<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, 2002

                                  OR


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

           FOR THE TRANSITION FROM           TO
</Table>

                        COMMISSION FILE NUMBER 000-33267
                             ---------------------

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

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

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

     Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).  Yes [X]     No [ ]

     At June 28, 2002, there were 23,246,190 shares of the registrant's Common
Stock outstanding. As of the same date, 15,129,047 shares of the Registrant's
Common Stock were held by non-affiliates of the registrant, having an aggregate
market value of $365.7 million (based on the last sale price of a share of
Common Stock on June 28, 2002 ($24.17), as reported on the Nasdaq National
Market).

     At March 21, 2003, there were 23,690,315 shares of the registrant's Common
Stock outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the registrant's Proxy Statement to be furnished to
stockholders in connection with the registrant's 2003 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, 2002

                               TABLE OF CONTENTS

<Table>
<S>        <C>                                                           <C>
                                   PART I
Item 1.    Business....................................................    2
Item 2.    Properties..................................................   32
Item 3.    Legal Proceedings...........................................   32
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 Financial Data.....................................   34
Item 7.    Management's Discussion and Analysis of Financial Condition
           and Results of Operations...................................   36
Item 7A.   Quantitative and Qualitative Disclosures About Market
           Risk........................................................   48
Item 8.    Financial Statements and Supplementary Data.................   49
Item 9.    Changes in and Disagreements With Accountants On Accounting
           and Financial Disclosure....................................   49

                                  PART III
Item 10.   Directors and Executive Officers of the Registrant..........   49
Item 11.   Executive Compensation......................................   49
Item 12.   Security Ownership of Certain Beneficial Owners and
           Management and Related Stockholder Matters..................   49
Item 13.   Certain Relationships and Related Transactions..............   49
Item 14.   Controls and Procedures.....................................   49

                                  PART IV
Item 15.   Exhibits, Financial Statement Schedules and Reports on Form
           8-K.........................................................   50
Signatures.............................................................   52
Certifications.........................................................   53
</Table>

                                        1
<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 (as amended, the
"Securities Act") and Section 21E of the Securities Exchange Act of 1934 (as
amended, 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 65 hospice locations to serve patients and their families
in 26 states. During February 2003, our average daily census was 5,408 patients,
which represents a 47.4% increase over our average daily census in February 2002
of 3,669 patients. Our net patient service revenue increased from $1.0 million
in 1996 to $194.5 million in 2002. Our net patient service revenue of $194.5
million for 2002 represents an increase of 49.4% over our net patient service
revenue of $130.2 million for 2001. We intend to continue our growth through
internal growth, the development of new hospice locations and a disciplined
strategy of acquisitions. Financial information about our segments is

                                        2
<PAGE>

contained in "Item 8. Financial Statements and Supplementary Data -- Note 17" of
this Annual Report on Form 10-K.

     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 and our telephone number is (214) 922-9711.

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.

                                        3
<PAGE>

     - 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 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 45 states and the District of Columbia
and by most private insurance plans.

     According to the Centers for Medicare and Medicaid Services ("CMS"),
Medicare payments for hospice services increased from approximately $118 million
in 1988 to approximately $3.7 billion in 2001. According to the United States
General Accounting Office ("GAO") and the CMS, the number of Medicare
beneficiaries electing hospice care increased over 300% between 1992 and 2001.
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 2001.
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. A
       1988 study conducted by the Health Care Financing Administration showed
       savings of $1.26 for every Medicare dollar spent on hospice.

     In the past decade, the number of hospice providers and beneficiaries in
the United States has increased significantly. According to the GAO and the CMS,
the number of Medicare beneficiaries who elected hospice care increased from
approximately 143,000 in 1992 to approximately 594,000 in 2001. To meet this
growing demand, the number of Medicare-certified hospices also increased from
approximately 1,208 in 1992 to 2,267 in 2001. Approximately 73% of 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. In 2001, the percentage of Medicare
beneficiaries electing hospice care who had conditions related to cancer
declined to 53.6%. 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 2002 increased 328.8% over

                                        4
<PAGE>

our total admissions for 1998, with cancer admissions and non-cancer admissions
representing 36.5% and 63.5%, respectively, of total growth. In 1998, our cancer
admissions and non-cancer admissions represented 45.0% and 55.0%, respectively,
of all admissions. In 2002, cancer admissions decreased to 37.4% of all
admissions and non-cancer admissions increased to 62.6% 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 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 2001
with those conditions, are as follows:

<Table>
<Caption>
PRIMARY DIAGNOSIS                                             PERCENT
-----------------                                             -------
<S>                                                           <C>
Cancer......................................................    53.6%
End-stage heart disease.....................................    10.0
Dementia....................................................     7.0
Lung disease................................................     6.0
End-stage kidney disease....................................     3.0
End-stage liver disease.....................................     2.0
Other.......................................................    18.4
                                                               -----
  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 the decline in the average
length of stay of hospice patients. In response to this decline, the CMS 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% of our patients are 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 2001, approximately 2.4 million persons
       died in the United States. Of these, approximately 1.9 million were age
       65 and over. According to the National Hospice and Palliative Care
       Organization, only approximately 32% of those who died in 2001 received
       hospice care. We believe that a significant percentage of Medicare
       beneficiaries who do not receive hospice services would be appropriate
       for hospice care. Approximately one-half of our hospice patients resided
       in nursing homes and other long-term care facilities in December 31, 2001
       and 2002. 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

                                        5
<PAGE>

       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
       CMS, 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 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. In addition, a recent study performed
       by Brown University found that hospitalization rates for nursing home
       residents who elected to receive hospice care was 1%; whereas, it was 42%
       for nursing home residents who did not elect to receive hospice care. 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 2,200 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 2001 the number of Medicare beneficiaries electing hospice care
       increased over 300% 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 2003 was 5,408 patients, and we currently have 65 hospice
locations to serve patients and their families in 26 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 Community Education Team.  We maintain a
       professionally trained team of approximately 150 employed community
       education 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 community education 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 community education 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 enable us to develop best
       practices, improve efficiencies, manage costs and increase operating
       margins. A key aspect

                                        6
<PAGE>

       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.

     - 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 65 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
$194.5 million in 2002. We reported net income of $12.9 million and $21.1
million in 2001 and 2002, respectively.

     We have developed 18 new hospice locations since we began operations, and
we are currently developing 7 additional locations. When developing a new
hospice location, we utilize our standardized operating model that includes
daily cost management and community education programs to increase patient
referrals. Applying our standardized development approach, on average, we have
reached breakeven, as measured by income, excluding corporate overhead
allocations, at our new locations within approximately 13 months from the date
we began development.

     We have acquired 48 hospice locations since beginning our operations in
1996. Seven 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 community education
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.

                                        7
<PAGE>

  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 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 is due, in large part, to 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 our president 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 community education 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
community education representatives in each of our markets and currently employ
approximately 150 community education representatives company-wide. Each
community education representative seeks to

                                        8
<PAGE>

develop relationships with patient referral sources located in the community
education 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 community education representative's ongoing contact with a patient
referral source, the community education 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
community education representatives coordinate their efforts to obtain contracts
with nursing homes, managed care companies and insurance 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 education 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
community education 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 community education 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 2,200 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.

                                        9
<PAGE>

     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;

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

     - conduct extensive education 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.

                                        10
<PAGE>

     - 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.

     - 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 2001 and 2002, approximately 47.0% and 44.7%, respectively,
of our days of care were attributable to patients who resided in long-term care
facilities.

                                        11
<PAGE>

EDUCATION

     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 150 dedicated
community education 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 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
community education representative's ongoing contact with a patient referral
source, the community education 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
community education representatives, our more than 2,000 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 community education
representatives as needed. In each start-up location, we hire three or more
community education 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 education plans to meet the specific needs
of each of our patient referral sources:

     - Physicians.  Our community education 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 education 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 community education representatives call on physicians,
       patient discharge planners and social workers at hospitals. We utilize
       our disease specific education materials when educating 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 community education 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 community education
       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 community education
       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 community education 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.

                                        12
<PAGE>

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. 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 multiple server-based systems with laptop and desktop computers
to connect all of our locations to one another electronically. Billings are
handled through a centralized server based system. Each local office enters all
initial patient registration information and updates to the billing status
through our intranet system. Our billing system and the use of our intranet
system have resulted in greater accuracy and more rapid collections. We continue
to seek ways to implement relevant technology to enhance business processes,
thereby increasing efficiency. Through the use of our company intranet site, we
are facilitating communications and enhancing standardization of all of our
operations through publication and dissemination of a standard vision and a
consistent, comprehensive direction. The efforts of the task force we have
appointed to direct our compliance with proposed federal regulations regarding
the privacy and security of patient medical information are proceeding as
planned and will meet all mandated deadlines. See "-- Government Regulation."

HOSPICE OFFICES AND INPATIENT FACILITIES

     Below is a listing of our current locations by state and city.

<Table>
<S>                         <C>
ALABAMA
  Birmingham
  Montgomery
ARIZONA
  Phoenix (Mesa inpatient
     facility)(1)
  Phoenix (Peoria inpatient
     facility)(1)
  Phoenix(2)
  Tucson (inpatient
     facility)(1)
  Tucson
ARKANSAS
  Little Rock
CALIFORNIA
  Bakersfield
  Orange County (Garden
     Grove)
  Los Angeles (Culver City)
  Palm Springs(3)
  San Bernardino(3)
  San Diego
  San Jose
COLORADO
  Denver
  Colorado Springs
GEORGIA
  Atlanta
  Atlanta (DeKalb inpatient
     facility)(1)
ILLINOIS
  Chicago (Arlington
     Heights)
  Chicago (South Chicago)
</Table>

                                        13
<PAGE>
<Table>
<S>                         <C>
INDIANA
  Indianapolis
KANSAS
     Wichita
LOUISIANA
  Baton Rouge
  Lake Charles
  New Orleans (Metro)
  New Orleans (Metairie)
  Shreveport
MICHIGAN
  Detroit (Novi)
MISSISSIPPI
     Gulfport
MISSOURI
  Kansas City
  St. Louis
NEBRASKA
  Omaha
NEVADA
  Las Vegas
  Las Vegas (inpatient
     facility)(3)
NEW JERSEY
  Edison
NEW MEXICO
  Albuquerque
  Santa Fe(4)
OHIO
  Cincinnati(4)
  Cleveland
  Columbus
  Toledo(4)
OKLAHOMA
  Oklahoma City
  Tulsa
OREGON
  Portland(4)
PENNSYLVANIA
  Philadelphia(4)
  Pittsburgh(5)
SOUTH CAROLINA
  Charleston
TENNESSEE
  Nashville
TEXAS
  Austin
  Beaumont
  Big Spring(4)
  Dallas
  El Paso
  Fort Worth
  Houston (Baytown)
  Houston (Bellaire)
  La Grange
  Odessa
  Round Rock
  San Antonio
  Waxahachie
VIRGINIA
  Norfolk
  Richmond(4)
WISCONSIN
  Milwaukee
</Table>

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

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

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

(3) 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.

(4) We are currently developing a new hospice location in each of Big Spring,
    Texas, Philadelphia, Pennsylvania, Santa Fe, New Mexico, Cincinnati, Ohio,
    Richmond, Virginia, Portland, Oregon and Toledo, Ohio. We anticipate
    admitting our first hospice patients at these new locations by the fourth
    quarter of 2003. Santa Fe, New Mexico and Big Spring, Texas were previously
    Alternate Delivery Sites to our Albuquerque, New Mexico and Odessa, Texas
    locations, respectively.

(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.

                                        14
<PAGE>

     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. Twenty-three of the 26 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 absence of a Medicaid benefit in the
three states in which we currently operate that do not have a Medicaid hospice
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
                                        15
<PAGE>

       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 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 by the fourth quarter of 2003. 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. 97.2% and 97.5% of
our net patient service revenue for the years ended December 31, 2001 and 2002,
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

                                        16
<PAGE>

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
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 $98.51 and $154.16 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 88.7% and 89.8% of
       our gross patient service revenue for 2001 and 2002, respectively.

     - General Inpatient Care.  We currently receive between $442.97 and $673.62
       per day for general inpatient care, depending on the location of the
       inpatient facility. General inpatient care services accounted for 9.0%
       and 8.3% of our gross patient service revenue for 2001 and 2002,
       respectively.

     - Continuous Home Care.  We currently receive between $574.93 and $899.76
       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 1.1% and 0.8% of
       our gross patient service revenue for 2001 and 2002, respectively.

     - Respite Care.  We currently receive between $105.34 and $150.69 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 2001 and
       2002.

     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
                                        17
<PAGE>

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 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 was $17,391 for the twelve month period ending October 31, 2002. The per
beneficiary cap amount for the twelve month period ending October 31, 2003 has
not been published. Once published, the new cap amount will become effective
retroactively for all services performed since November 1, 2002. 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 2001 and 2002.

     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
was 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 and 2002, the base Medicare payment rates for hospice
care increased by approximately 3.2% and 3.4%, respectively, over the base rates
previously in effect. The new Medicare daily rates for October 1, 2001 and 2002
were further adjusted by the hospice wage index.

     In May 2002, the Medicare Payment Advisory Commission issued its report to
Congress assessing Medicare beneficiaries' access to and use of the hospice
benefit. The Medicare Payment Advisory Commis-
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<PAGE>

sion recommended that the hospice payment rates be reviewed to insure that they
are consistent with the costs of providing hospice care, including whether a
case-mix adjusted payment system and outlier policy should be incorporated into
the Medicare hospice payment system.

     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. 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 CMS, 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 ("OIG"), has
published numerous "safe harbors" that exempt some practices from enforcement
action under the federal
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<PAGE>

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 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.

