulatory changes and to possible reductions in coverage or payment rates by
private third-party payors.

     As with most government programs, the Medicare and Medicaid programs are
subject to statutory and regulatory changes, possible retroactive and
prospective rate adjustments, administrative rulings, freezes and funding
reductions, all of which may adversely affect the level of program payments to
us for our services. Reductions or changes in Medicare or Medicaid funding could
significantly affect our results of operations. We cannot predict at this time
whether any additional healthcare reform initiatives will be implemented or

                                        17
<PAGE>

whether there will be other changes in the administration of governmental
healthcare programs or interpretations of governmental policies or other changes
affecting the healthcare system.

     Medicare.  Medicare pays us based on a prospective payment system under
which we receive one of several predetermined rates for each day in which the
Medicare beneficiary is under our care. As discussed below, these rates are
subject to annual adjustments for inflation and are also adjusted in some
circumstances based on geographic location. The rate we receive from Medicare
for a day of hospice care varies depending on which of the following four levels
of care is being furnished to the beneficiary:

     - Routine Home Care.  We currently receive between $102.50 and $144.83 per
       day for routine home care, depending on the location of service. We are
       paid the routine home care rate for each day a patient is under our care
       and not receiving one of the other categories of hospice care. This rate
       is not adjusted for the volume or intensity of routine home care services
       provided on a given day. This rate is also paid when a patient is
       receiving hospital care for a condition unrelated to the terminal
       condition. Routine home care services accounted for 83.8% and 88.7% of
       our gross patient service revenue for 2000 and 2001, respectively.

     - General Inpatient Care.  We currently receive between $458.37 and $633.81
       per day for general inpatient care, depending on the location of the
       inpatient facility. General inpatient care services accounted for 12.2%
       and 9.0% of our gross patient service revenue for 2000 and 2001,
       respectively.

     - Continuous Home Care.  We currently receive between $598.32 and $845.28
       per day for continuous home care, depending on the location of the
       service. This daily continuous home care rate is divided by 24 in order
       to arrive at an hourly rate. The hourly rate is paid for every hour that
       continuous home care is furnished, up to 24 hours in a single day. A
       minimum of eight hours must be provided in a single day to qualify for
       this rate. Continuous home care services accounted for 2.9% and 1.1% of
       our gross patient service revenue for 2000 and 2001, respectively.

     - Respite Care.  We currently receive between $107.76 and $142.27 per day
       for respite care, depending on the location of the inpatient facility.
       Respite care is provided when the family or caregiver of a patient
       requires a temporary reprieve for certain reasons. We can receive payment
       for respite care provided to a given patient for up to five consecutive
       days. Our payment for any additional days of respite care provided to the
       patient is limited to the routine home care rate. Respite care services
       accounted for 0.2% of our gross patient service revenue for both 2000 and
       2001.

     The Medicare program has entered into contracts with managed care companies
to provide a managed care benefit to electing Medicare beneficiaries. These
managed care programs are often referred to as Medicare HMO programs or Medicare
risk contracts. We provide hospice care to many Medicare beneficiaries who
participate in Medicare HMO programs. Under Medicare HMO programs, Medicare pays
the hospice directly. This direct payment reduces the per member per month
payment otherwise receivable by the managed care company. As a result, our
payments for services provided to Medicare beneficiaries enrolled in Medicare
HMO programs are processed in the same way and at the same rates as those of
other Medicare beneficiaries.

     Medicare limits the amount of payment we may receive for inpatient care
services. Under the so-called "80-20" rule, if the number of inpatient care days
furnished by us to Medicare beneficiaries exceeds 20% of the total days of
hospice care furnished by us to Medicare beneficiaries, Medicare payments to us
for inpatient care days exceeding the inpatient cap will be reduced to the
routine home care rate. This determination is made annually based on the twelve
month period beginning on November 1st of each year. This limit is computed on
an agency-by-agency basis. None of our hospices has exceeded the cap on
inpatient care services. However, we cannot assure you that one or more of our
hospices will not exceed the inpatient cap in the future.

     Overall payments made by Medicare to us are also subject to a cap amount
calculated by the Medicare fiscal intermediary at the end of the hospice cap
period. The hospice cap period runs from November 1st of each year through
October 31st of the following year. Total Medicare payments to us during this
period are

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<PAGE>

compared to the cap amount for this period. Payments in excess of the cap amount
must be returned by us to Medicare. The cap amount is calculated by multiplying
the number of beneficiaries electing hospice care during the period by a
statutory amount that is indexed for inflation. The per-beneficiary cap amount
is $16,651 for the twelve month period ending October 31, 2001. The hospice cap
amount is computed on a hospice-by-hospice basis. None of our hospices has
exceeded the cap amount in past years. However, we cannot assure you that one or
more of our hospices will not exceed the cap amount in the future.

     Direct patient care physician services delivered by physicians employed by
or contracted with us are billed separately by us to the Medicare intermediary
and paid at the lesser of the actual charge or 100% of the Medicare allowable
charge for these services. This payment is in addition to the daily rates we
receive for hospice care. Payment for our contractual and employed physicians'
administrative and general supervisory activities are included in the daily
payment rates discussed above. Payments for a patient's attending physician's
professional services, other than services furnished by physicians employed by
or contracted with us, are not paid to us, but rather are paid directly to the
attending physician by the Medicare carrier based on the Medicare physician fee
schedule. Physician services represented 0.5% of our net patient service revenue
for both 2000 and 2001.

     Medicare fiscal intermediaries periodically conduct focused medical reviews
and other audits on our claims. Focused medical reviews and other audits of our
hospices could result in material recoupments or denials of claims. Further,
Medicare payments for hospice services may not continue to remain at their
current levels or keep pace with the costs of providing hospice services.

     The Balanced Budget Act of 1997 made changes in Medicare coverage of and
payment for hospice care services. The law reduced the amount of anticipated
increases in Medicare payments for hospice services by setting the payment rate
increases at the "market basket" inflation rate minus one percentage point for
each of the Medicare fiscal years 1998 through 2002. The Medicare fiscal year
begins on October 1 of each year and runs through September 30 of the following
year. In addition, the Balanced Budget Act of 1997 requires us to file annual
cost reports with the Department of Health and Human Services on each of our
hospices for informational purposes. The Balanced Budget Act of 1997 also
requires us to submit claims on the basis of the location where we actually
furnish the hospice services. The purpose of this requirement is to adjust
payment rates for regional differences in wage costs.

     Congress enacted the Balanced Budget Refinement Act of 1999 to alleviate
some of the payment reductions resulting from the Balanced Budget Act of 1997.
One of the changes provided for in the Balanced Budget Refinement Act of 1999 is
to increase the Medicare payment for hospice services by 0.5% for Medicare
fiscal year 2001 and 0.75% for Medicare fiscal year 2002.

     Effective April 1, 2001, the Medicare, Medicaid and SCHIP Benefits
Improvement and Protection Act of 2000 increased the base Medicare daily payment
rates for hospice care by five percent over the base rates then in effect. This
increase was in addition to the increases previously provided by the Balanced
Budget Refinement Act of 1999.

     On October 1, 2001, the base Medicare payment rates for hospice care
increased by approximately 3.2% over the base rates previously in effect. The
new Medicare daily rates for October 1, 2001 are further adjusted by the hospice
wage index.

     Medicare Six-Month Eligibility Rule.  In order for a Medicare beneficiary
to qualify for the Medicare hospice benefit, two physicians must certify that
the beneficiary has less than six months to live, assuming the disease runs it
normal course in the best judgment of the physician or medical director. In
addition, the Medicare beneficiary must affirmatively elect hospice care and
waive any rights to other Medicare benefits related to the beneficiary's
terminal illness. Every six months, a physician must recertify that the Medicare
beneficiary's life expectancy is six months or less in order for the beneficiary
to continue to qualify for and to receive the Medicare hospice benefit. The
Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act of 2000
provides that the physician certification of a Medicare beneficiary's
eligibility for the Medicare hospice benefit is based on the physician's
clinical judgment regarding the normal course of the individual's illness. There
is no limit on the number of periods that a Medicare beneficiary may be
recertified.

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<PAGE>

A Medicare beneficiary may revoke his or her election at anytime and resume
receiving regular Medicare benefits.

     Increased regulatory scrutiny of compliance with the Medicare six-month
eligibility rule has impacted the hospice industry. The Centers for Medicare and
Medicaid Services, however, have recently reaffirmed that Medicare hospice
beneficiaries are not limited to six months of coverage and that there is no
limit on how long a Medicare beneficiary can continue to receive hospice
benefits and services, provided that the beneficiary continues to meet the
eligibility criteria under the Medicare hospice program. In addition, the
Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act of 2000
requires the Secretary of Health and Human Services to conduct a study to
examine the appropriateness of the current physician certification requirement
required before a Medicare beneficiary is eligible to receive the Medicare
hospice benefit.

     Medicaid.  State Medicaid programs are another source of net patient
service revenue. Medicaid is a state-administered program financed by state
funds and matching federal funds to provide medical assistance to the indigent
and certain other eligible persons. In 1986, hospice services became an optional
state Medicaid benefit. For those states that elect to provide a hospice
benefit, the Medicaid program is required to pay us rates that are at least
equal to the hospice rates paid to us by the Medicare program. For our patients
receiving nursing home care under a state Medicaid program who elect hospice
care under Medicare or Medicaid, the state must pay us, in addition to the
applicable Medicare or Medicaid hospice per diem rate, an amount equal to at
least 95% of the Medicaid per diem nursing home rate for "room and board"
furnished to the patient by the nursing home. We contract with various nursing
homes for the nursing homes' provision of certain "room and board" services that
the nursing homes would otherwise provide Medicaid nursing home patients. We
bill and collect from the applicable state Medicaid program an amount equal to
at least 95% of the amount that would otherwise have been paid directly to the
nursing home under the state's Medicaid plan. Under our standard nursing home
contracts, we pay the nursing home for these "room and board" services at the
Medicaid per diem nursing home rate. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Expenses."

     OTHER HEALTHCARE REGULATIONS

     Fraud and Abuse Laws.  Provisions of the Social Security Act, commonly
referred to as the fraud and abuse provisions, prohibit the filing of false or
fraudulent claims with Medicare or Medicaid and the payment or receipt of any
form of remuneration in return for the referral of Medicare or Medicaid patients
or arranging for the referral of patients, or in return for the recommendation,
arrangement, purchase, lease or order of items or services that are covered by
Medicare or Medicaid programs. Violation of these provisions could constitute a
felony criminal offense and applicable sanctions include imprisonment of up to
five years, criminal fees of up to $25,000, civil money penalties of up to
$50,000 per act plus three times the amount claimed or three times the
remuneration offered and exclusion from the Medicare and Medicaid programs. Many
states have adopted similar prohibitions against payments that are intended to
induce referrals of Medicaid and other third-party payor patients. The Office of
Inspector General, Department of Health and Human Services, referred to in this
prospectus as the "OIG," has published numerous "safe harbors" that exempt some
practices from enforcement action under the federal fraud and abuse laws. These
safe harbors exempt specified activities, including bona fide employment
relationships, some contracts for the rental of space or equipment, and some
personal service arrangements and management contracts. While the failure to
satisfy all of the requirements of a particular safe harbor does not necessarily
mean that the arrangement is unlawful, arrangements that do not satisfy a
particular safe harbor may be subject to scrutiny by the OIG.

     We are required under the Medicare conditions of participation and some
state licensing laws to contract with numerous healthcare providers and
practitioners, including physicians, hospitals and nursing homes, and to arrange
for these individuals or entities to provide services to our patients. In
addition, we have contracts with other suppliers, including pharmacies,
ambulance services and medical equipment companies. Some of these individuals or
entities may refer, or be in a position to refer, patients to us, and we may
refer, or be in a position to refer, patients to these individuals or entities.
These arrangements may not qualify for a safe harbor. We believe that our
contracts and arrangements with providers, practitioners and suppliers are not
in violation

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<PAGE>

of applicable fraud and abuse laws. We cannot assure you, however, that these
laws will ultimately be interpreted in a manner consistent with our practices.

     From time to time, various federal and state agencies, such as the
Department of Human Services, issue a variety of pronouncements, including fraud
alerts, the Office of Inspector General's Annual Work Plan and other reports,
identifying practices that may be subject to heightened scrutiny. For example,
in March 1998, the OIG issued a special fraud alert titled "Fraud and Abuse in
Nursing Home Arrangements with Hospices." This special fraud alert focused on
payments received by nursing homes from hospices. The OIG listed the following
specific practices that may violate the federal fraud and abuse laws:

     - a hospice offering free goods or goods at below fair market value to
       induce a nursing home to refer patients to the hospice;

     - a hospice paying "room and board" payments to the nursing home in amounts
       in excess of what the nursing home would have received directly from
       Medicaid had the patient not been enrolled in hospice;

     - a hospice paying amounts to the nursing home for "additional" services
       that Medicaid considers to be included in its room and board payment to
       the hospice;

     - a hospice referring its patients to a nursing home to induce the nursing
       home to refer its patients to the hospice;

     - a hospice providing free (or below fair market value) care to nursing
       home patients, for whom the nursing home is receiving Medicare payment
       under the skilled nursing facility benefit, with the expectation that
       after the patient exhausts the skilled nursing facility benefit, the
       patient will receive hospice services from that hospice; and

     - a hospice providing staff at its expense to the nursing home to perform
       duties that otherwise would be performed by the nursing home.

     We do not participate in any of the practices listed above and discussed in
this special fraud alert. We believe that we are in material compliance with all
applicable federal and state fraud and abuse laws. However, we cannot assure you
that these laws will not be interpreted in the future in such a way as to cause
us to be in violation of these laws.

     False Claims Act.  In addition to federal fraud and abuse laws, under
separate statutes, the submission of claims for items and services that are "not
provided as claimed" may lead to civil money penalties, criminal fines and
imprisonment, and/or exclusion from participation in federally funded healthcare
programs, including the Medicare and Medicaid programs. These false claims
statutes include the Federal False Claims Act. Under the Federal False Claims
Act, in addition to actions being initiated by the federal government, a private
party may bring an action on behalf of the federal government. These private
parties are often referred to as qui tam relators, and are entitled to share in
any amounts recovered by the government. Both direct enforcement activity by the
government and qui tam actions have increased significantly in recent years and
have increased the risk that a healthcare company, like us, will have to defend
a false claims action, pay fines or be excluded from the Medicare and/or
Medicaid programs as a result of an investigation arising out of this type of an
action. Because of the complexity of the government regulations applicable to
our industry, we cannot assure you that we will not be the subject of an action
under the False Claims Act.

     The Stark Law and State Physician Self-Referral Laws.  Section 1877 of the
Social Security Act, commonly known as the "Stark Law," prohibits physicians,
subject to the exceptions described below, from referring Medicare or Medicaid
patients to any entity providing "designated health services" in which the
physician has an ownership or investment interest or with which the physician
has entered into a compensation arrangement. Persons who violate the Stark Law
are subject to civil monetary penalties and exclusion from the Medicare and
Medicaid programs.

     Hospice care is not specifically enumerated as a health service subject to
this prohibition; however, some of the ten designated health services under the
Stark Law, including physical therapy, pharmacy services and certain infusion
therapies, are among the specific services furnished by our hospices.
Regulations interpreting

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<PAGE>

the Stark Law currently provide that investments by referring physicians in a
hospice will not violate the Stark Law. We cannot assure you, however, that
future regulatory changes will not result in us becoming subject to the Stark
Law's prohibition in the future.

     Many states have also enacted physician self-referral laws, which generally
prohibit financial relationships with referral sources that are not limited to
services for which Medicare or Medicaid payment may be made. Similar penalties,
including loss of license or eligibility to participate in government programs
and civil and criminal fines, apply to violations of these state self-referral
laws. These laws vary from state to state and have seldom been interpreted by
the courts or regulatory agencies. We believe that our relationships with
physicians do not violate these state self-referral laws. However, we cannot
assure you that these laws will not be interpreted in the future in such a way
as to call into question our relationships with physicians.

     Corporate Practice of Medicine and Fee-Splitting.  Most states, including
all of the states in which we operate, have laws that restrict or prohibit
unlicensed persons or business entities, including corporations, from employing
physicians and/or prohibit direct or indirect payments or fee-splitting
arrangements between physicians and unlicensed persons or business entities.
Possible sanctions for violations of these restrictions include loss of a
physician's license, civil and criminal penalties and rescission of business
arrangements. These laws vary from state to state, are often vague and have
seldom been interpreted by the courts or regulatory agencies.

     We employ and contract with physicians to provide medical direction and
patient care services. A state with these prohibitions could determine that the
provision of patient care services by our employed and/or contracted physicians
violates the corporate practice of medicine and/or fee-splitting prohibitions.
We structure our arrangements with healthcare providers to comply with the
relevant state law. However, we cannot assure you that government officials
charged with the responsibility for enforcing these laws will not assert that
we, or transactions in which we are involved, are in violation of these laws.
These laws may also be interpreted by the courts in a manner inconsistent with
our interpretations. The determinations or interpretations by a state may
require us to restructure our arrangements with physicians in the applicable
state.

     Health Information Practices.  The Health Insurance Portability and
Accountability Act of 1996, commonly referred to as "HIPAA," contains, among
other measures, provisions that may require many organizations, including us, to
implement very significant, potentially expensive new computer systems and
business procedures designed to protect each patient's individual healthcare
information. HIPAA requires the Department of Health and Human Services to issue
rules to define and implement patient privacy standards. Among the standards
that the Department of Health and Human Services will adopt pursuant to HIPAA
are standards for the following:

     - electronic transactions and code sets;

     - unique identifiers for providers, employers, health plans and
       individuals;

     - security and electronic signatures;

     - privacy; and

     - enforcement.

     On August 17, 2000, the Department of Health and Human Services finalized
the new transaction standards. The original compliance date was October 16,
2002. However, the compliance date has been delayed until October 16, 2003,
provided we file a compliance extension plan with the Department of Health and
Human Services by October 15, 2002. The transaction standards will require us to
use standard code sets established by the rule when transmitting health
information in connection with some transactions, including health claims and
health payment and remittance advice.

     On August 12, 1998, the Secretary of the Department of Health and Human
Services issued a proposed rule that establishes, in part, standards for the
security of health information by health plans, healthcare clearinghouses and
healthcare providers that maintain or transmit any health information in
electronic form, regardless of format. Under the proposed rule we would be an
affected entity. These security standards require

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<PAGE>

affected entities to establish and maintain reasonable and appropriate
administrative, technical and physical safeguards to ensure integrity,
confidentiality and availability of the information. The security standards were
designed to protect health information against reasonably anticipated threats or
hazards to the security or integrity of the information and to protect the
information against unauthorized use or disclosure. Although the security
standards do not reference or advocate a specific technology, and affected
entities have the flexibility to choose their own technical solutions, we expect
that the security standards will require us to implement significant systems.

     On December 28, 2000, the Secretary of the Department of Health and Human
Services published a final rule establishing standards for the privacy of
individually identifiable health information. These privacy standards apply to
all health plans, all healthcare clearinghouses and many healthcare providers,
including healthcare providers that transmit health information in an electronic
form in connection with certain standard transactions. We are a covered entity
under the final rule. The privacy standards apply to protect individually
identifiable health information held or disclosed by a covered entity in any
form, whether communicated electronically, on paper or orally. These standards
not only require our compliance with rules governing the use and disclosure of
protected health information, but they also require us to impose those rules, by
contract, on any business associate to whom such information is disclosed. A
violation of the privacy standards could result in civil monetary penalties of
$100 per incident, up to a maximum of $25,000 per person, per year, per
standard. The final rule also provides for criminal penalties of up to $50,000
and one year in prison for knowingly and improperly obtaining or disclosing
protected health information, up to $100,000 and five years in prison for
obtaining protected health information under false pretenses, and up to $250,000
and ten years in prison for obtaining or disclosing protected health information
with the intent to sell, transfer or use such information for commercial
advantage, personal gain or malicious harm.

     The final rule establishing the privacy standards became effective on April
14, 2001, with compliance required by April 14, 2003. The security regulations
under HIPAA have not yet been finalized by the Department of Health and Human
Services. Once the security regulations are issued in final form, we will have
approximately two years to be fully compliant.

     We expect that compliance with these standards will require significant
commitment and action by us. We have appointed a task force comprised of members
of our management team to direct our compliance with these standards. Although
we and other covered entities generally are not required to be in compliance
with these standards until two years following the effective date of the final
rules issued or to be issued by the Secretary of the Department of Health and
Human Services, implementation will require us to conduct extensive preparation
and make significant expenditures. Because the security standards are proposed
regulations and the final regulations for the privacy standards were only
recently issued and are currently under review by the new administration, we
cannot predict the total financial impact of the regulations on our operations.

     Additional Federal and State Laws.  The federal government and all states
also regulate other aspects of the hospice industry. In particular, our
operations are subject to federal and state laws covering professional services,
the dispensing of drugs and other types of hospice activities. Some of our
employees are subject to state laws and regulations governing the ethics and
practice of medicine, respiratory therapy, pharmacy and nursing. Our operations
are subject to periodic survey by government entities to assure compliance with
applicable state licensing and Medicare and Medicaid certification, as the case
may be. From time to time in the ordinary course of business, we, like other
healthcare companies, receive survey reports containing deficiencies for alleged
failure to comply with applicable requirements. We review these reports and take
appropriate corrective action. The failure to effect corrective action or to
obtain, renew or maintain any of the required regulatory approvals,
certifications or licenses could materially adversely affect our business and
could prevent our hospices involved from offering hospice services to patients.
In addition, laws and regulations often are adopted to regulate new products,
services and industries. We cannot assure you that either the states or the
federal government will not impose additional regulations upon our activities
that might adversely effect us.

