| **UNITED STATES**                                                                                                                                                                                                                                                          |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **SECURITIES AND EXCHANGE COMMISSION**                                                                                                                                                                                                                                     |
| **Washington, D.C. 20549**                                                                                                                                                                                                                                                 |
|                                                                                                                                                                                                                                                                            |
| **FORM 10-K**                                                                                                                                                                                                                                                              |
|                                                                                                                                                                                                                                                                            |
| **x**                  **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE                            SECURITIES**                                                            |
| **EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                   |
| **For the fiscal year ended December 31,                            2007**                                                                                                                                                                                                 |
| **OR**                                                                                                                                                                                                                                                                     |
| **o**                                               **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF                            THE SECURITIES EXCHANGE ACT OF 1934** |
| For the transition period from                            ___________to____________                                                                                                                                                                                        |
| Commission file number 001-09848                                                                                                                                                                                                                                           |
|                                                                                                                                                                                                                                                                            |
| **ALMOST FAMILY, INC.**                                                                                                                                                                                                                                                    |
| **(Exact name of Registrant as specified in its                            charter)**                                                                                                                                                                                      |
|                                                                                                                                                                                                                                                                            |
| **Delaware**                                                                                                                                                                                                                                                               | **06-1153720** |
| (State or other jurisdiction of incorporation or                            organization                                                                                                                                                                                   | (I.R.S. Employer Identification Number |
|                                                                                                                                                                                                                                                                       |   |
| **9510 Ormsby Station Road, Suite 300, Louisville,                            Kentucky 40223**                                                                                                                                                                             |
| (Address of principal executive offices)                                                                                                                                                                                                                                   |
|                                                                                                                                                                                                                                                                       |
| **(502) 891-1000**                                                                                                                                                                                                                                                         |
| (Registrant’s telephone number, including area                            code)                                                                                                                                                                                      |
|                                                                                                                                                                                                                                                                       |
| **Not Applicable**                                                                                                                                                                                                                                                         |
| (Former name, former address and former fiscal year, if                            changed since last report)                                                                                                                                                              |
|                                                                                                                                                                                                                                                                       |
| Securities registered pursuant to Section 12(b) of the                            Act                                                                                                                                                                                      |
| Title of Each Class                                                                                                                                                                                                                                                        |
| Common Stock, par value $.10 per share, with Preferred                            Stock Purchase Rights                                                                                                                                                                    |
|                                                                                                                                                                                                                                                                       |
| Name of Each Exchange on Which                            Registered:                                                                                                                                                                                                      |
| NASDAQ Global Market                                                                                                                                                                                                                                                       |
|                                                                                                                                                                                                                                                                       |
| Securities registered pursuant to Section 12(g) of the                            Act: None                                                                                                                                                                                |

 

Indicate by check mark if the registrant is a well-known seasoned            issuer, as defined in Rule 405 of the Securities Act.

YesoNox

 

Indicate by check mark if the registrant is not required to file reports            pursuant to Section 13 or Section 15(d) of the Exchange Act. YesoNox

 

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. YesxNoo

 

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 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 amendment to this Form            10-K.o

 

Indicate by check mark whether the registrant is a large accelerated            filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.            See the definitions of “large accelerated filer,” “accelerated            filer” and “smaller reporting company” in Rule 12b-2 of the Exchange            Act. (Check one):

Large            accelerated filero                Accelerated filerx

Non-accelerated fileroSmaller reporting            companyo

 

(Do not            check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as            defined in Rule 12b-2 of the Exchange Act) YesoNox

 

As            of June 30, 2007, the aggregate market value of the registrant’s common stock            held by non-affiliates of the registrant was $85,343,085 based on the last sale price            of a share of the common stock as of June 30, 2007 ($19.25), as reported by the NASDAQ            Global Market.

 

Indicate the number of shares outstanding of each of the issuer’s            classes of common stock, as of the latest practicable date.

 

| ____________Class______________ | _ | Outstanding at March 7, 2008 |
|---------------------------------|---|------------------------------|

| Common Stock, $.10 par value per share | 5,531,921 Shares |
|----------------------------------------|------------------|

 

DOCUMENTS INCORPORATED BY REFERENCE

 

The            definitive proxy statement relating to the registrant's Annual Meeting of Stockholders            is incorporated by reference in Part III to the extent described therein.

 

 

2

**TABLE OF CONTENTS**

 

| **PART                            I** | **4** |
|---------------------------------------|-------|

|   | **Item 1.                            Business** | **5** |
|--------|-------------------------------------------------|-------|

|   | **Item 1A.                            Risk Factors** | **16** |
|--------|------------------------------------------------------|--------|

|   | **Item 1B.                            Unresolved Staff Comments** | **24** |
|--------|-------------------------------------------------------------------|--------|

|   | **Item 2.                            Properties** | **24** |
|--------|---------------------------------------------------|--------|

|   | **Item 3.                            Legal Proceedings** | **24** |
|--------|----------------------------------------------------------|--------|

|   | **Item 4.                            Submission of Matters to a Vote of Security                            Holders** | **25** |
|--------|-----------------------------------------------------------------------------------------------------------------------|--------|

| **PART                            II** | **26** |
|----------------------------------------|--------|

|   | **Item 5.                            Market for Registrant's Common Equity, Related Stockholder Matters and                            Issuer Purchases of Equity Securities** | **26** |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|

|   | **Item 6.                            Selected Financial Data** | **26** |
|--------|----------------------------------------------------------------|--------|

|   | **Item 7.                            Management's Discussion and Analysis of Financial Condition and Results                            of Operations** | **28** |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|--------|

|   | **Item 7A.                            Quantitative and Qualitative Disclosures about Market                            Risk** | **43** |
|--------|-------------------------------------------------------------------------------------------------------------------------------|--------|

|   | **Item 8.                            Financial Statements and Supplementary                            Data** | **44** |
|--------|---------------------------------------------------------------------------------------------------------------|--------|

|   | **Item 9.                            Changes in and Disagreements with Accountants on Accounting and                            Financial Disclosure** | **70** |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------|--------|

|   | **Item 9A.                            Controls and Procedures** | **70** |
|--------|-----------------------------------------------------------------|--------|

|   | **Item 9B.                            Other Information** | **70** |
|--------|-----------------------------------------------------------|--------|

| **PART                            III** | **71** |
|-----------------------------------------|--------|

|   | **Item 10.                            Directors, Executive Officers and Corporate                            Governance** | **71** |
|--------|---------------------------------------------------------------------------------------------------------------------------|--------|

|   | **Items 11,                            12, 13 and 14. Executive Compensation; Security Ownership of Certain                            Beneficial Owners and Management and Related Stockholder Matters;                            Certain Relationships and Related Transactions; and Director                            Independence; and Principal Accountant Fees and                            Services** | **72** |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|

| **PART                            IV** | **73** |
|----------------------------------------|--------|

|   | **Item 15.                            Exhibits and Financial Statement                            Schedules** | **73** |
|--------|---------------------------------------------------------------------------------------------------------------|--------|

 

 

3

**Special Caution Regarding Forward-Looking Statements**

 

Certain statements contained in this annual report on Form 10-K,            including, without limitation, statements containing the words "believes,"            "anticipates," "intends," "expects," "assumes," "trends" and similar expressions,            constitute "forward-looking statements" within the meaning of the Private Securities            Litigation Reform Act of 1995. Forward-looking statements are based upon the Company's            current plans, expectations and projections about future events. However, such            statements involve known and unknown risks, uncertainties and other factors that may            cause the actual results, performance or achievements of the Company to be materially            different from any future results, performance or achievements expressed or implied by            such forward-looking statements. These factors include, among others, the            following:

|   | **•** | general economic and business conditions; |
|--------|------------|-------------------------------------------|

|   | **•** | demographic changes; |
|--------|------------|----------------------|

|   | **•** | changes in, or failure to comply with, existing                            governmental regulations; |
|--------|------------|------------------------------------------------------------------------------------------------------|

|   | **•** | legislative proposals for healthcare reform; |
|--------|------------|----------------------------------------------|

|   | **•** | changes in Medicare and Medicaid reimbursement levels,                            including a possible cut in the 2008 “market basket”                            increase in home health reimbursement; |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | effects of competition in the markets in which the                            Company operates; |
|--------|------------|-------------------------------------------------------------------------------------------------|

|   | **•** | liability and other claims asserted against the                            Company; |
|--------|------------|-------------------------------------------------------------------------------------|

|   | **•** | ability to attract and retain qualified                            personnel; |
|--------|------------|-------------------------------------------------------------------------------|

|   | **•** | availability and terms of capital; |
|--------|------------|------------------------------------|

|   | **•** | loss of significant contracts or reduction in revenues                            associated with major payer sources; |
|--------|------------|------------------------------------------------------------------------------------------------------------------------|

|   | **•** | ability of customers to pay for services; |
|--------|------------|-------------------------------------------|

|   | **•** | business disruption due to natural disasters or                            terrorist acts; |
|--------|------------|--------------------------------------------------------------------------------------------|

|   | **•** | ability to successfully integrate the operations of                            acquired businesses and achieve expected synergies and operating                            efficiencies from the acquisition, in each case within expected                            time-frames or at all; |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | effect on liquidity of the Company's financing                            arrangements; and, |
|--------|------------|----------------------------------------------------------------------------------------------|

|   | **•** | changes in estimates and judgments associated with                            critical accounting policies and estimates. |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------|

 

For            a detailed discussion of these and other factors that could cause the Company's actual            results to differ materially from the results contemplated by the forward-looking            statements, please refer to Item 1A. "Risk Factors" and Item 7 "Management's Discussion            and Analysis of Financial Condition and Results of Operations" and elsewhere in this            report. The reader should not place undue reliance on forward-looking statements, which            speak only as of the date of this report. Except as required under the federal            securities laws and the rules and regulations of the Securities and Exchange Commission            ("SEC"), the Company does not intend to publicly release any revisions to            forward-looking statements to reflect unforeseen or other events after the date of this            report. The Company has provided a detailed discussion of risk factors within this            annual report on Form 10-K and various filings with the SEC. The reader is encouraged            to review these risk factors and filings.

 

4

**PART I**

 

**ITEM 1. BUSINESS**

 

In            this report, the terms “Company,” “we,” “us” or            “our” mean Almost Family, Inc. and all subsidiaries included in our            consolidated financial statements.

 

**Introduction**

 

*Almost Family, Inc. TM*and            subsidiaries (collectively "*Almost            Family*") is a leading, regionally focused provider of home            health services. We have service locations in Florida, Kentucky, Ohio, Connecticut,            Massachusetts, Alabama, Indiana, Illinois and Missouri (in order of revenue            significance).

 

We            were incorporated in Delaware in 1985. Through a predecessor merged into the Company in            1991, we have been providing health care services, primarily home health care, since            1976. On January 31, 2000, we changed the Company’s name to*Almost Family, Inc.*from Caretenders            ® HealthCorp. We reported approximately $132 million of revenues from            continuing operations in the year ended December 31, 2007. Unless otherwise indicated,            the financial information included in Part I is for continuing operations.

 

All            share and per share information in this Form 10-K has been adjusted to reflect a            2-for-1 stock split in the form of a stock dividend in January 2007.

 

**How We Are Currently Organized and Operate**

 

The            Company has two reportable segments, Visiting Nurse (VN) and Personal Care (PC).            Reportable segments have been identified based upon how management has organized the            business by services provided to customers and the criteria in SFAS 131,            “Disclosures about Segments of an Enterprise and Related            Information.”

 

Our            VN segment, which we operate primarily under the trade names "CaretendersTM" and            "Mederi-Caretenders," provides a comprehensive range of Medicare-certified home health            nursing services to patients in need of recuperative care, typically following a period            of hospitalization or care in another type of inpatient facility. Our services are            often provided to patients in lieu of additional care in other settings, such as long            term acute care hospitals, inpatient rehabilitation hospitals or skilled nursing            facilities. Our nurses, therapists, medical social workers and home health aides work            closely with patients and their families to design and implement an individualized            treatment response to a physician-prescribed plan of care. We also offer specialty            programs based on local needs, such as our Cardiocare Program, Orthopedic Program,            Urology Program, Optimum Balance Program, and Telehealth Monitoring Program. VN            Medicare revenues are generated on a per episode basis rather than a fee per visit or            hourly basis. Approximately 94% of the VN segment revenues are generated from the            Medicare program while the balance is generated from Medicaid and private insurance            programs.

 

Our            PC segment, which we operate under the trade name “Almost Family,” provides            services in patients' homes on an as-needed, hourly, or live-in basis. These services            include personal care, medication management, meal preparation, caregiver respite and            homemaking. Our services are often provided to patients who would otherwise be admitted            to skilled nursing facilities for long term custodial care. PC revenues are generated            on an hourly basis. Approximately 70% of the PC segment revenues are generated from            Medicaid and other government programs while the balance is generated from insurance            programs and private pay patients.

 

Additional financial information about our segments can be found in Note            11 of our consolidated financial statements and related notes included elsewhere in            this Form 10-K.

 

**Our View on Reimbursement and Diversification of Risk**

 

Our            Company is highly dependent on government reimbursement programs which pay for the            majority of the services we provide to our patients. Reimbursement under these            programs, primarily Medicare and Medicaid, is

 

5

subject to frequent changes as policy makers balance constituents’            needs for health care services within the constraints of the specific            government’s fiscal budgets.

 

We            believe that an important key to our historical success and to our future success is            our ability to adapt our operations to meet changes in reimbursement as they occur. One            important way in which we have achieved this adaptability in the past, and in which we            plan to achieve it in the future, is to maintain some level of diversification in our            business mix.

 

The            execution of our business plan will place primary emphasis on the development of our            Visiting Nurse operations. Our Personal Care operation will help us maintain a level of            diversification of reimbursement risk that we believe is appropriate.

 

**Our Business Plan**

 

Our            future success depends on our ability to execute our business plan. Over the next three            to five years we will try to accomplish the following:

 

|   | **•** | Generate meaningful same store sales growth through the                            focused provision of high quality services and attending to the needs                            of our patients; |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | Expand the significance of our Visiting Nurse,                            Medicare-based, home health services by selectively acquiring other                            quality providers, and through the startup of new agencies;                            and |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | Expand our capital base through both earnings                            performance and by seeking additional capital investments in our                            Company. |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**Overview of Our Services**

 

Visiting Nurse Services (VN)

 

Our            Visiting Nurse services consist primarily of the provision of skilled in-home medical            services to patients in need of short-term recuperative health care. A majority of our            patients receive this care immediately following a period of hospitalization or care in            another type of in-patient facility. We operate thirty-three (33) Medicare-certified            home health agencies with a total of fifty-one (51) locations. In the year ended            December 31, 2007, approximately 94% of our visiting nurse segment revenues were            derived from the Federal Medicare program.

 

Our            Visiting Nurse segment, which uses the trade name            “*CaretendersTM” or            “Mederi-Caretenders”*as primary trade names in            most of its markets, provides a comprehensive range of Medicare-certified home health            nursing services. We also receive payment from Medicaid and private insurance            companies. Our professional staff includes registered nurses, licensed practical            nurses, physical, speech and occupational therapists, and medical social workers. They            monitor medical treatment plans prescribed by physicians. Our professional staff is            subject to state licensing requirements in the particular states in which they            practice. Para-professional staff members (primarily home health aides) also provide            care to these patients.

 

Our            Visiting Nurse segment operations located in Florida normally experience higher            admissions during the first quarter and lower admissions during the third quarter than            in the other quarters due to seasonal population fluctuations.

 

Personal Care Services (PC)

 

Our            PC segment services are also provided in patients’ homes. These services            (generally provided by para-professional staff such as home health aides) are generally            of a custodial rather than skilled nature. PC revenues are generated on an hourly            basis. We currently operate twenty-two (22) personal care locations.

 

6

As            of December 31, 2007, our operating locations were as follows:

|                            |   | **Visiting Nurse** |   | **Personal Care** |   |
|---------------------------------|--------|--------------------|--------|-------------------|--------|
| **Locations**                   |   | **Branches**       |   | **Branches**      |   |
| ***Florida:***                  |   |               |   |              |   |
| Bradenton                       |   | 2                  |   | -                 |   |
| Brandon                         |   | 1                  |   | -                 |   |
| Brooksville                     |   | 2                  |   | -                 |   |
| Delray                          |   | 1                  |   | -                 |   |
| Fort Lauderdale                 |   | 1                  |   | 1                 |   |
| Fort Myers                      |   | 1                  |   | -                 |   |
| Gainesville                     |   | 1                  |   | -                 |   |
| Holiday                         |   | 1                  |   | -                 |   |
| Inverness                       |   | 1                  |   | -                 |   |
| Jacksonville                    |   | 1                  |   | 1                 |
| Largo                           |   | 1                  |   | -                 |   |
| Melbourne                       |   | 1                  |   | -                 |   |
| Naples                          |   | 1                  |   | 1                 |   |
| New Port Richey                 |   | 1                  |   | -                 |   |
| Ocala                           |   | 1                  |   | -                 |   |
| Orlando                         |   | 1                  |   | -                 |   |
| Palm Coast                      |   | 1                  |   | -                 |   |
| Pinellas Park                   |   | 1                  |   | -                 |   |
| Port Charlotte                  |   | 1                  |   | -                 |   |
| Port St. Lucie                  |   | 1                  |   | 1                 |   |
| Sarasota                        |   | 1                  |   | 1                 |   |
| Sebring                         |   | 1                  |   | -                 |   |
| St. Augustine                   |   | 1                  |   | -                 |   |
| Tampa                           |   | 1                  |   | -                 |   |
| Tavares                         |   | 1                  |   | -                 |   |
| Titusville                      |   | 1                  |   | -                 |   |
| Vero Beach                      |   | 1                  |   | -                 |   |
| West Palm Beach                 |   | 1                  |   | 1                 |   |
| ***Kentucky:***                 |   |               |   |              |   |
| Danville                        |   | 1                  |   | -                 |   |
| Elizabethtown                   |   | 1                  |   | -                 |   |
| Frankfort                       |   | 1                  |   | -                 |   |
| Shepherdsville                  |   | 1                  |   | -                 |   |
| Lexington                       |   | 1                  |   | 1                 |   |
| Louisville                      |   | 2                  |   | 1                 |   |
| Northern KY (metro

Cincinnati) |   |  

1          |   |  

1         |   |
| Owensboro                       |   | 1                  |   | 1                 |   |
| Shelbyville                     |   | 1                  |   | -                 |   |
| ***Ohio:***                     |   |               |   |              |   |
| Akron                           |   | 1                  |   | 1                 |   |
| Cleveland                       |   | 2                  |   | 2                 |   |
| Columbus                        |   | -                  |   | 1                 |   |
| Youngstown                      |   | 1                  |   | -                 |   |
| ***Connecticut:***              |   |               |   |              |   |
| Bridgeport                      |   | -                  |   | 1                 |   |
| Danbury                         |   | -                  |   | 1                 |   |
| New London                      |   | -                  |   | 1                 |   |
| Stamford                        |   | -                  |   | 1                 |   |
| Waterbury                       |   | -                  |   | 1                 |   |
| West Haven                      |   | -                  |   | 1                 |   |
| ***Massachusetts:***            |   |               |   |              |   |
| Boston                          |   | 1                  |   | 1                 |   |
| ***Indiana:***                  |   |               |   |              |   |
| New Albany                      |   | 1                  |   | -                 |   |
| ***Illinois:***                 |   |               |   |              |   |
| Breese                          |   | 1                  |   | -                 |   |
| Swansea                         |   | 1                  |   | -                 |   |
| ***Missouri:***                 |   |               |   |              |   |
| St. Louis                       |   | 1                  |   | -                 |   |
| Sullivan                        |   | 1                  |   | -                 |   |
| ***Alabama:***                  |   |               |   |              |   |
| Birmingham                      |   | 1                  |   | 1                 |   |
| ***Total***                     |   | 51                 |   | 22                |   |

 

7

***Compensation for Services***

 

We            are compensated for our services by (i) Medicare (Visiting Nurse only), (ii) Medicaid            (iii) other third party payors (e.g. insurance companies and other sources), and (iv)            private pay (paid by personal funds). The rates of reimbursement we receive from            Medicare, Medicaid and Other Government programs are generally dictated by those            programs. In determining charge rates for goods and services provided to our other            customers, we evaluate several factors including cost and market competition. We            sometimes negotiate contract rates with third party providers such as insurance            companies.

 

Our            reliance on government sponsored reimbursement programs makes us vulnerable to possible            legislative and administrative regulations and budget cut-backs that could adversely            affect the number of persons eligible for such programs, the amount of allowed            reimbursements or other aspects of the program, any of which could materially affect            us. In addition, loss of certification or qualification under Medicare or Medicaid            programs could materially affect our ability to effectively market our            services.

 

The            following table sets forth our revenues from continuing operations derived from each            major class of payor during the indicated periods (by percentage of net            revenues):

 

|  

**Payor Group**                 |   |   | **Year Ended**

**December 31, 2007** |   | **Year Ended December 31, 2006** |   | **Year Ended**

**December 31, 2005** |
|-----------------------------------------|--------|--------|---------------------------------------|--------|----------------------------------|--------|---------------------------------------|
| Medicare                                |   |   | 68.5%                                 |   | 55.6%                            |   | 49.0%                                 |
| Medicaid and Other Government

Programs |   |   |  

21.8%                         |   |  

31.0%                    |   |  

34.3%                         |
| Insurance and private pay               |   |   | 9.7%                                  |   | 13.4%                            |   | 16.7%                                 |

 

 

Medicare revenues are earned only in our VN segment where they account            for 94% of segment revenues. Historical changes in payment sources are primarily a            result of changes in the types of customers we attract.

 

See            “Government Regulation” and “Risk Factors.” We will monitor the            effects of such items and may consider modifications to our expansion and development            strategy when and if necessary.

 

**Acquisitions**

 

Over            the next three to five years we will actively seek to acquire quality providers of            Medicare-certified home health services. We may consider acquisitions of businesses            that provide health care services similar to those we currently offer in our Personal            Care segment but we expect most of our acquisition activity to be focused on Visiting            Nurse operations.

 

Factors which may affect future acquisition decisions include the            quality and potential profitability of the business under consideration, and our            profitability and ability to finance the transaction.

 

***Acquisitions During 2007***

During 2007 the Company acquired 5 visiting nurse branch locations.            These operations added to our market presence in Florida and Ohio.

 

On            October 26, 2007 the Company acquired the assets of all the Medicare-certified home            health agencies owned and operated by Quality of Life Holdings, Inc. (Quality of Life)            for an initial purchase price of $10 million, consisting of $8 million cash, and $2            million (or approximately 101,000 shares) of Almost Family common stock (restricted).            Additional consideration of up to $6.9 million may be paid contingent primarily upon            the achievement of certain development targets following the closing. The cash portion            of the transaction paid at closing was funded from borrowings available on the            Company’s senior credit facility. The acquired operations generated net revenues            of approximately $8.6 million in the year ended December 31, 2006.

 

On            January 15, 2007, the Company acquired the fixed assets and business operations of a            home health agency with

 

8

one            personal care branch and one Medicare-certified branch located in Jacksonville,            Florida. The total purchase price of $600,000 was paid in cash. The Company assumed            employee paid-time-off liabilities of approximately $32,000 and fixed assets of            approximately $19,000, with the purchase price balance recorded as goodwill            (approximately $500,000). The cash portion of the transaction was funded from            borrowings available on the Company’s senior credit facility. The acquired            operations generated net revenues of approximately $1.3 million in the year ended            December 31, 2006.

 

***Acquisitions During 2006***

During 2006, the Company acquired 24 visiting nurse branch locations,            one of which was essentially a startup operation. These operations added to our market            presence in Florida, and gave us market presence in Alabama, Illinois and            Missouri.

 

On            December 3, 2006, the Company acquired all the Medicare-certified home health agencies            owned and operated by Mederi, Inc., located in Coconut Grove, Florida. The total            purchase price of $20.4 million was paid $11.7 million in cash, approximately $3            million or 100,000 shares of Almost Family common stock (restricted) and $4 million in            the form of two notes payable bearing interest at 6% payable quarterly with the            principal due in a balloon payment two years from the closing date. The Company assumed            employee paid-time-off liabilities of approximately $397,000 and a Medicare liability            of approximately $1.3 million. Approximately $1.7 million of additional consideration            was accrued as of December 31, 2007 and paid in March 2008 pursuant to the acquisition            agreement based on achievement of certain targets in 2007. Additional consideration of            up to $3.3 million in cash may be paid to the seller contingent primarily upon the            achievement of certain revenue targets in 2008. The cash portion of the transaction was            funded from borrowings available on the Company’s senior credit facility. The            acquired operations generated net revenues of approximately $23.8 million in the year            ended June 30, 2006. The Mederi acquisition significantly expanded the Company’s            presence and penetration in the state of Florida and gave the Company new market            presence in the states of Missouri and Illinois.

 

On            September 18, 2006, the Company acquired the business operations of a            Medicare-certified home health agency located in Ft. Lauderdale, Florida. The total            purchase price of $1.1 million was paid $1.0 million in cash with the $100,000 balance            in the form of a note payable bearing interest at 6% payable quarterly which was paid            in full in 2007. The Company funded the cash portion of the purchase price from            available cash on deposit.

 

On            June 30, 2006, the Company acquired all the assets and business operations of a            Medicare-certified home health agency located in Birmingham, Alabama. The total            purchase price of $982,000 was paid $810,000 in cash and $100,000 in the form of a note            payable bearing interest at 6% payable quarterly which was paid in full in 2007. The            remaining $72,000 is comprised of assumed employee time off liabilities. The Company            funded the cash portion of the purchase price from available cash on            deposit.

 

On            April 8, 2006, the Company acquired all the assets and business operations of a            Medicare-certified home health agency with branches located in Ocala and Palm Coast,            Florida. The total purchase price of $1.8 million was paid $1.4 million in cash with            the $340,000 balance in the form of a note payable bearing interest at 6% payable            quarterly with the principal balance due in a balloon payment 30 months from the            closing date. The remaining $50,000 is comprised of assumed employee time off            liabilities. The Company funded the cash portion of the purchase price from available            cash on deposit.

 

**Competition, Marketing and Customers**

 

The            visiting nurse industry is highly competitive and fragmented. Competitors include            larger publicly held companies such as Gentiva (NasdaqGS: GTIV) and Amedisys (NasdaqGS:            AMED), numerous privately held multi-site home care companies, privately held            single-site agencies and a significant number of hospital-based agencies. In some            locations, county health departments operate home health agencies. Competition for            customers at the local market level is very fragmented and market specific. Generally            each local market has its own competitive profile and no one competitor has significant            market share across all our markets. To our best knowledge, no individual provider has            more than 3% share of the national market.

 

9

We            believe the primary competitive factors are quality of service and reputation among            referral sources. However, competitors are increasingly focusing attention on providing            alternative site health care services. We market our services through our site managers            and marketing staff. These individuals contact referral sources in their areas to            market our services. Major referral sources include: physicians, hospital discharge            planners, Offices on Aging, social workers, and group living facilities. We also            utilize consumer-direct sales, marketing and advertising programs designed to attract            customers.

 

The            personal care industry is likewise highly competitive but fragmented. Competitors            include home health providers, senior adult associations, and the private hiring of            caregivers. We market our services primarily through our site managers, and we compete            by offering a high quality of care and by helping families identify and access            solutions for care.

 

**Government Regulation**

 

**Overview**

 

The            health care industry has experienced, and is expected to continue to experience,            extensive and dynamic change. In addition to economic forces and regulatory influences,            continuing political debate is subjecting the health care industry to significant            reform. Health care reforms have been enacted as discussed elsewhere in this document            and proposals for additional changes are continuously formulated by departments of the            Federal government, Congress, and state legislatures.

 

We            expect government officials to continue to review and assess alternative health care            delivery systems and payment methodologies. Changes in the law or new interpretations            of existing laws may have a dramatic effect on the definition of permissible or            impermissible activities, the relative cost of doing business, and the methods and            amounts of payments for medical care by both governmental and other payors. We expect            legislative changes to “balance the budget” and slow the annual rate of            growth of Medicare and Medicaid to continue. Such future changes may further impact            reimbursement for our services. There can be no assurance that future legislation or            regulatory changes will not have a material adverse effect on our            operations.

 

**Medicare Rates**

 

On            October 1, 2000, Medicare implemented the Prospective Payment System            (“PPS”) and began paying providers of home health care at fixed,            predetermined rates for services and supplies bundled into 60-day episodes of home            health care. An episode of home health care spans a 60-day period, starting with the            first day a billable visit is furnished to a Medicare beneficiary and ending 60 days            later. If a patient is still in treatment on the 60th day a new episode            begins on the 61st day regardless of whether a billable visit is rendered on            that day and ends 60 days later. The first day of a consecutive episode, therefore, is            not necessarily the new episode’s first billable visit. A base episode payment is            established by the Medicare Program through federal legislation for all episodes of            care ended on or after the applicable time periods detailed below:

 

| **Period**                                                                     |  

                              | **Base episode**

**Payment (1)** |   |
|--------------------------------------------------------------------------------|--------------------------------------------|-----------------------------------|--------|
| April 1, 2004 through December 31,                            2004   |                                       | $                                 | 2,213  |   |
| January 1, 2005 through December 31,                            2006 |                                       | $                                 | 2,264  |   |
| January 1, 2007 through December 31, 2007                                      |                                       | $                                 | 2,339  |   |
| January 1, 2008 through December 31, 2008                                      |                                       | $                                 | 2,270  |   |

 

| (1) | The actual episode payment rates, as presented in the                            table vary, depending on the home health resource groups                            (“HHRGs”) to which Medicare patients are assigned and the                            per episode payment is typically reduced or increased by such factors                            as the patient’s clinical, functional, and services utilization                            characteristics. |   |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|

 

Under PPS for Medicare reimbursement, we record net revenues based on a            reimbursement rate that varies based on the severity of the patient’s condition,            service needs and other related factors. We record net revenues as

 

10

services are rendered to patients over the 60-day episode period. At the            end of each month, a portion of our revenue is estimated for episodes in            progress.

 

Medicare reimbursement, on an episodic basis, is subject to adjustment            if there are significant changes in the patient’s condition during the treatment            period or if the patient is discharged but readmitted to another agency within the same            60-day episodic period. Our revenue recognition under the Medicare reimbursement            program is based on certain variables including, but not limited, to: (i) changes in            the base episode payments established by the Medicare Program; (ii) adjustments to the            base episode payments for partial episodes and for other factors, such as case mix,            geographic wages, low utilization and intervening events; and, (iii) recoveries of            overpayments. Adjustments to revenue result from differences between estimated and            actual reimbursement amounts, an inability to obtain appropriate billing documentation            or authorizations acceptable to the payor and other reasons unrelated to credit risk.            We recognize Medicare revenue on an episode-by-episode basis during the course of each            episode over its expected number of visits.

 

Effective January 1, 2007, the Medicare standard episode rates increased            3.3%. Based on current law and regulation, Medicare rates will change each January 1            thereafter, based on a statutory formula the intent of which is to cause reimbursement            rates to reflect changes in the costs of providing services minus 0.8% per            year.

 

Refer to the “Risk Factors” below, the “Notes to the            Consolidated Financial Statements” and “Management’s Discussion and            Analysis of Financial Condition and Results of Operations” for additional            information.

 

**Medicare Reimbursement Regulations for 2008**

 

In            August 2007 the Centers for Medicare & Medicaid Services (CMS) published final            regulations updating and revising the Medicare prospective payment system for home            health (HH-PPS) for 2008 (the “2008 Final Rule”). The 2008 Final Rule            became effective on January 1, 2008.

 

Under the HH-PPS providers are reimbursed on the basis of a 60-day            episode following a formula dependent upon, among other factors, the patient’s            medical condition, the number of visits performed in the episode and the locale in            which the patient resides.