     HIPAA Fraud and Abuse Provisions.  The Health Insurance Portability and
Accountability Act of 1996 ("HIPAA") broadened the application of the federal
fraud and abuse provisions beyond the Medicare and Medicaid programs. An
amendment included in HIPAA extended the federal fraud and abuse provisions'
prohibitions to all "federal healthcare programs," which include all state
healthcare programs receiving federal funding but exclude the federal Employees
Health Benefit Program. Additionally, HIPAA created five new categories of
criminal federal offenses that apply to all healthcare benefit programs
regardless of whether such programs are funded in whole or in part with federal
funds. The five new categories of federal offenses created by HIPAA are
healthcare fraud, theft or embezzlement in connection with healthcare, false
statements relating to healthcare matters, obstruction of criminal
investigations of healthcare offenses, and money

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<PAGE>

laundering. Violations of these provisions constitute felony criminal offenses
and applicable sanctions include imprisonment and/or substantial monetary fines.

     Civil Monetary Penalties Statute.  The federal civil monetary penalties
statute prohibits any person or entity from knowingly submitting false or
fraudulent claims, offering to or making payments to a beneficiary to induce the
beneficiary to use a particular provider or supplier, or arranging or
contracting with an individual or entity that the person or entity knows or
should know is excluded from the Medicare or Medicaid programs for the provision
of items or services that may be reimbursed, in whole or in part, by the
Medicare or Medicaid programs. Violations can result in civil monetary penalties
ranging from $10,000 to $50,000 per claim or act, plus damages of not more than
three times the amount claimed for each such item or service.

     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 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

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<PAGE>

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 administrative simplification provisions
of HIPAA contain provisions that 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 has or will adopt pursuant to
HIPAA are standards for the following:

     - electronic transactions and code sets;

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

     - security and electronic signatures;

     - privacy; and

     - enforcement.

     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. We filed the compliance extension plan in
September 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 February 20, 2003, the Secretary of the Department of Health and Human
Services published a final 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. The final rule will be effective April
21, 2003, with a compliance date of April 21, 2005. We are a covered entity
under the final rule. These security standards require covered 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 compliance with the security standards
will require us to implement significant systems and procedures.

     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. The final rule became effective on
April 14, 2001, with compliance required by April 14, 2003. 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 these 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
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<PAGE>

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.

     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 and believe
that we are on schedule to comply with the privacy standards by April 14, 2003.
Because the security standards have recently become finalized, 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 affect us.

     As a large employer, we are subject to various federal and state laws
regulating employment practices. We are specifically subject to audits by
various federal and state agencies regarding our compliance with these laws. We
believe that our employment practices are in material compliance with applicable
federal and state laws. However, we cannot assure you that government officials
charged with the responsibility of enforcing these laws will not assert that we
are in violation of these laws, or that these laws will be interpreted by the
courts in a manner consistent with our interpretations.

     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 a corporate code of business conduct and ethics;

     - employee education and training;

                                        23
<PAGE>

     - 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 programs policies.

     As part of our ongoing internal 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.

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 73% 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.

     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

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<PAGE>

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, 2002, we reserved
$0.6 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, 2003, we had 2,240 full-time employees and 566 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. The occurrence of any of the events described below could
have a material adverse effect on our business. This could cause the trading
price of our common stock to decline, perhaps significantly.

  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 95.6%, 97.2% and 97.5% of our net patient service revenue for the
years ended December 31, 2000, 2001 and 2002, 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;

     - privacy and security of medical records;

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<PAGE>

     - employment practices; 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."

  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.

     For our hospice patients receiving nursing home care under certain state
Medicaid programs 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 100% of the Medicaid per diem nursing home rate.

     Government studies conducted in the last several years have suggested that
the reimbursement levels for hospice patients living in nursing homes may be
excessive. In particular, the federal government has expressed concern that
hospice programs may provide fewer services to patients residing in nursing
homes than to patients living in other settings due to the presence of the
nursing home's own staff to address problems that might otherwise be handled by
hospice personnel. Because hospice programs are paid a fixed per diem amount,
regardless of the volume or duration of services provided, the government is
concerned that hospice programs may be increasing their profitability by
shifting the cost of certain patient care services to the nursing home.

     The reduction or elimination of Medicare payments for hospice patients
residing in nursing homes would reduce our net patient service revenue and
profitability. In addition, changes in the way nursing homes are reimbursed for
"room and board" services provided to hospice patients residing in nursing homes
could affect our ability to obtain referrals from nursing homes. A reduction in
referrals from nursing homes would adversely affect our net patient service
revenue and profitability.

                                        26
<PAGE>

  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. 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.

                                        27
<PAGE>

     An estimated 73% 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 review 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.

  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. The loss of 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 community education representatives could negatively impact our
ability to maintain or increase patient referrals, a key aspect of our growth
strategy.

     As we previously disclosed in our earnings release in February 2003, as
part of our CEO succession plan, David C. Gasmire, our President and Chief
Operating Officer, has been promoted to the position of Chief Executive Officer
and President, effective January 1, 2004. Richard R. Burnham, our Chairman of
the Board and current Chief Executive Officer, will continue as our Chairman of
the Board. Beginning in 2004, Mr. Burnham intends to spend more time on public
policy issues that impact us, as well as contributing more time to organizations
that support our interests. During 2003 with the assistance of Mr. Burnham, Mr.
Gasmire will begin the orderly transition to Chief Executive Officer as part of
our CEO succession plan. We do not expect Mr. Gasmire's and Mr. Burnham's
changing management roles to have any adverse affect on our future operating
results. Management is evaluating internal employees for promotion to the Chief
Operating Officer role.

     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, community education, 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 1,500 nurses on a full-time and part-time
basis. 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.

                                        28
<PAGE>

  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.

  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.

                                        29
<PAGE>

  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.

  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 and
security 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 and final regulations addressing the
security of such health information on February 20, 2003. We must comply with
the requirements of the privacy regulations by April 14, 2003 and the
requirements of the security regulations by April 21, 2005. Because the final
security regulations have only recently been issued and the final privacy
regulations are not yet effective, we cannot predict the total financial or
other impact of the regulations on our operations. 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.

  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 consists of intangible assets, primarily
goodwill. Goodwill accounted for approximately 37.1% of our total assets as of
December 31, 2002. Any event that 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.

  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

                                        30
<PAGE>

  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, 2002, we reserved
$0.6 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 Annual Report on Form 10-K. 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.

  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;

                                        31
<PAGE>

     - 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.

AVAILABLE INFORMATION

     We file reports with the Securities and Exchange Commission ("SEC"). We are
a reporting company and file an Annual Report on Form 10-K, Quarterly Reports on
Form 10-Q and Current Reports on Form 8-K when necessary. The public may read
and copy any materials that we file with the SEC at the SEC's Public Reference
Room at 450 Fifth Street, NW, Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy
and information statements, and other information regarding issuers that file
electronically with the SEC. That website address is http://www.sec.gov. Our
Internet address is www.odsyhealth.com. We have made available free of charge on
our Internet website our Annual Report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as
reasonably practicable after we electronically file such material with, or
furnish it to, the SEC.

ITEM 2. PROPERTIES

     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 65
hospice offices and inpatient facilities are in leased facilities in 26 states
with varying terms from one to ten years extending through 2011. We believe
these facilities are in good operating condition and suitable for their intended
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 on Form 10-K, we are not aware of any legal proceedings
pending or threatened that we expect would have a material adverse effect on us.

                                        32
<PAGE>

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,
2002.

                                    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 March 21, 2003,
there were 36 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 and as adjusted to take
into account the January 27, 2003 fifty percent stock dividend:

<Table>
<Caption>
                                                               HIGH     LOW
                                                              ------   ------
<S>                                                           <C>      <C>
2001
Fourth Quarter (October 31, 2001 -- December 31, 2001)......  $17.29   $10.57
2002
First Quarter...............................................  $20.40   $14.98
Second Quarter..............................................  $24.53   $17.67
Third Quarter...............................................  $23.99   $14.17
Fourth Quarter..............................................  $26.19   $19.45
</Table>

     Dividends.  On January 27, 2003, we announced that our Board of Directors
had authorized a three-for-two stock split payable in the form of a fifty
percent stock dividend that was distributed on February 24, 2003, to
stockholders of record at the close of business on February 6, 2003. We had
approximately 15.8 million shares outstanding at the close of business on
February 6, 2003 and issued approximately 7.9 million shares to our stockholders
of record. 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.

     While we do not have a history of paying any cash dividends, 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."

                                        33
<PAGE>

     Equity-Based Compensation Plans.  The following table provides information
about our common stock that may be issued upon the exercise of options under the
Odyssey HealthCare, Inc. Stock Option Plan and the 2001 Equity-Based
Compensation Plan.

                      EQUITY COMPENSATION PLAN INFORMATION

<Table>
<Caption>
                                                                                          (C) NUMBER OF
                                                                                            SECURITIES
                                                                                            REMAINING
                                                 (A) NUMBER OF                            AVAILABLE FOR
                                               SECURITIES TO BE      (B) WEIGHTED        FUTURE ISSUANCE
                                                  ISSUED UPON      AVERAGE EXERCISE        UNDER EQUITY
                                                  EXERCISE OF          PRICE OF            COMPENSATION
                                                  OUTSTANDING         OUTSTANDING        PLANS (EXCLUDING
                                               OPTIONS, WARRANTS   OPTIONS, WARRANTS   SECURITIES REFLECTED
PLAN CATEGORY                                     AND RIGHTS          AND RIGHTS          IN COLUMN (A))
-------------                                  -----------------   -----------------   --------------------
                                                                      (IN THOUSANDS)
<S>                                            <C>                 <C>                 <C>
Equity Compensation Plans Approved by
  Stockholders...............................        1,905               $6.77                1,611
Equity Compensation Plans Not Approved by
  Stockholders...............................           --                  --                   --
                                                     -----               -----                -----
Total........................................        1,905               $6.77                1,611
                                                     =====               =====                =====
</Table>

     Recent Sales of Unregistered Securities.  None.

     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. Subsequent to the offering, 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. Also during 2001, $1.5
million was used for the acquisition of a hospice. During 2002, $21.3 million
was used for the acquisition of hospices and $8.3 million was used for general
corporate purposes. Through March 15, 2003, $3.0 million was used for the
acquisition of a hospice. 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.

ITEM 6. SELECTED FINANCIAL DATA

     The selected consolidated statement of operations data set forth below for
the years ended December 31, 2000, 2001 and 2002 and the consolidated balance
sheet data at December 31, 2001 and 2002 are derived from our consolidated
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 consolidated financial statements. The selected consolidated
statement of operations data set forth below for the years ended December 31,
1998 and 1999 and the consolidated balance sheet data at December 31, 1998, 1999
and 2000 are derived from our consolidated financial statements that have been
audited by Ernst & Young LLP, but are not included in this Annual Report on Form
10-K.

                                        34
<PAGE>

     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. On February 24, 2003, the Company completed
a three-for-two stock split payable in the form of a fifty percent stock
dividend. All share information has been adjusted for the stock dividend
described in "Item 5. Market for Registrant's Common Equity and Related
Matters -- Dividends."

<Table>
<Caption>
                                                                    YEAR ENDED DECEMBER 31,
                                               -----------------------------------------------------------------
                                                  1998         1999         2000          2001          2002
                                               ----------   ----------   -----------   -----------   -----------
                                                                    (DOLLARS IN THOUSANDS)
<S>                                            <C>          <C>          <C>           <C>           <C>
Statements of Operations Data:
Net patient service revenue..................  $   27,239   $   46,460   $    85,271   $   130,181   $   194,459
Operating expenses:
Direct hospice care..........................      16,389       24,014        44,964        62,269        94,944
General and administrative (exclusive of $1.1
  million for both the years ended December
  31, 2000 and 2001 and $0.7 million for the
  year ended December 31, 2002, reported
  separately as stock-based compensation
  charges)...................................      14,675       18,873        28,375        42,471        60,414
Stock-based compensation charges.............          --           --         1,113         1,112           685
Provision for uncollectible accounts.........       1,203        2,031         2,708         3,207         2,952
Depreciation and amortization................         574        1,563         1,656         2,211         1,509
                                               ----------   ----------   -----------   -----------   -----------
Total operating expenses.....................      32,841       46,481        78,816       111,270       160,504
                                               ----------   ----------   -----------   -----------   -----------
Income (loss) from operations................      (5,602)         (21)        6,455        18,911        33,955
Other income (expense):
Minority interest............................          --           (5)          (46)         (150)           50
Interest income..............................         165           35            31           239           544
Interest expense.............................      (1,086)      (2,209)       (2,931)       (2,512)         (269)
                                               ----------   ----------   -----------   -----------   -----------
                                                     (921)      (2,179)       (2,946)       (2,423)          325
                                               ----------   ----------   -----------   -----------   -----------
Income (loss) before provision for income
  taxes and extraordinary item...............      (6,523)      (2,200)        3,509        16,488        34,280
Provision for income taxes...................          --           --           417         3,231        13,140
                                               ----------   ----------   -----------   -----------   -----------
Income (loss) before extraordinary item......      (6,523)      (2,200)        3,092        13,257        21,140
Extraordinary item -- debt extinguishment,
  net of tax.................................          --           --            --          (361)           --
                                               ----------   ----------   -----------   -----------   -----------
Net income (loss)............................      (6,523)      (2,200)        3,092        12,896        21,140
Preferred stock dividends....................      (1,122)      (1,320)       (1,302)       (1,097)           --
Gain on conversion of preferred
  securities(1)..............................          --           --            --         5,755            --
                                               ----------   ----------   -----------   -----------   -----------
Net income (loss) available to common
  stockholders...............................  $   (7,645)  $   (3,520)  $     1,790   $    17,554   $    21,140
                                               ----------   ----------   -----------   -----------   -----------
Net income (loss) per common share:
Basic net income before extraordinary item...  $    (2.75)  $    (1.21)  $      0.61   $      2.81   $      0.91
Extraordinary item -- debt extinguishment,
  net of tax.................................          --           --            --         (0.06)           --
                                               ----------   ----------   -----------   -----------   -----------
Basic net income per common share............  $    (2.75)  $    (1.21)  $      0.61   $      2.75   $      0.91
                                               ==========   ==========   ===========   ===========   ===========
  Diluted net income before extraordinary
    item.....................................  $    (2.75)  $    (1.21)  $      0.17   $      0.69   $      0.86
  Extraordinary item -- debt extinguishment,
    net of tax...............................          --           --            --         (0.02)           --
                                               ----------   ----------   -----------   -----------   -----------
  Diluted net income per common share........  $    (2.75)  $    (1.21)  $      0.17   $      0.67   $      0.86
                                               ==========   ==========   ===========   ===========   ===========
Weighted average shares outstanding:
  Basic......................................   2,779,400    2,914,796     2,919,933     6,368,436    23,187,554
  Diluted....................................   2,779,400    2,914,796    17,730,350    19,080,341    24,460,966
</Table>

