##### Table of Contents



UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, D.C.
    20549
      Form 10-K
  (Mark One)þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended
    December 31, 2005oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the transition period
    from          to   Commission file number
    000-33267
      Odyssey HealthCare,
    Inc.
 (Exact name of registrant as
    specified in its charter)
  Delaware

43-1723043(State or other jurisdiction
    of
    incorporation or organization)

(IRS Employer
    Identification Number)717 N. Harwood,
    Suite 1500
    Dallas, Texas(Address of principal
    executive offices)

75201(Zip
    Code)   Registrants telephone number, including area code:
 (214) 922-9711
  Securities registered pursuant to Section 12(b) of the
    Act:
 None
 Securities registered pursuant to Section 12(g) of the
    Act:
 Common Stock, par value $.001 per share
   o þ
   o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. o
  Rule 12b-2
 o þ o
  Rule 12b-2 o þ
      DOCUMENTS
    INCORPORATED BY REFERENCE
  Form 10-K.




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##### 



FORM 10-K
    ODYSSEY HEALTHCARE, INC.
    For the Year Ended December 31, 2005
    TABLE OF CONTENTS
  PART IItem 1.

Business


4Item 1A.

Risk Factors


23Item 1B.

Unresolved Staff
    Comments


31Item 2.

Properties


31Item 3.

Legal
    Proceedings


31Item 4.

Submission of
    Matters to a Vote of Security Holders


33PART IIItem 5.

Market for
    Registrants Common Equity, Related Stockholder Matters and
    Issuer Purchases of Equity Securities


33Item 6.

Selected Financial
    Data


34Item 7.

Managements
    Discussion and Analysis of Financial Condition and Results of
    Operation


36Item 7A.

Quantitative and
    Qualitative Disclosures About Market Risk


50Item 8.

Financial
    Statements and Supplementary Data


50Item 9.

Changes in and
    Disagreements With Accountants On Accounting and Financial
    Disclosure


50Item 9A.

Controls and
    Procedures


50Item 9B.

Other
    Information


53PART IIIItem 10.

Directors and
    Executive Officers of the Registrant


53Item 11.

Executive
    Compensation


53Item 12.

Security Ownership
    of Certain Beneficial Owners and Management and Related
    Stockholder Matters


53Item 13.

Certain
    Relationships and Related Transactions


53Item 14.

Principal
    Accountant Fees and Services


53PART IVItem 15.

Exhibits and
    Financial Statement Schedules


53Signatures


56SubsidiariesConsent of Ernst & Young LLPCertification Required by Rule 13a-14(a) - CEOCertification Required by Rule 13a-14(a) - CFOCertification Required by Rule 13a-14(b) - CEO & CFO   2




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FORWARD-LOOKING
    STATEMENTS
  Form 10-K
  
    general market conditions;
    adverse changes in reimbursement levels under Medicare and
    Medicaid programs;
    increases in inflation including inflationary increases in
    patient care costs;
    adverse changes in the Medicare cap amount and increases in our
    Medicare cap contractual adjustments;
    decline in patient census growth;
    challenges inherent in and potential changes in our growth and
    expansion strategy;
    our ability to effectively implement our 2006 operations
    initiatives;
    our ability to implement a new integrated billing, clinical
    management and electronic medical records system;
    our ability to attract and retain healthcare professionals and
    other key employees;
    our dependence on patient referral sources and potential adverse
    changes in patient referral practices of those referral sources;
    changes in state or federal income, franchise or similar tax
    laws and regulations;
    adverse changes in the state and federal licensure and
    certification laws and regulations;
    adverse results of regulatory surveys;
    delays in or loss of licensure
    and/or
    certification;
    government and private party legal proceedings and
    investigations, including the Department of Justice
    investigation;
    adverse changes in the competitive environment in which we
    operate;
    adverse impact of natural disasters; and
    changes in our estimate of additional compensation costs under
    FASB Statement No. 123(R).  Form 10-K
 3




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##### Table of Contents



PART I  Item 1.
    Business  Overview
    and Business Strategy
  Overview
          
    a physician;
    a patient care manager;
    one or more registered nurses;
    one or more certified home health aides;
    a medical social worker;
    a chaplain;
    a homemaker; and
    one or more specially trained volunteers.    
    the provision of coordinated care and treatment;
    clear accountability for clinical outcomes and cost of
    services; and
    the potential reduction of stress and dysfunction of patients
    and their families.  and/or
 4




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Business
    Strategy
    Provide quality, responsive care:
  Manage our
    length-of-stay: length-of-stay market-by-market
  Grow organically and through acquisitions:
  Number ofMedicare-CertifiedHospice Programsat This DailyPatient CensusDaily Patient Census

2004


20050-50


19



1851-100


17



25101-200


31



31200+


7



5     Organic Growth:
 5




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##### Table of Contents



start-up
  Growth through selectively acquiring other
    hospices: not-for-profit
  Continue implementation of our new information
    system:
  Continue our penetration of the continuous care
    market: market-by-market
  Expand our inpatient unit development:
  Address the impact of Hurricanes Katrina and
    Rita:
  Manage our costs more effectively: market-by-market
  Principal
    Office and State of Incorporation
  (214) 922-9711,
  Hospice
    Services and Payment
    
    Nursing care 6




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##### Table of Contents




    Medical social services
    Physician services
    Patient counseling (dietary, spiritual and other)
    General inpatient care
    Medical supplies and equipment
    Drugs for pain control and symptom management
    Home health aide services
    Homemaker services
    Therapy (physical, occupational and speech)
    Respite inpatient care
    Family bereavement counseling         7




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##### Table of Contents



Our CurrentReimbursement RangeLevel of Care

Description of Care

(Inclusive of Wage
    Index)Routine Home Care

Hospice services provided in the
    patients home or other residence. Accounted for 98.1% and
    97.4% of our total days of care in 2004 and 2005, respectively.

$112.76-$175.39Continuous Home Care

Continuous care provided in the
    patients home or other residence during a period of crisis
    to manage acute pain or other medical symptoms for a minimum of
    eight hours per day, with nursing care accounting for at least
    half of the care provided. Paid on an hourly basis. Accounted
    for 0.2% and 0.8% of our total days of care in 2004 and 2005,
    respectively.

$658.11-$1,023.70 
    (per diem equivalent)General Inpatient Care

Care provided in a hospital or
    other inpatient facility to manage acute pain and other medical
    symptoms that cannot be managed effectively in a home setting.
    Accounted for 1.5% and 1.6% of our total days of care in 2004
    and 2005, respectively.

$505.78-$765.36Respite Inpatient Care

Care provided for up to five days
    in a hospital or other inpatient facility to relieve the
    patients family or other caregivers. Accounted for 0.2% of
    our total days of care for both 2004 and 2005.

$119.66-$170.71     Effective Date of

PercentageRate Increase

IncreaseOctober 1, 2001


3.2
%October 1, 2002


3.4
%October 1, 2003


3.4
%October 1, 2004


3.3
%October 1, 2005


3.7
%  8




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##### Table of Contents



Hospice
    Utilization and Market Opportunity
    Acceleration in Hospice Use:
  Length of Stay:
  Aging Population in the United
    States:
  Our
    Hospice Services
    Caregivers:
   9




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Community Education Representatives:
  Increasing Our Patient Census:
  Where We Provide Our Care:
    Medicare-Covered Care:
 10




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Diagnoses:
  Percentage ofPatients Admittedby Primary DiagnosisPrimary Diagnosis

2003


2004


2005Cancer


35
%


33
%


31
%End-stage heart disease


20



21



20Dementia


19



17



19Debility


10



12



13Lung disease


8



8



8End-stage kidney disease


3



3



3End-stage liver disease


2



2



2Other


3



4



4Totals


100
%


100
%


100
%  11




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##### Table of Contents



Hospice
    Programs, Inpatient Facilities and Support Center
  Hospice Programs and Inpatient
    Facilities:
  Alabama

Florida

MissouriBirmingham

Daytona Beach (Palm Coast)

Kansas CityHuntsville

Georgia

St. LouisMobile

Athens

NebraskaMontgomery

Atlanta (one inpatient facility)(1)

OmahaArizona

Savannah

NevadaPhoenix (two inpatient

Valdosta

Las Vegas (one inpatientfacilities)(1)

Illinois

facility)(1)Tucson (one inpatient facility)(1)

Chicago (Arlington Heights)

New JerseyArkansas

Chicago   South
    (Chicago)

New Jersey (Piscataway)Little Rock

Indiana

New MexicoCalifornia

Indianapolis

AlbuquerqueBakersfield

Kansas

Santa FeLos Angeles (West Covina)

