UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

For the fiscal year ended December 31, 2003

or

Commission file number 0-19532

AMERICAN HOMEPATIENT, INC.

Registrant’s telephone number, including area code: (615) 221-8884

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days.

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

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

     The aggregate market value of registrant’s voting stock held by non-affiliates of the registrant, computed by reference to the price at which the stock was sold, or average of the closing bid and asked prices, as of June 30, 2003 was $19,564,751.

     On March 18, 2004, 16,377,389 shares of the registrant’s $0.01 par value Common Stock were outstanding.

Documents Incorporated by Reference

     The following documents are incorporated by reference into Part III, Items 10, 11, 12, 13 and 14 of this Form 10-K: Portions of the Registrant’s definitive proxy statement for its 2004 Annual Meeting of Stockholders.

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Table of Contents

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     This Annual Report on Form 10-K includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including, without limitation, statements containing the words “believes,” “anticipates,” “intends,” “expects,” “estimates,” “may,” “will,” “likely,” “could” and words of similar import. Such statements include statements concerning the Company’s business strategy, operations, cost savings initiatives, future compliance with accounting standards, industry, economic performance, financial condition, liquidity and capital resources, existing government regulations and changes in, or the failure to comply with, governmental regulations, the appeal of rulings in the bankruptcy proceeding, legislative proposals for health care reform, the ability to enter into strategic alliances and arrangements with managed care providers on an acceptable basis, and changes in reimbursement policies. Such statements are not guarantees of future performance and are subject to various risks and uncertainties. The Company’s actual results may differ materially from the results discussed in such forward-looking statements because of a number of factors, including those identified in the “Risk Factors” section and elsewhere in this Annual Report on Form 10-K. The forward-looking statements are made as of the date of this Annual Report on Form 10-K and the Company does not undertake to update the forward-looking statements or to update the reasons that actual results could differ from those projected in the forward-looking statements.

     The Company files reports with the Securities and Exchange Commission (“SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K. Copies of the Company’s reports filed with the SEC may be obtained by the public at the SEC’s Public Reference Room at 450 Fifth Street NW, Washington, D.C. 20549, or by calling the SEC at 1-800-SEC-0330. The Company files such reports with the SEC electronically, and the SEC maintains an Internet site at www.sec.gov that contains the Company’s periodic and current reports, proxy and information statements, and other information filed electronically. The Company’s website address is www.ahom.com. The Company also makes available, free of charge through the Company’s website, a direct link to its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and other materials filed with the SEC electronically. The information provided on the Company’s website is not part of this report, and is therefore not incorporated by reference unless such information is otherwise specifically referenced elsewhere in this report.

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PART I

ITEM 1. BUSINESS

Introduction

     American HomePatient, Inc. and its subsidiaries (collectively, the “Company”) provide home health care services and products consisting primarily of respiratory and infusion therapies and the rental and sale of home medical equipment and home health care supplies. These services and products are paid for primarily by Medicare, Medicaid and other third-party payors. As of December 31, 2003, the Company provided these services to patients primarily in the home through 286 centers in 35 states.

     American HomePatient, Inc. was incorporated in Delaware in September 1991. From its inception through 1997, the Company experienced substantial growth primarily as a result of its strategy of acquiring and operating home health care businesses. Beginning in 1998, the Company’s strategy shifted from acquiring new businesses to focusing more on internal growth, integrating its acquired operations and achieving operating efficiencies. American HomePatient, Inc.’s principal executive offices are located at 5200 Maryland Way, Suite 400, Brentwood, Tennessee 37027-5018, and its telephone number at that address is (615) 221-8884.

Proceedings under Chapter 11 of the Bankruptcy Code

     Bankruptcy Background. On July 1, 2003, American HomePatient, Inc. emerged from bankruptcy pursuant to a “100% pay plan” whereby the Company’s shareholders retain their equity interest and all of the Company’s creditors and vendors will be paid 100% of all amounts they are owed, either immediately or over time with interest. American HomePatient, Inc. and 24 of its subsidiaries (collectively, the “Debtors”) originally filed voluntary petitions on July 31, 2002 for relief to reorganize under Chapter 11 of the U.S. Bankruptcy Code (the “Bankruptcy Filing”) in the United States Bankruptcy Court for the Middle District of Tennessee (the “Bankruptcy Court”).

     These cases (the “Chapter 11 Cases”) were consolidated for the purpose of joint administration under Case Number 02-08915-GP3-11. On January 2, 2003, the Debtors filed their Second Amended Joint Plan of Reorganization (the “Proposed Plan”), proposed by the Debtors and the Official Committee of Unsecured Creditors appointed by the Office of the United States Trustee in the Chapter 11 Cases. The holders of the Company’s senior debt (the “Lenders”) objected to the Proposed Plan. On May 15, 2003, the Bankruptcy Court entered a memorandum opinion overruling the Lenders’ objections to the Proposed Plan. On May 27, 2003, the Bankruptcy Court entered an Order confirming the Proposed Plan (“Confirmation Order”) (hereafter referred to as the “Approved Plan”). On June 30, 2003, the United States District Court for the Middle District of Tennessee (the “District Court”) rejected the Lenders’ request to stay the effective date of the Approved Plan.