                                        35
<PAGE>

<Table>
<Caption>
                                                                 YEAR ENDED DECEMBER 31,
                                                 --------------------------------------------------------
                                                   1998       1999       2000        2001         2002
                                                 --------   --------   --------   ----------   ----------
                                                                       (UNAUDITED)
                                                                  (DOLLARS IN THOUSANDS)
<S>                                              <C>        <C>        <C>        <C>          <C>
OPERATING DATA:
Number of hospice locations(2).................        24         30         32           42           58
Admissions(3)..................................     5,145      8,303     12,965       15,969       22,062
Days of care(4)................................   237,589    422,577    737,088    1,111,168    1,608,556
Average daily census(5)........................       651      1,158      2,014        3,044        4,407
Cash flows provided by (used in) operating
  activities...................................  $(11,054)  $ (1,588)  $  3,520   $   14,956   $   17,841
Cash flows used in investing activities........  $ (5,880)  $ (5,340)  $ (1,503)  $  (31,001)  $  (28,348)
Cash flows provided by (used in) financing
  activities...................................  $ 14,917   $  6,702   $ (2,293)  $   36,019   $   (1,831)
</Table>

<Table>
<Caption>
                                                                      AS OF DECEMBER 31,
                                                      --------------------------------------------------
                                                        1998       1999       2000      2001      2002
                                                      --------   --------   --------   -------   -------
                                                                    (DOLLARS IN THOUSANDS)
<S>                                                   <C>        <C>        <C>        <C>       <C>
BALANCE SHEET DATA:
Working capital (deficit)...........................  $  4,738   $ (2,356)  $ (1,691)  $50,363   $51,498
Total assets........................................    22,578     31,925     38,845    98,216   125,414
Total long-term debt, including current portion.....    12,600     21,852     20,311     3,781       274
Total convertible preferred stock...................    18,539     19,860     21,162        --        --
Stockholders' equity (deficit)......................   (13,320)   (16,657)   (13,746)   77,635   100,933
</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 two
    locations in Cleveland, Ohio, and Big Spring, Texas, in the fourth quarter
    of 2002. We began development of six locations in Philadelphia,
    Pennsylvania, Santa Fe, New Mexico, Cincinnati, Ohio, Richmond, Virginia,
    Portland, Oregon and Toledo, Ohio, in the first quarter of 2003 and acquired
    our Waxahachie, Texas, location in February 2003.

(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.

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
65 hospice locations to serve patients and their families in 26 states. Our net
patient service revenue increased from $1.0 million in 1996 to $194.5 million in
2002. We operate all of our hospice locations through our operating
subsidiaries. Our net patient service revenue of $194.5 million in 2002
represents an increase of 49.4% over net patient service revenue of $130.2
million in 2001 and an increase of 128.0% over net patient service revenue of
$85.3 million in 2000. In 2000, 2001 and 2002, we reported net income of $3.1
million, $12.9 million and $21.1 million, respectively.

                                        36
<PAGE>

     On January 27, 2003, we announced that our Board of Directors had
authorized a three-for-two stock split payable in the form of a fifty percent
stock dividend that was distributed on February 24, 2003, to stockholders of
record at the close of business on February 6, 2003. We had approximately 15.8
million shares of common stock outstanding at the close of business on February
6, 2003 and issued approximately 7.9 million shares of common stock to the
stockholders of record.

DEVELOPED HOSPICES

     We have developed the following hospices since January 1, 2000:

     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.

     During 2002, we continued development of the Chicago (South), Illinois,
Tulsa, Oklahoma and Austin, Texas hospices and began development of new hospices
in Montgomery, Alabama, St. Louis, Missouri, Cleveland, Ohio and Big Spring,
Texas. Our Chicago (South), Illinois, Tulsa, Oklahoma, Austin, Texas,
Montgomery, Alabama and St. Louis, Missouri hospice locations opened in 2002.

     In 2003, we are continuing development of the Cleveland, Ohio and Big
Spring, Texas hospices and have started development of hospices in Philadelphia,
Pennsylvania, Richmond, Virginia, Cincinnati, Ohio, Portland, Oregon, Santa Fe,
New Mexico and Toledo, Ohio.

ACQUISITIONS

     We have acquired the following hospices since January 1, 2000:

     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.

     During 2002, we acquired twelve hospices for a combined purchase price of
$19.9 million, and also acquired the remaining 33% interest in Hospice of
Houston, L.P. for $1.1 million. We financed our acquisitions in 2002, including
the interest in Hospice of Houston, with $21.3 million in cash from the proceeds
of our initial public offering.

     In February 2003, we acquired one hospice for a purchase price of $3.0
million. We financed our acquisition in 2003 with $3.0 million in cash from the
proceeds of our initial public offering.

     We accounted for these acquisitions as purchases. See Note 3 to the
consolidated financial statements included elsewhere in this Annual Report on
Form 10-K.

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

     Goodwill from our hospice acquisitions was $46.5 million as of December 31,
2002. Goodwill was 46.1% of common stockholders' equity and 37.1% of total
assets as of December 31, 2002. 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 are subject to annual impairment tests in accordance
with the new rules. Other intangible assets continue to be amortized over their
useful lives. We are applying the new rules on

                                        37
<PAGE>

accounting for goodwill and other intangible assets. See Note 5 to our
consolidated financial statements included elsewhere in this Annual Report on
Form 10-K. 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,
net of tax.

     The following table lists our acquisitions since January 1, 2000, and
patient census data at acquisition:

<Table>
<Caption>
                                                                PATIENT
                                                               CENSUS ON
                                                                DATE OF
HOSPICE                                                       ACQUISITION
-------                                                       -----------
<S>                                                           <C>
2000
  Los Angeles (Culver City), California.....................       45
2001
  Little Rock, Arkansas.....................................       81
  Colorado Springs, Colorado................................       30
  Charleston, South Carolina................................       32
  Beaumont, Texas...........................................       55
  Pittsburgh, Pennsylvania(1)...............................       80
  Palm Springs, California(2)...............................       68
  Odessa, Texas.............................................      110
2002
  Baton Rouge, Louisiana....................................       50
  New Orleans, Louisiana....................................       56
  Shreveport, Louisiana.....................................      104
  Columbus, Ohio............................................       19
  Bakersfield, California...................................       11
  Wichita, Kansas...........................................        0
  Gulf Coast, Mississippi...................................       38
  Albuquerque, New Mexico...................................       80
  Omaha, Nebraska...........................................        3
  Lake Charles, Louisiana...................................      101
  La Grange, Texas..........................................       20
  Round Rock, Texas(3)......................................       60
2003
  Waxahachie, Texas.........................................      104
</Table>

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

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

(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 Round Rock, Texas hospice, which we acquired in 2002, are
    being relocated to our Austin, Texas hospice location, which we opened in
    2002.

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
                                        38
<PAGE>

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 93.0%,
94.1% and 94.2% of our net patient service revenue for the years ended December
31, 2000, 2001 and 2002, respectively. Services provided under Medicaid programs
represented approximately 2.6%, 3.1% and 3.3% of our net patient service revenue
for the years ended December 31, 2000, 2001 and 2002, 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 83.8%, 88.7% and 89.8% of gross patient service revenue
for the years ended December 31, 2000, 2001 and 2002, respectively. Inpatient
care represented 12.2%, 9.0% and 8.3% of gross patient service revenue for the
years ended December 31, 2000, 2001 and 2002, respectively. Continuous care and
respite care, combined, represented most of the remaining 4.0%, 2.3% and 1.9% 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 57 days in 2001 to 65 days in
2002. 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. On October 1, 2002,
the base Medicare payment rates for hospice care increased by approximately 3.4%
over the base rates previously in effect. These rates were 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 and profitability. 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.

     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

                                        39
<PAGE>

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 and $0.7 million in 2002 reported separately as stock-based compensation)
for the periods indicated:

<Table>
<Caption>
                                                              YEAR ENDED DECEMBER 31,
                                                              -----------------------
                                                              2000     2001     2002
                                                              -----    -----    -----
<S>                                                           <C>      <C>      <C>
Direct hospice care expenses:
  Salaries and payroll taxes................................  29.2%    27.2%    28.0%
  Pharmaceuticals...........................................   7.2      7.1      6.9
  Medical equipment and supplies............................   6.2      6.1      6.1
  Inpatient costs...........................................   3.0      2.0      2.3
  Other (including nursing home costs, net).................   7.1      5.4      5.5
                                                              ----     ----     ----
     Total..................................................  52.7%    47.8%    48.8%
                                                              ====     ====     ====
General and administrative expenses:
  Salaries and benefits.....................................  21.9%    19.6%    18.6%
  Leases....................................................   3.4      2.8      2.7
  Other (including bad debts, travel, office supplies,
     printing and equipment rental).........................  11.2     12.7     11.3
                                                              ----     ----     ----
     Total..................................................  36.5%    35.1%    32.6%
                                                              ====     ====     ====
</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 $0.7 million of deferred stock-based
compensation during 2003 and in future periods. We expect to amortize this
deferred stock-based compensation in the following approximate amounts:

     - $0.4 million during 2003;

     - $0.2 million during 2004; and

     - $0.1 million during 2005 and 2006.

     Upon completion of our initial public offering, we forgave the repayment of
promissory notes payable to us by Richard R. Burnham, our Chairman and Chief
Executive Officer, and David C. Gasmire, our President

                                        40
<PAGE>

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.

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. We estimate that our effective tax rate will be
approximately 39.0% during 2003 as there are no remaining net operating loss
carryforwards or remaining valuation allowances. See Note 14 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 included elsewhere in this Annual Report
on Form 10-K. Certain of our accounting policies are particularly important to
the portrayal of our financial position and results of operations included
elsewhere in this Annual Report on Form 10-K 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
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. Accounts are
written off when all collection efforts are exhausted.

  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
consolidated 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.

  GOODWILL

     Goodwill is the excess of the fair value of identifiable assets acquired
over the purchase price in an acquisition. Prior to the adoption of Statement of
Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets"
("SFAS 142"), goodwill was amortized using the straight-line method, generally
over periods ranging from 20-25 years. After the adoption of SFAS 142, we review
goodwill for impairment annually during the fourth quarter. We determine the
fair value of the reporting units using multiples of
                                        41
<PAGE>

revenue. If the fair value of the reporting unit is less than the carrying
value, then an indication of impairment exists. The amount of the impairment
would be determined by estimating the fair values of the tangible assets and
liabilities, with the remaining fair value assigned to goodwill. We have
determined that the change in impairment testing did not have an impact on our
2002 results of operations or financial position but cannot guarantee that
impairment will not impact our results of operations or financial position in
the future.

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,
                                                              ------------------------
                                                               2000     2001     2002
                                                              ------   ------   ------
<S>                                                           <C>      <C>      <C>
Net patient service revenue.................................  100.0%   100.0%   100.0%
Operating expenses:
  Direct hospice care.......................................   52.7     47.8     48.8
  General and administrative (exclusive of $1.1 million in
     both 2000 and 2001 and $0.7 million in 2002 reported
     separately as stock-based compensation charges)........   33.3     32.6     31.1
  Stock-based compensation charges..........................    1.3      0.9      0.3
  Provision for uncollectible accounts......................    3.2      2.5      1.5
  Depreciation and amortization.............................    1.9      1.7      0.8
                                                              -----    -----    -----
                                                               92.4     85.5     82.5
                                                              -----    -----    -----
Income from operations......................................    7.6     14.5     17.5
Other income (expense), net.................................   (3.5)    (1.8)     0.2
                                                              -----    -----    -----
Income before income taxes and extraordinary item...........    4.1     12.7     17.7
Provision for income taxes..................................    0.5      2.5      6.8
                                                              -----    -----    -----
Income before extraordinary item............................    3.6     10.2     10.9
Extraordinary item -- debt extinguishment, net of tax.......     --     (0.3)      --
                                                              -----    -----    -----
Net income..................................................    3.6%     9.9%    10.9%
                                                              =====    =====    =====
</Table>

  YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001

  Net Patient Service Revenue

     Net patient service revenue increased $64.3 million, or 49.4%, from $130.2
million in 2001 to $194.5 million in 2002 due primarily to an increase in
average daily census of 1,363, or 44.8%, from 3,044 in 2001 to 4,407 in 2002.
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 $51.4 million, or 79.9%, of this increase in net patient
service revenue. The remaining increase of $12.9 million, or 20.1%, in net
patient service revenue was due to the inclusion of net patient service revenue
from hospices acquired and developed in 2001 and 2002. Net patient service
revenue per day of care was $117.16 and $120.89 in 2001 and 2002, respectively.
This increase was primarily due to overall increases in Medicare payment rates
for our hospice services. Medicare and Medicaid payments represented 97.2% and
97.5% of our net patient service revenue in 2001 and 2002, respectively.

  Direct Hospice Care Expenses

     Direct hospice care expenses increased $32.7 million, or 52.5%, from $62.3
million in 2001 to $94.9 million in 2002. This increase was primarily due to the
growth of our operations at our existing hospices and, to a lesser extent, to
hospices acquired in 2001 and 2002. As a percentage of net patient service
revenue,

                                        42
<PAGE>

direct hospice care expenses increased from 47.8% in 2001 to 48.8% in 2002
primarily due to the growth of our operations through developed hospices.

