UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, ~~D.C.~~DC 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~June~~March 3031, ~~2005~~2007

orOR


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 No. 000-50118

VistaCare, Inc.

(Exact name of registrant as specified in its charter)


Delaware		06-1521534
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)

4800 North Scottsdale Road,
Suite 5000
Scottsdale, Arizona		85251
(Address of principal executive offices)		(Zip code)

(480) 648-4545
(Registrant’s telephone number, including area code)

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, ~~as amended (the “Exchange Act”),~~ 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. R þ Yes £o No

Indicate by check mark whether the ~~registrnt~~registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. ~~(as~~See ~~defined~~definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act). R(Check ~~Yes £ No~~one):

AsLarge ofaccelerated ~~August 2,~~filer ~~2005,~~o Accelerated ~~there~~filer ~~were~~þ Non-accelerated ~~outstanding~~filer ~~16,362,221 shares of the issuer’s Class A Common~~o ~~Stock, $0.01 par value per share.~~

~~Page~~ Indicate 1by check mark whether the registrant is a shell Company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No

~~Table~~ As of ~~Contents~~May 4, 2007, there were outstanding 16,766,250 shares of the issuer’s Class A Common Stock, $0.01 par value per share.

	Page
• PART I — FINANCIAL INFORMATION		3
• Item 1. Financial Statements		3
• Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		19
• Item 3. Quantitative and Qualitative Disclosures About Market Risk		40
• Item 4. Controls and Procedures		40
• PART II — OTHER INFORMATION		41
• Item 1. Legal Proceedings		41
• Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		41
• Item 3. Defaults Upon Senior Securities		42
• Item 4. Submission of Matters to a Vote of Security Holders		42
• Item 5. Other Information		42
• Item 6. Exhibits		42
• SIGNATURES		43
• EXHIBIT INDEX		44
EX-31.1
EX-31.2
EX-32.1
EX-32.2

VistaCare, Inc.
Table of Contents


	Page
PART I — FINANCIAL INFORMATION

Item 1. Financial Statements		3

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		10

Item 3. Quantitative and Qualitative Disclosures About Market Risk		18

Item 4. Controls and Procedures		18

PART II — OTHER INFORMATION

Item 1. Legal Proceedings		20

Item 1A. Risk Factors		20

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		20

Item 3. Defaults Upon Senior Securities		20

Item 4. Submission of Matters to a Vote of Security Holders		20

Item 5. Other Information		21

Item 6. Exhibits		21

SIGNATURES		22

EXHIBIT INDEX		23
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

VISTACARE, INC. CONSOLIDATED BALANCE SHEETS

CONSOLIDATED BALANCE SHEETS

(in thousands, except share information)

	June 30,			September 30,
	March 31,			September 30,
	2005			2004
	2007			2006
	(unaudited)			(note 1)
ASSETS
Current assets:
Cash and cash equivalents	$	1423,~~978~~233		$	2821,~~687~~583
Short-term investments		4320,~~699~~553			3319,~~165~~148
Patient accounts receivable (net of allowance for denials of $2,146 and $2,905 at June 30, 2005 and September 30, 2004, respectively)		17,995			17,495
Patient accounts receivable (net of allowance for denials of $2,237 and $1,502 at March 31, 2007 and September 30, 2006, respectively)		26,572			27,600
Patient accounts receivable-room & board (net of allowance for denials of $1,248 and $2,980 at June 30, 2005 and September 30, 2004, respectively)		5,833			8,789
Patient accounts receivable — room & board (net of allowance for denials of $822 and $692 at March 31, 2007 and September 30, 2006, respectively)		8,532			9,662
Prepaid expenses		3,498			3,404
Prepaid expenses and other current assets		5,372			4,653
Tax receivable		21,~~457~~360			31,~~014~~375
Deferred tax assets		6,728			10,676
Total current assets		85,622			84,021
Total current assets		95,188			105,230
Fixed assets, net		6,090			6,409
Fixed assets, net		5,493			5,379
Goodwill		24,002			24,002
Goodwill		20,852			20,564
Other assets		2,696			5,360
Other assets		6,600			6,619
Total assets	$	118,410		$	119,792
Total assets	$	128,133		$	137,792
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	~~406~~1,505		$	12,~~367~~591
Accrued expenses		36,036			45,117
Accrued expenses and other current liabilities		27,037			28,116
Current portion of capital lease obligations		—			5
Accrued Medicare Cap		12,311			9,849
Total current liabilities		3640,~~442~~853			4640,~~489~~556
Deferred tax liability-non-current		—1,210			31,~~776~~144
Stockholders’ equity:
Class A Common Stock, $0.01 par value; authorized 33,000,000 shares; 16,360,926 and 16,209,282 shares issued and outstanding at June 30, 2005 and September 30, 2004, respectively.		164			162
Class A Common Stock, $0.01 par value; authorized 33,000,000 shares; 16,747,851 and 16,610,500 shares issued and outstanding at March 31, 2007 and September 30, 2006, respectively.		167			166
Additional paid-in capital		~~107~~111,~~890~~448			~~107~~110,~~084~~378
Deferred compensation		(638	)		(1,175	)
Accumulated deficit		(35,268	)		(32,452	)
Accumulated deficit		(15,725	)		(18,544	)
Total stockholders’ equity		76,347			78,092
Total stockholders’ equity		91,691			87,527
Total liabilities and stockholders’ equity	$	118,410		$	119,792
Total liabilities and stockholders’ equity	$	128,133		$	137,792

See accompanying notes to consolidated financial statements.

VISTACARE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) (in thousands, except per share information)

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) (in thousands, except per share information)


	Three Months Ended						Six Months Ended
	March 31,						March 31,
	2007			2006			2007			2006
Net patient revenue	$	58,975		$	55,888		$	119,958		$	115,561
Operating expenses:
Patient care		40,088			37,317			80,196			73,238
Sales, general and administrative		21,293			20,855			42,216			41,052
Depreciation		608			625			1,208			1,239
Amortization		257			651			628			1,299
Gain on sale of hospice program assets		—			—			(1,105	)		—

Total operating expenses		62,246			59,448			123,143			116,828

Operating loss		(3,271	)		(3,560	)		(3,185	)		(1,267	)
Non-operating income (expense):
Interest income		397			370			840			679
Other expense		(153	)		(146	)		(224	)		(240	)

Total non-operating income		244			224			616			439

Net loss before income taxes		(3,027	)		(3,336	)		(2,569	)		(828	)
Income tax expense (benefit)		180			(1,320	)		248			(279	)

Net loss	$	(3,207	)	$	(2,016	)	$	(2,817	)	$	(549	)


Net loss per share:
Basic net loss per share	$	(0.19	)	$	(0.12	)	$	(0.17	)	$	(0.03	)

Diluted net loss per share	$	(0.19	)	$	(0.12	)	$	(0.17	)	$	(0.03	)


Weighted average shares outstanding:
Basic		16,736			16,399			16,693			16,383

Diluted		16,736			16,399			16,693			16,383

	Three Months Ended						Nine Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
Net patient revenue	$	57,476		$	48,069		$	171,547		$	155,282
Operating expenses:
Patient care expenses		36,113			33,202			106,546			96,559
Sales, general and administrative expenses (exclusive of stock-based compensation charges reported below)		18,946			16,565			57,157			46,100
Depreciation and amortization		1,056			955			3,474			2,771
Stock-based compensation		80			76			225			248
Total operating expenses		56,195			50,798			167,402			145,678
Operating income (loss)		1,281			(2,729	)		4,145			9,604
Non-operating income (expense):
Interest income		374			113			849			307
Interest expense		7			(19	)		—			(59	)
Other expense		(176	)		(11	)		(480	)		(44	)
Total non-operating income		205			83			369			204
Net income (loss) before income taxes		1,486			(2,646	)		4,514			9,808
Income tax expense (benefit)		506			(895	)		1,695			3,120
Net income (loss)	$	980		$	(1,751	)	$	2,819		$	6,688
Net income (loss) per common share:
Basic net income (loss) per common share	$	0.06		$	(0.11	)	$	0.17		$	0.42
Diluted net income (loss) per common share	$	0.06		$	(0.11	)	$	0.17		$	0.39
Weighted average shares outstanding:
Basic		16,362			16,167			16,299			16,013
Diluted		16,909			16,167			16,899			17,222

See accompanying notes to consolidated financial statements.

VISTACARE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (in thousands)

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (in thousands)


	Six Months Ended
	March 31,
	2007			2006
Operating activities
Net loss	$	(2,817	)	$	(549	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation		1,208			1,239
Amortization		628			1,299
Share-based compensation		939			1,024
Deferred income tax expense (benefit)		66			(290	)
Gain on sale of hospice program assets		(1,105	)		—
Loss on disposal of assets		140			146
Changes in operating assets and liabilities:
Patient accounts receivable, net		2,095			(6,474	)
Prepaid expenses and other		(376	)		136
Payment of Medicare Cap assessments — decrease in accrued Medicare Cap		(164	)		(6,121	)
Increase in accrual for Medicare Cap		2,626			2,396
Accounts payable and accrued expenses		(2,653	)		(3,320	)

Net cash provided by (used in) operating activities		587			(10,514	)
Investing activities
Short-term investments purchased		(9,515	)		(2,076	)
Short-term investments sold		8,110			1,740
Purchases of equipment		(797	)		(2,241	)
Internally developed software expenditures		—			(215	)
Proceeds from sale of hospice program assets		1,200			—
Decrease in other assets		1,933			560

Net cash provided by (used in) investing activities		931			(2,232	)
Financing activities
Proceeds from issuance of common stock from exercise of stock options and employee stock purchase plan		132			184

Net cash provided by financing activities		132			184

Net increase (decrease) in cash and cash equivalents		1,650			(12,562	)
Cash and cash equivalents, beginning of period		21,583			25,962

Cash and cash equivalents, end of period	$	23,233		$	13,400

Cash and cash equivalents and short-term investments, end of period	$	43,786		$	41,149

	Three Months Ended						Nine Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
Operating activities
Net income (loss)	$	980		$	(1,751	)	$	2,819		$	6,688
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Depreciation and amortization		1,056			955			3,474			2,771
Amortization of deferred compensation related to stock options and grants		80			76			225			248
Deferred income tax expense (benefit)		335			76			172			(1,009	)
Loss on disposal of assets		109			—			346			—
Changes in operating assets and liabilities:
Patient accounts receivable, net		(2,531	)		4,592			(4,980	)		5,714
Prepaid expenses and other		(59	)		(4,730	)		462			(4,495	)
Accounts payable and accrued expenses		(2,695	)		11,986			(2,605	)		13,472
Net cash (used in) provided by operating activities		(2,725	)		11,204			(87	)		23,389
Investing activities
Purchases of equipment		(508	)		(551	)		(1,765	)		(2,234	)
Short-term investments purchased		(240	)		(56,339	)		(23,014	)		(162,996	)
Short-term investments sold		—			56,252			12,480			162,779
Internally developed software expenditures		(134	)		(279	)		(752	)		(777	)
Acquisition		(300	)					(300	)
Other assets		(1,062	)		(63	)		(1,384	)		(823	)
Net cash used in investing activities		(2,244	)		(980	)		(14,735	)		(4,051	)
Financing activities
Net payments on long-term debt		—			—			(5	)		(23	)
Proceeds from issuance of common stock from exercise of stock options and employee stock purchase plan		257			131			1,118			2,872
Net cash provided by financing activities		257			131			1,113			2,849
Net (decrease) increase in cash		(4,712	)		10,355			(13,709	)		22,187
Cash and cash equivalents, beginning of period		19,690			23,204			28,687			11,372
Cash and cash equivalents, end of period	$	14,978		$	33,559		$	14,978		$	33,559
Cash and short-term investments, end of period	$	58,677		$	66,585		$	58,677		$	66,585

See accompanying notes to consolidated financial statements.

~~VISTACARE~~VistaCare, ~~INC~~Inc.

~~NOTES~~Notes TOto ~~CONSOLIDATED~~Consolidated ~~FINANCIAL~~Financial ~~STATEMENTS~~Statements (Unaudited) ~~June~~March 3031, ~~2005~~2007

Description of Business

VistaCare, Inc. (VistaCare, Company or “we” or similar pronoun), is a Delaware corporation ~~providing~~ providing medical care designed to address the physical, emotional, and spiritual needs of patients with a terminal illness and the support of their family members. Hospice services are provided predominately in the patient’s home; ~~however~~or other residence of choice, ~~certain~~such ~~patients~~as ~~require~~a nursing home or assisted living facility, or in a hospital or inpatient ~~services~~unit. VistaCare provides inpatient services at its inpatient units and through leased beds at unrelated hospitals and skilled nursing facilities on a per diem basis. VistaCare provides services in Alabama, Arizona, Colorado, Georgia, Indiana, Massachusetts, New Mexico, Nevada, Ohio, Oklahoma, Pennsylvania, South Carolina, Texas and Utah.

1 The accompanying interim consolidated financial statements of VistaCare have been prepared in conformity with U.S. ~~Significant~~generally ~~Accounting~~accepted ~~Policies~~accounting principles, consistent in all material respects with those applied in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2006 (“fiscal 2006”).

~~Change~~1. inBasis ~~Year~~of ~~End~~Presentation

~~On August 18, 2004, VistaCare’s Board of Directors changed the Company’s fiscal year-end from December 31 to September 30.~~ The ~~three~~accompanying ~~and~~unaudited ~~nine~~consolidated ~~months~~financial ~~ended~~statements ~~June 30,~~include ~~2005~~accounts ~~results~~of ~~now~~VistaCare ~~being~~and ~~reported~~its bywholly ~~the~~owned ~~Company~~subsidiaries: ~~relate~~VistaCare ~~to the fiscal year ending September 30~~USA, ~~2005~~Inc., ~~For~~Vista ~~comparative purposes~~Hospice ~~the nine months ended June 30~~Care, ~~2004~~Inc., ~~includes~~and ~~the~~FHI ~~six months ended June 30~~Health Systems, ~~2004~~Inc. ~~reported in~~(including ~~the~~its ~~fiscal~~wholly-owned ~~year~~subsidiaries). ~~ended~~Intercompany ~~September 30,~~transactions ~~2004,~~ and ~~the~~balances have ~~three~~been ~~months~~eliminated ~~ended December 31, 2003 reported~~ in ~~the fiscal year ended December 31, 2003~~consolidation.

~~Basis~~ The balance sheet at September 30, 2006 has been derived from the audited financial statements at that date but does not include all of ~~Presentation~~the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in VistaCare, Inc.’s Annual Report on Form 10-K for the year ended September 30, 2006.

The accompanying unaudited consolidated financial statements ~~include~~have ~~accounts~~been ofprepared ~~VistaCare~~in accordance with U.S. generally accepted accounting principles for interim financial information and with the ~~its~~instructions ~~wholly~~to ~~owned~~Form ~~subsidiaries:~~10-Q ~~VistaCare~~and ~~USA,~~Article 10 ~~Inc~~of Regulation S-X. Accordingly, ~~Vista~~they ~~Hospice~~do ~~Care,~~not ~~Inc.,~~include all of the information and ~~FHI~~footnotes ~~Health~~required by U.S. generally accepted accounting principles for ~~Services,~~complete ~~Inc~~financial statements. (In the opinion of management, all adjustments, including ~~its~~normal recurring ~~wholly-owned~~accruals, ~~subsidiaries)~~considered necessary for a fair presentation have been included. ~~Intercompany~~Operating results ~~transactions~~for the three and ~~balances~~six months ended March 31, 2007 are not necessarily indicative of the ~~have~~results ~~been~~that ~~eliminated~~may inbe ~~consolidation~~expected for the fiscal year ending September 30, 2007.

~~The~~During the ~~accompanying~~period, ~~unaudited~~the ~~consolidated~~Company ~~financial~~experienced ~~statements~~employee ~~have~~turnover ~~been prepared~~ in ~~accordance~~billing ~~with~~that ~~generally~~has ~~accepted~~led ~~accounting~~to ~~principles~~deterioration ~~for~~in ~~interim~~the ~~financial~~patient ~~information~~accounts ~~and with the~~receivable ~~instructions~~aging ~~to Form 10-Q~~ and ~~Article 10~~increased ofallowance ~~Regulation S-X~~for denials. ~~Accordingly,~~The ~~they~~Company dosupplemented its ~~not~~process ~~include~~for ~~all~~evaluating of the ~~information~~allowance ~~and~~for ~~footnotes~~denials ~~required~~ by ~~generally accepted accounting principles for complete~~performing ~~financial~~expanded ~~statements.~~reviews ~~In the opinion~~ of ~~management,~~older ~~all~~aging ~~adjustments~~patient ~~considered~~accounts ~~necessary,~~receivable ~~consisting~~categories ofthan ~~normal~~had ~~recurring~~historically ~~accruals, for a fair presentation have~~ been ~~included~~the case. ~~Operating results~~As ~~for~~ the ~~three~~Company ~~and~~is implementing ~~nine~~enhanced ~~months~~collection ~~ended June 30~~efforts, ~~2005~~the ~~are~~Company ~~not~~believes ~~necessarily indicative of~~ the ~~results~~allowance ~~that~~for ~~may~~denials beis ~~expected~~adequate ~~for~~in ~~the~~relation ~~fiscal~~to ~~year~~the ~~ending~~patient ~~September 30, 2005.~~accounts receivable.

The balance sheet at September 30, 2004 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements2. ~~For further information, refer to the consolidated financial statements and footnotes thereto included in VistaCare, Inc.’s Transition Report on Form 10~~Share-KBased ~~for the nine months ended September 30, 2004.~~Compensation

~~Capitalized~~ The ~~Software~~Company ~~Development~~accounts ~~Costs~~for share-based compensation transactions according to the provisions of Statement of Financial Accounting Standards (“SFAS”) Statement No. 123(R), “Share-Based Payment” (“SFAS No. 123(R)”), which requires companies to measure and recognize compensation expense for all share-based payments at fair value. At March 31, 2007, the Company had two active stock option plans, an employee plan and a non-employee director plan. Employee stock option awards are granted at prices equal to the market value of the stock on the date of grant, and vest over a period determined at the time the options are granted, ranging from three to seven years, and generally have a maximum term of ten years. Non-employee director stock option awards are granted at prices equal to the market value of the stock on the date of grant. Market value under both plans means the closing price on the date of the grant as reported by the Nasdaq Stock Market. Each option granted under the director’s stock plan is immediately exercisable in full and generally has a maximum term of ten years. When options are exercised, new shares of the Company’s Class A common stock are issued.

WeDuring ~~have~~the ~~capitalized~~current ~~certain~~fiscal ~~internal~~year, ~~costs related to~~ the ~~development~~Company ofhas ~~software~~issued ~~used~~more inrestricted ~~our business.~~share Wegrants ~~capitalize~~than ~~all qualifying internal costs incurred during the software’s development~~stock ~~stage~~options. ~~Costs~~The ~~incurred~~restricted ~~during~~shares ~~the preliminary project stage and post-implementation/operation stages~~ are ~~expensed~~recorded as ~~incurred.~~outstanding Weshares ~~amortize~~on the ~~capitalized~~date ~~software~~the ~~development~~shares ~~costs related to~~are ~~particular~~granted. ~~software~~The ~~over~~employee ~~a three-year period commencing when that software~~ is ~~substantially complete~~required ~~and~~to ~~ready~~perform ~~for~~future ~~its~~service ~~intended~~in ~~use.~~order ~~As of June 30, 2005 and September 30, 2004, we had total~~to ~~capitalized software development costs, net of amortization, of $3.7 million and $5.0 million, respectively.~~

~~Net~~VistaCare, ~~Patient Revenue~~Inc.

~~Net~~Notes ~~patient revenue is the amount VistaCare believes we are entitled~~ to ~~collect for our services, adjusted as described below. The amount varies depending on~~ the ~~level~~Consolidated ofFinancial ~~care,~~Statements ~~the~~— ~~payor~~continued ~~and the geographic area where the services are rendered. We derive net patient revenue from~~ billings to Medicare, Medicaid, private insurers, managed care providers, patients and others. We operate under arrangements with those payors pursuant to which they reimburse us for services we provide to hospice eligible patients they cover, subject only to our submission of adequate and timely claim documentation. Our patient intake process screens patients for hospice eligibility and identifies whether their care will be covered by Medicare, Medicaid, private insurance, managed care or self-pay. We recognize patient revenues once the patient’s hospice eligibility has been certified by a physician, the patient’s coverage from a payment source has been verified and services have been provided to that patient.

~~Our~~receive ~~patient revenues are primarily determined by~~ the ~~number of billable patient days, the level of care provided and reimbursement rates~~shares. The ~~number~~shares ofvest ~~billable~~equally ~~patient~~over ~~days~~a isperiod adetermined ~~function of~~at the ~~number~~time ~~of patients admitted to our programs and~~ the ~~number of days that those patients~~restricted ~~remain~~shares inare ~~our care (length of stay~~granted, ~~based~~ranging ~~upon~~from ~~patient discharges during the period). Our average length of stay was approximately 113 days for the~~ three ~~months ended June 30, 2005 and 115 days for the nine months ended June 30, 2005. We believe we exceed the industry average on average length of stay and we attribute this~~ to ~~several~~five ~~factors. First~~years, ~~compared to hospice industry averages, we have a relatively high percentage of non-cancer patients, though in line~~ with ~~total~~most ~~cancer~~grants ~~deaths in~~vesting ~~the~~over ~~country~~five ~~and in line with the Medicare decedent diagnosis mix, which typically have a longer average length of stay than cancer patients~~years. ~~Second, we believe that our open access philosophy and~~ ~~our~~The ~~efforts~~fair tovalue ~~educate referral sources about hospice care encourages earlier election~~ of ~~patients to~~the ~~hospice~~restricted ~~care.~~stock ~~Finally,~~award ~~a significant amount of our patient census~~ is inequal ~~rural markets, where access~~ to ~~intensive~~the ~~health~~market ~~care~~value ~~services, hospitals or other alternative health care services for hospice-eligible patients is more inconvenient than in more urban areas. Our median length~~ of ~~stay, based upon patient discharges during~~ the ~~period,~~stock ~~was~~on ~~31 days for~~ the ~~three months ended June 30,~~date ~~2005~~of ~~and 30 days for~~ the ~~nine months ended June 30, 2005~~grant. ~~We operate 56 hospice locations~~ ~~(programs) under 36 Medicare provider numbers (providers).~~

~~Net~~The fair value of each option or restricted share granted is amortized into compensation expense on a straight-line basis between the grant date of the award and the final vesting date of the award with 10% recorded as patient ~~revenue~~care ~~includes~~expenses ~~adjustments~~and ~~for:~~90% recorded as selling, general & administrative expenses in the accompanying Consolidated Statements of Operations.