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     Overview of the Approved Plan. On July 1, 2003, the Company’s Approved Plan, which is attached as an exhibit hereto, became effective and the Company successfully emerged from bankruptcy protection.

     The Approved Plan allows the Company to continue its business operations uninterrupted, led by its current management team, and accomplishes the Company’s primary goal of restructuring its long-term debt obligations to its Lenders. In addition, the Approved Plan provides that the Company’s shareholders retain their equity interest in the Company and that all of the Company’s creditors and vendors will be paid 100% of all amounts they are owed, either immediately or over time with interest.

     The Approved Plan provides for the treatment of all of the claims subject to compromise in the Bankruptcy Filing. The Approved Plan provides for the extension of the maturity on the debt to the Lenders, a reduction of the related interest cost on such debt, and the payment of all of the Company’s reported liabilities. The Lenders retained their liens on substantially all of the assets of the Company.

     Pursuant to the Approved Plan, the Company’s secured debt to the Lenders is quantified at $250.0 million and is evidenced by a promissory note in that amount and is secured by various security agreements. To the Company’s knowledge, the Lenders have not executed the agreements as of the date of this filing. The Company is no longer a party to a credit agreement. The remainder of the amounts due to the Lenders at July 1, 2003 over and above the $250.0 million is treated as unsecured.

     Treatment of the Lenders’ Secured Debt. The Approved Plan provides that principal is payable annually on the $250.0 million secured debt on March 31 of each year, beginning March 31, 2005, in the amount of one-third of the Company’s Excess Cash Flow (as defined in the Approved Plan) for the previous fiscal year. After the unsecured debt of the Lenders and the general unsecured debt is paid in full, 100% of the Company’s Excess Cash Flow is paid as a principal payment on the $250.0 million secured debt on March 31 of each year, with an estimated prepayment due on each previous September 30 in an amount equal to one-half of the anticipated March payment. Thus an estimated prepayment is due on September 30, 2004 in an amount equal to one-half of the anticipated payment due on March 31, 2005. The maturity date of the $250.0 million secured debt is July 1, 2009. The Approved Plan provides that interest is payable monthly on the $250.0 million secured debt at a rate of 6.785% per annum.

     Treatment of the Lenders’ Unsecured Debt and the General Unsecured Debt. The Approved Plan treats the general unsecured debt and the Lenders’ unsecured debt in the same manner. Principal and accrued interest is payable semi-annually in six equal installments (on June 30 and December 31 of each year) beginning December 31, 2003. Interest accrues on this unsecured debt at an annual rate of 8.3675%. In addition to the six scheduled payments, the holders of the unsecured debt also received an estimated prepayment of the Pro Rata Payment (as defined in the Approved Plan) on September 30, 2003, and will receive a payment on March 31, 2004 in the amount of 100% of the Company’s Excess Cash Flow for fiscal year 2003, if any and a payment on March 31, 2005 in the amount of two-thirds of the Company’s Excess Cash Flow

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for the previous fiscal year, if any. Additionally, an estimated prepayment is due on September 30, 2004 in an amount equal to one-half of the anticipated March 2005 payment.

     The Approved Plan allows the Company to make prepayments to holders of unsecured debt, either in whole or in part, at any time without penalty, which prepayments reduce and are a credit against any subsequent mandatory payments.

     Prior to emergence from bankruptcy protection, the Company made adequate protection payments to the Lenders totaling approximately $15.8 million. Pursuant to the Approved Plan all of the adequate protection payments have been applied to the Lenders’ unsecured debt during 2003 as part of the 2003 scheduled payments and prepayments have been made.

     The Company has made all payments due under the Approved Plan as of December 31, 2003, and has also prepaid some of its obligations thereunder. As of December 31, 2003, the Lenders were owed approximately $261.2 million, comprised of $250.0 million of secured debt and $11.2 million of unsecured debt. The remaining general unsecured claims (excluding the Government Settlement) as of December 31, 2003 were approximately $6.3 million.

     Treatment of Small Unsecured Claims. On July 1, 2003, the Company paid, in full, unsecured claims that individually totaled $10,000 or less, according to the provisions of the Approved Plan. The total of these payments was $3.3 million.

     Warrant Rejection Appeal. The Bankruptcy Court issued an opinion ruling in favor of the Company’s request to reject the warrants originally issued to the Company’s Lenders to purchase 3,265,315 shares of the Company’s common stock for $.01 per share. As a result of the ruling, the warrants, which represented approximately 20% of the Company’s outstanding common stock, were rejected by the Company. The Bankruptcy Court determined the damages stemming from rejection of the warrants were $846,000, which is payable by the Company to the warrant holders as an unsecured debt. The warrant holders have appealed the damages calculation determined in this ruling. If the appeal is successful, the amount owed to the warrant holders could substantially increase, which could materially adversely affect the Company’s cash flow and results from operations.

     Appeal of Confirmation of the Approved Plan. The Lenders also filed an appeal to the District Court of the order confirming the Approved Plan. On September 12, 2003 the District Court issued an opinion affirming in all respects the Confirmation Order. The Lenders have filed an appeal to the order confirming the Approved Plan with the United States Court of Appeals for the Sixth Circuit. The Company intends to vigorously defend the Confirmation Order entered by the Bankruptcy Court and upheld by the District Court.