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

     General and administrative expenses increased $17.9 million, or 42.2%, from
$42.5 million in 2001 to $60.4 million in 2002. This increase was due to the
growth of our operations at our hospice locations, including hospice locations
acquired after December 31, 2001, to support our patient census growth during
2002. As a percentage of net patient service revenue, general and administrative
expenses decreased from 32.6% in 2001 to 31.1% in 2002, 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 decreased $0.4 million, or 38.4%, from
$1.1 million in 2001 to $0.7 million in 2002. 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 decreased $0.3 million, or 8.0%,
from $3.2 million in 2001 to $3.0 million in 2002, due primarily to improved
collection efforts. As a percentage of net patient service revenue, our
provision for uncollectible accounts decreased from 2.5% in 2001 to 1.5% in
2002.

  Depreciation and Amortization Expense

     Depreciation and amortization expense decreased $0.7 million, or 31.8%,
from $2.2 million in 2001 to $1.5 million in 2002. The decrease was due to the
adoption of SFAS 142 in which goodwill is no longer amortized but assessed for
impairment at least annually. See Note 1 to the consolidated financial
statements included elsewhere in this Annual Report on Form 10-K. As a
percentage of net patient service revenue, depreciation and amortization expense
decreased from 1.7% in 2001 to 0.8% in 2002.

  Other Income (Expense)

     Other income (expense) increased $2.7 million, or 113.4%, from an expense
of $2.4 million in 2001 to income of $0.3 million in 2002, due primarily to a
decrease in interest expense as a result of paying off our line of credit and
certain seller notes with proceeds received from our initial public offering,
and by an increase in interest income received from the investment from the
proceeds of our initial public offering. Also, we acquired the minority interest
in the Hospice of Houston in the third quarter of 2002, reversing $50,000 of
previously recorded minority interest expense.

  Provision for Income Taxes

     Our provision for income taxes was $3.2 million and $13.1 million in 2001
and 2002, respectively. We had an effective income tax rate of 19% and 38% in
2001 and 2002, respectively, resulting primarily from state income taxes and
federal alternative minimum tax and our use of net operating loss carryforwards
in 2001. 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 No. 109 "Accounting for Income
Taxes."("SFAS 109")

                                        43
<PAGE>

  Net Income

     Net income increased $8.2 million, from $12.9 million in 2001 to $21.1
million in 2002.

  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 in 2000 to 3,044 in 2001.
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.

                                        44
<PAGE>

  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
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% and 19% 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 SFAS 109.

  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 totaling
$5.8 million that was used in the computation of basic net income per share.

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 and common 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, 2002, we
had cash and cash equivalents of $7.7 million and working capital of $51.5
million. At such date, we also had short-term investments of $25.9 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 operating activities was $3.5 million, $15.0 million and
$17.8 million for the years ended December 31, 2000, 2001 and 2002,
respectively. The increase in cash provided by operating activities in 2000,
2001 and 2002 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 $1.5 million, $31.0 million
and $28.3 million for the years ended December 31, 2000, 2001 and 2002,
respectively, and to establish short-term investments in 2001 and 2002.

                                        45
<PAGE>

     Net cash provided by (used in) financing activities was $(2.3) million,
$36.0 million and $(1.8) million for the years ended December 31, 2000, 2001 and
2002, respectively, and represented payments on acquisition notes and proceeds
from the sale of capital stock, warrants, and in 2000 and 2001, net borrowings
under our credit agreement 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 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,
was paid in May 2002.

     In connection with our acquisition of seven hospice programs in 2001, we
paid an aggregate of $8.3 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. We repaid in
       full the principal balance of this note and all accrued and unpaid
       interest in the aggregate amount of $0.3 million on April 1, 2002 and
       August 27, 2002;

     - A promissory note in the principal amount of $1.0 million. We repaid in
       full the principal balance of this note and all accrued and unpaid
       interest in the aggregate amount of $1.0 million on April 1, 2002 and
       August 21, 2002;

     - A promissory note in the principal amount of $0.5 million. We repaid in
       full the principal balance of this note and all accrued and unpaid
       interest in the aggregate amount of $0.5 million on May 31, 2002;

     - A promissory note in the principal amount of $0.6 million. We repaid in
       full the principal balance of this note and all accrued and unpaid
       interest in the aggregate amount of $0.6 million on June 30, 2002 and
       July 29, 2002; and

     - A promissory note in the principal amount of $0.5 million. We repaid in
       full the principal balance of this note and all accrued and unpaid
       interest in the aggregate amount of $0.6 million, with $0.3 million of
       the principal amount, plus accrued and unpaid interest, paid on December
       2, 2002 and the remaining principal amount, plus accrued and unpaid
       interest, paid on February 20, 2003.

     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, 2003, 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.

                                        46
<PAGE>

     We were in full compliance with our financial and other covenants as of
February 28, 2003. We expect to let our line of credit expire in October of
2003. We do not foresee any additional credit needs in the near future.

     We have entered into an agreement to purchase a new accounting system
during 2003. We plan to capitalize $0.5 million in 2003 related to this
implementation.

CONTRACTUAL OBLIGATIONS

<Table>
<Caption>
                                                              PAYMENTS DUE BY PERIOD
                                              -------------------------------------------------------
                                                        LESS THAN 1                           AFTER 5
                                               TOTAL       YEAR       1-3 YEARS   4-5 YEARS    YEARS
                                              -------   -----------   ---------   ---------   -------
                                                                  (IN THOUSANDS)
<S>                                           <C>       <C>           <C>         <C>         <C>
Long-Term Debt..............................  $   261     $  251       $     9     $    1     $   --
Capital Lease Obligations...................       13         13            --         --         --
Operating Leases............................   23,797      5,187        12,100      4,070      2,440
Other Long-Term Obligations.................      327        327            --         --         --
                                              -------     ------       -------     ------     ------
Total Contractual Obligations...............  $24,398     $5,778       $12,109     $4,071     $2,440
                                              =======     ======       =======     ======     ======
</Table>

     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 Annual Report on Form 10-K. 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 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

     We adopted Statement of Financial Accounting Standards No. 141 "Business
Combinations" ("SFAS 141") and Statement of Financial Accounting Standards No.
142 "Goodwill and Other Intangible Assets" ("SFAS 142"), on January 1, 2002.
SFAS 141 supercedes Accounting Principles Board Opinion No. 16 "Business
Combinations" and Statement of Financial Accounting Standards No. 28 "Accounting
for Preacquisition Contingencies of Purchased Enterprises" and eliminates
pooling of interests accounting for business combinations for transactions
entered into after July 1, 2001. The adoption of SFAS 141 did not have a
significant impact on our results of operations or financial condition. SFAS 142
supercedes Accounting Principles Board Opinion No. 17 "Intangible Assets" which
changes the accounting for goodwill and other intangible assets. The adoption of
SFAS 142 eliminates the periodic amortization of goodwill and institutes an
annual review of the fair value of goodwill. The elimination of goodwill
amortization would have increased net

                                        47
<PAGE>

income by $0.9 million and $1.2 million, for the years ended December 31, 2000
and 2001, respectively. Impairment of goodwill would be recorded if the fair
value of the goodwill is less than the book value. Goodwill is reviewed at the
reporting unit level, which is defined in SFAS 142 as an operating segment or
one level below an operating segment. We have defined our reporting units at the
operating segment level. SFAS 142 required the completion of the initial step of
a transitional impairment test within six months of adoption. Any impairment
loss resulting from the transitional impairment test would have been recorded as
a cumulative effect of a change in accounting principle. Subsequent impairment
losses would be reflected in operating income. We have determined that the
change in impairment testing did not have an impact on our 2002 results of
operations or financial position. We completed the annual testing in the fourth
quarter of 2002 and no impairments were required.

     We adopted Statement of Financial Accounting Standards No. 144 "Accounting
for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), on January 1,
2002. SFAS 144 supercedes Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" ("SFAS 121") and the accounting and reporting provisions of
Accounting Principles Board Opinion No. 30 "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions" ("APB
30") for the disposal of a segment of a business. SFAS 144 establishes a single
accounting model, based on the framework established in SFAS 121, for long-lived
assets to be disposed of by sale and resolves implementation issues related to
SFAS 121 by removing goodwill from its scope. The adoption of SFAS 144 would
impact our results of operations and financial position if a component of our
business is designated as held for sale after adoption of SFAS 144. Components
designated as held for sale would be reported separately as discontinued
operations with prior periods restated. Currently, we have not designated any
components as held for sale under SFAS 144, but could do so in the future.

     In April 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 145 "Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS
145"), which is required to be applied in fiscal years beginning after May 15,
2002, with early application encouraged. SFAS 145 rescinds Statement of
Financial Accounting Standards No. 4 "Reporting Gains and Losses From
Extinguishment of Debt." SFAS 145 requires any gains or losses on extinguishment
of debt that were classified as an extraordinary item in prior periods that do
not meet the criteria in APB 30 for classification as an extraordinary item be
reclassified into income from operations. We adopted the provisions of SFAS 145
on January 1, 2003. The impact of adoption of SFAS 145 will reduce income from
operations by $0.4 million for the year ended December 31, 2001 through the
reclassification of the extraordinary loss on extinguishment of debt.

     In July 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities" ("SFAS 146"), which is effective for exit or
disposal activities initiated after December 31, 2002 with early application
encouraged. SFAS 146 addresses the accounting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." We
do not anticipate a material impact on our results of operations or financial
position from the adoption of SFAS 146.

     The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 148 "Accounting for Stock-Based
Compensation -- Transition and Disclosures" ("SFAS 148") in December 2002. SFAS
148 amends the disclosure provisions and transition alternatives of Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation"
and is effective for fiscal years ending after December 15, 2002. We adopted the
disclosure provisions of SFAS 148 effective December 31, 2002.

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

                                        48
<PAGE>

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 consolidated
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 consolidated financial
statements.

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

     None.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information set forth under the headings "Proposal One -- Election of
Class II 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 2003 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 2003 Annual Meeting of Stockholders is
incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
         RELATED STOCKHOLDER MATTERS

     The information set forth under the heading "Security Ownership of
Principal Stockholders and Management" contained in our definitive Proxy
Statement to be filed pursuant to Regulation 14A of the Exchange Act in
connection with our 2003 Annual Meeting of Stockholders is incorporated herein
by reference.

     For information regarding common stock to be issued pursuant to
equity-based compensation plans, see "Item 5. Market for Registrant's Common
Equity and Related Stockholder Matters."

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 2003 Annual Meeting of Stockholders is incorporated herein
by reference.

ITEM 14. CONTROLS AND PROCEDURES

     Our Chief Executive Officer and Chief Financial Officer have reviewed and
evaluated the effectiveness of our disclosure controls and procedures (as
defined in the Securities Exchange Act of 1934 Rules 240.13a-14(c) and
15d-14(c)) as of a date within 90 days before the filing date of this Annual
Report on Form 10-K and concluded that such disclosure controls and procedures
are effective in timely alerting them to material

                                        49
<PAGE>

information that is required to be disclosed in the periodic reports we file or
submit under the Securities Exchange Act of 1934. There have not been any
significant changes in our internal controls or in other factors that could
significantly affect these internal controls subsequent to the date of the
evaluation.

                                    PART IV

ITEM 15. 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>       <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 (incorporated by reference to Exhibit
                10.2 to the Company's Annual Report on Form 10-K as filed
                with the Commission on March 20, 2002)
</Table>

                                        50
<PAGE>

<Table>
<Caption>
EXHIBIT
NUMBER                                  DESCRIPTION
-------                                 -----------
<C>       <C>   <S>
10.3        --  Amended and Restated Employment Agreement, effective as of
                February 28, 2002, by and between Odyssey HealthCare, Inc.
                and David C. Gasmire (incorporated by reference to Exhibit
                10.3 to the Company's Annual Report on Form 10-K as filed
                with the Commission on March 20, 2002)
10.4        --  Amended and Restated Employment Agreement, effective as of
                February 28, 2002, by and between Odyssey HealthCare, Inc.
                and Douglas B. Cannon (incorporated by reference to Exhibit
                10.4 to the Company's Annual report on Form 10-K as filed
                with the Commission on March 20, 2002)
10.5.1      --  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)
10.7.2      --  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)
10.8        --  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, 2002:

          (1) Current report on Form 8-K (Item 9), dated November 14, 2002,
     announcing that Richard R. Burnham, Chairman and Chief Executive Officer,
     and Douglas B. Cannon, Chief Financial Officer, submitted certificates to
     the Securities and Exchange Commission, relating to Odyssey's Quarterly
     Report on Form 10-Q for the quarter ended September 30, 2002, pursuant to
     18 U.S.C. Section 1350, adopted pursuant to section 906 of the
     Sarbanes-Oxley Act of 2002.