 

The            following are the more significant changes included in the 2008 Final Rule:

|   | **•** | A “market basket” rate increase of 3% to the                            episodic payment rate for 2008. |
|--------|------------|---------------------------------------------------------------------------------------------------------------------|

|   | **•** | A decrease in the episodic payment rate of 2.75% for                            each of the years 2008 through 2010 and a decrease of 2.71% for 2011                            (the “Case Mix Creep Adjustment”). This rate cut was                            rationalized by CMS in the regulations as offsetting coding increases                            from 1999 through 2005 that CMS believes are not related to changes in                            the underlying health of patients. |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | The national 60-day episodic payment rate for 2007 was                            $2,339 and for 2008 will be $2,270, reflecting both the 3% market                            basket increase and the 2.75% rate cut described above as well as                            certain other adjustments the more significant of which are described                            below. |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | A move from 80 different patient driven coding                            categories (Home Health Reimbursement Groups or “HHRGs”) to                            153 HHRGs. |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Establishment of eight different break points in therapy                            visit thresholds used to determine reimbursement related to therapy                            services. In 2008 reimbursement will change at each of the following                            visit thresholds: 6, 7, 10, 11, 14, 16, 18 and 20 visits. In 2007 there                            was a single threshold at 10 therapy visits. |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | A small increase in the reimbursement provided for                            certain episodes in which 4 or fewer visits are provided (“LUPA:                            episodes). A corresponding and offsetting adjustment was made to the                            national payment rate described above. |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Segregation of the reimbursement for non-routine medical                            supplies based on a new formula separate from the national payment                            rate. A corresponding and offsetting adjustment was made to the                            national payment rate described above. |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | A revision in the reimbursement formula provided for                            certain episodes in which a high number of visits are required to meet                            the needs of the patient. This revision results in a decrease in the                            amount of reimbursement for these episodes. A corresponding and                            offsetting adjustment was made to the national payment rate described                            above. |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

11

 

12

We            believe the 2008 Final Rule will have the following implications:

|   | **•** | The Case Mix Creep Adjustment for years 2008-2011 will                            put downward pressure on margins in the home health industry and in our                            Visiting Nurse segment. The extent of the downward pressure will be                            influenced by a number of factors including but not limited to future:                            wage rate inflation, transportation costs, demand for and availability                            of clinicians, market basket increases and further changes to Medicare                            reimbursement made by either CMS or Congress. |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Outcome of the refinements to the case mix formula will                            be dependent upon the type and needs of the patients actually seen in                            2008, and the clinical and other aspects of the care plans employed to                            care for those patients, all of which may differ from those experienced                            historically. |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Within the framework of providing the highest quality                            outcomes for our patients, we expect to take actions in response to the                            changing reimbursement environment with the goal of improving our                            clinical, operational and marketing efficiencies. |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | We believe the increased complexity of the reimbursement                            environment, combined with the long-term effect of the Case Mix Creep                            Adjustment, will likely increase the supply of acquisition candidates                            available to us. |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

In            2007 there was legislative activity in both the U.S. Senate and the U.S. House of            Representatives regarding potential changes in Medicare reimbursement. In this activity            Congress attempted to address a number of issues including the State Children's Health            Insurance Program (SCHIP) and a scheduled 10% reduction in Medicare payments for            physicians currently scheduled to go into effect in July 2008. To date no changes in            the law have been enacted, but one proposed bill included a cut to the 2008 3% "market            basket" increase in home health reimbursement described in the above discussion of the            2008 Final Rule.

 

There continues to be Congressional activity on these topics. We are            unable to predict when, or if, any legislation will ultimately become law or whether            any such legislation, if enacted, will cut any, all or a portion of the 2008 3% "market            basket" increase in home health reimbursement.

 

**Medicaid Reimbursement**

 

As            shown in “Compensation for Services” above, approximately 22% of our 2007            revenues were derived from state Medicaid and Other Government Programs, many of which            periodically face significant budget issues. The financial condition of the Medicaid            programs in each of the states in which we operate is cyclical and many may be expected            from time to time to take actions or evaluate taking actions to control the rate of            growth of Medicaid expenditures. Among these actions are the following:

|   | • | Redefining eligibility standards for Medicaid                            coverage |
|--------|--------|-----------------------------------------------------------------------------------|

|   | • | Redefining coverage criteria for home and community                            based care services |
|--------|--------|----------------------------------------------------------------------------------------------------|

|   | • | Slowing payments to providers by increasing the minimum                            time in which payments are made |
|--------|--------|--------------------------------------------------------------------------------------------------------------------|

|   | • | Limiting reimbursement rate increases |
|--------|--------|---------------------------------------|

|   | • | Increased utilization of self-directed care                            alternatives |
|--------|--------|-------------------------------------------------------------------------------------|

|   | • | Shifting beneficiaries from traditional coverage to                            Medicaid managed care providers |
|--------|--------|----------------------------------------------------------------------------------------------------------------|

|   | • | Changing regulations under which providers must                            operate |
|--------|--------|------------------------------------------------------------------------------------|

The            actions that might be taken or considered are because the number of Medicaid            beneficiaries and their related expenditures are growing at a faster rate than the            government’s revenue. Medicaid is consuming a greater percentage of the budget.            This issue is exacerbated when revenues slow in a slowing economy. We believe that            these financial issues are cyclical in nature rather than indicative of the long-term            prospect for Medicaid funding of health care services. Additionally, we believe our            services offer the lowest cost alternative to institutional care and are a part of the            solution to the states’ Medicaid financing problems. It is possible however, that            the actions taken by the state Medicaid programs in the future could have a significant            unfavorable impact on our results of operations, financial condition and            liquidity.

 

**Permits and Licensure**

 

Many            states require companies providing certain health care services to be licensed as home            health agencies. In addition, certain health care practitioners employed by us require            state licensure and/or registration and must comply with laws and regulations governing            standards of practice. The failure to obtain, renew or maintain any of

 

13

the            required regulatory approvals or licenses could adversely affect our business. We            believe we are currently licensed appropriately where required by the laws of the            states in which we operate. There can be no assurance that either the states or the            Federal government will not impose additional regulations upon our activities which            might adversely affect our results of operations, financial condition, or            liquidity.

 

**Certificates of Need**

 

Certain states require companies providing health care services to            obtain a certificate of need issued by a state health-planning agency. Where required            by law, we have obtained certificates of need from those states. There can be no            assurance that we will be able to obtain any certificates of need which may be required            in the future if we expand the scope of our services or if state laws change to impose            additional certificate of need requirements, and any attempt to obtain additional            certificates of need will cause us to incur certain expenses.

 

**Other Regulations**

 

A            series of laws and regulations dating back to the Omnibus Budget Reconciliation Act of            1987 ("OBRA 1987") and through the Medicare Prescription Drug Bill of 2003 have been            enacted and apply to us. Changes in applicable laws and regulations have occurred from            time to time since OBRA 1987 including reimbursement reductions and changes to payment            rules. Changes are also expected to occur continuously for the foreseeable            future.

 

As a            provider of services under Medicare and Medicaid programs, we are subject to the            Medicare and Medicaid anti-kickback statute, also known as the "fraud and abuse law."            This law prohibits any bribe, kickback, rebate or remuneration of any kind in return            for, or as an inducement for, the referral of Medicare or Medicaid patients. We may            also be affected by the Federal physician self-referral prohibition, known as the            "Stark" law, which, with certain exceptions, prohibits physicians from referring            patients to entities in which they have a financial interest or from which they receive            financial benefit. Many states in which we operate have adopted similar self-referral            laws, as well as laws that prohibit certain direct or indirect payments or            fee-splitting arrangements between health care providers, if such arrangements are            designed to induce or to encourage the referral of patients to a particular            provider.

 

Health care is an area of extensive and dynamic regulatory change.            Changes in laws or regulations or new interpretations of existing laws or regulations            can have a dramatic effect on our permissible activities, the relative costs associated            with our doing business, and the amount and availability of reimbursement we receive            from government and third-party payors. Furthermore, we will be required to comply with            applicable regulations in each new state in which we desire to provide            services.

 

As a            result of the Health Insurance Portability and Accountability Act of 1996 and other            legislative and administrative initiatives, Federal and state enforcement efforts            against the health care industry have increased dramatically, subjecting all health            care providers to increased risk of scrutiny and increased compliance costs.

 

We            are subject to routine and periodic surveys and audits by various governmental            agencies. We believe that we are in material compliance with applicable laws. However,            we are unable to predict what additional government regulations, if any, affecting our            business may be enacted in the future, how existing or future laws and regulations            might be interpreted or whether we will be able to comply with such laws and            regulations either in the markets in which we presently conduct, or wish to commence,            business.

 

**Health Insurance Portability and Accountability Act            (HIPAA)**

 

The            Health Insurance Portability and Accountability Act (HIPAA) was enacted by the Federal            government on August 12, 1996, and requires organizations to adhere to certain            standards to protect data integrity, confidentiality and availability. HIPAA also            mandates, among other things, that the Department of Health and Human Services adopt            standards for the exchange of electronic health information in an effort to encourage            overall administrative simplification and enhance the effectiveness and efficiency of            the health care industry. We implemented changes in our operations to comply with HIPAA            and we believe we are in compliance.

 

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**Insurance Programs and Costs** 

 

We            bear significant insurance risk under our large-deductible workers’ compensation            insurance programs and our self-insured employee health program. Under our            workers’ compensation insurance program, we bear risk up to $400,000 per            incident. We purchase stop-loss insurance for our employee health plan that places a            specific limit, generally $100,000, on our exposure for any individual covered            life.

 

Malpractice and general patient liability claims for incidents which may            give rise to litigation have been asserted against us by various claimants. The claims            are in various stages of processing and some may ultimately be brought to trial. We            also know of incidents that have occurred through December 31, 2007 that may result in            the assertion of additional claims. We carry insurance coverage for this exposure with            no deductible. Prior to April 1, 2007 the Company carried coverage with a deductible            per claim of $500,000.

 

We            record estimated liabilities for our insurance programs based on information provided            by the third-party plan administrators, historical claims experience, the life cycle of            claims, expected costs of claims incurred but not paid, and expected costs to settle            unpaid claims. We monitor our estimated insurance-related liabilities on a monthly            basis. As facts change, it may become necessary to make adjustments that could be            material to our results of operations and financial condition.

 

We            believe that our present insurance coverage is adequate. As part of our on-going risk            management and cost control efforts, we continually seek alternatives that might            provide a different balance of cost and risk, including potentially accepting            additional self-insurance risk in lieu of higher premium costs.

 

**Executive Officers**

 

See            Part III, Item 10 of this Form 10-K for information about the company’s executive            officers.

 

**Employees and Labor Relations**

 

As            of December 31, 2007 we had approximately 4,800 employees. None of our employees are            represented by a labor organization. We believe our relationship with our employees is            satisfactory.

 

**Discontinued Operations** 

 

We            follow the guidance in SFAS 144 “Accounting for the Impairment or Disposal of            Long-Lived Assets” and, when appropriate, reclassify operating units closed,            sold, or held for sale out of continuing operations and into discontinued operations            for all periods presented. During 2007, the PC segment had three facilities and during            2006, the VN segment had one facility that met the criteria to be reclassified as            discontinued operations. For all the years presented in this report, these facilities            have been reclassified. Net losses from the discontinued operations were approximately            $(211,000), ($76,000) and ($236,000) in the years ended December 31, 2007, 2006 and            2005 respectively, and such amounts are included in net loss from discontinued            operations in the accompanying financial statements.

 

On            September 20, 2005, the Company completed an asset sale transaction to divest of its            adult day care (ADC) segment to Active Services, Inc. ADC operations are now reported            as discontinued operations. The purchase price consisted of $13.6 million cash plus            assumption of approximately $1.4 million of debt. In return, Active Services acquired            substantially all the assets and assumed certain working capital liabilities related to            Almost Family’s 19 adult day care centers which generated approximately $21.0            million in annual revenues. The transaction closed on September 30, 2005. Proceeds of            the sale were used to retire debt with the balance invested in cash equivalents at            December 31, 2005. The Company reported an after-tax gain on the sale totaling $5.1            million.

 

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**Website Access to Our Reports**

 

Our            annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form            8-K, and all amendments to those reports are available free of charge on our website            atwww.almostfamily.comas soon as reasonably practicable after such material is electronically            filed with or furnished to the Securities and Exchange Commission. Also, copies of our            annual report will be made available, free of charge, upon written request.

 

**ITEM 1A. RISK FACTORS**

 

***Investing in our common stock involves a degree of risk. You            should consider carefully the following risks, as well as other information in this            filing and the incorporated documents before investing in our common            stock.***

 

**Risks Related to Our Industry**

 

***Our profitability depends principally on the level of            government-mandated payment rates. Reductions in rates, or rate increases that do not            cover cost increases, may adversely affect our business.***

 

We            generally receive fixed payments from Medicare for our services based on the level of            care that we provide patients. Consequently, our profitability largely depends upon our            ability to manage the cost of providing services. Although current Medicare legislation            provides for an annual adjustment of the various payment rates based on the increase or            decrease of the medical care expenditure category of the Consumer Price Index, these            Medicare payment rate increases may be less than actual inflation or could be            eliminated or reduced in any given year. Consequently, if our cost of providing            services, which consists primarily of labor costs, is greater than the current Medicare            payment rate, our profitability would be negatively impacted.

 

***If any of our agencies fail to comply with the conditions of            participation in the Medicare program, that agency could be terminated from the            Medicare program, which would adversely affect our net patient service revenue and            profitability.***

 

Each            of our home care agencies must comply with the extensive conditions of participation in            the Medicare program. If any of our agencies fail to meet any of the Medicare            conditions of participation, that agency may receive a notice of deficiency from the            applicable state surveyor. If that agency then fails to institute a plan of correction            to correct the deficiency within the correction period provided by the state surveyor,            that agency could be terminated from the Medicare program. Any termination of one or            more of our home care agencies from the Medicare program for failure to satisfy the            program’s conditions of participation could adversely affect our net service            revenue and profitability.

 

***We are subject to extensive government regulation. Any changes to            the laws and regulations governing our business, or the interpretation and enforcement            of those laws or regulations, could cause us to modify our operations and could            negatively impact our operating results.***

 

The            federal government and the states in which we operate regulate our industry            extensively. The laws and regulations governing our operations, along with the terms of            participation in various government programs, regulate how we do business, the services            we offer, and our interactions with patients and the public. These laws and            regulations, and their interpretations, are subject to frequent change. Changes in            existing laws and regulations, or their interpretations, or the enactment of new laws            or regulations could reduce our profitability by:

|   | **•** | increasing our liability; |
|--------|------------|---------------------------|

|   | **•** | increasing our administrative and other                            costs; |
|--------|------------|---------------------------------------------------------------------------|

|   | **•** | increasing or decreasing mandated services; |
|--------|------------|---------------------------------------------|

|   | **•** | forcing us to restructure our relationships with                            referral sources and providers; or |
|--------|------------|----------------------------------------------------------------------------------------------------------------|

|   | **•** | requiring us to implement additional or different                            programs and systems. |
|--------|------------|----------------------------------------------------------------------------------------------------|

 

For            example, Congress enacted the Health Insurance Portability and Accountability Act of            1996 (“HIPAA”), which mandates that provider organizations enhance privacy            protections for patient health information. This requires companies like us to develop,            maintain and monitor administrative, information, and security systems to

 

16

prevent inappropriate release of protected health information.            Compliance with this law has added, and will continue to add, costs that affect our            profitability. Failure to comply with HIPAA could result in fines and penalties, as            well as our exclusion from Medicare and Medicaid programs.

 

In            addition, we are subject to various routine and non-routine governmental reviews,            audits, and investigations. Violation of the laws governing our operations, or changes            in interpretations of those laws, could result in the imposition of fines, civil or            criminal penalties, the termination of our rights to participate in federal and            state-sponsored programs, and the suspension or revocation of our licenses. If we            become subject to material fines or if other sanctions or other corrective actions are            imposed on us, we might suffer a substantial reduction in profitability.

 

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

 

Our            success depends significantly on referrals from physicians, hospitals, and other            patient referral sources in the communities that our home care agencies serve, as well            as on our ability to maintain good relationships with these referral sources. Our            referral sources are not contractually obligated to refer home care patients to us and            may refer their patients to other providers. Our growth and profitability depend on our            ability to establish and maintain close working relationships with these patient            referral sources and to increase awareness and acceptance of the benefits of home 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, or            failure to maintain, existing relationships or our failure to develop new relationships            could adversely affect our ability to expand our operations and operate            profitably.

 

***We are subject to federal and state laws that govern our financial            relationships with physicians and other healthcare providers, including potential or            current referral sources.***

 

We            are required to comply with federal and state laws, generally referred to as            “anti-kickback laws,” that prohibit certain direct and indirect payments or            fee-splitting arrangements between healthcare providers that are designed to encourage            the referral of patients to a particular provider for medical services. In addition to            enacting anti-kickback laws, some of the states in which we operate have enacted laws            prohibiting certain business relationships between physicians and other providers of            healthcare services. We currently have contractual relationships with certain            physicians who provide consulting services to our company. Many of these physicians are            current or potential referral sources. Although we believe our physician consultant            arrangements currently comply with state and federal anti-kickback laws and state laws            regulating relationships between healthcare providers, we cannot assure you that courts            or regulatory agencies will not interpret these laws in ways that will implicate our            physician consultant arrangements. Violations of anti-kickback and similar laws could            lead to fines or sanctions that may have a material adverse effect on our            operations.

 

***We may be subject to substantial malpractice or other similar            claims.***

 

The            services we offer involve an inherent risk of professional liability and related            substantial damage awards. On any given day, we have several hundred nurses and other            direct care personnel driving to and from patients’ homes where they deliver            medical and other care. Due to the nature of our business, we and the caregivers who            provide services on our behalf may be the subject of medical malpractice claims. These            caregivers could be considered our agents, and, as a result, we could be held liable            for their medical negligence. We cannot predict the effect that any claims of this            nature, regardless of their ultimate outcome, could have on our business or reputation            or on our ability to attract and retain patients and employees. We maintain malpractice            liability insurance and are responsible for amounts in excess of the limits of our            coverage.

 

***Delays in reimbursement may cause liquidity            problems.***

 

Our            business is characterized by delays in reimbursement from the time we provide services            to the time we receive reimbursement or payment for these services. If we have            information system problems or issues that arise with Medicare, we may encounter delays            in our payment cycle. Such a timing delay may cause working capital

 

17

shortages. Working capital management, including prompt and diligent            billing and collection, is an important factor in our results of operations and            liquidity. We cannot assure you that system problems, Medicare issues or industry            trends will not extend our collection period, adversely impact our working capital, or            that our working capital management procedures will successfully negate this risk.            There are often timing delays when attempting to collect funds from Medicaid programs.            We cannot assure you that delays in receiving reimbursement or payments from these            programs will not adversely impact our working capital.

 

***Our industry is highly competitive.***

 

Our            home health care agencies compete with local and regional home health care companies,            hospitals, nursing homes, and other businesses that provide home nursing services, some            of which are large established companies that have significantly greater resources than            we do. Our primary competition comes from local companies in each of our markets, and            these privately-owned or hospital-owned health care providers vary by region and            market. We compete based on the availability of personnel; the quality, expertise, and            value of our services; and in select instances, on the price of our services. Increased            competition in the future from existing competitors or new entrants may limit our            ability to maintain or increase our market share. We cannot assure you that we will be            able to compete successfully against current or future competitors or that competitive            pressures will not have a material adverse impact on our business, financial condition,            or results of operations.

 

Some            of our existing and potential new competitors may enjoy greater name recognition and            greater financial, technical, and marketing resources than we do. This may permit our            competitors to devote greater resources than we can to the development and promotion of            services. These competitors may undertake more far-reaching and effective marketing            campaigns and may offer more attractive opportunities to existing and potential            employees and services to referral sources.

 

We            expect our competitors to develop new strategic relationships with providers, referral            sources, and payors, which could result in increased competition. The introduction of            new and enhanced service offerings, in combination with industry consolidation and the            development of strategic relationships by our competitors, could cause a decline in            revenue or loss of market acceptance of our services or make our services less            attractive. Additionally, we compete with a number of non-profit organizations that can            finance acquisitions and capital expenditures on a tax-exempt basis or receive            charitable contributions that are unavailable to us.

 

We            expect that industry forces will continue to have an impact on our business and that of            our competitors. In recent years, the health care industry has undergone significant            changes driven by efforts to reduce costs, and we expect these cost containment            measures to continue in the future. Frequent regulatory changes in our industry,            including reductions in reimbursement rates and changes in services covered, have            increased competition among home health care providers. If we are unable to react            competitively to new developments, our operating results may suffer.

 

***A shortage of qualified registered nursing staff, physical            therapists, occupational therapists and other caregivers could adversely affect our            ability to attract, train and retain qualified personnel and could increase operating            costs.***

 

We            rely significantly on our ability to attract and retain caregivers who possess the            skills, experience, and licenses necessary to meet the requirements of our patients. We            compete for personnel with other providers of home nursing services. Our ability to            attract and retain caregivers depends on several factors, including our ability to            provide these caregivers with attractive assignments and competitive benefits and            salaries. We cannot assure you that we will succeed in any of these areas. In addition,            there are occasional shortages of qualified healthcare personnel in some of the markets            in which we operate. As a result, we may face higher costs of attracting caregivers and            providing them with attractive benefit packages than we originally anticipated, and, if            that occurs, our profitability could decline. Finally, although this is currently not a            significant factor in our existing markets, if we expand our operations into geographic            areas where healthcare providers have historically unionized, we cannot assure you that            the negotiation of collective bargaining agreements will not have a negative effect on            our ability to timely and successfully recruit qualified personnel. Generally, if we            are unable to attract and retain caregivers, the quality of our services may decline,            and we could lose patients and referral sources.

 

18

 

**Risks Related to Our Business**

 

***We depend on Medicare for the largest portion of our            revenues.***

 

For            the years ended December 31, 2007, 2006 and 2005, we received 69%, 56% and 49%,            respectively, of our revenue from Medicare. Further, the acquisitions completed by us            in 2007 and 2006 substantially increase our dependence on Medicare reimbursement.            Reductions in Medicare reimbursement could have an adverse impact on our profitability.            Such reductions in payments to us could be caused by:

|   | **•** | administrative or legislative changes to the base                            episode rate; |
|--------|------------|--------------------------------------------------------------------------------------------|

|   | **•** | the elimination or reduction of annual rate increases                            based on medical inflation; |
|--------|------------|--------------------------------------------------------------------------------------------------------------|

|   | **•** | a possible cut in 2008 “market basket”                            increase in home health reimbursement; |
|--------|------------|----------------------------------------------------------------------------------------------------------------------|

|   | **•** | the imposition by Medicare of co-payments or other                            mechanisms shifting responsibility for a portion of payment to                            beneficiaries; |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | adjustments to the relative components of the wage                            index; |
|--------|------------|--------------------------------------------------------------------------------------|

|   | **•** | changes to our case mix or therapy thresholds;                            or |
|--------|------------|------------------------------------------------------------------------------|

|   | **•** | other adverse changes to the way we are paid for                            delivering our services. |
|--------|------------|------------------------------------------------------------------------------------------------------|

 

The            Medicare Payment Advisory Commission (MedPAC), an independent federal body established            to advise Congress on issues affecting the Medicare Program, has recently recommended            implementation of pay-for-performance initiatives for home care providers. If            implemented, Medicare will differentiate reimbursement rates for Medicare home health            service providers based on quality measures. While we believe that we provide high            quality services to our patients, there can be no assurances that a pay-for-performance            reimbursement system will not adversely affect our Medicare reimbursement rates and,            consequently, our results of operations.

 

Our            non-Medicare revenues and profitability also are affected by the continuing efforts of            third-party payors to contain or reduce the costs of health care by lowering            reimbursement rates, narrowing the scope of covered services, increasing case            management review of services, and negotiating reduced contract pricing. Any changes in            reimbursement levels from these third-party payor sources and any changes in applicable            government regulations could have a material adverse effect on our revenues and            profitability. We can provide no assurance that we will continue to maintain the            current payor or revenue mix.

 

Our            reliance on government sponsored reimbursement programs such as Medicare and Medicaid            makes us vulnerable to possible legislative and administrative regulations and budget            cut-backs that could adversely affect the number of persons eligible for such programs,            the amount of allowed reimbursements or other aspects of the programs, any of which            could materially affect us. For example, as discussed in Item 1 of this Form 10-K, in            August 2007, the Centers for Medicare & Medicaid Services (CMS) published final            regulations significantly updating and revising the Medicare prospective payment system            for home health (HH-PPS) for 2008. In addition, loss of certification or qualification            under Medicare or Medicaid programs could materially affect our ability to effectively            market our services.

 

19

***We have a significant dependence on state Medicaid reimbursement            programs.***

 

For            the year ended December 31, 2007, approximately 6.8%, 7.0% and 4.9% of our revenues            were generated from Medicaid reimbursement programs in the states of Ohio, Kentucky and            Connecticut, respectively.

 

Approximately 22% of our 2007 revenues were derived from state Medicaid            and other government programs, many of which periodically face significant budget            issues. The financial condition of the Medicaid programs in each of the states in which            we operate is cyclical and many may be expected from time to time to take actions or            evaluate taking actions to control the rate of growth of Medicaid expenditures. Among            these actions are the following:

|   | • | Redefining eligibility standards for Medicaid                            coverage |
|--------|--------|-----------------------------------------------------------------------------------|

|   | • | Redefining coverage criteria for home and community                            based care services |
|--------|--------|----------------------------------------------------------------------------------------------------|

|   | • | Slowing payments to providers by increasing the minimum                            time in which payments are made |
|--------|--------|--------------------------------------------------------------------------------------------------------------------|

|   | • | Limiting reimbursement rate increases |
|--------|--------|---------------------------------------|

|   | • | Increased utilization of self-directed care                            alternatives |
|--------|--------|-------------------------------------------------------------------------------------|

|   | • | Shifting beneficiaries from traditional coverage to                            Medicaid managed care providers |
|--------|--------|----------------------------------------------------------------------------------------------------------------|

|   | • | Changing regulations under which providers must                            operate |
|--------|--------|------------------------------------------------------------------------------------|

 

States may be expected to address these issues because the number of            Medicaid beneficiaries and their related expenditures are growing at a faster rate than            the government's revenue. Medicaid is consuming a greater percentage of the budget.            This issue is exacerbated when revenues slow in a slowing economy. We believe that            these financial issues are cyclical in nature rather than indicative of the long-term            prospect for Medicaid funding of health care services. Additionally, we believe our            services offer the lowest cost alternative to institutional care and are a part of the            solution to the states' Medicaid financing problems. It is possible, however, that the            actions taken by the state Medicaid programs in the future could have a significant            unfavorable impact on our results of operations, financial condition and            liquidity.

 

***Migration of our Medicare beneficiary patients to Medicare managed            care providers could negatively impact our operating results.***

 

Historically, we have generated a substantial portion of our revenue            from the Medicare fee-for-service market. Under the Medicare Prescription Drug            Improvement and Modernization Act of December 2003 (“MMA”), however, the            United States Congress allocated significant additional funds and other incentives to            Medicare managed care providers in order to promote greater participation in those            plans by Medicare beneficiaries. If these increased funding levels have the intended            result, the size of the potential Medicare fee-for-service market could decline,            thereby reducing the size of our potential patient population, which could cause our            operating results to suffer.

 

***Our growth strategy depends on our ability to manage growing and            changing operations.***

 

Our            business plan calls for significant growth in our business over the next several years.            This growth will place significant demands on our management systems, internal            controls, and financial and professional resources. In addition, we will need to            further develop our financial controls and reporting systems to accommodate future            growth. This could require us to incur expenses for hiring additional qualified            personnel, retaining professionals to assist in developing the appropriate control            systems, and expanding our information technology infrastructure. Our inability to            manage growth effectively could have a material adverse effect on our financial            results.

 

***Our growth strategy depends on our ability to develop and to            acquire additional agencies on favorable terms and to integrate and operate these            agencies effectively. If we are unable to do so, our future growth and operating            results could be negatively impacted.***

 

*Development.*We expect to continue to open            agencies in our existing and new markets. Our new agency growth, however, will depend            on several factors, including our ability to:

|   | **•** | obtain locations for agencies in markets where need                            exists; |
|--------|------------|----------------------------------------------------------------------------------------|

 

20

|   | **•** | identify and hire a sufficient number of sales personnel                            and appropriately trained home care and other health care                            professionals; |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | obtain adequate financing to fund growth; and |
|--------|------------|-----------------------------------------------|

|   | **•** | operate successfully under applicable government                            regulations. |
|--------|------------|------------------------------------------------------------------------------------------|

 

*Acquisitions.*We are focusing significant            time and resources on the acquisition of home healthcare providers, or of certain of            their assets, in targeted markets. We may be unable to identify, negotiate, and            complete suitable acquisition opportunities on reasonable terms. We may incur future            liabilities related to acquisitions. Should any of the following problems, or others,            occur as a result of our acquisition strategy, the impact could be material:

|   | **•** | difficulties integrating personnel from acquired                            entities and other corporate cultures into our business; |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | difficulties integrating information systems; |
|--------|------------|-----------------------------------------------|

|   | **•** | the potential loss of key employees or referral sources                            of acquired companies or a reduction in patient referrals by hospitals                            from which we have acquired home health care agencies; |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | the assumption of liabilities and exposure to                            undisclosed liabilities of acquired companies; |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------|

|   | **•** | the acquisition of an agency with undisclosed compliance                            problems; |
|--------|------------|-----------------------------------------------------------------------------------------------|

|   | **•** | the diversion of management attention from existing                            operations; |
|--------|------------|--------------------------------------------------------------------------------------------|

|   | **•** | difficulties in recouping partial episode payments and                            other types of misdirected payments for services from the previous                            owners; or |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | an unsuccessful claim for indemnification rights from                            previous owners for acts or omissions arising prior to the date of                            acquisition. |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

***We may require additional capital to pursue our acquisition            strategy.***

 

At            December 31, 2007, we had cash and cash equivalents of approximately $470,000 and            additional borrowing capacity of approximately $25.7 million. Based on our current plan            of operations, including acquisitions, we cannot assure you that this amount will be            sufficient to support our current growth strategies. We cannot readily predict the            timing, size, and success of our acquisition efforts and the associated capital            commitments. If we do not have sufficient cash resources, our growth could be limited            unless we obtain additional equity or debt financing. In June 2007, we filed a $75.0            million shelf registration statement with the availability for the issuance of any            combination of common stock, preferred stock, warrants and debt securities. The            registration statement became effective June 26, 2007, and we have not yet issued any            securities using the registration statement. At some future point we may elect to issue            additional equity securities in conjunction with raising capital or completing an            acquisition. We cannot assure you that such issuances will not be dilutive to existing            shareholders.

 

***Our business depends on our information systems. Our inability to            effectively integrate, manage, and keep secure our information systems could disrupt            our operations.***

 

Our            business depends on effective and secure information systems that assist us in, among            other things, monitoring utilization and other cost factors, processing claims,            reporting financial results, measuring outcomes and quality of care, managing            regulatory compliance controls, and maintaining operational efficiencies. These systems            include software developed in-house and systems provided by external contractors and            other service providers. To the extent that these external contractors or other service            providers become insolvent or fail to support the software or systems, our operations            could be negatively affected. Our agencies also depend upon our information systems for            accounting, billing, collections, risk management, quality assurance, payroll, and            other information. If we experience a reduction in the performance, reliability, or            availability of our information systems, our operations and ability to produce timely            and accurate reports could be adversely affected.

 

Our            information systems and applications require continual maintenance, upgrading, and            enhancement to meet our operational needs. Our acquisition activity requires            transitions and integration of various information systems. We regularly upgrade and            expand our information systems’ capabilities. If we experience difficulties with            the transition and integration of information systems or are unable to implement,            maintain, or expand our systems properly, we could suffer from, among other things,            operational disruptions, regulatory problems, and increases in administrative            expenses.

 

21

Our            business requires the secure transmission of confidential information over public            networks. Advances in computer capabilities, new discoveries in the field of            cryptography or other events or developments could result in compromises or breaches of            our security systems and patient data stored in our information systems. Anyone who            circumvents our security measures could misappropriate our confidential information or            cause interruptions in our services or operations. The Internet is a public network,            and data is sent over this network from many sources. In the past, computer viruses or            software programs that disable or impair computers have been distributed and have            rapidly spread over the Internet. Computer viruses could be introduced into our            systems, or those of our providers or regulators, which could disrupt our operations or            make our systems inaccessible to our providers or regulators. We may be required to            expend significant capital and other resources to protect against the threat of            security breaches or to alleviate problems caused by breaches. Our security measures            may be inadequate to prevent security breaches, and our business operations would be            negatively impacted by cancellation of contracts and loss of patients if security            breaches are not prevented.

 

Further, our information systems are vulnerable to damage or            interruption from fire, flood, natural disaster, power loss, telecommunications            failure, break-ins and similar events. A failure to restore our information systems            after the occurrence of any of these events could have a material adverse effect on our            business, financial condition and results of operations. Because of the confidential            health information we store and transmit, loss of electronically-stored information for            any reason could expose us to a risk of regulatory action, litigation, possible            liability and loss.

 

***Our clinical software system has been developed in-house. Failure            of, or problems with, our system could harm our business and operating            results.***

 

We            have developed and utilize a proprietary clinical software system to collect assessment            data, log patient visits, generate medical orders, and monitor treatments and outcomes            in accordance with established medical standards. The system integrates billing and            collections functionality as well as accounting, human resource, payroll, and employee            benefits programs provided by third parties. Problems with, or the failure of, our            technology and systems could negatively impact data capture, billing, collections, and            management and reporting capabilities. Any such problems or failures could adversely            affect our operations and reputation, result in significant costs to us, and impair our            ability to provide our services in the future. The costs incurred in correcting any            errors or problems may be substantial and could adversely affect our            profitability.

 

***We depend on outside software providers.***

 

We            depend on the proper functioning and availability of our information systems in            operating our business, some of which are provided by outside software providers. These            information systems and applications require continual maintenance, upgrading, and            enhancement to meet our operational needs. If our providers are unable to maintain or            expand our information systems properly, we could suffer from operational disruptions            and an increase in administrative expenses, among other things.