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Business

     The Company provides home health care services and products consisting primarily of respiratory therapy services, infusion therapy services and the rental and sale of home medical equipment and home health care supplies. For the year ended December 31, 2003, such services and products represented 69%, 13% and 18% of revenues, respectively. These services and products are paid for primarily by Medicare, Medicaid and other third-party payors. The Company’s objective is to be a leading provider of home health care products and services in the markets in which it operates. The Company’s centers are strategically located to achieve the market penetration necessary for the Company to be a cost-effective provider of comprehensive home health care services to managed care and other third-party payors.

     As of December 31, 2003, the Company provided services to patients primarily in the home through 286 centers in the following 35 states: Alabama, Arizona, Arkansas, Colorado, Connecticut, Delaware, Florida, Georgia, Illinois, Iowa, Kansas, Kentucky, Maine, Maryland, Michigan, Minnesota, Mississippi, Missouri, Nebraska, Nevada, New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Virginia, Washington, West Virginia, and Wisconsin.

     Prior to 1998, the Company had significantly expanded its operations through a combination of home health care acquisitions and joint ventures and strategic alliances with integrated health care delivery systems. Since 1998, the Company has not acquired any businesses or developed any new joint ventures other than converting certain 50% owned joint ventures to wholly owned operations during 1999 and 2000. At December 31, 2003 the Company is investor in and manager of eleven joint ventures.

     During 2003, the Company dissolved one of its previously owned 50% joint ventures as a result of the withdrawal of the hospital partner from the joint venture. At the time the joint venture was dissolved, the Company assumed two branches previously owned by the joint venture. As a result of these transactions, the results of operations of these assumed joint venture branches have been consolidated into the financial results of the Company beginning on the date of the conversions to wholly-owned operations. Previously, this joint venture was accounted for under the equity method.

     The Company does not anticipate renewing its acquisition or joint venture development activities during 2004. It continues to focus its efforts on internal operational matters.

     Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information,” (“SFAS No. 131”) establishes standards for the way that public business enterprises or other enterprises that are required to file financial statements with the Securities and Exchange Commission (“SEC”) report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. SFAS No. 131 also establishes standards for related disclosures about products and services, geographic areas, and major customers. The Company manages its business as one reporting segment.

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Services and Products

     The Company provides a diversified range of home health care services and products. The following table sets forth the percentage of revenues represented by each line of business for the periods presented:

     Home Respiratory Therapy Services. The Company provides a wide variety of home respiratory services primarily to patients with severe and chronic pulmonary diseases. Patients are referred to a Company center most often by primary care and pulmonary physicians as well as by hospital discharge planners and case managers. After reviewing pertinent medical records on the patient and confirming insurance coverage information, a Company respiratory therapist or technician visits the patient’s home to deliver and to prepare the prescribed therapy or equipment. Company representatives coordinate the prescribed therapy with the patient’s physician and train the patient and caregiver in the correct use of the equipment. For rental patients, Company representatives also make periodic follow-up visits to the home to provide additional instructions, required equipment maintenance and deliver oxygen and other supplies.

     The respiratory services that the Company provides include the following:

•

Oxygen systems to assist patients with breathing. There are three types of oxygen systems: (i) oxygen concentrators, which are stationary units that filter ordinary room air to provide a continuous flow of oxygen; (ii) liquid oxygen systems, which are portable, thermally-insulated containers of liquid oxygen which can be used as stationary units and/or as portable options for patients; and (iii) high pressure oxygen cylinders, which are used primarily for portability as an adjunct to oxygen concentrators. Oxygen systems are prescribed by physicians for patients with chronic obstructive pulmonary disease, cystic fibrosis and neurologically-related respiratory problems.

•

Nebulizers to deliver inhalation drugs to patients. Nebulizer compressors are used to administer aerosolized medications (such as albuterol) to patients with asthma, bronchitis, chronic obstructive pulmonary disease, and cystic fibrosis. “AerMeds” is the Company’s registered marketing name for its aerosol medications program.

•

Home ventilators to sustain a patient’s respiratory function mechanically in cases of severe respiratory failure when a patient can no longer breathe independently.

•

Non-invasive positive pressure ventilation (“NPPV”) to provide ventilation support via a face mask for patients with chronic respiratory failure and neuromuscular diseases.

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This therapy enables patients to receive positive pressure ventilation without the invasive procedure of intubation.

•

Continuous positive airway pressure (“CPAP”) and bi-level positive airway pressure therapies to force air through respiratory passage-ways during sleep. These treatments are used on adults with obstructive sleep apnea (“OSA”), a condition in which a patient’s normal breathing patterns are disturbed during sleep.

•

Apnea monitors to monitor and to warn parents of apnea episodes in newborn infants as a preventive measure against sudden infant death syndrome.

•

Home sleep screenings and related diagnostic equipment to detect sleep disorders and the magnitude of such disorders.

•

Home respiratory evaluations and related diagnostic equipment to assist physicians in identifying, monitoring and managing their respiratory patients.