Wichita

OhioOrange County (Garden Grove)

Louisiana

Cincinnati (Blue Ash)Palm Springs (Rancho Mirage)

Baton Rouge

Cleveland (Mayfield Heights)San Bernardino

Lake Charles

Columbus (Reynoldsburg)San Diego

New Orleans (Metairie)

Toledo (Maumee)San Jose (Campbell)

Shreveport

OklahomaSanta Ana (Garden Grove)

Michigan

Oklahoma CityColorado

Detroit (Southfield)

TulsaColorado Springs

Mississippi

OregonDenver

Gulf Coast (Gulfport)

Portland (Beaverton)Delaware

Jackson

UtahWilmington

Texas

Salt Lake CityPennsylvania

Amarillo (one inpatient
    facility)(1)

St. GeorgeAllentown

Austin

VirginiaHarrisburg (Camp Hill)

Baytown

Arlington (Vienna)Philadelphia (Blue Bell)

Beaumont

NorfolkPittsburgh

Big Spring

RichmondRhode Island

Brownsville

WisconsinProvidence (Warwick)

Conroe (one inpatient facility)(1)

Milwaukee (West Allis)South Carolina

Corpus ChristiCharleston (North Charleston)

DallasColumbia

El PasoTennessee

Fort WorthMemphis

HoustonNashville

OdessaSan AntonioTempleWaxahachie     (1)
    
    We have a total of 7 inpatient facilities as of
    December 31, 2005 with a total of 90 beds. 12




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Support Center:
    Government
    Regulation and Payment Structure
    What are Medicare and Medicaid?
  Medicare Conditions of Participation.
    
    Governing Body.  Each hospice must have a
    governing body that assumes full responsibility for the policies
    and the overall operation of the hospice and for ensuring that
    all services are provided in a manner consistent with accepted
    standards of practice. The governing body must designate one
    individual who is responsible for the
    day-to-day
    administrative operations of the hospice.
    Direct Provision of Core Services.  Medicare
    limits those services for which the hospice may use individual
    independent contractors or contract agencies to provide care to
    patients. Specifically, substantially all nursing, social work
    and counseling services must be provided directly by hospice
    employees meeting specific educational and professional
    standards. During periods of peak patient loads or under
    extraordinary circumstances, the hospice may be permitted to use
    contract workers, but the hospice must agree in writing to
    maintain professional, financial and administrative
    responsibility for the services provided by those individuals or
    entities. 13




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##### Table of Contents




    Medical Director.  Each hospice must have a
    medical director who is a physician and who assumes
    responsibility for overseeing the medical component of the
    hospices patient care program. These physicians may be
    employed by or under contract with the hospice.
    Professional Management of Non-Core
    Services.  A hospice may arrange to have non-core
    services such as therapy services, home health aide services,
    medical supplies or drugs provided by a non-employee or outside
    entity. If the hospice elects to use an independent contractor
    to provide non-core services, however, the hospice must retain
    professional management responsibility for the arranged services
    and ensure that the services are furnished in a safe and
    effective manner by qualified personnel, and in accordance with
    the patients plan of care.
    Plan of Care.  The patients attending
    physician, the medical director or designated hospice physician,
    and the interdisciplinary team must establish an individualized
    written plan of care prior to providing care to any hospice
    patient. The plan must assess the patients needs and
    identify services to be provided to meet those needs and must be
    reviewed and updated at specified intervals.
    Continuation of Care.  A hospice may not
    discontinue or reduce care provided to a Medicare beneficiary if
    the individual becomes unable to pay for that care.
    Informed Consent.  The hospice must obtain the
    informed consent of the hospice patient, or the patients
    representative, that specifies the type of care services that
    may be provided as hospice care.
    Training.  A hospice must provide ongoing
    training for its employees.
    Quality Assurance.  A hospice must conduct
    ongoing and comprehensive self-assessments of the quality and
    appropriateness of care it provides and that its contractors
    provide under arrangements to hospice patients.
    Interdisciplinary Team.  A hospice must
    designate an interdisciplinary team to provide or supervise
    hospice care services. The interdisciplinary team develops and
    updates plans of care, and establishes policies governing the
    day-to-day
    provision of hospice services. The team must include at least a
    physician, registered nurse, social worker and spiritual or
    other counselor. A registered nurse must be designated to
    coordinate the plan of care.
    Volunteers.  Hospice programs are required to
    recruit and train volunteers to provide patient care services or
    administrative services. Volunteer services must be provided in
    an amount equal to at least five percent of the total patient
    care hours provided by all paid hospice employees and contract
    staff.
    Licensure.  Each hospice and all hospice
    personnel must be licensed, certified or registered in
    accordance with applicable federal, state and local laws and
    regulations.
    Central Clinical Records.  Hospice programs
    must maintain clinical records for each hospice patient that are
    organized in such a way that they may be easily retrieved. The
    clinical records must be complete and accurate and protected
    against loss, destruction and unauthorized use.    Surveys.
 14




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Certificate of Need Laws and Other
    Restrictions.
    not-for-profit not-for-profit
  Limits on the Acquisition or Conversion of Non-Profit Health
    Care Organizations. and/or
  Professional Licensure and Participation
    Agreements.
  Overview
    of Government Payments
   15




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##### Table of Contents



Medicare.
    The Medicare Cap. program-by-program
  Dollar Amount Cap.
  Medicare Cap

MedicareYear Ending

Cap Amount2003

$
18,6612004

$
19,6362005

$
19,7782006 (est.)

$
20,371    16




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
    the actual number of Medicare beneficiary patient admissions and
    discharges and the dates of occurrence of each;
    the average length of stay within each
    Medicare  certified hospice program;
    fluctuations in weekly admissions and discharges;
    possible enrollment of beneficiaries in our hospice programs
    who, without our knowledge, may have previously elected Medicare
    hospice coverage through another hospice program and whose
    Medicare cap amount is prorated for the days of service for the
    previous hospice admission;
    possible enrollment of beneficiaries with another hospice
    program who had been on previous hospice service with one of our
    own hospice programs and whose Medicare cap amount is prorated
    between the programs for the days of service for the subsequent
    hospice admission;
    fiscal intermediary disallowances of certain beneficiaries and
    changes in calculation methodology;
    uncertainty surrounding length of patient stay in various
    patient groups, particularly with respect to non-cancer
    patients; and
    the fact that we are not advised of the Medicare cap amount that
    will be used by Medicare to calculate our Medicare cap
    contractual adjustment until the latter part of the Medicare cap
    year, requiring us to use an estimate of that amount throughout
    the year.  Inpatient Care Cap.
  Fiscal Intermediary Reviews.
    Medicare Six-Month Eligibility Rule.
 17




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fee-for-service fee-for-service fee-for-service
  Medicaid.
  Long-Term Care Facility Residents.
  Other
    Healthcare Regulations
  Fraud and Abuse Laws.
     18




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HIPAA Fraud and Abuse Provisions.
  Civil Monetary Penalties Statute.
  False Claims Act. and/or qui tam qui tam and/or
  The Stark Law and State Physician Self-Referral
    Laws.
   19




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##### Table of Contents



Corporate Practice of Medicine and
    Fee-Splitting. and/or
  and/or
  Regulation Governing
    the Privacy and Transmission of Healthcare
    Information
    
    standardization of certain electronic patient health,
    administrative and financial data;
    privacy standards protecting the privacy of individually
    identifiable health information; and
    security standards protecting the confidentiality and integrity
    of electronically held individually identifiable health
    information.     20




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##### Table of Contents



Additional Federal and State Laws.
      not-for-profit not-for-profit not-for-profit not-for-profit not-for-profit
    Compliance
    and Continuous Quality Improvement Programs
  Compliance Program:
  
    the appointment of a compliance officer and committee;
    adoption of a corporate code of business conduct and ethics;
    employee education and training;
    implementation of an internal system for reporting concerns on a
    confidential, anonymous basis;
    ongoing internal auditing and monitoring programs; and
    a means for enforcing the compliance program policies.  follow-up
 21




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Continuous Quality Improvement:
  
    on-going education of staff and quarterly continuous quality
    improvement meetings at each of our hospice programs and at our
    Support Center;
    quarterly comprehensive audits of patient charts performed by
    each of our hospice programs; and
    at least once a year, a comprehensive audit of patient charts
    performed on each of our hospice programs by our clinical
    compliance staff.  follow-up
    Competition
  not-for-profit
  and/or
  Insurance
   22