 

***Our insurance liability coverage may not be sufficient for our            business needs.***

 

We            bear significant insurance risk under our large-deductible workers’ compensation            insurance program and our self-insured employee health program. Under our            workers’ compensation insurance program, we bear risk up to $400,000 per            incident. We purchase stop-loss insurance for our employee health plan that places a            specific limit, generally $100,000, on our exposure for any individual covered life.            However, we cannot assure you that claims will not be made in the future in excess of            the limits of such insurance, if any, nor can we assure you that any such claims, if            successful and in excess of such limits, will not have a material adverse effect on our            ability to conduct business or on our assets. Our insurance coverage also includes            fire, property damage, and general liability with varying limits. Although we maintain            insurance consistent with industry practice, we cannot assure you that the insurance we            maintain will satisfy claims made against us. In addition, as a result of operating in            the home healthcare industry, our business entails an inherent risk of claims, losses            and potential lawsuits alleging employee accidents that are likely to occur in a            patient’s home. Finally, we cannot assure you that insurance coverage will            continue to be available to us at commercially reasonable rates, in adequate amounts or            on satisfactory terms. Any claims made against us, regardless of their merit or            eventual outcome, could damage our reputation and business.

 

22

 

***We have established reserves for Medicare liabilities that may be            payable by us in the future. These liabilities may be subject to audit or further            review, and we may owe additional amounts beyond what we expect and have reserved            for.***

 

The            Company is paid for its services primarily by Federal and state third-party            reimbursement programs, commercial insurance companies, and patients. Revenues are            recorded at established rates in the period during which the services are rendered.            Appropriate allowances to give recognition to third party payment arrangements are            recorded when the services are rendered.

 

Laws            and regulations governing the Medicare and Medicaid programs are extremely complex and            subject to interpretation. It is common for issues to arise related to: 1) the            determination of cost-reimbursed revenues, 2) medical coding, particularly with respect            to Medicare, 3) patient eligibility, particularly related to Medicaid, and 4) other            reasons unrelated to credit risk, all of which may result in adjustments to recorded            revenue amounts. Management continuously evaluates the potential for revenue            adjustments and when appropriate provides allowances for losses based upon the best            available information. There is at least a reasonable possibility that recorded            estimates could change by material amounts in the near term.

 

***We depend on the services of our executive officers and other key            employees.***

 

Our            success depends upon the continued employment of certain members of our senior            management team, including our Chairman and Chief Executive Officer, William B.            Yarmuth, and our other named executive officers. We also depend upon the continued            employment of the individuals that manage several of our key functional areas,            including operations, business development, accounting, finance, human resources,            marketing, information systems, contracting and compliance. The departure of any member            of our senior management team may materially adversely affect our            operations.

 

***Our operations could be affected by natural            disasters.***

 

A            substantial number of our agencies are located in the Florida, increasing our exposure            to hurricanes and other natural disasters. The occurrence of natural disasters in the            markets in which we operate could not only affect the day-to-day operations of our            agencies, but also could also disrupt our relationships with patients, employees and            referral sources located in the affected areas. In addition, any episode of care that            is not completed due to the impact of a natural disaster will generally result in lower            revenue for the episode. We cannot assure you that hurricanes or other natural            disasters will not have a material adverse impact on our business, financial condition            or results of operations in the future.

 

**Risks Related to Ownership of Our Common Stock**

 

***The price of our common stock may be volatile and this may            adversely affect our stockholders.***

 

The            price at which our common stock trades may be volatile. The stock market has from time            to time experienced significant price and volume fluctuations that have affected the            market prices of securities, particularly securities of health care companies. The            market price of our common stock may be influenced by many factors,            including:

|   | **•** | our operating and financial performance; |
|--------|------------|------------------------------------------|

|   | **•** | variances in our quarterly financial results compared to                            expectations; |
|--------|------------|---------------------------------------------------------------------------------------------------|

|   | **•** | the depth and liquidity of the market for our common                            stock; |
|--------|------------|----------------------------------------------------------------------------------------|

|   | **•** | future sales of common stock or the perception that                            sales could occur; |
|--------|------------|---------------------------------------------------------------------------------------------------|

|   | **•** | investor perception of our business and our                            prospects; |
|--------|------------|-----------------------------------------------------------------------------------|

|   | **•** | developments relating to litigation or governmental                            investigations; |
|--------|------------|------------------------------------------------------------------------------------------------|

|   | **•** | changes or proposed changes in health care laws or                            regulations or enforcement of these laws and regulations, or                            announcements relating to these matters; or |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | general economic and stock market conditions |
|--------|------------|----------------------------------------------|

 

23

In            addition, the stock market in general has experienced price and volume fluctuations            that have often been unrelated or disproportionate to the operating performance of            health care provider companies. These broad market and industry factors may materially            reduce the market price of our common stock, regardless of our operating performance.            In the past, securities class-action litigation has often been brought against            companies following periods of volatility in the market price of their respective            securities. We may become involved in this type of litigation in the future. Litigation            of this type is often expensive to defend and may divert our management team’s            attention as well as resources from the operation of our business.

 

***Sales of substantial amounts of our common stock, or the            availability of those shares for future sale, could adversely affect our stock price            and limit our ability to raise capital.***

 

At            December 31, 2007, 5,531,921 shares of our common stock were outstanding. In 2007, we            established the 2007 Stock and Incentive Compensation Plan for the benefit of employees            and directors providing for the issuance of up to 500,000 shares of common stock. As of            December 31, 2007, 317,014 shares of our common stock were issuable upon the exercise            of stock options pursuant to other incentive compensation plans. The market price of            our common stock could decline as a result of sales of substantial amounts of our            common stock in the public or the perception that substantial sales could occur. These            sales also may make it more difficult for us to sell common stock in the future to            raise capital.

 

***We do not anticipate paying dividends on our common stock in the            foreseeable future, and you should not expect to receive dividends on shares of our            common stock.***

 

We            do not pay dividends and intend to retain all future earnings to finance the continued            growth and development of our business. In addition, we do not anticipate paying cash            dividends on our common stock in the foreseeable future. Any future payment of cash            dividends will depend upon our financial condition, capital requirements, earnings, and            other factors deemed relevant by our board of directors.

 

***Our Board of Directors may use anti-takeover provisions or issue            stock to discourage control contests.***

 

We            have implemented anti-takeover provisions or provisions that could have an            anti-takeover effect, including (1) advance notice requirements for director            nominations and stockholder proposals and (2) a stockholder rights plan, also            known as a “poison pill.” These provisions, and others that the Board of            Directors may adopt hereafter, may discourage offers to acquire us and may permit our            Board of Directors to choose not to entertain offers to purchase us, even if such            offers include a substantial premium to the market price of our stock. Therefore, our            stockholders may be deprived of opportunities to profit from a sale of            control.

 

| **ITEM 1B.** | **UNRESOLVED STAFF COMMENTS** |
|--------------|-------------------------------|

 

None.

 

| **ITEM 2.** | **PROPERTIES** |
|-------------|----------------|

 

Our            executive offices are located in Louisville, Kentucky in approximately 25,000 square            feet of space leased from an unaffiliated party.

 

We            have 97 real estate leases ranging from approximately 200 to 24,000 square feet of            space in their respective locations. See “Item 1. Business – Operating            Segments” and Note 9 to our audited consolidated financial statements. We believe            that our facilities are adequate to meet our current needs, and that additional or            substitute facilities will be available if needed.

 

**ITEM 3. LEGAL PROCEEDINGS**

 

From            time to time, we are subject to claims and suits arising in the ordinary course of our            business, including claims for damages for personal injuries. In our opinion the            ultimate resolution of any of these pending claims and legal proceedings will not have            a material effect on our financial position or results of operations.

 

24

 

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

 

No            matters were submitted to a vote of our security holders during the fourth quarter of            fiscal 2007.

 

 

25

**PART II**

 

**ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY,            RELATED**

**STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY            SECURITIES**

 

Our            common stock is traded on the NASDAQ Global stock market under the symbol            “AFAM” Set forth below are the high and low sale prices for the common            stock for the periods indicated reported by NASDAQ:

 

**Closing Common Stock Prices**

|   | **Quarter Ended:** |   | **High**                                              |   | **Low**                                                           |
|--------|--------------------|--------|-------------------------------------------------------|--------|-------------------------------------------------------------------|
|   | March 31, 2006     |   | $        9.00 |   | $          7.05 |
|   | June 30, 2006      |   | $      12.44            |   | $          8.97 |
|   | September 30, 2006 |   | $      12.00            |   | $       11.60                  |
|   | December 31, 2006  |   | $      21.91            |   | $          9.65 |
|   | March 31, 2007     |   | $      26.17            |   | $       18.03                  |
|   | June 30, 2007      |   | $      24.94            |   | $       17.29                  |
|   | September 30, 2007 |   | $      19.53            |   | $       14.22                  |
|   | December 31, 2007  |   | $      22.21            |   | $       17.32                  |

 

On            March 7, 2008, the last reported sale price for the common stock reported by NASDAQ was            $22.13 and there were approximately 348 holders of record of our common stock. No cash            dividends have been paid by us during the periods indicated above. We do not presently            intend to pay dividends on our common stock and will retain our earnings for future            operations and the growth of our business.

 

**ITEM 6. SELECTED FINANCIAL DATA**

 

The            following table sets forth selected financial information derived from the consolidated            financial statements of the Company for the periods and at the dates indicated. The            information is qualified in its entirety by and should be read in conjunction with the            consolidated financial statements and related notes included elsewhere in this and            prior year Form 10-Ks.

 

26

      

|                                                     |      |  

**Year Ended December 31,** |
|----------------------------------------------------------|-----------|-------------------------------------|
| **(Dollar amounts in 000's**

**except per share data)** |      | **2007**                            |   | **2006** |   | **2005** |   |  

**2004** |   |  

**2003** |   |
| **Results of operations data:**                          |      |                                |   |   |   |   |   |   |   |   |   |
| Net revenues                                             | $         | 132,130                        | $ | 90,645  | $ | 73,607 | $ | 63,940  | $ | 59,502  |   |
| Income (loss) from:                                      |      |                                |   |   |   |   |   |   |   |   |   |
| Continuing operations                                    | $         | 7,815                          | $ | 4,315  | $ | 3,037 | $ | 1,813  | $ | 676  |   |
| Discontinued operations                                  |      | (211)                               |   | (76) |   | 4,831 |   | (557) |   | (565) |   |
| Net income (loss)                                        | $         | 7,604                          | $ | 4,239  | $ | 7,868 | $ | 1,256  | $ | 111  |   |
|                                                     |      |                                |   |   |   |   |   |   |   |   |   |
| Pershare: (1)                                            |      |                                |   |   |   |   |   |   |   |   |   |
| Basic:                                                   |      |                                |   |   |   |   |   |   |   |   |   |
| Number of shares

(in 000’s)                       |      |  

5,436                  |   |  

4,854  |   |  

4,675 |   |  

4,606  |   |  

4,590  |   |
| Income (loss) from:

Continuing operations               |  

$ |  

1.44                   |  

$ |  

0.89  |  

$ |  

0.65 |  

$ |  

0.39  |  

$ |  

0.15  |   |
| Discontinued operations                                  |      | (0.04)                              |   | (0.02) |   | 1.03 |   | (0.12) |   | (0.12) |   |
| Net income                                               | $         | 1.40                           | $ | 0.87  | $ | 1.68 | $ | 0.27  | $ | 0.02  |   |
|                                                     |      |                                |   |   |   |   |   |   |   |   |   |
| Diluted:                                                 |      |                                |   |   |   |   |   |   |   |   |   |
| Number of shares

(in 000’s)                       |      |  

5,599                  |   |  

5,327  |   |  

5,219 |   |  

5,134  |   |  

5,078  |   |
| Income (loss) from:

Continuing operations               |  

$ |  

1.40                   |  

$ |  

0.81  |  

$ |  

0.58 |  

$ |  

0.35  |  

$ |  

0.13  |   |
| Discontinued operations                                  |      | (0.04)                              |   | (0.01) |   | 0.93 |   | (0.11) |   | (0.11) |   |
| Net income                                               | $         | 1.36                           | $ | 0.80  | $ | 1.51 | $ | 0.24  | $ | 0.02  |   |

 

(1) all            share and per share information has been adjusted to reflect a 2-for-1 common stock            split completed in January 2007.

 

| **Balance sheet data as of:** |   | **2007** |   | **2006** |   | **2005** |   | **2004** |   | **2003** |   |
|-------------------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|
| Working capital               | $      | 5,505    | $      | 7,163    | $      | 9,300    | $      | 8,752    | $      | 13,320   |   |
| Total assets                  |   | 67,360   |   | 53,395   |   | 30,543   |   | 25,578   |   | 31,781   |   |
| Long-term liabilities         |   | 17,552   |   | 13,520   |   | 1,568    |   | 5,552    |   | 12,575   |   |
| Total liabilities             |   | 32,518   |   | 25,656   |   | 10,408   |   | 13,431   |   | 21,002   |   |
| Stockholders' equity          |   | 34,842   |   | 27,740   |   | 20,135   |   | 12,147   |   | 10,779   |   |

      

 

 

27

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

 

**OVERVIEW**

 

The            Company has two reportable segments, Visiting Nurse (VN) and Personal Care (PC).            Reportable segments have been identified based upon how management has organized the            business by services provided to customers and the criteria in SFAS 131,            “Disclosures about Segments of an Enterprise and Related            Information.”

 

Our            VN segment provides skilled medical services in patients’ homes largely to enable            recipients to reduce or avoid periods of hospitalization and/or nursing home care. VN            Medicare revenues are generated on a per episode basis rather than a fee per visit or            an hourly basis. 94% of the VN segment revenues are generated from the Medicare program            while the balance is generated from Medicaid and private insurance programs.

 

Our            PC segment services are also provided in patients’ homes. These services            (generally provided by paraprofessional staff such as home health aides) are generally            of a custodial rather than skilled nature. PC revenues are typically generated on an            hourly basis. 70% of the PC segment revenues are generated from Medicaid and other            government programs while the balance is generated from insurance programs and private            pay patients.

 

**Our View on Reimbursement and Diversification of Risk**

Our            Company is highly dependent on government reimbursement programs which pay for the            majority of the services we provide to our patients. Reimbursement under these            programs, primarily Medicare and Medicaid, is subject to frequent changes as policy            makers balance their own needs to meet the health care needs of constituents while also            meeting their fiscal objectives.

 

We            believe that an important key to our historical success and to our future success is            our ability to adapt our operations to meet changes in reimbursement as they occur. One            important way in which we have achieved this adaptability in the past, and in which we            plan to achieve it in the future, is to maintain some level of diversification in our            business mix.

 

The            execution of our business plan emphasizes our Visiting Nurse operations. Our Personal            Care operations will help us maintain a level of diversification of reimbursement risk            that we believe is appropriate.

 

**Our Business Plan**

Our            future success depends on our ability to execute our business plan. Over the next three            to five years we will try to accomplish the following:

 

|   | **•** | Generate meaningful same store sales growth through the                            focused provision of high quality services and attending to the needs                            of our patients; |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | Expand the significance of our Visiting Nurse,                            Medicare-based, home health services by selectively acquiring other                            quality providers and through the startup of new agencies;                            and |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | **•** | Expand our capital base through both earnings                            performance and by seeking additional capital investments in our                            Company. |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**Critical Accounting Policies** 

 

The            accompanying consolidated financial statements have been prepared in conformity with            accounting principles generally accepted in the United States. When more than one            accounting principle, or the method of its application, is generally accepted, we            select the principle or method that is appropriate in the specific circumstances.            Application of these accounting principles requires us to make estimates about the            future resolution of existing uncertainties; as a result, actual results could differ            from these estimates. In preparing these financial statements,

 

28

we            have made our best estimates and judgments of the amounts and disclosures included in            the financial statements, giving due regard to materiality.

 

**Receivables and Revenue Recognition**

We            recognize revenues when patient services are provided. Our receivables and revenues are            stated at amounts estimated by us to be their net realizable values. The Company is            paid for its services primarily by Federal and state third-party reimbursement            programs, commercial insurance companies, and patients. Revenues are recorded at            established rates in the period during which the services are rendered. Appropriate            allowances to give recognition to third party payment arrangements are recorded when            the services are rendered.

 

Laws            and regulations governing the Medicare and Medicaid programs are extremely complex and            subject to interpretation. It is common for issues to arise related to: 1) medical            coding, particularly with respect to Medicare, 2) patient eligibility, particularly            related to Medicaid, and 3) other reasons unrelated to credit risk, all of which may            result in adjustments to recorded revenue amounts. Management continuously evaluates            the potential for revenue adjustments and when appropriate provides allowances for            losses based upon the best available information. There is at least a reasonable            possibility that recorded estimates could change by material amounts in the near            term.

 

**Medicare Revenue Recognition**

 

On            October 1, 2000, Medicare implemented the Prospective Payment System            (“PPS”) and began paying providers of home health care at fixed,            predetermined rates for services and supplies bundled into 60-day episodes of home            health care. An episode of home health care spans a 60-day period, starting with the            first day a billable visit is furnished to a Medicare beneficiary and ending 60 days            later. If a patient is still in treatment on the 60th day a new episode begins on the            61st day regardless of whether a billable visit is rendered on that day and ends 60            days later. The first day of a consecutive episode, therefore, is not necessarily the            new episode’s first billable visit. A base episode payment is established by the            Medicare Program through federal legislation for all episodes of care ended on or after            the applicable time periods detailed below:

 

| **Period**                                                                     |  

                              | **Base episode**

**Payment (1)** |   |
|--------------------------------------------------------------------------------|--------------------------------------------|-----------------------------------|--------|
| April 1, 2004 through December 31,                            2004   |                                       | $                                 | 2,213  |   |
| January 1, 2005 through December 31,                            2006 |                                       | $                                 | 2,264  |   |
| January 1, 2007 through December 31, 2007                                      |                                       | $                                 | 2,339  |   |
| January 1, 2008 through December 31, 2008                                      |                                       | $                                 | 2,270  |   |

 

| (1) | The actual episode payment rates, as presented in the                            table vary, depending on the home health resource groups                            (“HHRGs”) to which Medicare patients are assigned and the                            per episode payment is typically reduced or increased by such factors                            as the patient’s clinical, functional, and services utilization                            characteristics. |   |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|

 

Under PPS for Medicare reimbursement, we record net revenues based on a            reimbursement rate that varies based on the severity of the patient’s condition,            service needs and other related factors. We record net revenues as services are            rendered to patients over the 60-day episode period. At the end of each month, a            portion of our revenue is estimated for episodes in progress.

 

Medicare reimbursement, on an episodic basis, is subject to adjustment            if there are significant changes in the patient’s condition during the treatment            period or if the patient is discharged but readmitted to another agency within the same            60-day episodic period. Our revenue recognition under the Medicare reimbursement            program is based on certain variables including, but not limited, to: (i) changes in            the base episode payments established by the Medicare Program; (ii) adjustments to the            base episode payments for partial episodes and for other factors, such as case mix,            geographic wages, low utilization and intervening events; and, (iii) recoveries of            overpayments. Adjustments to revenue result from differences between estimated and            actual reimbursement amounts, an inability to obtain appropriate billing documentation            or authorizations acceptable to the payor and other reasons unrelated to credit risk.            We recognize Medicare revenue on an episode-by-episode basis during the course of each            episode over its expected number of visits.

 

29

 

**Allowance for Doubtful Accounts**

We            evaluate the collectibility of our accounts receivable based on certain factors, such            as payor types, historical collection trends and aging categories. We calculate our            reserve for bad debts based on the length of time that the receivables are past due.            The percentage applied to the receivable balances in the various aging categories is            based on historical collection experience.

 

**Insurance Programs**

We            bear significant insurance risk under our large-deductible workers’ compensation            insurance program and our self-insured employee health program. Under our            workers’ compensation insurance program, we bear risk up to $400,000 per            incident. We purchase stop-loss insurance for our employee health plan that places a            specific limit, generally $100,000, on our exposure for any individual covered            life.

 

Malpractice and general patient liability claims for incidents which may            give rise to litigation have been asserted against us by various claimants. The claims            are in various stages of processing and some may ultimately be brought to trial. We            also know of incidents that have occurred through December 31, 2007 that may result in            the assertion of additional claims. We carry insurance coverage for this exposure with            no deductible. Prior to April 1, 2007 the Company carried coverage with a deductible            per claim of $500,000.

 

We            record estimated liabilities for our insurance programs based on information provided            by the third-party plan administrators, historical claims experience, the life cycle of            claims, expected costs of claims incurred but not paid, and expected costs to settle            unpaid claims. We monitor our estimated insurance-related liabilities on a monthly            basis. As facts change, it may become necessary to make adjustments that could be            material to our results of operations and financial condition.

 

We            believe that our present insurance coverage is adequate. As part of our on-going risk            management and cost control efforts, we continually seek alternatives that might            provide a different balance of cost and risk, including potentially accepting            additional self-insurance risk in lieu of higher premium costs.

 

**Goodwill and Other Intangible Assets**

We            perform impairment tests of goodwill and indefinite lived assets as required by            Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and            Other Intangible Assets. The impairment analysis requires numerous subjective            assumptions and estimates to determine fair value of the respective reporting units as            required by SFAS No. 142. As of December 31, 2007, we completed our impairment review            and determined that no impairment charge was required. Depending on level of sales, our            liquidity and other factors, we may be required to recognize impairment charges in the            future.

 

**Accounting for Income Taxes**

As            of December 31, 2007, we have net deferred tax assets of approximately $1,053,000. The            net deferred tax asset is composed of approximately $1,830,000 of current deferred tax            assets and approximately $777,000 of long-term deferred tax liabilities. We have            provided a valuation allowance against certain net deferred tax assets based upon our            estimation of realizability of those assets through future taxable income. This            valuation allowance was based in large part on our history of generating operating            income or losses in individual tax locales and expectations for the future. Our ability            to generate the expected amounts of taxable income from future operations is dependent            upon general economic conditions, competitive pressures on revenues and margins and            legislation and regulation at all levels of government. We have considered the above            factors in reaching our conclusion that it is more likely than not that future taxable            income will be sufficient to fully utilize the net deferred tax assets (net of the            valuation allowance) as of December 31, 2007. However, there can be no assurances that            we will meet our expectations of future taxable income.

 

During the years ended December 31, 2007, 2006 and 2005, based on            changes in facts and circumstances, changes occurred in the Company’s            expectations with regard to the generation of future taxable income in certain tax            jurisdictions. Accordingly, the state and local tax provision for 2007, 2006 and 2005            included an increase (reduction) in recorded valuation allowances of approximately            $175,000, $35,000 and ($152,000), respectively.

 

30

**Seasonality**

Our            Visiting Nurse segment operations located in Florida normally experience higher            admissions during the first quarter and lower admissions during the third quarter than            in the other quarters due to seasonal population fluctuations.

 

 

31

**RESULTS OF OPERATIONS** 

 

**Continuing Operations**

**Year            Ended December 31, 2007 Compared with Year Ended December 31, 2006**

 

| **Consolidated**                  |   | **2007**    |      | **2006** |             | **Change** |
|-----------------------------------|--------|-------------|-----------|----------|------------------|------------|
|                              |   | **Amount**  | **% Rev** |     | **Amount**       | **% Rev**  |   | **Amount** | **% Rev** |
| Net Revenue                       |   |        |      |     |             |       |   |   |   |
| Visiting nurses                   | $      | 96,219,949  | 72.8%     | $        | 55,190,258  | 60.9%      | $ | 41,029,691 | 74.3% |
| Personal care                     |   | 35,910,107  | 27.2%     |     | 35,455,236  | 39.1%      |   | 454,871 | 1.3% |
|                              | $      | 132,130,056 | 100.0%    | $        | 90,645,494  | 100.0%     | $ | 41,484,562 | 45.8% |
|                              |   |        |      |     |             |       |   |   |   |
| Operating income:                 |   |        |      |     |             |       |   |   |   |
| Visiting nurses                   | $      | 19,592,144  | 20.4%     | $        | 9,098,996   | 16.5%      | $ | 10,493,148 | 115.3% |
| Personal care                     |   | 3,412,008   | 9.5%      |     | 3,899,545   | 11.0%      |   | (487,536) | -12.5% |
|                              |   | 23,004,152  | 17.4%     |     | 12,998,541  | 14.3%      |   | 10,005,611 | 77.0% |
| Corporate expense            |   | 9,080,619   | 6.9%      |     | 5,891,932   | 6.5%       |   | 3,188,687 | 54.1% |
|                              |   | 13,923,533  | 10.5%     |     | 7,106,609   | 7.8%       |   | 6,816,924 | 95.9% |
| Interest (income) expense         |   | 836,911     | 0.6%      |     | (54,440)         | -0.1%      |   | 891,350 | NM |
| Income taxes                      |   | 5,272,149   | 4.0%      |     | 2,845,758   | 3.1%       |   | 2,426,391 | 85.3% |
| Income from continuing operations | $      | 7,814,474   | 5.9%      | $        | 4,315,291   | 4.8%       | $ |  

3,499,183 | 81.1% |
|                              |   |        |      |     |             |       |   |   |   |
| EBITDA                            | $      | 15,128,244  |      | $        | 8,120,116   |       | $ | 7,008,128 | 86.3% |

             

NM – Not meaningful.

 

Our            net revenues increased approximately $41.5 million or 46% with 74% growth in VN and 1%            growth in PC. VN revenue growth was driven by acquisitions, admissions growth, and            start-up operations. Acquired VN operations contributed approximately $24.9 million of            revenue in 2007. The remaining revenue growth came from locations in operation in both            periods which in the aggregate grew approximately 46% over revenue generated in 2006.            PC operating income decreased due to lower gross margins.

 

Interest expense is significantly higher due to increased usage of the            revolving line of credit for acquisitions in 2007.

 

EBITDA increased 86% between periods primarily due to revenue increases.            Corporate expenses increased due to increased incentive provisions, executive            compensation, increased recruiting efforts. In the year ended December 31, 2007 the            Company incurred approximately $650,000 of incremental corporate expense to comply with            internal control reporting requirements of the Sarbanes Oxley Act.

 

The            effective continuing operations tax rate is approximately 40.3% for the year ended            December 31, 2007 and 39.7% in 2006.

 

32

**Visiting Nurse Segment-Year Ended December 31, 2007 and            2006** 

Approximately 94% of the VN segment revenues are generated from the            Medicare program while the balance is generated from Medicaid and private insurance            programs. In addition to our focus on operating income from the Visiting Nurse segment,            we also measure this segment’s performance in terms of admissions, patient months            of care, revenue per patient month and cost of services per patient month.

 

|                                       | **2007**   | **2006**                                                                             | **Change**    |
|--------------------------------------------|------------|--------------------------------------------------------------------------------------|---------------|
|                                       | **Amount** | **% Rev**                                                                            | **Amount**    | **% Rev** | **Amount** | **%** |
| Net service revenues                       |       | $   96,219,949                                                        | 100.0%        | $       55,190,258 | 100.0% | $  41,029,691 | 74.3% |
| Cost of service revenues                   |       | 39,108,264                                                                           | 40.6%         | 22,231,988 | 40.3% | 16,876,276 | 75.9% |
| Gross margin                               |       | 57,111,685                                                                           | 59.4%         | 32,958,270 | 59.7% | 24,153,415 | 73.3% |
| General and administrative

expenses:      |       |                                                                                 |          |   |   |   |   |
| Salaries and benefits                      |       | 24,000,481                                                                           | 24.9%         | 16,336,305 | 29.6% | 7,664,176 | 46.9% |
| Other                                      |       | 13,519,060                                                                           | 14.1%         | 7,522,969 | 13.6% | 5,996,091 | 79.7% |
| Total general and administrative

expenses |       |  

37,519,541                                                                   |  

39.0% |  

23,859,274 |  

43.2% |  

13,660,267 |  

57.3% |
| Operating income                           |       | $   19,592,144                                                        | 20.4%         | $         9,098,996 | 16.5% | $  10,493,148 | 115.3% |
|                                       |       |                                                                                 |          |   |   |   |   |
| All Payors:                                |       |                                                                                 |          |   |   |   |   |
| Admissions                                 |       | 29,338                                                                               |          | 18,921 |   | 10,417 | 55.1% |
| Patient months of care                     |       | 76,678                                                                               |          | 46,266 |   | 30,412 | 65.7% |
| Revenue per patient month                  |       | $             1,255 |          | $                 1,193 |   | $                 62 | 5.2% |
| Billable Visits                            |       | 600,913                                                                              |          | 359,273 |   | 241,640 | 67.3% |
|                                       |       |                                                                                 |          |   |   |   |   |
| Average number of locations                |       | 47.2                                                                                 |          | 32.7 |   | 14.5 | 44.3% |

             

Medicare Statistics:

| Admissions                  |   | 26,199 |   | 16,906 |   | 9,293 | 55.0% |
|-----------------------------|--------|--------|--------|--------|--------|-------|-------|
| Medicare Revenue % of Total |   | 94.1%  |   | 92.4%  |   | N/A   | 1.7%  |

             

 

Due            to the significant impact of acquisition activities on VN revenue growth, the following            tables are presented comparing revenue growth by market type for the periods ended            December 31, 2007 and 2006:

 

| **VN Revenue Comparison by Market Type – All VN                            Operations** |   | **# of**

**Mkts** |   |  

**2007** |   |  

**2006** |   |  

**Change** |   |  

**Percent** |
|-----------------------------------------------------------------------------------------------|--------|--------------------|--------|------------------|--------|------------------|--------|--------------------|--------|---------------------|
|                                                                                          |   |               |   |             |   |             |   |               |   |                |
| Newly acquired markets                                                                        |   | 16                 | $      | 24,933,372       | $      | 1,230,132        | $      | 23,703,240         |   | NM                  |
|                                                                                          |   |               |   |             |   |             |   |               |   |                |
| Markets with in-market acquisitions                                                           |   | 10                 |   | 17,944,250       |   | 11,830,306       |   | 6,113,944          |   | 51.7%               |
| Acquisition related markets                                                                   |   | 26                 |   | 42,877,622       |   | 13,060,439       |   | 29,817,183         |   |                |
|                                                                                          |   |               |   |             |   |             |   |               |   |                |
| Markets with no acquisition impact                                                            |   | 25                 |   | 53,342,327       |   | 42,129,819       |   | 11,212,508         |   | 26.6%               |
|                                                                                          |   | 51                 | $      | 96,219,949       | $      | 55,190,258       | $      | 41,029,691         |   | 74.3%               |

NM – Not meaningful.

 

VN            revenues grew approximately $41.0 million between years of which 57.8% came from newly            acquired markets, 14.9% came in markets with in-market acquisitions and 27.3% came from            markets with no acquisition impact. This demonstrates both growth through acquisition            and improvement of existing markets.

 

Quality of Life generated $2.3 million of revenue in 2007 in 4 newly            acquired markets.

 

Gross margin remained constant between periods.

 

33

 

Our            General and administrative salaries and benefits increased predominantly as a result of            the increase in the average number of locations in operation between periods            (substantially all of which were acquired), increases in wage rates and the addition of            segment management staff driven by our focus on the execution of our strategic plan to            develop the visiting nurse segment. As a percent of revenue, these costs declined to            39.0% from 43.2% primarily due to increased volumes (admissions), particularly in            markets with no acquisition impact.

 

**Personal Care (PC) Segment-Year Ended December 31, 2007 and            2006** 

Approximately 71% of the PC segment revenues are generated from Medicaid            and other government programs while the balance is generated from insurance programs            and private pay patients.