     Oxygen systems comprised approximately 35% of the Company’s total 2003 revenues. Inhalation drugs and nebulizers comprised approximately 13% and 2%, respectively, of the Company’s total 2003 revenues. All other respiratory products and services comprised approximately 19% of the Company’s total 2003 revenues. The Company provides respiratory therapy services at all but six of its 286 centers.

     Home Infusion Therapy Services. The Company provides a wide range of home infusion therapy services. Patients are referred to a Company center most often by primary care and specialist physicians (such as infectious disease physicians and oncologists) as well as by hospital discharge planners and case managers. After confirming the patient’s treatment plan with the physician, the pharmacist mixes the medications and coordinates with the nurse the delivery of necessary equipment, medication and supplies to the patient’s home. The Company provides the patient and caregiver with detailed instructions on the patient’s prescribed medication, therapy, pump and supplies. For rental patients, the Company also schedules follow-up visits and deliveries in accordance with physicians’ orders.

     Home infusion therapy involves the administration of nutrients, antibiotics and other medications intravenously (into the vein), subcutaneously (under the skin), intramuscularly (into the muscle), intrathecally (via spinal routes), epidurally (also via spinal routes) or through feeding tubes into the digestive tract. The primary infusion therapy services that the Company provides include the following:

•

Enteral nutrition is the infusion of nutrients through a feeding tube inserted directly into the functioning portion of a patient’s digestive tract. This long-term therapy is often prescribed for patients who are unable to eat or to drink normally as a result of a neurological impairment such as a stroke or a neoplasm (tumor).

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	•		Anti-infective therapy is the infusion of anti-infective medications into a patient’s bloodstream typically for 5 to 14 days to treat a variety of serious bacterial and viral infections and diseases.
	•		Total parenteral nutrition (“TPN”) is the long-term provision of nutrients through central vein catheters that are surgically implanted into patients who cannot absorb adequate nutrients enterally due to a chronic gastrointestinal condition.
	•		Pain management involves the infusion of certain drugs into the bloodstream of patients, primarily terminally or chronically ill patients, suffering from acute or chronic pain.
	•		Other infusion therapies include chemotherapy, hydration, growth hormone and immune globulin therapies.

     Enteral nutrition services account for approximately 6% of the Company’s total revenues in 2003. Antibiotic therapy, TPN, and pain management and other infusion revenues accounted for approximately 7% of the Company’s total revenues in 2003. Enteral nutrition services are provided at most of the Company’s centers, and the Company currently provides other infusion therapies in 45 of its 286 centers.

     Home Medical Equipment and Medical Supplies. The Company provides a comprehensive line of equipment and supplies to serve the needs of home care patients. Revenues from home equipment and supplies are derived principally from the rental and sale of wheelchairs, hospital beds, ambulatory aids, bathroom aids and safety equipment, and rehabilitation equipment. Sales of home medical equipment and medical supplies account for 18% of the Company’s revenues in 2003.

Operations

     Organization. Currently, the Company’s operations are divided into two geographic divisions, each headed by a division vice president. Each division is further divided into geographic areas with each area headed by an area vice president. There are a total of 12 geographic areas within the Company. Each area vice president oversees the operations of approximately 17 - 35 centers. Management believes this field organizational structure enhances management flexibility and facilitates communication by enabling a greater focus on local market operations. Area vice presidents focus on revenue development, cost control and assist local management with decision-making to improve responsiveness in local markets. The Company’s billing centers report directly to the corporate reimbursement department under the leadership of the Vice President of Reimbursement and four directors of compliance and reimbursement. This organizational structure adds specialized knowledge and focused management resources to the billing, compliance and reimbursement functions.

     The Company’s centers are typically staffed with a general manager, a business office manager, a director of patient services (normally a registered nurse or respiratory therapist), registered nurses, clinical coordinators, respiratory therapists, service technicians and customer

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service representatives. In most of its markets, the Company employs account executives who are responsible for local sales efforts. In addition, the Company employs a licensed pharmacist in all centers that provide a significant amount of infusion therapy.

     The Company has achieved what management believes is an appropriate balance between centralized and decentralized management. Management believes that home care is a local business dependent in large part on personal relationships and, therefore, provides the Company’s operating managers with a significant degree of autonomy to encourage prompt and effective responses to local market demands. In conjunction with this local operational authority, the Company provides, through its corporate office, sophisticated management support, compliance oversight and training, marketing and managed care expertise, sales training and support, product development, and financial and information systems. The Company retains centralized control over those functions necessary to monitor quality of patient care and to maximize operational efficiency. Services performed at the corporate office include financial and accounting functions, treasury, corporate compliance, human resources, reimbursement oversight, sales and marketing support, clinical policy and procedure development, regulatory affairs and licensure, and information system design.

     Commitment to Quality. The Company maintains quality and performance improvement programs related to the proper implementation of its service standards. Management believes that the Company has developed and implemented service policies and procedures that comply with the standards required by the Joint Commission on Accreditation of Health Care Organizations (“JCAHO”). All of the Company’s centers are JCAHO-accredited or are in the process of being reviewed for accreditation from the JCAHO. The Company has Quality Improvement Advisory Boards at many of its centers, and center general managers conduct quarterly quality improvement reviews. Area quality improvement (“AQI”) specialists conduct quality compliance audits at each center in an effort to ensure compliance with state and federal regulations, JCAHO, FDA and internal standards. The AQI specialists also help train all new clinical personnel on the Company’s policies and procedures.