     (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 27, 2003

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below 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 27, 2003
 ------------------------------------------------     Chairman of the Board (Principal
                Richard R. Burnham                           Executive Officer)


               /s/ DAVID C. GASMIRE                  President, Chief Operating Officer   March 27, 2003
 ------------------------------------------------         and Assistant Secretary
                 David C. Gasmire


              /s/ DOUGLAS B. CANNON                     Senior Vice President, Chief      March 27, 2003
 ------------------------------------------------     Financial Officer, Secretary and
                Douglas B. Cannon                    Treasurer (Principal Financial and
                                                            Accounting Officer)


               /s/ JOHN K. CARLYLE                                Director                March 27, 2003
 ------------------------------------------------
                 John K. Carlyle


                /s/ DAVID W. CROSS                                Director                March 27, 2003
 ------------------------------------------------
                  David W. Cross


                /s/ PAUL FELDSTEIN                                Director                March 27, 2003
 ------------------------------------------------
                  Paul Feldstein


                /s/ MARTIN S. RASH                                Director                March 27, 2003
 ------------------------------------------------
                  Martin S. Rash


               /s/ DAVID L. STEFFY                                Director                March 27, 2003
 ------------------------------------------------
                 David L. Steffy


                 /s/ MARK A. WAN                                  Director                March 27, 2003
 ------------------------------------------------
                   Mark A. Wan
</Table>

                                        52
<PAGE>

                                 CERTIFICATIONS

I, Richard R. Burnham, certify that:

     1. I have reviewed this Annual Report on Form 10-K of Odyssey HealthCare,
Inc.;

     2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

     3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

     4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

          (a) designed such disclosure controls and procedures to ensure that
     material information relating to the registrant, including its consolidated
     subsidiaries, is made known to us by others within those entities,
     particularly during the period in which this annual report is being
     prepared;

          (b) evaluated the effectiveness of the registrant's disclosure
     controls and procedures as of a date within 90 days prior to the filing
     date of this annual report (the "Evaluation Date"); and

          (c) presented in this annual report our conclusions about the
     effectiveness of the disclosure controls and procedures based on our
     evaluation as of the Evaluation Date;

     5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):

          (a) all significant deficiencies in the design or operation of
     internal controls which could adversely affect the registrant's ability to
     record, process, summarize and report financial data and have identified
     for the registrant's auditors any material weaknesses in internal controls;
     and

          (b) any fraud, whether or not material, that involves management or
     other employees who have a significant role in the registrant's internal
     controls; and

     6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

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

Date: March 27, 2003

                                        53
<PAGE>

I, Douglas B. Cannon, certify that:

     1. I have reviewed this Annual Report on Form 10-K of Odyssey HealthCare,
Inc.;

     2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

     3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

     4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

          a. designed such disclosure controls and procedures to ensure that
     material information relating to the registrant, including its consolidated
     subsidiaries, is made known to us by others within those entities,
     particularly during the period in which this annual report is being
     prepared;

          b. evaluated the effectiveness of the registrant's disclosure controls
     and procedures as of a date within 90 days prior to the filing date of this
     annual report (the "Evaluation Date"); and

          c. presented in this annual report our conclusions about the
     effectiveness of the disclosure controls and procedures based on our
     evaluation as of the Evaluation Date;

     5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):

          a. all significant deficiencies in the design or operation of internal
     controls which could adversely affect the registrant's ability to record,
     process, summarize and report financial data and have identified for the
     registrant's auditors any material weaknesses in internal controls; and

          b. any fraud, whether or not material, that involves management or
     other employees who have a significant role in the registrant's internal
     controls; and

     6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

                                                 /s/ DOUGLAS B. CANNON
                                          --------------------------------------
                                                    Douglas B. Cannon
                                                 Chief Financial Officer

Date: March 27, 2003

                                        54
<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, 2001 and
  2002......................................................  F-3
Consolidated Statements of Operations for the years ended
  December 31, 2000, 2001 and 2002..........................  F-4
Consolidated Statements of Preferred Stock and Stockholders'
  Equity (Deficit) for the years ended December 31, 2000,
  2001 and 2002.............................................  F-5
Consolidated Statements of Cash Flows for the years ended
  December 31, 2000, 2001 and 2002..........................  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 (the Company) as of December 31, 2001 and
2002, and the related consolidated statements of operations, preferred stock and
stockholders' equity (deficit), and cash flows for each of the three years in
the period ended December 31, 2002. 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 financial position of Odyssey
HealthCare, Inc. and subsidiaries as of December 31, 2001 and 2002, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States.

     As discussed in Note 1 to the consolidated financial statements, effective
January 1, 2002, the Company changed its method of accounting for goodwill and
other intangible assets.

                                          /s/ ERNST & YOUNG LLP

Dallas, Texas
January 31, 2003
Except for Note 7
as to which the date
is February 24, 2003

                                       F-2
<PAGE>

                   ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

<Table>
<Caption>
                                                                   DECEMBER 31,
                                                              ----------------------
                                                                2001         2002
                                                              ---------   ----------
                                                              (IN THOUSANDS, EXCEPT
                                                               SHARE AND PER SHARE
                                                                     AMOUNTS)
<S>                                                           <C>         <C>
                                       ASSETS
Current assets:
  Cash and cash equivalents.................................   $20,072     $  7,732
  Short-term investments....................................    21,419       25,898
  Accounts receivable from patient services, net of
     allowance for uncollectible accounts of $3,394 and
     $2,962 at December 31, 2001 and 2002, respectively.....    25,043       35,652
  Deferred tax assets.......................................       903        1,752
  Income taxes receivable...................................        --          667
  Other current assets......................................     1,564        2,172
                                                               -------     --------
       Total current assets.................................    69,001       73,873
Property and equipment, net.................................     2,451        3,670
Debt issue costs, net and other.............................        59           25
Goodwill....................................................    26,705       46,527
Intangibles, net............................................        --        1,319
                                                               -------     --------
       Total assets.........................................   $98,216     $125,414
                                                               =======     ========

                        LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..........................................   $ 2,008     $  2,158
  Accrued compensation......................................     4,685        7,277
  Accrued nursing home costs................................     5,125        7,377
  Accrued income taxes......................................       834           --
  Other accrued expenses....................................     3,418        5,289
  Current maturities of long-term debt and capital lease
     obligations............................................     2,267          274
                                                               -------     --------
       Total current liabilities............................    18,337       22,375
Long-term debt and capital lease obligations, less current
  maturities................................................     1,213           --
Deferred tax liability......................................       580        1,779
Other liabilities...........................................       301          327
Commitments and contingencies
Minority interest...........................................       150           --
Stockholders' equity:
  Common stock, $.001 par value:
     Authorized shares -- 75,000,000
     Issued and outstanding shares -- 22,880,385 at December
      31, 2001 and 23,378,091 at December 31, 2002..........        23           23
  Additional paid-in capital................................    77,718       79,191
  Deferred compensation.....................................    (1,411)        (726)
  Retained earnings.........................................     1,305       22,445
                                                               -------     --------
       Total stockholders' equity...........................    77,635      100,933
                                                               -------     --------
       Total liabilities and stockholders' equity...........   $98,216     $125,414
                                                               =======     ========
</Table>

                            See accompanying notes.
                                       F-3
<PAGE>

                   ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<Table>
<Caption>
                                                                  YEAR ENDED DECEMBER 31,
                                                              --------------------------------
                                                                2000       2001        2002
                                                              --------   ---------   ---------
                                                              (IN THOUSANDS, EXCEPT PER SHARE
                                                                          AMOUNTS)
<S>                                                           <C>        <C>         <C>
Net patient service revenue.................................  $85,271    $130,181    $194,459
Operating expenses:
  Direct hospice care.......................................   44,964      62,269      94,944
  General and administrative (exclusive of $1,113, $1,112
     and $685 for the years ended December 31, 2000, 2001
     and 2002, respectively, reported below as stock-based
     compensation charges)..................................   28,375      42,471      60,414
  Stock-based compensation charges..........................    1,113       1,112         685
  Provision for uncollectible accounts......................    2,708       3,207       2,952
  Depreciation and amortization.............................    1,656       2,211       1,509
                                                              -------    --------    --------
                                                               78,816     111,270     160,504
                                                              -------    --------    --------
Income from operations......................................    6,455      18,911      33,955
Other income (expense):
  Minority interest.........................................      (46)       (150)         50
  Interest income...........................................       31         239         544
  Interest expense..........................................   (2,931)     (2,512)       (269)
                                                              -------    --------    --------
                                                               (2,946)     (2,423)        325
                                                              -------    --------    --------
Income before provision for income taxes and extraordinary
  item......................................................    3,509      16,488      34,280
Provision for income taxes..................................      417       3,231      13,140
                                                              -------    --------    --------
Income before extraordinary item............................    3,092      13,257      21,140
Extraordinary item -- debt extinguishment, net of tax.......       --        (361)         --
                                                              -------    --------    --------
Net income..................................................    3,092      12,896      21,140
Preferred stock dividends...................................   (1,302)     (1,097)         --
Gain on conversion of preferred securities..................       --       5,755          --
                                                              -------    --------    --------
Net income available to common stockholders.................  $ 1,790    $ 17,554    $ 21,140
                                                              =======    ========    ========
Net income per common share:
  Basic net income before extraordinary item................  $  0.61    $   2.81    $   0.91
  Extraordinary item -- debt extinguishment, net of tax.....       --       (0.06)         --
                                                              -------    --------    --------
  Basic net income per common share.........................  $  0.61    $   2.75    $   0.91
                                                              =======    ========    ========
  Diluted net income before extraordinary item..............  $  0.17    $   0.69    $   0.86
  Extraordinary item -- debt extinguishment, net of tax.....       --       (0.02)         --
                                                              -------    --------    --------
  Diluted net income per common share.......................  $  0.17    $   0.67    $   0.86
                                                              =======    ========    ========
Weighted average shares outstanding:
  Basic.....................................................    2,920       6,368      23,188
  Diluted...................................................   17,730      19,080      24,461
</Table>

                            See accompanying notes.
                                       F-4
<PAGE>

                   ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

 CONSOLIDATED STATEMENTS OF PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
<Table>
<Caption>
                                         CONVERTIBLE REDEEMABLE PREFERRED STOCK
                                 -------------------------------------------------------
                                     SERIES A           SERIES B            SERIES C                      COMMON STOCK
                                 ----------------   -----------------   ----------------   STOCKHOLDER   ---------------
                                 SHARES   AMOUNT    SHARES    AMOUNT    SHARES   AMOUNT       LOANS      SHARES   AMOUNT
                                 ------   -------   ------   --------   ------   -------   -----------   ------   ------
                                                                 (AMOUNTS IN THOUSANDS)
<S>                              <C>      <C>       <C>      <C>        <C>      <C>       <C>           <C>      <C>
Balance at January 1, 2000.....   7,009   $ 4,642    6,400   $  9,839    2,857   $ 5,595      $(216)      2,919    $ 3
  Exercise of stock options....      --        --       --         --       --        --         --          53     --
  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)      2,972      3
  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...................      --        --       --         --       --        --         --       6,210      6
  Preferred Share Conversion in
    connection with initial
    public offering............  (6,918)   (5,090)  (6,400)   (11,012)  (2,857)   (6,328)        --      12,132     12
  Forgiveness of stockholder
    loans......................      --        --       --         --       --        --        171          --     --
  Deferred compensation related
    to stock options...........      --        --       --         --       --        --         --          --     --
  Amortization of deferred
    compensation...............      --        --       --         --       --        --         --          --     --
  Exercise of stock options....      --        --       --         --       --        --         --          82     --
  Exercise of stock warrants...      --        --       --         --       --        --         --       1,485      2
  Net income...................      --        --       --         --       --        --         --          --     --
                                 ------   -------   ------   --------   ------   -------      -----      ------    ---
Balance at December 31, 2001...      --        --       --         --       --        --         --      22,881     23
  Expense related to Initial
    Public Offering............      --        --       --         --       --        --         --          --     --
  Amortization of deferred
    compensation...............      --        --       --         --       --        --         --          --     --
  Tax benefit related to stock
    option exercise............      --        --       --         --       --        --         --          --     --
  Exercise of stock options....      --        --       --         --       --        --         --         451     --
  Exercise of stock warrants...      --        --       --         --       --        --         --          46     --
  Net income...................      --        --       --         --       --        --         --          --     --
                                 ------   -------   ------   --------   ------   -------      -----      ------    ---
Balance at December 31, 2002...      --   $    --       --   $     --       --   $    --      $  --      23,378    $23
                                 ======   =======   ======   ========   ======   =======      =====      ======    ===

<Caption>

                                 ADDITIONAL                                  TOTAL
                                  PAID-IN       DEFERRED     RETAINED    STOCKHOLDERS'
                                  CAPITAL     COMPENSATION   EARNINGS   EQUITY (DEFICIT)
                                 ----------   ------------   --------   ----------------
                                                 (AMOUNTS IN THOUSANDS)
<S>                              <C>          <C>            <C>        <C>
Balance at January 1, 2000.....   $ 1,372       $    --      $(18,032)      $(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)      (16,242)       (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            --            (2)        56,004
  Preferred Share Conversion in
    connection with initial
    public offering............    16,667            --         5,751         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)           --            (1)            --
  Net income...................        --            --        12,896         12,896
                                  -------       -------      --------       --------
Balance at December 31, 2001...    77,718        (1,411)        1,305         77,635
  Expense related to Initial
    Public Offering............       (37)           --            --            (37)
  Amortization of deferred
    compensation...............        --           685            --            685
  Tax benefit related to stock
    option exercise............       891            --            --            891
  Exercise of stock options....       581            --            --            581
  Exercise of stock warrants...        38            --            --             38
  Net income...................        --            --        21,140         21,140
                                  -------       -------      --------       --------
Balance at December 31, 2002...   $79,191       $  (726)     $ 22,445       $100,933
                                  =======       =======      ========       ========
</Table>

                            See accompanying notes.