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<PAGE>

     A substantial number of our potential acquisition targets are likely to
involve hospices operated by not-for-profit entities. Some states require
government review, and in some cases approval, of transactions in which a
not-for-profit entity sells a healthcare facility or business. This increased
scrutiny may increase the difficulty in completing or prevent the completion of
acquisitions in some states in the future. We have acquired two not-for-profit
hospices and did not encounter any substantial regulatory or governmental
obstacles to our acquisition or integration of those hospices. We cannot,
however, assure you that we will not encounter regulatory or governmental
obstacles in connection with our acquisition of not-for-profit hospices in the
future.

     We maintain an internal corporate compliance program and from time to time
retain regulatory counsel for guidance on applicable laws and regulations.
However, we cannot assure you that our practices, if reviewed, would be found to
be in compliance with applicable health regulatory laws, as the laws ultimately
may be interpreted.

COMPLIANCE AND CONTINUOUS QUALITY IMPROVEMENT PROGRAMS

     We have a comprehensive company-wide compliance program. Our compliance
program provides for:

     - the appointment of a compliance officer and committee;

     - adoption of an ethics and business conduct code;

     - employee education and training;

     - implementation of an internal system for reporting concerns;

     - ongoing auditing and monitoring programs; and

     - a means for enforcing the compliance programs policies.

     As part of our ongoing auditing and monitoring programs, we conduct
periodic, at least annual, internal regulatory audits and mock surveys at each
of our hospices. If a hospice does not achieve a satisfactory rating, we require
the hospice to prepare and implement a plan of correction. We then perform a
follow-up audit and survey to verify that all deficiencies identified in the
initial audit and survey have been corrected.

     As required under the Medicare conditions of participation, we have a
continuous quality improvement program in place. Our continuous quality
improvement program involves:

     - on-going education of staff and quarterly continuous quality improvement
       meetings at each of our hospices and at our corporate office;

     - quarterly comprehensive audits of patient charts performed by each of our
       hospices; and

     - at least once a year, a comprehensive audit of patient charts performed
       on each of our hospices by our corporate staff.

If a hospice fails to achieve a satisfactory rating on a patient chart audit, we
require the hospice to prepare and implement a plan of correction. We then
conduct a follow-up patient chart audit to verify that appropriate action has
been taken to prevent future deficiencies.

     We continually expand and refine our compliance and continuous quality
improvement programs. Specific written policies, procedures, training and
educational materials and programs, as well as auditing and monitoring
activities, have been prepared and implemented to address the functional and
operational aspects of our business. Our programs also address specific problem
areas identified through regulatory interpretation and enforcement activities.
Our policies, training, standardized documentation requirements, reviews and
audits also specifically address our financial arrangements with our referral
sources, including fraud and abuse laws and physician self-referral laws.

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COMPETITION

     Hospice care in the United States is competitive. Because payments for
hospice services are generally fixed, we compete primarily on the basis of our
ability to deliver quality, responsive services. The hospice care market is
highly fragmented and we compete with a large number of organizations, some of
which have or may obtain significantly greater financial and marketing resources
than us. Based on industry data, we estimate that approximately 63% of existing
hospices are local not-for-profit hospices. Most hospices are small- and
medium-sized hospices.

     We also compete with a number of national and regional hospice providers,
including Vitas Healthcare Corporation and VistaCare, Inc., hospitals, nursing
homes, home health agencies and other healthcare providers, including those with
which we presently maintain contractual relationships, that offer hospice and/or
palliative care services. Many of them offer home care to patients who are
terminally ill, and some actively market palliative care and "hospice-like"
programs. In addition, various healthcare companies have diversified into the
hospice market. For example, Beverly Enterprises, Inc. and Manor Care, Inc.
compete with us in some of our markets. We believe that we are the only publicly
held healthcare provider that exclusively provides hospice care.

     Relatively few barriers to entry exist in the markets served by us.
Accordingly, other companies that are not currently providing hospice care may
enter these markets and expand the variety of services offered.

INSURANCE

     We maintain primary general and professional liability coverage on a claims
made and company-wide basis with limits of $1.0 million per occurrence and $3.0
million in the aggregate. In addition, we maintain umbrella coverage on a claims
made and company-wide basis with a limit of $20.0 million. While we believe that
our insurance coverage is adequate for our current operations, we cannot assure
you that our coverage will cover all future claims or will be available in
adequate amounts or at a reasonable cost.

     Our current general and professional liability policy does not provide
coverage for claims that arise from acts that occurred prior to the policy's
start date of April 12, 2000. From March 12, 1999 to April 12, 2000, Reliance
National Insurance Company provided our insurance coverage. Since April 12,
2000, Lexington Insurance Company, a subsidiary of American International Group,
Inc., has provided our insurance coverage. During the fourth quarter of 2001,
the Insurance Commissioner of the Commonwealth of Pennsylvania placed Reliance
National Insurance Company in liquidation. As of December 31, 2001, we reserved
$0.3 million to cover potential losses resulting from current and future
litigation claims covered by Reliance National Insurance Company to the extent
its assets are not sufficient to pay such claims. Although we believe that the
amount reserved is adequate to cover our potential losses, we cannot assure you
that our losses will not exceed the amount reserved. Our profitability will be
negatively impacted to the extent our actual losses exceed the amount reserved.

EMPLOYEES

     As of February 28, 2002, we had 1,509 full-time employees and 360 part-time
employees. None of our employees are covered by collective bargaining
agreements. We believe that our relations with our employees are good.

SOME RISKS RELATED TO OUR BUSINESS

     An investment in our common stock is subject to the significant risks
inherent in our business. Readers should consider carefully the risks and
uncertainties described below and the other information included in this Annual
Report on Form 10-K. If any of the events described below occurs, our business
could be adversely affected in a material way. This could cause the trading
price of our common stock to decline, perhaps significantly.

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<PAGE>

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 highly dependent on payments from Medicare and Medicaid.
Approximately 94.1%, 95.6% and 97.2% of our net patient service revenue for the
years ended December 31, 1999, 2000 and 2001, respectively, consisted of
payments from the Medicare and Medicaid programs. Because we generally receive
fixed payments for our hospice care services based on the level of care provided
to our hospice patients, we are at risk for the cost of services provided to our
hospice patients. Reductions in amounts paid by government programs for our
services or changes in methods or regulations governing payments could cause our
net patient service revenue and profits to materially decline.

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.

     The healthcare industry is subject to extensive federal, state and local
laws, rules and regulations relating to, among others:

     - payment for services;

     - conduct of operations, including fraud and abuse, anti-kickback
       prohibitions, physician self-referral prohibitions and false claims; and

     - facility and professional licensure, including certificates of need,
       surveys, certification and recertification requirements, and corporate
       practice of medicine prohibitions.

     In recent years, Congress and some state legislatures have introduced an
increasing number of proposals to make significant changes in the healthcare
system. Changes in law and regulatory interpretations could reduce our net
patient service revenue and profitability.

     Recently, there have been heightened coordinated civil and criminal
enforcement efforts by both federal and state government agencies relating to
the healthcare industry. There has also been an increase in the filing of
actions by private individuals on behalf of the federal government against
healthcare companies alleging the filing of false or fraudulent Medicare or
Medicaid claims. This heightened enforcement activity increases our potential
exposure to damaging lawsuits, investigations and other enforcement actions. Any
such action could distract our management and adversely affect our business
reputation and profitability.

     In the future, different interpretations or enforcement of laws, rules and
regulations governing the healthcare industry could subject our current business
practices to allegations of impropriety or illegality or could require us to
make changes in our facilities, equipment, personnel, services and capital
expenditure programs, increase our operating expenses and distract our
management. If we fail to comply with these extensive laws and government
regulations, we could become ineligible to receive government program payments,
suffer civil and criminal penalties or be required to make significant changes
to our operations. In addition, we could be forced to expend considerable
resources responding to an investigation or other enforcement action under these
laws or regulations. For a more detailed discussion of the regulatory
environment in which we operate, see "-- Government Regulation."

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 success is heavily dependent on referrals from physicians, nursing
homes, assisted living facilities, adult care centers, hospitals, managed care
companies, insurance companies and other patient referral sources in the
communities that our hospice locations serve, as well as on our ability to
maintain good relations with these referral sources. Our referral sources are
not contractually obligated to refer hospice patients to us and may refer their
patients to other hospice care providers, or not at all. Our growth and
profitability depend significantly on our ability to establish and maintain
close working relationships with these patient referral sources and to increase
awareness and acceptance of hospice care by our referral sources and their
patients.
                                        26
<PAGE>

We cannot assure you that we will be able to maintain our existing referral
source relationships or that we will be able to develop and maintain new
relationships in existing or new markets. Our loss of existing relationships or
our failure to develop new relationships could adversely affect our ability to
expand our operations and operate profitably. Moreover, we cannot assure you
that awareness or acceptance of hospice care will increase.

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.

     A significant element of our growth strategy is expansion of our business
by developing new hospice locations in new and existing markets. This aspect of
our growth strategy may not be successful, which could adversely impact our
growth and profitability. We cannot assure you that we will be able to:

     - identify markets that meet our selection criteria for new hospice
       locations;

     - hire and retain a qualified management team to operate each of our new
       hospice locations;

     - manage a large and geographically diverse group of hospice locations;

     - become Medicare and Medicaid certified in new markets;

     - generate sufficient hospice admissions in new markets to operate
       profitably in these new markets; or

     - compete effectively with existing hospices 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.

     In addition to growing existing locations and developing new hospice
locations, a significant element of our growth strategy is expansion through the
acquisition of other hospices. We cannot assure you that our acquisition
strategy will be successful. The success of our acquisition strategy is
dependent upon a number of factors, including:

     - 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.

     Acquisitions involve a number of other risks, including diversion of
management's attention from other business concerns and the assumption of known
or unknown liabilities of acquired hospices, including liabilities for failure
to comply with healthcare laws and regulations. The integration of acquired
hospices may place significant strains on our current operating and financial
systems and controls. We may not successfully overcome these risks or any other
problems encountered in connection with our acquisition strategy.

     An estimated 63% of hospices in the United States are not-for-profit
programs. Accordingly, it is likely that a substantial number of acquisition
opportunities will involve hospices operated by not-for-profit entities. In
recent years, several states have increased review and oversight of transactions
involving the sale of healthcare facilities by not-for-profit entities. Although
the level of interest varies from state to state, the current trend is to
provide for increased governmental review, and in some cases approval, of
transactions in which a not-for-profit entity sells a healthcare facility or
business. This increased scrutiny may increase the difficulty in completing or
prevent the completion of acquisitions in some states in the future.

                                        27
<PAGE>

OUR LOSS OF KEY MANAGEMENT PERSONNEL OR OUR INABILITY TO HIRE AND RETAIN SKILLED
EMPLOYEES COULD ADVERSELY AFFECT OUR BUSINESS AND OUR ABILITY TO INCREASE
PATIENT REFERRALS.

     Our future success depends, in significant part, upon the continued service
of our senior management personnel, particularly Richard R. Burnham, our
Chairman and Chief Executive Officer, and David C. Gasmire, our President and
Chief Operating Officer. The loss of the services of one or more of our key
senior management personnel or our inability to hire and retain new skilled
employees could adversely affect our future operating results. In addition, the
loss of key marketing representatives could negatively impact our ability to
maintain or increase patient referrals, a key aspect of our growth strategy.

     Competition for skilled employees is intense, and the process of locating
and recruiting skilled employees with the combination of qualifications and
attributes required to care effectively for terminally ill patients and their
families can be difficult and lengthy. We cannot assure you that we will be
successful in attracting, retaining or training highly skilled nursing,
management, marketing, operations, admissions and other personnel. Our business
could be disrupted and our growth and profitability negatively impacted if we
are unable to attract and retain skilled employees.

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.

     We currently employ approximately 580 nurses. We depend on qualified nurses
to provide quality, responsive hospice services to our patients. There is
currently a nationwide shortage of qualified nurses that is being felt in some
of the markets in which we provide hospice services, primarily in California. In
response to the shortage of qualified nurses in these markets, we have increased
and are likely to continue to increase our wages and benefits to recruit and
retain nurses or to engage contract nurses until we hire permanent staff nurses.
Our inability to attract and retain qualified nurses could adversely affect our
ability to provide quality, responsive hospice services to our patients and our
ability to increase patient census in those markets. In addition, because we
operate in a fixed reimbursement environment, increases in the wages and
benefits that we must provide to attract and retain qualified nurses or an
increase in our reliance on contract nurses could negatively impact our
profitability.

IF ANY OF OUR HOSPICE LOCATIONS FAILS TO COMPLY WITH THE MEDICARE CONDITIONS OF
PARTICIPATION, THAT HOSPICE LOCATION COULD BE TERMINATED FROM THE MEDICARE
HOSPICE PROGRAM, THEREBY ADVERSELY AFFECTING OUR NET PATIENT SERVICE REVENUE AND
PROFITABILITY.

     Each of our hospice locations must comply with the extensive conditions of
participation of the Medicare hospice program. If any of our hospice locations
fails to meet any of the Medicare conditions of participation, that hospice
location may receive a notice of deficiency from the applicable state surveyor.
If that hospice location then fails to institute a plan of correction and
correct the deficiency within the correction period provided by the state
surveyor, that hospice location could be terminated from the Medicare program.
For example, under the Medicare hospice program, each of our hospice locations
must demonstrate that volunteers provide administrative and direct patient care
services in an amount equal to at least five percent of the total patient care
hours provided by our employees and contract staff at the hospice location. If
we are unable to attract a sufficient number of volunteers at one of our hospice
locations to meet this requirement, that location could be terminated from the
Medicare hospice program if the location fails to address the deficiency within
the applicable correction period. Any termination of one or more of our hospice
locations from the Medicare hospice program for failure to satisfy the volunteer
or other conditions of participation could adversely affect our net patient
service revenue and profitability.

                                        28
<PAGE>

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.

     Many states have enacted certificate of need laws that require prior state
approval to open new healthcare facilities or expand services at existing
facilities. Currently, the states of Arkansas, Florida, Hawaii, Kentucky,
Maryland, New York, North Carolina, Rhode Island, Tennessee, Vermont, Washington
and West Virginia have certificate of need laws that apply to hospices. Of these
states, we currently only operate in Arkansas and Tennessee. Florida and New
York have additional barriers to entry. Florida places restrictions on the
ability of for-profit corporations to own and operate hospices, and New York
places restrictions on the corporate ownership of hospices. Accordingly, our
ability to operate in Florida and New York is restricted. These laws could
affect our ability to expand into new markets and to expand our services and
facilities in existing markets.

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.

     Hospice care in the United States is competitive. In many areas in which
our hospices are located, we compete with a large number of organizations,
including:

     - community-based hospice providers;

     - national and regional companies;

     - hospital-based hospice and palliative care programs;

     - nursing homes; and

     - home health agencies.

     Some of our current and potential competitors have or may obtain
significantly greater financial and marketing resources than us. Various
healthcare companies have diversified into the hospice market. For example, a
few large healthcare providers, including Beverly Enterprises, Inc. and Manor
Care, Inc., have entered the hospice business directly or through affiliates.
Relatively few barriers to entry exist in our local markets. Accordingly, other
companies, including hospitals and other healthcare organizations that are not
currently providing hospice care, may expand their services to include hospice
care. We may encounter increased competition in the future that could negatively
impact patient referrals to us, limit our ability to maintain or increase our
market position and adversely affect our profitability.

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.

     We generally receive fixed payments for our hospice services based on the
level of care that we provide to patients and their families. Accordingly, our
profitability is largely dependent on our ability to manage costs of providing
hospice services. Medicare and Medicaid currently provide for an annual
adjustment of the various hospice payment rates based on the increase or
decrease of the medical care expenditure category of the Consumer Price Index;
however, the increases have usually been less than actual inflation. If this
adjustment were eliminated or reduced, or if our costs of providing hospice
services, over one-half of which consist of labor costs, increased more than the
annual adjustment, our profitability could be negatively impacted. In addition,
cost pressures resulting from shorter patient lengths of stay and the use of
more expensive forms of palliative care, including drugs and drug delivery
systems, could negatively impact our profitability.

                                        29
<PAGE>

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, WHICH COULD NEGATIVELY IMPACT OUR
PROFITABILITY.

     There are currently numerous legislative and regulatory initiatives at both
the state and federal levels that address patient privacy concerns. In
particular, HIPAA contains provisions that may require us to implement expensive
new computer systems and business procedures designed to protect the privacy of
each of our hospice patient's individual health information. The Department of
Health and Human Services published final regulations addressing patient privacy
on December 28, 2000. We must comply with the requirements of the privacy
regulations by April 14, 2003. Final regulations addressing the security of
patient health information have not been issued. Because of the recent issuance
of the privacy regulations and the proposed nature of the security regulations,
we have not fully evaluated and cannot fully predict the total financial or
other impact of these regulations on us. Compliance with these rules could
require us to spend substantial sums, which could negatively impact our
profitability.

OUR NET PATIENT SERVICE REVENUE AND PROFITABILITY MAY BE CONSTRAINED BY COST
CONTAINMENT INITIATIVES UNDERTAKEN BY INSURERS AND MANAGED CARE COMPANIES.

     Initiatives undertaken by insurers and managed care companies to contain
healthcare costs affect the profitability of our hospices. We have a number of
contractual arrangements with insurers and managed care companies for providing
hospice care for a fixed fee. These payors attempt to control healthcare costs
by contracting with hospices and other healthcare providers to obtain services
on a discounted basis. We believe that this trend may continue and may limit
payments for healthcare services, including hospice services. In addition,
future changes in Medicare related to Medicare HMO programs could result in
managed care companies becoming financially responsible for providing hospice
care. If such changes were to occur, managed care companies could be responsible
for payments to us out of their Medicare payments, and a greater percentage of
our net patient service revenue could come from managed care companies. As
managed care companies attempt to control hospice-related costs, they could
reduce payments to us for hospice services. These developments could negatively
impact our net patient service revenue and profitability.

WE HAVE A LIMITED HISTORY OF PROFITABILITY AND MAY INCUR SUBSTANTIAL NET LOSSES
IN THE FUTURE.

     We began operations in January 1996. For the years ended December 31, 1996,
1997, 1998 and 1999, we reported net losses of $1.6 million, $4.1 million, $6.5
million and $2.2 million, respectively. We reported net income of $3.1 million
and $12.9 million for the years ended December 31, 2000 and 2001, respectively.
However, we cannot assure you that we will operate profitably in the future. In
addition, we may experience significant quarter-to-quarter variations in
operating results. We are pursuing a growth strategy focused on internal growth,
development of new hospice locations and acquisitions of hospices. Our growth
strategy may involve, among other things, significant cash expenditures, debt
incurrence, additional operating losses and expenses that could negatively
impact our profitability on a quarterly and an annual basis. Our net patient
service revenue could be adversely impacted by a number of factors,
particularly, reductions in Medicare payment rates and patient lengths of stay,
which may not be within our control.

A SIGNIFICANT REDUCTION IN THE CARRYING VALUE OF OUR GOODWILL COULD HAVE A
MATERIAL ADVERSE EFFECT ON OUR PROFITABILITY.

     A portion of our total assets consist of intangible assets, primarily
goodwill. Goodwill, net of accumulated amortization, accounted for approximately
27.2% of our total assets as of December 31, 2001. Any event which results in
the significant impairment of our goodwill, such as closure of a hospice
location or sustained operating losses, could have a material adverse effect on
our profitability.

                                        30
<PAGE>

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.

     In recent years, participants in the healthcare industry have become
subject to an increasing number of lawsuits, including allegations of medical
malpractice. Many of these lawsuits involve large claims and substantial defense
costs. From time to time, we are subject to these types of lawsuits. While we
maintain professional and general liability insurance, some risks and
liabilities, including claims for punitive damages, are not covered by
insurance. In addition, we cannot assure you that our coverage will be adequate
to cover potential losses. While we have been able to obtain liability insurance
in the past, insurance can be expensive and may not be available in the future
on terms acceptable to us, or at all. Claims, regardless of their merit or
eventual outcome, may also adversely affect our reputation, our ability to
obtain patient referrals or our ability to expand our business, as well as
divert management resources from the operation of our business.

     Our current general and professional liability policy does not provide
coverage for claims that arise from acts that occurred prior to the policy's
start date of April 12, 2000. From March 12, 1999 to April 12, 2000, Reliance
National Insurance Company provided our insurance coverage. Since April 12,
2000, Lexington Insurance Company, a subsidiary of American International Group,
Inc., has provided our insurance coverage. During the fourth quarter of 2001,
the Insurance Commissioner of the Commonwealth of Pennsylvania placed Reliance
National Insurance Company in liquidation. As of December 31, 2001, we reserved
$0.3 million to cover potential losses resulting from current and future
litigation claims covered by Reliance National Insurance Company to the extent
its assets are not sufficient to pay such claims. Although we believe that the
amount reserved is adequate to cover our potential losses, we cannot assure you
that our losses will not exceed the amount reserved. Our profitability will be
negatively impacted to the extent our actual losses exceed the amount reserved.