• The ~~estimated~~Company ~~required~~estimates ~~repayments~~the tofair ~~Medicare,~~value ifof ~~any~~all stock option awards as of ~~our~~the ~~programs~~date ~~exceed~~of the ~~annual~~grant ~~Medicare~~by applying ~~Cap,~~the asBlack-Scholes ~~described~~option ~~below~~pricing inmodel. ~~“Medicare~~The ~~and~~application ~~Medicaid~~of ~~Regulation”;~~this valuation model involves estimates and •management ~~estimated~~judgment ~~payment~~that ~~denials,~~impacts ~~contractual~~the ~~adjustments~~calculation ~~and~~of ~~subsequent~~compensation ~~changes~~expense related to the ~~initial~~stock ~~level~~option ofawards. ~~care~~The ~~determinations,~~key asassumptions ~~described~~used ~~below~~ in ~~“Adjustments~~determining tothe ~~Net~~fair ~~Patient~~value ~~Revenue~~of ~~for~~options ~~Estimated~~granted during ~~Payment~~the ~~Denials”.~~six months ended March 31, 2007 and 2006 are as follows:

We recorded reductions to net patient revenue for exceeding the annual Medicare Cap of $1.5 million and $6.2 million for the three months ended June 30, 2005 and June 30, 2004, respectively, and reductions of $4.5 million and $10.1 million for the nine months ended June 30, 2005 and June 30, 2004, respectively. For our transition and recent annual periods, we recorded a reduction of $14.8 million for the transition fiscal nine month period ended September 30, 2004, $4.6 million for the fiscal year ended December 31, 2003, and $1.3 million for the fiscal year ended December 31, 2002, for exceeding the annual Medicare Cap.


	Six Months Ended	Six Months Ended
	March 31, 2007	March 31, 2006
Expected dividend yield	0.0%	0.0%
Expected stock price volatility	48%	50%
Risk-free interest rate range	4.4%	3.9% to 4.8%
Expected term (in years)	7.5	7.5

The $4Company historically has not paid dividends and does not anticipate paying any dividends in the future.~~5 million~~ ~~reduction~~The toexpected ~~revenue~~stock ~~for~~price ~~Medicare~~volatility ~~Cap~~is ~~for~~based on historical trading of the ~~nine~~Company’s stock. ~~months~~The ~~ended~~risk-free ~~June 30,~~interest ~~2005~~rate is based on the U.S. treasury security rate in effect as of the ~~includes:~~date of grant. The expected term of options is an average of the contractual terms and vesting periods, and historical data, respectively.

• A ~~$1.1~~summary ~~million~~of ~~for~~stock ~~re-assessment~~options ~~received~~within ~~from our fiscal intermediary (FI) in April 2005 for~~ the ~~2002~~Company’s ~~Medicare~~share-based ~~Cap~~compensation ~~year.~~plans ~~The~~and FIchanges ~~had previously issued a zero assessment~~ for ~~2002; • $3.7 million for patient service dates during~~ the ~~2005~~six ~~Medicare~~months ~~regulatory~~ended ~~year~~March 31, ~~including~~2007 ~~pro-ration~~is ~~for~~as estimated services that these 2005 patients may receive from other hospice programs; and • ($0.3) million adjustment to net patient revenue to reverse two of our providers Medicare Cap accruals that received zero assessment letters from our fiscal intermediary in 2005 (for the 2004 Medicare regulatory year).follows:

As of the date of this report, we have received assessment letters for exceeding the annual Medicare Cap totaling $1.1 million for programs in the 2002 Medicare Cap year (an amount that reflects an adjustment made by Medicare in April of 2005, which they previously issued a zero assessment for 2002), $7.5 million for programs in the 2003 Medicare Cap year, and we have not yet received any assessment letters for the 2004 Medicare Cap year for exceeding the Medicare Cap, except for two received prior to the filing of this Form 10Q in the amount of $0.6 million which we have begun to assess as to its propriety. Out of our 34 providers in 2004, we have received 26 zero assessment letters. Any assessments for 2004 could result in adjustment in the fiscal year in which the assessment is received to reflect the difference between the actual assessment and the estimate previously recorded. As of June 30,


				Weighted
	Number of			Average
	Shares Under			Exercise
	Option			Price
Outstanding at September 30, 2006		2,360,977		$	15.60
Granted		20,000			12.23
Exercised		(23,684	)		5.97
Terminated/expired		(318,344	)		18.84

Outstanding at March 31, 2007		2,038,949		$	15.15

A summary of restricted stock activity within the Company’s share-based compensation plans and changes for the six months ended March 31, 2007 is as follows:


				Weighted
				Average
				Grant Date
Nonvested Shares	Shares			Fair Value
Nonvested at September 30, 2006		166,600		$	13.37
Granted		135,000			10.64
Vested		(26,800	)		13.47
Forfeited		(23,500	)		12.33

Nonvested at March 31, 2007		251,300		$	11.99

Total compensation costs for share-based awards for the six months ended March 31, 2007 and 2006 totaled approximately $0.9 million and $1.0 million, respectively. As of March 31, 2007, there was $5.4 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under all Company plans. That cost is expected to be recognized over a weighted-average period of 3.7 years.

~~2005 and September 30~~VistaCare, ~~2004, respectively, our accrued expenses included $16~~Inc.~~6 million and~~ ~~$19.6 million for Medicare Cap accrued liability.~~

WeNotes ~~adjust our estimates for payment denials from time~~ to time based on our billing and collection experience, and payor mix. VistaCare estimates such adjustments to net patient revenue based on significant historical experience utilizing our centralized billing and collection department, which continually monitors the ~~factors~~Consolidated ~~that~~Financial ~~could~~Statements ~~potentially~~— ~~result in a change in~~continued ~~charge denial experience. We recorded reductions to net patient revenue for estimated payment~~ denials, contractual adjustments (such as differences in payments by commercial payors) and subsequent changes to initial level of care determinations (made retroactively by VistaCare staff after initial admission) of $0.6 million and $1.5 million for the three months ended June 30, 2005 and June 30, 2004, respectively, $2.9 million and $2.8 million for the nine months ended June 30, 2005 and June 30, 2004, respectively, and $3.8 million for the transition fiscal nine months ended September 30, 2004. As of June 30, 2005 and September 30, 2004, the allowance for denials on patient accounts receivable and room & board was $3.4 million and $5.9 million, respectively. The decrease in our allowances was primarily due to a change in our charge-off practices whereby we have accelerated the timing of the charge-off. Any adjustments to net patient revenue for changes in estimates, based on historical trends, are made only in the current period.

~~The~~SFAS ~~company~~No. 123(R) ~~recorded~~requires ~~changes~~the inbenefits ~~estimates~~of totax ~~net~~deductions ~~patient~~in ~~revenue~~excess ~~for~~of the ~~three~~compensation ~~and~~cost recognized ~~nine~~for ~~months ended~~those ~~June 30,~~options ~~2005.~~(excess ~~See~~tax ~~further~~benefits) ~~discussions~~to ~~below~~be ~~in Note 1~~classified ofas ~~the~~financing ~~Notes~~cash toflows in the Consolidated ~~Financial~~ Statements ~~included~~ ~~elsewhere~~of ~~herein,~~Cash ~~under~~Flow. During the ~~headings~~six ~~“Medicare~~months ~~and Medicaid~~ended ~~Regulation”~~March 31, ~~“Adjustments~~2007 toand ~~Net~~2006, ~~Patient Revenue for Exceeding~~ the ~~Medicare Cap” and~~ ~~“Adjustments~~Company tohad ~~Net~~no ~~Patient~~excess ~~Revenue~~tax ~~for~~benefit ~~Estimated~~related ~~Payment~~to ~~Denials”~~stock ~~for~~option ~~explanation of Medicare Cap estimates, payment denial estimates or charges~~exercises.

~~Medicare~~3. ~~and~~Accrued ~~Medicaid~~Expenses ~~reimbursements account for approximately 97% of our net patient revenue for each of the three~~ and ~~nine~~Other ~~months~~Current ~~ended June 30, 2005 and June 30, 2004, respectively. Whether~~Liabilities ~~Medicare or Medicaid continues to provide reimbursement for hospice care is dependent upon governmental policies.~~

~~The~~A ~~table~~summary ~~below sets forth the percentage~~ of ~~our~~accrued ~~net~~expenses ~~patient revenue derived from Medicare, Medicaid, private insurers~~ and ~~managed~~other ~~care~~current ~~payors~~liabilities ~~for~~follows ~~the~~(in ~~periods indicated.~~thousands):

	Three Months Ended						Nine Months Ended
	March 31,			September 30,
	June 30,			June 30,			June 30,			June 30,
	2007			2006
Payors	2005			2004			2005			2004
Patient care expenses	$	10,783		$	10,674
Medicare		92.6	%		93.0	%		92.9	%		93.4	%
Salaries and payroll taxes		5,653			5,723
Medicaid		4.6	%		4.1	%		4.3	%		3.9	%
Accrued administrative expenses and other current liabilities		4,554			4,412
Private insurers and managed care		2.8	%		2.9	%		2.8	%		2.7	%
Accrued workers’ compensation		2,442			3,133
Self-insured health expenses		1,666			1,749
Accrued paid time-off		1,470			2,080
Accrued taxes		469			345
Total accrued expenses and other current liabilities	$	27,037		$	28,116

~~Medicare, Medicaid and most private insurers and managed care providers pay for hospice care at a daily or hourly rate that varies depending on the level of care provided~~4. ~~The~~Dilutive ~~table below~~Securities ~~sets forth the percentage of our net patient revenue generated under each of the four Medicare levels of care for the periods indicated:~~

	Three Months Ended						Nine Months Ended
	June 30,			June 30,			June 30,			June 30,
Level of Care	2005			2004			2005			2004
Routine home care		95.9	%		96.3	%		95.4	%		95.1	%
General inpatient care		3.2	%		3.4	%		3.9	%		4.4	%
Continuous home care		0.7	%		0.3	%		0.6	%		0.3	%
Respite inpatient care		0.2	%		0.1	%		0.1	%		0.2	%

Basic net income per share is computed by dividing net income by the weighted average number of shares outstanding during the period. Diluted net income per share is computed by dividing net income by the weighted average number of shares outstanding during the period plus the effect of potentially dilutive securities, including outstanding warrants and employee stock options (using the treasury stock method). The effect of potentially dilutive securities amounting to approximately 2.3 million shares and 2.8 million shares were not included in the diluted earnings per share calculations for the periods ended March 31, 2007 and 2006, respectively, because inclusion of the securities are either anti-dilutive due to the Company’s loss or do not result in common stock equivalents based on their strike price in relation to the market value of the Company’s stock plus unrecognized compensation.

~~Historically,~~The ~~effective~~following ~~each~~table ~~October~~presents ~~1st, Medicare adjusts its base hospice care reimbursement rates for~~ the ~~following~~calculation ~~year~~of ~~based~~basic ~~on inflation~~ and ~~other~~diluted ~~economic~~net ~~factors.~~loss ~~The Medicare~~per ~~base~~share ~~rates were increased 3.3% effective October 1, 2004, over the base rates then~~ (in ~~effect.~~thousands, ~~These~~except ~~increases~~per ~~have~~share ~~favorably impacted our net patient revenue. Medicare’s base rates are~~information): ~~subject to regional adjustments based on local wage levels. These regional adjustments are not necessarily proportional to adjustments in the national average base rate.~~

Medicaid reimbursement rates and hospice care coverage rates for private insurers and managed care plans generally tend to approximate Medicare rates.


	Three Months Ended						Six Months Ended
	March 31,						March 31,
	2007			2006			2007			2006
Numerator:
Net loss	$	(3,207	)	$	(2,016	)	$	(2,817	)	$	(549	)


Denominator:
Denominator for basic net loss per share — weighted average shares		16,736			16,399			16,693			16,383
Effect of dilutive securities:
Employee stock options		—			—			—			—


Denominator for diluted net loss per share — adjusted weighted average shares and assumed conversion		16,736			16,399			16,693			16,383


Net loss per share:
Basic net loss to stockholders	$	(0.19	)	$	(0.12	)	$	(0.17	)	$	(0.03	)
Diluted net loss to stockholders	$	(0.19	)	$	(0.12	)	$	(0.17	)	$	(0.03	)

Because we generally receive fixed payments for our hospice care services based on the level of care provided to our hospice patients, we are at risk for the cost of services provided to our hospice patients5. WeIncome ~~cannot assure that Medicare, Medicaid and private insurers will continue to~~Tax pay for hospice care in the same manner or in the same amount that they currently pay. Reductions in amounts paid by government programs for our services or changes in methods or regulations governing payments, which would likely result in similar changes by private third-party payors, could adversely affect our net patient revenue and profitability.

At the end of each interim period, the Company makes its best estimate of the effective tax rate expected to be applicable for the full fiscal year and adjusts the quarterly rate, as necessary. Although the Company had a net loss, the Company is expected to have taxable income for fiscal year 2007 due to differences between the Company’s reported net loss and the Company’s taxable income. Significant items affecting the difference between the Company’s reported net loss and taxable income include the Medicare Cap accrual, stock option expense, amortization expense, and bad debt expense. The Company has established a full valuation allowance on its net deferred tax asset, excluding tax deductible goodwill. The Company’s fiscal 2007 tax provision consists of the federal alternative minimum tax, state taxes where loss carry forwards do not exist and increases to our tax deductible goodwill deferred tax

~~Laws and regulations governing the Medicare and Medicaid program are complex and subject to interpretation.~~ VistaCare ~~believes that it is in compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrong doing~~, ~~which would have a material impact on VistaCare’s consolidated financial condition or results of operations~~Inc. ~~Compliance with such laws and regulations can be subject to~~ ~~future government review and interpretation as well as significant regulatory action including fines, penalties, and exclusion from the Medicare and Medicaid programs.~~

~~Expenses~~Notes to the Consolidated Financial Statements — continued

~~We recognize expenses as incurred~~liability. ~~Our primary expenses include those we classify as either~~ ~~patient care expenses or sales, general and administrative expenses.~~

~~Patient care expenses consist primarily of salaries, benefits, payroll taxes and travel expenses associated with our hospice care providers~~6. ~~Patient~~Program ~~care expenses also include the cost of~~Closures/Restructuring pharmaceuticals, durable medical equipment, medical supplies, inpatient facility expenses, nursing home costs and purchased services such as ambulance, infusion and radiology. We incur inpatient facility expenses primarily through per diem charge arrangements with hospitals and skilled nursing facilities where we provide our services. We currently operate one inpatient hospice facility under a lease agreement with an independent living facility.

~~Patient~~During ~~length~~the ofsecond ~~stay~~quarter ~~impacts our patient care expenses as a percentage~~ of ~~net~~fiscal ~~patient revenue.~~year ~~Patient~~2007, ~~care~~the ~~expenses~~Company ~~are~~closed ~~generally~~four ~~higher~~hospice ~~following~~programs ~~the initial admission~~ and ~~during the~~ ~~latter~~one ~~days~~inpatient ofunit ~~care~~as ~~for~~part ~~a patient. In the initial days~~ of ~~care,~~its ~~expenses~~previously ~~tend~~announced torestructuring. ~~be higher because of the initial purchases of pharmaceuticals~~Also, ~~medical~~during ~~equipment and supplies and~~ the ~~administrative~~second ~~expenses~~quarter of ~~determining~~fiscal ~~the~~year ~~patient’s~~2007, ~~hospice~~the ~~eligibility,~~Company ~~registering~~completed ~~the~~staff ~~patient~~reductions ~~and~~at ~~organizing~~ the ~~plan~~Corporate ~~of care~~Headquarters. The Intotal ~~the~~cost ~~latter days~~ of ~~care,~~the ~~expenses~~restructuring ~~tend to be higher because patients generally require more services~~charges, ~~such~~slightly asover ~~pharmaceuticals and nursing care~~$1.0 million, ~~due~~was toexpensed ~~their~~during ~~deteriorating medical~~the ~~condition.~~second ~~Accordingly,~~quarter ~~if lengths~~ of ~~stay~~fiscal ~~decline,~~2007. ~~those~~These ~~higher~~costs ~~expenses are spread over fewer days of care~~included, ~~which~~severance ~~increases patient care expenses as a percentage~~ of ~~net patient revenue and negatively impacts profitability~~$0.5 million, ~~Patient~~early ~~care expenses are also impacted by the geographic~~lease ~~concentration~~terminations of ~~patients~~$0. ~~Labor expenses~~4 million, ~~which~~fixed ~~represent~~asset ~~the~~write ~~single~~offs ~~largest category~~ of ~~patient care~~$0.1 million ~~expenses,~~and ~~tend~~an toimmaterial beamount ~~less if patients are geographically concentrated and hospice care~~of ~~providers~~other ~~are~~closure ~~required to spend less time traveling~~ and ~~can~~restructuring ~~care for more patients~~costs.

~~For~~Severance, early ~~patients~~lease ~~receiving~~terminations ~~nursing~~and ~~home~~other ~~care~~expenses ~~under~~are ~~state~~recorded ~~Medicaid programs~~ in ~~states other than Arizona~~sales, general ~~Oklahoma, Pennsylvania~~ and ~~South~~administrative ~~Carolina,~~expense ~~who~~on ~~elect hospice care under Medicare or~~the ~~Medicaid,~~accompanying ~~VistaCare~~Consolidated ~~contracts~~Statement ~~with nursing homes for the nursing homes’ provision to patients~~ of ~~room~~ ~~and~~Operations. ~~board~~Approximately ~~services~~$0.6 million Inof ~~those states,~~ the ~~applicable~~restructuring costs ~~Medicaid~~were ~~program~~paid ~~must~~during ~~pay VistaCare, in addition to~~ the ~~applicable~~quarter ~~Medicare~~ended ~~or Medicaid hospice daily or hourly rate~~March 31, an2007. ~~amount~~The ~~equal~~balance ~~to no more than 95%~~ of ~~the~~$0.4 million ~~Medicaid~~has ~~daily~~been accrued ~~nursing~~in ~~home~~accrued ~~rate~~expenses ~~for room~~ and ~~board~~other ~~services~~current ~~furnished~~liabilities toon the ~~patient~~ byaccompanying ~~the~~Consolidated ~~nursing home~~Balance Sheet. ~~Under~~The ~~VistaCare’s~~majority ~~standard~~of ~~nursing home contracts, VistaCare pays~~ the ~~nursing~~ ~~home~~accrued ~~for~~amounts ~~these~~will ~~room~~be ~~and~~paid ~~board~~in ~~services~~the atthird ~~predetermined~~quarter ~~contract rates, between 95% and 100%~~ of ~~the~~fiscal ~~full Medicaid per diem nursing home rate~~2007. ~~In Arizona, Oklahoma, Pennsylvania and South~~All ~~Carolina,~~amounts ~~the~~will ~~Medicaid~~be ~~program~~paid ~~pays~~by the ~~nursing~~end ~~home~~of ~~directly~~fiscal ~~for~~year ~~these expenses or has created a Medicaid managed care program that either reduces or eliminates this room and board payment~~2007. ~~Effective July 1, 2005, South Carolina switched from paying the nursing home directly to paying VistaCare the daily nursing home rate for room and board services.~~

~~Nursing~~The ~~home~~Company ~~expenses~~closed ~~totaled~~one ~~approximately~~additional ~~$12.0 million~~hospice ~~and~~program ~~$11.8 million~~during ~~for~~ the ~~three months~~third ~~ended~~quarter ~~June 30,~~of ~~2005~~fiscal ~~and June 30, 2004, respectively, and $35.6 million and $34.5 million for~~year ~~the nine months ended June 30, 2005 and June 30, 2004, respectively~~2007. ~~Nursing~~The ~~home~~estimated ~~revenues~~cost ~~totaled approximately~~of ~~$10.8 million~~closing ~~and~~this ~~$10.2 million for the three months ended June 30~~program, ~~2005~~which ~~and~~will ~~June 30, 2004,~~be ~~respectively,~~charged ~~and $32.6 million and $29.6 million for the nine months ended June 30, 2005 and June 30, 2004, respectively. Revenues are less than the expenses due~~ to ~~provisions~~expense ~~for estimated uncollectible amounts and differences~~ in ~~nursing home contracted rates. We account for~~ the ~~difference~~ ~~between the amount we pay the nursing home and the amount we receive from Medicaid (net~~third quarter of ~~estimated~~fiscal ~~room~~2007, ~~and~~is ~~board~~expected ~~reimbursement claim denials) as patient care expenses. We refer~~ to ~~this difference~~be asless ~~“nursing~~than ~~home costs, net”. Our nursing home costs, net, were~~ $10.21 million ~~and $1.6~~ ~~million~~principally for ~~the~~severance ~~three months ended June 30, 2005~~ and ~~June 30, 2004, respectively and $3.0 million~~lease ~~and~~termination $4costs.~~9 million for the nine months ended June 30, 2005 and June 30, 2004, respectively.~~

~~Sales,~~7. ~~general~~Sale ~~and~~of ~~administrative~~Program ~~expenses primarily include salaries, payroll taxes, benefits~~Assets ~~and travel expenses associated with our staff not directly involved with patient care, bonuses for all employees, marketing, office leases and professional services.~~

~~According~~During toOctober 2006, ~~our~~the ~~paid~~Company ~~time~~completed ~~off~~the ~~policy,~~sale ~~all~~of ~~accrued~~certain ~~paid~~operating ~~time~~assets ~~off~~of ~~must~~its ~~be used by February 28~~hospice ofprogram in the ~~following~~Cincinnati, ~~calendar~~Ohio ~~year~~market. ~~All~~Operating ~~hours~~liabilities ~~not~~and ~~taken~~accounts byreceivable ~~February 28~~were retained as of the ~~following~~sale ~~calendar~~date. ~~year are~~The ~~forfeited.~~sale ~~During~~included the ~~three~~Medicare ~~and~~provider ~~nine~~number ~~months~~and ~~ended~~current ~~June 30,~~patient census. ~~2005,~~The weCompany ~~reduced~~received ~~salaries,~~$1.2 million ~~benefits and~~in ~~payroll~~cash ~~taxes expenses~~ and ~~accruals~~recorded ~~for~~a ~~the~~gain ~~expiration~~ of ~~accrued~~approximately ~~paid time off by~~ $01.1 ~~million~~ ~~and $0.9~~ million, ~~respectively.~~from ~~The~~the ~~reductions~~sale, ~~for~~which ~~expired~~is ~~accrued~~shown ~~paid~~on ~~time~~the ~~off~~accompanying ~~for~~Consolidated ~~the~~Statement ~~three~~of ~~and nine~~Operations ~~months~~as ~~ended~~a component ~~June 30,~~of ~~2004~~operating ~~were~~income.