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Employees
    Available
    Information
  Form 10-K, Form 10-Q Form 8-K 1-800-SEC-0330.
  Form 10-K. Form 10-K, Form 10-Q Form 8-K,
 Item 1A.  Risk
    Factors  Form 10-K.
  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.
   23




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##### Table of Contents



We are
    subject to a Medicare cap amount which is calculated by
    Medicare. Our net patient service revenue and profitability
    could be adversely affected by limitations on Medicare payments
    and Medicare cap calculations.
  program-by-program
  We
    operate in an industry that is subject to extensive federal,
    state and local regulation, and changes in law and regulatory
    interpretations could reduce our net patient service revenue and
    profitability.
    
    payment for services;
    conduct of operations, including fraud and abuse, anti-kickback
    prohibitions, physician self-referral prohibitions and false
    claims;
    privacy and security of medical records;
    employment practices, including wage and hour laws and
    regulations; and
    facility and professional licensure, including certificates of
    need, surveys, certification and recertification requirements,
    and corporate practice of medicine prohibitions.       24




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Almost
    half of our hospice patients reside in nursing homes. Changes in
    the laws and regulations regarding payments for hospice services
    and room and board provided to our hospice patients
    residing in nursing homes could reduce our net patient service
    revenue and profitability.
        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.
   25




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Our
    growth strategy to develop new hospice programs in new and
    existing markets may not be successful, which could adversely
    impact our growth and profitability.
    
    identify markets that meet our selection criteria for new
    hospice programs;
    hire and retain a qualified management team to operate each of
    our new hospice programs;
    manage a large and geographically diverse group of hospice
    programs;
    become Medicare and Medicaid certified in new markets;
    generate sufficient hospice admissions in new markets to operate
    profitably in these new markets; or
    compete effectively with existing programs in new markets.  Our
    growth strategy to acquire other hospices may not be successful
    and the integration of future acquisitions may be difficult and
    disruptive to our ongoing business.
    
    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.    not-for-profit not-for-profit not-for-profit not-for-profit
  Our loss
    of key management personnel or our inability to hire and retain
    skilled employees at a reasonable cost could adversely affect
    our business and our ability to increase patient
    referrals.
   26




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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.
    Medical
    reviews and audits by governmental and private payors could
    result in material payment recoupments and payment denials,
    which could negatively impact our business.
    If any of
    our hospice programs fails to comply with the Medicare
    conditions of participation, that program could be terminated
    from the Medicare program, thereby adversely affecting our net
    patient service revenue and profitability.
   27




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Many
    states have certificate of need laws or other regulatory
    provisions that may adversely impact our ability to expand into
    new markets and thereby limit our ability to grow and to
    increase our net patient service revenue.
    We may
    not be able to compete successfully against other hospice
    providers, and competitive pressures may limit our ability to
    maintain or increase our market position and adversely affect
    our profitability.
    
    community-based hospice providers;
    national and regional companies;
    hospital-based hospice and palliative care programs;
    nursing homes; and
    home health agencies.    If our
    costs were to increase more rapidly than the fixed payment
    adjustments we receive for our hospice services from Medicare
    and Medicaid, our profitability could be negatively
    impacted.
    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.
   28




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Our net
    patient service revenue and profitability may be constrained by
    cost containment initiatives undertaken by insurers and managed
    care companies.
    A
    significant reduction in the carrying value of our goodwill
    could have a material adverse effect on our
    profitability.
    Professional
    and general liability claims may have an adverse effect on us
    either because our insurance coverage may be inadequate to cover
    the losses or because claims against us, regardless of merit or
    eventual outcome, may adversely affect our reputation, our
    ability to obtain patient referrals or our ability to expand our
    business.
    We may
    need additional capital to fund our operations and finance our
    growth, and we may not be able to obtain it on terms acceptable
    to us, or at all.
  Form 10-K.
 29




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We are
    dependent on the proper functioning of our information systems
    to efficiently manage our business.
    We may
    experience difficulties in implementing a new integrated
    billing, clinical management and electronic medical records
    system which we will continue to implement in 2006.
      Provisions
    in our charter documents, under Delaware law, and in our
    stockholder rights plan could discourage a takeover that
    stockholders may consider favorable.
    
    authorize the issuance by the board of directors of preferred
    stock without the requirement of stockholder approval, which
    could make it more difficult for a third party to acquire a
    majority of our outstanding voting stock;
    provide for a classified board of directors with staggered,
    three-year terms;
    prohibit cumulative voting in the election of directors;
    prohibit our stockholders from acting by written consent;
    limit the persons who may call special meetings of stockholders;
    prohibit our stockholders from amending our bylaws unless the
    amendment is approved by the holders of at least 80% of our
    shares of common stock; and
    establish advance notice requirements for nominations for
    election to the board of directors or for proposing matters to
    be approved by stockholders at stockholder meetings.   30




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##### Table of Contents



Item 1B.
    Unresolved
    Staff Comments    Item 2.
    Properties    Item 3.
    Legal
    Proceedings  Rule 10b-5
   31




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##### Table of Contents



qui tam qui tam qui tam
       32




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##### Table of Contents



Item 4.
    Submission
    of Matters to a Vote of Security Holders   PART II  Item 5.
    Market
    for Registrants Common Equity, Related Stockholder Matters
    and Issuer Purchases of Equity Securities  Market for Common Stock.
  High


Low2004First Quarter

$
31.65


$
17.50Second Quarter

$
21.85


$
15.70Third Quarter

$
19.69


$
16.44Fourth Quarter

$
18.30


$
7.132005First Quarter

$
14.06


$
10.38Second Quarter

$
14.86


$
10.72Third Quarter

$
18.01


$
14.22Fourth Quarter

$
20.41


$
14.90   Dividends.
    
    any applicable contractual restrictions limiting our ability to
    pay dividends;
    our earnings;
    our financial condition;
    our ability to fund capital requirements; and
    other factors our board of directors deems relevant.  Recent Sales of Unregistered Securities.
  Repurchases of Common Stock.
 33




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(d)Maximum(c)


Approximate(a)


(b)


Total Shares


Dollar Value ofTotal Number


Average


Purchased as Part


Shares That Mayof Shares


Price Paid


of Publicly


yet Be PurchasedPeriod

Purchased


per Share


Announced Plans


Under the PlanOctober 1-October 31














11,444,962November 1-November 30














11,444,962December
    1-December 31














11,444,962Total










   Equity-Based Compensation Plans.
  EQUITY
    COMPENSATION PLAN INFORMATION
  (c)Number ofSecurities(a)





RemainingNumber of


(b)


Available forSecurities to Be


Weighted-


Future IssuanceIssued upon


Average


Under EquityExercise of


Exercise


CompensationOutstanding


Price of


PlansOptions,


Outstanding


(ExcludingWarrants,


Options,


SecuritiesAwards and


Warrants,


ReflectedPlan Category

Rights


and Rights


in Column(a))(In thousands, except average
    exercise price)Equity Compensation Plans Approved
    by Stockholders


4,186
(1)

$
16.67



1,416Equity Compensation Plans Not
    Approved by Stockholders










Total


4,186


$
16.67



1,416     (1)
    
    Includes 131,250 unvested restricted stock awards granted to
    certain executive officers on November 18, 2004 and 78,000
    unvested restricted stock awards granted to certain employees on
    October 4, 2005. Restricted stock awards are not included
    in the calculation of the weighted-average exercise price since
    there is no exercise price attached to the award.  Item 6.
    Selected
    Financial Data  Form 10-K,
 34




---



##### Table of Contents



Form 10-K.
  Form 10-K.
  three-for-two
  Year Ended
    December 31,2001


2002


2003


2004


2005(In thousands, except per share
    amounts)Statements of Operations Data:Net patient service revenue

$
130,181


$
194,459


$
274,309


$
350,276


$
381,649Operating expenses:Direct hospice care


66,570



99,919



143,738



187,891



217,335General and administrative


38,742



55,439



72,809



93,830



110,992Stock-based compensation charges


1,112



685



409



287



721Government settlement


















13,000Provision for uncollectible
    accounts


3,207



2,952



4,015



8,119



4,454Depreciation and amortization


2,211



1,509



2,542



4,061



4,535Total operating expenses


111,842



160,504



223,513



294,188



351,037Income from operations


18,339



33,955



50,796



56,088



30,612Other income (expense):Minority interest


(150
)


50











Interest income


239



544



390



359



1,341Interest expense


(2,512
)


(269
)


(140
)


(118
)


(198
)(2,423
)


325



250



241



1,143Income before provision for income
    taxes


15,916



34,280



51,046



56,329



31,755Provision for income taxes


3,020



13,140



19,839



21,333



13,199Net income


12,896



21,140



31,207



34,996



18,556Preferred stock dividends


(1,097
)