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 expect that our existing funds, cash flows from operations and
borrowings under our credit agreement will be sufficient to fund our working
capital needs, anticipated hospice development and acquisition plans, debt
service requirements and other anticipated capital requirements for at least 12
months following the date of this prospectus. Continued expansion of our
business through the development of new hospice locations and acquisitions may
require additional capital, in particular if we were to accelerate our hospice
development and acquisition plans. In the past, we have relied on funds raised
through our initial public offering and private issuances of debt and equity and
also through bank financing and cash flows from operations to support our
growth. In the future, required financing may not be available or may be
available only on terms that are not favorable to us. If we are unable to raise
additional funds, we may have to delay or abandon some or all of our growth
strategies. Further, if additional funds are raised through the issuance of
additional equity securities, the percentage ownership of our stockholders would
be diluted. Any new equity securities may have rights, preferences or privileges
senior to those of our common stock.

IF THE OWNERSHIP OF OUR COMMON STOCK CONTINUES TO BE HIGHLY CONCENTRATED, IT MAY
PREVENT YOU AND OTHER STOCKHOLDERS FROM INFLUENCING SIGNIFICANT CORPORATE
DECISIONS AND MAY RESULT IN CONFLICTS OF INTEREST.

     Entities affiliated with Capital Resource Partners, Highland Capital
Partners, Oak Investment Partners, Three Arch Partners and Weiss Peck & Greer
and our officers and directors beneficially own approximately 71.1% of the
outstanding shares of our common stock. As a result, these stockholders, acting
together, are able to significantly influence fundamental corporate matters and
transactions, including:

     - the election of directors;

     - mergers, consolidations or acquisitions;

     - the sale of all or substantially all of our assets;

                                        31
<PAGE>

     - the amendment of our charter; and

     - our dissolution.

     This concentration of ownership may delay, deter or prevent acts that would
result in a change of control favored by our other stockholders. As a result,
the market price of our common stock could decline or stockholders might not
receive a change of control premium over the then-current market price of our
common stock. The interests of these stockholders may conflict with the
interests of our other stockholders.

PROVISIONS IN OUR CHARTER DOCUMENTS, UNDER DELAWARE LAW AND IN OUR STOCKHOLDER
RIGHTS PLAN COULD DISCOURAGE A TAKEOVER THAT STOCKHOLDERS MAY CONSIDER
FAVORABLE.

     Our certificate of incorporation and bylaws may discourage, delay or
prevent a merger or acquisition that a stockholder may consider favorable
because they:

     - 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.

     In addition, our certificate of incorporation prohibits the amendment by
our stockholders of many provisions of our certificate of incorporation unless
the amendment is approved by the holders of at least 80% of our shares of common
stock.

     Delaware law may also discourage, delay or prevent someone from acquiring
or merging with us. Under Delaware law, a corporation may not engage in a
business combination with any holder of 15% or more of its capital stock until
the holder has held the stock for three years unless, among other possibilities,
the board of directors approves the transaction. Our board of directors could
use this provision to prevent or delay takeovers.

     In addition, purchase rights distributed under our stockholder rights plan
will cause substantial dilution to any person or group that attempts to acquire
us without conditioning the offer on our redemption of the rights.

     These provisions could discourage potential acquisition proposals and could
delay or prevent a change of control transaction. As a result, they may limit
the price investors may be willing to pay for our stock in the future.

ITEM 2.  PROPERTIES

     We were incorporated in Delaware in August 1995 and began operations in
January 1996. Our executive offices are located at 717 N. Harwood, Suite 1500,
Dallas, Texas 75201, where we currently lease approximately 46,000 square feet
of space. We believe that these facilities are adequate for our current uses and
that additional space is available to accommodate our anticipated growth. Our 43
hospice offices and inpatient facilities are in leased facilities in 21 states
with varying terms from one to ten years extending through 2010. We believe
these facilities are in good operating condition and suitable for their intended

                                        32
<PAGE>

purposes. Refer to "Item 1. Business -- Hospice Offices and Inpatient
Facilities" for a complete listing of the locations of our hospice offices and
inpatient facilities.

ITEM 3.  LEGAL PROCEEDINGS

     From time to time, we may be involved in litigation relating to claims
arising out of our operations in the normal course of business. As of the date
of this Annual Report, we are not aware of any legal proceedings pending or
threatened that we expect would have a material adverse effect on us.

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

     No matters were submitted to a vote of our stockholders, through the
solicitation of proxies or otherwise, during the quarter ended December 31,
2001.

                                    PART II

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

     Market for Common Stock.  Our common stock has been quoted on the Nasdaq
National Market under the symbol "ODSY" since October 31, 2001. Prior to that
time there was no public market for our common stock. As of February 28, 2002,
there were 51 record holders of our common stock. The following table sets forth
the high and low sales prices per share of our common stock for the period
indicated, as reported on the Nasdaq National Market:

<Table>
<Caption>
                                                               HIGH     LOW
                                                              ------   ------
<S>                                                           <C>      <C>
Fourth Quarter (October 31, 2001 -- December 31, 2001)......  $25.94   $15.85
</Table>

     Dividends.  We have not declared or paid any dividends on our common stock,
and we do not anticipate declaring or paying any dividends on our common stock
in the foreseeable future. We currently intend to retain all future earnings to
fund the development and growth of our business. The payment of any future
dividends will be at the discretion of our board of directors and will depend
on:

     - any applicable contractual restrictions limiting our ability to pay
       dividends;

     - our earnings;

     - our financial condition;

     - our ability to fund our capital requirements; and

     - other factors our board deems relevant.

     Our credit agreement restricts the amount of dividends and other
distributions that we may pay or that our subsidiaries may pay to us upon our
lender's notice to us of an event of default under our credit agreement. See
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital Resources."

     Recent Sales of Unregistered Securities.  The following information relates
to all securities issued or sold by us in 2001, as adjusted to reflect our
one-for-two reverse stock split completed on August 8, 2001, that were not
registered under the Securities Act. Each of the transactions described below
was conducted in reliance upon the exemptions from registration provided in Rule
701 promulgated under Section 3(b) of the Securities Act and Section 4(2) of the
Securities Act and the rules and regulations promulgated thereunder. Each of the
transactions described below was completed prior to the completion of our
initial public offering on November 5, 2001.

     On January 3, 2001, we sold 22,500 shares of common stock to Patricia G.
Gross for a purchase price of $2,250 upon exercise of outstanding stock options.

                                        33
<PAGE>

     On January 31, 2001, we issued stock options to various employees and
directors to purchase 95,000 shares of common stock at an exercise price of
$3.10 per share.

     On April 25, 2001, we issued stock options to various employees to purchase
34,000 shares of common stock at an exercise price of $7.00 per share.

     On July 1, 2001, we sold 10,000 shares of common stock to Douglas B. Cannon
for a purchase price of $10,000 upon exercise of outstanding stock options.

     On July 1, 2001, we sold 5,000 shares of common stock to Patricia Roberts
for a purchase price of $5,000 upon exercise of outstanding stock options.

     On August 3, 2001, we issued stock options to various employees to purchase
55,250 shares of common stock at exercise prices ranging from $3.10 to $13.00
per share.

     Use of Proceeds from Initial Public Offering.  On November 5, 2001, we
completed our initial public offering in which we registered and sold 4.1
million shares (including 0.5 million shares issued upon the exercise of the
underwriters' option to purchase such shares to cover overallotments) of our
common stock at an offering price of $15.00 per share. The shares of common
stock sold in the offering were registered under the Securities Act on a
Registration Statement on Form S-1 (Registration No. 333-51522) that was
declared effective by the Securities and Exchange Commission on October 30,
2001. Our managing underwriters were Merrill Lynch, Pierce, Fenner & Smith
Incorporated, CIBC World Markets Corp. and SG Cowen Securities Corporation.

     The aggregate gross proceeds to us from the offering were $62.1 million. In
connection with the offering, we paid an aggregate of $4.3 million in
underwriting discounts and commissions to the underwriters. In addition, the
expenses incurred in connection with the offering for legal costs, accounting
costs, registration, filing and other costs were approximately $1.8 million. The
aggregate net proceeds to us from the offering after these expenses were $56.0
million. A portion of the net proceeds from the offering was used to repay $7.1
million, including accrued and unpaid interest, under our credit agreement and
to repay $10.6 million, including accrued and unpaid interest, under our 12%
senior subordinated notes. The remainder of the net proceeds will be used to
finance the development of new hospice locations and potential acquisitions of
hospices, and for other general corporate purposes.

                                        34
<PAGE>

ITEM 6.  SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

     The selected consolidated statement of operations data set forth below for
the years ended December 31, 1999, 2000 and 2001 and the consolidated balance
sheet data at December 31, 2000 and 2001 are derived from our financial
statements that have been audited by Ernst & Young LLP, and that are included
elsewhere in this Annual Report on Form 10-K, and are qualified by reference to
those financial statements. The selected consolidated statement of operations
data set forth below for the years ended December 31, 1997 and 1998 and the
balance sheet data at December 31, 1997, 1998 and 1999 are derived from our
financial statements that have been audited by Ernst & Young LLP, but are not
included in this Annual Report on Form 10-K.

     The historical results presented below are not necessarily indicative of
the results to be expected for any future period. You should read the selected
financial information set forth below in conjunction with "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and the notes thereto appearing elsewhere
in this Annual Report on Form 10-K.

<Table>
<Caption>
                                                                           YEAR ENDED DECEMBER 31,
                                                       ----------------------------------------------------------------
                                                          1997         1998         1999         2000          2001
                                                       ----------   ----------   ----------   -----------   -----------
                                                               (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                                    <C>          <C>          <C>          <C>           <C>
STATEMENTS OF OPERATIONS DATA:
Net patient service revenue..........................  $    6,901   $   27,239   $   46,460   $    85,271   $   130,181
Operating expenses:
  Direct hospice care................................       4,849       16,389       24,014        44,964        62,269
  General and administrative (exclusive of $1.1
    million for both the years ended December 31,
    2000 and 2001, reported separately as stock-based
    compensation charges)............................       6,167       14,675       18,873        28,375        42,471
  Stock-based compensation charges...................          --           --           --         1,113         1,112
  Provision for uncollectible accounts...............         187        1,203        2,031         2,708         3,207
  Depreciation and amortization......................         140          574        1,563         1,656         2,211
                                                       ----------   ----------   ----------   -----------   -----------
Total operating expenses.............................      11,343       32,841       46,481        78,816       111,270
                                                       ----------   ----------   ----------   -----------   -----------
Income (loss) from operations........................      (4,442)      (5,602)         (21)        6,455        18,911
Other income (expense):
  Minority interest..................................          --           --           (5)          (46)         (150)
  Interest income....................................         308          165           35            31           239
  Interest expense...................................          (9)      (1,086)      (2,209)       (2,931)       (2,512)
                                                       ----------   ----------   ----------   -----------   -----------
                                                              299         (921)      (2,179)       (2,946)       (2,423)
                                                       ----------   ----------   ----------   -----------   -----------
Income (loss) before provision for income taxes and
  extraordinary item.................................      (4,143)      (6,523)      (2,200)        3,509        16,488
Provision for income taxes...........................          --           --           --           417         3,231
                                                       ----------   ----------   ----------   -----------   -----------
Income (loss) before extraordinary item..............      (4,143)      (6,523)      (2,200)        3,092        13,257
Extraordinary item -- debt extinguishment, net of
  tax................................................          --           --           --            --          (361)
                                                       ----------   ----------   ----------   -----------   -----------
Net income (loss)....................................      (4,143)      (6,523)      (2,200)        3,092        12,896
Preferred stock dividends............................        (847)      (1,122)      (1,320)       (1,302)       (1,097)
Gain on conversion of preferred securities(1)........          --           --           --            --         5,755
                                                       ----------   ----------   ----------   -----------   -----------
Net income (loss) available to common stockholders...  $   (4,990)  $   (7,645)  $   (3,520)  $     1,790   $    17,554
                                                       ==========   ==========   ==========   ===========   ===========
Net income (loss) per common share:
  Basic net income before extraordinary item.........  $    (2.74)  $    (4.13)  $    (1.81)  $      0.92   $      4.22
  Extraordinary item -- debt extinguishment, net of
    tax..............................................          --           --           --            --         (0.09)
                                                       ----------   ----------   ----------   -----------   -----------
  Basic net income per common share..................  $    (2.74)  $    (4.13)  $    (1.81)  $      0.92   $      4.13
                                                       ==========   ==========   ==========   ===========   ===========
  Diluted net income before extraordinary item.......  $    (2.74)  $    (4.13)  $    (1.81)  $      0.26   $      1.04
  Extraordinary item -- debt extinguishment, net of
    tax..............................................          --           --           --            --         (0.03)
                                                       ----------   ----------   ----------   -----------   -----------
  Diluted net income per common share................  $    (2.74)  $    (4.13)  $    (1.81)  $      0.26   $      1.01
                                                       ==========   ==========   ==========   ===========   ===========
</Table>

                                        35
<PAGE>

<Table>
<Caption>
                                                                           YEAR ENDED DECEMBER 31,
                                                       ----------------------------------------------------------------
                                                          1997         1998         1999         2000          2001
                                                       ----------   ----------   ----------   -----------   -----------
                                                               (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                                    <C>          <C>          <C>          <C>           <C>
Weighted average shares Outstanding:
  Basic..............................................   1,818,785    1,852,933    1,943,197     1,946,622     4,245,624
  Diluted............................................   1,818,785    1,852,933    1,943,197    11,820,233    12,720,227
</Table>

<Table>
<Caption>
                                                                             YEAR ENDED DECEMBER 31,
                                                              -----------------------------------------------------
                                                               1997       1998       1999       2000        2001
                                                              -------   --------   --------   --------   ----------
                                                                                   (UNAUDITED)
                                                                             (DOLLARS IN THOUSANDS)
<S>                                                           <C>       <C>        <C>        <C>        <C>
OPERATING DATA:
Number of hospice locations(2)..............................       10         24         30         32           42
Admissions(3)...............................................    1,282      5,145      8,303     12,965       15,969
Days of care(4).............................................   60,144    237,589    422,577    737,088    1,111,168
Average daily census(5).....................................      165        651      1,158      2,014        3,044
Adjusted EBITDA(6)..........................................   (4,302)    (5,029)     1,542      9,224       22,234
Adjusted EBITDA as a % of net patient service revenue(6)....    (62.3)%    (18.5)%      3.3%      10.8%        17.1%
Cash flows provided by (used in) operating activities.......  $(4,629)  $(11,054)  $ (1,588)  $  3,520   $   14,956
Cash flows used in investing activities.....................  $(2,400)  $ (5,880)  $ (5,340)  $ (1,503)  $  (31,001)
Cash flows provided by (used in) financing activities.......  $ 8,038   $ 14,917   $  6,702   $ (2,293)  $   36,019
</Table>

<Table>
<Caption>
                                                                             AS OF DECEMBER 31,
                                                              -------------------------------------------------
                                                               1997       1998       1999      2000      2001
                                                              -------   --------   --------   -------   -------
                                                                           (DOLLARS IN THOUSANDS)
<S>                                                           <C>       <C>        <C>        <C>       <C>
BALANCE SHEET DATA:
Working capital (deficit)...................................  $ 3,251   $  4,738   $ (2,356)  $(1,691)  $50,363
Total assets................................................    7,434     22,578     31,925    38,845    98,216
Total long-term debt, including current portion.............      169     12,600     21,852    20,311     3,781
Total convertible preferred stock...........................   12,424     18,539     19,860    21,162        --
Stockholders' equity (deficit)..............................   (6,730)   (13,320)   (16,657)  (13,746)   77,635
</Table>

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

(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 hospice locations at end of period. We began development of our
    39th, 40th and 41st locations in Tulsa, Oklahoma, Austin, Texas and Chicago
    (South), Illinois in the fourth quarter of 2001 and acquired our 42nd
    location in Odessa, Texas in December 2001. We have also begun development
    of our 43rd location in Montgomery, Alabama in January 2002.

(3) Represents the total number of patients admitted into our hospice program
    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.

(6) Adjusted EBITDA consists of income (loss) before interest, income taxes,
    depreciation and amortization and minority interest expense, and excludes
    stock-based compensation charges and extraordinary items. We present
    adjusted EBITDA to enhance the understanding of our operating results.
    Adjusted EBITDA is not a measure of financial performance under generally
    accepted accounting principles. Items excluded from adjusted EBITDA are
    significant components in understanding and assessing financial performance.
    Adjusted EBITDA is a key measure used by us to evaluate our operations and
    provides useful information to investors. Adjusted EBITDA should not be
    considered in isolation or as an alternative to net income, cash flows
    generated by operations, investing or financing activities, or other
    financial statement data presented in the consolidated financial statements
    as indicators of financial performance or liquidity. Because adjusted EBITDA
    is not a measurement determined in accordance with generally accepted
    accounting principles and is thus susceptible to varying calculations,
    adjusted EBITDA as presented may not be comparable to other similarly titled
    measures of performance of other companies. See "Item 7. Management's
    Discussion and Analysis of Financial Condition and Results of
    Operations -- Adjusted EBITDA" for a reconciliation of net income (loss) to
    adjusted EBITDA.

                                        36
<PAGE>

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

     The following discussion of our financial condition and results of
operations should be read in conjunction with our selected consolidated
financial and operating data and the consolidated financial statements and
related notes included elsewhere in this Annual Report on Form 10-K.

OVERVIEW

     We are one of the largest providers of hospice care in the United States in
terms of both average daily census and number of locations. We have grown
rapidly since we opened our first hospice location in January 1996. Through the
development of new hospice locations and a series of acquisitions, we now have
43 hospice locations to serve patients and their families in 21 states. Our net
patient service revenue increased from $1.0 million in 1996 to $130.2 million in
2001. We operate all of these hospice locations through our operating
subsidiaries. Our net patient service revenue of $130.2 million in 2001
represents an increase of 52.7% over net patient service revenue of $85.3
million in 2000. In 1999, 2000 and 2001, we reported net income (loss) of $(2.2)
million, $3.1 million and $12.9 million, respectively.

DEVELOPED HOSPICES

     We have developed the following hospices since January 1, 1999:

     During 1999, we opened a new inpatient unit in Atlanta, Georgia.

     During 2000, we began development of two new hospices in El Paso, Texas and
Chicago (Arlington Heights), Illinois, which were opened in 2001.

     During 2001, we began development of four new hospices in Norfolk,
Virginia, Chicago (South), Illinois, Tulsa, Oklahoma and Austin, Texas. Our
Norfolk, Virginia hospice location opened in 2002.

     In 2002, we are continuing development of the Chicago (South), Illinois,
Tulsa, Oklahoma and Austin, Texas hospices and have begun development of a new
hospice in Montgomery, Alabama.

ACQUISITIONS

     We have acquired the following hospices since January 1, 1999:

     During 1999, we acquired eight hospices for a combined purchase price of
$8.1 million. We financed our acquisitions in 1999 with $4.8 million in cash
obtained from borrowings under our credit agreement and promissory notes payable
to the sellers in the aggregate principal amount of $3.3 million.

     During 2000, we acquired one hospice for a purchase price of $1.2 million.
We financed our acquisition in 2000 with $0.7 million in cash obtained from
borrowings under our credit agreement and a promissory note payable to the
seller in the principal amount of $0.5 million.

     During 2001, we acquired seven hospices for a combined purchase price of
$11.3 million. We financed our acquisitions in 2001 with $7.0 million in cash
obtained from borrowings under our credit agreement, $1.2 million in cash from
the proceeds of our initial public offering and promissory notes payable to the
sellers in the aggregate principal amount of $3.1 million.

     We accounted for these acquisitions as purchases.

     As part of our ongoing acquisition strategy, we are continually evaluating
other potential acquisition opportunities.

     On March 18, 2002, we entered into an agreement to purchase the assets of
three hospices located in Louisiana for an aggregate purchase price of $9.5
million payable in cash. We expect to complete this acquisition during the
second quarter of 2002 by utilizing a portion of the proceeds received by us in
our initial public offering. Completion of this acquisition is subject to
various conditions, including the accuracy of the representations and warranties
and the absence of any material change to the business and operations of the

                                        37
<PAGE>

hospices, and we cannot assure that these closing conditions will be satisfied
or that the acquisition will be completed.

     We have entered into a non-binding letter of intent to acquire a hospice
located in Ohio. Completion of this acquisition is subject to various
conditions, including our ability to enter into a definitive agreement to
acquire this hospice. We cannot assure you that a definitive agreement will be
entered into or that the acquisition will be completed.

     Goodwill from our hospice acquisitions, net of accumulated amortization,
was $26.7 million as of December 31, 2001. Goodwill, net of accumulated
amortization, was 34.4% of common stockholders' equity and 27.2% of total assets
as of December 31, 2001. During fiscal 2001 and prior years, we amortized our
goodwill over 20 years for acquisitions completed through June 30, 2001 and did
not amortize goodwill for acquisitions subsequent to June 30, 2001. Under new
rules issued by the Financial Accounting Standards Board, effective for fiscal
2002, goodwill and intangible assets deemed to have indefinite lives are no
longer amortized but will be subject to annual impairment tests in accordance
with the new rules. Other intangible assets will continue to be amortized over
their useful lives. We are applying the new rules on accounting for goodwill and
other intangible assets beginning in the first quarter of 2002. Application of
the non-amortization provisions of the new rules in 2001 would have resulted in
a decrease in amortization expense of $1.2 million.