8. Litigation

The Company is subject to a variety of claims and suits that arise from time to time in the ordinary course of its business. While management currently believes that resolving all of these matters, individually or in aggregate, will not have a material adverse impact on the Company’s financial position or its results of operations, the litigation and other claims that the Company faces are subject to inherent uncertainties and management’s view of these matters may change in the future. Should an unfavorable final outcome occur, there exists the possibility of a materially adverse impact on the Company’s financial position, results of operations and cash flows for the period in which the effect becomes probable and reasonably estimable.

9. Debt

The Company has a $30.0 million revolving line of credit and a $20.0 million term loan agreement (this total of $50.0 million is collectively referred to herein as the “credit facility”). The credit facility is collateralized by substantially all of the Company’s assets. The maturity date of the credit facility is December 22, 2009. As of March 31, 2007, there was no balance outstanding on the revolving line of credit or on the term loan. Because of recent operating losses, the Company is not in compliance with the credit facility’s debt service coverage ratio covenant and would have to receive a lender waiver, which has not been requested, and complete certain administrative procedures in order to borrow under the current terms of the credit facility.

$0Item ~~million and $0~~2.~~4 million,~~ ~~respectively.~~Management’s ~~These~~Discussion ~~higher~~and ~~forfeitures~~Analysis ~~were driven by lower levels~~ of ~~paid~~Financial ~~time~~Condition ~~off~~and ~~taken~~Results byof ~~existing personnel~~Operations.

~~Medicare and Medicaid Regulation~~Overview

~~VistaCare~~We iscurrently ~~subject~~operate to51 ~~certain~~hospice ~~limitations~~programs on(“programs”) ~~Medicare~~under ~~payments~~35 ~~for~~Medicare ~~services.~~provider ~~Specifically,~~numbers ifincluding ~~the~~four ~~number of~~ inpatient ~~care~~units, ~~days~~serving ofapproximately ~~any~~5,100 ~~hospice~~patients ~~program~~in ~~provided~~14 tostates. ~~Medicare~~Hospice ~~beneficiaries~~services ~~exceeds~~are ~~20%~~provided ofpredominately ~~the total days of hospice care such program provides to all patients for an annual period beginning September 28, the days~~ in ~~excess of~~ the ~~20%~~patient’s ~~figure may be reimbursed only at the routine~~ home ~~care~~or ~~rate.~~other ~~None~~residence of ~~the~~choice, ~~VistaCare’s~~such ~~hospice~~as ~~programs~~a ~~exceeded~~nursing home ~~the~~or ~~payment~~assisted ~~limits~~living ~~on inpatient~~community, ~~services~~or in ~~the~~a ~~nine~~hospital ~~months ended June 30, 2005~~ or ~~June 30,~~inpatient ~~2004~~unit. ~~Our~~Inpatient ~~hospice~~services ~~programs~~ are provided ~~assigned~~by ~~one~~us ofat 36our ~~provider~~inpatient ~~numbers~~units byand ~~Medicare~~through ~~and~~leased ~~these~~beds ~~providers~~at ~~are,~~unrelated ~~among~~hospitals ~~other~~and ~~things,~~skilled ~~the~~nursing ~~unit~~facilities ~~basis~~on ~~upon~~a ~~which~~per ~~Medicare~~diem ~~Cap limitation determinations are made~~basis.

~~Adjustment~~ During the second half of fiscal year 2007, we are opening three new inpatient units. In determining where to ~~Net~~expand, ~~Patient~~we ~~Revenue~~focus ~~for~~on ~~Exceeding~~key markets around the country that we have identified as having the characteristics to produce revenue growth and profits that are above the industry norms. These characteristics include, but are not limited to, critical mass, favorable demographics, low hospice utilization, and little or no potential for Medicare Cap exposure. As of the date of this report, we opened an inpatient unit in Corpus Christi, Texas and are committed to opening inpatient units in Columbus, Georgia and San Antonio, Texas.

~~Overall~~In ~~Medicare~~order ~~payments~~ to monitor our ~~hospice~~financial ~~providers~~performance, ~~are~~we ~~subject~~prepare tooperating anstatements ~~annual Medicare Cap. This Medicare Cap limitation is revised annually to account~~ for ~~inflation. For the Medicare Cap year~~each ~~ended October 31~~program, ~~2004,~~inpatient ~~the~~unit ~~Medicare Cap was $19,635.67 per beneficiary. Medicare~~ and ~~Medicaid currently~~SG&A ~~provide~~department for aneach ~~annual~~fiscal ~~adjustment~~period. ofManagement ~~the~~reviews ~~various~~these operating ~~hospice~~statements ~~payment~~to ~~rates~~improve ~~based on~~ the ~~increase~~ orprofitability ~~decrease~~ of ~~the~~our ~~medical~~operating ~~care~~units ~~expenditure~~and ~~category~~control of the ~~Consumer~~cost ~~Price Index, these~~of ~~hospice~~our ~~care~~support ~~increases have historically been less than actual inflation~~functions. ~~Compliance~~To ~~with~~assess ~~the Medicare Cap is not determined on the basis of an individual beneficiary’s experience~~performance, ~~but~~management ~~is measured~~monitors ~~by calculating~~ the total Medicare payments received under a given provider number with respect to services provided to all Medicare hospice care beneficiaries served within the provider number between each November 1 and October 31 of the following, ~~year~~as ~~(the~~well ~~“Medicare~~as ~~Cap year”). The~~other ~~result~~financial ~~is then compared with the product of the Medicare Cap amount~~ and ~~the~~operating ~~number~~statistics ofat ~~Medicare beneficiaries electing hospice care for~~ the ~~first~~entity ~~time~~level ~~from that hospice provider during the relevant period (September 28 of each year~~ and ~~September 27~~down ~~of the following year). There are further negative adjustments for the Medicare Cap calculation~~ to the ~~extent~~individual ~~any~~operating ~~of our first time~~unit ~~beneficiaries~~when ~~are later admitted to another provider and, there are also positive adjustments for~~applicable: beneficiaries with a previous hospice election who are admitted to one of our hospice providers; each pro-rated based on days of services. If actual Medicare reimbursements to the other provider exceed that amount, Medicare requires that we repay the difference to Medicare.

We• ~~actively~~Increases ~~monitor~~or ~~each~~decreases ~~of our programs, by provider number, as to their program specific admission, discharge rate and average length of stay data~~ in antotal ~~attempt~~net topatient ~~determine~~revenue ~~whether~~compared ~~they have the potential~~ to ~~exceed~~ the ~~annual~~same ~~Medicare~~period(s) ~~Cap. At the point~~ in ~~time in which we determine that a provider number has~~ the ~~potential~~prior tofiscal ~~exceed~~year; ~~the~~• ~~annual~~Increases ~~Medicare Cap based upon trends, we attempt to institute corrective action, such as a change in patient mix~~ or ~~increase~~decreases in net patient ~~admissions.~~ ~~However,~~revenue compared to the ~~extent~~same weperiod(s) ~~believe~~in ~~our corrective action will not avoid a Medicare Cap charge, we estimate~~ the ~~amount~~prior ~~that~~fiscal weyear ~~could~~at be“comparable” ~~required~~programs to— ~~repay Medicare following the end of the Medicare Cap year, and accrue~~ that ~~amount, which~~ is ~~proportional~~programs tothat ~~the~~have ~~number~~been ofopen 12 months ~~already passed~~or inlonger; ~~the~~• ~~Medicare~~Expenses, ~~Cap~~particularly ~~year~~payroll, as a ~~reduction~~percent toof net patient revenue.; ~~Our~~• ~~estimate~~Income isprior ~~based~~to oninterest, ~~a projection~~taxes, ~~model~~depreciation ~~that~~and ~~forecasts~~amortization; ~~the~~• ~~annual~~Medicare ~~amount~~Cap weliability; ~~could~~• bePayment ~~required~~denials; to• ~~repay~~Average ~~Medicare~~daily ~~based~~census; ~~upon the~~• ~~program’s~~Patient ~~actual~~days; ~~historical program specific admission, discharge rate~~ and ~~average~~• ~~length of stay data~~Admissions.

~~Key~~Net ~~projection~~patient ~~model~~revenue ~~assumptions~~is ~~include:~~primarily the amount we are entitled to collect for our services, which is determined by the number of billable patient days, the level of care provided, the contracted reimbursement rate by payor which can vary by geographic area, adjusted for estimated Medicare Cap and estimated payment denials. Medicare reimbursements accounted for approximately 92% of our net patient revenue during the three and six months ended March 31, 2007. We actively monitor each of our programs to determine when the programs have the potential to exceed the annual Medicare Cap and attempt to institute corrective actions to avoid a Medicare Cap charge. However, when we believe our corrective actions will not avoid a Medicare Cap charge, an estimate of the amount that could be repaid to Medicare is booked as a reduction to net patient revenue.

• Since payment for hospice services is primarily on a per diem basis, our ~~fiscal~~profitability ~~intermediary~~is largely ~~will~~dependent ~~calculate~~on our ~~Medicare~~ability ~~Cap~~to ~~liability~~manage inthe aexpenses ~~manner~~of ~~consistent~~providing hospice services. Expenses are primarily categorized as patient care expenses or sales, general and administrative expenses. Patient care expenses consist primarily of salaries, benefits, payroll taxes, contract labor and mileage costs associated with ~~prior~~patient ~~years;~~care and •direct ~~our~~patient ~~Medicare~~care ~~Cap~~expenses ~~expense~~for ispharmaceuticals, durable ~~incurred~~medical ~~ratably~~equipment, ~~throughout~~medical ~~the~~supplies, ~~Medicare~~in-patient ~~fiscal~~facilities, ~~year~~nursing home costs and purchased ~~therefore~~services such as ambulance, infusion and radiology. SG&A expenses primarily include salaries, payroll taxes, benefits and travel expenses associated with our ~~estimate~~staff ofnot ~~such~~directly involved ~~expense~~with ~~should~~patient becare, ~~recorded~~bonuses ~~ratably~~for ~~over~~all employees, marketing, office leases, professional services and use taxes. Expenses are controlled through a budgeting process by which managers are expected to meet the ~~corresponding~~established ~~periods~~benchmarks. ofApproved ~~our~~budgets ~~fiscal~~may ~~year~~be adjusted as changes in net patient revenue or other circumstances warrant.

~~The~~Patient care ~~Company~~labor ~~believes~~expense ~~that~~is ~~there~~our largest operating expense. Our programs are staffed noto ~~realistic~~provide ~~alternative~~service ~~assumptions~~to ~~upon~~a ~~which~~forecasted number of patients each day (our daily average number of patients is referred to as ~~estimate~~“average ~~Medicare~~daily ~~Cap~~census” ~~expense~~or “ADC”). If a program fails to meet the forecasted ADC level or staff is not reduced immediately to levels appropriate for the actual number of patients being cared for, then the program’s profitability will be negatively affected in the current period. During the current fiscal year, our total ADC has been below our forecasted ADC levels. Management has undertaken initiatives to increase ADC and reduce labor costs to achieve an improvement in profitability. To date these initiatives have not produced the expected improvement in ADC growth and profitability.

~~Throughout~~During the second quarter of fiscal year, 2007 we ~~review~~closed four hospice programs and one inpatient unit as part of our previously announced restructuring. Through our on-going financial analysis of operating ~~experience~~units and ~~adjust~~programs, ~~our~~these ~~estimates~~locations were deemed to be under performing and the decision was made to close them. Also, during the second quarter of ~~potential~~fiscal year 2007 we ~~Medicare~~completed ~~Cap~~our ~~liability~~staff ~~from~~reductions at the ~~projection~~Corporate ~~model~~Headquarters.

The ~~accuracy~~total cost of ~~our~~the ~~estimates~~restructuring ischarges ~~affected~~expensed byduring ~~many~~the ~~factors~~second quarter of fiscal 2007, was ~~including:~~approximately $1.0 million. These costs included severance $0.5 million, early lease terminations $0.4 million, fixed asset write offs $0.1 million and an

•immaterial ~~the~~amount ~~actual number~~ of ~~Medicare~~other ~~beneficiary~~closure ~~patient admissions~~ and ~~discharges~~restructuring ~~and~~costs. ~~the~~Management ~~dates~~believes ofthat ~~occurrence~~these restructuring ofcharges ~~each;~~will •be ~~the~~offset ~~average~~during length of stay within each provider number, with those averaging over 180 days most likely to generate Medicare Cap exposure; • fluctuations in weekly enrollment and/or discharges; • our success in implementing corrective measures; • possible enrollment of beneficiaries in our providers who, without our knowledge, may have previously elected Medicare hospice coverage through another hospice provider and whose Medicare Cap amount is prorated for the ~~days~~remainder of ~~service~~fiscal ~~for~~year ~~the~~2007 ~~previous~~by ~~hospice admission; •~~ the ~~possible~~elimination ~~enrollment~~ of operating ~~beneficiaries~~losses ~~with~~at ~~another~~these ~~hospice~~unprofitable ~~provider whom had been on previous~~ hospice ~~service~~programs ~~with one of our own hospice providers~~ and ~~whose~~reduced ~~Medicare~~payroll ~~Cap~~expense ~~amount~~at ~~is prorated between~~ the Corporate ~~providers~~Headquarters ~~for~~due ~~the~~to ~~days of service for~~ the ~~subsequent~~reductions ~~hospice admission; • fiscal intermediary disallowances of certain beneficiaries and changes~~ in calculation methodology; • uncertainty surrounding length of patient stay in various patient groups, particularly with respect to non-oncology patients; and • the fact that we are not advised of the Medicare Cap per beneficiary credit amount that will be used by Medicare to calculate our Medicare Cap exposure until the end of the Medicare Cap year, requiring us to use an estimate of that amount throughout the yearforce.

~~While~~We weclosed ~~endeavor~~one toadditional ~~record~~hospice anprogram ~~accurate~~during ~~estimate of Medicare Cap liability, for the Medicare Cap year ended October~~April ~~2003, actual assessments of certain providers differed from our estimates recorded~~2007. The ~~difference~~estimated ~~between~~cost our estimates and the actual assessment for the Medicare Cap year 2003 was due to our fiscal intermediary (FI) disallowing certain beneficiaries; patients who received care with another hospice provider and to activity that took place subsequent to the end of ~~the 2003 Medicare Cap year, that was not known or knowable until actual assessments were made,~~closing ~~approximately~~this ~~twelve~~program ~~months~~is ~~later.~~expected ~~Activity that took place subsequent~~ to ~~the~~be ~~end~~less ofthan the 2003 Medicare Cap year included: (i) patients who received care with another hospice provider, (ii) patients who were initially billed to commercial insurance companies and we later determined that Medicare should have been billed and (iii) to a lesser degree, due to minimal changes in the level of care recorded, which was discovered after the close of fiscal year end. Of the $10.~~6 million difference between estimates and actual assessment for letters received from our FI between June and October of 2004 for the 2003 Medicare regulatory year, $~~1.2 million ~~related~~mainly ~~to certain technical disqualifications of claims and the pro-ration of service dates~~ for ~~patients~~severance and ~~$0.4 million~~lease ~~related to patients who were initially billed to commercial insurance companies or to~~termination ~~changes in the level of care, all of which were recorded during our fiscal nine months ended September 30, 2004~~costs.

~~Actual~~Definition assessments for the Medicare Cap year ended October 31, 2004 and 2005 may also differ from the amount we have recorded as an estimate due to the factors listed above. Any adjustments to net patient revenue for differences between our original estimates, as explained above, and the assessment subsequently made by Medicare following the end of ~~the Medicare Cap year, are recorded~~Terms as soon as the assessment is received. Since assessments are not received until well after the close of any given fiscal year, each fiscal year will be subject to a potential adjustment, up or down, to reflect the differences between actual and estimated assessments from the prior year(s). During the three month period ended June 30, 2005, the Company included in its Medicare Cap charge, an amount for the re-assessment received relating to Medicare Cap in 2002 (discussed below) as well as changes in its estimates for Medicare Cap liability in 2005 based upon changes in the admission and length of stay patterns developing throughout 2005.

InAs ~~addition,~~used ~~each~~in ~~state’s~~this ~~Medicaid~~report, ~~program~~the ~~also~~terms ~~has~~listed ~~regulations~~below ~~similar~~have to the ~~annual~~meanings ~~Medicare Cap.~~as ~~We monitor any related liability by provider, which at this time is not considered material~~indicated.

WeAdmissions: ~~recorded~~New ~~reductions~~admissions toincluding ~~net patient revenue for exceeding the annual Medicare Cap of $1~~re-admissions.5 million and $6.2 million for the three months ended June 30, 2005 and June 30, 2004, respectively, and reductions of $4.5 million and $10.1 million for the nine months ended June 30, 2005 and June 30, 2004, respectively. For our transition and recent annual periods, we recorded a reduction of $14.8 million for the transition fiscal nine month period ended September 30, 2004, $4.6 million for the fiscal year ended December 31, 2003, and $1.3 million for the fiscal year ended December 31, 2002, for exceeding the annual Medicare Cap.

~~The~~Average ~~$4.5 million~~daily ~~reduction~~census to(“ADC”): ~~revenue~~Total patient days for ~~Medicare~~all ~~Cap~~patients ~~for~~divided by the ~~nine~~number ~~months~~of ~~ended~~days during ~~June 30,~~the ~~2005~~period. ~~includes:~~

Average length of stay: Total days of care for patients discharged during the period divided by the total patients discharged.

Discharges: Total patients deceased or discharged from service.

Ending census: All patients served on last day of period.

Inpatient days: Total patient days in an acute care facility (hospital based or company owned) at general inpatient level of care.

Inpatient unit: Patient care provided in a hospital or other facility when pain and other symptoms cannot be managed effectively in a home setting. In the inpatient units we operate, we care for our own patients and a limited number of other hospice providers’ patients. In some of our programs we contract with other inpatient units to provide care for our patients.

Median length of stay: The midpoint of the patients’ total days of service that were discharged during the period.

Medicare Cap: The limitation on overall aggregate payments made to a hospice for services provided to Medicare beneficiaries during a Cap period that begins November 1 and ends October 31 each year, assessed on an individual provider number basis.

Medicare Cap calculation: A calculation made by our Medicare fiscal intermediary pursuant to applicable Medicare regulations to determine whether a hospice provider received any payment in excess of the Medicare Cap. The total Medicare payments received under a given provider number for services provided to all Medicare hospice care beneficiaries served within the provider number between each November 1 and October 31 is determined (“Total Payments”). The number of Medicare beneficiaries admitted (adjusted for the portion of time served by another provider “pro-ration”) at each hospice provider between September 28 of each year and September 27 of the following year is determined (“Beneficiaries”). The number of Beneficiaries is multiplied by the per beneficiary Cap amount for the applicable Cap period (“Cap Amount”). If the Total Payments are greater than the Cap Amount, the provider must refund the difference.

Patient day: A day we provide service to a patient.

Program: A separate hospice location operated under the same management as other company hospices.

Provider number: Unique identifiers assigned by Medicare and Medicaid to their providers. Multiple locations can share the same Medicare provider number.

• $1.1 million for re-assessment received from our FI in April 2005 for the 2002 Medicare Cap year. The FI had previously issued a zero assessment for 2002; • $3.7 million for patient service dates during the 2005 Medicare regulatory yearVISTACARE, ~~including pro-ration for estimated services that these 2005 patients may receive from other hospice programs; and • ($0~~INC.3) million adjustment to net patient revenue to reverse two of our providers Medicare Cap accruals that received zero assessment letters from our fiscal intermediary in 2005 (for the 2004 Medicare regulatory year). HIGHLIGHTS


	Three Months Ended			Three Months Ended			Twelve Months Ended			Six Months Ended			Six Months Ended
	March 31, 2007			March 31, 2006			September 30, 2006			March 31, 2007			March 31, 2006
Patient Statistics:
Average Daily Census (ADC)		5,053			5,091			5,218			5,120			5,203
Ending census on last day of period		5,125			5,201			5,256			5,125			5,201
Patient days		454,803			458,183			1,904,667			931,774			946,967
In-patient days (general in-patient)		6,748			4,941			21,753			12,684			9,957
Admissions		4,333			4,435			17,006			8,376			8,564
Diagnosis mix of admitted patients:
Cancer		31	%		29	%		32	%		31	%		31	%
Alzheimers/Dementia		14	%		12	%		12	%		14	%		13	%
Heart disease		18	%		20	%		19	%		17	%		19	%
Respiratory		10	%		10	%		9	%		9	%		9	%
Failure to thrive/Rapid decline		21	%		22	%		21	%		22	%		21	%
All other		6	%		7	%		7	%		7	%		7	%
Discharges		4,366			4,384			17,233			8,499			8,861
Average length of stay on discharged patients		116			110			110			111			113
Median length of stay on discharged patients		30			28			30			30			31

Program site Statistics:
Programs		51			57			56			51			57
In-patient units (included within a program)		4			4			5			4			4
Medicare provider numbers		35			37			37			35			37
Programs by ADC size
0-60 ADC		18			22			23			18			22
61-100 ADC		18			16			16			18			16
101-200 ADC		11			14			13			11			14
201+ ADC		4			5			4			4			5

Net patient revenue:
Net patient revenue (in millions)	$	59.0		$	55.9		$	236.0		$	120.0		$	115.6
Net patient revenue per day of care	$	130		$	122		$	124		$	129		$	122
Patient revenue payor %
Medicare		91.8	%		92.4	%		92.2	%		92.3	%		92.4	%
Medicaid		4.5	%		4.6	%		4.4	%		4.2	%		4.6	%
Private insurers and managed care		3.7	%		3.0	%		3.4	%		3.5	%		3.0	%
Level of care % of patient revenue
Routine home care		93.2	%		94.4	%		94.1	%		93.6	%		94.6	%
General in-patient care		6.1	%		4.6	%		4.9	%		5.6	%		4.6	%
Continuous home care		0.6	%		0.8	%		0.8	%		0.7	%		0.7	%
Respite in-patient care		0.1	%		0.2	%		0.2	%		0.1	%		0.1	%
Level of care base Medicare per diem reimbursement rates in effect:
Routine home care	$	130.79		$	126.49		$	126.49		$	130.79		$	126.49
General in-patient care	$	581.82		$	562.69		$	562.69		$	581.82		$	562.69
Continuous home care	$	763.36		$	738.26		$	738.26		$	763.36		$	738.26
Respite in-patient care	$	135.30		$	130.85		$	130.85		$	135.30		$	130.85
Increase in base rates		3.4	%		3.7	%		3.7	%		3.4	%		3.7	%
Hospice Medicare Cap per beneficiary	$	21,410		$	20,585		$	20,585		$	21,410		$	20,585
Accrued Medicare Cap liability (in millions)	$	12.3		$	14.3		$	9.8		$	12.3		$	14.3
Est. Med Cap reduct to patient rev. (in millions)	$	1.2		$	1.2		$	6.8		$	2.6		$	2.4
Medicare Cap paid (in millions)	$	0.2		$	—		$	15.0		$	0.2		$	6.1
Allowance for denials reserve (in millions)	$	3.1		$	3.4		$	2.2		$	3.1		$	3.4

Expenses: (in millions)
Nursing home expenses	$	12.0		$	11.7		$	48.8		$	24.2		$	23.6
Nursing home revenues	$	(10.5	)	$	(10.8	)	$	(44.4	)	$	(21.2	)	$	(22.1	)

Nursing home costs, net	$	1.5		$	0.9		$	4.4		$	3.0		$	1.5

Adjustments to Net Patient Revenue for Estimated Payment Denials

Approximately 97% of our net patient revenue is derived from Medicare and Medicaid programs. The balance of our net patient revenue is derived primarily from private insurers and managed care programs. We operate under arrangements with these payors pursuant to which they reimburse us for services we provide to hospice-eligible patients they cover, subject only to our submission of adequate and timely claim documentation. In some cases, these payors deny our claims for reimbursement for reasons such as:

• our claim documentation is incomplete or contains incorrect patient information; • the payor deems the patient ineligible for insurance coverage; or • we have failed to provide timely written physician certifications as to patient eligibility.