Gain on conversion of preferred
    securities(1)


5,755















Net income available to common
    stockholders

$
17,554


$
21,140


$
31,207


$
34,996


$
18,556Net income per common share:Basic net income per common share

$
1.83


$
0.61


$
0.87


$
0.96


$
0.54Diluted net income per common share

$
0.45


$
0.58


$
0.84


$
0.93


$
0.53Weighted average shares
    outstanding:Basic


9,553



34,782



35,945



36,445



34,384Diluted


28,621



36,691



37,256



37,551



34,935   35




---



##### Table of Contents



Year Ended
    December 31,2001


2002


2003


2004


2005(Unaudited)(Dollars in thousands)Operating Data:Number of Medicare-certified
    hospice programs(2)


30



50



66



74



79Admissions(3)


15,969



22,062



26,763



31,231



33,221Days of care(4)


1,111,168



1,608,556



2,197,110



2,782,954



2,932,448Average daily census(5)


3,044



4,407



6,019



7,604



8,034Cash flows provided by operating
    activities

$
14,956


$
18,732


$
27,605


$
47,180


$
58,665Cash flows used in investing
    activities

$
(33,156
)

$
(975
)

$
(27,255
)

$
(41,226
)

$
(53,339
)Cash flows provided by (used in)
    financing activities

$
36,019


$
(2,724
)

$
4,983


$
(19,387
)

$
(14,994
)   As of
    December 31,2001


2002


2003


2004


2005(Dollars in thousands)Balance Sheet Data:Working capital

$
50,363


$
51,498


$
72,806


$
63,259


$
61,617Total assets


98,216



125,414



180,802



204,091



244,967Total long-term debt, including
    current portion


3,480



274



17



14



9Stockholders equity


77,635



100,933



144,725



162,080



167,298     (1)
    
    The accumulated dividends on our Series A convertible
    preferred stock, Series B convertible preferred stock and
    Series C convertible preferred stock were reversed in
    connection with the conversion of preferred stock upon
    completion of our initial public offering and recognized as a
    gain to common stockholders.(2)
    
    Number of Medicare-certified hospice programs at end of each
    respective year.(3)
    
    Represents the total number of patients admitted into our
    hospice programs during the period.(4)
    
    Represents the total days of care provided to our patients
    during the period.(5)
    
    Represents the average number of patients for whom we provided
    hospice care each day during the period and is computed by
    dividing days of care by the number of days during the period.  Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operation  Form 10-K.
  Overview
   36




---



##### Table of Contents



three-for-two
  three-for-two
      Developed
    Hospices
        not-for-profit
    Acquisitions
       37




---



##### Table of Contents



Patient Census onHospice

Date of Acquisition2003Waxahachie, Texas


104Valdosta, Georgia


16Memphis, Tennessee


8Wilmington, Delaware


15Brownsville, Texas


60Salt Lake City, Utah


280Omaha, Nebraska


35San Antonio, Texas(1)


1002004Amarillo, Texas


204Conroe, Texas


221Tulsa, Oklahoma(2)


792005Huntsville, Alabama


50Santa Ana, California


50     (1)
    
    Operations of our San Antonio, Texas hospice program
    acquired in 2003 were transferred to our existing
    San Antonio, Texas program opened in 1998.(2)
    
    Operations of our Tulsa, Oklahoma hospice program acquired in
    2004 were integrated into our existing Tulsa, Oklahoma program.  Net
    Patient Service Revenue
   38




---



##### Table of Contents



Expenses
    10-K.
 39




---



##### Table of Contents



Year Ended
    December 31,2003


2004


2005Direct hospice care expenses:Salaries, benefits and payroll
    taxes


31.2
%


32.8
%


36.4
%Pharmaceuticals


6.9



6.7



5.7Medical equipment and supplies


6.0



5.8



5.6Inpatient costs


3.0



2.6



3.0Other (including nursing home
    costs, net, mileage, medical director fees and contracted
    services)


5.3



5.7



6.2Total


52.4
%


53.6
%


56.9
%General and administrative
    expenses:Salaries, benefits and payroll
    taxes


15.9
%


16.5
%


16.9
%Leases


2.5



2.6



2.9Legal and accounting fees


0.4



0.6



1.4Other (including insurance,
    recruiting, travel, telephone and printing )


7.7



7.1



7.9Total


26.5
%


26.8
%


29.1
%   Stock-Based
    Compensation Charges
  period-to-period Form 10-K.
  Form 10-K.
  Form 10-K.
   40




---



##### Table of Contents



Provision
    for Income Taxes
  Form 10-K.
  Critical
    Accounting Policies
  Form 10-K. Form 10-K
  Net
    Patient Service Revenue and Allowance for Uncollectible
    Accounts
      Medicare
    Regulation
     41




---



##### Table of Contents



Insurance
    Risks
    Goodwill
   42




---



##### Table of Contents



Results
    of Operations
    Year Ended
    December 31,2003


2004


2005Net patient service revenue


100
%


100
%


100
%Operating expenses:Direct hospice care


52.4



53.6



56.9General and administrative


26.5



26.8



29.1Stock-based compensation charges


0.1



0.1



0.2Government settlement










3.4Provision for uncollectible
    accounts


1.5



2.3



1.2Depreciation and amortization


1.0



1.2



1.281.5



84.0



92.0Income from operations


18.5



16.0



8.0Other income (expense), net


0.1



0.1



0.3Income before income taxes


18.6



16.1



8.3Provision for income taxes


7.2



6.1



3.4Net income


11.4
%


10.0
%


4.9
%   Year
    Ended December 31, 2005 Compared to Year Ended
    December 31, 2004
    Year Ended
    December 31,2004


2005


$ Change


% Change(In thousands, except %
    change)Net patient service revenue

$
350,276


$
381,649


$
31,373



9.0
%Operating expenses:Direct hospice care


187,891



217,335



29,444



15.7
%General and administrative


93,830



110,992



17,162



18.3
%Stock-based compensation charges


287



721



434



151.2
%Government settlement






13,000



13,000



Provision for uncollectible
    accounts


8,119



4,454



(3,665
)


(45.1
)%Depreciation and amortization


4,061



4,535



474



11.7
%294,188



351,037



56,849



19.3
%Income from operations


56,088



30,612



(25,476
)


(45.4
)%Other income (expense)


241



1,143



902



374.3
%Provision for income taxes


21,333



13,199



(8,134
)


(38.1
)%Net income

$
34,996


$
18,556


$
(16,440
)


(47.0
)%   Net
    Patient Service Revenue
   43




---



##### Table of Contents



Direct
    Hospice Care Expenses
    General
    and Administrative Expenses
   44




---



##### Table of Contents



Stock-Based
    Compensation Charges
    Government
    Settlement
  10-K.
  Provision
    for Uncollectible Accounts
    Depreciation
    and Amortization Expense
    Other
    Income (Expense)
  10-K.
 45




---



##### Table of Contents



Provision
    for Income Taxes
  10-K.
  Year
    Ended December 31, 2004 Compared to Year Ended
    December 31, 2003
    Year Ended
    December 31,2003


2004


$ Change


% Change(In thousands, except %
    change)Net patient service revenue

$
274,309


$
350,276


$
75,967



27.7
%Operating expenses:Direct hospice care


143,738



187,891



44,153



30.7
%General and administrative


72,809



93,830



21,021



28.9
%Stock-based compensation charges


409



287



(122
)


(29.8
)%Provision for uncollectible
    accounts


4,015



8,119



4,104



102.2
%Depreciation and amortization


2,542



4,061



1,519



59.8
%223,513



294,188



70,675



31.6
%Income from operations


50,796



56,088



5,292



10.4
%Other income (expense)


250



241



(9
)


(3.6
)%Provision for income taxes


19,839



21,333



1,494



7.5
%Net income

$
31,207


$
34,996


$
3,789



12.1
%   Net
    Patient Service Revenue
    Direct
    Hospice Care Expenses
   46




---



##### Table of Contents



General
    and Administrative Expenses
    Stock-Based
    Compensation Charges
    Provision
    for Uncollectible Accounts
    Depreciation
    and Amortization Expense
    Other
    Income (Expense)
    Provision
    for Income Taxes
   47