     The following table lists our acquisitions since January 1, 1999 and
patient census data:

<Table>
<Caption>
                                                                PATIENT
                                                                CENSUS       AVERAGE DAILY
                                                              ON DATE OF        CENSUS
HOSPICE                                                       ACQUISITION   (FEBRUARY 2002)
-------                                                       -----------   ---------------
<S>                                                           <C>           <C>
1999
  Phoenix (Mesa), Arizona (Inpatient Facility)..............        6               8
  Phoenix (Peoria), Arizona (Inpatient Facility)............        6               7
  Phoenix, Arizona..........................................      134             189(1)
  Tucson, Arizona (Inpatient Facility)......................        8               9
  Tucson, Arizona...........................................      116             156
  Orange County (Garden Grove), California..................       77             131
  San Bernardino, California................................        8              94(2)
  San Diego, California.....................................       75             122
2000
  Los Angeles (Culver City), California.....................       45              44
2001
  Little Rock, Arkansas.....................................       81              79
  Colorado Springs, Colorado................................       30              65
  Charleston, South Carolina................................       32              36
  Beaumont, Texas...........................................       55              74
  Pittsburgh, Pennsylvania..................................       80             174(3)
  Palm Springs, California..................................       68              28(2)
  Odessa, Texas.............................................      110             116
</Table>

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

(1) Operations of our Phoenix, Arizona hospice acquired in 1999 were transferred
    to our Phoenix, Arizona hospice acquired in 1997.

(2) Operations of our Riverside, California hospice, which we acquired in 1999,
    were relocated to our San Bernardino, California hospice location, which we
    acquired in 2001. In connection with the relocation of our Riverside
    hospice, we transferred 37 hospice patients from our San Bernardino hospice
    to our Riverside hospice. In 2001, we also relocated the remaining
    operations of our San Bernardino hospice to a new location in Palm Springs,
    California.

(3) Operations of our Pittsburgh, Pennsylvania hospice acquired in 2001 were
    transferred to our Pittsburgh, Pennsylvania hospice opened in 1996.

                                        38
<PAGE>

NET PATIENT SERVICE REVENUE

     Net patient service revenue is the estimated net realizable revenue from
patients, Medicare, Medicaid, commercial insurance, managed care payors and
others for services rendered. Payors may determine that the services provided
are not covered and do not qualify for a payment or, for commercial payors, that
payments are subject to usual and customary rates. To determine net patient
service revenue, we adjust gross patient service revenue for estimated payment
denials and contractual adjustments based on historical experience. We recognize
net patient service revenue in the month in which our services are delivered.
Services provided under the Medicare program represented approximately 90.3%,
93.0% and 94.1% of our net patient service revenue for the years ended December
31, 1999, 2000 and 2001, respectively. Services provided under Medicaid programs
represented approximately 3.8%, 2.6% and 3.1% of our net patient service revenue
for the years ended December 31, 1999, 2000 and 2001, respectively. The payments
we receive from the Medicare and Medicaid programs are calculated using daily or
hourly rates for each of the four levels of care we deliver and are adjusted
based on geographic location.

     Routine home care is the largest component of our gross patient service
revenue, representing 91.8%, 83.8% and 88.7% of gross patient service revenue
for the years ended December 31, 1999, 2000 and 2001, respectively. Inpatient
care represented 7.1%, 12.2% and 9.0% of gross patient service revenue for the
years ended December 31, 1999, 2000 and 2001, respectively. Continuous care and
respite care, combined, represented most of the remaining 1.1%, 4.0% and 2.3% of
gross patient service revenue for these periods, respectively.

     The principal factors that impact net patient service revenue are our
average daily census, levels of care provided to our patients and changes in
Medicare and Medicaid payment rates due to adjustments for inflation. Average
daily census is affected by the number of patients referred by new and existing
referral sources, and admitted into our hospice program, and average length of
stay of those patients once admitted. Average length of stay is impacted by
patients' decisions of when to enroll in hospice care after diagnoses of
terminal illnesses and, once enrolled, the length of the terminal illnesses. Our
average hospice length of stay has increased from 49 days in 2000 to 57 days in
2001. See "-- Expenses" and "Item 1. Business -- Hospice Industry and Market
Opportunity."

     Payment rates under the Medicare and Medicaid programs are indexed for
inflation annually; however, the increases have historically been less than
actual inflation. Effective April 1, 2001, however, the base Medicare daily
payment rates for hospice care increased by five percent over the base rates
then in effect, which has favorably impacted our profitability. On October 1,
2001, the base Medicare payment rates for hospice care increased by
approximately 3.2% over the base rates previously in effect. These rates are
further adjusted by the hospice wage index. In the future, reductions in the
rate of increase in Medicare and Medicaid payments may have an adverse impact on
our net patient service revenue. See "Item 1. Business -- Government
Regulation -- Overview of Government Payments."

EXPENSES

     Because we generally receive fixed payments for our hospice services, our
profitability is largely dependent on our ability to manage the expenses of
providing hospice services. We recognize expenses as incurred and classify
expenses as either direct hospice care expenses or general and administrative
expenses. Direct hospice care expenses primarily include direct patient care
salaries and payroll taxes, pharmaceuticals, medical equipment and supplies, and
inpatient costs. Length of stay impacts our direct hospice care expenses as a
percentage of net patient service revenue because, if lengths of stay decline,
direct hospice care expenses, which are often highest during the latter days of
care for a patient, are spread against fewer days of care. Expenses are normally
higher during the latter days of care, because patients generally require
greater hospice services, including drugs, medical equipment and nursing care at
that time due to their deteriorating medical condition. These increased expenses
reduce our profitability because we generally receive fixed payments for our
hospice services. In addition, cost pressures resulting from the use of more
expensive forms of palliative care, including drugs and drug delivery systems,
could negatively impact our profitability.

                                        39
<PAGE>

     For our patients receiving nursing home care under a state Medicaid program
who elect hospice care under Medicare or Medicaid, we contract with nursing
homes for the nursing homes' provision to patients of room and board services.
The state must pay us, in addition to the applicable Medicare or Medicaid
hospice daily or hourly rate, an amount equal to at least 95% of the Medicaid
daily nursing home rate for room and board furnished to the patient by the
nursing home. Under our standard nursing home contracts, we pay the nursing home
for these room and board services at the Medicaid daily nursing home rate. We
refer to these costs, net of Medicaid payments, as "nursing home costs, net."
See note 1 to our consolidated financial statements included elsewhere in this
Annual Report on Form 10-K.

     General and administrative expenses primarily include non-patient care
salaries, employee benefits and office leases.

     The following table sets forth the percentage of net patient service
revenue represented by the items included in direct hospice care expenses and
general and administrative expenses (exclusive of $1.1 million in both 2000 and
2001 reported separately as stock-based compensation) for the periods indicated:

<Table>
<Caption>
                                                                   YEAR ENDED
                                                                  DECEMBER 31,
                                                               ------------------
                                                               1999   2000   2001
                                                               ----   ----   ----
<S>                                                            <C>    <C>    <C>
Direct hospice care expenses:
  Salaries and payroll taxes................................   29.0%  29.2%  27.2%
  Pharmaceuticals...........................................    7.5    7.2    7.1
  Medical equipment and supplies............................    6.0    6.2    6.1
  Inpatient costs...........................................    3.9    3.0    2.0
  Other (including nursing home costs, net).................    5.3    7.1    5.4
                                                               ----   ----   ----
     Total..................................................   51.7%  52.7%  47.8%
                                                               ====   ====   ====
General and administrative expenses:
  Salaries and benefits.....................................   25.0%  21.9%  19.6%
  Leases....................................................    4.2    3.4    2.8
  Other (including bad debts, travel, office supplies,
     printing and equipment rental).........................   15.8   11.2   12.7
                                                               ----   ----   ----
     Total..................................................   45.0%  36.5%  35.1%
                                                               ====   ====   ====
</Table>

STOCK-BASED AND OTHER COMPENSATION CHARGES

     Stock-based compensation charges represent the difference between the
exercise price of stock options granted and the deemed fair value of our common
stock on the date of grant determined in accordance with Accounting Principles
Board Opinion No. 25 and its related interpretations. We recognize compensation
charges over the vesting periods of the stock options using a graded
amortization methodology in accordance with Financial Accounting Standards Board
Interpretation No. 28. For purposes of the period-to-period comparisons included
in our results of operations, general and administrative expenses exclude these
stock-based compensation charges, which are reflected as a separate line item.

     We have recorded deferred stock-based compensation charges related to
unvested stock options granted to employees and directors during 2000 and 2001.
Based on the number of outstanding stock options granted during 2000 and 2001,
we expect to amortize approximately $1.4 million of deferred stock-based
compensation during 2002 and in future periods. We expect to amortize this
deferred stock-based compensation in the following approximate amounts:

     - $0.7 million during 2002;

     - $0.4 million during 2003;

     - $0.2 million during 2004; and

     - $0.1 million during 2005 and 2006.

                                        40
<PAGE>

     Upon completion of our initial public offering, we forgave the repayment of
promissory notes payable to us by Richard R. Burnham, our Chief Executive
Officer, and David C. Gasmire, our President and Chief Operating Officer. We
recorded a compensation charge of $0.2 million in connection with the
forgiveness of these notes in the fourth quarter of 2001.

ADJUSTED EBITDA

     Adjusted EBITDA consists of income (loss) before interest, income taxes,
depreciation and amortization and minority interest expense, and excludes
stock-based compensation charges and extraordinary items. We present adjusted
EBITDA to enhance the understanding of our operating results. Adjusted EBITDA is
not a measure of financial performance under generally accepted accounting
principles. Items excluded from adjusted EBITDA are significant components in
understanding and assessing financial performance. Adjusted EBITDA is a key
measure used by us to evaluate our operations and provides useful information to
investors. Adjusted EBITDA should not be considered in isolation or as an
alternative to net income (loss), cash flows generated by operating, investing
or financing activities, or other financial statement data presented in the
consolidated financial statements as indicators of financial performance or
liquidity. Because adjusted EBITDA is not a measurement determined in accordance
with generally accepted accounting principles and is thus susceptible to varying
calculations, adjusted EBITDA as presented may not be comparable to other
similarly titled measures of performance of other companies.

     The following table reconciles our net income (loss) to adjusted EBITDA and
also provides cash flows from operating, investing and financing activities for
the periods indicated:

<Table>
<Caption>
                                                           YEAR ENDED DECEMBER 31,
                                                         ----------------------------
                                                          1999      2000       2001
                                                         -------   -------   --------
                                                            (DOLLARS IN THOUSANDS)
<S>                                                      <C>       <C>       <C>
Net income (loss)......................................  $(2,200)  $ 3,092   $ 12,896
Add:
  Other expense (income), net..........................    2,179     2,946      2,423
  Provision for income taxes...........................       --       417      3,231
  Depreciation and amortization expense................    1,563     1,656      2,211
  Stock-based compensation charges.....................       --     1,113      1,112
  Extraordinary item -- debt extinguishment, net of
     tax...............................................       --        --        361
                                                         -------   -------   --------
Adjusted EBITDA........................................  $ 1,542   $ 9,224   $ 22,234
                                                         =======   =======   ========
Cash flows provided by (used in) operating
  activities...........................................  $(1,588)  $ 3,520   $ 14,956
Cash flows used in investing activities................  $(5,340)  $(1,503)  $(31,001)
Cash flows provided by (used in) financing
  activities...........................................  $ 6,702   $(2,293)  $ 36,019
</Table>

PROVISION FOR INCOME TAXES

     Our provision for income taxes consists of current and deferred federal and
state income tax expenses. For fiscal 2001, we fully utilized our net operating
loss carryforwards of $9.5 million that existed at December 31, 2000 and were
fully reserved by a valuation allowance. Accordingly, our effective tax rate was
19.0% during 2001, after considering the reversal of the valuation allowance on
our deferred tax assets. At December 31, 2001, no valuation allowance was
required for our net deferred tax assets. We estimate that our effective tax
rate will be approximately 37.0% during 2002 as there are no remaining net
operating loss carryforwards or remaining valuation allowances. See note 13 to
our consolidated financial statements included elsewhere in this Annual Report
on Form 10-K.

CRITICAL ACCOUNTING POLICIES

     Our significant accounting policies are more fully described in Note 1 to
our consolidated financial statements. Certain of our accounting policies are
particularly important to the portrayal of our financial position and results of
operations and require the application of significant judgment by us; as a
result, they are subject to an inherent degree of uncertainty. In applying those
policies, we use our judgment to determine the

                                        41
<PAGE>

appropriate assumptions to be used in the determination of certain estimates.
Those estimates are based on our historical experience, our observance of trends
in the industry and information available from other outside sources, as
appropriate.

     Net Patient Service Revenue and Allowance for Uncollectible Accounts

     We report net patient service revenue at the estimated net realizable
amounts from patients, Medicare, Medicaid, commercial insurance, managed care
payors and others for services rendered. Payors may determine that the services
provided are not covered and do not qualify for payment or, for commercial
payors, that payments are subject to usual and customary rates. To determine net
patient service revenue, we adjust gross patient service revenue for estimated
payment denials and contractual adjustments based on historical experience. We
recognize net patient service revenue in the month in which our services are
delivered. Due to the complexity of the laws and regulations affecting the
Medicare and Medicaid programs, there is a reasonable possibility that recorded
estimates could change by a material amount in the future.

     We maintain a policy for reserving for uncollectible accounts. We calculate
the allowance for uncollectible accounts based on a formula tied to the aging of
accounts receivable by payor class. We reserve for specific accounts that are
determined to be uncollectible when such determinations are made.

     Insurance Risks

     General and professional liability costs for the healthcare industry have
increased and become more difficult to estimate. In addition, insurance coverage
for patient care liabilities and other risks has become more difficult to
obtain. Insurance carriers often require companies to increase their liability
retention levels and pay higher policy premiums for reduced coverage. In our
financial statements, we provide for liabilities associated with the uninsured
portion of our general and professional liability risks, based on our
experience, consultation with our attorneys and insurers, and our existing
insurance coverage.

RESULTS OF OPERATIONS

     The following table sets forth selected consolidated financial information
as a percentage of net patient service revenue for the periods indicated:

<Table>
<Caption>
                                                              YEAR ENDED DECEMBER 31,
                                                              -----------------------
                                                              1999     2000     2001
                                                              -----    -----    -----
<S>                                                           <C>      <C>      <C>
Net patient service revenue.................................  100.0%   100.0%   100.0%
Operating expenses:
  Direct hospice care.......................................   51.7     52.7     47.8
  General and administrative (exclusive of $1.1 million in
     both 2000 and 2001 reported separately as stock-based
     compensation charges)..................................   40.6     33.3     32.6
  Stock-based compensation charges..........................     --      1.3      0.9
  Provision for uncollectible accounts......................    4.4      3.2      2.5
  Depreciation and amortization.............................    3.4      1.9      1.7
                                                              -----    -----    -----
                                                              100.1     92.4     85.5
                                                              -----    -----    -----
Income (loss) from operations...............................   (0.1)     7.6     14.5
Other income (expense), net.................................   (4.6)    (3.5)    (1.8)
                                                              -----    -----    -----
Income (loss) before income taxes and extraordinary item....   (4.7)     4.1     12.7
Provision for income taxes..................................     --      0.5      2.5
                                                              -----    -----    -----
Income (loss) before extraordinary item.....................   (4.7)     3.6     10.2
Extraordinary item -- debt extinguishment, net of tax.......     --       --     (0.3)
                                                              -----    -----    -----
Net income (loss)...........................................   (4.7)%    3.6%     9.9%
                                                              =====    =====    =====
Adjusted EBITDA.............................................    3.3%    10.8%    17.1%
                                                              =====    =====    =====
</Table>

                                        42
<PAGE>

YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000

     Net Patient Service Revenue

     Net patient service revenue increased $44.9 million, or 52.7%, from $85.3
million in 2000 to $130.2 million in 2001 due primarily to an increase in
average daily census of 1,030, or 51.1%, from 2,014 to 3,044. Increases in
patient referrals from existing and new referral sources, resulting in increased
billable days, and, to a lesser extent, increases in payment rates, provided
approximately $34.6 million, or 77.0%, of this increase in net patient service
revenue. The remaining increase of $10.3 million, or 23.0%, in net patient
service revenue was due to the inclusion of net patient service revenue from
hospices acquired and developed in 2000 and 2001. Net patient service revenue
per day of care was $115.69 and $117.16 in 2000 and 2001, respectively. This
increase was primarily due to overall increases in Medicare payment rates for
our hospice services. Medicare and Medicaid payments represented 95.6% and 97.2%
of our net patient service revenue in 2000 and 2001, respectively.

     Direct Hospice Care Expenses

     Direct hospice care expenses increased $17.3 million, or 38.5%, from $45.0
million in 2000 to $62.3 million in 2001. This increase was primarily due to the
growth of our operations at our existing hospices and, to a lesser extent, to
hospices acquired in 2000 and 2001. As a percentage of net patient service
revenue, direct hospice care expenses decreased from 52.7% in 2000 to 47.8% in
2001 due primarily to efficiencies in staffing and, to a lesser extent, overall
increases in Medicare payment rates.

     General and Administrative Expenses (Exclusive of Stock-Based Compensation)

     General and administrative expenses increased $14.1 million, or 49.7%, from
$28.4 million in 2000 to $42.5 million in 2001. This increase was due to the
growth of our operations at our hospice locations, including hospice locations
acquired after December 31, 2000, to support our patient census growth during
2001. As a percentage of net patient service revenue, general and administrative
expenses decreased from 33.3% in 2000 to 32.6% in 2001, due primarily to our
hospice and corporate costs being spread over our increased patient census
volume and, to a lesser extent, overall increases in Medicare payment rates.

     Stock-Based Compensation Charges

     Stock-based compensation charges were $1.1 million in both 2000 and 2001.
These charges related to stock options granted to management prior to our
initial public offering with exercise prices below the deemed fair value of our
common stock. See "-- Stock-Based and Other Compensation Charges."

     Provision for Uncollectible Accounts

     Our provision for uncollectible accounts increased $0.5 million, or 18.4%,
from $2.7 million in 2000 to $3.2 million in 2001, due to our increased net
patient service revenue. As a percentage of net patient service revenue, our
provision for uncollectible accounts decreased from 3.2% in 2000 to 2.5% in 2001
due to improved collection efforts at all of our hospice locations.

     Depreciation and Amortization Expense

     Depreciation and amortization expense increased $0.6 million, or 33.5%,
from $1.7 million in 2000 to $2.2 million in 2001. The increase was due to
increased depreciation expense on purchases of property and equipment and
increased amortization expense from our 2000 and 2001 hospice acquisitions. As a
percentage of net patient service revenue, depreciation and amortization expense
decreased from 1.9% in 2000 to 1.7% in 2001.

     Other Income (Expense)

     Other income (expense) decreased $0.5 million, or 17.8%, from $(2.9)
million in 2000 to $(2.4) million in 2001, due primarily to a decrease in
interest expense as a result of paying off our line of credit with proceeds

                                        43
<PAGE>

received from our initial public offering, and by an increase in interest income
received from investments of the proceeds of our initial public offering.

     Provision for Income Taxes

     Our provision for income taxes was $0.4 million and $3.2 million in 2000
and 2001, respectively. We had an effective income tax rate of 12.0% and 19.0%
in 2000 and 2001, respectively, resulting primarily from state income taxes and
federal alternative minimum tax and our use of net operating loss carryforwards.
In 2000, we utilized $8.1 million of net operating loss carryforwards. In 2001,
we fully utilized our net operating loss carryforwards of $9.5 million. At
December 31, 2001, no valuation allowance was required for our net deferred tax
assets because the assets met the criteria for recognition under Statement of
Financial Accounting Standards ("SFAS") No. 109 "Accounting for Income Taxes."

     Extraordinary Item

     During 2001, we repaid our 12% senior subordinated notes and, in connection
with the repayment, wrote off the unamortized discount relating to the notes.
This write off resulted in an extraordinary charge of $0.6 million, or $0.4
million net of taxes, representing 0.3% of net patient service revenue.

     Net Income

     Net income increased $9.8 million, from $3.1 million in 2000 to $12.9
million in 2001.

     Gain on Conversion of Preferred Securities

     The accumulated dividends on our Series A, Series B and Series C
convertible preferred stock were reversed in 2001 in connection with the
conversion of the preferred stock into common stock upon completion of our
initial public offering. We recognized a gain to common stockholders totalling
$5.8 million that was used in the computation of basic net income per share.

     Adjusted EBITDA

     Adjusted EBITDA increased $13.0 million, from $9.2 million in 2000 to $22.2
million in 2001. As a percentage of net patient service revenue, adjusted EBITDA
increased from 10.8% in 2000 to 17.1% in 2001.

YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

     Net Patient Service Revenue

     Net patient service revenue increased $38.8 million, or 83.5%, from $46.5
million in 1999 to $85.3 million in 2000 due primarily to an increase in average
daily census of 856, or 73.9%, from 1,158 to 2,014. Increases in patient
referrals from existing and new referral sources and, to a lesser extent,
increases in payment rates provided approximately $23.6 million, or 60.8%, of
this increase in net patient service revenue. The remaining increase of $15.2
million, or 39.2%, in net patient service revenue was due to the inclusion of
net patient service revenue from hospices acquired in 1999 and 2000. Net patient
service revenue per day of care was $109.94 and $115.69 in 1999 and 2000,
respectively. This increase was primarily due to increases in our provision of
inpatient care and continuous care as a result of our acquisition of three
inpatient facilities in the fourth quarter of 1999 and increased use of our
continuous care program. To a lesser extent, the increase was due to overall
increases in Medicare payment rates for our hospice services and our acquisition
in 1999 and 2000 of hospices located in geographic areas that receive higher
Medicare payment rates.

     Direct Hospice Care Expenses

     Direct hospice care expenses increased $21.0 million, or 87.2%, from $24.0
million in 1999 to $45.0 million in 2000. This increase was primarily due to
direct hospice care expenses of hospices acquired in 1999 and the growth of our
operations at our other hospices. As a percentage of net patient service
revenue,

                                        44
<PAGE>

direct hospice care expenses increased from 51.7% in 1999 to 52.7% in 2000 due
primarily to the increase in nursing home expense, net of nursing home revenue.

     General and Administrative Expenses (Exclusive of Stock-Based Compensation)

     General and administrative expenses increased $9.5 million, or 50.3%, from
$18.9 million in 1999 to $28.4 million in 2000. This increase was due to the
growth of our operations at each of our hospice locations, including hospice
locations acquired after December 31, 1999, to support our patient census growth
during 2000. As a percentage of net patient service revenue, general and
administrative expenses decreased from 40.6% in 1999 to 33.3% in 2000, as our
hospice and corporate costs were spread over increased patient census volume.

     Stock-Based Compensation Charges

     We did not recognize any stock-based compensation charges in 1999.
Stock-based compensation charges were $1.1 million in 2000. This charge related
to stock options granted to management with exercise prices below the deemed
fair value of our common stock. See "-- Stock-Based and Other Compensation
Charges."

     Provision for Uncollectible Accounts

     Our provision for uncollectible accounts increased $0.7 million, or 33.3%,
from $2.0 million in 1999 to $2.7 million in 2000, due to our increased net
patient service revenue. As a percentage of net patient service revenue, our
provision for uncollectible accounts decreased from 4.4% in 1999 to 3.2% in 2000
due to improved collection efforts at all of our hospice locations.

     Depreciation and Amortization Expense

     Depreciation and amortization expense increased $0.1 million, or 6.0%, from
$1.6 million in 1999 to $1.7 million in 2000. The increase was due to increased
depreciation expense on purchases of property and equipment and increased
amortization expense from our 1999 hospice acquisitions. As a percentage of net
patient service revenue, depreciation and amortization expense decreased from
3.4% in 1999 to 1.9% in 2000.

     Other Income (Expense)

     Other income (expense) increased $0.8 million, or 35.2%, from $(2.2)
million in 1999 to $(2.9) million in 2000, due primarily to increased borrowings
under our credit agreement. The increase in borrowings was a result of an
acquisition completed in the fourth quarter of 1999 and increased working
capital needs.

     Provision for Income Taxes

     Our provision for income taxes was $0.4 million in 2000. We reported no
provision for income taxes in 1999 due to operating losses incurred. We had an
effective income tax rate of 12.0% in 2000, resulting primarily from state
income taxes and federal alternative minimum tax and our use of net operating
loss carryforwards. In 2000, we utilized $8.1 million of net operating loss
carryforwards.

     Net Income (Loss)

     Net income increased $5.3 million, from a net loss of $(2.2) million in
1999 to net income of $3.1 million in 2000.

     Adjusted EBITDA

     Adjusted EBITDA increased $7.7 million, from $1.5 million in 1999 to $9.2
million in 2000. As a percentage of net patient service revenue, adjusted EBITDA
increased from 3.3% in 1999 to 10.8% in 2000.

                                        45
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

     Our principal liquidity requirements have historically been for debt
service, hospice acquisitions and development plans, working capital and other
capital expenditures. We have financed these requirements primarily with
borrowings under our credit facility, proceeds from the issuance of convertible
preferred stock, warrants and debt, seller financing of hospice acquisitions,
operating and capital leases, normal trade credit terms, and during 2000 and
2001, with cash flows from operations. At December 31, 2001, we had cash and
cash equivalents of $20.1 million and working capital of $50.4 million. At such
date, we also had short-term investments of $21.4 million and an available
borrowing capacity of $20.0 million under our credit agreement.

     In November 2001, we raised $56.0 million in net proceeds from our initial
public offering, of which $7.1 million was used to repay all outstanding
indebtedness under our revolving line of credit and $10.6 million was used to
repay our 12% senior subordinated notes.

     Cash provided by (used in) operating activities was $(1.6) million, $3.5
million and $15.0 million for the years ended December 31, 1999, 2000 and 2001,
respectively. Cash used in operating activities in 1999 was primarily
attributable to operating losses and increases in non-cash working capital. The
increase in cash provided by operating activities in 2000 and 2001 was primarily
attributable to the increase in net income during those periods, partially
offset by increases in non-cash working capital requirements due to the growth
of our business.

     Investing activities, consisting primarily of cash paid to purchase
hospices and property and equipment, used cash of $5.3 million, $1.5 million and
$31.0 million for the years ended December 31, 1999, 2000 and 2001,
respectively, and to establish short-term investments in 2001.

     Net cash provided by (used in) financing activities was $6.7 million,
$(2.3) million and $36.0 million for the years ended December 31, 1999, 2000 and
2001, respectively, and represented net borrowings under our credit agreement
and proceeds from the sale of capital stock, warrants and our 12% senior
subordinated notes. Net cash provided by financing activities in 2001 included
$56.0 million in net proceeds from our initial public offering.

     We made a principal payment of $0.8 million on our 12% senior subordinated
notes in June 2001 and a second principal payment of $0.7 million in September
2001. We paid $1.0 million and $1.6 million in accrued interest on these notes
in 2000 and 2001, respectively. We used $10.6 million of the proceeds from our
initial public offering to repay the notes in full in November 2001.

     In connection with our acquisition of seven hospice programs in November
1999, we issued two promissory notes payable to the seller in the principal
amounts of approximately $0.9 million and $1.6 million, each bearing interest at
the rate of 7% per annum. On October 31, 2000, we paid the seller $1.3 million
of the outstanding principal balance of these notes, plus accrued and unpaid
interest of $0.2 million. We paid the remaining principal balance of $1.2
million, plus accrued and unpaid interest of $0.1 million, in November, 2001.

     In connection with our acquisition of a hospice program in November 2000,
we paid $0.7 million in cash and issued a promissory note payable to the seller
in the principal amount of $0.5 million bearing interest at the rate of 8% per
annum. In November 2001 we paid the seller $0.2 million of the outstanding
principal balance, plus accrued and unpaid interest of $0.1 million. The
remaining principal amount of $0.3 million, plus accrued and unpaid interest, is
due and payable on May 19, 2002.

     In connection with our acquisition of seven hospice programs in 2001, we
paid an aggregate of $8.1 million in cash and issued the following promissory
notes payable to the sellers:

     - A promissory note in the principal amount of $0.2 million. We repaid in
       full the principal balance of this note and all accrued and unpaid
       interest in the aggregate amount of $0.3 million in February 2002;

     - A promissory note in the principal amount of $0.3 million. The promissory
       note bears interest at the rate of 8% per annum and is payable in two
       installments, with $0.2 million of the principal amount, plus

                                        46
<PAGE>

       accrued and unpaid interest, due and payable on April 19, 2002 and the
       remaining principal amount, plus accrued and unpaid interest, due and
       payable on April 19, 2003;

     - A promissory note in the principal amount of $1.0 million. The promissory
       note bears interest at the rate of 7% per annum and is payable in two
       installments, with $0.5 million of the principal amount, plus accrued and
       unpaid interest, due and payable on April 2, 2002 and the remaining
       principal amount, plus accrued and unpaid interest, due and payable on
       April 2, 2003;

     - A promissory note in the principal amount of $0.5 million. The promissory
       note bears interest at the rate of 8% per annum and is due and payable in
       one installment of principal, plus accrued and unpaid interest, on May
       31, 2002;

     - A promissory note in the principal amount of $0.6 million. The promissory
       note bears interest at the rate of 7% per annum, with interest payable
       monthly and principal payable in two installments of $0.3 million each on
       June 30, 2002 and 2003; and

     - A promissory note in the principal amount of $0.5 million. The promissory
       note bears interest at the rate of 8% per annum and is payable in two
       installments, with $0.3 million of the principal amount, plus accrued and
       unpaid interest, due and payable on December 6, 2002 and the remaining
       principal amount, plus accrued and unpaid interest, due and payable on
       December 6, 2003.

     We expect to utilize approximately $9.5 million of the proceeds received by
us in our initial public offering to complete the anticipated acquisition of the
assets of the three hospices located in Louisiana in the second quarter of 2002.

     Our credit agreement with Heller Healthcare Finance, Inc. provides us with
a $20 million revolving line of credit for working capital, acquisitions and
general corporate purposes. Borrowings outstanding under our revolving line of
credit bear interest at fluctuating rates equal to 1.0% above the prime rate of
interest designated by Citibank, with a floor of 10% per annum. Our revolving
line of credit will mature on October 2, 2003. As of February 28, 2002, we had
no outstanding borrowings under our credit agreement or accrued and unpaid
interest. Our revolving line of credit is secured by all of our accounts
receivable and any other right to payment for goods sold or leased or services
rendered by us and all other property in our possession or under our control. We
and our subsidiaries are subject to affirmative and negative covenants,
including:

     - limitations on indebtedness, mergers, acquisitions and dispositions of
       assets, dividends, investments and liens;

     - license maintenance covenants; and

     - financial maintenance covenants.

     We were in full compliance with our financial and other covenants as of
February 28, 2002. We may in the future refinance our credit agreement with a
new credit agreement with our existing lender or new lenders.

     We expect that our principal liquidity requirements will be for working
capital, development plans, anticipated hospice acquisitions, debt service and
other anticipated capital expenditures. We expect that our existing funds, cash
flows from operations and borrowings under our credit agreement will be
sufficient to fund our principal liquidity requirements for at least 12 months
following the date of this prospectus. Our future liquidity requirements and the
adequacy of our available funds will depend on many factors, including payment
for our services, regulatory changes and compliance with new regulations,
expense levels, capital expenditures and future development of new hospice
locations and acquisitions.

PAYMENT, LEGISLATIVE AND REGULATORY CHANGES

     We are highly dependent on payments from the Medicare and Medicaid
programs. These programs are subject to statutory and regulatory changes,
possible retroactive and prospective rate adjustments, administrative rulings,
rate freezes and funding reductions. Reductions in amounts paid by these
programs for our

                                        47
<PAGE>

services or changes in methods or regulations governing payments for our
services could materially adversely affect our net patient service revenue and
profits.

INFLATION

     The healthcare industry is labor intensive. Wages and other expenses
increase during periods of inflation and when labor shortages occur in the
marketplace. In addition, suppliers pass along rising costs to us in the form of
higher prices. We have implemented cost control measures designed to curb
increases in operating expenses. We have, to date, offset increases in operating
costs by increasing patient census. However, we cannot predict our ability to
cover or offset future cost increases.

RECENT ACCOUNTING PRONOUNCEMENTS

     In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets," effective for fiscal 2002. Under the new rules, goodwill and intangible
assets deemed to have indefinite lives will no longer be amortized but will be
subject to annual impairment tests in accordance with the new rules. Other
intangible assets will continue to be amortized over their useful lives. The
amortization provisions of SFAS No. 142 apply immediately to goodwill and
intangible assets acquired after June 30, 2001. With respect to goodwill and
intangible assets acquired prior to July 1, 2001, SFAS No. 142 will be effective
beginning in the first quarter of 2002. Application of the non-amortization
provisions of the new rules in 2001 would have resulted in a decrease in
amortization expense of $1.2 million. We are currently performing the required
impairment tests of goodwill and indefinite lived intangible assets and do not
expect that the adoption of the statement will have a significant impact on our
financial position or results of operations.

     In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations for a Disposal of a Segment of a Business." We have
adopted SFAS No. 144 as of January 1, 2002 and do not expect that the adoption
of the statement will have a significant impact on our financial position or
results of operations.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Changes in interest rates would affect the fair market value of our fixed
rate debt instruments but would not have an impact on our earnings or cash
flows. Fluctuations in interest rates on any future variable rate debt
instruments, which are tied to the prime rate, would affect our earnings and
cash flows but would not affect the fair market value of the variable rate debt.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     Reference is made to the Index to Consolidated Financial Statements on page
F-1 of this Annual Report on Form 10-K for a listing of our financial statements
and related notes thereto. 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.

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

     None.

                                        48
<PAGE>

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information set forth under the headings "Proposal One -- Election of
Class I Directors," "Directors," "Executive Officers" and "Section 16 Beneficial
Ownership Reporting Compliance" contained in our definitive Proxy Statement to
be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934 (the
"Exchange Act") in connection with our 2001 Annual Meeting of Stockholders is
incorporated herein by reference.

ITEM 11.  EXECUTIVE COMPENSATION

     The information set forth under the headings "Executive Compensation,"
"Compensation Committee Interlocks and Insider Participation," "Compensation
Committee Report on Executive Compensation" and "Performance Graph" contained in
our definitive Proxy Statement to be filed pursuant to Regulation 14A of the
Exchange Act in connection with our 2001 Annual Meeting of Stockholders is
incorporated herein by reference.

ITEM 12.  SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT

     The information set forth under the heading "Principal Stockholders and
Stock Ownership of Management" contained in our definitive Proxy Statement to be
filed pursuant to Regulation 14A of the Exchange Act in connection with our 2001
Annual Meeting of Stockholders is incorporated herein by reference.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information set forth under the headings "Executive Compensation" and
"Certain Relationships and Related Transactions" contained in our definitive
Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act in
connection with our 2001 Annual Meeting of Stockholders is incorporated herein
by reference.

                                    PART IV

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

     (a) The following documents are filed as part of this Annual Report on Form
10-K:

          (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:

<Table>
<Caption>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
         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)
</Table>

                                        49
<PAGE>

<Table>
<Caption>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
         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           -- Amended and Restated Loan and Security Agreement, dated
                            October 2, 2000 (the "Credit Agreement"), by and among
                            Odyssey HealthCare, Inc. and subsidiaries and Heller
                            Healthcare Finance, Inc. (incorporated by reference to
                            Exhibit 10.1.1 to the Company's Registration Statement on
                            Form S-1 (Registration No. 333-51522) as filed with the
                            Commission on December 8, 2000)
        10.1.2           -- First Amendment to the Credit Agreement, dated March 29,
                            2001 (incorporated by reference to Exhibit 10.1.2 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)
        10.1.3           -- Second Amendment to Credit Agreement, dated May 8, 2001
                            (incorporated by reference to Exhibit 10.1.3 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)
        10.2             -- Amended and Restated Employment Agreement, effective as
                            of February 28, 2002, by and between Odyssey HealthCare,
                            Inc. and Richard R. Burnham
        10.3             -- Amended and Restated Employment Agreement, effective as
                            of February 28, 2002, by and between Odyssey HealthCare,
                            Inc. and David C. Gasmire
        10.4             -- Amended and Restated Employment Agreement, effective as
                            of February 28, 2002, by and between Odyssey HealthCare,
                            Inc. and Douglas B. Cannon
        10.5.1           -- 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)
        10.5.2           -- 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)
        10.6             -- 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)
        10.7.1           -- 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)
</Table>

                                        50
<PAGE>

<Table>
<Caption>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
        10.7.2           -- First Amendment to Employee Stock Purchase Plan, dated
                            March 6, 2002
        10.8             -- 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)
        10.9.1           -- 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)
        10.9.2           -- 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)
        10.9.3           -- 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)
        21.1             -- Subsidiaries of Odyssey HealthCare, Inc.
        23.1             -- Consent of Ernst & Young LLP
</Table>

     (b) We filed the following reports on Form 8-K during the quarterly period
ended December 31, 2001:

          (1) Current report on Form 8-K (Item 5), dated November 6, 2001,
     announcing the adoption of our stockholder rights plan and the issuance of
     one preferred share purchase right with respect to each outstanding share
     of our common stock.

     (c) The exhibits required by Item 601 of Regulation S-K are filed as part
of this Annual Report on Form 10-K.

     (d) The required financial statements and financial statement schedules are
filed as part of this Annual Report on Form 10-K.

                                        51
<PAGE>

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                          ODYSSEY HEALTHCARE, INC.

                                          By:    /s/ RICHARD R. BURNHAM
                                            ------------------------------------
                                                     Richard R. Burnham
                                                  Chief Executive Officer
                                                 and Chairman of the Board

                                            Date: March 19, 2002

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

<Table>
<Caption>
                    SIGNATURE                                      TITLE                       DATE
                    ---------                                      -----                       ----
<S>     <C>                                          <C>                                  <C>

              /s/ RICHARD R. BURNHAM                    Chief Executive Officer and       March 19, 2002
 ------------------------------------------------     Chairman of the Board (Principal
                Richard R. Burnham                           Executive Officer)


               /s/ DAVID C. GASMIRE                  President, Chief Operating Officer   March 19, 2002
 ------------------------------------------------         and Assistant Secretary
                 David C. Gasmire


              /s/ DOUGLAS B. CANNON                     Senior Vice President, Chief      March 19, 2002
 ------------------------------------------------     Financial Officer, Secretary and
                Douglas B. Cannon                    Treasurer (Principal Financial and
                                                            Accounting Officer)


               /s/ JOHN K. CARLYLE                                Director                March 19, 2002
 ------------------------------------------------
                 John K. Carlyle


                /s/ DAVID W. CROSS                                Director                March 19, 2002
 ------------------------------------------------
                  David W. Cross


              /s/ ALEXANDER MCGRATH                               Director                March 19, 2002
 ------------------------------------------------
                Alexander McGrath


                /s/ MARTIN S. RASH                                Director                March 19, 2002
 ------------------------------------------------
                  Martin S. Rash


               /s/ DAVID L. STEFFY                                Director                March 19, 2002
 ------------------------------------------------
                 David L. Steffy


                 /s/ MARK A. WAN                                  Director                March 19, 2002
 ------------------------------------------------
                   Mark A. Wan
</Table>

                                        52
<PAGE>

                   ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<Table>
<Caption>
                                                              PAGE
                                                              ----
<S>                                                           <C>
ODYSSEY HEALTHCARE, INC.
Report of Ernst & Young LLP, Independent Auditors...........  F-2
Consolidated Balance Sheets as of December 31, 2000 and
  2001......................................................  F-3
Consolidated Statements of Operations for the years ended
  December 31, 1999, 2000 and 2001..........................  F-4
Consolidated Statements of Changes in Preferred Stock and
  Stockholders' Equity (Deficit) for the years ended
  December 31, 1999, 2000 and 2001..........................  F-5
Consolidated Statements of Cash Flows for the years ended
  December 31, 1999, 2000 and 2001..........................  F-6
Notes to Consolidated Financial Statements..................  F-7
</Table>

                                       F-1
<PAGE>

               REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

Board of Directors and Stockholders
Odyssey HealthCare, Inc.

     We have audited the accompanying consolidated balance sheets of Odyssey
HealthCare, Inc. and subsidiaries as of December 31, 2000 and 2001, and the
related consolidated statements of operations, changes in preferred stock and
stockholders' equity (deficit), and cash flows for each of the three years in
the period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Odyssey HealthCare, Inc. and subsidiaries, as of December 31, 2000 and 2001, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States.

                                                 /s/ ERNST & YOUNG LLP

DALLAS, TEXAS
FEBRUARY 1, 2002

                                       F-2
<PAGE>

                   ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

<Table>
<Caption>
                                                                 DECEMBER 31,
                                                              ------------------
                                                                2000      2001
                                                              --------   -------
                                                                (IN THOUSANDS,
                                                               EXCEPT SHARE AND
                                                              PER SHARE AMOUNTS)
<S>                                                           <C>        <C>
                                     ASSETS

Current assets:
  Cash and cash equivalents.................................  $     98   $20,072
  Short-term investments....................................        --    21,419
  Accounts receivable from patient services, net of
    allowance for uncollectible accounts of $3,140 and
    $3,394 at December 31, 2000 and 2001, respectively......    18,753    25,043
  Deferred tax assets.......................................        --       903
  Other current assets......................................     1,503     1,564
                                                              --------   -------
        Total current assets................................    20,354    69,001
Property and equipment, net.................................     1,603     2,451
Debt issue costs, net and other.............................       126        59
Goodwill, net...............................................    16,762    26,705
                                                              --------   -------
        Total assets........................................  $ 38,845   $98,216
                                                              ========   =======

                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)


Current liabilities:
  Accounts payable..........................................  $  2,290   $ 2,008
  Accrued compensation......................................     1,956     4,685
  Accrued nursing home costs................................     3,460     5,125
  Accrued income taxes......................................       135       834
  Other accrued expenses....................................     3,277     3,418
  Line of credit............................................     6,769        --
  Current maturities of long-term debt and capital lease
    obligations.............................................     4,158     2,568
                                                              --------   -------
        Total current liabilities...........................    22,045    18,638
Long-term debt and capital lease obligations, less current
  maturities................................................     9,384     1,213
Deferred tax liability......................................        --       580
Commitments and contingencies
Minority interest...........................................        --       150
Convertible Preferred Stock, bearing liquidation
  preferences:
  Series A, $.001 par value, cumulative:
    Authorized shares -- 7,009,091; issued and outstanding
     shares -- 6,918,091 at December 31, 2000, net of
     stockholder loans of $171 in 2000......................     4,688        --
  Series B, $.001 par value, cumulative:
    Authorized shares -- 6,519,993; issued and outstanding
     shares -- 6,400,000 at December 31, 2000...............    10,479        --
  Series C, $.001 par value, cumulative:
    Authorized, issued and outstanding shares -- 2,857,137
     at December 31, 2000...................................     5,995        --
Stockholders' equity (deficit):
  Common stock, $.001 par value:
    Authorized shares -- 75,000,000
    Issued and outstanding shares -- 1,981,072 at December
     31, 2000 and 15,253,590 at December 31, 2001...........         2        15
  Additional paid-in capital................................     3,437    77,718
  Deferred compensation.....................................      (944)   (1,411)
  Retained earnings (deficit)...............................   (16,241)    1,313
                                                              --------   -------
        Total stockholders' equity (deficit)................   (13,746)   77,635
                                                              --------   -------
        Total liabilities and stockholders' equity
        (deficit)...........................................  $ 38,845   $98,216
                                                              ========   =======
</Table>

                            See accompanying notes.