We adjust our net patient revenue to the extent we estimate to what magnitude these payors may deny our claims. This estimate is based on historical trends and is subject to change based on information we receive or data we compile concerning factors such as:

• our historical experience of claim denials by payor class; • the strength and reliability of our internal billing practices and controls; and • regulatory changes in the environment.

We recorded reductions to net patient revenue for estimated payment denials, contractual adjustments (such as differences in payments by commercial payors) and subsequent changes to initial level of care determinations (made retroactively by VistaCare staff after initial admission) of $0.6 million and $1.5 million for the three months ended June 30, 2005 and June 30, 2004, respectively, $2.9 million and $2.8 million for the nine months ended June 30, 2005 and June 30, 2004, respectively, and $3.8 million for the transition fiscal nine months ended September 30, 2004. As of June 30, 2005 and September 30, 2004, the allowance for denials on patient accounts receivable and room & board was $3.4 million and $5.9 million, respectively. The decrease in our allowances was primarily due to a change in our charge-off practices whereby we have accelerated the timing of the charge-off. Any adjustments to net patient revenue for changes in estimates, based on historical trends, are made only in the current period.

Charity Care

VistaCare provides care at no cost to patients who are not eligible for insurance coverage and meet certain financial need criteria established by VistaCare. Charity care totaled approximately $0.5 million and $0.4 million for the three months ended June 30, 2005 and June 30, 2004, respectively, and $1.5 million and $1.7 million for the nine months ended June 30, 2005 and June 30, 2004

respectively. Since VistaCare does not pursue collection of amounts determined to qualify as charity care, these amounts are not recorded in net patient revenue. Expenses that VistaCare incurs in providing charity care are recorded as patient care expenses.

Nursing Home Costs

For patients receiving nursing home care under state Medicaid programs in states other than Arizona, Oklahoma, Pennsylvania and South Carolina, who elect hospice care under Medicare or Medicaid, VistaCare contracts with nursing homes for the nursing homes’ provision to patients of room and board services. In these states, the applicable Medicaid program must pay VistaCare, in addition to the applicable Medicare or Medicaid hospice daily or hourly rate, an amount equal to no more than 95% of the Medicaid daily nursing home rate for room and board services furnished to the patient by the nursing home. Under VistaCare’s standard nursing home contracts, VistaCare pays the nursing home for these room and board services at predetermined contract rates, between 95% and 100% of the full Medicaid per diem nursing home rate. In Arizona, Oklahoma, Pennsylvania and South Carolina, the Medicaid program pays the nursing home directly for these expenses or has created a Medicaid managed care program that either reduces or eliminates this room and board payment. Effective July 1, 2005, South Carolina switched from paying the nursing home directly to paying VistaCare the daily nursing home rate for room and board services.

Nursing home expenses totaled approximately $12.0 million and $11.8 million for the three months ended June 30, 2005 and June 30, 2004, respectively, and $35.6 million and $34.5 million for the nine months ended June 30, 2005 and June 30, 2004, respectively. Nursing home revenues totaled approximately $10.8 million and $10.2 million for the three months ended June 30, 2005 and June 30, 2004, respectively, and $32.6 million and $29.6 million for the nine months ended June 30, 2005 and June 30, 2004, respectively. Revenues are less than the expenses due to provisions for estimated uncollectible amounts and differences in nursing home contracted rates. We account for the difference between the amount we pay the nursing home and the amount we receive from Medicaid (net of estimated room and board reimbursement claim denials) as patient care expenses. We refer to this difference as “nursing home costs, net”. Our nursing home costs, net, were $1.2 million and $1.6 million for the three months ended June 30, 2005 and June 30, 2004, respectively and $3.0 million and $4.9 million for the nine months ended June 30, 2005 and June 30, 2004, respectively.

Income Taxes

VistaCare accounts for income taxes under the liability method as required by Financial Accounting Standards Board Statement No. 109, Accounting for Income Taxes. Under the liability method, deferred taxes are determined based on temporary differences between financial statement and tax bases of assets and liabilities existing at each balance sheet date using enacted tax rates for years in which the related taxes are expected to be paid or recovered.

Insurance

VistaCare is covered by a general liability insurance policy on an occurrence basis with limits of $1.0 million per occurrence and $3.0 million in the aggregate. VistaCare is also covered by a healthcare professional liability insurance policy on a claims-made basis with limits of $1.0 million per occurrence and $3.0 million in the aggregate. VistaCare maintains workers’ compensation coverage at the statutory limits with a $1.0 million limit and a $250,000 deductible per occurrence, and an employer’s liability policy with a $1.0 million limit and a $150,000 deductible per occurrence. VistaCare also maintains a policy insuring hired and non-owned automobiles with a $1.0 million limit of liability and a $1.0 million deductible. In addition, VistaCare maintains umbrella coverage with a limit of $10.0 million excess over the general liability, healthcare professional liability, hired and non-owned automobile and employer’s liability policies. VistaCare has not experienced any uninsured health care negligence losses for the three and nine months ended June 30, 2005.

Use of Estimates

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

Stock-Based Compensation

VistaCare has elected to follow Accounting Principles Board Opinion No. 25 (APB No. 25), Accounting for Stock Issued to Employees and related interpretations, in accounting for its employee stock options rather than the alternative fair value accounting allowed by Statement of Financial Accounting Standards No. 123 (SFAS 123), Accounting for Stock-Based Compensation. Under APB No. 25, if the exercise price of VistaCare’s stock options equals or exceeds the estimated fair value of the underlying stock on the dates of grant, no compensation expense is recognized. However, if the exercise prices of VistaCare’s stock options are less than the estimated fair value on the date of grant, then compensation expense will be recognized for the difference over the related vesting periods. All stock-based awards to non-employees are accounted for at their fair value in accordance with SFAS 123.

If compensation for options granted under VistaCare’s stock option plan had been determined based on the deemed fair value at the grant date consistent with the method provided under SFAS 123, then VistaCare’s net income (loss) would have been as indicated in the pro-forma table below (in thousands, except per share information).

	Three Months Ended						Nine Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
Net income (loss) to common stockholders:
As reported:	$	980		$	(1,751	)	$	2,819		$	6,688
Deduct total stock-based employee compensation expense determined under fair value method for all awards, net of tax impact		(3,219	)		(741	)		(4,005	)		(979	)
Pro-forma (loss) net income to common stockholders	$	(2,239	)	$	(2,492	)	$	(1,186	)	$	5,709
Basic net income (loss) per common share:
As reported	$	0.06		$	(0.11	)	$	0.17		$	0.42
Pro-forma		(0.14	)		(0.15	)		(0.07	)		0.36
Diluted net income (loss) per common share:
As reported	$	0.06		$	(0.11	)	$	0.17		$	0.39
Pro-forma		(0.14	)		(0.15	)		(0.07	)		0.33
Weighted average shares used in computation:
Basic		16,362			16,167			16,299			16,013
Diluted		16,909			16,167			16,899			17,222

Net Income (Loss) Per Share

Basic net income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per common share is computed by dividing net income by the weighed average number of shares outstanding during the period plus the effect of potentially dilutive securities, including shares, outstanding warrants and employee stock options (using the treasury stock method).

On May 4, 2005, the Company’s Board of Directors approved accelerating 179,000 out-of-the-money unvested employee stock options. Under SFAS 123, a modified award requires a new measurement of compensation cost as the excess, if any, of the fair value of the modified award over the fair value of the original award immediately before its terms are modified. Because there is no further service requirement for these stock options, the excess of the compensation cost for these options measured at the modification date, less amounts previously expensed on a pro-forma basis, resulted in an increase to pro-forma compensation expense of $2.9 million net of tax impact for the three months and nine months ended June 30, 2005.

	Number of		Exercise
	Accelerated		Price Per
Holder of Non-qualified Stock Options	Options		Share
Executive Officers as of May 4, 2005:
Hughes, Carla		60,000	$	34.09
Lewis, Stephen		15,000		34.09
Watson, Ron		32,000		36.20
Berry, Roseanne		25,000		34.09
Steging, Jon		16,000		36.25
Crisci, John		16,000		23.41

	Number of		Exercise
	Accelerated		Price Per
Holder of Non-qualified Stock Options	Options		Share
Crisci, John		15,000		34.09
All executive officers as a group (weighted average exercise price)		179,000		33.71
All other employees (weighted average exercise price)		434,624		28.06
Total (weighted average exercise price)		613,624	$	29.71

The acceleration of these options eliminates future compensation expense that the Company would otherwise recognize in its statement of operations with respect to these options upon the effectiveness of SFAS No. 123(R) (Share-Based Payment) as described below in “New Accounting Pronouncement” in October 2005. The maximum future expense that is eliminated is approximately $4.6 million. This amount will be reflected in pro-forma footnote disclosure in our fiscal 2005 financial statements, as permitted under the transition guidance provided by the Financial Accounting Standards Board.

The acceleration of stock option vesting requires a new measurement date. However, while the modification may allow the employees to vest in options that could have been forfeited pursuant to the options original terms (i.e., termination prior to vesting), no future compensation expense will result since the options were out-of-the-money at the new measurement date.

New Accounting Pronouncement

On December 16, 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123(R) (revised 2004), Share-Based Payment, which is a revision of SFAS No. 123. SFAS No. 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement of Cash Flows. Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro-forma disclosure is no longer an alternative. On April 14, 2005, the Securities and Exchange Commission delayed the effective date of SFAS No. 123(R) for public companies. Under the SEC’s new rule, SFAS No. 123(R) must be implemented at the beginning of the next fiscal year that begins after June 15, 2005. Early adoption will be permitted in periods in which financial statements have not yet been issued. We will utilize the modified prospective method, recognizing compensation cost for share-based awards to employees based on their grant-date fair values from the beginning of the year in which the recognition provisions are first applied as if the fair value-based method had been used to account for all employee awards. Under this transition approach, compensation cost will be recognized for all awards granted, modified or settled after the date of adoption as well as to any awards that were not fully vested as of that date. We will adopt SFAS No. 123(R) on October 1, 2005.

The adoption of SFAS No. 123(R)’s fair value method will have a significant impact on our results of operations, although it will have no impact on our overall financial position. The impact of adoption of SFAS No. 123(R) cannot be predicted at this time because it will depend on the levels of share-based payments granted in the future. However, had we adopted SFAS No. 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro-forma net income and earnings per share set forth above in this Note. SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While we cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), no amounts of operating cash flows were recognized in prior periods for such excess tax deductions in both the first nine months of 2004 and 2005.

Reclassifications

Certain amounts have been reclassified to conform to the current presentation.

2. Fixed Assets

A summary of fixed assets follows (in thousands):

	June 30,			September 30,
	2005			2004
Equipment	$	9,068		$	8,106
Furniture and fixtures		2,350			1,886
Leasehold improvements		1,419			1,309
Total fixed assets		12,837			11,301
Less accumulated depreciation		(7,344	)		(5,922	)
Net fixed assets	$	5,493		$	5,379

3. Other Assets

A summary of other assets follows (in thousands):

	June 30,		September 30,
	2005		2004
Internally developed software, net of amortization of $3,715 and $2,118 as of June 30, 2005 and September 30, 2004, respectively	$	3,714	$	4,984
Workers’ compensation, restricted cash		2,063		812
Refundable deposits		407		387
Computer software, net of amortization of $1,973 and $1,670 as of June 30, 2005 and September 30, 2004, respectively		382		400
Notes receivable		34		36
Total other assets	$	6,600	$	6,619

4. Accrued Expenses

A summary of accrued expenses follows (in thousands):

	June 30,		September 30,
	2005		2004
Medicare Cap accrual	$	16,610	$	19,584
Treatment expenses		7,748		11,386
Accrued administrative expenses		3,619		4,486
Self-insurance health expenses		2,963		3,027
Salaries and payroll taxes		2,833		4,019
Accrued PTO		2,263		2,615
Total accrued expenses	$	36,036	$	45,117

5. Long-Term Debt

In December 2004, VistaCare renewed a $30.0 million revolving line of credit and entered into a $20.0 million term loan (credit facility). The credit facility is collateralized by substantially all of VistaCare’s assets including cash, accounts receivable and equipment. Loans under the revolving line of credit bear interest at an annual rate equal to the one-month London Interbank Borrowing Rate in effect from time to time plus 3.0-5.0%. Accrued interest under the revolving line of credit is due weekly.

Under the revolving line of credit, VistaCare may borrow, repay and re-borrow an amount equal to the lesser of: (i) $30.0 million or (ii) 85% of the net value of eligible accounts receivable. Under the term loan, borrowings are based on allowable total indebtedness based on a multiplier of cash flow as defined in the loan agreement. The maturity date of the credit facility is December 22, 2009. As of June 30, 2005, there was no balance outstanding on the revolving line of credit or on the term loan.

The credit facility contains certain customary covenants including those that restrict the ability of VistaCare to incur additional indebtedness, pay dividends under certain circumstances, permit liens on property or assets, make capital expenditures, make certain investments, and prepay or redeem debt or amend certain agreements relating to outstanding indebtedness. The Company was not in compliance with the financial debt service coverage covenant as of June 30, 2005; however, the lender provided a waiver through June 30, 2005. We anticipate receiving an extension of the covenant waiver through September 30, 2005.

6. Related Party Transactions

In September 2003, we entered into a consulting services agreement with Dr. Perry G. Fine, a member of our Board of Directors, pursuant to which Dr. Fine provides certain consulting and other related services to VistaCare as we may request from time to time. In return, Dr. Fine receives an annual retainer of $60,000, paid in equal monthly installments commencing on September 1, 2003, plus reimbursement by us in accordance with Company policy of travel and other business-related expenses. The agreement may be terminated by either Dr. Fine or us upon 30 days written notice with or without cause. In addition, we may terminate the agreement immediately under certain circumstances. A copy of the agreement appears at Exhibit 10.39 to our 2003 annual report on Form 10-K.

7. Litigation

Between August and September 2004, approximately five complaints were filed individually and on behalf of all others similarly situated in the United States District Court for the District of Arizona against the Company and two of our officers alleging violations of the federal securities laws arising out of recent declines in the Company’s stock price. Specifically, the complaints allege claims in connection with various statements and purported omissions to the public and to the securities markets relating to the Company’s August 2004 announcement of our decision to accrue an increased amount for the quarter ended June 30, 2004 as an accrual for potential liability due to the Medicare Cap on reimbursement for hospice services. The five lawsuits were consolidated on April 15, 2005, a consolidated complaint was served and the Company filed a motion to dismiss. No discovery has taken place and the Company intends to vigorously defend the lawsuit. No assurances can be made that the Company will be successful in defense of such claims. If the Company is not successful in defense of such claims, we could be forced to make significant payments to our stockholders and their lawyers, and such payments could have a material adverse effect on our business, financial condition and results of operations if not covered by our insurance carrier. Even if such claims are not successful, the litigation could result in substantial costs and divert management’s attention and resources, which could adversely affect our business, results of operations and financial position.

Between August and September 2004, two shareholders filed separate derivative lawsuits purportedly on behalf of the Company against several present and former officers and members of the Board of Directors of the Company in the United States District Court for the District of Arizona. The two derivative complaints, which have been consolidated, allege breaches of fiduciary duties, abuse of control, mismanagement, waste of corporate assets and unjust enrichment, as a result of the same activities alleged in the lawsuits discussed above. The derivative complaint seeks attorney fees and the payment of damages to the Company. As of the date of this report, these derivative actions are at the early pleading stage and have been stayed.

We are also subject to a variety of other claims and suits that arise from time to time in the ordinary course of our business. While management currently believes that resolving all of the matters discussed in this note, individually or in aggregate, will not have a material adverse impact on our financial position or our results of operations, the litigation and other claims that we face are subject to inherent uncertainties and management’s view of these matters may change in the future. Should an unfavorable final outcome to occur, there exists the possibility of a material adverse impact on our financial position and on the results of operations for the period in which the effect becomes reasonably estimable.

8. Dilutive Securities

The following table presents the calculation of basic and diluted net income (loss) per common share (in thousands, except per share information):

	Three Months Ended					Nine Months Ended
	June 30,					June 30,
	2005		2004			2005		2004
Numerator
Net income (loss)	$	980	$	(1,751	)	$	2,819	$	6,688
Denominator
Denominator for basic net income (loss) per share — weighted average shares		16,362		16,167			16,299		16,013
Effect of dilutive securities:
Employee stock options		547		—			600		1,209
Denominator for diluted net income (loss) per share — adjusted weighted average shares and assumed conversion		16,909		16,167			16,899		17,222
Net income (loss) per common share:
Basic net income (loss) to common stockholders	$	0.06	$	(0.11	)	$	0.17	$	0.42
Diluted net income (loss) to common stockholders	$	0.06	$	(0.11	)	$	0.17	$	0.39

The effect of dilutive securities amounting to 768,000 shares and 511,000 shares were not included in the diluted net income per share calculation for the three months ended June 30, 2005 and June 30, 2004, respectively, and the effect of dilutive securities, relating to stock options with exercise prices in excess of the weighted average stock for value for the period, amounting to 1,078,000 shares and 608,000 shares were not included in the diluted net income per share calculation for the nine months ended June 30, 2005 and June 30, 2004, respectively, because inclusion of the securities would be anti-dilutive.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Change in Year End

On August 18, 2004, VistaCare’s Board of Directors changed the Company’s fiscal year-end from December 31 to September 30. The three and nine months ended June 30, 2005 results now being reported by the Company relate to the fiscal year ending September 30, 2005. For comparative purposes the nine months ended June 30, 2004, includes the six months ended June 30, 2004 reported in the fiscal year ended September 30, 2004, and the three months ended December 31, 2003 reported in the fiscal year ended December 31, 2003.

Overview

During the three months ended June 30, 2005, we developed two new licensed and Medicare certified hospice programs for a total of twelve new licensed hospice programs added during the nine months ended June 30, 2005. As a result we are as of June 30, 2005, operating 56 hospice programs and one in-patient unit, serving approximately 5,459 patients in 14 states. Our net patient revenue increased to $57.5 million for the three months ended June 30, 2005, from $48.1 million for the three months ended June 30, 2004. Our net patient revenue for the three months ended June 30, 2005 was reduced by $1.5 million, which was recorded as reserved for estimated Medicare Cap liabilities, as compared to a reduction of $6.2 million for the three months ended June 30, 2004. As of June 30, 2005, our accrued expenses included $16.6 million for the Medicare Cap accrued liability.

For the three months ended June 30, 2005, we recorded net income of $1.0 million, as compared to a net loss of $1.8 million for the three months ended June 30, 2004. Net income for the nine months ended June 30, 2005 was $2.8 million, compared to net income of $6.7 million for the nine months ended June 30, 2004. Our net income was impacted positively by a 3.3% increase in Medicare hospice reimbursement rates effective October 1, 2004 and higher patient days, but offset by increases in patient care labor expense, increases in sales, general and administrative expense, and new site development costs. Our net income was impacted by the Medicare Cap in the nine months ending June 30, 2005 by $4.5 million compared to $10.1 million for the nine months ended June 30, 2004.

Net Patient Revenue

Net patient revenue is the amount VistaCare believes we are entitled to collect for our services, adjusted as described below. The amount varies depending on the level of care, the payor and the geographic area where the services are rendered. We derive net patient revenue from billings to Medicare, Medicaid, private insurers, managed care providers, patients and others. We operate under arrangements with those payors pursuant to which they reimburse us for services we provide to hospice eligible patients they cover, subject only to our submission of adequate and timely claim documentation. Our patient intake process screens patients for hospice eligibility and identifies whether their care will be covered by Medicare, Medicaid, private insurance, managed care or self-pay. We recognize patient revenues once the patient’s hospice eligibility has been certified by a physician, the patient’s coverage from a payment source has been verified and services have been provided to that patient.

Our patient revenues are primarily determined by the number of billable patient days, the level of care provided and reimbursement rates. The number of billable patient days is a function of the number of patients admitted to our programs and the number of days that those patients remain in our care (length of stay, based upon patient discharges during the period). Our average length of stay was approximately 113 days for the three months ended June 30, 2005 and 115 days for the nine months ended June 30, 2005. We believe we exceed the industry average on average length of stay and we attribute this to several factors. First, compared to hospice industry averages, we have a relatively high percentage of non-cancer patients, though in line with total cancer deaths in the country and in line with the Medicare decedent diagnosis mix, which typically have a longer average length of stay than cancer patients. Second, we believe that our open access philosophy and our efforts to educate referral sources about hospice care encourages earlier election of patients to hospice care. Finally, a significant amount of our patient census is in rural markets, where access to intensive health care services, hospitals or other alternative health care services for hospice-eligible patients is more inconvenient than in more urban areas. Our median length of stay, based upon patient discharges during the period, was 31 days for the three months ended June 30, 2005 and 30 days for the nine months ended June 30, 2005. We operate 56 hospice locations (programs) under 36 Medicare provider numbers (providers).

Net patient revenue includes adjustments for:

• estimated required repayments to Medicare, if any of our programs exceed the annual Medicare Cap, as described in this 10-Q under “Medicare and Medicaid Regulation”; and

• estimated payment denials, contractual adjustments and subsequent changes to initial level of care determinations, as described in this 10-Q under “Adjustments to Net Patient Revenue for Estimated Payment Denials”.

The $4.5 million reduction to revenue for Medicare Cap for the nine months ended June 30, 2005 includes:

• $1.1 million for re-assessment received from our FI in April 2005 for the 2002 Medicare Cap year. The FI had previously issued a zero assessment for 2002; • $3.7 million for patient service dates during the 2005 Medicare regulatory year, including pro-ration for estimated services that these 2005 patients may receive from other hospice programs; and • ($0.3) million adjustment to net patient revenue to reverse two of our providers Medicare Cap accruals that received zero assessment letters from our fiscal intermediary in 2005 (for the 2004 Medicare regulatory year).