                                       F-5
<PAGE>

                   ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<Table>
<Caption>
                                                                  YEAR ENDED DECEMBER 31,
                                                              -------------------------------
                                                                2000       2001        2002
                                                              --------   ---------   --------
                                                                      (IN THOUSANDS)
<S>                                                           <C>        <C>         <C>
Operating Activities
  Net income................................................  $  3,092   $  12,896   $ 21,140
  Adjustments to reconcile net income to net cash provided
     by operating activities:
     Extraordinary item-debt extinguishment.................        --         572         --
     Forgiveness of stockholder loans.......................        --         171         --
     Depreciation and amortization..........................     1,656       2,211      1,509
     Amortization of deferred charges and debt discount.....       189         173         34
     Stock-based compensation...............................     1,113       1,112        685
     Minority interest......................................        --         150        (50)
     Deferred tax expense...................................        --        (323)       350
     Provision for uncollectible accounts...................     2,708       3,207      2,952
     Changes in operating assets and liabilities, net of
       acquisitions:
       Accounts receivable..................................    (8,671)     (9,242)   (13,561)
       Other current assets.................................      (814)       (623)    (1,275)
       Accounts payable, accrued nursing home costs and
          other accrued expenses............................     4,247       4,652      6,057
                                                              --------   ---------   --------
       Net cash provided by operating activities............     3,520      14,956     17,841
Investing Activities
  Cash paid for acquisitions................................      (825)     (7,845)   (21,269)
  Increase in short-term investments........................        --     (21,419)    (4,479)
  Purchases of property and equipment.......................      (678)     (1,737)    (2,600)
                                                              --------   ---------   --------
       Net cash used in investing activities................    (1,503)    (31,001)   (28,348)
Financing Activities
  Proceeds from issuance of common stock....................         9      56,616      1,473
  Distributions to minority partners........................        --          --       (100)
  Proceeds from issuance of debt............................    89,426     116,893         15
  Payments on debt..........................................   (91,628)   (137,490)    (3,221)
  Payment of debt issue costs...............................      (100)         --         --
                                                              --------   ---------   --------
       Net cash provided by (used in) financing
          activities........................................    (2,293)     36,019     (1,833)
                                                              --------   ---------   --------
Net increase (decrease) in cash and cash equivalents........      (276)     19,974    (12,340)
Cash and cash equivalents, beginning of period..............       374          98     20,072
                                                              --------   ---------   --------
Cash and cash equivalents, end of period....................  $     98   $  20,072   $  7,732
                                                              ========   =========   ========
Supplemental Cash Flow Information
  Cash interest paid........................................  $  2,583   $   2,698   $    341
  Income taxes paid.........................................  $    282   $   2,526   $ 13,353
</Table>

                            See accompanying notes.
                                       F-6
<PAGE>

                   ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002

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, 2002, had 65 locations serving patients and their
families in 26 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
91.2% and 90.6% of the accounts receivable at December 31, 2001 and 2002,
respectively, represent amounts due from the Medicare and Medicaid programs. The
Company maintains a policy for reserving for uncollectible accounts. The Company
calculates the allowance for uncollectible accounts based on a formula tied to
the aging of accounts receivable by payor class. The Company reserves for
specific accounts that are determined to be uncollectible when such
determinations are made. Accounts are written off when all collection efforts
are exhausted.

  GOODWILL

     The Company adopted Statement of Financial Accounting Standards No. 142
"Goodwill and Other Intangible Assets" ("SFAS 142") on January 1, 2002. The
adoption of SFAS 142 eliminates the periodic amortization of goodwill and
institutes an annual review of the fair value of goodwill. The elimination of
goodwill amortization would have increased net income by $0.9 million and $1.2
million, for the years ended December 31, 2000 and 2001, respectively.
Impairment of goodwill would be recorded if the fair value of the goodwill is
less than the book value. Goodwill is reviewed at the reporting unit level,
which is defined in

                                       F-7
<PAGE>
                   ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

SFAS 142 as an operating segment or one level below an operating segment. The
Company has defined their reporting units at the operating segment level. SFAS
142 required the completion of the initial step of a transitional impairment
test within six months of adoption. Any impairment loss resulting from the
transitional impairment test would have been recorded as a cumulative effect of
a change in accounting principle. Subsequent impairment losses would be
reflected in operating income. The Company has determined that the change in
impairment testing did not have an impact on their 2002 results of operations or
financial position. The Company completed the annual testing in the fourth
quarter of 2002 and no impairments were required.

     Goodwill is the excess of the fair value of identifiable assets acquired
over the purchase price in an acquisition. Prior to the adoption of SFAS 142,
goodwill was amortized using the straight-line method, generally over periods
ranging from 20-25 years. After the adoption of SFAS 142, the Company reviews
goodwill for impairment annually during the fourth quarter. The Company
determines the fair value of the reporting units using multiples of revenue. If
the fair value of a reporting unit is less than the carrying value, then an
indication of impairment exists. The amount of the impairment would be
determined by estimating the fair values of the tangible assets and liabilities,
with the remaining fair value assigned to goodwill.

  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 are adjusted in future periods as the
payments are determined. The percentage of net patient service revenue derived
under the Medicare and Medicaid programs was 95.6%, 97.2% and 97.5% for the
years ended December 31, 2000, 2001 and 2002, respectively.

     The Company is subject to limits for payments for routine home care and for
inpatient services. Routine home care, which represented about 89.8% of gross
patient service revenue in 2002, 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 8.3% of gross patient service revenue in 2002,
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 2000, 2001, or 2002.

     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 $0.4 million, $0.9
million and $2.0 million for the years ended December 31, 2000, 2001 and 2002,
respectively.

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  DIRECT HOSPICE CARE EXPENSES

     Direct hospice care expenses consist primarily of salaries, benefits,
payroll taxes, and travel costs associated with hospice care providers. Direct
hospice care expenses also include the cost of pharmaceuticals, durable medical
equipment, medical supplies, inpatient arrangements, net nursing home costs and
purchase services such as ambulance, infusion and radiology.

  PROPERTY AND EQUIPMENT AND OTHER INTANGIBLE ASSETS

     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.

     Other intangible assets are comprised of licenses and non-compete
agreements, which are being amortized based on the terms of the respective
contracts.

     When events, circumstances and operating results indicate that the carrying
value of certain property, equipment, and other intangible assets might be
impaired, the Company prepares projections of the undiscounted future cash flows
expected to result from the use of the assets and their eventual disposition. If
the projections indicate that the recorded amounts are not expected to be
recoverable, such amounts are reduced to estimated fair value. Indicators of
potential impairment are typically beyond the control of management. If market
conditions become less favorable than those projected by management, impairments
may be required.

     On January 1, 2002 the Company adopted Statement of Financial Accounting
Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"). SFAS 144 supercedes Statement of Financial Accounting
Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of" ("SFAS 121") and the accounting and
reporting provisions of Accounting Principles Board Opinion No. 30 "Reporting
the Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" ("APB 30") for the disposal of a segment of a business. SFAS 144
establishes a single accounting model, based on the framework established in
SFAS 121, for long-lived assets to be disposed of by sale and resolves
implementation issues related to SFAS 121 by removing goodwill from its scope.
The adoption of SFAS 144 would impact the results of operations and the
financial position of the Company if a component of the Company's business is
designated as held for sale after adoption of SFAS 144. Components designated as
held for sale would be reported separately as discontinued operations with prior
periods restated. Currently, the Company has not designated any components as
held for sale under SFAS 144, but could do so in the future.

  STOCK-BASED COMPENSATION

     The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 148 "Accounting for Stock-Based
Compensation -- Transition and Disclosures" ("SFAS 148") in December 2002. SFAS
148 amends the disclosure provisions and transition alternatives of Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation"
("SFAS 123") and is effective for fiscal years ending after December 15, 2002.
The Company adopted the disclosure provisions of SFAS 148 effective December 31,
2002.

     Prior to 2001, the Company had two stock-based compensation plans which are
described more fully in Note 9. The Company accounts for those plans under the
recognition and measurement principles of APB Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25") and related interpretations. APB 25 uses
the intrinsic value method to account for options granted to employees.
Stock-based
                                       F-9
<PAGE>
                   ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

compensation is generally not recognized since the option price is typically
equal the market value of the underlying common stock on the date of grant.
During the years ended December 31, 2000 and 2001, the Company recorded
aggregate deferred compensation for employees of $2.1 million and $1.5 million,
respectively, representing the difference between the exercise prices of the
stock options granted in fiscal year 2000 and 2001 under the Odyssey HealthCare,
Inc. Stock Option Plan and 2001 Equity-Based Compensation Plan and the then
deemed fair value of the common stock prior to the initial public offering (the
"Offering"). These amounts are being amortized to operations using the graded
method. Under the graded method, approximately 46%, 26%, 15%, 9% and 4%,
respectively of each option's compensation expense is recognized in each of the
five years following the date of the grant. For the years ended December 31,
2000, 2001 and 2002, the Company amortized deferred compensation in the amount
of $1.1 million, $1.1 million and $0.7 million, respectively. The following
table illustrates the effect on net income and earnings per share if the Company
had applied the fair value recognition provisions of SFAS 123 to all stock-based
compensation.

<Table>
<Caption>
                                                             YEAR ENDED DECEMBER 31
                                                           --------------------------
                                                            2000     2001      2002
                                                           ------   -------   -------
                                                                 (IN THOUSANDS)
<S>                                                        <C>      <C>       <C>
Net income, as reported..................................  $1,790   $17,554   $21,140
Add: Stock-based employee compensation expense recorded,
  net of tax.............................................     979       901       425
Deduct: Fair value stock-based employee compensation
  expense, net of tax....................................     682       444     1,278
                                                           ------   -------   -------
Pro forma net income.....................................  $2,087   $18,011   $20,287
                                                           ======   =======   =======
Earnings per share:
Basic -- as reported.....................................  $ 0.61   $  2.76   $  0.91
Add: Stock-based employee compensation expense recorded,
  net of tax.............................................    0.33      0.14      0.02
Deduct: Fair value stock-based employee compensation
  expense, net of tax....................................   (0.23)    (0.07)    (0.05)
                                                           ------   -------   -------
Basic -- pro forma.......................................  $ 0.71   $  2.83   $  0.88
                                                           ======   =======   =======
Diluted -- as reported...................................  $ 0.17   $  0.67   $  0.86
Add: Stock-based employee compensation expense recorded,
  net of tax.............................................    0.05      0.05      0.02
Deduct: Fair value stock-based employee compensation
  expense, net of tax....................................   (0.03)    (0.02)    (0.05)
                                                           ------   -------   -------
Diluted -- pro forma.....................................  $ 0.19   $  0.70   $  0.83
                                                           ======   =======   =======
</Table>

     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 volatility. The
following table illustrates the weighted average assumptions for the years ended
December 31:

<Table>
<Caption>
                                                   2000        2001          2002
                                                  -------   -----------   -----------
<S>                                               <C>       <C>           <C>
Risk free interest rate.........................     6.1%   4.50%-5.19%   3.44%-4.55%
Expected life...................................  6 years       6 years       5 years
Expected volatility.............................       --         0.590         0.715
Expected dividend yield.........................       --            --            --
</Table>

     The weighted average deemed fair value of the option granted was $1.83,
$6.32 and $11.46 in the years ended December 31, 2000, 2001 and 2002,
respectively.

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  NET INCOME PER COMMON SHARE

     Basic net income per common share is computed by dividing net income 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 per common share is computed
by dividing the net income 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). Also see Note 7.

     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 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 in 2001 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 Statement of Financial Accounting Standards Board Statement No. 109,
"Accounting for Income Taxes" ("SFAS 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 2002, 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 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
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 $16.8 million, $25.6 million and $38.4 million for the years ended
December 31, 2000, 2001 and 2002, respectively. Nursing home revenue totaled
$16.2 million, $25.1 million and $38.2 million for the years ended December 31,
2000, 2001 and 2002, respectively.

  ADVERTISING COSTS

     The Company expenses all advertising costs as incurred, which totaled $0.2
million for each of the years ended December 31, 2000 and 2001 and totaled $0.3
million for the year ended December 31, 2002.

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  DEFERRED RENT LIABILITY

     Payments under operating leases are recognized as rent expense on a
straight-line basis over the term of the related lease. The difference between
the rent expense recognized for financial reporting purposes and the actual
payments made in accordance with the lease agreements is recognized as a
deferred rent liability. Rent expense charged to operations for the year ended
December 31, 2002 exceeded actual rent payments by $0.3 million. The Company had
no deferred rent liability in 2000 and 2001.

  USE OF ESTIMATES

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

  RECENT ACCOUNTING PRONOUNCEMENTS

     In April 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 145 "Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS
145"), which is required to be applied in fiscal years beginning after May 15,
2002, with early application encouraged. SFAS 145 rescinds Statement of
Financial Accounting Standards No. 4 "Reporting Gains and Losses From
Extinguishment of Debt." SFAS 145 requires any gains or losses on extinguishment
of debt that were classified as an extraordinary item in prior periods that do
not meet the criteria in APB 30 for classification as an extraordinary item be
reclassified into income from operations. The Company adopted the provisions of
SFAS 145 on January 1, 2003. The impact of adoption of SFAS 145 will reduce
income from operations by $0.4 million for the year ended December 31, 2001
through the reclassification of the extraordinary loss on extinguishment of
debt.

     In July 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities" ("SFAS 146"), which is effective for exit or
disposal activities initiated after December 31, 2002 with early application
encouraged. SFAS 146 addresses the accounting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The
Company does not anticipate a material impact on its results of operations or
financial position from the adoption of SFAS 146.

2.  INITIAL PUBLIC OFFERING

     On November 5, 2001, the Company completed its Offering at $15.00 per
share. 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 Company incurred debt extinguishments costs of $0.6
million, or $0.4 million, net of tax. 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 Chairman and 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 2001. Upon the closing of the Offering, the
Company's preferred stock was mandatorily converted into 8.1 million shares of
common stock. The accumulated dividends, which were not payable in the
                                       F-12
<PAGE>
                   ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

event of a mandatory conversion, were reversed and no additional dividends were
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

  2000

     In November 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.

  2001

     In February 2001, the Company purchased all the 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.

     In April 2001, the Company purchased all the 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.

     In April 2001, the Company purchased all the 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.

     In June 2001, the Company purchased all the 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.

     In July 2001, the Company purchased all the 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.

     In September 2001, the Company purchased all the 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.

     In December 2001, the Company purchased all 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.

  2002

     In April 2002, the Company purchased all the assets and business of Heart
of Ohio Community Health Services Corporation, a hospice in Columbus, Ohio. The
purchase price, including transaction costs, totaled $0.6 million and was
accounted for as goodwill.

                                       F-13
<PAGE>
                   ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     In April 2002, the Company purchased three hospices from Hospice Care of
Louisiana, Inc., located in Baton Rouge, New Orleans and Shreveport, Louisiana.
The purchase price, including transaction costs, totaled $9.9 million. Assets
acquired include furniture and fixtures of $0.1 million and goodwill of $9.8
million.