                                       F-3
<PAGE>

                   ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<Table>
<Caption>
                                                                YEAR ENDED DECEMBER 31,
                                                              ----------------------------
                                                               1999      2000       2001
                                                              -------   -------   --------
                                                                     (IN THOUSANDS,
                                                               EXCEPT PER SHARE AMOUNTS)
<S>                                                           <C>       <C>       <C>
Net patient service revenue.................................  $46,460   $85,271   $130,181
Operating expenses:
  Direct hospice care.......................................   24,014    44,964     62,269
  General and administrative (exclusive of $1,113 and $1,112
     for the years ended December 31, 2000 and 2001,
     respectively, reported below as stock-based
     compensation charges)..................................   18,873    28,375     42,471
  Stock-based compensation charges..........................       --     1,113      1,112
  Provision for uncollectible accounts......................    2,031     2,708      3,207
  Depreciation and amortization.............................    1,563     1,656      2,211
                                                              -------   -------   --------
                                                               46,481    78,816    111,270
                                                              -------   -------   --------
Income (loss) from operations...............................      (21)    6,455     18,911
Other income (expense):
  Minority interest.........................................       (5)      (46)      (150)
  Interest income...........................................       35        31        239
  Interest expense..........................................   (2,209)   (2,931)    (2,512)
                                                              -------   -------   --------
                                                               (2,179)   (2,946)    (2,423)
                                                              -------   -------   --------
Income (loss) before provision for income taxes and
  extraordinary item........................................   (2,200)    3,509     16,488
Provision for income taxes..................................       --       417      3,231
                                                              -------   -------   --------
Income (loss) before extraordinary item.....................   (2,200)    3,092     13,257
Extraordinary item -- debt extinguishment, net of tax.......       --        --       (361)
                                                              -------   -------   --------
Net income (loss)...........................................   (2,200)    3,092     12,896
Preferred stock dividends...................................   (1,320)   (1,302)    (1,097)
Gain on conversion of preferred securities..................       --        --      5,755
                                                              -------   -------   --------
Net income (loss) available to common stockholders..........  $(3,520)  $ 1,790   $ 17,554
                                                              =======   =======   ========
Net income (loss) per common share:
  Basic net income before extraordinary item................  $ (1.81)  $  0.92   $   4.22
  Extraordinary item -- debt extinguishment, net of tax.....       --        --      (0.09)
                                                              -------   -------   --------
  Basic net income per common share.........................  $ (1.81)  $  0.92   $   4.13
                                                              =======   =======   ========
  Diluted net income before extraordinary item..............  $ (1.81)  $  0.26   $   1.04
  Extraordinary item -- debt extinguishment, net of tax.....       --        --      (0.03)
                                                              -------   -------   --------
  Diluted net income per common share.......................  $ (1.81)  $  0.26   $   1.01
                                                              =======   =======   ========
Weighted average shares outstanding:
  Basic.....................................................    1,943     1,947      4,246
  Diluted...................................................    1,943    11,820     12,720
</Table>

                            See accompanying notes.

                                       F-4
<PAGE>

                   ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

 CONSOLIDATED STATEMENTS OF CHANGES IN PREFERRED STOCK AND STOCKHOLDERS' EQUITY
                                   (DEFICIT)
                             (AMOUNTS IN THOUSANDS)
<Table>
<Caption>
                                                  CONVERTIBLE PREFERRED STOCK
                                     ------------------------------------------------------
                                         SERIES A           SERIES B           SERIES C                      COMMON STOCK
                                     ----------------   -----------------   ---------------   STOCKHOLDER   ---------------
                                     SHARES   AMOUNT    SHARES    AMOUNT    SHARES   AMOUNT      LOANS      SHARES   AMOUNT
                                     ------   -------   ------   --------   ------   ------   -----------   ------   ------
<S>                                  <C>      <C>       <C>      <C>        <C>      <C>      <C>           <C>      <C>
Balance at January 1, 1999.........  7,009     4,362    6,400       9,199   2,857    5,195       (216)      1,937       2
Series A Convertible Preferred
 Stock dividends...................     --       280       --          --      --       --         --          --      --
Series B Convertible Preferred
 Stock dividends...................     --        --       --         640      --       --         --          --      --
Series C Convertible Preferred
 Stock dividends...................     --        --       --          --      --      400         --          --      --
Issuance of Common Stock
 warrants..........................     --        --       --          --      --       --         --          --      --
Exercise of stock options..........     --        --       --          --      --       --         --           9      --
Net loss...........................     --        --       --          --      --       --         --          --      --
                                     ------   -------   ------   --------   ------   ------      ----       ------    ---
Balance at December 31, 1999.......  7,009     4,642    6,400       9,839   2,857    5,595       (216)      1,946       2
Exercise of stock options..........     --        --       --          --      --       --         --          35      --
Cancellation of Series A
 Convertible Preferred Stock.......    (91)      (45)      --          --      --       --         45          --      --
Series A Convertible Preferred
 Stock dividends, net of dividends
 on cancelled stock................     --       262       --          --      --       --         --          --      --
Series B Convertible Preferred
 Stock dividends...................     --        --       --         640      --       --         --          --      --
Series C Convertible Preferred
 Stock dividends...................     --        --       --          --      --      400         --          --      --
Deferred compensation related to
 stock options.....................     --        --       --          --      --       --         --          --      --
Amortization of deferred
 compensation......................     --        --       --          --      --       --         --          --      --
Net income.........................     --        --       --          --      --       --         --          --      --
                                     ------   -------   ------   --------   ------   ------      ----       ------    ---
Balance at December 31, 2000.......  6,918    $4,859    6,400    $ 10,479   2,857    5,995       (171)      1,981       2
Series A Convertible Preferred
 Stock dividends...................     --       231       --          --      --       --         --          --      --
Series B Convertible Preferred
 Stock dividends...................     --        --       --         533      --       --         --          --      --
Series C Convertible Preferred
 Stock dividends...................     --        --       --          --      --      333         --          --      --
Proceeds from initial public
 offering..........................     --        --       --          --      --       --         --       4,140       4
Preferred stock conversion in
 connection with initial public
 offering..........................  (6,918)  (5,090)   (6,400)   (11,012)  (2,857)  (6,328)       --       8,088       8
Forgiveness of stockholder loans...     --        --       --          --      --       --        171          --      --
Deferred compensation related to
 stock options.....................     --        --       --          --      --       --         --          --      --
Amortization of deferred
 compensation......................     --        --       --          --      --       --         --          --      --
Exercise of stock options..........     --        --       --          --      --       --         --          55      --
Exercise of stock warrants.........     --        --       --          --      --       --         --         990       1
Net income.........................     --        --       --          --      --       --         --          --      --
                                     ------   -------   ------   --------   ------   ------      ----       ------    ---
Balance at December 31, 2001.......     --        --       --          --      --       --         --       15,254    $15
                                     ======   =======   ======   ========   ======   ======      ====       ======    ===

<Caption>

                                     ADDITIONAL                  RETAINED        TOTAL
                                      PAID-IN       DEFERRED     EARNINGS    STOCKHOLDERS'
                                      CAPITAL     COMPENSATION   (DEFICIT)      EQUITY
                                     ----------   ------------   ---------   -------------
<S>                                  <C>          <C>            <C>         <C>
Balance at January 1, 1999.........    1,18 9            --       (14,511)      (13,320)
Series A Convertible Preferred
 Stock dividends...................        --            --          (280)         (280)
Series B Convertible Preferred
 Stock dividends...................        --            --          (640)         (640)
Series C Convertible Preferred
 Stock dividends...................        --            --          (400)         (400)
Issuance of Common Stock
 warrants..........................       181            --            --           181
Exercise of stock options..........         2            --            --             2
Net loss...........................        --            --        (2,200)       (2,200)
                                      -------       -------      --------      --------
Balance at December 31, 1999.......    1,37 2            --       (18,031)      (16,657)
Exercise of stock options..........         8            --            --             8
Cancellation of Series A
 Convertible Preferred Stock.......        --            --            --            --
Series A Convertible Preferred
 Stock dividends, net of dividends
 on cancelled stock................        --            --          (262)         (262)
Series B Convertible Preferred
 Stock dividends...................        --            --          (640)         (640)
Series C Convertible Preferred
 Stock dividends...................        --            --          (400)         (400)
Deferred compensation related to
 stock options.....................     2,057        (2,057)           --            --
Amortization of deferred
 compensation......................        --         1,113            --         1,113
Net income.........................        --            --         3,092         3,092
                                      -------       -------      --------      --------
Balance at December 31, 2000.......     3,437          (944)      (16,241)      (13,746)
Series A Convertible Preferred
 Stock dividends...................        --            --          (231)         (231)
Series B Convertible Preferred
 Stock dividends...................        --            --          (533)         (533)
Series C Convertible Preferred
 Stock dividends...................        --            --          (333)         (333)
Proceeds from initial public
 offering..........................    56,000            --            --        56,004
Preferred stock conversion in
 connection with initial public
 offering..........................    16,667            --         5,755        22,430
Forgiveness of stockholder loans...        --            --            --            --
Deferred compensation related to
 stock options.....................     1,579        (1,579)           --            --
Amortization of deferred
 compensation......................        --         1,112            --         1,112
Exercise of stock options..........        36            --            --            36
Exercise of stock warrants.........        (1)           --            --            --
Net income.........................        --            --        12,896        12,896
                                      -------       -------      --------      --------
Balance at December 31, 2001.......   $77,718       $(1,411)     $  1,313      $ 77,635
                                      =======       =======      ========      ========
</Table>

                            See accompanying notes.

                                       F-5
<PAGE>

                   ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<Table>
<Caption>
                                                                      YEAR ENDED DECEMBER 31,
                                                              ----------------------------------------
                                                                 1999          2000           2001
                                                              -----------   -----------   ------------
                                                              (IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
<S>                                                           <C>           <C>           <C>
Operating Activities
  Net income (loss).........................................   $ (2,200)     $  3,092      $  12,896
  Adjustments to reconcile net income (loss) to net cash
     provided by (used in) operating activities:
     Extraordinary item-debt extinguishment.................         --            --            572
     Forgiveness of stockholder loans.......................         --            --            171
     Depreciation and amortization..........................      1,563         1,656          2,211
     Amortization of deferred charges and debt discount.....        128           189            173
     Stock-based compensation...............................         --         1,113          1,112
     Minority interest......................................         --            --            150
     Deferred tax expense...................................         --            --           (323)
     Provision for uncollectible accounts...................      2,031         2,707          3,207
     Changes in operating assets and liabilities, net of
       acquisitions:
       Accounts receivable..................................     (4,660)       (8,671)        (9,242)
       Other current assets.................................       (137)         (814)          (623)
       Accounts payable, accrued nursing home costs and
          other accrued expenses............................      1,687         4,248          4,652
                                                               --------      --------      ---------
          Net cash provided by (used in) operating
            activities......................................     (1,588)        3,520         14,956
Investing Activities
  Cash paid for acquisitions................................     (4,803)         (825)        (7,845)
  Increase in short-term investments........................         --            --        (21,419)
  Purchases of property and equipment.......................       (537)         (678)        (1,737)
                                                               --------      --------      ---------
       Net cash used in investing activities................     (5,340)       (1,503)       (31,001)
Financing Activities
  Proceeds from issuance of common stock....................          2             9         56,616
  Proceeds from issuance of common stock warrants...........        181            --             --
  Proceeds from issuance of debt............................     46,568        89,426        116,893
  Payments on debt..........................................    (40,049)      (91,628)      (137,490)
  Payment of debt issue costs...............................         --          (100)            --
                                                               --------      --------      ---------
       Net cash provided by (used in) financing
          activities........................................      6,702        (2,293)        36,019
                                                               --------      --------      ---------
Net increase (decrease) in cash and cash equivalents........       (226)         (276)        19,974
Cash and cash equivalents, beginning of period..............        600           374             98
                                                               --------      --------      ---------
Cash and cash equivalents, end of period....................   $    374      $     98      $  20,072
                                                               ========      ========      =========
Supplemental Cash Flow Information
  Cash interest paid........................................   $  2,444      $  2,583      $   2,698
  Income taxes paid.........................................   $     --      $    282      $   2,526
  Equipment financed under capital leases...................   $     73      $     --      $      --
</Table>

                            See accompanying notes.
                                       F-6
<PAGE>

                   ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001

1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  ORGANIZATION

     Odyssey HealthCare, Inc. and its subsidiaries (the Company) provide hospice
care, with a goal of improving the quality of life of terminally ill patients
and their families. Hospice services focus on palliative care for patients with
life-limiting illnesses, which is care directed at managing pain and other
discomforting symptoms and addressing the psychosocial and spiritual needs of
patients and their families. The Company provides for all medical, psychosocial
care and certain other support services associated with the patient's terminal
illness.

     The Company was incorporated on August 29, 1995 in the state of Delaware
and, as of December 31, 2001, had 42 locations serving patients and their
families in 21 states, with significant operations in Texas, California and
Arizona.

  PRINCIPLES OF CONSOLIDATION

     The consolidated financial statements include the accounts of Odyssey
HealthCare, Inc. and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.

  CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

     Cash and cash equivalents include currency, checks on hand and overnight
repurchase agreements of government securities. Short-term investments primarily
include money market funds and debt securities with initial maturities between
180 days and one year.

  FAIR VALUE OF FINANCIAL INSTRUMENTS

     The fair value of financial instruments is the amount at which the
instrument could be exchanged in a current transaction between willing parties.
Management estimates that the carrying amounts of the Company's financial
instruments included in the accompanying consolidated balance sheets are not
materially different from their fair values.

  ACCOUNTS RECEIVABLE

     Accounts receivable represents amounts due from patients, third-party
payors (principally the Medicare and Medicaid programs), and others for services
rendered based on payment arrangements specific to each payor. Approximately
85.6% and 91.2% of the accounts receivable at December 31, 2000 and 2001,
respectively, represent amounts due from the Medicare and Medicaid programs.

  GOODWILL

     Goodwill represents the excess of cost over fair value of the net assets
acquired in acquisitions. Goodwill is amortized on a straight-line basis over
the period of benefit, which is estimated to be 20 years. During the Company's
1999 review of its intangible assets, it was determined that the useful life of
goodwill should be changed from 25 to 20 years. The amortization period was
adjusted accordingly, which resulted in an increase in amortization expense of
$0.2 million for the year ended December 31, 1999. Accumulated amortization
totaled $1.7 million and $2.9 million, as of December 31, 2000 and 2001,
respectively.

     On an ongoing basis, the Company reviews the carrying value of its
intangible assets in light of any events or circumstances that indicate they may
be impaired or that the amortization period may need to be adjusted. If such
circumstances suggest the intangible value cannot be recovered, calculated based
on undiscounted cash flows over the remaining amortization period, the carrying
value of the intangible will be reduced by such
                                       F-7
<PAGE>
                   ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

shortfall based on discounted cash flows. As of December 31, 2000 and 2001, the
Company does not believe there is any indication that the carrying value or the
amortization period of its intangible assets needs to be adjusted.

     There has been no amortization taken on acquisitions acquired after June
30, 2001.

     During March 1999, the Company closed a hospice facility in Minnesota and
wrote off the remaining goodwill related to the purchase of the facility of $0.2
million during 1999.

  NET PATIENT SERVICE REVENUE

     Net patient service revenue is reported at the estimated net realizable
amounts from patients, Medicare, Medicaid, commercial insurance and managed care
payors and others for services rendered. Payors may determine that the services
provided are not covered and do not qualify for payment or, for commercial
payors, that payments are subject to usual and customary rates. To determine net
patient service revenue, management adjusts gross patient service revenue for
estimated payment denials and contractual adjustments based on historical
experience. Changes in the estimate will be adjusted in future periods as the
payments are determined. The percentage of net patient service revenue derived
under the Medicare and Medicaid programs was 94.1%, 95.6% and 97.2% for the
years ended December 31, 1999, 2000 and 2001, respectively.

     The Company is subject to limits for payments for routine home care and for
inpatient services. Routine home care, which represented about 88.7% of gross
patient service revenue in 2001, is subject to limits based on aggregate length
of stay by hospice provider for the year, and the limit by hospice provider is
effective for average lengths of stay in excess of 180 days. For inpatient
services, which represented about 9.0% of gross patient service revenue in 2001,
the limit is based on inpatient care days. If inpatient care days provided to
patients at a hospice exceeded 20% of the total days of hospice care provided
for the year, then payment for days in excess of this limit are paid for at the
routine home care rate. None of the Company's hospices exceeded the payment
limits on routine home care or inpatient services in 1999, 2000, or 2001.

     Laws and regulations governing the Medicare and Medicaid programs are
complex and subject to interpretation. The Company believes that it is in
compliance with all applicable laws and regulations and is not aware of any
pending or threatened investigations involving allegations of potential
wrongdoing. While no such regulatory inquiries have been made, compliance with
laws and regulations can be subject to future government review and
interpretation as well as significant regulatory action including fines,
penalties and exclusion from the Medicare and Medicaid programs.

  CHARITY CARE

     The Company provides charity care to patients without charge when
management of the hospice has determined that the patient does not have the
financial capability to pay, which is determined at or near the time of
admission. Because the Company does not pursue collection of amounts determined
to qualify as charity care, they are not reported as revenue.

     Charity care, based on established charges, amounted to $0.6 million, $0.4
million and $0.9 million for the years ended December 31, 1999, 2000 and 2001,
respectively.

  PROPERTY AND EQUIPMENT

     Property and equipment, including improvements to existing facilities, are
recorded at cost. Depreciation and amortization are calculated principally using
the straight-line method over the estimated useful lives of the assets.
Estimated useful lives for major asset categories are three years for leasehold
improvements, three to five years for equipment and computer software, and five
years for office furniture. Leased assets are

                                       F-8
<PAGE>
                   ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

amortized over the shorter of the lease term or their respective estimated
useful life. Amortization of assets under capital lease obligations is included
in depreciation and amortization expense.

  STOCK-BASED COMPENSATION

     The Company has elected to follow the Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
interpretations in accounting for its employee stock options. As such, the
Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation."
Under APB 25, compensation expense is measured as the excess of the deemed fair
value of the Company's stock at the date of the grant over the option exercise
price and is charged to operations over the vesting period using the graded
method.

  NET INCOME (LOSS) PER COMMON SHARE

     Basic net income (loss) per common share is computed by dividing net income
(loss) less the annual Series A, Series B and Series C Convertible Preferred
Stock dividends, where applicable, by the weighted average number of common
shares outstanding during the period. Diluted net income (loss) per common share
is computed by dividing the net income (loss) by the weighted average number of
common shares outstanding during the period plus the effect of dilutive
securities, giving effect to the conversion of the convertible preferred stock
(using the if-converted method), where applicable, and employee stock options
and outstanding warrants (using the treasury stock method and considering the
effect of unrecognized deferred compensation charges).

     The accumulated dividends on the Series A, Series B and Series C
Convertible Preferred Stock were reversed in 2001 as they are no longer payable
due to the mandatory conversion of the convertible preferred stock in connection
with the Company's initial public offering. The Company has accounted for the
reversal in accordance with Emerging Issues Task Force Topic No. D-42 "The
Effect on the Calculation of Earnings per Share for the Redemption or Induced
Conversion of Preferred Stock" and recognized a gain to common stockholders
totaling $5.8 million. This gain was used in the computation of basic net income
per common share.

  INCOME TAXES

     The Company accounts for income taxes using the liability method as
required by Financial Accounting Standards Board Statement No. 109, "Accounting
for Income Taxes" (FAS 109). Under the liability method, deferred taxes are
determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax laws that will be
in effect when the differences are expected to reverse.