     Training and Retention of Quality Personnel. Management recognizes that home health care is by nature a localized business. General managers attempt to recruit knowledgeable local talent for all positions including account executives who are capable of gaining new business from the local medical community. In addition, the Company provides sales training and orientation to general managers and account executives.

     Management Information Systems. Management believes that periodic refinement and upgrading of its management information systems, which permit management to monitor closely the activities of the Company’s centers, is important to the Company’s business. The Company’s financial systems provide, among other things, monthly budget analyses, trended financial data, financial comparisons to prior periods, and comparisons among Company centers. These systems also provide a means for management to monitor key statistical data for each center, such as accounts receivable, payor mix, cash collections, revenue mix and expense trends. Additionally, Medicare and other third party claims are billed electronically through the Company’s systems, thereby facilitating and improving the timeliness of accounts receivable collections. The Company also maintains a communication network that provides company-

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wide access to email and the Internet. The Company maintains an intranet program, AMNET, which is a productivity driven, secure site focused on reducing paperwork, disseminating information throughout the Company, and facilitating communication among the Company’s employees.

     Corporate Compliance. The Company’s goal is to operate its business with honesty and integrity, and in compliance with the numerous laws and regulations that govern its operations. The Company’s corporate compliance program is designed to help accomplish these goals through employee training and education, a confidential disclosure program, written policy guidelines, periodic reviews, compliance audits and other programs. The Company’s corporate compliance program is monitored by its Vice President of Compliance and Government Affairs, Assistant Compliance Officer and Compliance Committee. The Compliance Committee, which meets quarterly, is comprised of the Company’s President and CEO, Chief Operating Officer, Chief Financial Officer, Vice President of Reimbursement, and both division vice presidents. There can be no assurance that the Company’s compliance activities will prevent or detect violations of the governing laws and regulations. See “Business - Government Regulation.”

Hospital Joint Ventures

     The Company owns 50% of nine home health care businesses, and 70% of two other home health care businesses that were operational as of December 31, 2003. The remaining ownership percentage of each business is owned by local hospitals. The Company is solely responsible for the management of these businesses and receives fixed monthly management fees or monthly management fees based upon a percentage of net revenues, net income or cash collections. The operations of the 70% owed joint ventures are consolidated with the operations of the Company. The operations of the 50% owned joint ventures are not consolidated with the operation of the Company and are instead accounted for, by the Company, under the equity method. The Company has not developed any new joint ventures since 1998.

     The Company’s joint ventures typically are 50/50% equity partnerships with an initial term of between three and ten years and with the following typical provisions: (i) the Company contributes assets of an existing business in the designated market or contributes cash to fund half of the initial working capital required for the hospital joint venture to commence operations; (ii) the hospital partner contributes similar assets and/or an amount of cash equal, in the aggregate, to the fair market value of the Company’s net contribution; (iii) the Company is the managing partner for the hospital joint venture and receives a monthly management and administrative fee; and (iv) distributions, to the extent made, are generally made on a quarterly basis and are consistent with each partner’s capital contributions. Within the hospital joint venture’s designated market, all services provided within the geographic market are deemed to be revenues of the hospital joint venture, including revenues from sources other than the hospital joint venture partner.

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     The following table lists the Company’s hospital joint venture partners and locations for all joint ventures as of December 31, 2003:

*

70% owned consolidated joint venture. All others are 50% owned non-consolidated joint ventures.

Revenues

     The Company derives substantially all of its revenues from third-party payors, including Medicare, private insurers and Medicaid. Medicare is a federally funded and administered health insurance program that provides coverage for beneficiaries who require certain medical services and products. Medicaid is a state administered reimbursement program that provides reimbursement for certain medical services and products. Amounts paid under these programs are generally based upon a fixed rate. Revenues are recorded at the expected reimbursement rates when the services are provided, merchandise delivered or equipment rented to patients. Revenues are recorded net of estimated adjustment for billing errors or other reimbursement adjustments. Although amounts earned under the Medicare and Medicaid programs are subject to review by such third-party payors, subsequent adjustments to such reimbursements are historically insignificant as these reimbursements are based on fixed fee schedules. In the opinion of management, adequate provision has been made for any adjustment that may result from such reviews. Any differences between estimated settlements and final determinations are reflected in operations in the year finalized.

     Sales and related services revenues include all product sales to patients and are derived from the provision of infusion therapies, the sale of home health care equipment and medical supplies, the sale of aerosol medications and respiratory therapy equipment, and supplies and services related to the delivery of these products. Sales revenues are recognized at the time of delivery, and are billed using fixed fee schedules based upon the type of product and the payor when the Company has obtained the properly completed Certificate for Medical Necessity (“CMN”) from the health care provider, when applicable. Rentals and other patient revenues are derived from the rental of home health care equipment, enteral pumps and equipment related to the provision of respiratory therapy. All rentals of equipment are provided by the Company on a month-to-month basis and are

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billed and recorded as revenue using fixed monthly fee schedules based upon the type of rental and the payor when the Company has obtained the properly completed CMN from the health care provider, when applicable. The fixed monthly fee encompasses the rental of the product as well as the delivery set-up and instruction by the product technician.