     In June 2002, the Company purchased all the assets and business of
Centercal Management Services, LTD, a hospice located in Bakersfield,
California. The purchase price, including transaction costs, totaled $0.5
million and was accounted for as goodwill.

     In July 2002, the Company purchased all the assets and business of
Palliative Hospice Center, LLC, a hospice located in Wichita, Kansas. The
purchase price, including transaction costs, totaled $0.1 million. Assets
acquired included a license of $0.1 million.

     In August 2002, the Company purchased all the assets and business of
HospiCare, Inc., a hospice located in Biloxi, Mississippi. The purchase price,
including transaction costs, totaled $1.1 million. Assets acquired include
licenses of $0.2 million, a non-compete agreement of $0.1 million and goodwill
of $0.8 million.

     In August 2002, the Company purchased all the assets and business of Delta
Hospice, Inc., a hospice located in Albuquerque, New Mexico, including an
alternate delivery site located in Los Alamos, New Mexico. The purchase price,
including transaction costs, totaled $2.0 million. Assets acquired include
licenses of $0.2 million, a non-compete agreement of $0.1 million and goodwill
of $1.7 million. The purchase agreement included an earnout provision, whereby,
in December 2002, the Company paid $0.2 million to the seller in response to
certain revenue targets being met. The earnout was treated as part of the
purchase price.

     In September 2002, the Company purchased all the assets and business of The
Lutheran Home, Inc., a hospice located in Omaha, Nebraska. The purchase price,
including transaction costs, totaled $0.1 million. Assets acquired include
licenses and a non-compete agreement of $0.1 million.

     In October 2002, the Company purchased all the assets and business of
Alternative Healthcare Systems, Inc., a hospice located in Lake Charles,
Louisiana. The purchase price, including transaction costs, totaled $3.2
million. Assets acquired include goodwill of $2.8 million, licenses of $0.2
million and a non-compete agreement and fixed assets of $0.2 million.

     In December 2002, the Company purchased two hospices from Circle of Life
Hospice, LLP, located in La Grange and Round Rock, Texas. The purchase price,
including transaction costs, totaled $2.5 million. Assets acquired include
goodwill of $2.1 million, licenses of $0.2 million, and a non-compete agreement
and fixed assets of $0.2 million.

  2003

     In January 2003, the Company purchased all the assets and business of Good
Shepherd Hospice and Palliative Care Center, LLC. The purchase price totaled
$3.0 million.

     The Company has made acquisitions to expand its base of hospice locations.
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, 2000, 2001 and 2002 are presented below. Such pro
forma presentation has been prepared assuming

                                       F-14
<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,
                                                       ---------------------------------
                                                         2000        2001        2002
                                                       ---------   ---------   ---------
                                                        (IN THOUSANDS, EXCEPT PER SHARE
                                                                   AMOUNTS)
<S>                                                    <C>         <C>         <C>
Pro forma net patient service revenue................  $102,223    $160,336    $204,847
Pro forma net income.................................     4,404      15,486      22,237
Pro forma net income per common share:
  Basic net income before extraordinary item.........  $   1.06    $   3.22    $   0.96
  Extraordinary item -- debt extinguishment, net of
     tax.............................................        --       (0.06)         --
                                                       --------    --------    --------
  Basic net income available to common
     stockholders....................................  $   1.06    $   3.16    $   0.96
                                                       ========    ========    ========
  Diluted net income before extraordinary item.......  $   0.25    $   0.83    $   0.91
  Extraordinary item -- debt extinguishment, net of
     tax.............................................        --       (0.02)         --
                                                       --------    --------    --------
  Diluted net income available to common
     stockholders....................................  $   0.25    $   0.81    $   0.91
                                                       ========    ========    ========
</Table>

4.  HOSPICE OF HOUSTON

     The Company entered into an exchange agreement on September 30, 1998,
whereby Hospice Management Partners, Inc., and Hospice Associates of America,
Inc. conveyed their limited partnership (66%) and general partnership (1%)
interests in Hospice of Houston, L.P. (the "Partnership"), to the Company. San
Jacinto Methodist Hospital ("San Jacinto") held the remaining 33% interest in
the partnership. The partnership was consolidated with the Company and the
Company's Houston operations are considered part of the partnership. At December
31, 2001, the Company had recorded $0.2 million as a liability in the
consolidated balance sheet for amounts owed to San Jacinto. On August 20, 2002,
the Company purchased the remaining 33% interest in the partnership for $1.1
million. Minority interest was $(46,000) and $(150,000) for the years ended
December 31, 2000 and 2001, respectively, and is included in Other Income
(Expense) in the consolidated statement of operations. Minority interest of $0.1
million was paid on August 20, 2002 and the remaining $50,000 was recorded as
income and is included in Other Income (Expense) in the consolidated statement
of operations.

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5.  INTANGIBLE ASSETS

     Goodwill allocated to the Company's reportable segments at December 31,
2001 and 2002 is as follows (in thousands):

<Table>
<Caption>
                                                                DECEMBER 31,
                                                              -----------------
                                                               2001      2002
                                                              -------   -------
<S>                                                           <C>       <C>
Goodwill:
  Northeast.................................................  $ 3,358   $ 3,958
  Southeast.................................................    1,970     7,768
  Central...................................................    3,916     3,916
  South.....................................................    4,600    15,548
  Midwest...................................................    1,181     1,181
  Mountain..................................................    6,770     8,740
  West......................................................    4,790     5,296
  Corporate.................................................      120       120
                                                              -------   -------
                                                              $26,705   $46,527
                                                              =======   =======
</Table>

     Other indefinite lived assets are comprised of license agreements, which
totaled $0 and $0.9 million at December 31, 2001 and 2002, respectively, and are
included in intangibles in the accompanying consolidated balance sheets. The
Company does not believe there is any indication that the carrying value of the
license agreements exceed their fair value.

     Intangible assets subject to amortization relate primarily to non-compete
agreements that are being amortized based on the terms of the respective
contracts and totaled $0 and $0.4 million (net of accumulated amortization) at
December 31, 2001 and 2002, respectively and are included in intangibles in the
accompanying consolidated balance sheets. Amortization expense of the assets
that still require amortization under SFAS 142 was $0, $0 and $41,000 for the
years ended December 31, 2000, 2001 and 2002, respectively. Amortization expense
relating to these intangible assets will be approximately $0.2 million in both
2003 and 2004.

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Consistent with SFAS 142, the results of operations for the years ended
December 31, 2000 and 2001 have not been restated for the change in goodwill
amortization, which was recognized in the years ended December 31, 2000 and
2001.

<Table>
<Caption>
                                                            YEAR ENDED DECEMBER 31,
                                                           --------------------------
                                                            2000     2001      2002
                                                           ------   -------   -------
                                                             (IN THOUSANDS, EXCEPT
                                                                PER SHARE DATA)
<S>                                                        <C>      <C>       <C>
Reported net income applicable to common stockholders....  $1,790   $17,554   $21,140
Add back goodwill amortization, net of income tax........     870     1,228        --
                                                           ------   -------   -------
Adjusted net income......................................  $2,660   $18,782   $21,140
                                                           ======   =======   =======
Basic earnings per share:
  As reported............................................  $ 0.61   $  2.75   $  0.91
  Goodwill amortization..................................    0.30      0.19        --
                                                           ------   -------   -------
  Adjusted basic earnings per share......................  $ 0.91   $  2.94   $  0.91
                                                           ======   =======   =======
Diluted earnings per share:
  As reported............................................  $ 0.17   $  0.67   $  0.86
  Goodwill amortization..................................    0.05      0.07        --
                                                           ------   -------   -------
  Adjusted diluted earnings per share....................  $ 0.22   $  0.74   $  0.86
                                                           ======   =======   =======
</Table>

6.  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 $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 into 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.

7.  COMMON STOCK

     On February 24, 2003, the Company completed a three-for-two stock split
payable in the form of a fifty percent stock dividend. The accompanying
consolidated financial statements and notes thereto have been restated for all
periods presented to reflect the stock dividend.

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8.  SERIES B CONVERTIBLE PREFERRED STOCK WARRANTS

     In connection with the issuance of the $1.5 million convertible promissory
notes on May 22, 1998, the Company issued Series B warrants to the lenders to
purchase 0.2 million shares of Series B Convertible Preferred Stock for
consideration of $0.017 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 was $0.83 and was 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 $4.00, the warrants were exercisable to purchase
0.2 million shares of the Company's common stock at an exercise price of $1.67
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 19,555 shares of
common stock remained outstanding as of December 31, 2002.

9.  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 150,000,000
shares, or 10% of the total number of shares of common stock then outstanding,
assuming the 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, 2002 there were 1,102,495 options and 809,625 options
outstanding under the Stock Option Plan and the Compensation Plan, respectively,
with exercise prices ranging from $0.07 to $23.30 per share. All options granted
have five to ten-year terms and vest over a four- and five-year period.

     There were 2,973,260 shares and 1,611,185 shares available for issuance
under the Compensation Plan at December 31, 2001 and 2002, respectively.

     A summary of stock option activity follows:

<Table>
<Caption>
                                                          WEIGHTED AVERAGE
                                                           EXERCISE PRICE       OPTIONS
                                                          ----------------   --------------
                                                                             (IN THOUSANDS)
<S>                                                       <C>                <C>
Options outstanding at January 1, 2000..................       $ 0.56              994
  Granted...............................................         1.12              609
  Canceled..............................................         0.63             (120)
  Exercised.............................................         0.16              (53)
                                                                                 -----
Options outstanding at December 31, 2000................         0.77            1,430
  Granted...............................................         8.53              798
  Canceled..............................................         2.72              (48)
  Exercised.............................................         0.45              (82)
                                                                                 -----
</Table>

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<Table>
<Caption>
                                                          WEIGHTED AVERAGE
                                                           EXERCISE PRICE       OPTIONS
                                                          ----------------   --------------
                                                                             (IN THOUSANDS)
<S>                                                       <C>                <C>
Options outstanding at December 31, 2001................         3.65             2098
  Granted...............................................        18.59              398
  Cancelled.............................................         9.28             (140)
  Exercised.............................................         1.19             (451)
                                                                                 -----
Options outstanding at December 31, 2002................         6.77            1,905
                                                                                 =====
</Table>

     The following table summarizes the stock options outstanding as of December
31, 2002:

<Table>
<Caption>
                                                 WEIGHTED AVERAGE
                                                    REMAINING         NUMBER          NUMBER
                                     NUMBER      CONTRACTUAL LIFE   VESTED AND     UNVESTED AND
EXERCISE PRICE                     OUTSTANDING       (YEARS)        EXERCISABLE   NOT EXERCISABLE
--------------                     -----------   ----------------   -----------   ---------------
                                                       (AMOUNTS IN THOUSANDS)
<S>                                <C>           <C>                <C>           <C>
$ 0.07...........................        23            3.91              23               --
  0.67...........................       741            5.77             450              291
  2.07...........................       256            7.86             113              143
  4.67...........................        31            8.33               5               26
  8.67...........................        51            8.67               8               43
 10.78...........................       486            8.92              91              395
 16.91...........................       102            9.58              --               74
 17.54...........................       138            9.08              --              138
 23.30...........................        77            9.92              28               77
                                      -----            ----             ---            -----
                                      1,905            8.01             718            1,187
                                      =====            ====             ===            =====
</Table>

10.  NET INCOME PER COMMON SHARE

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

<Table>
<Caption>
                                                            YEAR ENDED DECEMBER 31,
                                                          ---------------------------
                                                           2000      2001      2002
                                                          -------   -------   -------
                                                             (IN THOUSANDS, EXCEPT
                                                              PER SHARE AMOUNTS)
<S>                                                       <C>       <C>       <C>
Numerator
  Net income............................................  $ 3,092   $13,257   $21,140
  Extraordinary item -- debt extinguishment, net of
     tax................................................       --      (361)       --
                                                          -------   -------   -------
  Net income............................................    3,092    12,896    21,140
  Series A, B and C Preferred Stock Dividends...........   (1,302)   (1,097)       --
  Gain on conversion of preferred securities............       --     5,755        --
                                                          -------   -------   -------
  Numerator for basic earnings per share -- income
     available to common stockholders...................    1,790    17,554    21,140
  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 per share -- net
     income available to common stockholders after
     assumed or actual conversions......................  $ 3,092   $12,896   $21,140
                                                          =======   =======   =======
</Table>

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<Table>
<Caption>
                                                            YEAR ENDED DECEMBER 31,
                                                          ---------------------------
                                                           2000      2001      2002
                                                          -------   -------   -------
                                                             (IN THOUSANDS, EXCEPT
                                                              PER SHARE AMOUNTS)
<S>                                                       <C>       <C>       <C>
Denominator
  Denominator for basic net income per share -- weighted
     average shares.....................................    2,920     6,368    23,188
  Effect of dilutive securities:
     Employee stock options.............................    1,160     1,250     1,254
     Series A, B and C Preferred Stock..................   12,132    10,071        --
     Series B Preferred Stock Warrants convertible to
       common stock.....................................       64       159        19
     Common stock warrants..............................    1,454     1,232        --
                                                          -------   -------   -------
  Denominator for diluted net income per
     share -- adjusted weighted average shares and
     assumed or actual conversions......................   17,730    19,080    24,461
                                                          =======   =======   =======
Net income per common share:
  Basic net income before extraordinary item............  $  0.61   $  2.81   $  0.91
  Extraordinary item -- debt extinguishment, net of
     tax................................................       --     (0.06)       --
                                                          -------   -------   -------
  Basic net income available to common stockholders.....  $  0.61   $  2.75   $  0.91
                                                          =======   =======   =======
  Diluted net income before extraordinary item..........  $  0.17   $  0.69   $  0.86
  Extraordinary item -- debt extinguishment, net of
     tax................................................       --     (0.02)       --
                                                          -------   -------   -------
  Diluted net income available to common stockholders...  $  0.17   $  0.67   $  0.86
                                                          =======   =======   =======
</Table>

11.  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, 2000...........     $1,085         $2,708         $  (653)      $3,140
Year ended December 31, 2001...........     $3,140         $3,207         $(2,953)      $3,394
Year ended December 31, 2002...........     $3,394         $2,952         $(3,384)      $2,962
</Table>

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

12.  PROPERTY AND EQUIPMENT

     Property and equipment is as follows:

<Table>
<Caption>
                                                               DECEMBER 31,
                                                              ---------------
                                                               2001     2002
                                                              ------   ------
                                                              (IN THOUSANDS)
<S>                                                           <C>      <C>
Office furniture............................................  $1,095   $1,432
Computer hardware...........................................   1,323    2,022
Computer software...........................................     664    1,041
Equipment...................................................   1,240      526
Motor vehicles..............................................      94       93
Buildings...................................................      --       25
Leasehold improvements......................................     909    1,803
                                                              ------   ------
                                                               5,325    6,942
Less accumulated depreciation and amortization..............   2,874    3,272
                                                              ------   ------
                                                              $2,451   $3,670
                                                              ======   ======
</Table>

13.  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,
                                                              ---------------
                                                               2001     2002
                                                              -------   -----
                                                              (IN THOUSANDS)
<S>                                                           <C>       <C>
Acquisition notes payable, due in 2003; bearing interest at
  7% to 8%, all of which are unsecured......................  $3,450    $248
Leasehold improvement loan due between 2002 and 2007;
  interest at 10.37%........................................      --      13
Various capital leases covering equipment, due in 2003;
  interest rates ranging from 7% to 15%; secured by
  equipment.................................................      30      13
                                                              ------    ----
                                                               3,480     274
Less line of credit and current maturities..................   2,267     274
                                                              ------    ----
                                                              $1,213    $ --
                                                              ======    ====
</Table>

     The Company has a $20.0 million revolving line of credit that 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. No amounts were drawn on the line of credit
at December 31, 2001 and 2002.