  GENERAL AND PROFESSIONAL LIABILITY INSURANCE

     The Company maintains general liability and professional liability
insurance coverage on a claims-made basis in fiscal 2001, and on an occurrence
basis in fiscal 2000 and prior years, with limits of liability of $1.0 million
per occurrence and $3.0 million in the aggregate. The Company has recorded a
liability for its estimated exposure to incurred but not reported claims. The
Company also maintains general liability and umbrella coverage with a limit of
$20.0 million.

  NURSING HOME COSTS

     For patients receiving nursing home care under a state Medicaid program who
elect hospice care under Medicare or Medicaid, the Company contracts with
nursing homes for the nursing homes' provision to patients of room and board
services. The state must pay the Company, in addition to the applicable Medicare

                                       F-9
<PAGE>
                   ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

or Medicaid hospice daily or hourly rate, an amount equal to at least 95% of the
Medicaid daily nursing home rate for room and board furnished to the patient by
the nursing home. Under the Company's standard nursing home contracts, the
Company pays the nursing home for these room and board services at the Medicaid
daily nursing home rate. Nursing home costs are offset by nursing home revenue,
and the net amount is included in direct hospice care expenses. Nursing home
costs totaled $8.5 million, $16.8 million and $25.6 million for the years ended
December 31, 1999, 2000 and 2001, respectively. Nursing home revenue totaled
$8.2 million, $16.2 million and $25.1 million for the years ended December 31,
1999, 2000 and 2001, respectively.

  ADVERTISING COSTS

     The Company expenses all advertising costs as incurred, which totaled
approximately $0.2 million for the each of the years ended December 31, 1999,
2000 and 2001.

  SEGMENT INFORMATION

     The Company evaluates the performance and allocates resources of its
hospice locations based on current operations and market assessments on a
hospice-by-hospice basis. The Company does not have a concentration of
operations geographically.

  USE OF ESTIMATES

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

  RECENT ACCOUNTING PRONOUNCEMENTS

     In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets," effective for 2002. Under the new rules, goodwill and
intangible assets deemed to have indefinite lives will no longer be amortized
but will be subject to annual impairment tests in accordance with the new rules.
Other intangible assets will continue to be amortized over their useful lives.
The amortization provisions of SFAS No. 142 apply immediately to goodwill and
intangible assets acquired after June 30, 2001. With respect to goodwill and
intangible assets acquired prior to July 1, 2001, SFAS No. 142 will be effective
beginning in the first quarter of 2002. Application of the non-amortization
provisions of the new rules in 2001 would have resulted in a decrease in
amortization expense of $1.2 million. The Company is currently performing the
required impairment tests of goodwill and indefinite lived intangible assets and
does not expect that the adoption of the statement will have a significant
impact on the Company's financial position or results of operations.

     In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of," and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of Operations for a
Disposal of a Segment of a Business." The Company has adopted SFAS No. 144 as of
January 1, 2002 and does not expect that the adoption of the statement will have
a significant impact on the Company's financial position or results of
operations.

  RECLASSIFICATION

     Certain prior year amounts have been reclassified to conform to the 2001
presentation.

                                       F-10
<PAGE>
                   ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2.  INITIAL PUBLIC OFFERING

     On November 5, 2001, the Company completed its initial public offering at
$15.00 per share (Offering). The Company sold 4.1 million shares (including 0.5
million shares issued upon the exercise of the underwriter's option to purchase
such shares to cover overallotments). The Company received $56.0 million in net
proceeds from the Offering, of which $7.1 million was used to repay the
Company's outstanding borrowings under its revolving line of credit, including
unpaid interest thereon, and $10.6 million was used to repay the Company's 12%
senior subordinated notes. The remaining proceeds will be used to finance
potential acquisitions of hospices, to develop new hospice locations and for
other general corporate purposes. Upon completion of the Offering, the Company
forgave the repayment of promissory notes payable to it by Richard R. Burnham,
the Company's Chief Executive Officer, and David C. Gasmire, the Company's
President and Chief Operating Officer. The Company recorded a compensation
charge of $0.2 million in connection with the forgiveness of these notes in the
fourth quarter of 2001. Upon the closing of the Offering, the preferred stock
was mandatorily converted to 8.1 million shares of common stock. The accumulated
dividends, which were not payable in the event of a mandatory conversion, were
reversed and no additional dividends will be accrued or recorded subsequent to
the Offering. In November 2001 and in connection with the Offering, 1.0 million
shares of common stock were issued upon exercise of warrants originally issued
by the Company in connection with the original issuance of its 12% senior
subordinated notes.

3.  ACQUISITIONS

     The Company has made acquisitions to expand its base of hospice locations.

  1999 ACQUISITIONS

     On May 25, 1999, the Company purchased all the assets and business of
Quality Continuum Hospice (Westminster) and Quality Health Services Hospice
(Riverside), two hospices in Orange County (Garden Grove), California and
Riverside, California. The purchase price, including transaction costs, totaled
$0.9 million. Assets acquired include furniture and fixtures and goodwill of
$0.9 million.

     On November 1, 1999, the Company purchased all the assets and business of
six hospices, including three inpatient facilities from Dignita Hospice Care,
LLC (Dignita), three located in Phoenix, Arizona, two located in Tucson,
Arizona, and one located in San Diego, California. The purchase price totaled
$7.3 million, which includes a note payable of $2.5 million, and an additional
payment of $0.8 million due to the seller if the six facilities' net revenue and
earnings before interest, depreciation and amortization expense exceeded certain
thresholds as defined in the purchase agreement. Management met these thresholds
and, as of December 31, 2000, $0.8 million was earned and the liability was
reflected in other accrued expenses in the consolidated balance sheet. This
liability was paid in full on January 3, 2001. Of the additional payment, $0.1
million and $0.2 million were recognized as compensation expense in 1999 and
2000, respectively, because of an employment requirement with a former owner of
Dignita who was employed through June 2000. Assets acquired include property and
equipment of $0.3 million and goodwill of $6.7 million.

  2000 ACQUISITION

     On November 20, 2000, the Company purchased all the assets and business of
Hospice Services of California, Inc., a hospice in Los Angeles (Culver City),
California. The purchase price, including transaction costs, totaled $1.2
million, which included a note payable of $0.5 million. Assets acquired include
furniture and fixtures and goodwill of $1.2 million.

                                       F-11
<PAGE>
                   ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  2001 ACQUISITIONS

     On February 1, 2001, the Company purchased all assets and business of the
Comforter of Colorado, LLC, a hospice in Colorado Springs, Colorado. The
purchase price, including transaction costs, totaled $0.7 million. Assets
acquired include furniture and fixtures and goodwill of $0.7 million.

     On April 1, 2001, the Company purchased all assets and business of Hospice
Health Services, Inc., a hospice in Charleston, South Carolina. The purchase
price, including transaction costs, totaled $0.7 million, which included a note
payable of $0.3 million and assumed liabilities of $0.1 million. Assets acquired
include furniture and fixtures and goodwill of $0.6 million.

     On April 1, 2001, the Company purchased all assets and business of
Crossroads Hospice of Arkansas, LLC, a hospice in Little Rock, Arkansas. The
purchase price, including transaction costs, totaled $2.8 million, which
included a note payable of $1.0 million. Assets acquired include furniture and
fixtures and goodwill of $2.7 million.

     On June 1, 2001, the Company purchased all assets and business of Viator
Healthcare, LP, a hospice in Pittsburgh, Pennsylvania. The purchase price,
including transaction costs, totaled $2.5 million, which included a note payable
of $0.5 million. Assets acquired include goodwill of $2.5 million.

     On July 1, 2001, the Company purchased all assets and business of
Alternative Healthcare System, Inc., a hospice in Beaumont, Texas. The purchase
price, including transaction costs, totaled $1.5 million, which included a note
payable of $0.6 million. Assets acquired include goodwill of $1.5 million.

     On September 1, 2001, the Company purchased all assets and business of
Trinity Health Ventures, Inc., a hospice in San Bernardino, California. The
purchase price, including transaction costs, totaled $1.5 million, which
included a note payable of $0.2 million. Assets acquired include furniture and
fixtures and goodwill of $1.5 million.

     On December 1, 2001, the Company purchased all of the stock of Community
Care Hospice, a hospice in Odessa, Texas. The purchase price, including
transaction costs, totaled $1.7 million, which included a note payable of $0.5
million. Assets and liabilities acquired included cash and short-term
investments of $0.4 million, accounts receivable of $0.3 million, goodwill of
$1.6 million, liabilities of $0.3 million and notes payable of $0.2 million.

     All acquisitions were accounted for under the purchase method of
accounting. The results of operations have been included in the consolidated
financial statements of the Company from the dates of acquisition.

     Unaudited pro forma consolidated results of operations of the Company for
the years ended December 31, 1999, 2000 and 2001 are presented below. Such pro
forma presentation has been prepared assuming

                                       F-12
<PAGE>
                   ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

that the acquisitions described above have been made as of January 1 of the year
preceding the year of acquisition:

<Table>
<Caption>
                                                            YEAR ENDED DECEMBER 31,
                                                        --------------------------------
                                                          1999       2000        2001
                                                        --------   ---------   ---------
                                                        (IN THOUSANDS, EXCEPT PER SHARE
                                                                    AMOUNTS)
<S>                                                     <C>        <C>         <C>
Pro forma net patient service revenue.................  $62,630    $102,223    $138,939
Pro forma net income (loss)...........................   (2,247)      4,404      13,305
Pro forma net income (loss) per common share:
  Basic net income before extraordinary item..........  $ (1.84)   $   1.59    $   4.32
  Extraordinary item -- debt extinguishment, net of
     tax..............................................       --          --       (0.09)
                                                        -------    --------    --------
  Basic net income available to common stockholders...  $ (1.84)   $   1.59    $   4.23
                                                        =======    ========    ========
  Diluted net income before extraordinary item........  $ (1.84)   $   0.37    $   1.08
  Extraordinary item -- debt extinguishment, net of
     tax..............................................       --          --       (0.03)
                                                        -------    --------    --------
  Diluted net income available to common
     stockholders.....................................  $ (1.84)   $   0.37    $   1.05
                                                        =======    ========    ========
</Table>

4.  HOSPICE OF HOUSTON

     The Company entered into an exchange agreement on September 30, 1998,
whereby Hospice Management Partners, Inc. (HMPI), and Hospice Associates of
America, Inc. (HAOA) conveyed their limited partnership (66%) and general
partnership (1%) interests in Hospice of Houston, L.P. (the Partnership), to the
Company. The Company agreed to contribute all of its Houston operations to the
Partnership, which included the assignment of contracts and the existing office
space lease, although this has not been completed as of December 31, 2001. On
September 30, 1998, a management services agreement was executed between the
Partnership and the Company whereby the Company receives a management fee of 5%
of net revenue of the Partnership in exchange for assistance in the day-to-day
management, administration, and marketing of the Partnership. The Partnership
has been consolidated with the Company and the Company's Houston operations are
considered part of the Partnership. San Jacinto Methodist Hospital (San Jacinto)
holds the remaining 33% interest in the Partnership, and San Jacinto's share of
the cumulative net loss has been recorded in other assets ($0.6 million at
December 31, 2000) from San Jacinto in accordance with the terms of the
Partnership agreement. The Company has provided an allowance against the
minority interest asset of $0.6 million at December 31, 2000, due to
uncertainties regarding its recoverability. At December 31, 2001, the Company
has recorded $0.2 million as a liability on the balance sheet for amounts owed
to San Jacinto. Minority interest was $(5,000), $(46,000) and $(150,000) for the
years ended December 31, 1999, 2000, 2001, respectively, and is included in
Other Income (Expense) on the statement of operations.

5.  PREFERRED STOCK

     Prior to the Offering, the Series A, Series B, and Series C Convertible
Preferred Stock was convertible, at the option of the holder, to Common Stock at
any time, subject to certain conditions. The Series A, Series B, and Series C
Convertible Preferred Stock also was subject to mandatory conversion into Common
Stock upon certain conditions, including the issuance of Common Stock in an
initial public offering where the aggregate price paid for such shares by the
public was equal to or greater than $20.0 million at a per share price of at
least $6.00 and, in the case of a liquidation, dissolution or winding up of the
Company, the amounts to be received by the holders of the Series A, Series B,
and Series C Convertible Preferred Stock are in excess of the Liquidation
Preference Payments. Upon conversion, one share of each of the Series A, Series
B and Series C Convertible Preferred Stock was exchanged for one-half share of
common stock. As of December 31, 2000, the Series A, Series B and Series C
Convertible Preferred Stock balances included cumulative dividends of
                                       F-13
<PAGE>
                   ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

$1.1 million, $2.5 million and $1.0 million, respectively. As of October 31,
2001, the date of the Offering, the Series A, Series B and Series C Convertible
Preferred Stock balances included cumulative dividends of $1.4 million, $3.0
million and $1.4 million, respectively. Upon closing of the Offering, the
preferred stock was mandatorily converted to 8.1 million shares of common stock.
The accumulated dividends, which were not payable in the event of a mandatory
conversion, were reversed and no additional dividends have been accrued or
recorded subsequent to the Offering.

6.  COMMON STOCK

     On August 8, 2001, the Company completed a one for two reverse stock split
of its common stock. The accompanying consolidated financial statements and
notes thereto have been restated for all periods presented to reflect the
reverse stock split.

7.  WARRANTS

  COMMON STOCK

     In conjunction with the senior subordinated notes issued on July 1, 1998,
the Company issued stock warrants to purchase 0.9 million shares of common
stock. On January 1, 1999, the Company issued additional stock warrants to
purchase 0.1 million shares of common stock in connection with the senior
subordinated notes. The exercise price of the stock warrants was $0.02 per share
and was adjusted from time to time as provided in the respective stock warrant
agreement. The warrants were valued at fair value, as determined by the Company,
at $0.9 million on July 1, 1998 and $0.2 million on January 1, 1999. This was
recorded as a discount on the senior subordinated notes, which was being
amortized over the term of the debt. In November 2001, and in connection with
the Offering, 1.0 million shares of common stock were issued upon exercise of
these warrants.

  SERIES B CONVERTIBLE PREFERRED STOCK

     In connection with the issuance of the $1.5 million convertible promissory
notes as of May 22, 1998, the Company issued Series B warrants to the lenders to
purchase 0.1 million shares of Series B Convertible Preferred Stock for
consideration of $0.025 per share. The warrants were valued at fair value, as
determined by the Company, at $0.2 million. This was recorded as a discount on
the convertible promissory notes as of December 31, 1998. The exercise price of
the stock warrants is $1.25 and has been adjusted from time to time as provided
in the warrant purchase agreement. In December 2000, the warrants were amended
such that upon completion of an initial public offering where the aggregate
price paid for such shares by the public is equal to or greater than $20.0
million at a per share price of at least $6.00, the warrants will be exercisable
to purchase 0.1 million shares of the Company's common stock at an exercise
price of $2.50 per share. This amendment eliminated the possibility of any
additional shares of Series B Convertible Preferred Stock becoming outstanding
after the completion of an initial public offering and did not provide the
holders of the warrants any additional rights and, accordingly, no additional
expense was recorded. Series B Convertible Preferred Stock warrants to purchase
37,338 shares of common stock remained outstanding as of December 31, 2001, and
the remaining Series B Convertible Preferred Stock warrants were exercised in
2001 subsequent to the initial public offering.

8.  STOCK OPTIONS

     The Company no longer grants options under the Odyssey HealthCare, Inc.
Stock Option Plan (Stock Option Plan). During 2001, the Company adopted the 2001
Equity-Based Compensation Plan (Compensation Plan). Awards of stock options
under the Compensation Plan shall not exceed the lesser of 100,000,000 shares,
or 10% of the total number of shares of common stock then outstanding, assuming
the

                                       F-14
<PAGE>
                   ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

exercise of all outstanding options, warrants and the conversion or exchange or
exercise of all securities convertible into or exchangeable or exercisable for
common stock.

     At December 31, 2001 there were 1,051,063 options and 347,500 options
outstanding under the Stock Option Plan and Compensation Plan, respectively,
with exercise prices ranging from $0.10 to $16.20 per share. All options granted
have five to ten-year terms and vest over a five-year period.

     At December 31, 2000, 26,112 shares were available for issuance under the
Stock Option Plan. At December 31, 2001, 1,321,449 shares were available for
issuance under the Compensation Plan.

     A summary of stock option activity follows:

<Table>
<Caption>
                                                          WEIGHTED AVERAGE
                                                           EXERCISE PRICE       OPTIONS
                                                          ----------------   --------------
                                                                             (IN THOUSANDS)
<S>                                                       <C>                <C>
Options outstanding at January 1, 1999..................       $ 0.80              522
  Granted...............................................         1.00              289
  Canceled..............................................         1.00             (139)
  Exercised.............................................         0.26               (9)
                                                                                 -----
Options outstanding at December 31, 1999................         0.84              663
  Granted...............................................         1.68              406
  Canceled..............................................         0.94              (80)
  Exercised.............................................         0.24              (36)
                                                                                 -----
Options outstanding at December 31, 2000................         1.16              953
  Granted...............................................        12.79              532
  Cancelled.............................................         4.08              (32)
  Exercised.............................................         0.68              (54)
                                                                                 -----
Options outstanding at December 31, 2001................         5.48            1,399
                                                                                 =====
</Table>

     The following table summarizes the stock options outstanding as of December
31, 2001:

<Table>
<Caption>
                                                    WEIGHTED AVERAGE                   NUMBER
                                                       REMAINING         NUMBER       UNVESTED
EXERCISE                                NUMBER      CONTRACTUAL LIFE   VESTED AND      AND NOT
PRICE                                 OUTSTANDING       (YEARS)        EXERCISABLE   EXERCISABLE
--------                              -----------   ----------------   -----------   -----------
                                                        (AMOUNTS IN THOUSANDS)
<S>                                   <C>           <C>                <C>           <C>
$ 0.10..............................       110            4.91             108             2
  1.00..............................       654            6.77             320           334
  1.10..............................         3            8.33               1             2
  3.10..............................       220            8.86              89           131
  7.00..............................        26            9.33              --            26
 13.00..............................        39            9.67              --            39
 16.20..............................       347            9.92               7           340
                                         -----                             ---           ---
                                         1,399            7.98             525           874
                                         =====                             ===           ===
</Table>

     During the years ended December 31, 2000 and 2001, the Company recorded
aggregate deferred compensation for employees of $2.1 million and $3.6 million,
respectively, representing the difference between the exercise prices of stock
options granted in fiscal year 2000 under the Stock Option Plan and the then
deemed fair value of the common stock prior to our initial public offering.
These amounts are being amortized

                                       F-15
<PAGE>
                   ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

as charges to operations, using the graded method. Under the graded method,
approximately 46%, 26%, 15%, 9% and 4%, respectively, of each options
compensation expense is recognized in each of the five years following the date
of the grant. For both the years ended December 31, 2000 and 2001, the Company
amortized $1.1 million of deferred compensation.

     Pro forma information regarding net income (loss) is required by SFAS No.
123, which requires that the information be determined as if the Company has
accounted for its employee stock options granted during the fiscal periods ended
December 31, 1999, 2000 and 2001, under the fair value method of SFAS No. 123.
The deemed fair value for options granted prior to the initial public offering
was estimated at the date of grant using the minimum value option valuation
model, which assumes the stock price has no volatility since the common stock
was not publicly traded at the time of grant. The deemed fair value for options
granted after the initial public offering was estimated at the date of grant
using the Black-Scholes Model, which considers stock volatility. The following
assumptions were used to calculate the deemed fair value of the option awards at
the date of grant: no dividend payouts expected, expected option life of six
years, expected volatility of 0.59 and a risk free interest rate averaging
6.10%. The weighted average deemed fair value of the options granted was $0.55,
$2.75 and $9.85 in the years ended December 31, 1999, 2000 and 2001,
respectively.

     The minimum value option valuation model and the Black-Scholes model were
developed for use in estimating the fair value of traded options that have no
vesting restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including the
expected life of the option. Because, among other things, changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options. For purposes of pro forma
disclosures, the deemed fair value of the options is amortized to expense over
the vesting periods.