We adjust our estimates for payment denials from time to time based on our billing and collection experience, and payor mix. VistaCare estimates such adjustments to net patient revenue based on significant historical experience utilizing our centralized billing and collection department, which continually monitors the factors that could potentially result in a change in charge denial experience. We recorded reductions to net patient revenue for estimated payment denials, contractual adjustments (such as differences in payments by commercial payors) and subsequent changes to initial level of care determinations (made retroactively by VistaCare staff after initial admission) of $0.6 million and $1.5 million for the three months ended June 30, 2005 and June 30, 2004, respectively, $2.9 million and $2.8 million for the nine months ended June 30, 2005 and June 30, 2004, respectively, and $3.8 million for the transition fiscal nine months ended September 30, 2004. As of June 30, 2005 and September 30, 2004, the allowance for denials on patient accounts receivable and room & board was $3.4 million and $5.9 million, respectively. The decrease in our allowances was primarily due to a change in our charge-off practices whereby we have accelerated the timing of the charge-off. Any adjustments to net patient revenue for changes in estimates, based on historical trends, are made only in the current period.

The company recorded changes in estimates to net patient revenue for the three and nine months ended June 30, 2005. See further discussions in Note 1 of the Notes to Consolidated Financial Statements included elsewhere herein, under the headings “Medicare and Medicaid Regulation”, “Adjustments to Net Patient Revenue for Exceeding the Medicare Cap” and “Adjustments to Net Patient Revenue for Estimated Payment Denials” for explanation of Medicare Cap estimates, payment denial estimates or charges.

Medicare and Medicaid reimbursements account for approximately 97% of our net patient revenue for each of the three and nine months ended June 30, 2005 and June 30, 2004, respectively. Whether Medicare or Medicaid continues to provide reimbursement for hospice care is dependent upon governmental policies.

The table below sets forth the percentage of our net patient revenue derived from Medicare, Medicaid, private insurers and managed care payors for the periods indicated.

	Three Months Ended						Nine Months Ended
	June 30,			June 30,			June 30,			June 30,
Payors	2005			2004			2005			2004
Medicare		92.6	%		93.0	%		92.9	%		93.4	%
Medicaid		4.6	%		4.1	%		4.3	%		3.9	%
Private insurers and managed care		2.8	%		2.9	%		2.8	%		2.7	%

Medicare, Medicaid, most private insurers and managed care providers pay for hospice care at a daily or hourly rate that varies depending on the level of care provided. The table below sets forth the percentage of our net patient revenue generated under each of the four Medicare levels of care for the periods indicated:

	Three Months Ended						Nine Months Ended
	June 30,			June 30,			June 30,			June 30,
Level of Care	2005			2004			2005			2004
Routine home care		95.9	%		96.3	%		95.4	%		95.1	%
General inpatient care		3.2	%		3.4	%		3.9	%		4.4	%
Continuous home care		0.7	%		0.3	%		0.6	%		0.3	%
Respite inpatient care		0.2	%		0.1	%		0.1	%		0.2	%

Historically, effective each October 1st, Medicare adjusts its base hospice care reimbursement rates for the following year based on inflation and other economic factors. The Medicare base rates were increased 3.3% effective October 1, 2004, over the base rates then in effect. These increases have favorably impacted our net patient revenue. Medicare’s base rates are subject to regional adjustments based on local wage levels. These regional adjustments are not necessarily proportional to adjustments in the national average base rate.

Medicaid reimbursement rates and hospice care coverage rates for private insurers and managed care plans generally tend to approximate Medicare rates.

Because we generally receive fixed payments for our hospice care services based on the level of care provided to our hospice patients, we are at risk for the cost of services provided to our hospice patients. We cannot assure that Medicare, Medicaid and private insurers will continue to pay for hospice care in the same manner or in the same amount that they currently pay. Reductions in amounts paid by government programs for our services or changes in methods or regulations governing payments, which would likely result in similar changes by private third-party payors, could adversely affect our net patient revenue and profitability.

Laws and regulations governing the Medicare and Medicaid program are complex and subject to interpretation. VistaCare believes that it is in compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrong doing, which would have a material impact on VistaCare’s consolidated financial condition or results of operations. Compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties, and exclusion from the Medicare and Medicaid programs.

Expenses

We recognize expenses as incurred. Our primary expenses include those we classify as either patient care expenses or sales, general and administrative expenses.

Patient care expenses consist primarily of salaries, benefits, payroll taxes and travel expenses associated with our hospice care providers. Patient care expenses also include the cost of pharmaceuticals, durable medical equipment, medical supplies, inpatient facility expenses, nursing home costs and purchased services such as ambulance, infusion and radiology. We incur inpatient facility expenses primarily through per diem charge arrangements with hospitals and skilled nursing facilities where we provide our services. We currently operate one inpatient hospice facility under a lease agreement with an independent living facility.

Patient length of stay impacts our patient care expenses as a percentage of net patient revenue. Patient care expenses are generally higher following the initial admission and during the latter days of care for a patient. In the initial days of care, expenses tend to be higher because of the initial purchases of pharmaceuticals, medical equipment and supplies and the administrative expenses of determining the patient’s hospice eligibility, registering the patient and organizing the plan of care. In the latter days of care, expenses tend to be higher because patients generally require more services, such as pharmaceuticals and nursing care, due to their deteriorating medical condition. Accordingly, if lengths of stay decline, those higher expenses are spread over fewer days of care, which increases patient care expenses as a percentage of net patient revenue and negatively impacts profitability. Patient care expenses are also impacted by the geographic concentration of patients. Labor expenses, which represent the single largest category of patient care expenses, tend to be less if patients are geographically concentrated and hospice care providers are required to spend less time traveling and can care for more patients.

For patients receiving nursing home care under state Medicaid programs in states other than Arizona, Oklahoma, Pennsylvania and

South Carolina, who elect hospice care under Medicare or Medicaid, VistaCare contracts with nursing homes for the nursing homes’ provision to patients of room and board services. In these states, the applicable Medicaid program must pay VistaCare, in addition to the applicable Medicare or Medicaid hospice daily or hourly rate, an amount equal to no more than 95% of the Medicaid daily nursing home rate for room and board services furnished to the patient by the nursing home. Under VistaCare’s standard nursing home contracts, VistaCare pays the nursing home for these room and board services at predetermined contract rates, between 95% and 100% of the full Medicaid per diem nursing home rate. In Arizona, Oklahoma, Pennsylvania and South Carolina, the Medicaid program pays the nursing home directly for these expenses or has created a Medicaid managed care program that either reduces or eliminates this room and board payment. Effective July 1, 2005, South Carolina switched from paying the nursing home directly to paying VistaCare the daily nursing home rate for room and board services.

Sales, general and administrative expenses primarily include salaries, payroll taxes, benefits and travel expenses associated with our staff not directly involved with patient care, bonuses for all employees, marketing, office leases and professional services.

According to our paid time off policy, all accrued paid time off must be used by February 28 of the following calendar year. All hours not taken by February 28 of the following calendar year are forfeited. During the three and nine months ended June 30, 2005, we reduced salaries, benefits and payroll taxes expenses and accruals for the expiration of accrued paid time off by $0.1 million and $0.9 million, respectively. The reductions for expired accrued paid time off for the three and nine months ended June 30, 2004 were $0 million and $0.4 million, respectively. These higher forfeitures were driven by lower levels of paid time off taken by existing personnel.

Health Insurance expense declined by $0.9 million for the three and nine months ended June 30, 2005 due to a review of our claim experience which demonstrated a decline in our claim lag from 3 months to 2.5 months. We therefore reduced our accrual for employee health benefit expense from an accrual for 3 months of health benefit expense to 2.5 months.

Stock-Based Compensation

Certain employee stock options, which we granted in each of the years 2001 through 2004 have resulted in and will continue to result in stock-based compensation charges. In accordance with Accounting Principles Board Opinion No. 25 and related interpretations, if an employee stock option is granted or modified with an exercise price, which is less than the deemed fair value of the underlying stock, the difference is treated as a compensation charge that must be recognized ratably over the vesting period for the option. As of June 30, 2005 and September 30, 2004, we had total accrued stock-based compensation net of amortization of $0.6 million and $1.2 million, respectively.

Capitalized Software Development Costs

We have capitalized certain internal costs related to the development of software used in our business. We capitalize all qualifying internal costs incurred during the software’s development stage. Costs incurred during the preliminary project stage and post-implementation/operation stages are expensed as incurred. We amortize the capitalized software development costs related to particular software over a three-year period commencing when that software is substantially complete and ready for its intended use. As of June 30, 2005 and September 30, 2004, we had total capitalized software development costs, net of amortization, of $3.7 million and $5.0 million, respectively.

Goodwill

Goodwill from our 1998, 2002 and 2005 acquisitions, net of accumulated amortization, was $20.9 million as of June 30, 2005. Prior to 2002, we were amortizing the goodwill, from our 1998 acquisitions over 30 years. Rules issued by the Financial Accounting Standards Board, effective beginning in 2002, require that we no longer amortize goodwill. These rules require that we analyze our

goodwill for impairment annually, or more often if events or circumstances arise that indicate that the carrying value of our goodwill exceeds its fair market value. We have concluded that no basis for impairment of our goodwill existed as of June 30, 2005.

Current and Subsequent Events

On January 11, 2005, we finalized the purchase of the Prayer of Jabez hospice in Houston, Texas for $0.3 million. We anticipate this purchase will broaden several of our current markets and further develop culturally underserved markets. The cash purchase was paid in April 2005.

At the required compliance date of April 20, 2005, we believe we were in compliance with the privacy and security of health information provisions of the Health Insurance Portability and Accountability Act of 1996 (HIPAA). Compliance with these rules has required costly changes and we expect to incur additional expenses in the future for continued compliance with these regulations.

On April 27, 2005, we received an assessment letter for exceeding the annual Medicare Cap totaling $1.1 million for all programs in the 2002 Medicare Cap year. We paid the 2002 Medicare Cap assessment in June 2005. (See further discussions in this Form 10-Q under note 1 of Notes to Consolidated Financial Statements.)

At the May 4, 2005 Board of Directors meeting, our Directors elected Jack A. Henry and James C. Crews as new board members to fill vacancies created by the departure of two of our Directors that day. Mr. Henry filled the vacancy created by the retirement of William J. McBride, and will serve the remainder of the Class II Director term, which ends on the date of the annual meeting of stockholders in 2007. Mr. McBride announced his retirement, after nearly 10 years of service, to be able to devote more time to his family and other personal and business matters. Mr. Crews filled the vacancy created by the resignation of David W. Faeder, and will serve the remainder of the Class I Director term, which ends on the date of the annual meeting of stockholders in 2006. Mr. Faeder announced his resignation due to changed circumstances of his business activities, including the need to devote more time to his new business venture.

On May 4, 2005, the Company’s Board of Directors approved accelerating the vesting of all out-of-the-money, unvested options to purchase the Company’s common shares held by current employees, including affected executive officers’ options. No options held by non-employee directors were subject to the acceleration. All options priced above $17.51, the closing price of the Company’s common shares on May 4, 2005, were considered to be out-of-the-money. The following table summarizes the options subject to acceleration:

	Number of		Exercise
	Accelerated		Price Per
Holder of Non-qualified Stock Options	Options		Share
Executive Officers as of May 4, 2005:
Hughes, Carla		60,000	$	34.09
Lewis, Stephen		15,000		34.09
Watson, Ron		32,000		36.20
Berry, Roseanne		25,000		34.09
Steging, Jon		16,000		36.25
Crisci, John		16,000		23.41
Crisci, John		15,000		34.09
All executive officers as a group (weighted average exercise price)		179,000		33.71
All other employees (weighted average exercise price)		434,624		28.06
Total (weighted average exercise price)		613,624	$	29.71

On May 16, 2005, Carla Davis Hughes, ceased being our Executive Vice President, effective May 31, 2005, and is now a part-time employee on a limited basis for a minimum of two years. During the process of recruiting a replacement, Richard Slager, Chief Executive Officer, has temporarily assumed leadership responsibility for the Public Policy, and David Elliot, President and Chief

Operating Officer, has temporarily assumed leadership responsibility for the Strategic Marketing team.

On June 16, 2005, VistaCare and Emory Healthcare announced the signing of a number of service agreements, including an agreement to develop a 28-bed hospice inpatient unit, in an effort to enhance the depth and scope of end-of-life care services in the Atlanta metropolitan area and throughout the Emory Healthcare system.

On July 7, 2005, the Board of Directors appointed Jon M. Donnell to the Board of Directors. Mr. Donnell fills a vacancy resulting from a newly created class II director position, the term of which ends on the date of the annual meeting of shareholders in 2007. We now have a total of nine members on our Board of Directors.

Results of Operations

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

	Three Months Ended						~~Nine~~Six Months Ended
	June 30,						June 30,
	March 31,						March 31,
	2005			2004			2005			2004
	2007			2006			2007			2006
Net patient revenue		100	%		100	%		100	%		100	%
Operating expenses:
Patient care expenses:
Salaries, benefits and payroll taxes		4043.9	%		43.20	%		4044.90	%		3840.58	%
Pharmaceuticals		45.75	%		5.70	%		45.83	%		54.29	%
Durable medical equipment		54.18	%		5.80	%		54.06	%		54.19	%
Other (including inpatient arrangements, nursing home costs, net, purchased services, travel and supplies)		12.1	%		14.4	%		11.4	%		13.4	%
Other (including in-patient arrangements, nursing home costs, net, purchased services, travel and supplies)		13.7	%		13.7	%		12.9	%		12.7	%
Total patient care expenses		6267.89	%		6966.17	%		6266.18	%		6263.23	%
Sales, general and administrative expenses (exclusive of stock-based compensation charges reported below):
Sales, general and administrative expenses:
Salaries, benefits and payroll taxes		20.16	%		2021.72	%		20.16	%		1719.63	%
Office leases		23.67	%		3.92	%		23.62	%		3.50	%
Other (including severance, travel, marketing and charitable contributions)		1011.38	%		913.90	%		1011.64	%		813.62	%
Total sales, general and administrative expenses		3336.01	%		3437.54	%		3335.32	%		2935.75	%
Depreciation and amortization		1.95	%		2.03	%		2.1.5	%		12.82	%
Stock-based compensation		0.1	%		0.1	%		0.1	%		0.1	%
Gain on sale of hospice program assets		—			—			0.9	%		—
Operating income (loss)		2.2	%		(5.7	)%		2.4	%		6.2	%
Operating loss		(5.5	)%		(6.4	)%		(2.6	)%		(1.0	)%
Non-operating income		0.4	%		0.24	%		0.25	%		0.14	%
Income tax expense (benefit)		0.93	%		(12.94	)%		1.0.2	%		2.(0.3	)%
Net income (loss)		1.7	%		(3.6	)%		1.6	%		4.3	%
Net loss		(5.4	)%		(3.6	)%		(2.3	)%		(0.3	)%

Three ~~and Nine~~ Months Ended ~~June~~March 3031, ~~2005~~2007, Compared to Three ~~and Nine~~ Months Ended ~~June~~March 3031, ~~2004~~2006

Net Patient Revenue

Net patient revenue increased $93.41 million, or 205.5%, to $5759.50 million for the three months ended ~~June~~March 3031, ~~2005~~2007, as compared to $4855.19 million for the three months ended ~~June~~March 3031, ~~2004~~2006. Net patient revenue ~~increased $16.2 million or 10%, to $171.5 million for the nine months ended June 30, 2005, from $155.3 million for the nine months ended June 30, 2004. Net patient revenue~~ per day of care increased to approximately $~~117~~130 per day for the three months ended ~~June~~ March 3031, ~~2005~~2007 from approximately $~~101~~122 per day for the three months ended ~~June~~March 3031, ~~2004~~2006. ~~Net patient revenue per day of~~Overall ~~care~~increases ~~increased~~in tonet ~~approximately~~patient ~~$117~~revenue ~~per day for the nine months ended June 30, 2005 from approximately $109 per day for the nine months ended June 30, 2004. These increases~~ were due to:

• Medicare reimbursement rate increase effective October 1, 2004; • an increase in patient days, to 490,244 days and 1,461,659 days for the three and nine months, respectively, ended June 30, 2005, from 474,631 days and 1,420,703 days for the three and nine months, respectively, ended June 30, 2004; and • lower Medicare Cap accrual of $1.5 million for the three months ended June 30, 2005, compared to $6.2 million for the three months ended June 30, 2004, and accrual of $4.5 million for the nine months ended June 30, 2005, compared to $10.1 million for the nine months ended June 30, 2004.

	•		Medicare reimbursement rate increase of 3.4% effective October 1, 2006; and

	•		an increase in inpatient days, which have a high per diem rate, to 6,748 days for the three months ended March 31, 2007, from 4,941 days for the three months ended March 31, 2006.

WeThese ~~recorded~~increases ~~reductions~~were topartially ~~net~~offset ~~patient~~by ~~revenue~~the ~~for~~negative ~~estimated~~impact ~~payment~~of ~~denials,~~lower ~~contractual~~ADC and lower patient ~~adjustments~~days ~~(such~~when ascomparing ~~differences~~this inquarter ~~payments~~to bythe ~~commercial~~same ~~payors)~~quarter ~~and~~last ~~subsequent~~year. ~~changes~~During ~~to initial~~the ~~level~~three ofmonths ~~care~~ended March 31, ~~determinations~~2007, ~~(made~~the ~~retroactively~~ADC bywas ~~VistaCare~~5,053 ~~staff~~and ~~after~~the ~~initial admission)~~number of ~~$0.6 million~~patient ~~and~~days $1was 454,803.~~5 million~~ ~~for~~During the three months ended ~~June~~March 3031, ~~2005~~2006, the ADC was 5,091 and ~~June 30~~the number of patient days was 458,183. Patient ~~2004,~~admissions ~~respectively~~of 4,333 ~~$2.9 million~~were ~~and~~lower ~~$2.8 million~~during ~~for~~ the ~~nine~~three months ended ~~June~~March 3031, ~~2005~~2007 ~~and~~than ~~June~~the patient 30admissions of 4,435 ~~2004~~in the three months ended March 31, ~~respectively~~2006. However, ~~and~~the ~~$3.8~~average length of stay increased to 116 ~~million~~days for the ~~transition~~three ~~fiscal nine~~ months ended ~~September~~March 3031, ~~2004.~~ As2007 offrom ~~June 30,~~an ~~2005~~average ~~and~~length ~~September~~of stay of 110 ~~30,~~days ~~2004,~~during the ~~allowance~~three ~~for~~months ~~denials~~ended onMarch 31, 2006.

26 We are subject to Medicare Cap limits based on the total amount of Medicare payments that will be made to each of our provider numbers. We actively monitor each of our programs, by provider number, as to their program specific admission, discharge rate and average length of stay data in an attempt to determine whether they have the potential to exceed the annual Medicare Cap. When we determine that a provider number has the potential to exceed the annual Medicare Cap based upon trends, we attempt to institute corrective action, such as a change in patient mix or increase in patient admissions. However, to the extent we believe our corrective action will not avoid a Medicare Cap charge, we estimate the amount that we could be required to repay Medicare following the end

~~patient~~of ~~accounts~~the ~~receivable~~Medicare ~~and~~Cap ~~room~~year, ~~& board was $3.4 million~~ and ~~$5.9 million,~~accrue ~~respectively. The~~that ~~decrease~~amount in ~~our~~proportion ~~allowances was primarily due~~ to athe ~~change~~number inof ~~our~~months ~~charge-off practices whereby we~~that have ~~accelerated~~elapsed in the ~~timing~~Medicare ofCap ~~the~~year ~~charge-off.~~as ~~Any~~a ~~adjustments~~reduction to net patient revenue ~~for changes in estimates, based on historical trends, are made only in the current period~~.

27 We recorded reductions to net patient revenue of $1.2 million for the three months ended March 31, 2007 and 2006, respectively, for the estimated cost of exceeding the annual Medicare Cap. The $1.2 million reduction to net patient revenue for Medicare Cap for the three months ended March 31, 2007 adjusts our year to date Medicare Cap expense to $2.6 million or half of the total estimated accrual for patient service dates during 2007, including pro-ration for estimated services that these 2007 patients may receive from other hospice programs. Our Medicare Cap liability accrual as of March 31, 2007 and September 30, 2006, is $12.3 million and $9.8 million, respectively.

We also record reductions to net patient revenue for estimated payment denials, contractual adjustments (such as differences in payments by commercial payors) and subsequent changes to initial level of care determinations (made retroactively by VistaCare staff after initial admission). We recorded reductions to net patient revenue for these types of adjustments of $0.6 million and $0.9 million for the three months ended March 31, 2007 and 2006, respectively. Our allowance for denials on patient accounts receivable and room and board as of March 31, 2007 and September 30, 2006 is $3.1 million and $2.2 million, respectively.

Patient Care Expenses

Patient care expenses increased $2.8 million, or 7.5%, to $40.1 million for the three months ended March 31, 2007 from $37.3 million for the three months ended March 31, 2006. As a percentage of net patient revenue, patient care expenses increased to 67.9% for the three months ended March 31, 2007 from 66.7% for the three months ended March 31, 2006.

Patient care salary expense increased $1.7 million for the three months ended March 31, 2007 as compared to the three months ended March 31, 2006 due mainly to wage increases. Health insurance costs increased $0.3 million when compared to the same quarter in the prior year primarily due to increasing claims. Pharmaceutical expense increased $0.4 million in the three months ended March 31, 2007 when compared to the three months ended March 31, 2006 mainly due to price increases.

Also negatively affecting patient care expenses was an increase in net room and board expenses of $0.6 million for the three months ended March 31, 2007 as compared to the three months ended March 31, 2006. Nursing home revenue decreased by approximately $0.3 million to $10.5 million for the three months ended March 31, 2007 from $10.8 million for the three months ended March 31, 2006. Nursing home expenses totaled approximately $12.0 million for the three months ended March 31, 2007 and $11.7 million for the three months ended March 31, 2006. Nursing home costs, net were $1.5 million and $0.9 million for the three months ended March 31, 2007 and 2006, respectively.

Sales, General and Administrative Expenses

Sales, general and administrative (“SG&A”) expenses increased $0.4 million, or 1.9%, to $21.3 million for the three months ended March 31, 2007 from $20.9 million for the three months ended March 31, 2006. As a percentage of net patient revenue, SG&A expenses decreased to 36.1% for the three months ended March 31, 2007 from 37.4% for the three months ended March 31, 2006.

The increase in SG&A expense was primarily due to expense associated with our restructuring. Severance expense for the period was $0.5 million while lease buyout expense for closed programs totaled $0.4 million. These increases were offset by a reduction of $0.4 million for training expense because a training event was held at a different time in the prior fiscal year and a $0.3 million reduction in bonus expense due to lower anticipated bonus payouts.