     The following table sets forth the percentage of the Company’s revenues from each source indicated for the years presented:

     Because the Company derives a significant portion of its revenues from Medicare and Medicaid reimbursement, material changes in reimbursement have a material impact on our revenues and, consequently, on our business operations and financial results. Reimbursement levels typically are subject to downward pressure as the federal and state governments seek to reduce expenditures under the Medicare and Medicaid programs. Thus, since its inception the Company has experienced numerous reductions related to its products and services and regularly learns of proposals for other reductions, some of which are subsequently implemented as proposed or in a modified form. The Company anticipates that future reductions will occur, whether through administrative action, legislative changes, or otherwise.

     In September 2003, the Office of Inspector General Department of Health and Human Services the (OIG) approved Operation Wheeler-Dealer, which will subject power wheelchairs and power operated vehicles to more intense scrutiny to assure the Medicare beneficiaries receiving these products do in fact have medical necessity. The result of Operation Wheeler-Dealer is an expected increase in the number of post-payment and pre-payment Medicare audits.

     In the last quarter of 2003, Congress enacted the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”). The Act reduces Medicare reimbursement levels for a variety of the Company’s products and services, with some reductions beginning in January 2004 and others beginning in January 2005.

     Effective January 1, 2004, a provision in the Act required that reimbursement for virtually all durable medical equipment (“DME”) and infusion drugs used with DME be frozen at the reimbursement level in effect on October 1, 2003. The freeze will remain in effect until the roll out of a national competitive bidding system scheduled to begin in 2007. The competitive bidding for DME will be required in the top ten (10) Metropolitan Statistical Areas (MSAs) in 2007 with the next 80 MSAs scheduled for roll out in 2009. In addition, in January 2005, the Medicare reimbursement for 16 durable medical and respiratory items will be reduced to the median rate of Federal Employee Health Benefit Plan (FEHBP) fee schedule.

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     Also effective January 1, 2004 a provision in the Medicare Prescription Drug, Improvement and Modernization Act of 2003 required that the reimbursement rate for inhalation drugs used with a nebulizer be reduced from 95% of the average wholesale price (AWP) to 80% of AWP. Beginning January 1, 2005, the reimbursement for inhalation drugs will be further reduced to the average manufacturer’s sales price plus six percent (ASP + 6%).

     In February 2004 the executive branch of the federal government released the fiscal year 2005 budget for the Department of Health and Human Services that contained a provision to eliminate the Medicare capped rental program which in turn, would eliminate reimbursement of the semi-annual maintenance billing and fourteenth and fifteenth months of rent on equipment in this payment category.

Collections

     The Company has four key initiatives in place to maintain and/or improve collections of accounts receivable: (i) proper staffing and training; (ii) process redesign and standardization; (iii) consolidation of billing center activities; and (iv) billing center specific goals geared toward improved cash collections and reduced accounts receivable.

     Net patient accounts receivable at December 31, 2003 was $56.9 million compared to net patient accounts receivable of $54.2 million at December 31, 2002.

     An important indicator of the Company’s accounts receivable collection efforts is the monitoring of the days sales outstanding (“DSO”). The Company monitors DSO trends for each of its branches and billing centers, and for the Company in total, as part of the management of the billing and collections process. An increase in DSO usually indicates a breakdown in processes at the billing centers and/or branches. A decline in DSO usually results from process improvements and improved cash collections. Management uses DSO trends to monitor, evaluate and improve the performance of the billing centers. The table below shows the Company’s DSO for the periods indicated and is calculated by dividing the previous 90 days of revenue (excluding dispositions and acquisitions), net of bad debt expense into net patient accounts receivable and multiplying the ratio by 90 days:

     The Company attempts to minimize DSO by screening new patient cases for adequate sources of reimbursement and by providing complete and accurate claims data to relevant payor sources. The decrease in DSO and net patient receivables between 2001 and 2003 is due to improved collection results on current billings and improved timeliness in obtaining necessary billing documentation. The Company’s level of DSO and net patient receivables is affected by the extended time required to obtain necessary billing documentation.

     Another key indicator of the Company’s receivable collection efforts is the amount of unbilled revenue which reports the amount of sales and rental revenues which have not yet been

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billed to the payor’s due to incomplete documentation or the receipt of the CMN. At December 31, 2003 and 2002, the amount of unbilled revenue was $10.2 million and $10.8 million, respectively, net of reserves.

     During 2003, the Company closed five of its stand alone billing centers and three billing locations that were located within its branches. These centers were closed to gain efficiencies by the consolidation of billing activity into existing billing centers that have a history of higher performance. The closure of these billing centers allowed the Company to increase productivity and gain efficiency in its billing and collection processes, which in turn has improved the Company’s DSO, reduced bad debt expense as a percentage of revenue, and reduced the cost to bill and collect patient revenue. As of December 31, 2003, the Company operated 19 stand alone billing centers.