     If compensation cost for the Company's stock-based compensation plan had
been determined based on the deemed fair value at the grant date for awards
under this plan consistent with the method provided for under FAS 123, then the
Company's net income (loss) would have been as indicated in the pro forma
amounts below:

<Table>
<Caption>
                                                            YEAR ENDED DECEMBER 31,
                                                           --------------------------
                                                            1999      2000     2001
                                                           -------   ------   -------
                                                                 (IN THOUSANDS,
                                                           EXCEPT PER SHARE AMOUNTS)
<S>                                                        <C>       <C>      <C>
Net income (loss):
  As reported............................................  $(2,200)  $3,092   $12,896
  Pro forma..............................................   (2,275)   3,029    13,116
Basic net income (loss) per common share:
  As reported
     Basic net income before extraordinary item..........  $ (1.81)  $ 0.92   $  4.22
     Extraordinary item -- debt extinguishment, net of
       tax...............................................       --       --     (0.09)
                                                           -------   ------   -------
     Basic net income available to common stockholders...  $ (1.81)  $ 0.92   $  4.13
                                                           =======   ======   =======
  Pro forma
     Basic net income before extraordinary item..........  $ (1.85)  $ 0.89   $  4.19
     Extraordinary item -- debt extinguishment, net of
       tax...............................................       --       --     (0.09)
                                                           -------   ------   -------
     Basic net income available to common stockholders...  $ (1.85)  $ 0.89   $  4.10
                                                           =======   ======   =======
</Table>

                                       F-16
<PAGE>
                   ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<Table>
<Caption>
                                                            YEAR ENDED DECEMBER 31,
                                                           --------------------------
                                                            1999      2000     2001
                                                           -------   ------   -------
                                                                 (IN THOUSANDS,
                                                           EXCEPT PER SHARE AMOUNTS)
<S>                                                        <C>       <C>      <C>
Diluted net income (loss) per common share:
As reported
  Diluted net income before extraordinary item...........  $ (1.81)  $ 0.26   $  1.04
  Extraordinary item -- debt extinguishment, net of
     tax.................................................       --       --     (0.03)
                                                           -------   ------   -------
  Diluted net income available to common stockholders....  $ (1.81)  $ 0.26   $  1.01
                                                           =======   ======   =======
Pro forma
  Diluted net income before extraordinary item...........  $ (1.85)  $ 0.26   $  1.03
  Extraordinary item -- debt extinguishment, net of
     tax.................................................       --       --     (0.03)
                                                           -------   ------   -------
  Diluted net income available to common stockholders....  $ (1.85)  $ 0.26   $  1.00
                                                           =======   ======   =======
</Table>

                                       F-17
<PAGE>
                   ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9.  NET INCOME (LOSS) PER COMMON SHARE

     The following table presents the calculation of basic and diluted net
income (loss) per common share:

<Table>
<Caption>
                                                                YEAR ENDED DECEMBER 31,
                                                              ---------------------------
                                                               1999      2000      2001
                                                              -------   -------   -------
                                                                    (IN THOUSANDS,
                                                               EXCEPT PER SHARE AMOUNTS)
<S>                                                           <C>       <C>       <C>
Numerator
  Net income (loss).........................................  $(2,200)  $ 3,092   $13,257
  Extraordinary item -- debt extinguishment, net of tax.....       --        --      (361)
                                                              -------   -------   -------
  Net income (loss).........................................   (2,200)    3,092    12,896
  Series A, B and C Preferred Stock Dividends...............   (1,320)   (1,302)   (1,097)
  Gain on conversion of preferred securities................       --        --     5,755
                                                              -------   -------   -------
  Numerator for basic earnings per share -- income available
     to common stockholders.................................   (3,520)    1,790    17,554
  Effect of dilutive securities:
     Series A, B and C Preferred Stock dividends............       --     1,302     1,097
     Gain on conversion of preferred securities.............       --        --    (5,755)
                                                              -------   -------   -------
  Numerator for diluted net income (loss) per share -- net
     income (loss) available to common stockholders after
     assumed or actual conversions..........................  $(3,520)  $ 3,092   $12,896
                                                              =======   =======   =======
Denominator
  Denominator for basic net income per share -- weighted
     average shares.........................................    1,943     1,947     4,246
  Effect of dilutive securities:
     Employee stock options.................................       --       773       833
     Series A, B and C Preferred Stock......................       --     8,088     6,714
     Series B Preferred Stock Warrants convertible to common
       stock................................................       --        43       106
     Common stock warrants..................................       --       969       821
                                                              -------   -------   -------
  Denominator for diluted net income (loss) per
     share -- adjusted weighted average shares and assumed
     or actual conversions..................................    1,943    11,820    12,720
                                                              =======   =======   =======
Net income (loss) per common share:
  Basic net income before extraordinary item................  $ (1.81)  $  0.92   $  4.22
  Extraordinary item -- debt extinguishment, net of tax.....       --        --     (0.09)
                                                              -------   -------   -------
  Basic net income available to common stockholders.........  $ (1.81)  $  0.92   $  4.13
                                                              =======   =======   =======
  Diluted net income before extraordinary item..............  $ (1.81)  $  0.26   $  1.04
  Extraordinary item -- debt extinguishment, net of tax.....       --        --     (0.03)
                                                              -------   -------   -------
  Diluted net income available to common stockholders.......  $ (1.81)  $  0.26   $  1.01
                                                              =======   =======   =======
</Table>

                                       F-18
<PAGE>
                   ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10.  ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS

     The allowance for uncollectible accounts for patient accounts receivable is
as follows:

<Table>
<Caption>
                                          BALANCE AT    PROVISION FOR   WRITE-OFFS,
                                         BEGINNING OF   UNCOLLECTIBLE     NET OF      BALANCE AT
                                             YEAR         ACCOUNTS      RECOVERIES    END OF YEAR
                                         ------------   -------------   -----------   -----------
                                                              (IN THOUSANDS)
<S>                                      <C>            <C>             <C>           <C>
Year ended December 31, 1999...........     $  923         $2,031         $(1,869)      $1,085
Year ended December 31, 2000...........     $1,085         $2,708         $  (653)      $3,140
Year ended December 31, 2001...........     $3,140         $3,207         $(2,953)      $3,394
</Table>

11.  PROPERTY AND EQUIPMENT

     Property and equipment is as follows:

<Table>
<Caption>
                                                               DECEMBER 31,
                                                              ---------------
                                                               2000     2001
                                                              ------   ------
                                                              (IN THOUSANDS)
<S>                                                           <C>      <C>
Office furniture............................................  $  850   $1,095
Computer hardware...........................................   1,474    1,323
Computer software...........................................     466      664
Equipment...................................................     185    1,240
Motor vehicles..............................................      47       94
Leasehold improvements......................................     476      909
                                                              ------   ------
                                                               3,498    5,325
Less accumulated depreciation and amortization..............   1,895    2,874
                                                              ------   ------
                                                              $1,603   $2,451
                                                              ======   ======
</Table>

     Assets under capital lease obligations are $0.9 million at both December
31, 2000 and 2001, and accumulated amortization is $0.8 million and $0.9 million
at December 31, 2000 and 2001, respectively. Depreciation and amortization
expense includes amortization expense on assets under capital lease obligations
totaling $0.3 million, $0.3 million and $0.1 million for the years ended
December 31, 1999, 2000 and 2001, respectively.

                                       F-19
<PAGE>
                   ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

12.  LINE OF CREDIT, LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS

     Line of credit, long-term debt and capital lease obligations consists of
the following:

<Table>
<Caption>
                                                                DECEMBER 31,
                                                              ----------------
                                                               2000      2001
                                                              -------   ------
                                                               (IN THOUSANDS)
<S>                                                           <C>       <C>
Revolving $20 million line of credit, bearing interest at
  prime plus 1% (10.5% at December 31, 2000); interest
  payable monthly, secured by accounts receivable...........  $ 6,769   $   --
Senior subordinated notes with a limited liability
  partnership dated July 1, 1998, paid in full November
  2001......................................................   11,316       --
Acquisition notes payable, due between 2001 and 2003;
  bearing interest at 7% to 8%, all of which are
  unsecured.................................................    2,057    3,751
Various capital leases covering equipment, due between 2001
  and 2003; interest rates ranging from 7% to 15%; secured
  by equipment..............................................      169       30
                                                              -------   ------
                                                               20,311    3,781
Less line of credit and current maturities..................   10,927    2,568
                                                              -------   ------
                                                              $ 9,384   $1,213
                                                              =======   ======
</Table>

     Subsequent to the Offering, the Company paid $10.6 million to extinguish
its outstanding debt relating to its 12% senior subordinated notes and incurred
debt extinguishment costs of $0.6 million, or $0.4 million net of taxes. These
costs have been recorded as an extraordinary item on the Company's income
statement.

     The revolving $20.0 million line of credit bears interest at prime, as
defined in the agreement, plus 1%, not to fall below 10%, and matures on October
2, 2003. The line of credit bears a usage fee and a loan management fee, as
defined in the agreement, of 0.04% and 0.03%, respectively. Advances made under
the loan agreement are secured by a substantial portion of the Company's
accounts receivable.

     The revolving line of credit requires certain financial and other covenants
be met in order to maintain the existing notes payable and obtain new debt
fundings, and also restrict payment of dividends. The Company was in full
compliance with its financial and other covenants as of December 31, 2000 and
2001.

     Debt issue costs in the amount of $0.1 million were incurred in 1998 in
connection with the senior subordinated notes and in 2000 in connection with the
amended line of credit. Upon payment of the senior subordinated notes, related
debt issuance costs were written off. Debt issuance costs relating to the line
of credit are continuing to be amortized over the terms of the agreement.
Accumulated amortization was $0.1 million at both December 31, 2000 and 2001.

                                       F-20
<PAGE>
                   ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Scheduled principal repayments on debt and payments on capital lease
obligations for the next five years as of December 31, 2001 are as follows:

<Table>
<Caption>
                                                              DECEMBER 31, 2001
                                                              ------------------
                                                                        CAPITAL
                                                               DEBT      LEASES
                                                              -------   --------
                                                                (IN THOUSANDS)
<S>                                                           <C>       <C>
2002........................................................  $2,551      $19
2003........................................................   1,200       14
2004........................................................      --       --
2005........................................................      --       --
2006........................................................      --       --
                                                              ------      ---
                                                              $3,751       33
                                                              ======
Less amounts representing interest..........................               (3)
                                                                          ---
                                                                          $30
                                                                          ===
</Table>

13.  INCOME TAXES

     Significant components of the Company's net deferred tax assets are as
follows:

<Table>
<Caption>
                                                                DECEMBER 31,
                                                              -----------------
                                                               2000      2001
                                                              -------   -------
                                                               (IN THOUSANDS)
<S>                                                           <C>       <C>
Deferred tax liabilities:
  Accrual to cash/Section 481 adjustment....................  $(1,218)  $  (595)
  Amortizable/depreciable assets............................     (195)     (603)
                                                              -------   -------
                                                              $(1,413)  $(1,198)
Deferred tax assets:
  Accounts receivable.......................................  $ 1,193   $   883
  Accrued compensation......................................      178       362
  Workers' compensation.....................................       --       253
  Alternative minimum tax credit carryforward...............      162        --
  Net operating loss carryforward...........................    3,597        --
  Other.....................................................        2        23
                                                              -------   -------
                                                                5,132     1,521
                                                              -------   -------
Deferred taxes, net:........................................    3,719       323
  Valuation allowance.......................................   (3,719)       --
                                                              -------   -------
     Net deferred tax assets................................  $    --   $   323
                                                              =======   =======
</Table>

                                       F-21
<PAGE>
                   ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The components of the Company's income tax expense are as follows:

<Table>
<Caption>
                                                              YEAR ENDED DECEMBER 31,
                                                              ------------------------
                                                               1999    2000     2001
                                                              ------   -----   -------
                                                               (DOLLARS IN THOUSANDS)
<S>                                                           <C>      <C>     <C>
Current:
  Federal...................................................  $  --    $162    $2,698
  State.....................................................     --     255       645
                                                              -----    ----    ------
                                                                 --     417     3,343
Deferred:
  Federal...................................................     --      --      (306)
  State.....................................................     --      --       (17)
                                                              -----    ----    ------
                                                              $  --    $417    $3,020
                                                              =====    ====    ======
</Table>

     The Company recognized an income tax benefit of $0.2 million attributable
to extraordinary items and had an income tax expense of $3.2 million from
continuing operations.

     The reconciliation of income tax expense (benefit) computed at the federal
statutory tax rate to income tax expense (benefit) is as follows:

<Table>
<Caption>
                                                                    YEAR ENDED DECEMBER 31,
                                                    --------------------------------------------------------
                                                          1999               2000                2001
                                                    ----------------   -----------------   -----------------
                                                    AMOUNT   PERCENT   AMOUNT    PERCENT   AMOUNT    PERCENT
                                                    ------   -------   -------   -------   -------   -------
                                                                     (DOLLARS IN THOUSANDS)
<S>                                                 <C>      <C>       <C>       <C>       <C>       <C>
Tax at federal statutory rate....................   $(748)     (34)%   $ 1,193      34%    $ 5,571      35%
State income tax, net of federal benefit.........     (88)      (4)        395      11         628       4
Stock-based compensation charges.................      --       --         378      11         389       2
Non-deductible expenses and other................      42        3          85       2         151       1
Increase (decrease) in valuation allowance.......     794       35      (1,634)    (46)     (3,719)    (23)
                                                    -----      ---     -------     ---     -------     ---
                                                    $  --       --%    $   417      12%    $ 3,020      19%
                                                    =====      ===     =======     ===     =======     ===
</Table>

     At December 31, 2000, the Company recorded a full valuation allowance of
$3.7 million to reduce the net deferred tax asset to zero. At December 31, 2000,
the deferred tax asset did not meet the criteria for recognition under SFAS No.
109 due to the Company's history of operating losses prior to fiscal 2000. At
December 31, 2001, no valuation allowance has been recorded against the deferred
tax asset because the asset meets the criteria for recognition under SFAS No.
109.

     The decrease in the valuation allowance in 2000 and 2001 was due to the
consistent profitability of the Company's operations and the Company's ability
to generate taxable income and utilize its remaining net operating loss
carryforwards. The Company had a federal net operating loss carryforward
totaling $17.0 million and $9.5 million at December 31, 1999 and 2000,
respectively, which was fully utilized in 2001. The Company had an alternative
minimum tax credit carryforward of approximately $0.2 million at December 31,
2000, which also was fully utilized in 2001.

     The Company estimates that its effective tax rate will be approximately
37.0% during 2002 as there are no remaining net operating loss carryforwards or
remaining valuation allowances.

14.  RETIREMENT PLAN

     The Company sponsors a 401(k) plan, which is available to all regular
employees after meeting certain eligibility requirements. The plan provides for
contributions by the employees based on a percentage of their

                                       F-22
<PAGE>
                   ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

income. The Company at its discretion may make contributions. The Company made
no matching contributions in 1999 and matching contributions totaled $0.1
million and $0.2 million for the years ended December 31, 2000 and 2001,
respectively.

15.  COMMITMENTS AND CONTINGENCIES

  LEASES

     The Company leases office space and equipment at its various locations.
Total rental expense was approximately $2.2 million, $3.2 million, and $4.1
million for the years ended December 31, 1999, 2000 and 2001, respectively.

     Future minimum rental commitments under noncancelable operating leases for
the years subsequent December 31, 2001, are as follows (in thousands):

<Table>
<S>                                                            <C>
2002........................................................   $ 3,803
2003........................................................     3,342
2004........................................................     2,704
2005........................................................     1,765
2006........................................................     1,363
Thereafter..................................................     1,315
                                                               -------
                                                               $14,292
                                                               =======
</Table>

  CONTINGENCIES

     The Company is involved in various legal proceedings arising in the
ordinary course of business. Although the results of litigation cannot be
predicted with certainty, management believes the outcome of pending litigation
will not have a material adverse effect, after considering the effect of the
Company's insurance coverage, on the Company's consolidated financial
statements.

     The Company's current general and professional liability policy does not
provide coverage for claims that arise from acts that occurred prior to the
policy's start date of April 12, 2000. From March 12, 1999 to April 12, 2000,
Reliance National Insurance Company provided the Company's insurance coverage.
Since April 12, 2000, Lexington Insurance Company, a subsidiary of American
International Group, Inc., has provided the Company's insurance coverage. During
the fourth quarter of 2001, the Insurance Commissioner of the Commonwealth of
Pennsylvania placed Reliance National Insurance Company in liquidation. As of
December 31, 2001, the Company reserved $0.3 million to cover potential losses
resulting from current and future litigation claims covered by Reliance National
Insurance Company to the extent its assets are not sufficient to pay such
claims. Although the Company believes that the amount reserved is adequate to
cover its potential losses, the Company cannot assure that its losses will not
exceed the amount reserved. The Company's profitability will be negatively
impacted to the extent its actual losses exceed the amount reserved.

16.  RELATED PARTY TRANSACTIONS

     A member of the Company's board of directors is a partner of the limited
liability partnership from which the Company had obtained the senior
subordinated notes. Interest paid on these notes was approximately $1.8 million,
$1.1 million and $1.6 million for the years ended December 31, 1999, 2000 and
2001, respectively. These notes were paid in full with proceeds from the initial
public offering.

     In January 1996, the Company accepted notes from executive management
totaling $0.2 million for the purchase of Series A Convertible Preferred Stock.
During 2000, a former executive forfeited 0.1 million shares

                                       F-23
<PAGE>
                   ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

of Series A Convertible Preferred Stock in exchange for forgiveness of his note
payable to the Company totaling $0.1 million, including accumulated dividends.
In 2001, the Company forgave the remaining notes totaling $0.2 million.
Compensation expense was recorded totaling $0.2 million representing note
principal and accrued interest in 2001.

17.  FAIR VALUES OF FINANCIAL INSTRUMENTS

     SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosures of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate that value. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by assumptions used, including the
discount rate and estimates of future cash flows. In that regard, the derived
fair value estimates cannot be substantiated by comparison to independent
markets, and in many cases, could not be realized in immediate settlement of the
instrument. SFAS No. 107 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Company. The following methods and assumptions used by the Company in
estimating its fair value disclosures for financial instruments:

  CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

     The carrying amount reported in the consolidated balance sheets for cash
and cash equivalents and short-term investments approximates its fair value.

  LINE OF CREDIT AND LONG-TERM DEBT (INCLUDING CURRENT MATURITIES)

     The carrying amounts of the Company's variable-rate borrowings under the
line of credit approximate their fair values. The fair values of the remaining
long-term debt are estimated using discounted cash flow analyses, based on the
Company's incremental borrowing rates for similar types of borrowing
arrangements.

     The carrying amounts and estimated fair values of the Company's financial
instruments at December 31, 2000 and 2001 are as follows (in thousands):

<Table>
<Caption>
                                                       2000                    2001
                                               ---------------------   ---------------------
                                               CARRYING                CARRYING
                                                AMOUNT    FAIR VALUE    AMOUNT    FAIR VALUE
                                               --------   ----------   --------   ----------
<S>                                            <C>        <C>          <C>        <C>
Cash and cash equivalents....................  $    98     $    98     $20,072     $20,072
Short-term investments.......................       --          --      21,419      21,419
Line of credit...............................    6,769       6,769          --          --
Senior subordinated notes and acquisition
  notes payable (including current
  maturities)................................   13,373      13,239       3,751       3,751
</Table>

                                       F-24
<PAGE>
                   ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

18.  UNAUDITED QUARTERLY FINANCIAL INFORMATION

          The quarterly interim financial information shown below has been
     prepared by the Company's management and is unaudited. It should be read in
     conjunction with the audited consolidated financial statements appearing
     herein:

<Table>
<Caption>
                                                          2001 CALENDAR QUARTERS
                                                 -----------------------------------------
                                                  FIRST      SECOND     THIRD      FOURTH
                                                 --------   --------   --------   --------
                                                 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                              <C>        <C>        <C>        <C>
Total revenues.................................  $26,217    $30,804    $34,875    $38,285
Net income.....................................    2,072      2,871      3,541      4,412
Net income per share -- Basic..................  $  0.87    $  1.27    $  1.59    $  0.93
Net income per share -- Diluted................     0.17       0.24       0.29       0.30
Weighted average shares outstanding -- Basic...    2,006      2,006      2,026     10,868
Weighted average shares
  outstanding -- Diluted.......................   11,993     11,992     12,014     14,872
</Table>

<Table>
<Caption>
                                                        2000 CALENDAR QUARTERS
                                                 -------------------------------------
                                                  FIRST    SECOND     THIRD    FOURTH
                                                 -------   -------   -------   -------
                                                            (IN THOUSANDS)
<S>                                              <C>       <C>       <C>       <C>
Total revenues.................................  $17,022   $20,390   $22,246   $25,613
Net income (loss)..............................      (13)      911     1,260       934
</Table>

                                       F-25
<PAGE>

                                 EXHIBIT INDEX

<Table>
<Caption>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
         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           -- Amended and Restated Loan and Security Agreement, dated
                            October 2, 2000 (the "Credit Agreement"), by and among
                            Odyssey HealthCare, Inc. and subsidiaries and Heller
                            Healthcare Finance, Inc. (incorporated by reference to
                            Exhibit 10.1.1 to the Company's Registration Statement on
                            Form S-1 (Registration No. 333-51522) as filed with the
                            Commission on December 8, 2000)
        10.1.2           -- First Amendment to the Credit Agreement, dated March 29,
                            2001 (incorporated by reference to Exhibit 10.1.2 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)
        10.1.3           -- Second Amendment to Credit Agreement, dated May 8, 2001
                            (incorporated by reference to Exhibit 10.1.3 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)
        10.2             -- Amended and Restated Employment Agreement, effective as
                            of February 28, 2002, by and between Odyssey HealthCare,
                            Inc. and Richard R. Burnham
        10.3             -- Amended and Restated Employment Agreement, effective as
                            of February 28, 2002, by and between Odyssey HealthCare,
                            Inc. and David C. Gasmire
        10.4             -- Amended and Restated Employment Agreement, effective as
                            of February 28, 2002, by and between Odyssey HealthCare,
                            Inc. and Douglas B. Cannon
        10.5.1           -- 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)
        10.5.2           -- 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)
</Table>
<PAGE>

<Table>
<Caption>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
        10.6             -- 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)
        10.7.1           -- 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)
        10.7.2           -- First Amendment to Employee Stock Purchase Plan, dated
                            March 6, 2002
        10.8             -- 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)
        10.9.1           -- 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)
        10.9.2           -- 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)
        10.9.3           -- 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)
        21.1             -- Subsidiaries of Odyssey HealthCare, Inc.
        23.1             -- Consent of Ernst & Young LLP
</Table>