Income Tax

We record income taxes under the liability method as required by Financial Accounting Standards Board Statement No. 109, Accounting for Income Taxes. Due to our recent operating losses, we recorded a full valuation allowance which was equal to our deferred tax assets, less the deferred tax liabilities expected to reverse and become taxable income.

For the three months ended March 31, 2007, our income tax expense was $0.2 million as compared to a tax benefit of $1.3 million for the three months ended March 31, 2006. Since we have a full valuation allowance established on our net deferred tax assets, our fiscal 2007 tax provision consists of the federal alternative minimum tax, state taxes where loss carry forwards do not exist and increases to our tax deductible goodwill deferred tax liability.

~~We recorded~~Six ~~reductions~~Months toEnded ~~net patient revenues for exceeding the annual Medicare Cap of $1.5~~March ~~million and $6.2 million for the three months ended June 30~~31, ~~2005 and June 30~~2007, ~~2004,~~Compared ~~respectively,~~to ~~and reductions~~Six ofMonths ~~$4.5 million~~Ended ~~and $10.1~~March ~~million for the nine months ended June 30~~31, ~~2005 and June 30,~~2006 ~~2004, respectively.~~

~~The~~Net ~~$4.5 million~~Patient ~~reduction to revenue for Medicare Cap for the nine months ended June 30, 2005~~Revenue ~~includes:~~

• Net patient revenue increased $14.1 4 million, ~~for~~or ~~re-assessment~~3.8%, ~~received~~to ~~from~~$120.0 million ~~our FI in April 2005~~ for the ~~2002~~six ~~Medicare~~months ended ~~Cap~~March 31, ~~year.~~2007, ~~The~~as FIcompared ~~had~~to ~~previously issued a zero assessment for 2002. •~~ $3115.7 6 million for ~~patient service dates during~~ the ~~2005~~six ~~Medicare~~months ~~regulatory~~ended ~~year~~March 31, ~~including~~2006. ~~pro-ration~~Net patient ~~for~~revenue ~~estimated~~per ~~services~~day ~~that~~of ~~these~~care ~~2005~~increased ~~patients~~to ~~may~~approximately ~~receive from other hospice programs; and • (~~$~~0.3)~~129 ~~million~~per ~~adjustment~~day tofor ~~net~~the ~~patient~~six ~~revenue~~months toended March 31, ~~reverse~~2007 ~~two~~from ofapproximately ~~our~~$122 ~~providers~~per ~~Medicare~~day ~~Cap~~for ~~accruals~~the ~~that~~six ~~received~~months ~~zero~~ended ~~assessment~~March 31, ~~letters~~2006. ~~from~~Overall increases ~~our fiscal intermediary~~ in ~~2005~~net ~~(for~~patient ~~the~~revenue ~~2004~~were ~~Medicare~~due ~~regulatory year).~~to:

Our average daily census increased 3%, to 5,387 patients for the three months ended June 30, 2005 from 5,216 patients for the three months ended June 30, 2004. For the nine months ended June 30, 2004, average daily census increased 3% to 5,354 patients from 5,185 patients for the nine months ended June 30, 2004. Average length of stay was relatively unchanged at 113 days for the three months ended June 30, 2005 from 114 days for the three months ended June 30, 2004. The average length of stay increased to 115 days for the nine months ended June 30, 2005 from 110 days for the nine months ended June 30, 2004. The increase was also attributable to an increase in admissions to 4,428 patients for the three months ended June 30, 2005 from 3,754 patients for the three months ended June 30, 2004 and 13,343 patients for the nine months ended June 30, 2005 from 11,627 patients for the nine months ended June 30, 2004. We believe that our average length of stay is higher than the industry average and is due in part to our relatively high mix of non-cancer patients, by hospice industry standards. Non-cancer patients generally have a higher average length of stay than do cancer patients.

	•		Medicare reimbursement rate increase of 3.4% effective October 1, 2006; and

	•		an increase in inpatient days, which have a high per diem rate, to 12,684 days for the six months ended March 31, 2007, from 9,957 days for the six months ended March 31, 2006.

~~The~~These ~~table~~increases ~~below~~were ~~shows~~partially offset by the negative impact of lower ADC and lower patient days when comparing this six month period to the same period last year. During the six months ended March 31, 2007, the ADC was 5,120 and the number of ~~our~~patient days was 931,774. During the six months ended March 31, 2006, the ADC was 5,203 and the number of patient days was 946,967. Patient admissions of 8,376 were lower during the six months ended March 31, 2007 than the patient admissions of 8,564 in the six months ended March 31, 2006. Also, the average length of stay decreased to 111 days for the ~~periods~~six ~~indicated:~~months ended March 31, 2007 from an average length of stay of 113 days during the six months ended March 31, 2006.

Quarter ending:	Number of Admissions:
June 30, 2005		4,428
March 31, 2005		4,601
December 31, 2004		4,314
September 30, 2004		3,949
June 30, 2004		3,754

We recorded reductions to net patient revenue of approximately $2.6 million and $2.4 million for the six months ended March 31, 2007 and 2006, respectively, for the estimated cost of exceeding the annual Medicare Cap limit. The $2.6 million reduction to net patient revenue for Medicare Cap for the six months ended March 31, 2007 represents half of the total estimated accrual for patient service dates during 2007, including pro-ration for estimated services that these 2007 patients may receive from other hospice programs. Our Medicare Cap liability accrual as of March 31, 2007 and September 30, 2006, is $12.3 million and $9.8 million, respectively.

We also record reductions to net patient revenue for estimated payment denials, contractual adjustments (such as differences in payments by commercial payors) and subsequent changes to initial level of care determinations (made retroactively by VistaCare staff after initial admission). We recorded reductions to net patient revenue for these types of adjustments of $1.3 million and $1.7 million for the six months ended March 31, 2007 and 2006, respectively. Our allowance for denials on patient accounts receivable and room and board as of March 31, 2007 and September 30, 2006 is $3.1 million and $2.2 million, respectively.

Patient Care Expenses

Patient care expenses increased $27.90 million, or 9.6%, to $3680.12 million for the ~~three~~six months ended ~~June~~March 3031, ~~2005~~2007 from $3373.2 million for the ~~three~~six months ended ~~June~~March 3031, ~~2004~~2006. ~~For the nine months ended June 30, 2005 compared to the nine months ended June 30, 2004, patient care expenses increased $9.9 million, or 10%, to $106.5 million from $96.6 million.~~ As a percentage of ~~net~~ net patient revenue, patient care expenses ~~decreased~~increased to 6366.8% for the ~~three~~six months ended ~~June~~March 3031, ~~2005~~ 2007 from 6963.3% for the ~~three~~six months ended ~~June~~March 3031, ~~2004~~2006. ~~For the nine months ended June 30, 2005, the~~ ~~percentage of net patient revenue to patient care expenses remained the same at 62% for the nine months ended June 30, 2005 and June 30, 2004, respectively.~~

~~We believe~~Patient ~~that~~care ~~our~~salary expense increased ~~investments~~$3.6 million infor ~~our new programs during~~ the ~~first~~ ~~nine~~six months ofended ~~2005~~March 31, ~~will~~2007 ~~lead~~as compared to ~~improved~~the ~~future~~six ~~earnings growth.~~months ~~These~~ended ~~investments~~March 31, ~~however,~~2006 ~~contributed~~due ~~to the increased patient care expenses~~ in ~~the~~part ~~initial~~to ~~months~~wage ~~of the new programs~~increases. ~~New~~Salary ~~sites~~expense ~~initially~~was ~~operate~~negatively ataffected aby ~~lower~~excess ~~census~~costs ~~and~~associated ~~consequently~~with ~~reflect~~revamping ~~higher~~the ~~patient care~~Indiana ~~expenses.~~programs ~~Additionally,~~following welast year’s ~~believe~~decertification ~~part of~~and the ~~increase~~opening isof ~~due~~three tonew ~~shorter~~inpatient ~~median~~units. ~~length~~Inpatient ofunits ~~stays~~have ~~during~~higher salary ~~2005~~expense ~~periods~~ than ~~during~~hospice ~~the corresponding~~home ~~periods~~care ~~in 2004~~programs. ~~The~~Health ~~increase~~insurance incosts ~~patient~~increased ~~care expenses for salaries, benefits, and payroll taxes of hospice care providers was~~ $21.56 million ~~for the three months ended June 30, 2005~~as compared to the ~~three~~same ~~months~~six ~~ended~~month ~~June 30,~~period ~~2004,~~in ~~and $9.6 million for~~ the ~~nine~~prior ~~months~~year ~~ended~~primarily ~~June 30,~~due ~~2005 compared~~ to ~~the~~increasing ~~nine months ended June 30, 2004~~claims. ~~Additionally,~~ ~~pharmaceuticals,~~Pharmaceutical ~~durable~~expense ~~medical equipment and other patient care expenses~~ increased by $0.8 million ~~for~~in the ~~three~~six months ended ~~June~~March 3031, ~~2005~~2007 ~~and~~when ~~$2.2 million for the nine months ended June 30, 2005, as~~ compared to the ~~three~~six ~~and nine ending June 30, 2004. These increases were partially offset by a reduction in net room and board expenses of $0.4 million for the three~~ months ended ~~June 30,~~ ~~2005 verses the three months ended June~~March 3031, ~~2004,~~2006 ~~and~~mainly $due ~~1.9 million~~to ~~for~~price ~~the nine months ended June 30, 2005 verses the nine months ended June 30, 2004~~increases.

28 Also negatively impacting patient care expenses was an increase in net room and board expenses of $1.5 million for the six months ended March 31, 2007 as compared to the six months ended March 31, 2006. Nursing home revenue decreased by approximately $0.9 million to $21.2 million for the six months ended March 31, 2007 from $22.1 million for the six months ended March 31, 2006. Nursing home expenses totaled approximately $24.2 million for the six months ended March 31, 2007 as compared to $23.6 million for the six months ended March 31, 2006. Nursing home costs, net were $3.0 million and $1.5 million for the six months ended March 31, 2007 and 2006, respectively.

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

~~Sales, general and administrative (~~SG&A) expenses increased $21.31 million, or 142.7%, to $1842.92 million ~~for~~ ~~the three months ended June 30, 2005 from $16.6 million~~ for the ~~three~~six months ended ~~June 30,~~March ~~2004. SG&A expenses increased $11.1 million~~31, or2007 ~~24%, to $57.2 million for the nine months ended June 30, 2005~~ from $4641.1 million for the ~~nine~~six months ended ~~June 30~~March 31, ~~2004~~2006. As a percentage of net patient revenue, SG&A expenses ~~slightly~~ decreased to ~~33% for the three months ended June 30, 2005 from 34% for the three months ended June 30, 2004~~35. ~~As a percentage of net patient revenue, SG&A expenses increased to 33~~2% for the ~~nine~~six months ended ~~June~~March 3031, ~~2005~~2007 from 3035.5% for the ~~nine~~six months ended ~~June~~March 3031, ~~2004~~2006.

~~The increases~~Salary ~~in SG&A expenses were due to additional development of new programs,~~ and ~~the internal~~insurance ~~implementation~~expense ~~expenses~~increased ~~of Sarbanes-Oxley and HIPAA~~$0.7 million ~~The increase in salaries, benefits~~ and ~~payroll taxes of~~ $10.65 million ~~for~~respectively when compared to the ~~three~~six ~~months~~month period ended ~~June~~March 3031, ~~2005~~2006 ~~and~~primarily $7due to cost increases.~~1 million~~ Severance expense for the ~~nine~~ ~~months~~six month period ended ~~June~~March 3031, ~~2005.~~2007 Wewhich ~~reversed~~related ~~bonuses~~to ~~causing~~our ~~a decrease~~restructuring inwas ~~bonus accruals during 2005 of~~ $0.5 million ~~for~~while ~~the~~lease ~~three~~buyout ~~months~~expense ~~ended~~for ~~June 30,~~programs ~~2005~~closed ~~as compared~~in to the ~~three~~restructuring ~~months~~totaled ~~ended June 30, 2004, and recorded site bonuses of~~ $10.4 million ~~for the~~. ~~nine~~These ~~months~~increases ~~ended~~were ~~June 30,~~offset ~~2005~~by ~~verses~~a ~~the~~reduction ~~reversal~~ of ~~bonus accruals of~~ $0.52 million ~~during~~for ~~nine months~~professional ~~ended~~fees ~~June 30,~~due ~~2004.~~primarily Weto ~~also~~a reduction ~~recorded slight increases~~ in ~~training~~SOX ~~and~~404 ~~education, professional service~~ fees, ~~office~~a ~~supplies and severance costs. The remaining increase of~~ $0.3 2 million ~~for~~reduction ~~the~~in ~~three~~legal ~~months~~fees ~~ended June 30, 2005~~ and ~~the~~a ~~increase of~~ $1.0.4 million ~~for~~reduction ~~the nine~~in ~~months~~bonus ~~ended June 30, 2005 resulted from higher rent~~ expense~~, primarily~~ due to ~~new~~lower ~~leases~~anticipated ~~for~~bonus ~~new programs~~payouts.

29Gain on Sale of Program Assets

~~Table~~ We recorded a $1.1 million gain on the sale of ~~Contents~~certain operating assets of our Cincinnati, Ohio program during the six months ended March 31, 2007. No such asset sales occurred in the six months ended March 31, 2006.

Stock-Based Compensation

Stock-based compensation expense was approximately $0.1 million for each of the three months ended and $0.2 million for each of the nine months ended June 30, 2005 and June 30, 2004, respectively, and these expenses principally relate to the amortization of our deferred stock compensation balances.

Non-Operating Income

Non-operating income was $0.2 million and $0.1 million for the three months ended June 30, 2005 and June 30, 2004, respectively, and $0.4 million and $0.2 million for the nine months ended June 30, 2005 and June 30, 2004, respectively. This income primarily relates to interest income net of other expenses.

Income Tax

For the ~~three~~six months ended ~~June~~March 3031, ~~2005~~2007, our income tax expense was $0.52 million as compared to a tax benefit of $0.93 million for the ~~three~~six months ended ~~June~~March 3031, ~~2004~~2006. ~~For~~Since ~~the~~we ~~nine~~have ~~months~~a ~~ended~~full ~~June 30,~~valuation ~~2005~~allowance ~~the~~established ~~company~~on ~~had~~our annet ~~income~~deferred tax ~~expense~~assets, ofour ~~$1.7 million~~fiscal as2007 ~~compared~~tax toprovision consists ~~$3.1 million~~of ~~for~~ the ~~nine~~federal ~~months~~alternative ~~ended~~minimum ~~June 30~~tax, ~~2004~~state taxes where loss carry forwards do not exist and increases to our tax deductible goodwill deferred tax liability.

The effective rate for the three and nine months ended June 30, 2005 and June 30, 2004 remained at the same 39% rate. However, the rate for June 30, 2005 was comprised of tax at our estimated 39% effective rate and adjustments totaling a $0.1 million decrease in tax relating to rate changes and other permanent tax adjustments for 2004. Conversely, the rate for June 30, 2004 was also comprised of tax at our estimated 39% rate but reflected an additional $0.2 million of taxes due in certain states for 2003 based upon a change in our assessment of amounts due.

Liquidity and Capital Resources

~~Our~~We expect that our principal liquidity requirements ~~have~~will ~~been~~be for working capital, ~~and capital expenditures.~~the Wedevelopment ~~have~~of ~~financed~~new ~~these~~hospice ~~requirements~~programs, ~~primarily~~the ~~with~~development ~~cash~~of ~~flow~~new ~~from~~inpatient ~~operations.~~units, Wethe ~~raised~~acquisition ~~net~~of ~~proceeds~~other ofhospice ~~$48~~programs and capital expenditures.~~1 million~~ ~~from~~Other ~~our~~than ~~initial~~working ~~public~~capital ~~offering~~needs, inthese expenditures ~~December 2002~~are ofat ~~common~~our ~~stock.~~election ~~We used~~and ~~the~~we ~~net~~do ~~proceeds~~not tocurrently ~~repay~~have ~~debt~~material ofcommitments ~~$11~~for expenditures in these areas.~~0 million,~~ ~~with~~Based ~~the~~on ~~balance~~our ~~invested~~current inworking ~~short-term investments.~~capital Asrequirements ofand ~~June 30,~~existing ~~2005~~capital commitments, we ~~had~~expect ~~cash~~that our existing funds and cash ~~equivalents~~flows ~~and~~from ~~short-term~~operations ~~investments~~will ofbe sufficient to ~~$58.7 million,~~fund ~~working~~our ~~capital~~principal ofliquidity ~~approximately~~requirements ~~$58~~for at least the next twelve months.~~7 million~~ Our future liquidity requirements and the ~~ability~~adequacy toof ~~borrow~~our upavailable tofunds ~~$50.0 million~~will ~~depending~~depend on ~~eligible~~many ~~receivables~~factors, ~~under~~including payment for our ~~revolving~~services, ~~credit~~regulatory changes and ~~term~~compliance ~~loan~~with ~~facility~~new regulations, expense levels, future ~~described~~development ~~below~~of new hospice programs, future development of new inpatient units, acquisitions of other hospice programs and capital expenditures.

~~Net~~As ~~cash~~of ~~used by operating activities for the three months ended June~~March 3031, ~~2005 was $2.7 million as compared to cash provided of $11.2 million for the three months ended June 30~~2007, ~~2004. This~~we ~~decrease~~had in cash ~~provided was primarily due to the decrease in accrued expenses from a $3.4 million payment of our July 1, 2005 direct deposit payroll~~ and ~~current~~cash ~~period~~equivalents ~~payroll taxes being done on June 30, 2005,~~ and ~~increase in~~short-term ~~patient~~investments ~~accounts~~of ~~receivables from a~~ $143.~~1 million 2002~~8 ~~Medicare Cap reassessment payment~~million, aworking ~~delay~~capital ~~in Medicaid reimbursements~~ of ~~$1.5 million,~~approximately ~~an unintentional billing delay in Medicaid of~~ $144.58 million and ~~a $0.5 million decline in collections in~~ the ~~quarter.~~potential ~~The~~ability ~~decrease is partially offset by higher net income for the three months ended June 30, 2005 as compared~~ to aborrow ~~net~~up ~~loss for the three months ended June 30,~~to ~~2004. For the nine months ended June 30, 2005, cash used by operating activities was~~ $050.10 million~~, compared~~ tounder ~~cash~~our ~~provided~~revolving ofcredit ~~$23.4 million~~and ~~for~~term ~~the~~loan ~~nine~~facility ~~months~~based ~~ended~~on ~~June 30,~~borrowing ~~2004. This decrease~~base ~~was~~calculations, ~~due~~subject ~~primarily~~ to ~~the~~lender ~~$7.4 million~~approval ~~of repayments made during 2005 of Medicare Cap assessment for the 2003~~ and ~~2002~~certain ~~Medicare~~other ~~Cap~~restrictions ~~years,~~as ~~decreases~~described in ~~accrued~~more ~~expenses and the lower net income~~detail ~~recorded~~below in ~~the nine months ended June 30, 2005~~“Debt”.

~~Net~~Six ~~cash used in investing activities was $2.2 million and $1.0 million for the three~~ months ended ~~June~~March 3031, ~~2005~~2007 ~~and~~compared ~~June 30, 2004, respectively. These cash uses related primarily~~ to ~~the continued~~six investment in internally developed software and its implementation and the purchase of computer and office equipment for new programs being developed, the acquisition of the Prayer of Jabez hospice and the increase in other assets for the funding of $2.2 million for our 2005-06 policy year workers’ compensation. Net cash used in investing activities was $14.7 million and $4.1 million for the nine months ended ~~June~~March 3031, ~~2005 and June 30, 2004, respectively~~2006. ~~These cash uses related primarily~~ ~~to the purchases of short-term investments.~~

Net cash provided by ~~financing~~operating activities for the six months ended March 31, 2007 was $0.36 million ~~and~~as compared to net cash used in operating activities of $010.15 million for the ~~three~~six months ~~ended~~ ~~June~~ended March 3031, ~~2005~~2006. ~~and~~This ~~June~~decrease in net cash used in operating activities occurred because payments for Medicare Cap assessments were $6.0 30million lower in the period ended March 31, ~~2004~~2007 than in the period ended March 31, ~~respectively~~2006 ~~and~~due ~~was~~to $1the timing of annual payments.1 Also, accounts receivable balances in the period ending March ~~million~~31, ~~and~~2007 decreased $2.81 million ~~for~~while the ~~nine months~~accounts ~~ended~~receivable ~~June 30,~~balances ~~2005~~in ~~and~~the ~~June~~period ended March 3031, ~~2004,~~2006 ~~respectively~~increased by $6.5 million. ~~Cash~~These increases in cash provided by ~~financing~~operating activities ~~principally~~were ~~resulted~~offset ~~from~~by ~~the~~a ~~exercise~~net ofloss ~~employee~~in ~~stock~~the ~~options~~period ending March 31, ~~employee~~2007 ~~stock~~which ~~purchases~~was ~~and~~$2.3 million higher than ~~interest~~the ~~income~~net loss in the period ended March 31, 2006 and a $1.1 million gain on sale of a hospice program.

InNet ~~December 2004,~~cash ~~VistaCare~~provided ~~renewed~~by ainvesting activities was $~~30.~~0.9 million ~~revolving~~for ~~line~~the ofsix ~~credit~~months ~~and~~ended ~~entered into~~March 31, a2007 compared to $202.02 million ~~term~~of ~~loan~~cash ~~(credit~~used ~~facility).~~in ~~The~~investing ~~credit~~activities ~~facility~~for isthe ~~collateralized~~six bymonths ~~substantially~~ended March ~~all~~31, of2006. ~~VistaCare’s~~Cash ~~assets~~used ~~including~~for ~~cash~~equipment purchases was $1.4 million less in the six months ended March 31, ~~accounts~~2007 ~~receivable~~than ~~and~~in ~~equipment~~the six months ended March 31, 2006. ~~Loans~~Also, ~~under~~$1.2 million ~~the~~of cash was received from ~~revolving~~the ~~line~~sale of ~~credit~~the ~~bear~~Cincinnati ~~interest~~hospice atprogram anduring ~~annual~~the ~~rate~~six ~~equal~~months toended March 31, 2007. No program sales occurred during the ~~one-month~~six ~~London~~months ~~Interbank~~ended March 31, 2006.

3016

~~Borrowing~~Net ~~Rate~~cash inprovided ~~effect~~by ~~from~~financing ~~time~~activities towas ~~time~~$0.1 million ~~plus~~for 3.the six months ended March 31, 2007 as compared to $0-5.~~0%.~~2 million ~~Accrued~~of ~~interest~~cash ~~under~~provided by financing activities for the ~~revolving~~six months ended March ~~line~~31, 2006. Cash provided by financing activities in both periods principally resulted from the exercise of ~~credit~~employee isstock ~~due~~options ~~weekly~~and employee stock purchases.