 

|  

                              | **2007**                                                                             | **2006**      | **Change**                                                                                                   |
|--------------------------------------------|--------------------------------------------------------------------------------------|---------------|--------------------------------------------------------------------------------------------------------------|
| **Amount**                                 | **% Rev**                                                                            | **Amount**    | **% Rev**                                                                                                    | **Amount** | **%** |
| Net service revenue                        | $   35,910,107                                                        | 100.0%        | $       35,455,236                                                        | 100.0% | $       454,871  | 1.3% |
| Cost of service revenues                   | 24,769,129                                                                           | 69.0%         | 23,883,708                                                                                                   | 67.4% | 885,421  | 3.7% |
| Gross margin                               | 11,140,978                                                                           | 31.0%         | 11,571,528                                                                                                   | 32.6% | (430,550) | -3.7% |
| General and administrative

expenses:      |                                                                                 |          |  

                                                                                                |   |   |   |
| Salaries and benefits                      | 5,013,598                                                                            | 14.0%         | 4,974,809                                                                                                    | 14.0% | 38,789 | 0.8% |
| Other                                      | 2,715,970                                                                            | 7.6%          | 2,697,174                                                                                                    | 7.6% | 18,198  | .07% |
| Total general and administrative

expenses |  

7,728,970                                                                    |  

21.5% |  

7,671,983                                                                                            |  

21.6% |  

56,987  |  

0.7% |
| Operating income                           | $     3,412,008                                             | 9.5%          | $         3,899,545                                             | 11.0% | $     (487,537) | -12.5% |
|                                       |                                                                                 |          |                                                                                                         |   |   |   |
| Admissions                                 | 2,687                                                                                |          | 2,494                                                                                                        |   | 193  | 7.7% |
| Patient months of care                     | 41,337                                                                               |          | 41,458                                                                                                       |   | (121) | -0.3% |
| Patient days of care                       | 505,323                                                                              |          | 515,534                                                                                                      |   | (10,211) | -2.0% |
| Billable hours                             | 2,054,922                                                                            |          | 2,081,769                                                                                                    |   | (26,847) | -1.3% |
| Revenue per billable hour                  | $             17.48 |          | $                 17.03 |   | $            0.87  | 2.6% |
|                                            |                                                                                      |               |                                                                                                              |  |  |  |  |

 

PC            operating income was $3.4 million for the twelve months ended December 2007 compared to            $3.9 million for the same period of last year. Admissions increased 7.7% over the prior            year while patient months of care decreased 2.0%, reflecting a change in the mix of            business. Direct margin decreased 1.6% from 32.6% of revenue in 2006 to 31.0% of            revenue in 2007 due to increased employee benefit costs, pay rates growing slightly            faster than revenue rates and changes in mix of business toward lower margin markets            and disciplines of care. Our volume of business and our business mix have been            unfavorably impacted by changes in Medicaid programs, particularly in Ohio, which have            caused a shift of patients away from traditional programs and toward managed care            programs which typically pay lower rates and more stringently limit utilization of            services per patient.

 

General and administrative expenses were relatively unchanged between            years.

 

 

34

**Year Ended December 31, 2006 Compared with Year Ended December 31,            2005**

             

| **Consolidated**                   | **2006**                                                                                                                               | **2005**     | **Change**                                                                                                     |         |
|------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------|--------------|----------------------------------------------------------------------------------------------------------------|--------------|
|                               | **Amount**                                                                                                                             | **% Rev**    | **Amount**                                                                                                     | **% Rev**    | **Amount** | **%** |   |
| Net Revenues:                      |                                                                                                                                   |         |                                                                                                           |         |   |   |   |
| Visiting nurses                    | $       55,190,258                                                                             | 60.9%        | $    39,732,561                                                                       | 52.6%        | $                                15,457,697  | 38.9% |
| Personal care                      |                                  35,455,236                                                              | 39.1%        |                                  33,873,984                                      | 47.4%        | (1,581,252)  | 4.7% |
|                               |                                    $       90,645,494       | 100.0%       |                                   $    75,606,545       | 100.0%       | $                               17,038,948 | 22.5% |
| Operating income:                  |                                                                                                                                   |         |                                                                                                           |         |   |   |
| Visiting nurses                    |                                   $         9,098,996  | 10.0%        |                                  $      5,387,672  | 7.1%         | $    3,711,324  | 68.9% |
| Personal care                      |     3,899,545                                                                                                      | 4.3%         |     3,471,139                                                                              | 4.6%         | 428,406  | 12.3% |
|                               |     12,998,541                                                                                                     | 14.3%        |     8,858,811                                                                              | 11.7%        | 4,139,729  | 46.7% |
| Corporate expense                  |    5,891,932                                                                                                            | 6.5%         |     4,512,141                                                                              | 6.0%         | 1,379,791  | 30.6% |
|                               |    7,106,609                                                                                                            | 7.8%         |    4,346,670                                                                                    | 5.7%         | 2,759,939  | 63.5% |
| Litigation gain                    | -                                                                                                                                      | 0.0%         |    (267,426)                                                                                         | -0.4%        | 267,426  | 100.0% |
| Interest expense                   |    (54,440)                                                                                                                  | -0.1%        |   112,608                                                                                            | 0.2%         | (167,048) | 148.3% |
| Income taxes                       |     2,845,758                                                                                                      | 3.1%         |  1,464,014                                                                                                | 1.9%         |  1,381,744  | 94.4% |
| Income from continuing

operations |  

$         4,315,291                                                          |  

4.8% |  

$   3,037,474                                                                      |  

4.0% |  

 $     1,277,817  |  

42.1% |
|                               |                                                                                                                                   |         |                                                                                                           |         |   |   |
| EBITDA                             |                                   $         8,120,117  |         |                                 $      6,066,212        |         | $      2,053,905  | 33.9% |
|                                    |                                                                                                                                        |              |                                                                                                                |              |  |  |  |  |  |  |

 

Our            net revenues increased approximately $17.0 million or 23% with 39% growth in VN and 5%            growth in PC. VN revenue growth was driven by admissions growth and acquisitions. New            VN operations started in late 2004 and early 2005 generated approximately $2.6 million            in revenue and operating losses of $145,000 in the twelve months ended December 31,            2005. Acquired operations added approximately $3.1 million in revenues and about            $645,000 in operating income in 2006. PC revenue and operating income increased due to            increased volumes. EBITDA increased 33.9% between periods primarily due to revenue            increases. Corporate expenses increased due to additional corporate wages and            incentives associated with our revenue growth and performance and amortization of            stock-based compensation expense in 2006.

 

As a            result of the settlement of a litigation, a non-taxable gain of $267,426 was recognized            in 2005. Excluding this non-taxable litigation gain, the effective continuing            operations income tax rate was approximately 34.2% of income before income taxes in            2005. The lower effective tax rate for continuing operations in 2005 resulted primarily            from the reversal of a valuation allowance of $152,000 (3.6% of pretax income) related            to certain state net operating loss carry forwards.

 

35

**Visiting Nurse Segment-Year Ended December 31, 2006 and            2005**

 

|                                      | **2006**                                                           | **2005**  | **Change** |                                                                                       |
|-------------------------------------------|--------------------------------------------------------------------|-----------|------------|--------------------------------------------------------------------------------------------|
| **Amount**                                |                                                               | **% Rev** | **Amount** | **% Rev**                                                                                  | **Amount** | **%** |   |
| Net service revenues                      | $ 55,190,258                                                  |      | 100.0%     | $     39,732,561                                                  | 100.0% | $ 15,457,697 | 38.9% |
| Cost of service revenues                  | 22,231,988                                                         |      | 40.3%      | 15,710,599                                                                                 | 39.5% | 6,521,389 | 41.5% |
| Gross margin                              | 32,958,270                                                         |      | 59.7%      | 24,021,962                                                                                 | 60.5% | 8,936,308 | 37.2% |
| General and administrative expenses:      |                                                               |      |       |                                                                                            |   |   |   |
| Salaries and benefits                     | 16,336,305                                                         |      | 29.6%      | 12,531,336                                                                                 | 31.5% | 3,804,969 | 30.4% |
| Other                                     | 7,522,969                                                          |      | 13.6%      | 6,102,954                                                                                  | 15.4% | 1,420,015 | 23.3% |
| Total general and administrative expenses | 23,859,274                                                         |      | 43.2%      | 18,634,290                                                                                 | 46.9% | 5,224,984 | 28.0% |
| Operating income                          | $   9,098,996                                       |      | 16.5%      | $       5,387,672                                       | 13.6% | $   3,711,324 | 68.9% |
|                                      |                                                               |      |       |                                                                                       |   |   |   |
| Admissions                                | 18,921                                                             |      |       | 14,130                                                                                     |   | 4,791 | 33.9% |
| Patient months of care                    | 46,266                                                             |      |       | 33,461                                                                                     |   | 12,805 | 38.3% |
| Revenue per patient month                 | $          1,193 |      |       | $              1,187 |   | 6 | 0.5% |
| Billable Visits                           | 359,273                                                            |      |       | 267,966                                                                                    |   | 91,307 | 34.1% |
|                                      |                                                               |      |       |                                                                                       |   |   |   |   |
| Average number of locations               | 32.7                                                               |      |       | 24.9                                                                                       |   | 8 | 31.3% |   |
|                                      |                                                               |      |       |                                                                                       |   |   |   |   |
|                                           |                                                                    |           |            |                                                                                            |  |  |  |  |  |  |  |  |  |  |

             

Medicare Statistics:

| Admissions                  | 16,906 |   | 12,817 |   | 4,089 | 31.9% |
|-----------------------------|--------|--------|--------|--------|-------|-------|
| Medicare Revenue % of Total | 92.4%  |   | 92.5%  |   | N/A   | -0.1% |

             

VN            operating income for the twelve months was approximately $9.1 million versus $5.4            million in 2005. New VN operations started in late 2004 and early 2005 generated            approximately $2.6 million in revenue and operating losses of $145,000 in the twelve            months ended December 31, 2005. Acquired operations added approximately $3.1 million in            revenues and about $645,000 in operating income. Excluding these start-up and            acquisition operations, operating income grew 14% as a percentage of revenue.            Admissions grew about 33.9% over the prior year while patient months increased at a            slightly higher 38.3% from the effect of the existing patient base in acquired            operations. Revenue per patient month increased slightly due to changes in geographic            mix and differences in local market wage indexes included in Medicare reimbursement            rates. Operating costs per patient month increased approximately 2.3% due to higher            wage rates and employee benefits. General and administrative expenses increased            primarily as a result of a 31.3% increase in the average number of locations in            operation in 2006 versus 2005.

 

36

**Personal Care Segment-Year Ended December 31, 2006 and            2005** 

 

|                                                                                   | **2006**                                                                             | **2005**      | **Change**                                                                                       |
|----------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------|---------------|--------------------------------------------------------------------------------------------------|
| **Amount**                                                                             | **% Rev**                                                                            | **Amount**    | **% Rev**                                                                                        | **Amount** | **%** |
| Net service revenue                                                                    | $   35,455,236                                                        | 100.0%        | $     33,873,984                                                        | 100.0% | $    1,581,252  | 4.7% |
| Cost of service revenues                                                               | 23,883,708                                                                           | 67.4%         | 22,438,439                                                                                       | 66.2% | 1,445,269  | 6.4% |
| Gross margin                                                                           | 11,571,528                                                                           | 32.6%         | 11,435,545                                                                                       | 33.8% | 135,983  | 1.2% |
| General and administrative

expenses:                                                  |                                                                                 |          |                                                                                             |   |   |   |
| Salaries and benefits                                                                  | 4,974,809                                                                            | 14.0%         | 4,472,208                                                                                        | 13.2% | 502,601  | 11.2% |
| Other                                                                                  | 2,697,174                                                                            | 7.6%          | 3,492,198                                                                                        | 10.3% | (795,024) | -22.8% |
| Total general and    administrative                            expenses |  

7,671,983                                                                    |  

21.6% |  

7,964,406                                                                                |  

23.5% |  

(292,423) |  

-3.7% |
| Operating income                                                                       | $     3,899,545                                             | 11.0%         | $       3,471,139                                             | 10.2% | $       428,406  | 12.3% |
|                                                                                   |                                                                                 |          |                                                                                             |   |   |   |
| Admissions                                                                             | 2,494                                                                                |          | 2,577                                                                                            |   | (83) | -3.2% |
| Patient months of care                                                                 | 41,458                                                                               |          | 40,256                                                                                           |   | 1,202  | 3.0% |
| Patient days of care                                                                   | 515,534                                                                              |          | 492,552                                                                                          |   | 22,982  | 4.7% |
| Billable hours                                                                         | 2,081,769                                                                            |          | 2,048,823                                                                                        |   | 32,946  | 1.6% |
| Revenue per billable hour                                                              | $             17.03 |          | $               16.53 |   | $               .50  | 3.0% |
|                                                                                        |                                                                                      |               |                                                                                                  |  |  |  |  |

 

PC            operating income was about $3.9 million for the twelve months ended December 2006            compared to $3.5 million for the same period of 2005. Startups contributed            approximately $430,000 in revenues and $234,000 in operating losses in 2006. Admissions            decreased about 3.2% over the prior year while Patient Months of Care increased 3.0%,            reflecting an increase in the average length of stay.

 

General and Administrative Expenses: Salaries and Benefits increased            about $502,000 due to the startup of three new locations, additional segment management            staff, wage increases and workers compensation experience. General and Administrative            Expenses: Other decreased approximately $795,000, primarily due to a reduction in bad            debt expense as a result of improved accounts receivable collection efforts, lower            liability insurance costs and lower information systems expenses.

 

***Liquidity and Capital Resources*** 

 

**Revolving Credit Facility**. The Company has            a $40.0 million credit facility with JP Morgan Chase Bank, NA as amended November 30,            2007, with an expiration date of June 30, 2010.The credit            facility bears an interest rate option at either the bank’s prime rate plus a            margin (ranging from -1.50% to -0.25%, currently -1.00%), or one-month LIBOR plus a            margin (ranging from +1.25% to +2.50%) dependent upon total leverage and is secured by            substantially all assets and the stock of the Company’s subsidiaries. The            weighted average interest rates were 7.31% and 7.24% for the years ended December 31,            2007 and 2006, respectively. The Company pays a commitment fee of 0.25% per annum on            the unused facility balance. Borrowings are available equal to the greater of: a) a            multiple of 3.5 times earnings before interest, taxes, depreciation and amortization            (As Defined EBITDA) or b) an asset based formula, primarily based on accounts            receivable. “As Defined EBITDA” of acquired operations, up to 75% of base            “As Defined EBITDA,” may be included in the availability calculations.            Borrowings under the facility may be used for working capital, capital expenditures,            acquisitions, development and growth of the business and other corporate purposes. As            of December 31, 2007, the formula permitted approximately $40.0 million to be used, of            which $12.4 million was outstanding. The Company has irrevocable letters of credit,            totaling $1.9 million outstanding in connection with its self-insurance programs. Thus,            a total of $25.7 million was available for use at December 31, 2007. The            Company’s revolving credit facility is subject to various financial covenants. As            of December 31, 2007, the Company was in compliance with the covenants. Under the most            restrictive of its covenants, the Company is required to maintain minimum net worth of            at least $10.5 million.

 

The            Company believes that this facility will be sufficient to fund its operating needs for            at least the next year. The Company will continue to evaluate additional capital,            including possible debt and equity investments in the Company, to support a more rapid            development of the business than would be possible with internal funds.

 

37

**Medicare Reimbursement Regulations for 2008**

 

In            August 2007 the Centers for Medicare & Medicaid Services (CMS) published final            regulations updating and revising the Medicare prospective payment system for home            health (HH-PPS) for 2008 (the “2008 Final Rule”). The 2008 Final Rule            became effective on January 1, 2008.

 

Under the HH-PPS providers are reimbursed on the basis of a 60-day            episode following a formula dependent upon, among other factors, the patient’s            medical condition, the number of visits performed in the episode and the locale in            which the patient resides.

 

The            following are the more significant changes included in the 2008 Final Rule:

|   | **•** | A “market basket” rate increase of 3% to the                            episodic payment rate for 2008. |
|--------|------------|---------------------------------------------------------------------------------------------------------------------|

|   | **•** | A decrease in the episodic payment rate of 2.75% for                            each of the years 2008 through 2010 and a decrease of 2.71% for 2011                            (the “Case Mix Creep Adjustment”). This rate cut was                            rationalized by CMS in the regulations as offsetting coding increases                            from 1999 through 2005 that CMS believes are not related to changes in                            the underlying health of patients. |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | The national 60-day episodic payment rate for 2007 was                            $2,339 and for 2008 will be $2,270, reflecting both the 3% market                            basket increase and the 2.75% rate cut described above as well as                            certain other adjustments the more significant of which are described                            below. |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | A move from 80 different patient driven coding                            categories (Home Health Reimbursement Groups or “HHRGs”) to                            153 HHRGs. |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Establishment of eight different break points in therapy                            visit thresholds used to determine reimbursement related to therapy                            services. In 2008 reimbursement will change at each of the following                            visit thresholds: 6, 7, 10, 11, 14, 16, 18 and 20 visits. In 2007 there                            was a single threshold at 10 therapy visits. |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | A small increase in the reimbursement provided for                            certain episodes in which 4 or fewer visits are provided. A                            corresponding and offsetting adjustment was made to the national                            payment rate described above. |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Segregation of the reimbursement for non-routine medical                            supplies based on a new formula separate from the national payment                            rate. A corresponding and offsetting adjustment was made to the                            national payment rate described above. |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | A revision in the reimbursement formula provided for                            certain episodes in which a high number of visits is required to meet                            the needs of the patient. This revision results in a decrease in the                            amount of reimbursement for these episodes. A corresponding and                            offsetting adjustment was made to the national payment rate described                            above. |
|--------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

We            believe the 2008 Final Rule will have the following implications:

|   | **•** | The Case Mix Creep Adjustment for years 2008-2011 will                            put downward pressure on margins in the home health industry and in our                            Visiting Nurse segment. The extent of the downward pressure will be                            influenced by a number of factors including but not limited to future:                            wage rate inflation, transportation costs, demand for and availability                            of clinicians, market basket increases and further changes to Medicare                            reimbursement made by either CMS or Congress. |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Outcome of the refinements to the case mix formula will                            be dependent upon the type and needs of the patients actually seen in                            2008, and the clinical and other aspects of the care plans employed to                            care for those patients, all of which may differ from those experienced                            historically. |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | Within the framework of providing the highest quality                            outcomes for our patients, we expect to take actions in response to the                            changing reimbursement environment with the goal of improving our                            clinical, operational and marketing efficiencies. |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | **•** | We believe the increased complexity of the reimbursement                            environment, combined with the long-term effect of the Case Mix Creep                            Adjustment, will likely increase the supply of acquisition candidates                            available to us. |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**Medicaid Reimbursement**

We            have a significant dependence on state Medicaid reimbursement programs. For the year            ended December 31, 2007, approximately 6.8%, 7.0%, 4.9%, 1.6%, 1.2%, 0.3% and 0.1% of            our revenues were generated from

 

38

Medicaid reimbursement programs in the states of Ohio, Kentucky,            Connecticut, Massachusetts, Florida, Alabama and Illinois, respectively.

 

Approximately 22% of our 2007 revenues were derived from state Medicaid            and Other Government Programs, many of which periodically face significant budget            issues. The financial condition of the Medicaid programs in each of the states in which            we operate is cyclical and many may be expected from time to time to take actions or            evaluate taking actions to control the rate of growth of Medicaid expenditures. Among            these actions are the following:

|   | • | Redefining eligibility standards for Medicaid                            coverage |
|--------|--------|-----------------------------------------------------------------------------------|

|   | • | Redefining coverage criteria for home and community                            based care services |
|--------|--------|----------------------------------------------------------------------------------------------------|

|   | • | Slowing payments to providers by increasing the minimum                            time in which payments are made |
|--------|--------|--------------------------------------------------------------------------------------------------------------------|

|   | • | Limiting reimbursement rate increases |
|--------|--------|---------------------------------------|

|   | • | Increased utilization of self-directed care                            alternatives |
|--------|--------|-------------------------------------------------------------------------------------|

|   | • | Shifting beneficiaries from traditional coverage to                            Medicaid managed care providers |
|--------|--------|----------------------------------------------------------------------------------------------------------------|

|   | • | Changing regulations under which providers must                            operate |
|--------|--------|------------------------------------------------------------------------------------|

The            actions that might be taken or considered are because the number of Medicaid            beneficiaries and their related expenditures are growing at a faster rate than the            government’s revenue. Medicaid is consuming a greater percentage of the budget.            This issue is exacerbated when revenues slow in a slowing economy. We believe that            these financial issues are cyclical in nature rather than indicative of the long-term            prospect for Medicaid funding of health care services. Additionally, we believe our            services offer the lowest cost alternative to institutional care and are a part of the            solution to the states’ Medicaid financing problems. It is possible however, that            the actions taken by the state Medicaid programs in the future could have a significant            unfavorable impact on our results of operations, financial condition and            liquidity.

 

**Acquisitions**

Over            the next three to five years we will actively seek to acquire quality providers of            Medicare-certified home health services like our current Visiting Nurse segment            operations. We may consider acquisitions of businesses that provide health care            services similar to those we currently offer in our Personal Care segment but we expect            most of our acquisition activity to be focused on Visiting Nurse operations.

 

Factors which may affect future acquisition decisions include the            quality and potential profitability of the business under consideration, and our            profitability and ability to finance the transaction.

 

***Acquisitions During 2007***

During 2007 the Company acquired 5 visiting nurse branch locations.            These operations added to our market presence in Florida and Ohio.

 

On            October 26, 2007 the Company acquired the assets of all the Medicare-certified home            health agencies owned and operated by Quality of Life Holdings, Inc. (Quality of Life)            for an initial purchase price of $10 million, consisting of $8 million cash, and $2            million (or approximately 101,000 shares) of Almost Family common stock (restricted).            Additional consideration of up to $6.9 million may be paid contingent primarily upon            the achievement of certain development targets following the closing. The cash portion            of the transaction paid at closing was funded from borrowings available on the            Company’s senior credit facility. The acquired operations generated net revenues            of approximately $8.6 million in the year ended December 31, 2006.

 

On            January 15, 2007, the Company acquired the fixed assets and business operations of a            home health agency with one personal care branch and one Medicare-certified branch            located in Jacksonville, Florida. The total purchase price of $600,000 was paid in            cash. The Company assumed employee paid-time-off liabilities of approximately $32,000            and fixed assets of approximately $19,000, with the purchase price balance recorded as            goodwill (approximately $500,000). The cash portion of the transaction was funded from            borrowings available on the Company’s senior credit facility. The acquired            operations generated net revenues of approximately $1.3 million in the year ended            December 31, 2006.

 

***Acquisitions During 2006***

 

39

During 2006, the Company acquired 24 visiting nurse branch locations,            one of which was essentially a startup operation. These operations added to our market            presence in Florida, and gave us market presence in Alabama, Illinois and            Missouri.

 

On            December 3, 2006, the Company acquired all the Medicare-certified home health agencies            owned and operated by Mederi, Inc., located in Coconut Grove, Florida. The total            purchase price of $20.4 million was paid $11.7 million in cash, approximately $3            million or 100,000 shares of Almost Family common stock (restricted) and $4 million in            the form of two notes payable bearing interest at 6% payable quarterly with the            principal due in a balloon payment two years from the closing date. The Company assumed            employee paid-time-off liabilities of approximately $397,000 and a Medicare liability            of approximately $1.3 million. Approximately $1.7 million of additional consideration            was accrued as of December 31, 2007 and paid in March 2008 pursuant to the acquisition            agreement based on achievement of certain targets in 2007. Additional consideration of            up to $3.3 million in cash may be paid to the seller contingent primarily upon the            achievement of certain revenue targets in 2008. The cash portion of the transaction was            funded from borrowings available on the Company’s senior credit facility. The            acquired operations generated net revenues of approximately $23.8 million in the year            ended June 30, 2006. The Mederi acquisition significantly expanded the Company’s            presence and penetration in the state of Florida and gave the Company new market            presence in the states of Missouri and Illinois.

 

On            September 18, 2006, the Company acquired the business operations of a            Medicare-certified home health agency located in Ft. Lauderdale, Florida. The total            purchase price of $1.1 million was paid $1.0 million in cash with the $100,000 balance            in the form of a note payable bearing interest at 6% payable quarterly which was paid            in full in 2007. The Company funded the cash portion of the purchase price from            available cash on deposit.

 

On            June 30, 2006, the Company acquired all the assets and business operations of a            Medicare-certified home health agency located in Birmingham, Alabama. The total            purchase price of $982,000 was paid $810,000 in cash and $100,000 in the form of a note            payable bearing interest at 6% payable quarterly which was paid in full in 2007. The            remaining $72,000 is comprised of assumed employee time off liabilities. The Company            funded the cash portion of the purchase price from available cash on            deposit.

 

On            April 8, 2006, the Company acquired all the assets and business operations of a            Medicare-certified home health agency with branches located in Ocala and Palm Coast,            Florida. The total purchase price of $1.8 million was paid $1.4 million in cash with            the $340,000 balance in the form of a note payable bearing interest at 6% payable            quarterly with the principal balance due in a balloon payment 30 months from the            closing date. The remaining $50,000 is comprised of assumed employee time off            liabilities. The Company funded the cash portion of the purchase price from available            cash on deposit.

 

**Cash Flows** 

Key            elements to the Consolidated Statements of Cash Flows for the years ended December 31,            2007, 2006 and 2005 were as follows:

 

| **Net Change in Cash and Cash                            Equivalents** | **2007**                                                   | **2006**                                                   | **2005**                                                           |
|------------------------------------------------------------------------|------------------------------------------------------------|------------------------------------------------------------|--------------------------------------------------------------------|
|                                                                   |                                                       |                                                       |                                                               |
| Provided by (used in):                                                 |                                                       |                                                       |                                                               |
| Operating activities                                                   | $       7,358,018  | $       5,411,175  | $       5,355,608          |
| Investing activities                                                   | (9,665,892)                                                | (16,380,472)                                               | (3,749,895)                                                        |
| Financing activities                                                   | (1,264,788)                                                | 8,757,071                                             | (4,022,360)                                                        |
| Discontinued operations activities                                     | (79,708)                                                   | 149,498                                               | 7,731,481                                                     |
| Net increase / (decrease) in cash and cash

equivalents                |  

$     (3,652,370)         |  

$     (2,062,728)         |  

$       5,314,834  |

 

***2007 Compared to 2006***

Net            cash provided by operating activities resulted principally from current period income,            net of changes in accounts receivable, accounts payable and accrued expenses. Accounts            receivable days revenue outstanding were 44 at December 31, 2007 and 50 at December 31,            2006. The cash used in investing activities is primarily due to acquisitions completed            in 2007 and capital expenditures. Net cash used in financing activities resulted            primarily

 

40

from            stock option exercises, net repayments of the revolving credit facility and the payment            of notes payable from acquisitions in 2005 and 2006. The Company’s stock option            plans permit optionees to have option shares withheld on exercises in lieu of taxes            which is shown in the cash flow statement as a repurchase of shares in the amount of            $3.8 million. The Company receives a current tax deduction for compensation expense            subject to IRS limits. Such deductions related to stock option exercises in the March            2007 quarter, is shown in the cash flow statement as a cash inflow of approximately            $704,000.

 

***2006 Compared to 2005***

Net            cash provided by operating activities resulted principally from current period income,            net of changes in accounts receivable, accounts payable and accrued expenses. Accounts            receivable days revenues outstanding were 50 at December 31, 2006, and 48 at December            31, 2005, primarily due to a slow down in the processing of claims in acquired            operations as they are converted to our information system. The increase in combined            accounts payable and accrued liabilities resulted primarily from an increase in            insurance liabilities, accrued accounts payable and accrued taxes. Net cash used in            investing activities resulted principally from the acquisition of home health agencies.            Net cash used in financing activities resulted primarily from the borrowings on our            credit facility for the current year acquisitions.

 

***Contractual            Obligations****.*The            following table provides information about the payment dates of our contractual            obligations at December 31, 2007, excluding current liabilities except for the current            portion of long-term debt and additional consideration on Mederi acquisition (amounts            in thousands):

 

|                                                                      | 2008                                                                       | 2009                                                                                                                | 2010                                                                                                                | 2011                                                                                                                      | 2012                                                                                                                                  | Total         |
|---------------------------------------------------------------------------|----------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------|---------------|
| Revolving credit facility                                                 | $            - | $           -                                                | $ 12,388                                                                                                       | $            -                                                | $              -                                                | $12,388       |
| Capital lease obligations                                                 | 118                                                                        | -                                                                                                                   | -                                                                                                                   | -                                                                                                                         | -                                                                                                                                     | 118           |
| Additional consideration on Mederi                            acquisition |  

1,706                                                              |  

                                       -   |  

                                         - |  

                                          - |  

                                            - |  

1,706 |
| Notes payable                                                             | 540                                                                        | 4,000                                                                                                               | -                                                                                                                   | -                                                                                                                         | -                                                                                                                                     | 4,540         |
| Operating leases                                                          | 2,600                                                                      | 1,618                                                                                                               | 826                                                                                                                 | 480                                                                                                                       | 382                                                                                                                                   | 5,967         |
| Total                                                                     | $   4,964                                                   | $  5,618                                                                                                  | $ 13,214                                                                                                       | $      480                                                                                  | $        382                                                                                  | $24,719       |
|                                                                      |                                                                       |                                                                                                                |                                                                                                                |                                                                                                                      |                                                                                                                                  |          |

 

We            believe that a certain amount of debt has an appropriate place in our overall capital            structure and it is not our strategy to eliminate all debt financing. We believe that            our cash flow from operations and borrowing capacity on our bank credit facility will            be sufficient to cover operating needs, future capital expenditure requirements and            scheduled debt payments of miscellaneous small borrowing arrangements and capitalized            leases. In addition, it is likely that we will pursue growth from acquisitions,            partnerships and other ventures that would be funded from excess cash from operations,            credit available under the bank credit agreement and other financing arrangements that            are normally available in the marketplace.

 

***Commitments and Contingencies***

***Letters of Credit.***We have            outstanding letters of credit totaling $1.9 million at December 31, 2007, which benefit            our third-party insurer/administrators for our self-insurance programs. The amount of            such insurance program letter of credit is subject to negotiation annually upon renewal            and may vary in the future based upon such negotiation, our historical claims            experience and expected future claims. It is reasonable to expect that the amount of            the letter of credit will increase in the future, however, we are unable to predict to            what degree.

 

We            currently have no obligations related to acquisition agreements. However, we            periodically seek acquisition candidates and may reasonably be expected to enter into            acquisitions in the future.

 

***General and Professional Liability.***Malpractice and general patient liability claims for incidents which may            give rise to litigation have been asserted against us by various claimants. The claims            are in various stages of processing and some may ultimately be brought to trial. We            also know of incidents that have occurred through December 31, 2007 that may result in            the assertion of additional claims. We carry insurance coverage for this exposure with            no deductible.

 

41

We            record estimated liabilities for our insurance programs based on information provided            by the third-party plan administrators, historical claims experience, the life cycle of            claims, expected costs of claims incurred but not paid, and expected costs to settle            unpaid claims. We monitor our estimated insurance-related liabilities on a monthly            basis. As facts change, it may become necessary to make adjustments that could be            material to our results of operations and financial condition.

 

**Health Care Reform**

The            health care industry has experienced, and is expected to continue to experience,            extensive and dynamic change. In addition to economic forces and regulatory influences,            continuing political debate is subjecting the health care industry to significant            reform. Health care reforms have been enacted as discussed elsewhere in this document.            Proposals for additional changes are continuously formulated by departments of the            Federal government, Congress, and state legislatures.

 

Government officials can be expected to continue to review and assess            alternative health care delivery systems and payment methodologies. Changes in the law            or new interpretations of existing laws may have a dramatic effect on the definition of            permissible or impermissible activities, the relative cost of doing business, and the            methods and amounts of payments for medical care by both governmental and other payors.            Legislative changes to "balance the budget" and slow the annual rate of growth of            expenditures are expected to continue. Such future changes may further impact our            reimbursement. There can be no assurance that future legislation or regulatory changes            will not have a material adverse effect on our operations.

 

Federal and State legislative proposals continue to be introduced that            would impose more limitations on payments to providers of health care services such as            us. Many states have enacted, or are considering enacting, measures that are designed            to reduce their Medicaid expenditures.

 

We            cannot predict what additional government regulations may be enacted in the future            affecting our business or how existing or future laws and regulations might be            interpreted, or whether we will be able to comply with such laws and regulations in our            existing or future markets.

 

**Discontinued Operations**

We            follow the guidance in SFAS 144 “Accounting for the Impairment or Disposal of            Long-Lived Assets” and, when appropriate, reclassify operating units closed,            sold, or held for sale out of continuing operations and into discontinued operations            for all periods presented. During 2007, the PC segment had three facilities and during            2006, the VN segment had one facility that met the criteria to be reclassified as            discontinued operations. For all the years presented in this report, these facilities            have been reclassified. Net losses from the discontinued operations were approximately            $(211,000), ($76,000) and ($236,000) in the years ended December 31, 2007, 2006 and            2005 respectively, and such amounts are included in net loss from discontinued            operations in the accompanying financial statements.

 

**Impact of Inflation**

We            do not believe that inflation has had a material effect on income during the past            several years.

 

**Non-GAAP Financial Measure**

The            information provided in the some of the tables use certain non-GAAP financial measures            as defined under Securities and Exchange Commission (SEC) rules. In accordance with SEC            rules, the Company has provided, in the supplemental information and the footnotes to            the tables, a reconciliation of those measures to the most directly comparable GAAP            measures.

 

**EBITDA:**

EBITDA is defined as income before depreciation and amortization, net            interest expense and income taxes. EBITDA is not a measure of financial performance            under accounting principles generally accepted in the United States of America. It            should not be considered in isolation or as a substitute for net income, operating            income, cash flows from operating, investing or financing activities, or any other            measure calculated in accordance with generally accepted accounting principles. The            items excluded from EBITDA are significant components in

 

42

understanding and evaluating financial performance and liquidity.            Management routinely calculates and communicates EBITDA and believes that it is useful            to investors because it is commonly used as an analytical indicator within our industry            to evaluate performance, measure leverage capacity and debt service ability, and to            estimate current or prospective enterprise value. EBITDA is also used in measurements            of borrowing availability and certain covenants contained in our credit            agreement.