Sales and Marketing

     Over the past three years, the Company has increased its focus on sales and marketing efforts in an effort to improve revenues. Relatively few barriers exist to entry into local markets served by the Company, resulting in substantial competition from new market entrants. Additionally, in larger markets, regional and national providers account for a significant portion of the Company’s competition. Furthermore, some of the Company’s present and potential competitors are significantly larger than the Company and have, or may obtain, greater financial and marketing resources than the Company. With this in mind, the Company has increased its focus on sales and marketing efforts over the past three years in an effort to improve revenues. Continuing these efforts will be critical to the Company’s success. Management believes that the competitive factors most important in the Company’s lines of business are quality of care and service, reputation with referral sources, ease of doing business with the provider, ability to develop and to maintain relationships with referral sources and the range of services offered. The Company’s marketing efforts are therefore focused on cost effectively positioning the Company to remain competitive and responsive to the expressed needs of our referral sources and patients while identifying and implementing strategies to achieve maximum revenue growth.

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Competition

     The home health care industry is consolidating but remains highly fragmented and competition varies significantly from market to market. In the small and mid-size markets in which the Company primarily operates, the majority of its competition comes from local independent operators or hospital-based facilities, whose primary competitive advantage is market familiarity. There are still relatively few barriers to entry in the local markets served by the Company, and it may encounter substantial competition from new market entrants. In the larger markets, regional and national providers account for a significant portion of competition. Management believes that the competitive factors most important in the Company’s lines of business are quality of care and service, reputation with referral sources, ease of doing business with the provider, ability to develop and to maintain relationships with referral sources, competitive prices, and the range of services offered.

     Third-party payors and their case managers actively monitor and direct the care delivered to their beneficiaries. Accordingly, relationships with such payors and their case managers and inclusion within preferred provider and other networks of approved or accredited providers has become a prerequisite, in many cases, to the Company’s ability to serve many of the patients it treats. Similarly, the ability of the Company and its competitors to align themselves with other health care service providers may increase in importance as managed care providers and provider networks seek out providers who offer a broad range of services, substantially discounted prices, and geographic coverage.

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Branch Locations

     Following is a list of the Company’s 286 home health care centers as of December 31, 2003.

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Supplies and Equipment

     The Company centrally purchases home medical and respiratory equipment, prescription drugs, solutions and other materials and products required in connection with the Company’s business from select suppliers.

Insurance

     The Company maintains a commercial general liability policy which is on a claims-made basis. This insurance is renewed annually and includes product liability coverage on the medical equipment that it sells or rents with per claim coverage limits of up to $1.0 million per claim with a $5.0 million product liability annual aggregate and a $5.0 million general liability annual aggregate. The Company’s professional liability policy is on a claims-made basis and is renewable annually with per claim coverage limits of up to $1.0 million per claim and $5.0 million in the aggregate. The Company retains the first $100,000 of each professional or general liability claim subject to $400,000 in the aggregate. The defense costs are included within the limits of insurance. The Company also maintains excess liability coverage with limits of $20.0 million per claim and $20.0 million in the aggregate. Management believes the manufacturers of the equipment it sells or rents currently maintain their own insurance, and in some cases the Company has received evidence of such coverage and has been added by endorsement as an additional insured. However, there can be no assurance that such manufacturers will continue to do so, that such insurance will be adequate or available to protect the Company, or that the Company will not have liability independent of that of such manufacturers and/or their insurance coverage. Liabilities in excess of these aggregate amounts are the responsibility of the insurer.

     The Company is insured for auto liability coverage for $1.0 million per accident. The Company retains the first $250,000 of each claim. The Company is insured for workers’ compensation, but retains the first $250,000 risk exposure of each claim. The insurance carrier is responsible for amounts in excess of $250,000 on each claim. Liabilities below the $250,000 limit for each claim are the responsibility of the Company. The Company provides reserves for the settlement of outstanding claims and claims incurred but not reported at amounts believed to be adequate. The Company did not maintain annual aggregate stop-loss coverage for the years 2003, 2002 and 2001, as such coverage was not available.

     The Company is self-insured for health insurance for substantially all employees for the first $150,000 on a per person, per year basis and maintains annual aggregate stop-loss coverage of $13.3 million for 2003. The health insurance policies are limited to maximum lifetime reimbursements of $2.0 million per person for 2003 and 2002, and had unlimited lifetime reimbursements for 2001. Liabilities in excess of these aggregate amounts are the responsibility of the insurer. The Company provides reserves for the settlement of outstanding claims and claims incurred but not reported at amounts believed to be adequate. The differences between actual settlements and reserves are included in expense once a probable amount is known. The Company has purchased insurance protecting its directors and officers for a limit of $20.0 million. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies.”

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     There can be no assurance that any of the Company’s insurance will be sufficient to cover any judgments, settlements or costs relating to any pending or future legal proceedings or that any such insurance will be available to the Company in the future on satisfactory terms, if at all. If the insurance carried by the Company is not sufficient to cover any judgments, settlements or costs relating to pending or future legal proceedings, the Company’s business and financial condition could be materially adversely affected.