~~Under the revolving line of credit, VistaCare may borrow, repay and re-borrow an amount equal~~Debt to the lesser of: (i) $30.0 million or (ii) 85% of the net value of eligible accounts receivable. Under the term loan, borrowings are based on allowable total indebtedness based on a multiplier of cash flow as defined in the loan agreement. The maturity date of the credit facility is December 22, 2009. As of June 30, 2005, there was no balance outstanding on the revolving line of credit or on the term loan.

~~The~~In ~~credit~~December 2004, ~~facility~~we ~~contains~~renewed ~~certain~~our ~~customary~~$30.0 million ~~covenants~~revolving ~~including~~line ~~those~~of ~~that~~credit ~~restrict~~and ~~the~~entered into a ~~ability~~$20.0 million ofterm ~~VistaCare~~loan toagreement ~~incur~~(this ~~additional~~total ~~indebtedness,~~of ~~pay~~$50.0 million ~~dividends~~is ~~under~~collectively ~~certain~~referred ~~circumstances, permit~~to ~~liens~~herein onas ~~property~~the “credit orfacility”). ~~assets,~~The ~~make~~credit ~~capital~~facility ~~expenditures,~~is ~~make~~collateralized ~~certain~~by ~~investments,~~substantially ~~and~~all ~~prepay~~of our assets, orincluding ~~redeem~~cash, ~~debt~~accounts orreceivable ~~amend~~and ~~certain~~equipment. ~~agreements~~Loans ~~relating~~under tothe ~~outstanding~~credit ~~indebtedness.~~facility ~~The~~bear ~~Company~~interest ~~was~~at ~~not~~an inannual ~~compliance~~rate ~~with~~equal to the ~~financial~~one-month ~~debt~~London ~~service~~Interbank ~~coverage~~Borrowing ~~covenant~~Rate asin ofeffect ~~June 30,~~from ~~2004;~~time ~~however,~~to time ~~the~~plus ~~lender~~3.0-5.0%, ~~provided~~depending aupon ~~waiver~~our ~~through~~achieving ~~June 30,~~certain ~~2005~~financial ratios as described in the credit agreement. WeAccrued ~~anticipate~~interest ~~receiving~~under anthe ~~extension~~revolving line of credit and the ~~covenant~~ ~~waiver~~term ~~through~~loan ~~September 30,~~is ~~2005~~due monthly.

~~Overall~~Under the ~~Medicare~~revolving ~~payments~~line toof ~~our~~credit, ~~hospice~~we ~~providers~~may ~~are~~(upon ~~subject~~satisfaction toof ~~the annual Medicare Cap. If~~certain weconditions ~~are~~and ~~found~~Lender’s bywaiver ~~Medicare~~of toa ~~have~~covenant ~~exceeded~~default) ~~the annual Medicare Cap~~borrow, ~~Medicare~~repay ~~will~~and ~~require~~re-borrow ~~that~~an ~~we make~~amount ~~restitution~~equal ~~for payments made~~ to ~~us in excess of~~ the ~~annual Medicare Cap. We were required to~~ ~~repay~~lesser ~~Medicare Cap~~ of: (i) $730.40 million ~~for~~or (ii) 85% of the ~~nine~~net ~~months~~value ~~ended~~of ~~June 30,~~eligible ~~2005,~~accounts $1receivable.~~1 million~~ ~~for the~~The ~~transition~~revolving ~~fiscal~~line ~~nine~~of ~~months~~credit ~~ended~~can ~~September 30,~~be ~~2004,~~used ~~$0.6 million~~ for ~~the~~working ~~fiscal~~capital ~~year~~and ~~ended December 31,~~general ~~2003~~corporate purposes, $0including acquisitions.~~0 million~~ ~~for~~Under the ~~fiscal year ended December 31, 2002,~~ $120.0 million ~~for~~term ~~the fiscal year ended December 31~~loan, ~~2001,~~borrowings ~~and~~are ~~$0.6 million~~used for ~~the~~“permitted ~~fiscal year ended December 31, 2000~~acquisitions” ~~for~~as ~~exceeding~~defined in the ~~annual~~credit ~~Medicare Cap~~agreement. AsThe ofLender ~~the~~will ~~date~~permit ofterm ~~this~~loans provided ~~report,~~our wepro ~~had~~forma ~~not~~Debt ~~yet been assessed~~Service ~~for~~Coverage ~~exceeding~~Ratio, ~~the~~as ~~Medicare~~defined ~~Cap~~in ~~for~~ the ~~2004~~credit ~~Medicare Cap~~agreement, ~~year~~does ~~except~~not fall ~~for~~below ~~two received prior to~~ the ~~filing~~ ofspecified ~~this~~ratio. ~~Form 10Q~~(At inMarch ~~the~~31, ~~amount~~2007 ~~of $0.6 million which~~ we ~~have~~failed ~~begun~~ to ~~assess~~meet asthe specified toratio). ~~its~~The ~~propriety.~~maturity ~~Out~~date of ~~our~~the 34credit ~~providers~~facility inis ~~2004~~December 22, ~~we have received 26 zero assessment letters~~2009. As of ~~June 30~~March 31, ~~2005~~2007, ~~and~~there ~~September 30,~~was ~~2004,~~no balance ~~respectively,~~outstanding ~~our~~on ~~accrued~~the ~~expenses~~revolving ~~included~~line ~~$16.6 million~~of ~~and $19.6 million~~credit ~~for~~or ~~Medicare~~on ~~Cap~~the ~~accrued~~term ~~liability~~loan.

WeThe ~~expect~~credit ~~that~~facility ~~our~~contains ~~principal~~certain ~~liquidity~~customary ~~requirements~~covenants ~~will~~including bethose ~~for~~that ~~working~~restrict ~~capital, the~~our ~~development~~ability ofto ~~new~~incur ~~hospice~~additional ~~programs~~indebtedness, ~~the~~pay ~~development~~dividends ofunder ~~new~~certain ~~in-patient units~~circumstances, ~~the~~permit ~~acquisition of~~liens ~~other~~on ~~hospice~~property ~~programs~~or ~~and~~assets, make capital expenditures., Wemake ~~expect~~certain ~~that~~investments ~~our~~and ~~existing~~prepay ~~funds,~~or ~~cash flows from~~redeem ~~operations~~debt ~~and~~or ~~borrowing~~amend ~~capacity~~certain ~~under~~agreements ~~our~~relating ~~credit~~to ~~agreement~~outstanding ~~will~~indebtedness. beBecause ~~sufficient~~of torecent ~~fund our~~operating ~~principal~~losses, ~~liquidity~~we ~~requirements~~are ~~for~~not atin ~~least~~compliance with the ~~next~~credit ~~twelve~~facility’s ~~months.~~debt ~~Our~~service ~~future~~coverage ~~liquidity requirements~~ratio covenant and ~~the~~we ~~adequacy~~would ofhave ~~our~~to ~~available~~receive ~~funds~~a ~~will~~lender ~~depend on many factors~~waiver, ~~including~~which ~~payment for~~we ~~our~~have ~~services~~not requested, ~~regulatory changes~~ and ~~compliance~~complete ~~with new regulations, expense levels, future~~certain ~~development~~administrative ofprocedures ~~new~~in ~~hospice~~order ~~programs,~~to ~~future~~borrow ~~development~~under ofthe ~~new~~current ~~in-patient~~terms ~~units, acquisitions~~ of ~~other~~ ~~hospice~~the ~~programs~~credit ~~and capital expenditures~~facility.

Interest Rate and Foreign Exchange Risk

Interest Rate Risk

We do not expect our cash flow to be affected, to any significant degree, by a sudden change in in market interest rates. We have not implemented a strategy to manage interest rate market risk because we do not believe that our exposure to this risk is material at this time. We invest excess cash balances in money market accounts with average maturities of less than 90 days.

Foreign Exchange

We operate our business within the United States and execute all transactions in U.S. dollars.

Payment, Legislative and Regulatory Changes

We are ~~highly~~almost exclusively dependent on payments from the Medicare and Medicaid programs. These ~~programs~~ programs are subject to statutory and regulatory changes, possible retroactive and prospective rate adjustments, administrative rulings, rate freezes and funding reductions. Reductions in amounts paid by these programs for our services or changes in methods or regulations governing payments for our services could have a ~~materially~~material adverse affect on our net patient revenue, cash flow from operations and profitability.

Inflation

The healthcare industry is labor intensive. ~~Wages~~Historically, wages and other expenses ~~increase~~ increased during periods of inflation and labor shortages in the marketplace. In addition, suppliers pass along rising costs to us in the form of higher prices. for the goods and services that we purchase. We have implemented control measures designed to curb increases in operating expenses; however, we cannot predict our ability to cover or offset future cost increases.

31Critical Accounting Policies

There have been no changes to our critical accounting policies during the six months ended March 31, 2007. Refer to our Annual Report on Form 10-K for the fiscal year ended September 30, 2006 for a summary of our critical accounting policies.

~~increases.~~ Contractual Obligations

~~Recent~~ The ~~Accounting~~following ~~Pronouncements~~table summarizes our significant contractual obligations at March 31, 2007, and the effect such obligations are expected to have on our liquidity and cash flows in future periods. The total excludes amounts already recorded on our balance sheet as current liabilities as of March 31, 2007 (in thousands):

Payments Due by Fiscal Year

Contractual Obligation

Total

2007 (1)

2008 - 2009

2010 - 2011

Thereafter

Operating lease obligations(2)

$25,592

$3,772

$13,804

$7,028

$988


1.		Represents payments to be made during the period of April 2007 through September 2007.

2.		Changes from our 2006 Annual Report are due to leases for new inpatient units and other lease extensions.

The expected timing and amount of payment of the obligations discussed above are estimated based on current information. Timing of payments and actual amounts may be different depending on changes to agreed-upon amounts for some obligations.

For the purpose of this table, contracted obligations are defined as agreements that are enforceable and legally binding on VistaCare and that specify all significant terms, including fixed or minimum quantities to purchase and approximate timing of the transaction.

Forward-Looking Statements

~~This~~Certain statements contained in this quarterly report on Form 10-Q ~~contains~~and orthe ~~incorporates~~accompanying tables, ~~forward-looking~~including statements ~~within the~~with ~~meaning~~respect ofto ~~section~~VistaCare’s ~~27A~~anticipated ofgrowth ~~the~~in ~~Securities~~net ~~Act~~patient ofrevenue, organic ~~1933~~patient census and ~~section~~diluted ~~21E~~earnings per share, are “forward-looking statements” within the meaning of the Private Securities ~~Exchange~~ Litigation Reform Act of ~~1934~~1995. ~~These~~The ~~forward-looking~~words ~~statements~~“believe,” ~~are~~“expect,” “hope,” ~~based~~“anticipate,” on“plan,” ~~current~~ “expectations,” ~~estimates~~“forecast, ~~forecasts~~” “goal,” “targeted” and ~~projections~~similar expressions ~~about~~identify ~~the~~forward-looking ~~industry~~statements, ~~and~~which ~~markets~~speak inonly ~~which~~as weof ~~operate~~the ~~and~~date ~~management’s beliefs~~the ~~and~~statement ~~assumptions~~was made. InVistaCare ~~addition,~~does ~~other~~not ~~written~~undertake orand ~~oral~~specifically ~~statements~~disclaims ~~that~~any ~~constitute~~obligation to publicly update or revise any forward-looking statements, ~~may~~whether beas ~~made~~a byresult orof onnew ~~our~~information, ~~behalf.~~future ~~Words~~events ~~such~~or otherwise. asThese ~~“expect,”~~statements ~~“anticipate,” “intend,”~~are ~~“plan,”~~based ~~“believe,”~~on ~~“seek,”~~current ~~“estimate,” “~~expectations,” ~~“forecast,”~~and ~~“goal,”~~assumptions ~~“hope”~~ and ~~similar~~ ~~variations~~involve ofvarious risks ~~such~~and ~~words~~uncertainties, orwhich ~~similar~~could ~~expressions~~cause ~~are~~VistaCare’s ~~intended~~actual results to ~~identify~~differ ~~such~~from those expressed in such forward-looking statements. These ~~statements~~risks ~~are~~and ~~not~~uncertainties ~~guarantees~~arise offrom, ~~future~~among ~~performance~~other things, ~~and~~possible ~~involve certain~~changes ~~risks~~in regulations governing the hospice care industry, ~~uncertainties~~periodic changes in reimbursement levels and ~~assumptions~~procedures ~~that~~under ~~are~~Medicare ~~difficult~~and toMedicaid ~~predict.~~programs, Wedifficulties ~~have~~predicting patient ~~included~~length of stay and estimating potential Medicare reimbursement obligations, patient ~~important~~discharge ~~factors~~rate, challenges inherent in VistaCare’s growth strategy, the ~~cautionary~~current ~~statements~~shortage ~~below~~of qualified nurses and other healthcare professionals, VistaCare’s dependence on patient referral sources and other factors detailed under the ~~heading~~caption “Factors ~~That~~that May Affect Future Results” ~~that~~or “Risk weFactors” ~~believe~~in ~~could~~VistaCare’s ~~cause~~most ~~our~~recent ~~actual~~report ~~results~~on toForm ~~differ~~10-K ~~materially~~and ~~from~~its other filings with the ~~forward-looking~~Securities ~~statements~~and weExchange ~~make~~Commission. WeYou doare cautioned not ~~intend~~ to ~~update~~place ~~publicly~~undue ~~any~~reliance on such forward-looking statements, ~~whether~~and asthere aare ~~result~~no ofassurances ~~new~~that ~~information,~~the ~~future~~matters ~~events~~contained orin ~~otherwise~~such statements will be achieved.

Factors That May Affect Future Results

We are dependent on payments from Medicare and Medicaid. Changes in the rates or methods governing these payments for our services could adversely affect our net patient revenue and profitability.

Approximately 97% of our net patient revenue for the three months ended June 30, 2005 consisted of payments from Medicare and Medicaid programs. Because we generally receive fixed payments for our hospice care services based on the level of care provided to our hospice patients, we are at risk for the cost of services provided to our hospice patients. We cannot assure you that Medicare and Medicaid will continue to pay for hospice care in the same manner or in the same amount that they currently pay. Reductions in amounts paid by government programs for our services or changes in methods or regulations governing payments, which would likely result in similar changes by private third-party payors, could adversely affect our net patient revenue and profitability.

Our profitability may be adversely affected by limitations on Medicare payments.

Overall Medicare payments to our hospice providers are subject to an annual Medicare Cap amount, which for the twelve months ended October 31, 2004 was $19,635.37 per beneficiary. Compliance with the Medicare Cap is measured by calculating the annual Medicare payments received under a Medicare provider number with respect to services provided to all Medicare hospice care beneficiaries in the program or programs covered by that provider number during the Medicare regulation year and comparing the result with the product of the annual Medicare Cap amount and the number of Medicare beneficiaries electing hospice care for the first time from that program or programs during that year. There is a further negative adjustment for the Medicare Cap calculation to the extent our first time beneficiaries are later admitted to another provider and also a positive adjustment for a beneficiary with a previous hospice election admitted to one of our providers, each pro-rated based on days of service. We reflected as a reduction to net patient revenue of approximately $4.5 million in the nine months ended June 30, 2005 and $10.1 million in the nine months ended June 30, 2004, as a result of estimated reimbursements in excess of the annual Medicare Cap in those periods. Our ability to comply with this limitation depends on a number of factors relating to the hospice program or programs under a given Medicare provider number, including the rate at which our patient census increases, the average length of stay and the mix in level of care. Our profitability may be adversely affected if, in the future, we are unable to comply with this and other Medicare payment limitations.

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

We generally receive fixed payments for our hospice services based on the level of care that we provide to patients and their families. Accordingly, our profitability is largely dependent on our ability to manage expenses of providing hospice services and to maintain a patient base with a sufficiently long length of stay to attain profitability. We are susceptible to situations, particularly because of our “open access” philosophy, where we may be referred a disproportionate share of patients requiring more intensive care and therefore more expensive care than other providers. Although Medicare and Medicaid currently provide for an annual adjustment of the various hospice payment rates based on the increase or decrease of the medical care expenditure category of the Consumer Price Index, these hospice care increases have historically been less than actual inflation. If these annual adjustments were eliminated or reduced, or if our expenses of providing hospice services, over one-half of which consist of labor expenses, increase more than the annual adjustment, our profitability could be negatively impacted. In addition, cost pressures resulting from shorter patient lengths of stay and the use of more expensive forms of palliative care, including drugs and drug delivery systems, could negatively impact our profitability.

We may be adversely affected by governmental decisions regarding our nursing home patients.

For our patients receiving nursing home care under certain state Medicaid programs, the applicable Medicaid program pays us an amount equal to no more than 95% of the Medicaid per diem nursing home rate for “room and board” services furnished to the patient by the nursing home in addition to the applicable Medicare or Medicaid hospice per diem payment.

We in turn, are generally obligated to pay the nursing home for these room and board services at a rate between 95% and 100% of the full Medicaid per diem nursing home rate. In the past, we have experienced situations where both the Medicaid program and VistaCare have paid a nursing home for the same room and board service and the Medicaid program has imposed on us the burden of recovering the amount we previously paid to the nursing home. There can be no assurance that these situations will not recur in the future or that, if they do, we will be able to fully recover from the nursing home.

In addition, many of our patients residing in nursing homes are eligible for both Medicare and Medicaid benefits. In these cases, the patients’ state Medicaid program pays their nursing home room and board charges and Medicare pays their hospice services benefit. In the past, the government has questioned whether the reimbursement levels for these dual-eligible hospice patients as well as for Medicare-only patients living in nursing homes may be excessive. Specifically, the government has expressed concerns that hospice programs may provide fewer services to patients who reside in nursing homes than to patients living in other settings, due to the presence of the nursing home’s own staff to address problems that might otherwise be handled by hospice personnel. Since hospice programs are paid a fixed daily amount, regardless of the volume or duration of services provided, the government is concerned that by shifting the responsibility and cost for certain patient care or counseling services to the nursing home, hospice programs may inappropriately increase their profitability. In the case of these dual-eligible patients, the government’s concern is that the cost of providing both the room and board and hospice services may be significantly less than the combined reimbursement paid to the nursing homes and hospice programs as a result of the overlap in services.

From time to time, there have been legislative proposals to reduce or eliminate Medicare reimbursement for hospice patients residing in nursing homes and to require nursing homes to provide end-of-life care, or alternatively to reduce or eliminate the Medicaid reimbursement of room and board services provided to hospice patients. The likelihood of this type of charge may be greater when the federal and state governments experience budgetary shortfalls. If any such proposal were adopted, it could significantly affect our ability to obtain referrals from and continue to serve patients residing in nursing homes.

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

Medicare fiscal intermediaries and other payors periodically conduct pre-payment or post-payment medical reviews or other audits of our reimbursement claims. In order to conduct these reviews, the payor requests documentation from us and then reviews that documentation to determine compliance with applicable rules and regulations, including the eligibility of patients to receive hospice benefits, the appropriateness of the care provided to those patients, and the documentation of that care. We cannot predict whether medical reviews or similar audits by federal or state agencies or commercial payors of our hospice programs’ reimbursement claims will result in material recoupments or denials, which could have a material adverse effect on our financial condition and results of operations.

We have a limited history of profitability and may incur substantial net losses in the future.

Although we recorded net income of $2.8 million for the nine months ended June 30, 2005, and $6.7 million for the nine months ended June 30, 2004, we had a loss of $4.2 for the nine months ended September 30, 2004 and we had an accumulated deficit of $15.7 million at June 30, 2005. We cannot assure you that we will operate profitably in the future. In addition, we may experience significant quarter-to-quarter variations in operating results. We are pursuing a growth strategy focused primarily on same-store growth, but also involving the development of new hospice programs, the development of new in-patient units, and acquisitions of other hospice programs. Our growth strategy may involve, among other things, increased marketing expenses, significant cash expenditures, debt incurrence and other expenses that could negatively impact our profitability on a quarterly and an annual basis. Our net patient revenue could be adversely impacted by a number of factors including, in particular, reductions in Medicare payment rates and patient lengths of stay, which may not be within our control.

If we are unable to attract qualified nurses and other healthcare professionals at reasonable costs, it could limit our ability to grow, increase our operating expenses and negatively impact our business.

We rely significantly on our ability to attract and retain qualified nurses and other healthcare professionals who possess the skills, experience and licenses necessary to meet the Medicare certification requirements and the requirements of the hospitals, nursing homes and other healthcare facilities with which we work. We compete for qualified nurses and other healthcare professionals with hospitals, nursing homes, other hospices and other healthcare organizations. Currently, there is a shortage of qualified nurses in most areas of the United States. Competition for nursing personnel is increasing, and nurses’ salaries and benefits have risen.

Our ability to attract and retain qualified nurses and other healthcare professionals depends on several factors, including our ability to provide attractive assignments and competitive benefits and wages. We cannot assure you that we will be successful in any of these areas. Because we operate in a fixed reimbursement environment, increases in the wages and benefits that we must provide to attract and retain qualified nurses and other healthcare professionals or increases in our reliance on contract nurses or temporary healthcare professionals could negatively affect our profitability. We may be unable to continue to increase the number of qualified nurses and other healthcare professionals that we recruit, decreasing the potential for growth of our business. Moreover, if we are unable to attract and retain qualified nurses and other healthcare professionals, we may have to limit the number of patients for whom we can provide hospice care in order to maintain the quality of our hospice services.

We may not be able to attract and retain a sufficient number of volunteers to grow our business or maintain our Medicare certification.

Medicare requires certified hospice programs to recruit and train volunteers to provide patient care services or administrative services. Volunteer services must be provided in an amount equal to at least five percent of the total patient care hours provided by all paid hospice employees and contract staff of a hospice program. If we are unable to attract and retain volunteers, it could limit our potential for growth and our hospice programs could lose their Medicare certifications, which would make those hospice programs ineligible for Medicare reimbursement.

If we fail to cultivate new or maintain established relationships with existing patient referral sources our net patient revenue may decline.

Our success is heavily dependent on referrals from physicians, nursing homes, assisted living facilities, hospitals, managed care companies, insurance companies and other patient referral sources in the communities that our hospice programs serve. Since we and many of our referral sources are dependent upon Medicare, we are limited in our ability to engage in business practices that are commonplace among referring businesses in other industries such as referral fees, or bonuses and long-term exclusive contracts.

Our growth and profitability depends significantly on our ability to establish and maintain close working relationships with patient referral sources and to increase awareness and acceptance of hospice care by our referral sources and their patients. We cannot assure you that we will be able to maintain our existing referral source relationships or that we will be able to develop and maintain new relationships in existing or new markets. Our loss of existing relationships or our failure to develop new relationships could adversely affect our ability to expand our operations and operate profitably. Moreover, we cannot assure you that awareness or acceptance of hospice care will increase.

Our growth strategy may not be successful, which could adversely impact our growth and profitability.