 

The            following table sets forth a reconciliation of Continuing Operations Net Income - to            EBITDA:

 

 

|                                                                                                                               |   | **Year Ended December 31,**                                                                 |
|------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------|
|                                                                                                                               |   | **2007**                                                                                    | **2006** | **2005** |
| Net income from continuing operations                                                                                              |   | $        7,814,474                                  | $              4,315,291  | $           3,037,474 |
|                                                                                                                               |   |                                                                                        |   |   |
| Add back:                                                                                                                          |   |                                                                                        |   |   |
| Interest (income) expense                                                                                                          |   | 836,911                                                                                     | (54,440) | 112,608 |
| Income taxes                                                                                                                       |   | 5,272,149                                                                                   | 2,845,758  | 1,464,014 |
| Depreciation and amortization                                                                                                      |   | 842,200                                                                                     | 999,376  | 1,452,116 |
| Amortization of stock based

compensation                                                                                          |   |  

362,510                                                                             |  

14,132  |  

- |
| Earnings before interest, income taxes, depreciation and                            amortization EBITDA from continuing operations |   |  

                             

$      15,128,244 |  

                             

$              8,120,117  |  

                             

$            6,066,212 |
|                                                                                                                               |   |                                                                                        |   |   |

 

**ITEM 7A. Quantitative and Qualitative Disclosures About Market            Risk**

             

***Derivative Instruments***

 

We            do not use derivative instruments.

 

***Market Risk of Financial Instruments***

 

Our            primary market risk exposure with regard to financial instruments is to changes in            interest rates.

 

At            December 31, 2007, a hypothetical 100 basis point increase in short-term interest rates            would result in a reduction of approximately $124,000 in annual pre-tax            earnings.

 

43

**ITEM            8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

 

***ALMOST FAMILY, INC.*****AND            SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF INCOME**

|   | **Year Ended December 31,** |
|--------|-----------------------------|

|                                                                                           | **2007**                                                                                              |   | **2006**                                                                                              |   | **2005**                                                                                              |   |
|------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------|--------|
| Net service revenues                                                                           | $  132,130,056                                                                         |   | $    90,645,494                                                              |   | $    73,606,545                                                              |   |
| Cost of service revenue (excluding amortization and                            depreciation)   | 63,880,104                                                                                       |   | 46,128,803                                                                                       |   | 38,149,107                                                                                       |   |
| Gross margin                                                                                   | 68,249,952                                                                                       |   | 44,516,691                                                                                       |   | 35,457,438                                                                                       |   |
| General and administrative expenses:                                                           |                                                                                                  |   |                                                                                                  |   |                                                                                                       |   |
| Salaries and benefits                                                                          | 35,945,823                                                                                       |   | 24,508,410                                                                                       |   | 19,481,970                                                                                       |   |
| Other                                                                                          | 18,380,596                                                                                       |   | 12,901,673                                                                                       |   | 11,628,798                                                                                       |   |
| Total general and administrative expense                                                       | 54,326,419                                                                                       |   | 37,410,083                                                                                       |   | 31,110,768                                                                                       |   |
| Operating income                                                                               | 13,923,533                                                                                       |   | 7,106,609                                                                                        |   | 4,346,670                                                                                        |   |
| Other income (expense):                                                                        |                                                                                                  |   |                                                                                                  |   |                                                                                                  |   |
| Litigation gain                                                                                | -                                                                                                     |   | -                                                                                                |   | 267,426                                                                                          |   |
| Interest (income) expense                                                                      | 836,911                                                                                          |   | (54,440)                                                                                         |   | (112,608)                                                                                             |   |
| Income from continuing operations before income                            taxes               | 13,086,622                                                                                       |   | 7,161,049                                                                                        |   | 4,501,488                                                                                        |   |
| Income tax expense                                                                             | (5,272,149)                                                                                           |   | (2,845,758)                                                                                           |   | (1,464,014)                                                                                           |   |
| Net income from continuing operations                                                          | 7,814,474                                                                                        |   | 4,315,291                                                                                        |   | 3,037,474                                                                                        |   |
|                                                                                           |                                                                                                  |   |                                                                                                  |   |                                                                                                  |   |
| Discontinued operations :                                                                      |                                                                                                  |   |                                                                                                  |   |                                                                                                  |   |
| Loss from operations, net of tax of $138,229, $23,873                            and

$288,756 |  

(210,914)                                                                                     |   |  

(75,848)                                                                                      |   |  

(236,297)                                                                                     |   |
| Income on sale, net of tax of ($3,155,995)                                                     | -                                                                                                     |   | -                                                                                                     |   | 5,067,291                                                                                        |   |
| Gain (loss) on discontinued operations                                                         | (210,914)                                                                                             |   | (75,848)                                                                                              |   | 4,830,994                                                                                        |   |
| Net income                                                                                     | $      7,603,560                                                   |   | $      4,239,443                                                   |   | $      7,868,468                                                   |   |
|                                                                                           |                                                                                                  |   |                                                                                                  |   |                                                                                                  |   |
| Per share amounts-basic: (1)                                                                   |                                                                                                  |   |                                                                                                  |   |                                                                                                  |   |
| Average shares outstanding                                                                     | 5,435,615                                                                                        |   | 4,853,535                                                                                        |   | 4,674,578                                                                                        |   |
| Income from continuing operations                                                              | 1.44                                                                                             |   | $               0.89  |   | $               0.65  |   |
| Income (loss) from discontinued operations                                                     | (0.04)                                                                                                |   | (0.02)                                                                                                |   | 1.03                                                                                             |   |
| Net income                                                                                     | $               1.40  |   | $               0.87  |   | $               1.68  |   |
|                                                                                           |                                                                                                  |   |                                                                                                  |   |                                                                                                  |   |
| Per share amounts-diluted: (1)                                                                 |                                                                                                  |   |                                                                                                  |   |                                                                                                  |   |
| Average shares outstanding                                                                     | 5,599,476                                                                                        |   | 5,326,997                                                                                        |   | 5,218,658                                                                                        |   |
| Income from continuing operations                                                              | $               1.40  |   | $               0.81  |   | $               0.58  |   |
| Income (loss) from discontinued operations                                                     | (0.04)                                                                                                |   | (.01)                                                                                                 |   | 0.93                                                                                             |   |
| Net income                                                                                     | $               1.36  |   | $               0.80  |   | $               1.51  |   |

 

 

(1) All            share and per share information has been adjusted to reflect a 2-for-1 common stock            split completed in January 2007.

 

 

 

The            accompanying notes to consolidated financial statements are an integral part of these            financial statements.

 

44

***ALMOST FAMILY, INC.*****AND            SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

 

|   | As of December 31, |
|--------|--------------------|

| **ASSETS**                                | **2007**                                                                   |   | **2006**                                                         |
|-------------------------------------------|----------------------------------------------------------------------------|--------|------------------------------------------------------------------|
| CURRENT ASSETS:                           |                                                                       |   |                                                             |
| Cash and cash equivalents                 | $          473,222  |   | $        4,125,592  |
| Accounts receivable – net           | 16,965,316                                                            |   | 12,781,866                                                  |
| Prepaid expenses and other current assets | 1,203,454                                                             |   | 855,021                                                     |
| Deferred tax assets                       | 1,829,895                                                             |   | 1,535,639                                                   |
| TOTAL CURRENT ASSETS                      | 20,471,887                                                            |   | 19,298,118                                                  |
|                                      |                                                                       |   |                                                             |
| PROPERTY AND EQUIPMENT – NET        | 1,458,844                                                             |   | 1,516,856                                                   |
|                                      |                                                                       |   |                                                             |
| GOODWILL AND OTHER INTANGIBLE ASSETS      | 45,155,300                                                            |   | 32,094,317                                                  |
|                                      |                                                                       |   |                                                             |
| DEFERRED TAX ASSETS                       | -                                                                     |   | 290,647                                                     |
|                                      |                                                                       |   |                                                             |
| OTHER ASSETS                              | 274,359                                                               |   | 195,555                                                     |
|                                      | $     67,360,390                             |   | $     53,395,493                   |

 

 

| **LIABILITIES AND STOCKHOLDERS'                            EQUITY**                                                                   |                                                             |   |                                                             |
|---------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------|--------|------------------------------------------------------------------|
|                                                                                                                                  |                                                             |   |                                                             |
| CURRENT LIABILITIES:                                                                                                                  |                                                             |   |                                                             |
| Accounts payable                                                                                                                      | $        3,943,555  |   | $        3,546,096  |
| Accrued liabilities                                                                                                                   | 10,369,346                                                  |   | 6,267,796                                                   |
| Current portion - capital leases and notes                            payable                                                         | 653,891                                                     |   | 2,321,675                                                   |
|                                                                                                                                  | 14,966,792                                                  |   | 12,135,567                                                  |
|                                                                                                                                  |                                                             |   |                                                             |
| LONG-TERM LIABILITIES:                                                                                                                |                                                             |   |                                                             |
| Revolving credit facility                                                                                                             | 12,386,783                                                  |   | 8,465,935                                                   |
| Capital leases                                                                                                                        | -                                                           |   | 113,891                                                     |
| Notes payable                                                                                                                         | 4,000,000                                                   |   | 4,540,000                                                   |
| Deferred tax liabilities                                                                                                              | 776,672                                                     |   | -                                                                |
| Other liabilities                                                                                                                     | 388,230                                                     |   | 400,296                                                     |
| TOTAL LONG-TERM LIABILITIES                                                                                                           | 17,551,685                                                  |   | 13,520,122                                                  |
| TOTAL LIABILITIES                                                                                                                     | 32,518,477                                                  |   | 25,655,689                                                  |
|                                                                                                                                  |                                                             |   |                                                             |
| COMMITMENTS AND CONTINGENCIES                                                                                                         |                                                             |   |                                                             |
|                                                                                                                                  |                                                             |   |                                                             |
| STOCKHOLDERS' EQUITY: (1)                                                                                                             |                                                             |   |                                                             |
| Common stock, par value $0.10; authorized 20,000,000                            shares;

7,808,819 and 7,357,620 issued, respectively |  

780,882                                             |   |  

735,762                                             |
| Treasury stock, at cost, 2,276,898 and 2,245,974                            shares                                                    | (8,877,641)                                                      |   | (8,200,095)                                                      |
| Additional paid-in capital                                                                                                            | 30,198,671                                                  |   | 30,067,696                                                  |
| Retained Earnings                                                                                                                     | 12,740,001                                                  |   | 5,136,441                                                   |
| TOTAL STOCKHOLDERS' EQUITY                                                                                                            | 34,841,913                                                  |   | 27,739,804                                                  |
|                                                                                                                                  | $     67,360,390                   |   | $     53,395,493                   |

 

(1) All            share and related information has been adjusted to reflect a 2-for-1 common stock split            completed in January 2007.

 

The            accompanying notes to consolidated financial statements are an integral part of these            financial statements.

 

45

***ALMOST FAMILY, INC.*****AND            SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (1)**

 

|  

                                             |             |   |                       |        |                                       |         |               |              |  

**Additional**        |   | **Retained**                                                   |   |  

**Total**             |   |
|-----------------------------------------------------------|------------------|--------|----------------------------|-------------|--------------------------------------------|--------------|--------------------|-------------------|-------------------------------|--------|----------------------------------------------------------------|--------|-------------------------------|--------|
|                                                      | **Common Stock** |   | **Treasury Stock**         | **Paid-in** |                                       | **Earnings** |               | **Stockholders'** |                          |
|                                                      | **Shares**       |   | **Amount**                 |        | **Shares**                                 |         | **Amount**         |              | **Capital**                   |   | **(Deficit)**                                                  |   | **Equity**                    |   |
| **Balance, December 31, 2004**                            | 6,829,748        |   | $   682,975 |        | 2,193,566                                  |         | $ (7,772,048) |              | $  26,207,149  |   | $   (6,971,470)                                 |   | $  12,146,606  |
|                                                      |             |   |                       |        |                                       |         |               |              |                          |   |                                                           |   |                          |
| Options exercised, net of shares

surrendered or withheld |  

209,614  |   |  

20,961             |        |  

47,456                             |         |  

(369,390)  |              |  

(271,945)             |   |  

-                                                 |   |  

(620,374)             |
| Tax benefit from exercise of

non-qualified stock options |  

-        |   |  

-                  |        |  

                              |         |  

-     |              |  

740,676          |   |  

-                                                 |   |  

740,676          |
| Net Income                                                | -                |   | -                          |        | -                                          |         | -             |              | -                        |   | 7,868,468                                                 |   | 7,868,468                |
|                                                      |             |   |                       |        |                                       |         |               |              |                          |   |                                                           |   |                          |
| **Balance, December 31, 2005**                            | 7,039,362        |   | $   703,936 |        | 2,241,022                                  |         | $ (8,141,438) |              | $  26,675,880  |   | $        897,998  |   | $  20,135,376  |
|                                                      |             |   |                       |        |                                       |         |               |              |                          |   |                                                           |   |                          |
| Options exercised, net of shares

surrendered or withheld |  

118,258  |   |  

11,826             |        |  

4,952                              |         |  

(58,657)   |              |  

(542,934)             |        |  

-                                                 |   |  

(589,765)             |
| Stock-based compensation                                  | -                |   | -                          |        | -                                          |         | -             |              | 14,131                   |   | -                                                         |   | 14,131                   |
| Stock provided in acquisitions                            | 200,000          |   | 20,000                     |        | -                                          |         | -             |              | 2,962,000                |   | -                                                         |   | 2,982,000                |
| Tax benefit from exercise of

non-qualified stock options |  

-        |   |  

-                  |        |  

-                                  |         |  

-     |              |  

958,619          |   |  

-                                                 |   |  

958,619          |
| Net Income                                                | -                |   | -                          |        | -                                          |         | -             |              | -                        |   | 4,239,443                                                 |   | 4,239,443                |
|                                                      |             |   |                       |        |                                       |         |               |              |                          |   |                                                           |   |                          |
| **Balance, December 31, 2006**                            | 7,357,620        |   | $   735,762 |        | 2,245,974                                  |         | $ (8,200,095) |              | $  30,067,696  |   | $     5,136,441                  |   | $  27,739,804  |
|                                                      |             |   |                       |        |                                       |         |               |              |                          |   |                                                           |   |                          |
| Options exercised, net of shares

surrendered or withheld |  

350,232  |   |  

35,023             |        |  

30,924                             |         |  

(677,546)  |              |  

(2,925,733)           |   |  

-                                                 |   |  

(3,568,256)           |
| Stock-based compensation                                  | -                |   | -                          |        | -                                          |         | -             |              | 362,510                  |   | -                                                         |   | 362,510                  |
| Stock provided in acquisitions                            | 100,967          |   | 10,097                     |        | -                                          |         | -             |              | 1,989,903                |   | -                                                         |   | 2,000,000                |
| Tax benefit from exercise of

non-qualified stock options | -                |   | -                          |        | -                                          |         | -             |              | 704,295                  |   | -                                                         |   | 704,295                  |
| Net Income                                                | -                |   | -                          |        | -                                          |         | -             |              | -                        |   | 7,603,560                                                 |   | 7,603,560                |
|                                                      |             |   |                       |        |                                       |         |               |              |                          |   |                                                           |   |                          |
| **Balance, December 31, 2007**                            | 7,808,819        |   | $   780,882 |        | 2,276,898                                  |         | $ (8,877,641) |              | $  30,198,671  |   | $   12,740,001                             |   | $  34,841,913  |
|                                                           |                  |        |                            |             |                                            |              |                    |                   |                               |        |                                                                |        |                               |        |  |  |  |  |  |

 

(1) All            share and related information has been adjusted to reflect a 2-for-1 common stock split            completed in January 2007.

             

             

             

             

             

             

             

             

             

             

The            accompanying notes to consolidated financial statements are an integral part of these            financial statements.

 

46

***ALMOST FAMILY, INC.*****AND            SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 

|   | **Year Ended December 31,** |
|--------|-----------------------------|

|                                                                                                                                 | **2007**                                                                                                                               |   | **2006**                                                                                                                               |   | **2005**                                                                                                                               |   |
|--------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                 |                                                                                                                                   |   |                                                                                                                                   |   |                                                                                                                                   |   |
| Cash flows from operating activities:                                                                                                |                                                                                                                                   |   |                                                                                                                                   |   |                                                                                                                                   |   |
| Net income                                                                                                                           | $      7,603,560                                                                                    |   | $      4,239,443                                                                                    |   | $      7,868,468                                                                                    |   |
| Gain (loss) on discontinued operations, net of                            tax                                                        | (210,914)                                                                                                                              |   | (75,848)                                                                                                                               |   | 4,917,861                                                                                                                         |   |
| Income from continuing operations                                                                                                    | 7,814,474                                                                                                                         |   | 4,315,291                                                                                                                         |   | 2,950,607                                                                                                                         |   |
| Adjustments to reconcile income from continuing                            operations to

net cash provided by operating activities: |                                                                                                                                   |   |                                                                                                                                   |   |                                                                                                                                   |   |
| Depreciation and amortization                                                                                                        | 842,201                                                                                                                           |   | 999,376                                                                                                                           |   | 1,189,229                                                                                                                         |   |
| Interest earned on escrow funds                                                                                                      | -                                                                                                                                 |   | 6,696                                                                                                                             |   | -                                                                                                                                 |   |
| Stock-based compensation                                                                                                             | 362,510                                                                                                                           |   | 14,131                                                                                                                                 |   | -                                                                                                                                 |   |
| Tax benefit from non-qualified stock option                            exercises                                                     | -                                                                                                                                 |   | -                                                                                                                                 |   | 73,088                                                                                                                            |   |
| Provision for uncollectible accounts                                                                                                 | 1,546,284                                                                                                                         |   | 671,397                                                                                                                           |   | 935,141                                                                                                                           |   |
| Deferred income taxes                                                                                                                | 911,211                                                                                                                           |   | 276,242                                                                                                                           |   | (406,218)                                                                                                                              |   |
|                                                                                                                                 | 11,476,680                                                                                                                        |   | 6,283,132                                                                                                                         |   | 4,741,847                                                                                                                         |   |
| Change in certain net assets and liabilities, net of the                            effects of  acquisitions:              |                                                                                                                                   |   |                                                                                                                                   |   |                                                                                                                                   |   |
| (Increase) decrease in:                                                                                                              |                                                                                                                                   |   |                                                                                                                                   |   |                                                                                                                                   |   |
| Accounts receivable                                                                                                                  | (4,785,292)                                                                                                                            |   | (1,831,405)                                                                                                                            |   | (60,902)                                                                                                                               |   |
| Prepaid expenses and other current assets                                                                                            | (302,908)                                                                                                                              |   | 117,554                                                                                                                           |   | (427,402)                                                                                                                              |   |
| Other assets                                                                                                                         | (78,804)                                                                                                                               |   | (68,706)                                                                                                                               |   | (22,063)                                                                                                                               |   |
| Increase (decrease) in:                                                                                                              |                                                                                                                                   |   |                                                                                                                                   |   |                                                                                                                                   |   |
| Accounts payable and accrued expenses                                                                                                | 1,048,343                                                                                                                         |   | 910,599                                                                                                                           |   | 1,124,128                                                                                                                         |   |
| Net cash provided by operating activities                                                                                            | 7,358,018                                                                                                                         |   | 5,411,175                                                                                                                         |   | 5,355,608                                                                                                                         |   |
| Cash flows from investing activities:                                                                                                |                                                                                                                                   |   |                                                                                                                                   |   |                                                                                                                                   |   |
| Capital expenditures                                                                                                                 | (590,839)                                                                                                                              |   | (853,900)                                                                                                                              |   | (456,349)                                                                                                                              |   |   |
| Acquisitions, net of cash acquired                                                                                                   | (9,075,054)                                                                                                                            |   | (15,526,572)                                                                                                                           |   | (3,293,546)                                                                                                                            |   |   |
| Net cash used in investing activities                                                                                                | (9,665,892)                                                                                                                            |   | (16,380,472)                                                                                                                           |   | (3,749,895)                                                                                                                            |   |
| Cash flows from financing activities:                                                                                                |                                                                                                                                   |   |                                                                                                                                   |   |                                                                                                                                   |   |
| Net revolving credit facility borrowings                            (repayments)                                                     | 3,921,785                                                                                                                         |   | 8,465,935                                                                                                                         |   | (3,769,575)                                                                                                                            |   |
| Proceeds from stock option exercises                                                                                                 | 157,277                                                                                                                                |   | 154,647                                                                                                                           |   | 47,215                                                                                                                            |   |
| Tax effect of non-qualified stock option                            exercises                                                        | (3,021,258)                                                                                                                            |   | 214,207                                                                                                                           |   | -                                                                                                                                 |   |
| Principal payments on capital leases and notes                            payable                                                    | (2,322,612)                                                                                                                            |   | (77,718)                                                                                                                               |   | (300,000)                                                                                                                              |   |
| Net cash provided by (used in) financing                            activities                                                       | (1,264,788)                                                                                                                            |   | 8,757,071                                                                                                                         |   | (4,022,360)                                                                                                                            |   |
| Cash flows from discontinued operations:                                                                                             |                                                                                                                                   |   |                                                                                                                                   |   |                                                                                                                                   |   |
| Operating activities                                                                                                                 | (345,591)                                                                                                                              |   | (850,502)                                                                                                                              |   | (533,423)                                                                                                                              |   |
| Investing activities                                                                                                                 | 265,883                                                                                                                           |   | 1,000,000                                                                                                                         |   | 8,448,286                                                                                                                         |   |
| Financing activities                                                                                                                 | -                                                                                                                                 |   | -                                                                                                                                 |   | (183,382)                                                                                                                              |   |
| Net cash (used) provided by discontinued                            operations                                                       | (79,708)                                                                                                                               |   | 149,498                                                                                                                           |   | 7,731,481                                                                                                                         |   |
|                                                                                                                                 |                                                                                                                                   |   |                                                                                                                                   |   |                                                                                                                                   |   |
| Net increase (decrease) in cash and cash                            equivalents                                                      | (3,652,370)                                                                                                                            |   | (2,062,728)                                                                                                                            |   | 5,314,834                                                                                                                         |   |
| Cash and cash equivalents at beginning of                            period                                                          | 4,125,592                                                                                                                         |   | 6,188,321                                                                                                                         |   | 873,487                                                                                                                           |   |
| Cash and cash equivalents at end of period                                                                                           | $        473,222                                                                          |   | $     4,125,592                                                                                          |   | $      6,188,321                                                                                    |   |
|                                                                                                                                 |                                                                                                                                   |   |                                                                                                                                   |   |                                                                                                                                   |   |
| **Supplemental disclosures of cash flow                            information:**                                                    |                                                                                                                                   |   |                                                                                                                                   |   |                                                                                                                                   |   |
| Cash payment of interest, net of amounts                            capitalized                                                      | $        915,000                                                                          |   | $           61,000                                                         |   | $        325,000                                                                          |   |
| Cash payment of taxes                                                                                                                | $      3,176,000                                                                                    |   | $      2,872,000                                                                                    |   | $      4,489,000                                                                                    |   |
|                                                                                                                                 |                                                                                                                                   |   |                                                                                                                                   |   |                                                                                                                                   |   |
| **Summary of non-cash investing and financing                            activities:**                                               |                                                                                                                                   |   |                                                                                                                                   |   |                                                                                                                                   |   |
| Capital expenditures financed under capital                            leases                                                        | $                     -  |   | $                     -  |   | $        321,444                                                                          |   |
| Acquisitions funded by notes payable                                                                                                 | $                     -  |   | $      5,854,666                                                                                    |   | $        900,000                                                                          |   |
| Acquisitions funded by stock                                                                                                         | $      2,000,000                                                                                    |   | $                     -  |   | $                     -  |   |
| Value of stock option shares withheld in lieu of payroll                            taxes                                            | $      3,725,533                                                                                    |   | $        744,412                                                                          |   | $        667,587                                                                          |   |
|                                                                                                                                      |                                                                                                                                        |        |                                                                                                                                        |        |                                                                                                                                        |        |  |  |

 

The            accompanying notes to consolidated financial statements are an integral part of these            financial statements.

***ALMOST FAMILY, INC.*****AND            SUBSIDIARIES**

 

47

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING            POLICIES**

 

**BASIS OF CONSOLIDATION AND DESCRIPTION OF BUSINESS** 

 

The            consolidated financial statements include the accounts of*Almost Family, Inc.*(a Delaware            corporation) and its wholly-owned subsidiaries (collectively            "*Almost Family*" or the "Company").            The Company is a leading, regionally focused provider of home health services and has            service locations in Florida, Kentucky, Ohio, Connecticut, Massachusetts, Alabama,            Indiana, Illinois and Missouri (in order of revenue significance).

 

The            Company was incorporated in Delaware in 1985. Through a predecessor that merged into            the Company in 1991, we have been providing health care services, primarily home health            care, since 1976. On January 31, 2000, we changed the Company’s name to*Almost Family, Inc.*from Caretenders            ® HealthCorp. All material intercompany transactions and accounts have            been eliminated in consolidation.

 

**CASH AND CASH EQUIVALENTS**

 

The            Company considers all highly liquid debt instruments purchased with an original            maturity of three months or less to be cash equivalents.

 

Uninsured deposits at December 31, 2007, and 2006 were approximately            $360,000 and $4.1 million, respectively. These amounts have been deposited with            national financial institutions.

 

**PROPERTY AND EQUIPMENT** 

 

Property and equipment are stated at cost. Depreciation is computed            using the straight-line method over the estimated useful lives. The estimated useful            lives of depreciable assets are as follows:

|   | Estimated |
|--------|-----------|

|   | Useful Life |
|--------|-------------|

|   | In Years |
|--------|----------|

|   | Leasehold improvements | 3-10 |
|--------|------------------------|------|

|   | Medical equipment | 2-10 |
|--------|-------------------|------|

|   | Office and other equipment | 3-10 |
|--------|----------------------------|------|

|   | Transportation equipment | 3-5 |
|--------|--------------------------|-----|

|   | Internally generated software | 3 |
|--------|-------------------------------|---|

 

**GOODWILL AND OTHER INTANGIBLE ASSETS**

 

The            goodwill acquired is stated at cost. Subsequent to its acquisitions, the Company            conducts the required annual tests for impairment under Statement of Financial            Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible            Assets. The Company has completed its most recent annual impairment test required by            FAS No. 142 as of December 31, 2007 and has determined that no impairment            exists.

 

The following is a progression of goodwill by segment for the years            ended December 31, 2007 and 2006. 

|                         |   | Visiting |             |   | Personal |   |      |   |   |   |
|------------------------------|--------|----------|------------------|--------|----------|--------|-----------|--------|--------|--------|
|                         |   | Nurses   |             |   | Care     |   |      |   | Total  |   |
| Balance at December 31, 2005 |   | $        | 5,768,969   |   |     | $      | 3,826,862 |   |   |   | $ | 9,595,831 |   |
| Acquisitions                 |   |     | 21,386,097  |   |     |   | -         |   |   |   |   | 21,386,097 |   |
| Balance at December 31, 2006 |   |     | 27,155,066  |   |     |   | 3,826,862 |   |   |   |   | 30,981,928 |   |
| Acquisitions                 |   |     | 11,942,909  |   |     |   | -         |   |   |   |   | 11,942,909 |   |
| Dispositions                 |   |     | (257,593)        |   |     |   | -         |   |   |   |   | (257,593) |   |
| Balance at December 31, 2007 |   | $        | 38,840,382  |   |     | $      | 3,826,862 |   |   |   | $ | 42,667,244 |   |

 

Intangible assets consist of licenses, provider numbers, non-compete            agreements, and trade name.  Intangibles

 

48

are            amortized on a straight-line basis over their estimated useful lives.  The            cost of licenses and provider numbers is amortized over 15 years, trade name over 5            years and non-compete agreements over the life of the agreement, usually 3 years,            beginning after earn out period.  The Company reviews intangible assets for            possible impairment whenever events or changes in circumstances indicate that carrying            amounts may not be recoverable.

 

Intangible assets were comprised of the following as of December 31,            2007 and 2006.

 

|                    |   | 2007     |      |   | 2006         |   |
|-------------------------|--------|----------|-----------|--------|--------------|--------|
|                    |   | Gross    |      |   |         |   |   | Net |   |   | Gross |   |   |   |   |   | Net |   |
|                    |   | carrying |      |   | Accumulated  |   |   | carrying |   |   | carrying |   |   | Accumulated |   |   | carrying |   |
|                    |   | amount   |      |   | amortization |   |   | amount |   |   | amount |   |   | amortization |   |   | amount |   |
| Licenses                |   | $        | 465,000   |   |         | $      | (30,336 | ) |   | $ | 434,664 |   |   | $ | 420,000 |   |   | $ | (2,333 | ) |   | $ | 417,667 |   |
| Provider Numbers        |   |     | 1,750,000 |   |         |   | (25,272 | ) |   |   | 1,724,728 |   |   |   | 350,000 |   |   |   | (1,945 | ) |   |   | 348,055 |   |
| Other intangibles       |   |     | 372,000   |   |         |   | (43,336 | ) |   |   | 328,664 |   |   |   | 350,000 |   |   |   | (3,333 | ) |   |   | 346,667 |   |
| Total intangible assets |   | $        | 2,587,000 |   |         | $      | (98,944 | ) |   | $ | 2,488,056 |   |   | $ | 1,120,000 |   |   | $ | (7,611 | ) |   | $ | 1,112,389 |   |

             

Amortization expense recognized on intangible assets was $91,333 for            2007 and $7,611 for 2006 and none in 2005.

 

**LONG-LIVED ASSETS**

 

SFAS            144 “Accounting for the Impairment or Disposal of Long-Lived Assets”            specifies circumstances in which certain long-lived assets must be reviewed for            impairment. Application of this standard for 2007, 2006, and 2005, has resulted in no            impairment.

 

**CAPITALIZATION POLICIES**

 

Maintenance, repairs and minor replacements are charged to expense as            incurred. Major renovations and replacements are capitalized to appropriate property            and equipment accounts. Upon sale or retirement of property, the cost and related            accumulated depreciation are eliminated from the accounts and the related gain or loss            is recognized in income.

 

Consistent with AICPA Statement of Position 98-1, the Company            capitalizes the cost of internally generated computer software developed for the            Company’s own use. Software development costs of approximately $101,000, $220,000            and $184,000 were capitalized in the years ended December 31, 2007 and 2006 and 2005,            respectively.

 

**NET REVENUES** 

 

The            Company is paid for its services primarily by Federal and state third-party            reimbursement programs, commercial insurance companies, and patients. Revenues are            recorded at established rates in the period during which the services are rendered.            Appropriate allowances to give recognition to third party payment arrangements are            recorded when the services are rendered.

 

Laws            and regulations governing the Medicare and Medicaid programs are extremely complex and            subject to interpretation. It is common for issues to arise related to: 1) the            determination of cost-reimbursed revenues, 2) medical coding, particularly with respect            to Medicare, 3) patient eligibility, particularly related to Medicaid, and 4) other            reasons unrelated to credit risk, all of which may result in adjustments to recorded            revenue amounts. Management continuously evaluates the potential for revenue            adjustments and when appropriate provides allowances for losses based upon the best            available information. There is at least a reasonable possibility that recorded            estimates could change by material amounts in the near term.

 

49

**Changes in Contractual Allowance Estimates Pertaining to Prior            Periods**

Approximately 98% of the Company’s revenues are earned on a            “fee for service” basis. For all services provided, the Company uses either            payor-specific or patient-specific fee schedules for the recording of revenues at the            amounts actually expected to be received. Changes in estimates related to prior period            contractual allowances decreased revenues by $127,000, $63,000, and $89,000 in the            years ended December 31, 2007, 2006 and 2005, respectively.

 

Approximately 31% of the Company’s 2007 revenues were derived from            state Medicaid and other government programs, some of which are currently facing            significant budget issues. It is possible that the actions taken by the state Medicaid            programs in the future could have a significant unfavorable impact on the            Company’s results of operations, financial condition and liquidity.