     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 restricts payment of dividends. The Company was in full
compliance with its financial and other covenants as of December 31, 2001 and
2002.

                                       F-21
<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, 2002 are as follows:

<Table>
<Caption>
                                                              DECEMBER 31, 2002
                                                              ------------------
                                                                        CAPITAL
                                                              DEBT       LEASES
                                                              -----     --------
                                                                (IN THOUSANDS)
<S>                                                           <C>       <C>
2003........................................................  $251        $14
2004........................................................     3         --
2005........................................................     3         --
2006........................................................     3         --
2007........................................................     1         --
                                                              ----        ---
                                                              $261        $14
                                                              ====        ===
Less amounts representing interest..........................               (1)
                                                                          ---
                                                                          $13
                                                                          ===
</Table>

14.  INCOME TAXES

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

<Table>
<Caption>
                                                                DECEMBER 31,
                                                              -----------------
                                                               2001      2002
                                                              -------   -------
                                                               (IN THOUSANDS)
<S>                                                           <C>       <C>
Deferred tax assets:
  Accounts receivable.......................................  $   883   $   889
  Accrued compensation......................................      362       622
  Workers' compensation.....................................      253       241
  Other.....................................................       23         0
                                                              -------   -------
                                                                1,521     1,752
                                                              -------   -------
Deferred tax liabilities:
  Accrual to cash/Section 481 adjustment....................     (595)       --
  Amortizable and depreciable assets........................     (603)   (1,767)
  Other.....................................................       --       (12)
                                                              -------   -------
     Net deferred tax assets (liabilities)..................   (1,198)   (1,779)
                                                              -------   -------
                                                              $   323   $   (27)
                                                              =======   =======
</Table>

                                       F-22
<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,
                                                              -----------------------
                                                              2000    2001     2002
                                                              ----   ------   -------
                                                              (DOLLARS IN THOUSANDS)
<S>                                                           <C>    <C>      <C>
Current:
  Federal...................................................  $162   $2,698   $10,704
  State.....................................................   255      645     2,086
                                                              ----   ------   -------
                                                               417    3,343    12,790
Deferred:
  Federal...................................................    --     (306)      298
  State.....................................................    --      (17)       52
                                                              ----   ------   -------
                                                              $417   $3,020   $13,140
                                                              ====   ======   =======
</Table>

     In 2001, 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 computed at the federal statutory
tax rate to income tax expense is as follows:

<Table>
<Caption>
                                                   YEAR ENDED DECEMBER 31,
                                  ---------------------------------------------------------
                                        2000                2001                2002
                                  -----------------   -----------------   -----------------
                                  AMOUNT    PERCENT   AMOUNT    PERCENT   AMOUNT    PERCENT
                                  -------   -------   -------   -------   -------   -------
                                                   (DOLLARS IN THOUSANDS)
<S>                               <C>       <C>       <C>       <C>       <C>       <C>
Tax at federal statutory rate...  $ 1,193      34%    $ 5,571      35%    $11,998     35%
State income tax, net of federal
  benefit.......................      395      11         628       4       1,064      3
Stock-based compensation
  charges.......................      378      11         389       2         142      1
Non-deductible expenses and
  other.........................       85       2         151       1         (64)    (1)
Decrease in valuation
  allowance.....................   (1,634)    (46)     (3,719)    (23)         --     --
                                  -------     ---     -------     ---     -------     --
                                  $   417      12%    $ 3,020      19%    $13,140     38%
                                  =======     ===     =======     ===     =======     ==
</Table>

     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 $9.5 million at December 31, 2000, 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.

15.  RETIREMENT PLAN

     The Company sponsors a 401(k) plan, which is available to substantially all
employees after meeting certain eligibility requirements. The plan provides for
contributions by the employees based on a percentage of their income. The
Company at its discretion may make contributions. Matching contributions totaled
$0.1 million, $0.2 million and $0.3 million for the years ended December 31,
2000, 2001 and 2002, respectively.

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

16.  COMMITMENTS AND CONTINGENCIES

  LEASES

     The Company leases office space and equipment at its various locations.
Total rental expense was approximately $3.2 million, $4.1 million, and $5.2
million for the years ended December 31, 2000, 2001 and 2002, respectively.

     Future minimum rental commitments under noncancelable operating leases for
the years subsequent to December 31, 2002, are as follows (in thousands):

<Table>
<S>                                                           <C>
2003........................................................  $ 5,187
2004........................................................    4,642
2005........................................................    3,792
2006........................................................    3,666
2007........................................................    2,496
Thereafter..................................................    4,014
                                                              -------
                                                              $23,797
                                                              =======
</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, 2002, the Company reserved $0.6 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.

17.  SEGMENT REPORTING

     Prior to 2002, the Company evaluated the performance of, and allocated
resources to, its hospice locations based on current operations and market
assessments on a hospice-by-hospice basis. The Company's continued growth in
2002 reshaped these bases for evaluation and the Company now has geographically
defined operating segments which to perform analysis and evaluate performance.
The 2000 and 2001 amounts have been restated to reflect the change in operating
segments.

     The Company's chief operating decision maker currently evaluates
performance and allocates resources primarily on the basis of cost per day of
care and income from operations. The distribution of the Company's net patient
service revenue, direct hospice care expenses, income (loss) from operations
(which is used by

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

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

management for operating performance review), average daily census and assets by
geographic location are summarized in the following tables.

<Table>
<Caption>
                                                          YEAR ENDED DECEMBER 31,
                                                       ------------------------------
                                                         2000       2001       2002
                                                       --------   --------   --------
                                                               (IN THOUSANDS)
<S>                                                    <C>        <C>        <C>
Net patient service revenue:
  Northeast..........................................  $  8,504   $ 13,293   $ 19,194
  Southeast..........................................    13,852     18,305     29,117
  Central............................................     6,822     13,019     16,793
  South..............................................    15,136     22,756     43,299
  Midwest............................................     7,890     13,628     17,768
  Mountain...........................................    21,892     29,545     40,784
  West...............................................    11,228     19,638     27,504
  Corporate..........................................       (53)        (3)        --
                                                       --------   --------   --------
                                                       $ 85,271   $130,181   $194,459
                                                       ========   ========   ========
Direct hospice care expenses:
  Northeast..........................................  $  3,561   $  5,223   $  8,027
  Southeast..........................................     6,797      8,926     14,743
  Central............................................     3,454      5,739      7,652
  South..............................................     8,336     12,680     23,505
  Midwest............................................     3,772      6,191      7,970
  Mountain...........................................    11,081     14,393     19,814
  West...............................................     5,771      9,025     13,160
  Corporate..........................................     2,192         92         73
                                                       --------   --------   --------
                                                       $ 44,964   $ 62,269   $ 94,944
                                                       ========   ========   ========
Income (loss) from operations:
  Northeast..........................................  $  2,855   $  5,620   $  7,539
  Southeast..........................................     4,400      6,145      8,500
  Central............................................     2,033      5,117      5,781
  South..............................................     3,403      5,677     12,116
  Midwest............................................     2,228      4,569      6,292
  Mountain...........................................     4,786      8,363     12,716
  West...............................................     2,427      6,275      8,378
  Corporate..........................................   (15,677)   (22,855)   (27,367)
                                                       --------   --------   --------
                                                       $  6,455   $ 18,911   $ 33,955
                                                       ========   ========   ========
</Table>

                                       F-25
<PAGE>
                   ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<Table>
<Caption>
                                                              YEAR ENDED DECEMBER 31,
                                                              ------------------------
                                                               2000     2001     2002
                                                              ------   ------   ------
                                                                   (IN THOUSANDS)
<S>                                                           <C>      <C>      <C>
Average Daily Census:
  Northeast.................................................    203      314      427
  Southeast.................................................    338      451      702
  Central...................................................    179      347      431
  South.....................................................    373      568    1,048
  Midwest...................................................    214      341      427
  Mountain..................................................    454      605      808
  West......................................................    253      418      564
                                                              -----    -----    -----
                                                              2,014    3,044    4,407
                                                              =====    =====    =====
</Table>

<Table>
<Caption>
                                                              YEAR ENDED DECEMBER 31,
                                                              -----------------------
                                                                2001          2002
                                                              ---------    ----------
                                                                  (IN THOUSANDS)
<S>                                                           <C>          <C>
Total Assets:
  Northeast.................................................   $ 5,962      $  7,859
  Southeast.................................................     4,773        13,731
  Central...................................................     7,807         6,955
  South.....................................................     9,961        24,398
  Midwest...................................................     5,303         5,093
  Mountain..................................................    11,674        18,314
  West......................................................     8,956        10,233
  Corporate.................................................    43,780        38,831
                                                               -------      --------
                                                               $98,216      $125,414
                                                               =======      ========
</Table>

18.  RELATED PARTY TRANSACTIONS

     A former 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 $1.1 million
and $1.6 million for the years ended December 31, 2000 and 2001, respectively.
These notes were paid in full with proceeds from the 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 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.

19.  FAIR VALUES OF FINANCIAL INSTRUMENTS

     Statement of Financial accounting Standards No. 107 "Disclosures about Fair
Value of Financial Instruments," ("SFAS 107") 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

                                       F-26
<PAGE>
                   ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 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, 2001 and 2002 are as follows (in thousands):

<Table>
<Caption>
                                                        2001                 2002
                                                 ------------------   ------------------
                                                 CARRYING    FAIR     CARRYING    FAIR
                                                  AMOUNT     VALUE     AMOUNT     VALUE
                                                 --------   -------   --------   -------
<S>                                              <C>        <C>       <C>        <C>
Cash and cash equivalents......................  $20,072    $20,072   $ 7,732    $ 7,732
Short-term investments.........................  $21,419    $21,419   $25,898    $25,898
Acquisition notes payable (including current
  maturities)..................................  $ 3,751    $ 3,751   $   248    $   248
</Table>

20.  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>
                                                          2002 CALENDAR QUARTERS
                                                 -----------------------------------------
                                                  FIRST      SECOND     THIRD      FOURTH
                                                 --------   --------   --------   --------
                                                 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                              <C>        <C>        <C>        <C>
Total revenues.................................  $40,133    $46,636    $50,737    $56,953
Net income.....................................  $ 4,024    $ 4,732    $ 5,405    $ 6,979
Net income per share -- Basic..................  $  0.17    $  0.21    $  0.23    $  0.30
Net income per share -- Diluted................  $  0.17    $  0.19    $  0.22    $  0.28
Weighted average shares outstanding -- Basic...   22,998     23,159     23,261     23,329
Weighted average shares
  outstanding -- Diluted.......................   24,482     24,543     24,518     24,668
</Table>

                                       F-27
<PAGE>
                   ODYSSEY HEALTHCARE, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<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..................  $  0.58    $  0.85    $  1.06    $  0.62
Net income per share -- Diluted................  $  0.11    $  0.16    $  0.19    $  0.20
Weighted average shares outstanding -- Basic...    3,009      3,009      3,039     16,302
Weighted average shares
  outstanding -- Diluted.......................   17,990     17,988     18,021     22,308
</Table>

                                       F-28
<PAGE>

                                 EXHIBIT INDEX

<Table>
<Caption>
EXHIBIT
NUMBER                                  DESCRIPTION
-------                                 -----------
<C>       <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 (incorporated by reference to Exhibit
                10.2 to the Company's Annual Report on Form 10-K as filed
                with the Commission on March 20, 2002)
10.3        --  Amended and Restated Employment Agreement, effective as of
                February 28, 2002, by and between Odyssey HealthCare, Inc.
                and David C. Gasmire (incorporated by reference to Exhibit
                10.3 to the company's Annual Report on Form 10-K as filed
                with the Commission on March 20, 2002)
10.4        --  Amended and Restated Employment Agreement, effective as of
                February 28, 2002, by and between Odyssey HealthCare, Inc.
                and Douglas B. Cannon (incorporated by reference to Exhibit
                10.4 to the Company's Annual report on Form 10-K as filed
                with the Commission on March 20, 2002)
10.5.1      --  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)
</Table>
<PAGE>

<Table>
<Caption>
EXHIBIT
NUMBER                                  DESCRIPTION
-------                                 -----------
<C>       <C>   <S>
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 (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)
10.8        --  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>