---



##### Table of Contents



Liquidity
    and Capital Resources
              Form 10-K.
 48




---



##### Table of Contents



Contractual
    Obligations
    Payments Due by PeriodLess Than








AfterTotal


1 Year


1-3 Years


4-5 Years


5 Years(In thousands)Long-Term Debt

$
9


$
5


$
4


$



$
Software License Fees


768



409



359







New Billing System


5,224



3,409



1,815







Operating Leases


36,564



9,325



13,384



6,989



6,866Total Contractual Obligations

$
42,565


$
13,148


$
15,562


$
6,989


$
6,866   Off-Balance
    Sheet Arrangements
    Interest
    Rate and Foreign Exchange Risk
  Interest Rate Risk.
  Foreign Exchange.
  Recent
    Accounting Pronouncements
         49




---



##### Table of Contents



Payment,
    Legislative and Regulatory Changes
    Inflation
    Item 7A.
    Quantitative
    and Qualitative Disclosures About Market Risk    Item 8.
    Financial
    Statements and Supplementary Data  page F-1 Form 10-K
  Item 9.
    Changes
    in and Disagreements With Accountants on Accounting and
    Financial Disclosure    Item 9A.
    Controls
    and Procedures  Rules 13a-15(e) 15d-15(e)
 50




---



##### Table of Contents



Rules 13a-15(f) 15a-15(f)
  Managements
    Report on Internal Control over Financial Reporting.
  Rule 13a-15(f)
    Internal
    Control Integrated
    Framework.
   51




---



##### Table of Contents



Report of
    Independent Registered Public Accounting Firm
                    52




---



##### Table of Contents



Item 9B.
    Other
    Information  Form 8-K Form 8-K.
 PART III  Item 10.
    Directors
    and Executive Officers of the Registrant    Item 11.
    Executive
    Compensation    Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Stockholder Matters      Item 13.
    Certain
    Relationships and Related Transactions    Item 14.
    Principal
    Accountant Fees and Services   PART IV  Item 15.
    Exhibits
    and Financial Statement Schedules  Form 10-K:
  10-K page F-1 Form 10-K.
   53




---



##### Table of Contents



Form 10-K:
  ExhibitNumber



Description3.1



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 Securities and Exchange Commission (the
    Commission) on September 13, 2001)3.2



Second Amended and Restated Bylaws
    (incorporated by reference to Exhibit 3.2 to the
    Companys Registration Statement on
    Form S-1
    (Registration
    No. 333-51522)
    as filed with the Commission on December 8, 2000)4.1



Form of Common Stock Certificate
    (incorporated by reference to Exhibit 4.1 to the
    Companys Amendment No. 1 to Registration Statement on
    Form S-1
    (Registration
    No. 333-51522)
    as filed with the Commission on August 2, 2001)4.2



Second Amended and Restated
    Registration Rights Agreement, dated July 1, 1998, by and
    among Odyssey HealthCare, Inc. and the security holders named
    therein (incorporated by reference to Exhibit 4.3 to the
    Companys Registration Statement on
    Form S-1
    (Registration
    No. 333-51522)
    as filed with the Commission on December 8, 2000)4.3



Rights Agreement (the Rights
    Agreement) dated November 5, 2001, between Odyssey
    HealthCare, Inc. and Rights Agent (incorporated by reference to
    Exhibit 4.1 to the Companys Registration Statement on
    Form 8-A
    as filed with the Commission on December 8, 2001)4.4



Form of Certificate of Designation
    of Series A Junior Participating Preferred Stock (included
    as Exhibit A to the Rights Agreement (Exhibit 4.3
    hereto))10.1.1



Credit Agreement, dated
    May 14, 2004, among Odyssey HealthCare Operating A, LP,
    Odyssey HealthCare Operating B, LP and Hospice of the Palm
    Coast, Inc. as borrowers, Odyssey HealthCare Inc. as a credit
    party and the other credit parties signatory thereto, General
    Electric Capital Corporation as agent and lender, and the other
    lenders signatory thereto from to time (incorporated by
    reference to Exhibit 2.1 to the Companys Current
    Report on
    Form 8-K
    as filed with the Commission on May 26, 2004)10.1.2



Consent and Amendment No. 1
    to Credit Agreement dated November 1, 2004. (incorporated
    by reference to Exhibit 10.1 to the Companys
    Quarterly Report on
    Form 10-Q
    as filed with the Commission on November 9, 2004)10.2



Employment Agreement, dated as of
    October 11, 2005, by and between Odyssey HealthCare, Inc.
    and Robert A. Lefton (incorporated by reference to
    Exhibit 10.1 to the Companys Current Report on
    Form 8-K
    as filed with the Commission on October 12, 2005)10.3



Employment Agreement, dated as of
    August 1, 2005, by and between Odyssey HealthCare, Inc. and
    Brenda A. Belger (incorporated by reference to Exhibit 10.2
    to the Companys Quarterly Report on
    Form 10-Q
    as filed with the Commission on November 9, 2005)10.4



Employment Agreement, dated as of
    August 1, 2005, by and between Odyssey HealthCare, Inc. and
    W. Bradley Bickham (incorporated by reference to
    Exhibit 10.3 to the Companys Quarterly Report on
    Form 10-Q
    as filed with the Commission on November 9, 2005)10.5



Second Amended and Restated
    Employment Agreement, dated as of August 1, 2005, by and
    between Odyssey HealthCare, Inc. and Douglas B. Cannon
    (incorporated by reference to Exhibit 10.4 to the
    Companys Quarterly Report on
    Form 10-Q
    as filed with the Commission on November 9, 2005)10.6



Employment Agreement, dated as of
    August 1, 2005, by and between Odyssey HealthCare, Inc. and
    Deborah A. Hoffpauir (incorporated by reference to
    Exhibit 10.5 to the Companys Quarterly Report on
    Form 10-Q
    as filed with the Commission on November 9, 2005)10.7



Employment Agreement, dated as of
    August 1, 2005, by and between Odyssey HealthCare, Inc. and
    Kathleen A. Ventre (incorporated by reference to
    Exhibit 10.6 to the Companys Quarterly Report on
    Form 10-Q
    as filed with the Commission on November 9, 2005)10.8.1



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)10.8.2



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) 54




---



##### Table of Contents



ExhibitNumber



Description10.9.1



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)10.9.2



First Amendment to the 2001
    Equity-Based Compensation Plan, dated May 5, 2005
    (incorporated by reference to Exhibit 10.1 to the
    Companys Current Report on
    Form 8-K
    as filed with the Commission On May 5, 2005)10.9.3



Second Amendment to the 2001
    Equity-Based Compensation Plan, dated May 5, 2005
    (incorporated by reference to Exhibit 10.2 to the
    Companys Quarterly Report on
    Form 10-Q
    as filed with the Commission on August 8, 2005)10.9.4



Form of Restricted Stock Award
    Agreement pursuant to the 2001 Equity  Based
    Compensation Plan Management Stock Option Agreement
    (incorporated by reference to Exhibit 10.1 to the
    Companys Current Report on
    Form 8-K
    as filed with the Commission on January 12, 2005)10.9.5



Odyssey HealthCare, Inc.
    Equity-Based Compensation Plan Management Stock Option
    Agreement, dated October 11, 2005, by and between Odyssey
    HealthCare, Inc. and Robert A. Lefton (incorporated by reference
    to Exhibit 10.2 to the Companys Current Report on
    Form 8-K
    as filed with the Commission on October 12, 2005)10.10.1



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)10.10.2



First Amendment to Employee Stock
    Purchase Plan, dated March 6, 2002 (incorporated by
    reference to Exhibit 10.7.2 to the Companys Annual
    Report on
    Form 10-K
    as filed with the Commission on March 20, 2002)10.11



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)10.12.1



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)10.12.2



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)10.12.3



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)10.13



Separation Agreement and Release,
    dated January 19, 2005, between David C. Gasmire and
    Odyssey HealthCare, Inc. (incorporated by reference to
    Exhibit 10.2 to the Companys Quarterly Report on
    Form 10-Q
    as filed with the Commission on May 9, 2005)21



Subsidiaries of Odyssey
    HealthCare, Inc.*23.1



Consent of Ernst & Young
    LLP*31.1



Certification required by
    Rule 13a-14(a),
    dated March 10, 2006, by Robert A. Lefton, Chief Executive
    Officer*31.2



Certification required by
    Rule 13a-14(a),
    dated March 10, 2006, by Douglas B. Cannon, Chief Financial
    Officer*32



Certification required by
    Rule 13a-14(b),
    dated March 10, 2006, by Robert A. Lefton, Chief Executive
    Officer, and Douglas B. Cannon, Chief Financial Officer**     
    
    Management contract or compensatory plan or arrangement.*
    
    Filed herewith.**
    
    Furnished herewith. 55




---



##### Table of Contents



SIGNATURES       By:
    /s/  ROBERT A. LEFTON   President and Chief Executive Officer
      Signature