The primary focus of our growth strategy is same-store growth. To achieve this growth, we intend to increase our marketing efforts and other expenditures. If our resources are not deployed effectively and we do not achieve the same-store growth we seek, it could adversely impact our profitability.

Our growth strategy also involves the development of new hospice programs. When we develop new hospice programs, we first engage a small staff and obtain office space, contracts and referral sources, while obtaining state licensure and Medicare certification. Following Medicare certification, we spend significant management and financial resources in an effort to increase patient census of that program. This aspect of our growth strategy may not be successful, which could adversely impact our growth and profitability. In this regard, we cannot assure you that we will be able to:

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

Competition for acquisition opportunities may restrict our future growth by limiting our ability to make acquisitions at reasonable valuations.

In addition to same-store growth and the development of new programs, our business strategy includes increasing our market share and presence in the hospice care industry through strategic acquisitions of companies that complement or enhance our business. We have historically faced competition for acquisitions. In the future, this could limit our ability to grow by acquisitions or could raise the prices of potential acquisition targets and make them less attractive to us.

Our ability to grow through acquisitions may be limited by increasing government oversight and review of sales of not-for-profit healthcare providers.

According to the National Hospice and Palliative Care Organization, 67% of hospice programs in the United States in 2003 were not-for-profit programs. Accordingly, it is likely that a substantial number of acquisition opportunities will involve hospice programs operated by not-for-profit entities. In recent years, several states have increased review and oversight of transactions involving the sale of healthcare facilities by not-for-profit entities. Although the level of oversight varies from state to state, the current trend is to provide for increased governmental review, and in some cases approval, of transactions in which a not-for-profit entity sells a healthcare facility or business to a for profit entity. This increased scrutiny may increase the difficulty of completing or prevent the completion of acquisitions in some states in the future.

As with our past acquisitions, we may face difficulties integrating businesses that we may acquire in the future. Our efforts to acquire other businesses may be unsuccessful, involve significant cash expenditures or expose us to unforeseen liabilities.

Our 1998 acquisitions, which were closed nearly simultaneously, increased our patient census approximately five-fold and presented significant integration difficulties. Due to the size and complexity of these transactions, immediately following the transactions, our resources available for integration efforts were limited. In time, as we were able to focus on the integration of the acquired businesses, we spent substantial resources on projects such as:

• implementing consistent billing and payroll systems across a large number of new programs; • instituting standard procedures for ordering pharmaceuticals, medical equipment and supplies; and • re-training staff from the acquired businesses to complete our standard claim documentation properly and to conform to our service philosophy and internal compliance procedures;

Our future acquisitions could require that we spend significant resources on some of the same types of projects. In addition, our future acquisitions could present other challenges such as:

• potential loss of key employees or referral sources of acquired businesses; • potential difficulties in obtaining required regulatory approvals; and • assumption of liabilities and exposure to unforeseen liabilities of acquired businesses, including liabilities for their failure to comply with healthcare regulations.

Our future acquisitions may also involve significant cash expenditures, debt incurrence and integration expenses that could have a material adverse effect on our financial condition and results of operations. Any acquisition may ultimately have a negative impact on our business and financial condition.

If any of our hospice programs fail to comply with the Medicare conditions of participation, that hospice program could lose its Medicare certification, thereby adversely affecting our net patient revenue and profitability.

Each of our hospice programs must comply with the extensive conditions of participation to remain certified under Medicare guidelines. If any of our hospice programs fail to meet any of the Medicare conditions of participation, that hospice program may receive a notice of deficiency from a state surveyor designated by Medicare to measure the hospice program’s level of compliance. The notice may require the hospice program to prepare a plan of correction and undertake other steps to ensure future compliance with the conditions of participation. If a hospice program fails to correct the deficiency or develop an adequate plan of correction, the hospice program may be required to suspend admissions or may have its Medicare or Medicaid provider agreement terminated. In June 2000, the Medicare provider agreement for our Odessa, Texas hospice program was terminated. We cannot assure you that we will not lose our Medicare certification at one or more of our other hospice programs in the future. Any such loss could adversely affect our net patient revenue and profitability as well as our reputation within the hospice care industry.

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

Hospice care in the United States is competitive. In many areas in which we maintain hospice programs, we compete with a large number of organizations, including:

• community-based hospice providers; • national and regional companies; • hospital-based hospice and palliative care programs; • nursing homes; and • home health agencies.

Our largest competitors include Vitas Healthcare Corporation (a subsidiary of Chemed, Inc.), Odyssey Healthcare, Inc., Manor Care, Inc., SouthernCare Hospice, Inc. and Beverly Enterprises, Inc.

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

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

A substantial portion of our total assets consists of intangible assets, primarily goodwill. Goodwill, net of accumulated amortization, accounted for approximately 16% of our total assets as of June 30, 2005. Effective January 1, 2002, we adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. As a result, we no longer amortize goodwill and long-lived intangible assets. Instead, we review them at least annually to determine whether they have become impaired. If they have become impaired, we charge the impairment as an expense in the period in which the impairment occurred. Any event, which results in the significant impairment of our goodwill, such as closure of a hospice program or sustained operating losses, could have a materially adverse effect on our profitability.

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

We are dependent on the proper functioning of our information systems in operating our business. Critical information systems used in daily operations perform billing and accounts receivable functions. Our information systems are vulnerable to fire, storm, flood, power loss, telecommunications failures, physical or software break-ins and similar events. If our information systems fail or are otherwise unavailable, these functions would have to be accomplished manually, which could impact our ability to identify business opportunities quickly, to maintain billing and clinical records reliably, to pay our staff in a timely fashion and to bill for services efficiently.

We may experience difficulties in transitioning to a new billing software system, which may result in delays and errors in billing for our services.

During 2003, we began replacing the billing system with our proprietary software running on our CareNation operating platform. The full conversion to the proprietary software will continue throughout 2005. Accurate billing is crucial to reimbursement from third-party payors. If any unforeseen problems emerge in connection with our migration to the new billing software, billing delays and errors may occur, which could significantly increase the time it takes for us to collect payments from payors and in some cases our ability to collect the payments at all. Any such increase in collection time or inability to collect could have a materially adverse effect on our cash flows or result in a financial loss.

A material write-off of our capitalized software development costs and costs and problems related to the implementation of new software applications could have a materially adverse effect on our profitability.

As of June 30, 2005, our capitalized software development costs, net of amortization, were approximately $3.7 million, most of which related to the development of CareNation, our proprietary software platform, and related application modules. If one or more of the application modules do not function as anticipated, we may be required to write off a significant amount of capitalized software development costs and we may experience significant disruptions in our operations, all of which could have a material adverse effect on our profitability. In addition, the expenses associated with training our employees to use these new applications effectively and errors arising from being unfamiliar with the new applications could have a materially adverse effect on our operations and profitability.

We operate in a regulated industry and changes in regulations or violations of regulations may result in increased expenses or sanctions that could reduce our revenues and profitability.

The healthcare industry is subject to extensive and complex federal and state laws and regulations related to professional licensure, conduct of operations, payment for services and payment for referrals. If we fail to comply with the laws and regulations that are directly applicable to our business, we could suffer civil and/or criminal penalties, be subject to injunctions or cease and desist orders or become ineligible to receive government program payments.

In recent years, Congress and some state legislatures have introduced an increasing number of proposals to make significant changes in the United States healthcare system. Changes in law and regulatory interpretations could reduce our net patient revenue and profitability. Recently, there have been heightened coordinated civil and criminal enforcement efforts by both federal and state government agencies relating to the healthcare industry. There has also been an increase in the filing of actions by private individuals on behalf of the federal government against healthcare companies alleging the filing of false or fraudulent healthcare claims. This heightened enforcement activity increases our potential exposure to damaging lawsuits, investigations and other enforcement actions. Any such action could distract our management and adversely affect our business reputation and profitability.

In the future, different interpretations or enforcement of laws, rules and regulations governing the healthcare industry could subject our current business practices to allegations of impropriety or illegality or could require us to make changes in our operations and personnel and distract our management. If we fail to comply with these extensive laws and government regulations, we could become ineligible to receive government program payments, suffer civil and criminal penalties or be required to make significant changes to our operations. In addition, we could be forced to expend considerable resources responding to an investigation or other enforcement action under these laws or regulations.

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

Many states have enacted certificate of need laws that require prior state approval to open new healthcare facilities or expand services at existing facilities. Currently, twelve states have certificate of need laws that apply to hospice programs. Those laws require some form of state agency review or approval before a hospice may add new services or undertake significant capital expenditures. In addition, two states in which we do not currently operate, Florida and New York, have additional barriers to entry. Florida places restrictions on the ability of for-profit corporations to own and operate hospices, and New York places restrictions on the corporate ownership of hospices. Accordingly, our ability to operate in Florida and New York and the states with certificate of need laws is restricted. The laws in these states could affect our ability to expand into new markets and to expand our services and facilities into existing markets.

To comply with new laws and regulations regarding the confidentiality of patient medical information, we may be required to expend substantial sums on acquiring and implementing new information systems, which could negatively impact our profitability.

There are currently numerous legislative and regulatory initiatives at both the state and federal levels that address patient privacy concerns. In particular, the Health Insurance Portability and Accountability Act of 1996, or HIPAA, contains provisions that required us to implement new systems and business procedures designed to protect the privacy and security of each of our hospice patient’s individual health information. Final regulations addressing the security of patient health information were modified and published in final form on February 20, 2003. We were in compliance with these regulations by the April 21, 2005 deadline. Compliance with these rules has required costly changes and we expect to incur additional expenses in the future for continued compliance with these regulations, which could negatively impact our profitability.

Our net patient revenue and profitability may be constrained by cost containment initiatives undertaken by payors.

Initiatives undertaken by private insurers, managed care companies and federal and state governments to contain healthcare costs may affect the profitability of our hospice programs. We have a number of contractual arrangements with private insurers and managed care companies to provide hospice care for a fixed fee. These payors often attempt to control healthcare costs by contracting with hospices and other healthcare providers to obtain services on a discounted basis. We believe that this trend may continue and may limit payments for healthcare services, including hospice services in the future. In addition, there may be changes made to the Medicare program’s Medicare HMO component, which could result in managed care companies becoming financially responsible for providing hospice care. Currently, Medicare pays for hospice services outside of the Medicare HMO per-member per-month fee so that managed care companies do not absorb the cost of providing these services. If such changes were to occur, a greater percentage of our net patient revenue could come from managed care companies and these companies would be further incentivized to reduce hospice costs. As managed care companies attempt to control hospice-related costs, they could reduce payments to us for hospice services. In addition, states, many of which are operating under significant budgetary pressures, may seek to reduce hospice payments under their Medicaid programs or Medicaid managed care programs may opt not to continue providing hospice coverage. These developments could negatively impact our net patient revenue and profitability.

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

In recent years, participants in the healthcare industry have become subject to an increasing number of lawsuits, including allegations of medical malpractice. Many of these lawsuits involve large claims and substantial defense costs.

We maintain general liability insurance coverage on an occurrence basis with limits of $1.0 million per occurrence and $3.0 million in the aggregate. VistaCare is also covered by a healthcare professional liability insurance policy on a claims-made basis with

limits of $1.0 million per occurrence and $3.0 million in the aggregate. VistaCare maintains workers’ compensation coverage at the statutory limits with a $1.0 million limit and a $250,000 deductible per occurrence, and an employer’s liability policy with a $1.0 million limit and a $150,000 deductible per occurrence. VistaCare also maintains a policy insuring hired and non-owned automobiles with a $1.0 million limit of liability and a $1.0 million deductible. In addition, we maintain umbrella coverage with a limit of $10.0 million excess over general liability, healthcare professional liability, hired and non-owned automobile and employer’s liability policies.

Nevertheless, some risks and liabilities, including claims for punitive damages or claims based on the actions of third parties, may not be covered by insurance. In addition, we cannot assure you that our coverage will be adequate to cover potential losses. While we have generally been able to obtain liability insurance in the past, insurance can be expensive and may not be available in the future on terms acceptable to us, or at all. Moreover, claims, regardless of their merit or eventual outcome, may also adversely affect our reputation, our ability to obtain patient referrals or our ability to expand our business, as well as divert management resources from the operation of our business.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Market risk represents the risk of loss that may affect us due to adverse changes in financial market prices and rates. We have not entered into derivative or hedging transactions to manage any market risk. We do not believe that our exposure to market risk is material at this time.

Item 4. Controls and Procedures.

(a) Evaluation of Disclosure Controls and Procedures.

Our management, with the participation of our Chief Executive Officer (“CEO”) and ~~Interim~~ Chief Financial Officer (“CFO”) evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act) as of ~~June~~March 3031, ~~2005~~2007. In In designing and evaluating our disclosure controls and procedures, our management recognized that ~~any~~ any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and our management necessarily applied its judgment in evaluating the cost-benefit relationship of possible controls and ~~procedures. Based on this~~ evaluation, our CEO and CFO concluded that, as of June 30, 2005, our disclosure controls and procedures were (1) designed to ensure that material information relating to us, including our consolidated subsidiaries, is made known to our CEO and CFO by others within those entities, particularly during the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities Exchange Commission’s rules and forms.

procedures. Based on this evaluation, our CEO and CFO concluded that, as of March 31, 2007, our disclosure controls and procedures were (1) designed to ensure that information required to be disclosed by us is accumulated and communicated to management, including our CEO and CFO, by others within our organization to allow timely decisions regarding required disclosure and (2) effective, in that they provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities Exchange Commission’s rules and forms.

(b) Changes in Internal Controls.

There have been no changes in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act) that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

~~Between~~We ~~August~~are ~~and~~subject ~~September 2004,~~to ~~approximately~~a ~~five~~variety ~~complaints~~of ~~were~~claims ~~filed individually~~ and on ~~behalf~~suits ofthat ~~all~~arise ~~others~~from ~~similarly~~time ~~situated~~to time in the ~~United States District Court for the District of~~ordinary ~~Arizona~~course ~~against the Company and two~~ of our ~~officers~~business. ~~alleging~~While ~~violations~~management ofcurrently ~~the~~believes ~~federal~~that ~~securities laws~~resolving ~~arising~~all ~~out~~ of ~~recent~~these ~~declines in the Company’s stock price. Specifically~~matters, ~~the complaints~~ ~~allege~~individually ~~claims~~or in ~~connection~~aggregate, ~~with~~will ~~various~~not ~~statements~~have ~~and~~a ~~purported~~material ~~omissions~~adverse toimpact ~~the~~on ~~public and to the securities markets relating to the Company’s August 2004 announcement of~~ our ~~decision~~financial toposition ~~accrue~~or anresults ~~increased~~of ~~amount~~operations, ~~for~~ the ~~quarter~~litigation ~~ended~~and ~~June 30,~~other ~~2004~~claims asthat anwe ~~accrual~~face ~~for~~are ~~potential~~subject ~~liability due~~ to ~~the Medicare Cap on reimbursement for hospice services. The five lawsuits were consolidated on~~inherent ~~April 15,~~uncertainties ~~2005, a consolidated complaint was served~~ and ~~the~~management’s ~~Company~~view ~~filed~~of athese ~~motion~~matters tomay ~~dismiss.~~change ~~No discovery~~in ~~has taken place and~~ the ~~Company intends to vigorously defend the lawsuit~~future. NoShould ~~assurances~~an ~~can~~unfavorable befinal ~~made~~outcome ~~that~~occur, ~~the~~there ~~Company~~exists ~~will be successful in defense of such claims. If~~ the ~~Company~~possibility ~~is not successful in defense~~ of ~~such claims, we could be forced to make significant payments to our stockholders and their lawyers, and such payments could have~~ a ~~material~~materially adverse ~~effect~~impact on our ~~business,~~ financial ~~condition~~position, ~~and~~ results of operations ifand ~~not~~cash ~~covered~~flows byfor ~~our insurance carrier. Even if such claims are not successful,~~ the ~~litigation~~period ~~could result~~ in ~~substantial costs and divert management’s attention and resources,~~ which ~~could~~the ~~adversely~~effect ~~affect our business, results of~~becomes ~~operations~~probable and ~~financial~~reasonably ~~position~~estimable.

~~Between August and September~~Item 2004, two shareholders filed separate derivative lawsuits purportedly on behalf of the Company against several present and former officers and members of the Board of Directors of the Company in the United States District Court for the District of Arizona1A. ~~The~~ ~~two~~Risk derivative complaints, which have been consolidated, allege breaches of fiduciary duties, abuse of control, mismanagement, waste of corporate assets and unjust enrichment, as a result of the same activities alleged in the lawsuits discussed aboveFactors. ~~The derivative complaint seeks~~ ~~attorney fees and the payment of damages to the Company. As of the date of this report, these~~ ~~derivative actions are at the early pleading stage and have been stayed.~~

WeIn ~~are~~addition ~~also subject~~ to athe ~~variety of~~ other ~~claims~~information ~~and~~set ~~suits~~forth ~~that~~in ~~arise~~this ~~from~~report, ~~time~~you toshould ~~time~~carefully ~~in the~~consider ~~ordinary~~the ~~course~~factors ofdiscussed ~~our~~in ~~business~~Part I, “Item 1A. ~~While~~Risk ~~management~~Factors” ~~currently~~in ~~believes~~our ~~that~~Annual ~~resolving~~Report ~~all~~on ofForm 10-K for the ~~matters~~year ~~discussed~~ended ~~in this note~~September 30, ~~individually or in aggregate~~2006, ~~will~~which ~~not~~could ~~have~~materially aaffect ~~material adverse impact on~~ our financial ~~position~~condition, ~~or our~~ results of operations, ~~the~~or ~~litigation~~future ~~and~~results. ~~other~~The ~~claims~~risks ~~that we~~described ~~face~~in ~~are~~our ~~subject~~Annual toReport ~~inherent~~on ~~uncertainties~~Form ~~and~~10-K ~~management’s~~are ~~view~~not ofthe only ~~these~~risks ~~matters~~we ~~may~~face. ~~change~~Additional ~~in the~~risks ~~future.~~and ~~Should~~uncertainties annot ~~unfavorable~~currently ~~final~~known ~~outcome~~or tothat ~~occur,~~are ~~there~~currently deemed ~~exists~~to ~~the~~be ~~possibility~~immaterial ofmay also have a material adverse ~~impact~~affect on our financial ~~position~~condition, ~~and on the~~ results of operations ~~for~~and ~~the~~future ~~period in which the effect becomes reasonably estimable~~results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

(a) Sales of Unregistered Securities. ~~None~~Not Applicable.

(b) Use of Proceeds from Registered Securities. OnNot ~~December 23, 2002, we completed an initial public offering of shares of our Class A common stock~~Applicable. ~~The shares were registered under the~~ Securities Act of 1933 on a registration statement on Form S-1 (Registration No. 333-98033), which was declared effective by the Securities and Exchange Commission on December 17, 2002. Our net proceeds from the offering were $48.1 million, which we used to repay debt of $11.0 million, with the balance invested in short-term investments. None of the offering proceeds were used in the three-months ended June 30, 2005.

(c) Repurchases of Securities. We did not repurchase any of our securities during the ~~nine~~six months ended ~~June~~March 3031, ~~2005~~2007.

(d) Restrictions Upon the Payment of Dividends. We are prohibited under our credit facility from paying any cash dividends if there is a default under the facility or if the payment of any cash dividends would result in default.

Item 3. Defaults Upon Senior Securities.

~~None~~Not Applicable.

~~Item~~ 4. Submission of Matters to a Vote of Security Holders.

Our annual meeting of stockholders was held on ~~May~~February 51, ~~2005~~2007, in Phoenix, Arizona. On the record date for the annual meeting, 16,~~330~~721,~~344~~200 shares of common stock were outstanding and eligible to vote. A quorum was present at the annual meeting. The table below briefly describes the proposal and the results from the annual meeting of stockholders.

	Number of Shares Voted:
	For		Withheld
Election of Directors, each to serve a three-year term:
Pete A. Klisares		14,176,329		269,406
Jon M. Donnell		13,816,866		939,499
Ronald A. Matricaria		14,175,714		270,021
Perry G. Fine, M.D.		10,642,899		4,113,466
Richard R. Slager		14,128,047		317,688
Jack A. Henry		10,634,299		4,122,066

	For		Against		~~Withheld~~Abstain
Ratification of selection of Ernst & Young LLP as the independent registered public accounting firm for the fiscal year ending September 30, 2005:		14,263,996		180,849		890
Ratification of selection of Ernst & Young LLP as the independent registered public accounting firm for the fiscal year ending September 30, 2007:		14,743,204		11,497		1,664

In addition to the election of three directors at the annual meeting, the terms of five directors continued after the meeting. The continuing directors were ~~David~~James WC. ~~Elliot~~Crews, JrGeneva B., ~~David~~Johnson, WBrian S. ~~Faeder~~Tyler, ~~Perry G~~PH. ~~Fine~~D., ~~Geneva~~Pete ~~Bolton~~A. ~~Johnson~~Klisares and ~~William~~Richard JR. ~~McBride~~Slager.

Item 5. Other Information.

~~None~~Not applicable.

Item 6. Exhibits.

Exhibits: The exhibits are listed in the Exhibit Index ~~immediately~~to ~~preceding~~this ~~such~~report ~~exhibits~~and are ~~filed~~ ~~as part of this report~~incorporated herein.

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SIGNATURES

Pursuant to the requirements 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.

	VISTACARE, INC.	~~VISTACARE, INC.~~
		By: /s/ Richard R. Slager
	By:	/s/ Richard R. Slager
Date: August 9, 2005		Richard R. Slager
Date: May 9, 2007		Richard R. Slager
		President and Chief Executive Officer
		By: /s/ Jon A. Steging
Date: August 9, 2005		Jon A. Steging
		Interim Chief Financial Officer



	By:	/s/ Henry L. Hirvela
Date: May 9, 2007		Henry L. Hirvela
		Chief Financial Officer

EXHIBIT INDEX

Exhibit
Exhibit No.		Exhibit
Number		Description
31.1		Certification of the Chief Executive Officer pursuant to Exchange Act Rules 13a-14 and 15d-14.
10.44		Second Amended and Restated Loan and Security Agreement, dated as of December 23, 2004, by and among VistaCare, Inc., its subsidiaries and Healthcare Business Credit Corporation (filed as an exhibit to a Current Report on Form 8-K dated December 29, 2004 and incorporated herein by reference).
31.2		Certification of the Chief Financial Officer pursuant to Exchange Act Rules 13a-14 and 15d-14.
31.1		Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 of the Chief Executive Officer.
32.1		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350.
31.2		Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 of the Interim Chief Financial Officer.
32.2		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350.
32.1		Certification pursuant to 18 U.S.C. Section 1350 of the Chief Executive Officer.
32.2		Certification pursuant to 18 U.S.C. Section 1350 of the Interim Chief Financial Officer.

4423

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