 

**Revenue and Receivable Concentrations**

The            following table sets forth the percent of the Company’s revenues generated from            Medicare, state Medicaid programs and other payors:

|   | Year Ended December 31, |
|--------|-------------------------|

|                                      | **2007** |   | **2006** |   |
|-------------------------------------------|----------|--------|----------|--------|
| Medicare                                  | 68.5%    |   | 55.6%    |   |
| Medicaid & other government programs: |     |   |     |   |
| Ohio                                      | 6.8%     |   | 12.0%    |   |
| Kentucky                                  | 7.0%     |   | 8.6%     |   |
| Connecticut                               | 4.9%     |   | 6.1%     |   |
| Massachusetts                             | 1.6%     |   | 2.2%     |   |
| Florida                                   | 1.2%     |   | 1.7%     |   |
| Others                                    | 0.4%     |   | 0.4%     |   |
| Subtotal                                  | 21.9%    |   | 31.0%    |   |
| All other payors                          | 9.6%     |   | 13.4%    |   |
| Total                                     | 100.0%   |   | 100.0%   |   |

 

Concentrations in the Company’s accounts receivable were as            follows:

 

|   | **As of December 31, 2007** | **As of December 31, 2006** |
|--------|-----------------------------|-----------------------------|

|                                      | **Amount**                                                                                     |   | **Percent** |   | **Amount**                               |   | **Percent** |
|-------------------------------------------|------------------------------------------------------------------------------------------------|--------|-------------|--------|------------------------------------------|--------|-------------|
| Me Medicare                               | $             9,883,497  |   | 49.5%       |   | $    6,744,667  |   | 45.3%       |
| Medicaid & other government programs: |                                                                                           |   |        |   |                                     |   |        |
| Kentucky                                  | 1,207,882                                                                                 |   | 6.0%        |   | 1,118,658                           |   | 7.5%        |
| Ohio                                      | 1,535,701                                                                                 |   | 7.7%        |   | 1,546,935                           |   | 10.4%       |
| Connecticut                               | 1,426,868                                                                                 |   | 7.1%        |   | 1,145,112                           |   | 7.7%        |
| Massachusetts                             | 329,186                                                                                   |   | 1.6%        |   | 243,406                             |   | 1.6%        |
| Florida                                   | 261,067                                                                                   |   | 1.3%        |   | 425,384                             |   | 2.9%        |
| Others                                    | 95,544                                                                                    |   | 0.5%        |   | 39,366                              |   | 0.3%        |
| Subtotal                                  | 4,856,248                                                                                 |   | 24.3%       |   | 4,518,861                           |   | 30.4%       |
| All other payors                          | 5,231,737                                                                                 |   | 26.2%       |   | 3,619,164                           |   | 24.3%       |
| Subtotal                                  | 19,971,482                                                                                |   | 100.0%      |   | 14,882,692                          |   | 100.0%      |
| Allowance for uncollectible accounts      | (3,006,166)                                                                                    |   |        |   | (2,100,826)                              |   |        |
|                                      | $            16,965,316            |   |        |   | $  12,781,866             |   |        |

 

At            December 31, 2007 and 2006, the Company had approximately ($1,330,000) and ($806,000)            of net payables outstanding specifically related to filed or estimated cost reports. Of            these amounts, approximately ($1,108,000) and ($267,000), respectively, were due to the            Kentucky Medicaid program.

 

50

The            ability of payors to meet their obligations depends upon their financial stability,            future legislation and regulatory actions. The Company does not believe there are any            significant credit risks associated with receivables from Federal and state third-party            reimbursement programs. The allowance for doubtful accounts principally consists of            management's estimate of amounts that may prove uncollectible for coverage, eligibility            and technical reasons.

 

**Payor Mix Concentrations and Related Aging of Accounts            Receivable**

The            approximate breakdown of accounts receivable by payor classification as of December 31,            2007 and 2006 is set forth in the following tables:

             

|                      | **As of December 31, 2007:** | **Percent of Accounts Receivable** |   |
|---------------------------|------------------------------|------------------------------------|--------|
|  

**Payor**         |                         |  

**0-120**                  |   |  

**121-365** |   | **>1yr**

**<2yrs** |   |  

**>2yrs** |   |  

**Total** |
| Medicare                  |                         | 38%                                |   | 4% |   | -% |   | -1% |   | 41% |
| Medicaid & Government |                         | 20%                                |   | 7% |   | 2% |   | 0% |   | 29% |
| Self Pay                  |                         | 14%                                |   | 1% |   | -% |   | 0% |   | 15% |
| Insurance                 |                         | 8%                                 |   | 5% |   | 2% |   | 0% |   | 15% |
| Total                     |                         | 80%                                |   | 17% |   | 4% |   | -1% |   | 100% |
|                           |                              |                                    |        |  |  |  |  |  |  |  |  |  |  |

 

|                      | **As of December 31, 2006:** | **Percent of Accounts Receivable** |   |
|---------------------------|------------------------------|------------------------------------|--------|
|  

**Payor**         |                         |  

**0-120**                  |   |  

**121-365** |   | **>1yr**

**<2yrs** |   |  

**>2yrs** |   |  

**Total** |
| Medicare                  |                         | 35%                                |   | 2% |   | -% |   | -1% |   | 37% |
| Medicaid & Government |                         | 26%                                |   | 4% |   | 1% |   | -% |   | 31% |
| Self Pay                  |                         | 22%                                |   | -% |   | 1% |   | -% |   | 23% |
| Insurance                 |                         | 7%                                 |   | 2% |   | -% |   | -% |   | 9% |
| Total                     |                         | 90%                                |   | 8% |   | 2% |   | -1% |   | 100% |
|                           |                              |                                    |        |  |  |  |  |  |  |  |  |  |  |

 

The            balance sheet as of December 31, 2007 reflects a 33% increase in net accounts            receivable from December 31, 2006 of which 10% of the increase was due to the acquired            accounts receivable purchased during the year. The balance sheet as of December 31,            2006 reflects a 76% increase from December 31, 2005 due to acquired accounts receivable            purchase over that time frame. Days sales outstanding decreased to 44 days at December            31, 2007 from 50 days at December 31, 2006 and 48 days at December 31, 2005.

 

**Allowance for Uncollectible Accounts by Payor Mix and Related            Aging**

The            Company records an estimated allowance for uncollectible accounts by applying estimated            bad debt percentages to its accounts receivable agings. The percentages to be applied            by payor type are based on the Company’s historical collection and loss            experience. The Company’s effective allowances for bad debt were as            follows:

 

|                      | **As of December 31, 2007:** | **Percent of Accounts Receivable** |   |
|---------------------------|------------------------------|------------------------------------|--------|
|  

**Payor**         |                         |  

**0-120**                  |   |  

**121-365** |   | **>1yr**

**<2yrs** |   |  

**>2yrs** |
| Medicare                  |                         | 3%                                 |   | 19% |   | 100% |   | 100% |
| Medicaid & Government |                         | 2%                                 |   | 14% |   | 77% |   | 100% |
| Self Pay                  |                         | -%                                 |   | 13% |   | 73% |   | 100% |
| Insurance                 |                         | 3%                                 |   | 24% |   | 99% |   | 100% |
| Total                     |                         | 2%                                 |   | 18% |   | 89% |   | 100% |
|                           |                              |                                    |        |  |  |  |  |  |  |  |  |

 

|                      | **As of December 31, 2006:** | **Percent of Accounts Receivable** |   |
|---------------------------|------------------------------|------------------------------------|--------|
|  

**Payor**         |                         |  

**0-120**                  |   |  

**121-365** |   | **>1yr**

**<2yrs** |   |  

**>2yrs** |
| Medicare                  |                         | 3%                                 |   | 18% |   | 100% |   | 100% |
| Medicaid & Government |                         | 1%                                 |   | 13% |   | 77% |   | 100% |
| Self Pay                  |                         | -%                                 |   | 10% |   | 69% |   | 100% |
| Insurance                 |                         | 2%                                 |   | 22% |   | 83% |   | 100% |
| Total                     |                         | 2%                                 |   | 17% |   | 85% |   | 100% |
|                           |                              |                                    |        |  |  |  |  |  |  |  |  |

 

 

51

 

The            Company’s provision for uncollectible accounts for the years ended December 31,            2007, 2006 and 2005 was $1,507,000, $687,000 and $935,000, respectively.

 

**STOCK SPLIT**

All            share and per share information in the accompanying financial statements and the notes            thereto have been adjusted to give effect to the 2-for-1 split in the form of a            dividend completed in January 2007.

 

**NET INCOME PER SHARE** 

 

Net            income per share is presented as a unit of basic shares outstanding and diluted shares            outstanding. Diluted shares outstanding is computed based on the weighted average            number of common shares and common equivalent shares outstanding. Common equivalent            shares result from dilutive stock options. The following table is a reconciliation of            basic to diluted shares used in the earnings per share calculation:

|   | **Year Ended December 31,** |
|--------|-----------------------------|

|                                                                                          |   | **2007**                                            | **2006**                                            | **2005**                                            |
|-----------------------------------------------------------------------------------------------|--------|-----------------------------------------------------|-----------------------------------------------------|-----------------------------------------------------|
|                                                                                          |   |                                                |                                                |                                                |
| Basic weighted average outstanding shares                                                     |   | 5,435,615                                           | 4,853,535                                           | 4,674,578                                           |
| Add-common equivalent shares representing

shares issuable upon exercise of dilutive

options |   |  

                             

163,861 |  

                             

473,462 |  

                             

544,080 |
| Diluted weighted average number of shares at

year end                                        |   |  

5,599,476                                   |  

5,326,997                                   |  

5,218,658                                   |

 

**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 reported amounts of assets and liabilities and disclosure of contingent            assets and liabilities at the date of the financial statements and reported amounts of            revenues and expenses during the reporting period. Actual results could differ from            those estimates. Refer also to “NET REVENUES” above and to Note 2 --            “HEALTHCARE REFORM LEGISLATION, REGULATIONS AND MARKET            CONDITIONS.”

 

**FINANCIAL STATEMENT RECLASSIFICATIONS**

 

Certain prior period amounts and data have been reclassified in the            financial statements and related notes in order to conform to the 2007 presentation.            Such reclassifications had no effect on previously reported net income.

 

**FAIR VALUE OF FINANCIAL INSTRUMENTS**

 

The            Company’s financial instruments consist of cash, accounts receivable, payables            and debt instruments. The book values of cash, accounts receivable and payables are            considered representative of their respective fair values. The fair value of the            Company’s debt instruments approximates their carrying values as substantially            all of such debt has rates which fluctuate with changes in market rates.

 

**STOCK-BASED COMPENSATION**

 

Stock options are granted under various stock compensation programs to            employees and independent directors. The Company accounts for stock option grants in            accordance with SFAS No. 123R “Share-Based Payment”, adopted effective            January 1, 2006, using the modified prospective method of application, the adoption of            which had no significant effect on income from operations, income before taxes, net            income, cash flow from operations, cash flow from financing activities and basic and            diluted earnings per share. Prior to the first quarter of fiscal 2006, the Company            accounted for stock-based compensation arrangements in accordance with the

 

52

provisions and related interpretations of Accounting Principles Board            Opinion 25, “Accounting for Stock Issued to Employees”. Had compensation            cost for stock-based compensation been determined consistent with SFAS No. 123R, the            net income and earnings per share for the year ended December 31, 2005 would have been            adjusted to the following pro forma amounts:

                                                                                                                                         

| Net income as reported                                    | $       7,868,468                                                  |   |   |
|-----------------------------------------------------------|-------------------------------------------------------------------------------------------------------|--------|--------|
| Pro forma stock-based comp-

ensation expense, net of tax |  

14,131                                                                                        |   |   |
| Pro forma net income                                      | $       7,854,337                                                  |   |   |
|                                                      |                                                                                                  |   |   |
| Earnings per common share:                                |                                                                                                  |   |   |
| Basic – as reported                                 | $                1.68 |   |   |
| Basic – pro forma                                   | $                1.68 |   |   |
| Diluted – as reported                               | $                1.51 |   |   |
| Diluted – proforma                                  | $                1.51 |   |   |

                         

Under the modified prospective approach, SFAS No. 123(R) applies to new            stock options granted on or after January 1, 2006 as well as grants that were            outstanding as of December 31, 2005 including those that are subsequently modified,            repurchased or cancelled. Under the modified prospective method, compensation cost            recognized in the year ended December 31, 2006 includes compensation cost for all stock            options granted prior to, but not yet vested as of December 31, 2006 in accordance with            the provisions of SFAS No. 123(R). Prior periods were not restated to reflect the            impact of adopting the new standard.

 

Changes in option shares outstanding are summarized as            follows:

 

|              |   |   |  

**Shares** |   | **Wtd. Avg**

**Ex. Price**                                                                     |
|-------------------|--------|--------|--------------------|--------|-------------------------------------------------------------------------------------------------|
| December 31, 2006 |   |   | 614,060       |   | $               1.83 |
| Granted           |   |   | 187,000       |   | 19.50                                                                                           |
| Exercised         |   |   | (471,046)          |   | 6.31                                                                                            |
| Forfeited         |   |   | (13,000)           |   | 19.40                                                                                           |
| December 31, 2007 |   |   | 317,014       |   | $             11.87            |
|              |   |   |               |   |                                                                                            |

 

 

**NEW ACOUNTING PRONOUNCEMENTS**

 

In            September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157            requires companies to determine fair value based on the price that would be received to            sell the asset or paid to transfer the liability to a market participant. SFAS No. 157            emphasizes that fair value is a market-based measurement; not an entity-specific            measurement. The effective date of SFAS No. 157 will be the first quarter of 2008. The            adoption of SFAS No. 157 is not expected to have any material impact on the            Company’s consolidated financial statements..

 

In            February 2007 the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets            and Financial Liabilities – Including an Amendment of SFAS No. 115. SFAS No. 159            is effective for fiscal years beginning after November 15, 2008 or our first quarter of            fiscal 2009. This statement provides companies with the option to measure, at specified            election dates, many financial instruments and certain other items at fair value that            are not currently measured at fair value. Companies electing to adopt SFAS No. 159 will            report unrealized gains and losses on items for which the fair value option has been            elected in earnings at each subsequent reporting date. The adoption of SFAS No. 159 is            not expected to have a significant impact on the Company’s consolidated financial            statements.

 

In            December 2007, the FASB issued SFAS No. 141R, “Business Combinations”            (“SFAS 141R”). SFAS 141R provides guidance to improve the relevance,            representational faithfulness, and comparability of the information

 

53

that            a reporting entity provides in its financial reports about its business combinations            and its effects. SFAS 141R establishes principles and requirements for how the acquirer            recognizes and measures in its financial statements the identifiable assets acquired,            liabilities assumed, the goodwill acquired and determines what information to disclose            to enable users of the financial statements to evaluate the nature and financial            effects of the business combination. SFAS 141R is effective for acquisitions beginning            in our fiscal year beginning January 1, 2009 and earlier application is prohibited. The            adoption of this statement is not expected to have a significant impact on Almost            Family, Inc’s consolidated financial statements.

 

In            December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated            Financial Statements – an amendment to ARB No. 51. SFAS No. 160 requires all            entities to report noncontrolling (minority) interests in subsidiaries as equity in the            consolidated financial statements, but separate from the equity of the parent company.            The statement further requires that consolidated net income be reported at amounts            attributable to the parent and the noncontrolling interest, rather than expensing the            income attributable to the minority interest holder. This statement also requires that            companies provide sufficient disclosures to clearly identify and distinguish between            the interests of the parent company and the interests of the noncontrolling owners,            including a disclosure on the face of the consolidated statements for income            attributable to the noncontrolling interest holder. This statement is effective for the            fiscal years beginning on or after December 15, 2008 or our first quarter of 2009.            Early adoption is prohibited. The adoption of this statement is not expected to have a            significant impact on Almost Family, Inc.’s consolidated financial            statements.

 

**ADVERTISING COSTS**

 

The            Company expenses the costs of advertising as incurred. Advertising expense was            $219,244, $179,575 and $87,740 for the years ended December 31, 2007, 2006, and 2005,            respectively.

 

**DISCONTINUED OPERATIONS**

 

The            Company follows the guidance in SFAS 144 No. “Accounting for the Impairment or            Disposal of Long-Lived Assets” and, when appropriate, reclassifies operating            units closed, sold, or held for sale out of continuing operations and into discontinued            operations for all periods presented.

 

**NOTE 2 - HEALTHCARE REFORM LEGISLATION, REGULATIONS AND            MARKET** 

**CONDITIONS**

 

**HEALTH CARE REFORM**

 

The            health care industry has experienced, and is expected to continue to experience,            extensive and dynamic change. In addition to economic forces and regulatory influences,            continuing political debate is subjecting the health care industry to significant            reform. Health care reforms have been enacted and proposals for additional changes are            continuously formulated by departments of the Federal government, Congress, and state            legislatures.

 

Government officials can be expected to continue to review and assess            alternative health care delivery systems and payment methodologies. Changes in the law            or new interpretations of existing laws may have a dramatic effect on the definition of            permissible or impermissible activities, the relative cost of doing business, and the            methods and amounts of payments for medical care by both governmental and other payors.            Legislative changes to "balance the budget" and slow the annual rate of growth of            expenditures are expected to continue. Such future changes may further impact            reimbursement. There can be no assurance that future legislation or regulatory changes            will not have a material adverse effect on the operations of the Company.

 

State legislative proposals continue to be introduced that would impose            more limitations on payments to providers of health care services such as the Company.            Many states have enacted, or are considering enacting, measures that are designed to            reduce their Medicaid expenditures.

 

54

The            Company cannot predict what additional government regulations may be enacted in the            future affecting its business or how existing or future laws and regulations might be            interpreted, or whether the Company will be able to comply with such laws and            regulations in its existing or future markets.

 

**NOTE 3 - ACCRUED LIABILITIES**

 

Accrued liabilities consist of the following:

|   | As of December 31, |
|--------|--------------------|

|                                   | **2007**                                                   |   | **2006**                                                   |
|----------------------------------------|------------------------------------------------------------|--------|------------------------------------------------------------|
| Wages and employee benefits            | $        4,720,470 |   | $       3,433,763  |
| Insurance accruals                     | 1,876,207                                                  |   | 1,863,100                                             |
| Accrued taxes                          | 749,246                                                    |   | 737,265                                               |
| Accrued professional fees and other    | 220,744                                                    |   | 233,668                                               |
| Liabilities assumed in QOL acquisition | 1,097,054                                                  |   | -                                                     |
| Mederi contingent consideration        | 1,705,625                                                  |   | -                                                     |
|                                   | $    10,369,346                        |   | $     6,267,796              |

 

**NOTE 4 - PROPERTY AND EQUIPMENT** 

 

Property and equipment, including equipment under capital leases,            consist of the following:

|   | As of December 31, |
|--------|--------------------|

|                            |   | **2007**                                 |   | **2006**                                 |   |
|---------------------------------|--------|------------------------------------------|--------|------------------------------------------|--------|
|                            |   |                                     |   |                                     |   |
| Leasehold improvements          |   | $    1,326,440  |   | $    1,285,323  |   |
| Medical equipment               |   | 409,743                             |   | 405,562                             |   |
| Computer equipment and software |   | 10,000,152                          |   | 9,487,154                           |   |
| Office and other equipment      |   | 1,792,137                           |   | 1,648,789                           |   |
|                            |   | 13,528,472                          |   | 12,826,828                          |   |
| Less accumulated depreciation   |   | (12,069,628)                             |   | (11,309,972)                             |   |
|                            |   | $    1,458,844  |   | $    1,516,856  |   |

 

Depreciation and amortization expense (including amortization of assets            held under capital leases) is recorded in General & Administrative - Other and was            $842,200, $1,003,766 and $1,189,229 for the years ended December 31, 2007, 2006 and            2005, respectively.

 

**NOTE 5 - REVOLVING CREDIT FACILITY**

 

**Revolving Credit Facility***.*Company has a $40.0 million credit facility with JP Morgan Chase Bank,            NA (successor by merger to Bank One, NA), as amended November 30, 2007, with an            expiration date of June 30, 2010.The credit facility bears an            interest rate option at either the bank’s prime rate plus a margin (ranging from            -1.50% to -0.25%, currently -1.00%), or one-month LIBOR plus a margin (ranging from            +1.25% to +2.50%) dependent upon total leverage and is secured by substantially all            assets and the stock of the Company’s subsidiaries. The weighted average interest            rates were 7.31% and 7.24% for the years ended December 31, 2007 and 2006,            respectively. The Company pays a commitment fee of 0.25% per annum on the unused            facility balance. Borrowings are available equal to the greater of: a) a multiple of            3.5 times earnings before interest, taxes, depreciation and amortization (As Defined            EBITDA) or b) an asset based formula, primarily based on accounts receivable. “As            Defined EBITDA” of acquired operations, up to 75% of base “As Defined            EBITDA,” may be included in the availability calculations. Borrowings under the            facility may be used for working capital, capital expenditures, acquisitions,            development and growth of the business and other corporate purposes. As of December 31,            2007, the formula permitted approximately $40.0 million to be used, of which $12.4            million was outstanding. The Company has irrevocable letters of credit, totaling $1.9            million outstanding in connection with its self-insurance programs. Thus, a total of            $25.7 million was available for use at December 31, 2007. The Company’s revolving            credit facility is subject to various financial covenants. As of December 31, 2007,            the

 

55

Company was in compliance with the covenants. Under the most restrictive            of its covenants, the Company is required to maintain minimum net worth of at least            $10.5 million.

 

**NOTE 6 - INCOME TAXES**

 

The            Company recognizes deferred tax assets and liabilities for the expected future tax            consequences of events that have been included in the financial statements or tax            returns. Under this method, deferred tax assets and liabilities are determined based on            the difference between the Company’s book and tax bases of assets and liabilities            and tax carryforwards using enacted tax rates in effect for the year in which the            differences are expected to reverse. The principal tax carryforwards and temporary            differences were as follows:

 

                                                                                                                                                                   

|                                   |   | **As of December 31**                                                          |
|----------------------------------------|--------|--------------------------------------------------------------------------------|
|                                   |   | **2007**                                                                       |   | **2006** |
| Deferred tax assets                    |   |                                                                           |   |   |
| Nondeductible reserves and

allowances |   |  

$         1,243,000  |   |  

$     1,005,000  |
| Intangibles                            |   | -                                                                         |   | 211,000  |
| Insurance accruals                     |   | 587,000                                                                   |   | 531,000  |
| Net operating loss carryforwards       |   | 743,000                                                                   |   | 686,000  |
|                                   |   | 2,573,000                                                                 |   | 2,433,000  |
| Valuation allowance                    |   | (542,000)                                                                      |   | (367,000) |
|                                   |   | 2,031,000                                                                 |   | 2,066,000  |
| Deferred tax liabilities               |   |                                                                           |   |   |
| Intangibles                            |   | (727,000)                                                                      |   | -  |
| Accelerated depreciation               |   | (251,000)                                                                      |   | (240,000) |
| Deferred tax liabilities               |   | (978,000)                                                                      |   | (240,000) |
| Net deferred tax assets                |   | $         1,053,000          |   | $     1,826,000  |

 

| Deferred tax assets (liabilities) are reflected in the                            accompanying balance sheets as: |   |  

                                                          |   |                                           |
|-------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------|--------|------------------------------------------------|
| Current                                                                                                           |   | 1,830,000                                                         |   | $     1,536,000  |
| Long-term                                                                                                         |   | (777,000)                                                              |   | 290,000                                   |
| Net deferred tax assets                                                                                           |   | $         1,053,000  |   | $     1,826,000  |

 

The            Company has state and local net operating loss carryforwards of approximately $15.6            million which expire on various dates through 2017.

 

56

Provision (benefit) for income taxes consists of the            following:

|   | **Year Ended December 31,** |
|--------|-----------------------------|

|                                                |   | **2007**                                                         |   | **2006**                                                         |   | **2005**                                                         |   |
|-----------------------------------------------------|--------|------------------------------------------------------------------|--------|------------------------------------------------------------------|--------|------------------------------------------------------------------|--------|
| Federal – current                             |   | $        3,852,000  |   | $        2,447,000  |   | $        1,481,000  |   |
| State and local - current                           |   | 854,000                                                     |   | 490,000                                                     |   | 197,000                                                     |
| Deferred                                            |   | 566,000                                                     |   | (119,000)                                                        |   | (272,000)                                                        |
|                                                |   | $        5,272,000  |   | $        2,818,000  |   | $        1,406,000  |
|                                                |   |                                                             |   |                                                             |   |                                                             |   |
| Shown in the accompanying

statements of income as: |   |  

                                                    |   |                                                             |   |                                                             |   |
| Continuing operations                               |   | $        5,272,000  |   | $        2,818,000  |   | $        1,406,000  |
| Discontinued operations                             |   | (138,000)                                                        |   | (24,000)                                                         |   | 2,868,000                                                   |
|                                                |   | $        5,134,000  |   | $        2,794,000  |   | $        4,274,000  |

 

A            reconciliation of the statutory to the effective rate of the Company is as            follows:

|   | **Year Ended December 31,** |
|--------|-----------------------------|

|                                          | **2007** |   | **2006** |   | **2005** |
|-----------------------------------------------|----------|--------|----------|--------|----------|
| Tax provision using statutory rate            | 34.0%    |   | 34.0%    |   | 34.0%    |
| State and local taxes, net of Federal benefit | 4.9%     |   | 5.5%     |   | 4.5%     |
| Valuation allowance                           | 1.4%     |   | -        |   | -3.6%    |
| Other, net                                    | 0.0%     |   | 0.2%     |   | -2.9%    |
| Tax provision for continuing operations       | 40.3%    |   | 39.7%    |   | 32.0%    |

 

The            Company has provided a valuation allowance against certain net deferred tax assets            based upon management’s estimation of realizability of those assets through            future taxable income. This valuation allowance was based in large part on the            Company’s history of generating operating income or losses in individual tax            locales and expectations for the future. The Company’s ability to generate the            expected amounts of taxable income from future operations to realize its recorded net            deferred tax assets is dependent upon general economic conditions, competitive            pressures on revenues and margins and legislation and regulation at all levels of            government. There can be no assurances that the Company will meet its expectations of            future taxable income. However, management has considered the above factors in reaching            its conclusion that it is more likely than not that future taxable income will be            sufficient to realize the net deferred tax assets as (net of valuation allowance) of            December 31, 2007.

 

During the years ended December 31, 2007, 2006 and 2005, based on            changes in facts and circumstances, favorable changes occurred in the Company’s            expectations with regard to the generation of future taxable income in certain tax            jurisdictions. Accordingly, the state and local tax provision for these periods include            an increase (reduction) of previously recorded valuation allowances of approximately            $175,000, $35,000 and, ($152,000), for the years ended December 31, 2007, 2006 and 2005            respectively.

 

The            Company adopted the provisions of FASB interpretation No. 48, “Accounting for            Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109” (FIN            48), on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income            taxes recognized in an enterprise’s financial statements in accordance with FASB            Statement 109, “Accounting for Income Taxes”, and prescribes a recognition            threshold and measurement process for financial statement recognition and measurement            of a tax position taken or expected to be taken in a tax return. FIN 48 also provides            guidance on derecognition, classification, interest and penalties, accounting in            interim periods, disclosure and transition.

 

Based on the Company’s evaluation, it has concluded that there are            no significant uncertain tax positions requiring recognition in its financial            statements. The evaluation was performed for the tax years ended December 31, 2003,            2004, 2005, 2006 and 2007. For federal tax purposes, the Company is currently subject            to examinations for tax years 2005 and forward while for state purposes, tax years 2003            and forward, depending on

 

57

the            specific state rules and regulations. The Internal Revenue Service has completed its            examination of the tax year ending December 31, 2004 with no assessment of any            additional tax or penalty.

 

The            Company may from time to time be assessed interest and penalties by major tax            jurisdictions, although any such assessments historically have been minimal and            immaterial to its financial results. Assessments for interest and/or penalties are            classified in the financial statements as general and administrative expenses            other**.**

 

**NOTE 7 – STOCKHOLDERS' EQUITY** 

 

**Employee Stock Option Plans** 

 

The            Company has the following stock option plans:

 

1.      The Company has a 1993 Stock Option Plan for Non-employee Directors            which provided for the granting of options to purchase up to 240,000 shares of the            Company’s common stock to directors who are not employees. Each newly elected            director or any director who did not possess options to purchase 20,000 shares of the            Company’s common stock were automatically granted options to purchase 20,000            shares of common stock under this plan at an exercise price based on the market price            as of the date of grant. As of December 31, 2007, all option shares available under            this plan have been granted and options for 60,000 shares were outstanding under this            plan.

 

2.      The Company has a 2000 Employee Stock Option Plan which provides for            options to purchase up to 1,000,000 shares of the Company’s common stock to key            employees, officers and directors. The Board of Directors determines the amount and            terms of the options, which cannot exceed ten years. As of December 31, 2007, options            for 265,014 shares had been granted and were outstanding under this plan. There are no            shares available for future grant.

 

3.      The Company has a 2007 Stock and Incentive Compensation Plan which            provides for options to purchase up to 500,000 shares of the Company’s common            stock to employees, non-employee directors or independent contractors. The Board of            Directors determines the amount and terms of the options, which cannot exceed ten            years. As of December 31, 2007, options for 5,000 shares had been granted and were            outstanding under this plan. Shares available for future grant amounted to 495,000            shares at December 31, 2007.

 

Changes in option shares outstanding are summarized as            follows:

 

|  

                              |   |   |  

**Shares** |   | **Wtd. Avg**

**Ex. Price**                                       |
|--------------------------------------------|--------|--------|--------------------|--------|-------------------------------------------------------------------|
| December 31, 2004                          |   |   | 1,052,000     |   | $          1.60 |
|                                       |   |   |               |   |                                                              |
| Granted                                    |   |   | 20,000        |   | 2.70                                                              |
| Exercised                                  |   |   | (209,614)          |   | 1.45                                                              |
| Forfeited                                  |   |   | (86,386)           |   | 1.41                                                              |
| December 31, 2005                          |   |   | 776,000       |   | 1.72                                                              |
|                                       |   |   |               |   |                                                              |
| Granted                                    |   |   | -             |   | -                                                                 |
| Exercised                                  |   |   | (123,160)          |   | 1.34                                                              |
| Forfeited                                  |   |   | (38,780)           |   | 1.26                                                              |
| December 31, 2006                          |   |   | 614,060       |   | 1.83                                                              |
|                                       |   |   |               |   |                                                              |
| Granted                                    |   |   | 187,000       |   | 19.50                                                             |
| Exercised                                  |   |   | (471,046)          |   | 6.31                                                              |
| Forfeited                                  |   |   | (13,000)           |   | 19.40                                                             |
| December 31, 2007                          |   |   | 317,014       |   | $        11.87            |

 

58

The            following table details exercisable options and related information:

|   | **Year Ended December 31,** |
|--------|-----------------------------|

|                               |   | **2007**                                                                                  | **2006**                                                                                                                         | **2005**                                                                                  |
|------------------------------------|--------|-------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------|
|                               |   |                                                                                      |                                                                                                                             |                                                                                      |
| Exercisable at end of year         |   | 186,514                                                                                   | 609,060                                                                                                                          | 766,000                                                                                   |
| Weighted average exercise price    |   | $              6.54 | $              1.81                                        | $              1.70 |
|                               |   |                                                                                      |                                                                                                                             |                                                                                      |
| Weighted average fair value        |   |                                                                                      |                                                                                                                             |                                                                                      |
| of options granted during the year |   | $              8.54 | $                     - | $              2.71 |

 

In            2005 and 2006, the fair value of each option award was estimated on the date of grant            using the Black-Scholes option pricing model with the following weighted-average            assumptions used for awards in the year ended December 31, 2005: risk-free interest            rates of 4.44%, expected volatility of approximately 45.81%, expected lives of 10            years, and no expected dividend yields. There were no options granted in            2006.

 

In            2007, the fair value of each option award is estimated on the date of grant using the            Monte Carlo option valuation model with suboptimal exercise behavior. The Company has            adopted the Monte Carlo option valuation pricing model in 2007. This lattice model            places greater emphasis on market evidence and predicts more realistic results, because            it considers open form information including volatility, employee exercise behaviors            and turnover. The following assumptions were used for the year ended December 31, 2007:            equivalent interest rate of 4.80%, equivalent volatility of approximately 44.79%,            implied expected lives of 3.5 years, and expected lives of 7.4 years.

 

The            following table summarizes information about stock options outstanding at December 31,            2007:

 

| **Options Outstanding** |   | **Options Exercisable** |
|-------------------------|--------|-------------------------|
|                    |   | **Outstanding**         |   | **Wtd. Avg.** |   |   |   | **Exercisable** |   |   |   |
| **Range of**            |   | **As of**               |   | **Remaining** |   | **Wt. Avg.** |   | **As of** |   | **Wt. Avg.** |   |
| **Ex. Price**           |   | **December 31, 2007**   |   | **Contractual Life** |   | **Ex. Price** |   | **December 31, 2007** |   | **Ex. Price** |   |
| $1.31-2.50              |   | 113,014                 |   | 2.98 |   | $2.06 |   | 113,014 |   | $2.06 |   |
| $2.51 - 3.00            |   | -                       |   | 0.00 |   | $0.00 |   | - |   | $0.00 |   |
| Over $3.00              |   | 204,000                 |   | 8.67 |   | $17.31 |   | 73,500 |   | $13.41 |   |
| $1.31 – $23.00    |   | 317,014                 |   | 6.64 |   | $11.87 |   | 186,514 |   | $6.54 |   |
|                    |   |                    |   |   |   |   |   |   |   |   |   |
|                         |        |                         |  |  |  |  |  |  |  |  |  |  |

 

***Shareholders Rights Plan***

On            February 1, 1999 the Company implemented a shareholder protection rights plan. One            right was distributed as a dividend on each share of common stock of the Company held            of record as of the close of business on February 16, 1999. Subject to the terms and            conditions of the plan, the rights will be exercisable only if a person or group            acquires beneficial ownership of 20% or more of the Company’s common stock or            announces a tender or exchange offer upon consummation of which, such person or group            would beneficially own 20% or more of the common stock of the Company. If the rights            are triggered, then each right not owned by the acquiring person or group entitles its            holder to purchase shares of Company common stock at the right’s current exercise            price, having a value of twice the right’s exercise price. The Company may redeem            the rights at any time until the close of business on the tenth business day following            an announcement by the Company that an acquiring person or group has become the            beneficial owner of 20% or more of the Company’s common stock.