Title

Date/s/  ROBERT
    A. LEFTONRobert A. Lefton

President, Chief Executive
    Officer,
    and Director

March 10, 2006/s/  DOUGLAS
    B. CANNONDouglas
    B. Cannon

Senior Vice President, Chief
    Financial Officer, Assistant Secretary and Treasurer (Principal
    Financial and Accounting Officer)

March 10, 2006/s/  RICHARD
    R. BURNHAMRichard
    R. Burnham

Chairman of the Board

March 10, 2006/s/  JOHN
    K. CARLYLEJohn
    K. Carlyle

Director

March 10, 2006/s/  DAVID
    W. CROSSDavid
    W. Cross

Director

March 10, 2006/s/  PAUL
    J. FELDSTEINPaul
    J. Feldstein

Director

March 10, 2006/s/  MARTIN
    S. RASHMartin
    S. Rash

Director

March 10, 2006/s/  SHAWN
    S. SCHABELShawn
    S. Schabel

Director

March 10, 2006/s/  DAVID
    L. STEFFYDavid
    L. Steffy

Director

March 10, 2006  56




---



##### Table of Contents



ODYSSEY
    HEALTHCARE, INC. AND SUBSIDIARIES
    INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
  PageOdyssey HealthCare,
    Inc.Report of
    Ernst & Young LLP, Independent Registered Public
    Accounting Firm


F-2Consolidated
    Balance Sheets as of December 31, 2004 and 2005


F-3Consolidated
    Statements of Operations for the years ended December 31,
    2003, 2004 and 2005


F-4Consolidated
    Statements of Stockholders Equity for the years ended
    December 31, 2003, 2004 and 2005


F-5Consolidated
    Statements of Cash Flows for the years ended December 31,
    2003, 2004 and 2005


F-6Notes to
    Consolidated Financial Statements


F-7  F-1




---



##### Table of Contents



Report of
    Independent Registered Public Accounting Firm                 F-2




---



##### Table of Contents



ODYSSEY
    HEALTHCARE, INC. AND SUBSIDIARIES
 CONSOLIDATED BALANCE SHEETS  December 31,2004


2005(In thousands, except share and
    per share amounts)ASSETSCurrent assets:Cash and cash equivalents

$
24,851


$
15,183Short-term investments


8,407



48,286Accounts receivable from patient
    services, net of allowance for uncollectible accounts of $3,862
    and $2,029 at December 31, 2004 and 2005, respectively


59,376



59,911Deferred tax assets


30



2,707Income taxes receivable


1,679



Prepaid expenses and other current
    assets


3,823



4,251Total current assets


98,166



130,338Property and equipment, net of
    accumulated depreciation


7,490



11,629Goodwill


93,933



98,163Intangibles, net of accumulated
    amortization


4,502



4,837Total assets

$
204,091


$
244,967LIABILITIES AND
    STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
3,664


$
2,989Accrued compensation


10,331



12,100Accrued nursing home costs


9,932



11,581Accrued Medicare cap contractual
    adjustments


2,915



14,883Accrued government settlement






13,000Other accrued expenses


8,060



14,163Current maturities of long-term
    debt


5



5Total current liabilities


34,907



68,721Long-term debt, less current
    maturities


9



4Deferred tax liability


7,095



8,355Other liabilities






589Commitments and contingencies






Stockholders equity:Common stock, $.001 par value:Authorized
    shares  75,000,000Issued and outstanding
    shares  36,750,917 at December 31, 2004 and
    37,410,750 at December 31, 2005


37



37Additional paid-in capital


95,822



101,346Deferred compensation


(2,148
)


(2,722
)Retained earnings


88,636



107,192Treasury stock, at cost, 1,648,600
    and 3,002,934 shares held at December 31, 2004 and
    2005, respectively


(20,267
)


(38,555
)Total stockholders equity


162,080



167,298Total liabilities and
    stockholders equity

$
204,091


$
244,967    F-3




---



##### Table of Contents



ODYSSEY
    HEALTHCARE, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF OPERATIONS  Year Ended
    December 31,2003


2004


2005(In thousands, except per share
    amounts)Net patient service revenue

$
274,309


$
350,276


$
381,649Operating expenses:Direct hospice care


143,738



187,891



217,335General and administrative


72,809



93,830



110,992Stock-based compensation charges


409



287



721Government settlement










13,000Provision for uncollectible
    accounts


4,015



8,119



4,454Depreciation


2,181



3,371



3,971Amortization


361



690



564223,513



294,188



351,037Income from operations


50,796



56,088



30,612Other income (expense):Interest income


390



359



1,341Interest expense


(140
)


(118
)


(198
)250



241



1,143Income before provision for income
    taxes


51,046



56,329



31,755Provision for income taxes


19,839



21,333



13,199Net income

$
31,207


$
34,996


$
18,556Net income per common share:Basic net income per common share

$
0.87


$
0.96


$
0.54Diluted net income per common share

$
0.84


$
0.93


$
0.53Weighted average shares
    outstanding:Basic


35,945



36,445



34,384Diluted


37,256



37,551



34,935    F-4




---



##### Table of Contents



ODYSSEY
    HEALTHCARE, INC. AND SUBSIDIARIES
  CONSOLIDATED STATEMENTS OF STOCKHOLDERS
    EQUITY
  Additional











TotalCommon Stock


Paid-in


Deferred


Retained


Treasury


StockholdersShares


Amount


Capital


Compensation


Earnings


Stock


Equity(Amounts in thousands)Balance at January 1, 2003


35,067


$
35


$
79,191


$
(726
)

$
22,433


$



$
100,933Amortization of deferred
    compensation














409











409Tax benefit related to stock
    option exercise










6,936















6,936Exercise of stock options


1,450



2



5,238















5,240Employee Stock Purchase Plan


30























Net income


















31,207







31,207Balance at December 31, 2003


36,547



37



91,365



(317
)


53,640







144,725Amortization of deferred
    compensation














287











287Deferred compensation related to
    restricted stock awards










2,118



(2,118
)










Tax benefit related to stock
    option exercises










1,129















1,129Exercise of stock options


159







608















608Employee Stock Purchase Plan


45







602















602Purchase of treasury stock, at cost






















(20,267
)


(20,267
)Net income


















34,996







34,996Balance at December 31, 2004


36,751



37



95,822



(2,148
)


88,636



(20,267
)


162,080Amortization of deferred
    compensation














721











721Deferred compensation related to
    restricted stock awards


164







1,295



(1,295
)










Tax benefit related to stock
    option exercises










930















930Exercise of stock options


455







2,810















2,810Employee Stock Purchase Plan


41







489















489Purchase of treasury stock, at cost






















(18,288
)


(18,288
)Net income


















18,556







18,556Balance at December 31, 2005


37,411


$
37


$
101,346


$
(2,722
)

$
107,192


$
(38,555
)

$
167,298    F-5




---



##### Table of Contents



ODYSSEY
    HEALTHCARE, INC. AND SUBSIDIARIES
 CONSOLIDATED
    STATEMENTS OF CASH FLOWS  Year Ended
    December 31,2003


2004


2005(In thousands)Operating Activities:Net income

$
31,207


$
34,996


$
18,556Adjustments to reconcile net
    income to net cash provided by operating activities:Depreciation and amortization


2,542



4,061



4,535Amortization of deferred charges
    and debt discount


25



68



109Stock-based compensation


409



287



721Deferred tax (benefit) expense


3,089



3,949



(1,417
)Tax benefit realized for stock
    option exercises


6,936



1,129



930Provision for uncollectible
    accounts


4,015



8,119



4,454Changes in operating assets and
    liabilities, net of acquisitions:Accounts receivable


(27,585
)


(8,600
)


(4,989
)Other current assets


(2,706
)


43



1,427Accrued government settlement










13,000Accounts payable, accrued nursing
    home costs, accrued Medicare cap contractual adjustments and
    other accrued expenses


9,673



3,128



21,339Net cash provided by operating
    activities


27,605



47,180



58,665Investing Activities:Cash paid for acquisitions and
    procurement of licenses


(22,469
)


(29,106
)


(5,365
)Increase in short-term investments


(11
)


(7,717
)


(39,879
)Purchases of property and equipment


(4,775
)


(4,403
)


(8,095
)Net cash used in investing
    activities


(27,255
)


(41,226
)


(53,339
)Financing Activities:Proceeds from issuance of common
    stock


5,240



1,210



3,299Purchases of treasury stock






(20,267
)


(18,288
)Proceeds from issuance of debt


13







Payments of debt issue costs






(327
)


Payments on debt


(270
)


(3
)


(5
)Net cash provided by (used in)
    financing activities


4,983



(19,387
)


(14,994
)Net increase (decrease) in cash
    and cash equivalents


5,333



(13,433
)


(9,668
)Cash and cash equivalents,
    beginning of period


32,951



38,284



24,851Cash and cash equivalents, end of
    period

$
38,284


$
24,851


$
15,183Supplemental cash flow informationCash interest paid

$
125


$
34


$
89Income taxes paid

$
11,513


$
15,976


$
11,248    F-6




---



##### Table of Contents



ODYSSEY
    HEALTHCARE, INC. AND SUBSIDIARIES



NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS

Years
    Ended December 31, 2003, 2004 and 2005 1.
    Organization
    and Summary of Significant Accounting Policies  Organization
      Principles
    of Consolidation
    Cash
    and Cash Equivalents and Short-Term Investments
    Fair
    Value of Financial Instruments
    Accounts
    Receivable
     F-7




---



##### Table of Contents



ODYSSEY
    HEALTHCARE, INC. AND SUBSIDIARIES
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Goodwill
    and Other
    Non-Amortizable
    Assets
    Net
    Patient Service Revenue
         F-8




---



##### Table of Contents



ODYSSEY
    HEALTHCARE, INC. AND SUBSIDIARIES
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Charity
    Care
      Direct
    Hospice Care Expenses
    Property
    and Equipment and Other Intangible Assets
    not-for-profit
    Stock-Based
    Compensation
   F-9




---



##### Table of Contents



ODYSSEY
    HEALTHCARE, INC. AND SUBSIDIARIES
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
                Net
    Income Per Common Share
    Income
    Taxes
   F-10




---



##### Table of Contents



ODYSSEY
    HEALTHCARE, INC. AND SUBSIDIARIES
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   General
    and Professional Liability Insurance
    Nursing
    Home Costs
    Advertising
    Costs
    Deferred
    Rent Liability
    Use of
    Estimates
   F-11




---



##### Table of Contents



ODYSSEY
    HEALTHCARE, INC. AND SUBSIDIARIES
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   2.
    Acquisitions  2003
                  2004
     F-12




---



##### Table of Contents



ODYSSEY
    HEALTHCARE, INC. AND SUBSIDIARIES
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   2005
          Year Ended
    December 31,2003


2004


2005(In thousands, except per share
    amounts)Pro forma net patient service
    revenue

$
314,419


$
359,294


$
385,499Pro forma net income


34,400



35,313



18,591Pro forma net income per common
    share:Basic

$
0.96


$
0.97


$
0.54Diluted

$
0.92


$
0.94


$
0.53   3.
    Intangible
    Assets    North


SouthNortheast


Southeast


Central


South


Midwest


Texas


Texas


Mountain


West


Corporate


TotalJanuary 1, 2004

$
2,695


$
993


$
4,153


$
15,711


$
2,590


$
5,165


$
9,919


$
20,036


$
5,296


$
120



66,678Acquisitions










5,810











10,294



11,151















27,255Reclasses






























92



28



(120
)


December 31, 2004


2,695



993



9,963



15,711



2,590



15,459



21,070



20,128



5,324







93,933Acquisitions














1,924



















2,306







4,230December 31, 2005

$
2,695


$
993


$
9,963


$
17,635


$
2,590


$
15,459


$
21,070


$
20,128


$
7,630


$



$
98,163      F-13




---



##### Table of Contents



ODYSSEY
    HEALTHCARE, INC. AND SUBSIDIARIES
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
          4.
    Common
    Stock  three-for-two
      5.
    Series B
    Convertible Preferred Stock Warrants   F-14




---



##### Table of Contents



ODYSSEY
    HEALTHCARE, INC. AND SUBSIDIARIES
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    6.
    Stock
    Options and Restricted Stock Awards            WeightedAverageExercise Price


Options(In thousands, except dollar
    amounts)Options outstanding at
    January 1, 2003

$
4.51



2,858Granted

$
19.81



1,528Cancelled

$
13.42



(194
)Exercised

$
3.04



(1,450
)Options outstanding at
    December 31, 2003

$
12.85



2,742Granted

$
21.35



1,032Cancelled

$
19.11



(207
)Exercised

$
3.89



(159
)Options outstanding at
    December 31, 2004

$
15.57



3,408Granted

$
16.06



1,336Cancelled

$
16.78



(313
)Exercised

$
6.61



(455
)Options outstanding at
    December 31, 2005

$
16.67



3,976  F-15




---



##### Table of Contents



ODYSSEY
    HEALTHCARE, INC. AND SUBSIDIARIES
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     WeightedAverage





NumberRemaining


Number


UnvestedNumber


Contractual


Vested and


and NotExercise Price

Outstanding


Life (Years)


Exercisable


Exercisable(Amounts in thousands, except
    dollar and year amounts)$0.05


1



0.91



1



$0.45


79



2.77



79



$1.38


106



4.86



90



16$3.11


12



5.33



8



4$5.78


19



5.67



7



12$7.19


367



5.92



367



$11.27


104



6.58



92



12$11.69


90



6.08



58



32$11.90


50



9.33







50$12.07


151



9.33







151$12.10


266



8.88



52



214$14.56


14



9.58







14$15.14


20



9.50







20$15.15


310



6.92



223



87$15.25


104



7.08



48



56$15.53


70



6.92



52



18$15.55


500



9.75







500$16.87


36



8.33



36



$17.00


18



8.58



4



14$18.14


578



9.92







578$18.76


31



7.42



31



$18.82


21



8.33



6



15$20.00


34



7.42



34



$21.86


27



8.17



27



$22.33


382



7.50



382



$27.96


9



7.50



9



$28.48


142



7.50



142



$30.64


435



8.08



435



3,976







2,183



1,793   7.
    Stock-Based
    Compensation   F-16




---



##### Table of Contents



ODYSSEY
    HEALTHCARE, INC. AND SUBSIDIARIES
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
           F-17




---



##### Table of Contents



ODYSSEY
    HEALTHCARE, INC. AND SUBSIDIARIES
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Year Ended
    December 312003


2004


2005(In thousands)Net income available to common
    stockholders, as reported

$
31,207


$
34,996


$
18,556Add: Stock-based employee
    compensation expense recorded, net of tax


249



178



421Deduct: Fair value stock-based
    employee compensation expense, net of tax


(2,366
)


(4,238
)


(8,897
)Pro forma net income available to
    common stockholders

$
29,090


$
30,936


$
10,080Earnings per share:Basic  as reported

$
0.87


$
0.96


$
0.54Add: Stock-based employee
    compensation expense recorded, net of tax


0.01



0.01



0.01Deduct: Fair value stock-based
    employee compensation expense, net of tax


(0.07
)


(0.12
)


(0.26
)Basic  pro forma

$
0.81


$
0.85


$
0.29Diluted  as
    reported

$
0.84


$
0.93


$
0.53Add: Stock-based employee
    compensation expense recorded, net of tax


0.00



0.00



0.01Deduct: Fair value stock-based
    employee compensation expense, net of tax


(0.06
)


(0.11
)


(0.25
)Diluted  pro forma

$
0.78


$
0.82


$
0.29     2003


2004


2005Risk free interest rate


3.50
%


3.44
%


4.26
%Expected life


5 years



5 years



5 yearsExpected volatility


1.558



0.603



0.347Expected dividend yield










    F-18




---



##### Table of Contents



ODYSSEY
    HEALTHCARE, INC. AND SUBSIDIARIES
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   8.
    Net
    Income Per Common Share    Year Ended
    December 31,2003


2004


2005(In thousands, except per share
    amounts)NumeratorNumerator for basic and diluted
    net income per share  net income available to
    common stockholders

$
31,207


$
34,996


$
18,556DenominatorDenominator for basic net income
    per share  weighted average shares outstanding


35,945



36,445



34,384Effect of dilutive securities:Employee stock options and
    restricted stock awards


1,281



1,076



522Series B Preferred Stock
    Warrants convertible to common stock


30



30



29Denominator for diluted net income
    per share  adjusted weighted average shares and
    assumed or actual conversions


37,256



37,551



34,935Net income per common share:Basic

$
0.87


$
0.96


$
0.54Diluted

$
0.84


$
0.93


$
0.53     9.
    Government
    Settlement  qui tam qui tam qui tam
 F-19




---



##### Table of Contents



ODYSSEY
    HEALTHCARE, INC. AND SUBSIDIARIES
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   10.
    Allowance
    for Uncollectible Accounts    Balance at