 

***Directors Deferred Compensation Plan***

The            Company has a Non-Employee Directors Deferred Compensation Plan which allows Directors            to elect to receive fees for Board services in the form of shares of the            Company’s common stock. The Plan authorized 200,000 shares for such use. As of            December 31, 2007, 115,955 shares have been allocated in deferred accounts, 8,622 have            been issued to previous Directors and 75,423 remain available for future            allocation.

 

59

Allocated shares are to be issued to Directors when they cease to be            Directors or upon a change in control. Directors’ fees are expensed as incurred            whether paid in cash or deferred into the Plan.

 

**NOTE 8 – RETIREMENT PLAN**

 

The            Company administers a 401(k) defined contribution retirement plan for the benefit of            the majority of its employees, who have completed 90 days of service and been credited            with 1,000 hours of service as defined by the plan agreement. The Company matches            contributions in an amount equal to one-quarter of the first 5% of each            participant’s contribution to the plan. 401(k) assets are held by an independent            trustee, are not assets of the Company, and accordingly are not reflected in the            Company’s balance sheets.

 

The            Company’s retirement plan expense was approximately $193,000, $110,000 and            $103,000 for the years ended December 31, 2007, 2006, and 2005,            respectively.

 

**NOTE 9 - COMMITMENTS AND CONTINGENCIES** 

 

**Operating Leases**

The            Company leases certain real estate, office space, and equipment under non-cancelable            operating leases expiring at various dates through 2012 and which contain various            renewal and escalation clauses. Rent expense amounted to $3,221,208, $2,374,379 and            $1,939,722 for years ended December 31, 2007, 2006 and 2005, respectively. At December            31, 2007 the minimum rental payments under these leases were as follows:

 

| 2008  | $      | 2,660,471 |
|-------|--------|-----------|
| 2009  |   | 1,618,004 |
| 2010  |   | 826,337   |
| 2011  |   | 479,908   |
| 2012  |   | 382,423   |
| Total | $      | 5,967,143 |

 

**Capital Leases and Term Debt**

The            Company has certain assets, primarily computer equipment, under capital leases. The            leases include interest of approximately 6.50% per annum. Assets held under capital            lease are carried at cost of approximately $113,000 with accumulated depreciation of            approximately $99,000 as of December 31, 2007.

 

The            Company has three unsecured notes payable totaling $4.5 million to sellers bearing            interest at 6% per annum at December 31, 2007, October and November 2008 and May            2009.

 

Future minimum lease payments and principal and interest payments on the            term debt are as follows:

 

|  

**Year Ending December 31,**                                                     |   |  

**Capital Leases** |   | **Acquisition**

**Notes Payable** |   |  

**Total**       |
|------------------------------------------------------------------------------------------|--------|----------------------------|--------|------------------------------------|--------|-------------------------|
| 2008                                                                                     | $      | 117,784               | $      | 540,000                       | $      | 657,784            |
| 2009                                                                                     |   | -                     |   | 4,000,000                     |   | 4,000,000          |
|                                                                                     |   | 117,784                    |   | 4,540,000                     |   | 4,657,784          |
| Less: amount representing

Interest                                                      |   |  

(4,830)            |   |  

-                          |   |  

(4,830)         |
| Present value of minimum   lease/principal                            payments |   |  

112,954       |   |  

4,540,000             |   |  

4,652,954  |
| Less: current portion                                                                    |   | 112,954               |   | 540,000                       |   | 652,954            |
|                                                                                     | $      | -                     | $      | 4,000,000                     | $      | 4,000,000          |

 

 

 

**Insurance Programs**

 

60

 

The            Company bears significant insurance risk under our large-deductible workers’            compensation insurance program and its self-insured employee health program. Under the            workers’ compensation insurance program, the Company bears risk up to $400,000            per incident. The Company purchases stop-loss insurance for the employee health plan            that places a specific limit, generally $100,000, on its exposure for any individual            covered life.

 

Malpractice and general patient liability claims for incidents which may            give rise to litigation have been asserted against the Company by various claimants.            The claims are in various stages of processing and some may ultimately be brought to            trial. The Company is aware of incidents that have occurred through December 31, 2007            that may result in the assertion of additional claims. The Company carries insurance            coverage for this exposure with no deductible. Prior to April 1, 2007, the Company            carried coverage with a deductible per claim of $500,000.

 

The            Company records estimated liabilities for its insurance programs based on information            provided by the third-party plan administrators, historical claims experience, the life            cycle of claims, expected costs of claims incurred but not paid, and expected costs to            settle unpaid claims. The Company monitors its estimated insurance-related liabilities            on a monthly basis. As facts change, it may become necessary to make adjustments that            could be material to the Company’s results of operations and financial            condition.

 

**Legal Proceedings**

 

The            Company is currently, and from time to time, subject to claims and suits arising in the            ordinary course of its business, including claims for damages for personal injuries. In            the opinion of management, the ultimate resolution of any of these pending claims and            legal proceedings will not have a material effect on the Company's financial position            or results of operations.

 

**NOTE 10 – STOCK REPURCHASES**

 

During the year ended December 31, 2007, the Company redeemed 30,924            shares of its common stock in conjunction with the exercise of employee stock options            and issuance of related stock. These were shares previously outstanding and owned by            option holders submitted by them in lieu of the cash exercise price (an aggregate of            $(677,545) that would have otherwise been due on option exercise).

 

During the year ended December 31, 2006, the Company redeemed 4,952            shares of its common stock in conjunction with the exercise of employee stock options            and issuance of related stock. These were shares previously outstanding and owned by            option holders submitted by them in lieu of the cash exercise price (an aggregate of            $(58,657) that would have otherwise been due on option exercise).

 

During the year ended December 31, 2005, the Company redeemed 47,456            shares of its common stock in conjunction with the exercise of employee stock options            and issuance of related stock. These were shares previously outstanding and owned by            option holders submitted by them in lieu of the cash exercise price (an aggregate of            $(369,390) that would have otherwise been due on option exercise).

 

**NOTE 11 – SEGMENT DATA** 

 

The            Company has two reportable segments, Visiting Nurse (VN) and Personal Care (PC).            Reportable segments have been identified based upon how management has organized the            business by services provided to customers and the criteria in SFAS 131,            “Disclosures about Segments of an Enterprise and Related            Information.”

 

The            Company’s VN segment provides skilled medical services in patients’ homes            largely to enable recipients to reduce or avoid periods of hospitalization and/or            nursing home care. VN Medicare revenues are generated on a per episode basis rather            than a fee per visit or day of care. Approximately 94% of the VN segment revenues are            generated from the Medicare program while the balance is generated from Medicaid and            private insurance programs.

 

61

 

The            Company’s PC segment services are also provided in patients’ homes. These            services (generally provided by paraprofessional staff such as home health aides) are            generally of a custodial rather than skilled nature. PC revenues are generated on an            hourly basis. Approximately 70% of the PC segment revenues are generated from Medicaid            and other government programs while the balance is generated from insurance programs            and private pay patients.

 

|   | **Year Ended December 31,** |
|--------|-----------------------------|

|                              | **2007**                                                                    |   | **2006**                                                                          |   | **2005**                                                                                     |
|-----------------------------------|-----------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------|
| **Net revenues**                  |                                                                        |   |                                                                              |   |                                                                                         |
| Visiting nurses                   |   $   96,219,949                                   |   |   $   55,190,258                                         |   |  $   39,732,561                                                     |
| Personal care                     | 35,910,107                                                             |   | 35,455,236                                                                   |   | 33,873,984                                                                              |
|                              |   $ 132,130,056                                              |   |   $   90,645,494                                         |   |  $   73,606,545                                                     |
| **Operating income (loss)**       |                                                                        |   |                                                                              |   |                                                                                         |
| Visiting nurses                   | 19,592,144                                                             |   |   $     9,098,996                              |   |  $     5,387,672                                          |
| Personal care                     | 3,412,008                                                              |   | 3,899,545                                                                    |   | 3,471,139                                                                               |
| Corporate                         | (9,080,619)                                                                 |   | (5,891,932)                                                                       |   | (4,512,141)                                                                                  |
|                              |  $   13,923,533                                    |   |                              $     7,106,609   |   |  $     4,346,670                                          |
| **Identifiable assets**           |                                                                        |   |                                                                              |   |                                                                                         |
| Visiting nurses                   |    $  53,600,409                                   |   |   $  36,741,798                                               |   |   $  10,850,130                                                          |
| Personal care                     | 9,656,465                                                              |   | 9,140,323                                                                    |   | 9,830,902                                                                               |
| Corporate                         | 4,103,516                                                              |   | 7,513,372                                                                    |   | 9,862,123                                                                               |
|                              |    $  67,360,390                                   |   |   $  53,395,493                                               |   |    $  30,543,155                                                    |
| **Identifiable liabilities**      |                                                                        |   |                                                                              |   |                                                                                         |
| Visiting nurses                   |    $   14,011,123                             |   |   $   17,035,181                                         |   |   $     3,958,764                                         |
| Personal care                     | 1,845,604                                                              |   | 1,382,060                                                                    |   | 4,315,335                                                                               |
| Corporate                         | 16,661,751                                                             |   | 7,238,448                                                                    |   | 2,133,678                                                                               |
|                              |                               $   32,518,477  |   |   $   25,655,689                                         |   |   $   10,407,777                                                         |
| **Capital expenditures**          |                                                                        |   |                                                                              |   |                                                                                         |
| Visiting nurses                   |    $        310,468  |   |     $        195,447  |   |    $           85,963  |
| Personal care                     | 32,562                                                                 |   | 27,605                                                                       |   | 6,768                                                                                   |
| Corporate                         |   358,614                                                    |   |  635,238                                                                |   |  363,618                                                                           |
|                              |    $        701,644  |   |    $        858,290        |   |    $        456,349                   |
| **Depreciation and amortization** |                                                                        |   |                                                                              |   |                                                                                         |
| Visiting nurses                   |    $        222,347  |   |     $        173,415  |   |    $        127,109                   |
| Personal care                     | 12,987                                                                 |   | 20,968                                                                       |   | 27,191                                                                                  |
| Corporate                         |  606,867                                                          |   |  804,992                                                                |   |   1,030,390                                                                        |
|                              |    $        842,201  |   |    $        999,376        |   |     $     1,184,690                             |

 

 

62

**NOTE 12 – DISCONTINUED OPERATIONS**

 

On            September 30, 2005, the Company sold its adult day care (ADC) segment to Active            Services, Inc. ADC operations are now reported as discontinued operations. The sale            price consisted of $13.6 million cash plus assumption of approximately $1.4 million of            debt. In return, Active Services acquired substantially all the assets and assume            certain working capital liabilities related to Almost Family’s 19 medical adult            day care centers which generated approximately $21.0 million in annual revenues. The            Company reported an after-tax gain on the sale totaling $5.1 million.

 

Revenues from the discontinued ADC segment were approximately $16.5            million in the year ended December 31 2005. During 2007, the VN segment had one            facility and the PC segment had three facilities that met the criteria to be            reclassified as discontinued operations. For all the years presented in this report,            these facilities have been reclassified. Net losses from the discontinued operations            were approximately $(211,000), ($76,000) and ($236,000) in the years ended December 31,            2007, 2006 and 2005 respectively, and such amounts are included in net loss from            discontinued operations in the accompanying financial statements.

 

**NOTE 13 -- ACQUISITIONS**

 

Each            of the following acquisitions was completed in order to pursue the Company’s            strategy of expanding its visiting nurse operations in the eastern United States by            expanding its service base and enhancing its position in certain geographic areas as a            leading provider of home health services. The purchase price of each acquisition was            determined based on the Company’s analysis of comparable acquisitions and            expected cash flows. Goodwill generated from the acquisitions was recognized given the            expected contributions of each acquisition to the overall corporate strategy. Each of            the acquisitions completed was accounted for as a purchase and are included in the            Company’s financial statements from the respective acquisition date. All goodwill            generated in the transactions below is expected to be deductible for tax            purposes.

 

***Acquisitions During 2007***

During 2007 the Company acquired 5 visiting nurse branch locations.            These operations added to our market presence in Florida and Ohio.

 

On            October 26, 2007 the Company acquired the assets of all the Medicare-certified home            health agencies owned and operated by Quality of Life Holdings, Inc. (Quality of Life)            for an initial purchase price of $10 million, consisting of $8 million cash, and $2            million (or approximately 101,000 shares) of Almost Family common stock (restricted).            Additional consideration of up to $6.9 million may be paid contingent primarily upon            the achievement of certain development targets following the closing. The cash portion            of the transaction paid at closing was funded from borrowings available on the            Company’s senior credit facility. The acquired operations generated net revenues            of approximately $8.6 million in the year ended December 31, 2006.

 

The            following table summarizes the approximate estimated fair values of the assets acquired            and liabilities assumed of the Quality of Life acquisition on October 26,            2007.

 

| Accounts receivable - net       | $    944,000  |
|---------------------------------|----------------------------------------|
| Property, plant & equipment | 67,000                            |
| Other Assets                    | 57,000                            |
| Goodwill and other intangibles  | 10,811,000                        |
| Assets acquired                 | 11,879,000                        |
| Liabilities assumed             | (1,702,000)                            |
| Net assets acquired             | $10,177,000                       |

 

The            Company is currently in the process of finalizing its valuation of the assets acquired            and liabilities assumed for the Quality of Life acquisition, to assist it in allocating            the purchase price to the individual assets acquired and liabilities assumed. The            preliminary allocation of purchase price included in the current period balance sheet            is based on the Company’s current best estimate and is subject to revision based            on final determination of fair

 

63

value. The Company has engaged an independent valuation firm to assist            with the valuation of Quality of Life, which is expected to be completed prior to the            first anniversary of the acquisition.

 

The            unaudited proforma results of operations of the Company as if the Quality of Life,            acquisition had been made at the beginning of 2006 are as follows:

 

|                                          | Twelve Months ended December 31                                                                                                                                                     |
|-----------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                          | 2007                                                                                                                                                                                | 2006 |
| Revenues                                      | $              139,375,839                                                                                    | $             99,291,013 |
| Net Income from continuing operations         | $                   7,076,837                                                        | $               3,971,421 |
| Net Income                                    | $                   7,159,695                                                        | $               4,032,219 |
| Earnings per share from continuing operations |                                                                                                                                                                                |   |
| Basic                                         | $                             1.28 | $                         0.80 |
| Diluted                                       | $                             1.24 | $                         0.73 |
| Earnings per share                            |                                                                                                                                                                                |   |
| Basic                                         | $                             1.30 | $                         0.81 |
| Diluted                                       | $                             1.26 | $                         0.74 |

             

The            pro forma information presented above is presented for illustrative purposes only and            may not be indicative of the results of operations that would have actually occurred if            the transaction described had been completed as of the beginning of 2006. In addition,            future results may vary significantly from the results reflected in such            information.

 

On            January 15, 2007, the Company acquired the fixed assets and business operations of a            home health agency with one personal care and one Medicare-certified branch located in            Jacksonville, Florida. The total purchase price of $600,000 was paid in cash. The            Company assumed employee paid-time-off liabilities of approximately $32,000 and fixed            assets of approximately $19,000, with the purchase price balance recorded as goodwill            (approximately $0.5 million). The cash portion of the transaction was funded from            borrowings available on the Company’s senior credit facility. The acquired            operations generated net revenues of approximately $1.3 million in the year ended            December 31, 2006.

 

*Acquisitions During 2006*

During 2006, we acquired 24 visiting nurse branch locations one of which            was essentially a startup operation. These operations added to our market presence in            Florida, and gave us market presence in Alabama, Illinois and Missouri.

 

On            December 3, 2006, the Company acquired all the Medicare-certified home health agencies            owned and operated by Mederi, Inc., located in Coconut Grove, Florida. The total            purchase price of $20.4 million was paid $11.7 million in cash, approximately $3            million or 100,000 shares of Almost Family common stock (restricted) and $4 million in            the form of two notes payable bearing interest at 6% payable quarterly with the            principal due in a balloon payment two years from the closing date. The Company assumed            employee paid-time-off liabilities of approximately $397,000 and a Medicare liability            of approximately $1.3 million which were settled in 2007. Approximately $1.7 million of            additional consideration was accrued as of December 31, 2007 and paid in March 2008            pursuant to the acquisition agreement based on achievement of certain targets in 2007.            Additional consideration of up to $3.3 million in cash may be paid to the seller            contingent primarily upon the achievement of certain revenue targets in 2008. The cash            portion of the transaction was funded from borrowings available on the Company’s            senior credit facility. The acquired operations generated net revenues of approximately            $23.8 million in the year ended June 30, 2006. The Mederi acquisition significantly            expanded the Company’s presence and penetration in the state of Florida and gave            the Company new market presence in the states of Missouri and Illinois.

 

The            Company engaged an independent valuation firm to complete a purchase price allocation            in connection with SFAS No. 141 as of December 3, 2006 for the Mederi acquisition. This            valuation was completed in 2007 and

 

64

was            used in allocating purchase price to the individual assets acquired and liabilities            assumed. The allocation of purchase price included in the current period balance sheet            is based upon this valuation.

 

The            following table summarizes the approximate fair values of the assets acquired and            liabilities assumed of the Mederi, Inc. acquisition on December 3, 2006.

 

| Accounts receivable - net       | $    905,000  |
|---------------------------------|----------------------------------------|
| Property, plant & equipment | 220,000                           |
| Intangible Assets               | 2,587,000                         |
| Other Assets                    | 87,000                            |
| Goodwill                        | 18,366,000                        |
| Assets acquired                 | 22,165,000                        |
| Liabilities assumed             | (1,752,000)                            |
| Net assets acquired             | $20,413,000                       |

 

The            unaudited proforma results of operations of the Company as if the Mederi, Inc.            acquisition had been made at the beginning of 2005 are as follows:

 

|                                          | Twelve Months ended December 31                                                                                                                 |
|-----------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------|
|                                          | 2006                                                                                                                                            | 2005 |
| Revenues                                      | $        114,578,381                                                                                    | $         98,466,791 |
| Net Income from continuing operations         | $             3,814,218                                                        | $           1,749,589 |
| Net Income                                    | $             3,240,867                                                        | $           6,287,273 |
| Earnings per share from continuing operations |                                                                                                                                            |   |
| Basic                                         | $                       0.75 | $                     0.36 |
| Diluted                                       | $                       0.69 | $                     0.32 |
| Earnings per share                            |                                                                                                                                            |   |
| Basic                                         | $                       0.64 | $                     1.29 |
| Diluted                                       | $                       0.59 | $                     1.16 |

             

The pro forma information presented above is presented for illustrative            purposes only and may not be indicative of the results of operations that would have            actually occurred if the transaction described had been completed as of the beginning            of 2005. In addition, future results may vary significantly from the results reflected            in such information.

 

On            September 18, 2006, the Company acquired the business operations of a            Medicare-certified home health agency located in Ft. Lauderdale, Florida. The total            purchase price of $1.1 million was paid $1.0 million in cash with the $100,000 balance            in the form of a note payable bearing interest at 6% payable quarterly which was paid            in full in 2007. The Company funded the cash portion of the purchase price from            available cash on deposit. The Company recorded substantially the entire purchase price            as goodwill.

 

On            June 30, 2006, the Company acquired all the assets and business operations of a            Medicare-certified home health agency located in Birmingham, Alabama. The total            purchase price of $982,000 was paid $810,000 in cash plus $100,000 in a note payable            bearing interest at 6% payable quarterly which was paid in full in 2007. The remaining            $72,000 is comprised of assumed employee time off liabilities. The Company funded the            cash portion of the purchase price from available cash on deposit. The acquired            operation generated net Medicare revenues of approximately $1.8 million in the year            ended June 30, 2006. The purchase price was allocated to tangible assets ($930,000)            including primarily receivables and fixed assets with the balance recorded as goodwill            (approximately $52,000).

 

On            April 8, 2006, the Company acquired all the assets and business operations of a            Medicare-certified home health agency with branches located in Ocala and Palm Coast,            Florida. The total purchase price of $1.8 million was paid $1.4 million in cash plus            $340,000 in a note payable bearing interest at 6% payable quarterly with the principal            balance due in a balloon payment 30 months from the closing date. The remaining $5,000            is compromised of assumed employee time off liabilities. The Company funded the cash            portion of the purchase

 

65

price from available cash on deposit. The purchase price was allocated            to tangible assets ($100,000) including primarily receivables and fixed assets with the            balance recorded as goodwill ($1.7 million).

 

**NOTE 14 - QUARTERLY FINANCIAL DATA— (UNAUDITED)            (1)**

 

Summarized quarterly financial data for the years ended December 31,            2007 and 2006 are as follows (in thousands except per share data):

      

|                                                |                                                        | **Year Ended December 31, 2007**                                  |                                                                                   | **Year Ended December 31, 2006**                            |   |
|-----------------------------------------------------|-------------------------------------------------------------|-------------------------------------------------------------------|----------------------------------------------------------------------------------------|-------------------------------------------------------------|--------|
|                                                | **Dec. 31, 2007**                                           | **Sept. 30,**

**2007**                                           | **June 30,**

**2007**                                                                 | **March 31,**

**2007**                                     |   | **Dec. 31, 2006** | **Sept. 30, 2006** | **June 30,**

**2006** | **March 31,**

**2006** |
| Net service revenues                                | $    35,876                        | $     31,971                        | $     32,510                                             | $    31,773                        |   | $     25,953  | $      22,631  | $      21,550  | $          20,511  |
| Gross margin                                        | 18,637                                                 | 16,315                                                       | 16,966                                                                            | 16,332                                                 |   | 13,142  | 11221  | 10,335  | 9,819  |
| Income from continuing

operations                  |  

2,076                                          |  

1,955                                                |  

1,962                                                                     |  

1,821                                          |   |  

1,413  |  

1,046  |  

929  |  

928  |
| Income (loss) from discontinued

operations         |  

                             

(6)        |  

                             

(69)             |  

                             

(19)                                       |  

                             

(155)           |   |  

                             

56  |  

                             

(20)  |  

                             

(30) |  

                             

(82) |
| Net income                                          | 2,070                                                  | 1,886                                                        | 1,943                                                                                  | 1,666                                                  |   | 1,469  | 1,026  | 899  | 846  |
|                                                |                                                        |                                                              |                                                                                   |                                                        |   |   |   |   |   |
| **Income from**

**continuing operations**          |                                                        |                                                              |                                                                                   |                                                        |   |   |   |   |   |
| Basic                                               | $        0.38  | $         0.36  | $        0.36                             | $        0.34  |   | $         0.26  | $        0.19  | $        0.17  | $            0.17  |
| Diluted                                             | $        0.37  | $         0.35  | $        0.35                             | $        0.32  |   | $         0.25  | $        0.19  | $        0.17  | $            0.17  |
|                                                |                                                        |                                                              |                                                                                   |                                                        |   |   |   |   |   |
| **Income (loss) from**

**discontinued operations** |                                                        |                                                              |                                                                                   |                                                        |   |   |   |   |   |
| Basic                                               | $        0.00  | $         0.01  | $             -  | $      (0.03)                 |   | $         0.01  | $              -  | $       (0.01) | $          (0.01) |
| Diluted                                             | $        0.00  | $         0.01  | $             -  | $      (0.03)                 |   | $         0.01  | $              -  | $       (0.01) | $          (0.01) |
|                                                |                                                        |                                                              |                                                                                   |                                                        |   |   |   |   |   |
| **Net income per share**                            |                                                        |                                                              |                                                                                   |                                                        |   |   |   |   |   |
| Basic                                               | $        0.38  | $         0.35  | $        0.36                             | $        0.31  |   | $         0.27  | $        0.19  | $        0.17  | $            0.16  |
| Diluted                                             | $        0.37  | $         0.34  | $        0.35                             | $        0.30  |   | $         0.27  | $        0.18  | $        0.16  | $              0.1  |
|                                                |                                                        |                                                              |                                                                                   |                                                        |   |   |   |   |   |
|                                                     |                                                             |                                                                   |                                                                                        |                                                             |        |  |  |  |  |  |  |

             

(1) All            share and per share information has been adjusted to reflect a 2-for-1 common stock            split completed in January 2007.

 

66

**Report of Independent Registered Public Accounting            Firm**

 

The            Board of Directors and Shareholders of

Almost            Family, Inc.

 

We            have audited the accompanying consolidated balance sheets of Almost Family, Inc. and            subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements            of income, shareholders' equity, and cash flows for each of the three years in the            period ended December 31, 2007. Our audits also included the financial statement            schedule listed in the Index at Item 15(a). These financial statements and schedule are            the responsibility of the Company's management. Our responsibility is to express an            opinion on these financial statements and schedule based on our audits.

 

We            conducted our audits in accordance with the standards of the Public Company Accounting            Oversight Board (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 financial statements referred to above present fairly, in all material            respects, the consolidated financial position of Almost Family, Inc. and subsidiaries            at December 31, 2007 and 2006, and the consolidated results of their operations and            their cash flows for each of the three years in the period ended December 31, 2007, in            conformity with U.S. generally accepted accounting principles. Also, in our opinion,            the related financial statement schedule, when considered in relation to the basic            financial statements taken as a whole, presents fairly in all material respects the            information set forth therein.

 

As            discussed in Note 1 to the consolidated financial statements, effective January 1,            2006, the Company changed its method of accounting for stock-based compensation to            conform to Statement of Financial Accounting Standards No. 123(R),            “Share-Based Payment”.

 

We            also have audited, in accordance with the standards of the Public Company Accounting            Oversight Board (United States), the effectiveness of Almost Family, Inc. and            subsidiaries’ internal control over financial reporting as of December 31, 2007,            based of criteria established in Internal Control-Integrated Framework issued by the            Committee of Sponsoring Organizations of the Treadway Commission and our report dated            March 7, 2008 expressed an unqualified opinion thereon.

 

/s/            Ernst & Young, LLP

 

Louisville, Kentucky

March 7, 2008

 

 

67

**Management’s Report on Internal Control over Financial            Reporting**

 

The            consolidated financial statements appearing in this Annual Report have been prepared by            management, that is responsible for their preparation, integrity and fair presentation.            The statements have been prepared in accordance with accounting principles generally            accepted in the United States, which requires management to make estimates and            assumptions that affect the amounts reported in the consolidated financial statements            and accompanying notes.

 

Our            management is responsible for establishing and maintaining adequate internal control            over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Securities            Exchange Act of 1934, as amended). Our internal control system was designed to provide            reasonable assurance regarding the reliability of financial reporting and the            preparation of financial statements for external purposes in accordance with generally            accepted accounting principles.

 

All            internal control systems, no matter how well designed, have inherent limitations.            Therefore, even those systems determined to be effective can provide only reasonable            assurance with respect to financial statement preparation and presentation. Further,            because of changes in conditions, the effectiveness of an internal control system may            vary over time.

 

Under the supervision and with the participation of our management,            including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), we            conducted an evaluation of the effectiveness of our internal control over financial            reporting as of December 31, 2007 based on the framework            in*Internal Control — Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway            Commission (COSO), with the exception of the operations of Quality of Life acquired            during October 2007, as disclosed in Note 13, which altogether constituted            approximately 6% of total assets as of December 31, 2007 and 2% of revenues for the            year then ended. Based on that evaluation, our management concluded our internal            control over financial reporting was effective to provide reasonable assurance            regarding the reliability of financial reporting and the preparation of financial            statements for external purposes in accordance with generally accepted accounting            principles as of December 31, 2007.

 

Ernst & Young LLP, an independent registered public accounting firm,            has audited and reported on the consolidated financial statements of Almost Family,            Inc. and on the effectiveness of our internal control over financial reporting. The            reports of Ernst & Young LLP are contained in this Annual Report.

 

| /s/ William B. Yarmuth                |   | /s/ C. Steven Guenthner |
|---------------------------------------|--------|-------------------------|
| William B. Yarmuth                    |   | C. Steven Guenthner     |
| President and Chief Executive Officer |   | Chief Financial Officer |
| Date: March 7, 2008                   |   | March 7, 2008           |

 

 

68

**Report of Independent Registered Public Accounting            Firm**

 

The            Board of Directors and Shareholders of

Almost            Family, Inc.

 

We            have audited Almost Family, Inc. and subsidiaries’ internal control of financial            reporting as of December 31, 2007, based on criteria establish in Internal Control            – Integrated Framework issued by the Committee of Sponsoring Organizations of the            Treadway Commission (the COSO criteria). Almost Family, Inc. and subsidiaries’            management is responsible for maintaining effective internal control over financial            reporting, and for its assessment of the effectiveness of internal control over            financial reporting included in the accompanying Management’s Report on Internal            Control over Financial Reporting. Our responsibility is to express an opinion on the            company’s internal control over financial reporting based on our            audit.

 

We            conducted our audits in accordance with the standards of the Public Company Accounting            Oversight Board (United States). Those standards require that we plan and perform the            audit to obtain reasonable assurance about whether effective internal control over            financial reporting was maintained in all material respects. Our audit included            obtaining an understanding of internal control over financial reporting, assessing the            risk that a material weakness exists, testing and evaluating the design and operating            effectiveness of internal control based on the assessed risk, and performing such other            procedures as we considered necessary in the circumstances. We believe that our audit            provides a reasonable basis for our opinion.

 

A            company’s internal control over financial reporting is a process designed to            provide reasonable assurance regarding the reliability of financial reporting and the            preparation of financial statements for external purposes in accordance with generally            accepted accounting principles. A company’s internal control over financial            reporting includes those policies and procedures that (1) pertain to the maintenance of            records that, in reasonable detail, accurately and fairly reflect the transactions and            dispositions of the assets of the company; (2) provide reasonable assurance that            transactions are recorded as necessary to permit preparation of financial statements in            accordance with generally accepted accounting principles, and that receipts and            expenditures of the company are being made only in accordance with authorizations of            management and directors of the company; and (3) provide reasonable assurance regarding            prevention or timely detection of unauthorized acquisition, use, or disposition of the            company’s assets that could have a material effect on the financial            statements.

 

Because of its inherent limitations, internal control over financial            reporting may not prevent or detect misstatements. Also, projections of any evaluation            of effectiveness to future periods are subject to the risk that controls may become            inadequate because of changes in conditions, or that the degree of compliance with the            policies or procedures may deteriorate.

 

As            indicated in the accompanying Management’s Report on Internal Control over            Financial Reporting, management’s assessment and conclusion on the effectiveness            of internal control over financial reporting did not include the internal controls of            Quality of Life which is included in the 2007 consolidated financial statements of            Almost Family, Inc. and subsidiaries and constituted 6% of total assets as of December            31, 2007 and 2% of revenues for the year then ended. Our audit of internal control over            financial reporting of Almost Family, Inc. also did not include an evaluation of the            internal control over financial reporting of Qualify of Life.

 

In            our opinion, Almost Family, Inc. and subsidiaries maintained, in all material respects,            effective internal control over financial reporting as of December 31, 2007, based on            the COSO criteria.

 

We            also have audited, in accordance with the standards of the Public Company Accounting            Oversight Board (United States), the consolidated balance sheets of Almost Family, Inc.            and subsidiaries as of December 31, 2007 and 2006, and the related consolidated            statements of income, shareholder’s equity, and cash flows for each of the three            years in the period, ended December 31, 2007, of Almost Family, Inc. and subsidiaries            and our report dated March 7, 2008 expressed an unqualified opinion thereon.

 

/s/            Ernst & Young, LLP

 

Louisville, Kentucky

March 7, 2008

 

69

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

 

None.

 

**ITEM 9A. CONTROLS AND PROCEDURES**

 

*Disclosure Controls and Procedures*–            As of December 31, 2007, the Company’s management, with participation of the            Company’s Chief Executive Officer and Chief Financial Officer, evaluated the            effectiveness of the Company’s disclosure controls and procedures as defined in            Exchange Act Rules 13a-15(e) and 15d-15(e). Based on that evaluation, the Chief            Executive Officer and Chief Financial Officer concluded that the Company’s            disclosure controls and procedures were effective as of December 31, 2007.

 

*Internal Control*– Pursuant to            Section 404 of the Sarbanes-Oxley Act of 2002, we have included a report that provides            management’s assessment of our internal control over financial reporting as part            of this Annual Report on Form 10-K for the year ended December 31, 2007.            Management’s report is included in Item 8 of this report under the caption            entitled “Management’s Report on Internal Control Over Financial            Reporting,” and is incorporated herein by reference. Our independent registered            public accounting firm has issued an attestation report on the effectiveness of our            internal control over financial reporting. This attestation report is included in item            8 of this report under the caption entitled “Report of Independent Registered            Public Accounting Firm” and is incorporated herein by reference.