Provision For


Write-Offs,


Balance atBeginning of


Uncollectible


Net of


End ofYear


Accounts


Recoveries


Year(In thousands)Year ended December 31, 2003

$
2,962


$
4,015


$
(3,064
)

$
3,913Year ended December 31, 2004

$
3,913


$
8,119


$
(8,170
)

$
3,862Year ended December 31, 2005

$
3,862


$
4,454


$
(6,287
)

$
2,029   11.
    Property
    and Equipment    December 31,2004


2005(In thousands)Office furniture

$
4,030


$
5,195Computer hardware


3,940



4,758Computer software


3,042



6,411Equipment


968



1,152Motor vehicles


97



106Land






396Leasehold improvements


3,776



5,53115,853



23,549Less accumulated depreciation and
    amortization


8,363



11,920$
7,490


$
11,629    F-20




---



##### Table of Contents



ODYSSEY
    HEALTHCARE, INC. AND SUBSIDIARIES
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   12.
    Other
    Accrued Expenses    December 31,2004


2005(In thousands)Workers compensation


2,274



3,063Inpatient


1,685



3,388Rent


1,211



1,482Pharmacy


1,038



1,047Medical supplies and durable
    medical equipment


881



1,288Property taxes


189



312Medical director fees


144



295Professional fees


121



520Income taxes payable






526New billing system and computer
    software






1,649Other


517



593$
8,060


$
14,163   13.
    Line of
    Credit and Long-Term Debt    December 31,2004


2005(In thousands)Leasehold improvement loans due
    between 2004 and 2008; interest at 6.50% and 10.37%


14



9Less current maturities


5



5$
9


$
4     PrincipalRepaymentYear

Amount2006

$
5,0002007


2,0002008


2,000$
9,000    F-21




---



##### Table of Contents



ODYSSEY
    HEALTHCARE, INC. AND SUBSIDIARIES
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    14.
    Income
    Taxes    December 31,2004


2005(In thousands)Deferred tax assets:Accounts receivable

$
(966
)

$
(2,292
)Insurance


(606
)


(487
)Accrued compensation


727



872Workers compensation


875



1,172Government settlement






3,44230



2,707Deferred tax liabilities:Amortizable and depreciable assets


(6,931
)


(8,257
)Other


(164
)


(98
)(7,095
)


(8,355
)Net deferred tax liabilities

$
(7,065
)

$
(5,648
)     Year Ended
    December 31,2003


2004


2005(In thousands)Current:Federal

$
14,914


$
14,968


$
13,093State


1,836



2,416



1,52316,750



17,384



14,616Deferred:Federal


2,629



3,357



(1,239
)State


460



592



(178
)3,089



3,949



(1,417
)$
19,839


$
21,333


$
13,199  F-22




---



##### Table of Contents



ODYSSEY
    HEALTHCARE, INC. AND SUBSIDIARIES
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Year Ended
    December 31,2003


2004


2005Amount


Percent


Amount


Percent


Amount


Percent(Dollars in thousands)Tax at federal statutory rate

$
17,866



35
%

$
19,715



35
%

$
11,114



35
%State income tax, net of federal
    benefit


1,452



3



1,955



3



973



4Stock-based compensation charges


(94
)






101







30



Non-deductible portion of
    government settlement


















1,400



4Municipal interest income


















(391
)


(1
)Other non-deductible expenses and
    other


615



1



(438
)






73



$
19,839



39
%

$
21,333



38
%

$
13,199



42
%   15.
    Retirement
    Plan    16.
    Commitments
    and Contingencies  Leases
      2006

$
9,3252007


7,5752008


5,8092009


4,2002010


2,789Thereafter


6,866$
36,564   Contingencies
   F-23




---



##### Table of Contents



ODYSSEY
    HEALTHCARE, INC. AND SUBSIDIARIES
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Rule 10b-5
    qui tam qui tam qui tam
   F-24




---



##### Table of Contents



ODYSSEY
    HEALTHCARE, INC. AND SUBSIDIARIES
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
       F-25




---



##### Table of Contents



ODYSSEY
    HEALTHCARE, INC. AND SUBSIDIARIES
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   17.
    Segment
    Reporting    Year Ended
    December 31,2003


2004


2005(In thousands)Net patient service revenue:Northeast

$
15,730


$
16,885


$
23,711Southeast


12,426



16,888



18,404Central


23,051



26,550



27,566South


41,073



49,320



53,861Midwest


25,345



34,111



38,630North Texas


32,012



43,662



43,874South Texas


29,181



46,678



48,521Mountain


57,360



69,138



69,583West


38,131



47,059



58,774Corporate






(15
)


(1,275
)$
274,309


$
350,276


$
381,649Direct hospice care expenses:Northeast

$
8,051


$
9,795


$
14,199Southeast


6,349



8,906



11,361Central


11,740



15,460



17,083South


21,208



25,016



29,836Midwest


13,175



16,953



19,991North Texas


18,327



24,365



25,137South Texas


16,605



26,362



28,911Mountain


29,249



36,957



40,060West


19,629



24,054



30,757Corporate


(595
)


23



$
143,738


$
187,891


$
217,335 F-26




---



##### Table of Contents



ODYSSEY
    HEALTHCARE, INC. AND SUBSIDIARIES
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Year Ended
    December 31,2003


2004


2005(In thousands)Income (loss) from operations:Northeast

$
3,984


$
1,648


$
2,307Southeast


3,525



3,395



2,216Central


6,327



4,616



3,347South


11,678



13,756



12,497Midwest


5,999



9,521



9,657North Texas


8,055



11,343



10,470South Texas


6,847



11,910



9,528Mountain


18,227



18,861



15,827West


10,845



13,522



17,188Corporate


(24,691
)


(32,484
)


(52,425
)$
50,796


$
56,088


$
30,612   Year Ended
    December 31,2003


2004


2005Average Daily Census:Northeast


346



362



484Southeast


259



365



394Central


566



657



655South


1,019



1,188



1,253Midwest


559



733



806North Texas


747



983



963South Texas


693



1,060



1,043Mountain


1,094



1,379



1,403West


736



877



1,0336,019



7,604



8,034   F-27




---



##### Table of Contents



ODYSSEY
    HEALTHCARE, INC. AND SUBSIDIARIES
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Year Ended
    December 31,2004


2005(In thousands)Total Assets:Northeast

$
6,192


$
6,984Southeast


4,773



5,109Central


14,480



15,267South


24,689



28,089Midwest


11,561



11,556North Texas


22,419



22,134South Texas


29,669



31,046Mountain


33,971



30,491West


14,627



18,667Corporate


41,710



75,624$
204,091


$
244,967   18.
    Fair
    Values of Financial Instruments    Cash
    and Cash Equivalents and Short-term Investments
    Line
    of Credit and Long-term Debt (Including Current
    Maturities)
      2004


2005Carrying


Fair


Carrying


FairAmount


Value


Amount


Value(In thousands)Cash and cash equivalents

$
24,851


$
24,851


$
15,183


$
15,183Short-term investments

$
8,407


$
8,407


$
48,286


$
48,286Long-term debt (including current
    maturities)

$
14


$
14


$
9


$
9  F-28




---



##### Table of Contents



ODYSSEY
    HEALTHCARE, INC. AND SUBSIDIARIES
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   19.
    Unaudited
    Quarterly Financial Information    2005 Calendar QuartersFirst


Second


Third


Fourth(In thousands, except per share
    amounts)Total net revenues

$
87,828


$
93,170


$
98,894


$
101,757Net income (loss)

$
5,343


$
7,257


$
7,747


$
(1,791
)Net income (loss) per
    share  Basic

$
0.15


$
0.21


$
0.23


$
(0.05
)Net income (loss) per
    share  Diluted

$
0.15


$
0.21


$
0.22


$
(0.05
)Weighted average shares
    outstanding  Basic


34,854



34,343



34,218



34,129Weighted average shares
    outstanding  Diluted


35,376



34,935



35,074



34,129   2004 Calendar QuartersFirst


Second


Third


Fourth(In thousands, except per share
    amounts)Total revenues

$
84,690


$
86,818


$
87,462


$
91,306Net income

$
7,903


$
9,310


$
9,003


$
8,780Net income per
    share  Basic

$
0.22


$
0.25


$
0.25


$
0.24Net income per
    share  Diluted

$
0.21


$
0.25


$
0.24


$
0.24Weighted average shares
    outstanding  Basic


36,559



36,608



36,653



35,963Weighted average shares
    outstanding  Diluted


37,882



37,586



37,586



36,637  F-29