 

*Changes in Internal Control Over Financial Reporting*- There were no changes in the Company’s internal control over            financial reporting during the fourth quarter of 2007, that have materially affected,            or are reasonably likely to materially affect, Almost Family, Inc.’s internal            control over financial reporting.

 

**ITEM 9B. OTHER INFORMATION**

 

None.

 

70

**PART III**

 

**ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE            GOVERNANCE**

 

The            information required by this Item is set forth in the Registrant’s definitive            proxy statement to be filed with the Commission no later than 120 days after December            31, 2007, except for the information regarding executive officers of the Company. The            information required by this Item contained in such definitive proxy statement is            incorporated herein by reference.

 

The            following table sets forth certain information with respect to the Company’s            executive officers.

 

| **Name** | **Age** | **Position with the Company** |
|----------|---------|-------------------------------|

| William B. Yarmuth (1) | 55 | Chairman of the Board President |
|------------------------|----|---------------------------------|

|   | and Chief Executive Officer |
|--------|-----------------------------|

| C. Steven Guenthner (2) | 47 | Senior Vice President and |
|-------------------------|----|---------------------------|

|   | Chief Financial Officer |
|--------|-------------------------|

| P. Todd Lyles (3) | 46 | Senior Vice President – Administration |
|-------------------|----|----------------------------------------------|

| Anne T. Liechty (4) | 55 | Senior Vice President - Operations |
|---------------------|----|------------------------------------|

| Phyllis Montville (5) | 59 | Vice President – Operations |
|-----------------------|----|-----------------------------------|

| David Pruitt (6) | 44 | Vice President – Operations |
|------------------|----|-----------------------------------|

| John B. Walker (7) | 49 | Vice President - Chief Accounting Officer |
|--------------------|----|-------------------------------------------|

 

Executive officers of the Company are elected by the Board of Directors            for one year and serve at the pleasure of the Board of Directors with the exception of            William B. Yarmuth who has an employment agreement with the Company. There are no            family relationships between any director or executive officer.

 

| (1) | William B. Yarmuth has been a director of the Company                            since 1991, when the Company acquired National Health Industries                            (“National”), where Mr. Yarmuth was Chairman, President and                            Chief Executive Officer. After the acquisition, Mr. Yarmuth became the                            President and Chief Operating Officer of the Company. Mr. Yarmuth                            became Chairman and CEO in 1992. He was Chairman of the Board,                            President and Chief Executive Officer of National from 1981 to                            1991. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

| (2) | C. Steven Guenthner has been Senior Vice President and                            Chief Financial Officer of the Company since 1992. From 1983 through                            1992 Mr. Guenthner was employed as a C.P.A. with Arthur Andersen LLP.                            Prior to joining the Company he served as a Senior Manager in the                            firm’s Accounting and Audit division specializing in mergers and                            acquisitions, public companies and the healthcare industry. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

| (3) | P. Todd Lyles joined the Company as Senior Vice                            President Planning and Development in October 1997 and now serves as                            Senior Vice President – Administration. Prior to joining the                            Company Mr. Lyles was Vice President Development for the Kentucky                            Division of Columbia/HCA, a position he had held since 1993. Mr. Lyles                            experience also includes 8 years with Humana Inc. in various financial                            and hospital management positions. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

| (4) | Anne T. Liechty became Senior Vice President – VN                            Operations in 2001. Ms. Liechty has been employed by the Company since                            1986 in various capacities including Vice President of Operations for                            the Company’s VN segment and its Product segment. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

| (5) | Phyllis Montville became Vice President –                            Operations in 2006. Ms. Montville came to the company in 2006 as Vice                            President of VN Operations in Florida. She has 23 years experience in                            home care management, most of which is in the Florida market. Ms.                            Montville owned and |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

71

operated her own franchise for 10 years. She started in the home care            field as a branch manager and home care nurse.

             

| (6) | David Pruitt became Vice President – Operations in                            2002. Mr. Pruitt has been employed by the company since 1996 in various                            roles in the company’s service divisions. Prior to 1996, he was                            employed by the Medicare Intermediary in Columbia, South                            Carolina. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

| (7) | John B. Walker became Chief Accounting Officer of the                            Company in May 2007.  He is certified public accountant with 28                            years of financial management experience.  In 2003, he founded                            American Pipe Lining – MidAmerica, Inc. and served as its                            president until the company’s sale in 2007.  Prior to that,                            he held various senior financial management positions with high-growth                            companies in health insurance, home health and energy industries.                                |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

**Code of Ethics and Business Conduct**

 

The            Company has adopted a Code of Ethics and Business Conduct that applies to all its            directors, officers (including its chief executive officer, chief financial officer,            chief accounting officer and any person performing similar functions) and employees.            The Company has made the Code of Ethics and Business Conduct available on its website            atwww.almostfamily.com            .

 

**ITEMS 11, 12, 13 and 14. EXECUTIVE COMPENSATION; SECURITY OWNERSHIP            OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS; CERTAIN            RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE; AND PRINCIPAL            ACCOUNTANT FEES AND SERVICES**

 

The            Registrant intends to file a definitive proxy statement with the Commission pursuant to            Regulation 14A (17 CFR 240.14a) not later than 120 days after the close of the fiscal            year covered by this report. In accordance with General Instruction G(3) to Form 10-K,            the information called for by Items 11, 12, 13 and 14 is incorporated herein by            reference to the definitive proxy statement. Neither the report on Executive            Compensation nor the performance graph included in the Company’s proxy statement            shall be deemed incorporated herein by reference.

 

**Equity Compensation Plans** 

 

As            of December 31, 2007, shares of common stock authorized for issuance under our equity            compensation plans are summarized in the following table. See note 7 to the            consolidated financial statements for a description of the plans. The table below is            furnished pursuant to item 12.

 

|  

                             

Plan Category                  |  

Shares to Be IssuedUpon                            Exercise |   | Weighted-Average Option Exercise Price                                                    |   |  

                             

Shares Available for Future Grants |
|----------------------------------------------------------------------------|---------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------|
|  

Plans approved by shareholders

Plans not approved by shareholders |  

317,014

-                                                  |   |  

$            11.87

- |   |  

555,000

-                                                             |
|                                                                       |                                                                |   |                                                                                      |   |                                                                           |
| Total                                                                      | 317,014                                                             |   | $            11.87            |   | 555,000                                                                        |

 

 

72

**PART IV**

 

| **Item 15.** | **EXHIBITS AND FINANCIAL STATEMENT                            SCHEDULES** |
|--------------|---------------------------------------------------------------------------|

|   | **Page Number** |
|--------|-----------------|

|   | (a) | The following items are filed as part of this                            report: |
|--------|-----|----------------------------------------------------------------------------------|

 

|   | 1. | Index to Consolidated Financial Statements |
|--------|----|--------------------------------------------|

             

|   | Consolidated Statements of Income for the years ended                            December 31, 2007, 2006 and 2005 | 41 |
|--------|-------------------------------------------------------------------------------------------------------------------|----|

|   | Consolidated Balance Sheets – December 31, 2007                            and 2006 | 42 |
|--------|-------------------------------------------------------------------------------------------|----|

Consolidated Statements of Cash Flows for the years ended December 31,            2007, 2006 and

|   | 2005 | 44 |
|--------|------|----|

Consolidated Statements of Stockholders’ Equity for the years            ended December 31, 2007,

|   | 2006 and 2005 | 43 |
|--------|---------------|----|

|   | Notes to Consolidated Financial Statements | 45 |
|--------|--------------------------------------------|----|

|   | Report of Independent Registered Public Accounting                            Firm | 64 |
|--------|------------------------------------------------------------------------------------|----|

             

|   | 2. | Index to Financial Statement Schedule |
|--------|----|---------------------------------------|

             

|   | Schedule II – Valuation and Qualifying                            Accounts | 75 |
|--------|----------------------------------------------------------------------------------|----|

             

All other Schedules have been omitted because they are either not            required, not applicable or,

the information has otherwise been supplied in the financial statements            or notes thereto.

             

|   | (b) | Exhibits required to be filed by Item 601 of Regulation                            S-K are set forth below: |
|--------|-----|-------------------------------------------------------------------------------------------------------------|

 

73

                                                                                                                                                                                                                         

|   | **Number** | **Description of Exhibit** |
|--------|------------|----------------------------|

 

 

|   | 3.1 | Certificate of Incorporation, as amended, of the                            Registrant (incorporated by reference to Exhibit No. 3.1 of the                            Registrant’s Annual Report on Form 10-K for the year ended March                            31, 1997) |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | 3.2 | Amended and Restated Bylaws of the Registrant                            (incorporated by reference to Exhibit 3 of the Registrant’s                            Current Report on Form 8-K dated November 12, 2007) |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | 4.1 | Stockholder Protection Rights Agreement dated February                            1, 1999, between the Registrant and Reliance Trust Company                            (incorporated by reference to Exhibit 4 to the Registrant’s                            Current Report on Form 8-K dated February 1, 1999) |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | 4.2 | Other Debt Instruments – copies of other debt                            instruments for which the total debt is less than 10% of assets will be                            furnished to the Commission upon request. |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | 10.1+ | Nonqualified Stock Option Plan, as amended (incorporated                            by reference to the Registrant’s Registration Statement on Form                            S-8 Reg. No. 33-20815). |
|--------|-------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | 10.2+ | Supplemental Nonqualified Stock Option Plan                            (incorporated by reference to Exhibit 19.4 to the Registrant’s                            Report on Form 10-Q for the Quarter Ended November 30, 1987 Commission                            File No. 15342). |
|--------|-------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | 10.3+ | Incentive Stock Option Plan, as amended (incorporated by                            reference to the Registrant’s Registration Statement on Form S-8                            Reg. No. 33-20815). |
|--------|-------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | 10.4+ | Amendment to the Senior Service Corporation 1987                            Nonqualified Stock Option Plan (incorporated by reference to Exhibit                            19.3 to the Registrant’s Report on Form 10-Q for the quarter                            ended November 30, 1989). |
|--------|-------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | 10.5+ | 1991 Long-Term Incentive Plan (incorporated by                            references to the Registrant’s Registration Statement on Form S-8                            Reg. No. 33-81124). |
|--------|-------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | 10.6+ | Employment Agreement, dated January 1, 1996, between the                            Company and William B. Yarmuth (incorporated by reference to the                            Registrant’s report on Form 10K for the year ended March 31,                            1996). |
|--------|-------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | 10.7 | Loan Agreement between the Company and Bank One, KY                            (incorporated by reference to the Registrant’s report on Form 10K                            for the year ended March 31, 2001). |
|--------|------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | 10.8 | Third Amendment to Loan Agreement between the Company                            and Bank One, NA, dated March 23, 2004 (incorporated by reference to                            the Registrant’s report on Form 10-K for the year ended December                            31, 2003) |
|--------|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 10.9 |          Fourth                            Amendment to Loan Documents dated as of August 11, 2005, by and between                            (i) Almost Family, Inc., (ii) each of the subsidiaries of AFI that is                            party to the Agreement, and (iii) JP Morgan Chase Bank, N.A. (successor                            by merger to Bank One N.A.). (incorporated by reference to the                            Registrant’s report on Form 10-Q for the quarter ended June 30,                            2005). |
|--------|------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

74

|   | 10.10* | Fifth Amendment to Loan Documents dated as of December                            4, 2007, by and between (i) Almost Family, Inc., (ii) each of the                            subsidiaries of Almost Family, Inc. that is party to the Amendment, and                            (iii) JP Morgan Chase Bank, N.A. (successor by merger to Bank One                            N.A. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | 10.11+ | 2007 Stock Option and Incentive Compensation Plan                            (incorporated by reference to Appendix A of the Definitive Proxy                            Statement on Schedule 14A as filed on June 25, 2007). |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | 10.12+ | 2000 Stock Option Plan (incorporated by reference to the                            Registrant’s Registration |
|--------|--------|---------------------------------------------------------------------------------------------------------------------|

|   | Statement on Form S-8 Reg. No. 333-88744) |
|--------|-------------------------------------------|

             

|   | 10.13+ | Non-Employee Director Deferred Compensation                            Plan |
|--------|--------|-----------------------------------------------------------------------------|

             

|   | 10.14+ | 1993 Non-Employee Directors Stock Option Plan                            (incorporated by reference to the |
|--------|--------|------------------------------------------------------------------------------------------------------------|

|   | Registrant’s Registration Statement on Form S-8                            Reg. No. 333-881100) |
|--------|-------------------------------------------------------------------------------------------------------|

             

|   | 10.15 | Asset Purchase Agreement dated as of October 23, 2007                            (the "Agreement"), among (i) the Registrant, Caretenders Visiting                            Services of Hernando County, LLC, Caretenders Visiting Services of                            Pinellas County, LLC, and Mederi Caretenders VS of Tampa, LLC, (ii)                            Quality of Life Holdings, Inc., Quality of Life Home Health Services,                            Inc., Quality of Life Home Health Services of Hillsborough, Inc., and                            Quality of Life Homecare of Hernando, Inc., (collectively, "Sellers"),                            and (iii) Michael Moses, James Heenan and Rosalind M. Heenan.                            (incorporated by reference to the Registrant’s report on Form 8K                            filed October 23, 2007) |
|--------|-------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | 10.16 | Asset Purchase Agreement dated as of November 15, 2006,                            among (x) the Registrant, Caretenders Visiting Services of Ocala, LLC,                            Caretenders Visiting Services of Southwest Florida, Inc., Caretenders                            Visiting Services of Orlando, LLC, Caretenders Visiting Services of                            District 7, LLC, Pro-Care Home Health of Broward, Inc., Caretenders                            Visiting Services of Southeast Florida, Inc., Caretenders Visiting                            Services of Hernando County, LLC, Caretenders Visiting Services of                            District 6, LLC, Caretenders Visiting Services of Pinellas County, LLC,                            Caretenders Visiting Services of Cook County, LLC, and National Health                            Industries, Inc., (y) Mederi, Inc., Mederi of Collier County, Inc.,                            Mederi of Manatee County, Inc., Mederi of Pinellas County, Inc., Mederi                            of Alachua County, Inc., Mederi of Palm Beach County, Inc., Mederi of                            Orange County, Inc., d/b/a Mederi of Brevard County, Inc., and United                            Home Health Services, Inc. d/b/a Mederi of Illinois, and (z) David                            Nesslein and Sandra Vazquez, (incorporated by reference to the                            Registrant’s report on Form 8K filed December 7, 2006) |
|--------|-------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | 10.17 | Asset Purchase Agreement dated as of October 23, 2007                            among (i) the Registrant, Caretenders Visiting Services of Hernando                            County, LLC, Caretenders Visiting Services of Pinellas County, LLC, and                            Mederi Caretenders VS of Tampa, LLC, (ii) Quality of Life Holdings,                            Inc., Quality of Life Home Health Services, Inc., Quality of Life Home                            Health Services of Hillsborough, Inc., and Quality of Life Homecare of                            Hernando, Inc., and (iii) Michael Moses, James Heenan and Rosalind M.                            Heenan, including executed copies of the following exhibits: (listed                            omitted schedules will be furnished supplementally to the SEC upon                            request): |
|--------|-------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | (A) | Assignment and Assumption Agreements dated as of October                            26, 2007, between various parties to the Agreement. |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------|

             

 

75

|   | (B) | Confidentiality, Nonsolicitation and Noncompetition                            Agreement dated as of October 26, 2007 among (i) the Registrant,                            Caretenders Visiting Services of Hernando County, LLC, Mederi                            Caretenders VS of Tampa, LLC, and Caretenders Visiting Services of                            Pinellas County, LLC and (ii) Quality of Life Holdings, Inc., Quality                            of Life Home Health Services, Inc., Quality of Life Home Health                            Services of Hillsborough, Inc., Quality of Life Homecare of Hernando,                            Inc., Michael Moses, James Heenan and Rosalind M. Heenan; |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | (C) | Registration Rights Agreement dated October 26, 2007                            between the Registrant and Quality of Life Holdings, Inc.,                            and |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | (D) | Stock Pledge Agreement dated as of October 26, 2007                            between the Registrant and Quality of Life Holdings, Inc. (incorporated                            by reference to the Registrant’s Report in Form 8-K dated October                            26, 2007). |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | 21* | List of Subsidiaries of Almost Family, Inc. |
|--------|-----|---------------------------------------------|

             

|   | 23.1* | Consent of Ernst & Young LLP |
|--------|-------|----------------------------------|

             

|   | 31.1* |        Certification                            of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule                            15d-14(a) of        the Securities                            Exchange Act, as amended. |
|--------|-------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | 31.2* |        Certification                            of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule                            15d-14(a) of        the Securities                            Exchange Act, as amended. |
|--------|-------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | 32.1* |        Certification                            of Chief Executive Officer pursuant to 18 U.S.C 1350, as adopted                            pursuant to        section 906 of                            the Sarbanes Oxley Act of 2002. |
|--------|-------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | 32.2* |        Certification                            of Chief Financial Officer pursuant to 18 U.S.C 1350, as adopted                            pursuant to        section 906 of                            the Sarbanes Oxley Act of 2002. |
|--------|-------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

*****Denotes filed herein.

+Denotes compensatory plan or management contract.

 

76

**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.

 

*ALMOST FAMILY, INC.*

March 12, 2008

 

| /S/ William B. Yarmuth | March 12, 2008 |
|------------------------|----------------|

William B. Yarmuth

Chairman, Chief Executive Officer and President

 

| /S/ C. Steven Guenthner | March 12, 2008 |
|-------------------------|----------------|

C.            Steven Guenthner

Senior Vice President and Chief Financial Officer

(Principal Financial Officer)

 

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

 

| **Signature** |                                            | **Title** |                           | **Date**                                                                     |
|---------------|-------------------------------------------------|-----------|--------------------------------|------------------------------------------------------------------------------|
|          |                                            |      |                           |                                                                         |
| By:           | /s/ William B. Yarmuth                          |      |                           | Director, Chief Executive Officer and                            President   |   | March 12, 2008 |
|          | William B. Yarmuth                              |      | (principal executive officer)  |                                                                         |   |
|          |                                            |      |                           |                                                                         |   |
| By:           | /s/ C. Steven Guenthner                         |      |                           | Senior Vice President and Chief Financial                            Officer |   | March 12, 2008 |
|          | C. Steven                            Guenthner  |      | (principal financial officer)  |                                                                         |   |
|          |                                            |      |                           |                                                                         |   |
| By:           | /s/ John B. Walker                              |      |                           | Vice President and Chief Accounting Officer                                  |   | March 12, 2008 |
|          | John B. Walker                                  |      | (principal accounting officer) |                                                                         |   |
|          |                                            |      |                           |                                                                         |   |
| By:           | /s/ Steven B. Bing                              |      |                           | Director                                                                     |   | March 12, 2008 |
|          | Steven B. Bing                                  |      |                           |                                                                         |   |
|          |                                            |      |                           |                                                                         |   |
| By:           | /s/ Donald G. McClinton                         |      |                           | Director                                                                     |   | March 12, 2008 |
|          | Donald G. McClinton                             |      |                           |                                                                         |   |
|          |                                            |      |                           |                                                                         |   |
| By:           | /s/ Tyree G. Wilburn                            |      |                           | Director                                                                     |   | March 12, 2008 |
|          | Tyree G. Wilburn                                |      |                           |                                                                         |   |
|          |                                            |      |                           |                                                                         |   |
| By:           | /s/ Jonathan D. Goldberg                        |      |                           | Director                                                                     |   | March 12, 2008 |
|          | Jonathan D. Goldberg                            |      |                           |                                                                         |   |
|          |                                            |      |                           |                                                                         |   |
| By:           | /s/ W. Earl Reed, III                           |      |                           | Director                                                                     |   | March 12, 2008 |
|          | W. Earl Reed, III                               |      |                           |                                                                         |   |
|          |                                            |      |                           |                                                                         |   |   |   |   |   |   |   |   |
|          |                                            |      |                           |                                                                         |   |
| By:           | /s/ Henry M. Altman, Jr.                        |      |                           | Director                                                                     |   | March 12, 2008 |
|          | Henry                            M. Altman, Jr. |      |                           |                                                                         |   |
|               |                                                 |           |                                |                                                                              |  |  |  |  |  |  |  |  |  |

 

 

77

***ALMOST FAMILY, INC.*****AND            SUBSIDIARIES**

**VALUATION AND QUALIFYING ACCOUNTS**

**SCHEDULE II**

 

|   | **Col. A** | **Col. B** | **Col. C** | **Col. D** | **Col. E** |
|--------|------------|------------|------------|------------|------------|

 

|   | **Additions** |
|--------|---------------|

|  

                             

                             

**Description** |   |  

**Balance at**

**Beginning of**

**Period** |   | **(1)**

**Charged to Costs**

**and Expenses**    |   | **(2)**

**Charged to**

**Other Accounts** |   |  

                             

**(3)**

**Deductions** |   |  

                             

**Balance at**

**End of Period** |
|-------------------------------------------------------------------------------------------------|--------|------------------------------------------------------|--------|----------------------------------------------------|--------|---------------------------------------------|--------|---------------------------------------------------------------------|--------|-------------------------------------------------------------------------------|
|                                                                                            |   |                                                 |   |                                               |   |                                        |   |                                                                |   |                                                                          |
| **Allowance for bad debts:**                                                                    |   |                                                 |   |                                               |   |                                        |   |                                                                |   |                                                                          |
| Year Ended December 31, 2007                                                                    |   | $   2,100,826                         |   | $    1,506,570                 |   | $   957,650                  |   | $  1,558,880                                              |   | $      3,006,166                                |
|                                                                                            |   |                                                 |   |                                               |   |                                        |   |                                                                |   |                                                                          |
| Year Ended December 31, 2006                                                                    |   | $   1,795,800                         |   | $       687,103 |   | 599,513                                     |   | $     981,590                              |   | $      2,100,826                                |
|                                                                                            |   |                                                 |   |                                               |   |                                        |   |                                                                |   |                                                                          |
| Year ended December 31, 2005                                                                    |   | $   2,081,394                         |   | $       935,141 |   | 262,303                                     |   | $  1,483,038                                              |   | $      1,795,800                                |
|                                                                                            |   |                                                 |   |                                               |   |                                        |   |                                                                |   |                                                                          |

 

|   | (1) | Charged to bad debt expense. |
|--------|-----|------------------------------|

|   | (2) | Acquired Bad Debt Reserves. |
|--------|-----|-----------------------------|

|   | (3) | Write-off of accounts. |
|--------|-----|------------------------|

             

78

Exhibit 21

 

***ALMOST FAMILY, INC.*****AND            SUBSIDIARIES**

**LIST OF SUBSIDIARIES AS OF MARCH 7, 2008**

 

|                             | **Subsidiaries of*****Almost Family, Inc.*** |   |
|----------------------------------|----------------------------------------------|--------|
| Adult Day Care of America, Inc.  | National Health Industries, Inc.             |
| Adult Day Care of Maryland, Inc. | Adult Day Care of Louisville, Inc.           |
| Almost Family, Inc.              |                                         |
|                             |                                         |
|                                  |                                              |        |  |

 

|                                                                               | **Subsidiaries of National Health Industries,                            Inc.** |   |
|------------------------------------------------------------------------------------|---------------------------------------------------------------------------------|--------|
|                                                                               |                                                                            |
| Almost Family PC of Ft. Lauderdale, LLC                                            | Caretenders Visiting Services of St. Augustine,                            LLC  |
| Almost Family PC of Kentucky, LLC                                                  | Caretenders Visiting Services of St. Louis,                            LLC      |
| Almost Family PC of SW Florida, LLC                                                | Caretenders Visiting Services of Boston, LLC                                    |
| Almost Family PC of West Palm, LLC                                                 | Caretenders Visiting Services of Central KY,                            LLC     |
| Caretenders Mobile Medical Services, LLC                                           | Caretenders Visiting Services of Louisville,                            LLC     |
| Caretenders of Birmingham, Inc.                                                    | Caretenders Visiting Services of Northern KY,                            LLC    |
| Caretenders of Cleveland, Inc.                                                     | Caretenders Visiting Services of Western KY,                            LLC     |
| Caretenders of Columbus, Inc.                                                      | Mederi Caretenders VS of Broward, LLC                                           |
| Caretenders of Jacksonvillle, LLC                                                  | Mederi Caretenders VS of SE FL, LLC                                             |
| Caretenders Visiting Service Employment, Inc.                                      | Mederi Caretenders VS of SW FL, LLC                                             |
| Caretenders Visiting Services of Cook County,                            LLC       | Mederi Caretenders VS of Tampa, LLC                                             |
| Caretenders Visiting Services of District 6,                            LLC        | Princeton Home Health                                                           |
| Caretenders Visiting Services of District 7,                            LLC        | Almost Family PC of Alabama, LLC                                                |
| Caretenders Visiting Services of Gainesville,                            LLC       | Almost Family PC of Columbus, LLC                                               |
| Caretenders Visiting Services of Hernando County,                            LLC   | Almost Family PC of Connecticut, LLC                                            |
| Caretenders Visiting Services of Kentuckiana,                            LLC       | Caretenders VS of Cleveland, LLC                                                |
| Caretenders Visiting Services of Ocala, LLC                                        | Caretenders of Cincinnati, Inc.                                                 |
| Caretenders Visiting Services of Orlando, LLC                                      | Caretenders of Marshall County, Inc.                                            |
| Caretenders Visiting Services of Pinellas County,                            LLC   | Caretenders of New Jersey, Inc.                                                 |
| Caretenders Visiting Services of Southern Illinois,                            LLC | Caretenders of Southwest Florida, Inc.                                          |
| Caretenders of West Palm Beach, Inc.                                               |                                                                            |
|                                                                               |                                                                            |
| ***Caretenders*****of                            Birmingham, Inc.**                |                                                                            |
| Princeton Home Health LLC                                                          |                                                                            |
|                                                                                    |                                                                                 |        |  |

 

79

Exhibit 23.1

 

**Consent of Independent Registered Public Accounting            Firm**

 

We consent to the incorporation by reference in the Registration            Statement Form S-8 No. 33-881100 pertaining to the 1993 Non-Employee Directors Stock            Option Incentive Plan, Registration Statement Form S-8 No. 33-81124 pertaining to the            1991 Long-Term Employee Stock Option Plan, Registration Statement Form S-8 No.            333-88744 pertaining to the 2000 Employee Stock Option Plan, Registration Statement            Form S-8 No. 333-43631 pertaining to the Non-Employee Directors Deferred Compensation            Plan and Registration Statement Form S-3 No. 333-143459 pertaining to the 2007 shelf            registration of securities, of our report dated March 7, 2008, with respect to the            consolidated financial statements and schedule of Almost Family, Inc. and subsidiaries            included in the Annual Report (Form 10-K) for the year ended December 31,            2007.

 

/s/            Ernst & Young, LLP

 

Louisville, Kentucky

March 7, 2008

 

80

Exhibit 31.1

**CERTIFICATION OF CHIEF EXECUTIVE OFFICER**

**PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT**

 

I,            William B. Yarmuth, certify that:

1. I            have reviewed this annual report on Form 10-K of Almost Family, Inc.;

2.            Based on my knowledge, this 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 report;

3.            Based on my knowledge, the financial statements, and other financial information            included in this 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 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-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in            Exchange Act Rules 13a-15f and 15d-15(f)), for the registrant and have:

|   | a) | Designed such disclosure controls and procedures, or                            caused such disclosure controls and procedures to be designed under our                            supervision, 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 report is being prepared; |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | b) | Designed such internal control over financial reporting,                            or caused such internal control over financial reporting to be designed                            under our supervision, to provide reasonable assurance regarding the                            reliability of financial reporting and the preparation of financial                            statements for external purposes in accordance with generally accepted                            accounting principles; |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | c) | Evaluated the effectiveness of the registrant's                            disclosure controls and procedures and presented in this report our                            conclusions about the effectiveness of the disclosure controls and                            procedures, as of the end of the period covered by this report based on                            such evaluation; and |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | d) | Disclosed in this report any change in the                            registrant’s internal control over financial reporting that                            occurred during the registrant’s most recent fiscal quarter that                            has materially affected, or is reasonably likely to materially affect,                            the registrant’s internal control over financial reporting;                            and |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 5. | The registrant's other certifying officer and I have                            disclosed, based on our most recent evaluation of internal control over                            financial reporting, 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 and material weaknesses in                            the design or operation of internal control over financial reporting                            which are reasonably likely to adversely affect the registrant's                            ability to record, process, summarize and report financial information;                            and |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | b) | Any fraud, whether or not material, that involves                            management or other employees who have a significant role in the                            registrant's internal control over financial reporting. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

| Date: March 12, 2008 | By   /s/                            William B. Yarmuth               |
|----------------------|-------------------------------------------------------------------------------------|
|                      | William B. Yarmuth

Chairman of the Board,

President & Chief Executive Officer |

 

81

Exhibit 31.2

**CERTIFICATION OF CHIEF FINANCIAL OFFICER**

**PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT**

 

I, C.            Steven Guenthner, certify that:

1. I            have reviewed this annual report on Form 10-K of Almost Family, Inc.;

2.            Based on my knowledge, this 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 report;

3.            Based on my knowledge, the financial statements, and other financial information            included in this 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 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-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in            Exchange Act Rules 13a-15f and 15d-15(f)), for the registrant and have:

|   | a) | Designed such disclosure controls and procedures, or                            caused such disclosure controls and procedures to be designed under our                            supervision, 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 report is being prepared; |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | b) | Designed such internal control over financial reporting,                            or caused such internal control over financial reporting to be designed                            under our supervision, to provide reasonable assurance regarding the                            reliability of financial reporting and the preparation of financial                            statements for external purposes in accordance with generally accepted                            accounting principles; |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | c) | Evaluated the effectiveness of the registrant's                            disclosure controls and procedures and presented in this report our                            conclusions about the effectiveness of the disclosure controls and                            procedures, as of the end of the period covered by this report based on                            such evaluation; and |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | d) | Disclosed in this report any change in the                            registrant’s internal control over financial reporting that                            occurred during the registrant’s most recent fiscal quarter that                            has materially affected, or is reasonably likely to materially affect,                            the registrant’s internal control over financial reporting;                            and |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 5. | The registrant's other certifying officer and I have                            disclosed, based on our most recent evaluation of internal control over                            financial reporting, 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 and material weaknesses in                            the design or operation of internal control over financial reporting                            which are reasonably likely to adversely affect the registrant's                            ability to record, process, summarize and report financial information;                            and |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | b) | Any fraud, whether or not material, that involves                            management or other employees who have a significant role in the                            registrant's internal control over financial reporting. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| Date: March 12, 2008 | By   /s/ C.                            Steven Guenthner    |
|----------------------|---------------------------------------------------------------------------|
|                      | C. Steven Guenthner

Senior Vice President & Chief Financial

Officer |

 

82

Exhibit 32.1

 

**CERTIFICATION OF CHIEF EXECUTIVE OFFICER**

**PURSUANT TO 18 U.S.C. SECTION 1350**

**(AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF            2002)**

 

I, William B. Yarmuth, Chief Executive Officer of Almost Family, Inc.            (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act            of 2002, 18 U.S.C. Section 1350, that:

 

|   | (1) | The Annual Report on Form 10-K of the Company for the                            annual period ended December 31, 2007 (the “Report”) fully                            complies with the requirements of Section 13(a) of the Securities                            Exchange Act of 1934 (15 U.S.C. 78m); and |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | (2) | The information contained in the Report fairly presents,                            in all material respects, the financial condition and results of                            operations of the Company. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

 

| Date: March 12, 2008 | By   /s/                            William B. Yarmuth               |
|----------------------|-------------------------------------------------------------------------------------|
|                      | William B. Yarmuth

Chairman of the Board,

President & Chief Executive Officer |

 

 

 

 

A            signed copy of this original statement required by Section 906 has been provided to the            Company and will be retained by the Company and furnished to the Securities and            Exchange Commission or its staff on request.

 

83

Exhibit 32.2

 

**CERTIFICATION OF CHIEF FINANCIAL OFFICER**

**PURSUANT TO 18 U.S.C. SECTION 1350**

**(AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF            2002)**

 

I, C. Steven Guenthner, Chief Financial Officer of Almost Family, Inc.            (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act            of 2002, 18 U.S.C. Section 1350, that:

 

|   | (1) | The Annual Report on Form 10-K of the Company for the                            annual period ended December 31, 2007 (the “Report”) fully                            complies with the requirements of Section 13(a) of the Securities                            Exchange Act of 1934 (15 U.S.C. 78m); and |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

(2)The information contained in the Report fairly presents, in all            material respects, the financialcondition and results of            operations of the Company

 

 

| Date: March 12, 2008 | By   /s/ C.                            Steven Guenthner    |
|----------------------|---------------------------------------------------------------------------|
|                      | C. Steven Guenthner

Senior Vice President & Chief Financial

Officer |

 

 

A            signed copy of this original statement required by Section 906 has been provided to the            Company and will be retained by the Company and furnished to the Securities and            Exchange Commission or its staff on request.

 

 

 

84