Employees

     At December 31, 2003, the Company had approximately 3,100 full-time employees, 144 part-time employees and 207 employees used on an “as needed” basis only. Approximately 135 individuals were employed at the corporate office in Brentwood, Tennessee. None of the employees work under a union contract.

Trademarks

     The Company owns and uses a variety of marks, including American HomePatient®, AerMeds®, Redi^sm, EnterCare^sm, Resource^sm, EnSpire^sm, OPUS^sm, SLEEP^sm, Go Paperless^sm and Personal Caring Service^sm which have either been registered at the federal or state level or are being used pursuant to common law rights.

Government Regulation

     General. The Company, as a participant in the health care industry, is subject to extensive federal, state and local regulation. In addition to the Federal False Claims Act (“False Claims Act”) and other federal and state anti-kickback and self-referral laws applicable to all of the Company’s operations (discussed more fully below), the operations of the Company’s home health care centers are subject to federal laws covering the repackaging and dispensing of drugs (including oxygen) and regulating interstate motor-carrier transportation. Such centers also are subject to state laws (most notably licensing and controlled substances registration) governing pharmacies, nursing services and certain types of home health agency activities.

     The Company’s operations are also subject to a series of laws and regulations dating back to 1987 that apply to the Company’s operations. Changes have occurred from time to time since 1987, including reimbursement reductions and changes to payment rules.

     The Federal False Claims Act imposes civil liability on individuals or entities that submit false or fraudulent claims to the government for payment. False Claims Act penalties for violations can include sanctions, including civil monetary penalties.

     As a provider of services under the federal reimbursement programs such as Medicare, Medicaid and TRICARE, the Company is subject to the federal statute known as the anti-kickback statute, also known as the “fraud and abuse law.” This law prohibits any bribe, kickback, rebate or remuneration of any kind in return for, or as an inducement for, the referral of patients for government-reimbursed health care services.

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     The Company may also be affected by the federal physician self-referral prohibition, known as the “Stark Law,” which, with certain exceptions, prohibits physicians from referring patients to entities with which they have a financial relationship. Many states in which the Company operates have adopted similar fraud and abuse and self-referral laws, as well as laws that prohibit certain direct or indirect payments or fee-splitting arrangements between health care providers, under the theory that such arrangements are designed to induce or to encourage the referral of patients to a particular provider. In many states, these laws apply to services reimbursed by all payor sources.

     In 1996, the Health Insurance Portability and Accountability Act (“HIPAA”) introduced a new category of federal criminal health care fraud offenses. If a violation of a federal criminal law relates to a health care benefit, then an individual is guilty of committing a Federal Health Care Offense. The specific offenses are: health care fraud, theft or embezzlement, false statements, obstruction of an investigation, and money laundering. These crimes can apply to claims submitted not only to government reimbursement programs such as Medicare, Medicaid and TRICARE, but to any third-party payor, and carry penalties including fines and imprisonment. HIPAA has mandated an extensive set of regulations to protect the privacy of individually identifiable health information. The regulations consist of three sets of standards, each with a different date for required compliance: (1) Privacy Standards had a compliance date of April 14, 2003; (2) Transactions and Code Sets Standards required compliance by October 16, 2002, except as extended by one year to October 16, 2003 for providers that filed a compliance extension form by October 15, 2002; and (3) Security Standards which were published in final form on February 2, 2003 and have a compliance date of April 21, 2005.

     The Company must follow strict requirements with paperwork and billing. As required by law, it is Company policy that certain service charges (as defined by Medicare) falling under Medicare Part B are confirmed with a CMN signed by a physician. In January 1999, the OIG published a draft Model Compliance Plan for the Durable Medical Equipment, Prosthetics, Orthotics and Supply Industry. The OIG has stressed the importance for all health care providers to have an effective compliance plan. The Company has created and implemented a compliance program, which it believes meets the elements of the OIG’s Model Plan for the industry. As part of its compliance program, the Company performs internal audits of the adequacy of billing documentation. The Company’s policy is to voluntarily refund to the government any reimbursements previously received for claims with insufficient documentation that are identified in this process and that cannot be corrected. The Company periodically reviews and updates its policies and procedures in an effort to comply with applicable laws and regulations; however, certain proceedings have been and may in the future be commenced against the Company alleging violations of applicable laws governing the operation of the Company’s business and its billing practices.

     The Company is also subject to state laws governing Medicaid, professional training, licensure, financial relationships with physicians and the dispensing and storage of pharmaceuticals. The facilities operated by the Company must comply with all applicable laws, regulations and licensing standards and many of the Company’s employees must maintain licenses to provide some of the services offered by the Company. Additionally, certain of the Company’s employees are subject to state laws and regulations governing the professional practice of respiratory therapy, pharmacy and nursing.

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     Information about individuals and other health care providers who have been sanctioned or excluded from participation in government reimbursement programs is readily available on the Internet, and all health care providers, including the Company, are held responsible for carefully screening entities and individuals they employ or do business with, to avoid contracting with an excluded provider. The entity cannot bill government programs for services or supplies provided by an excluded provider, and the federal government may also impose sanctions, including financial penalties, on companies that contract with excluded providers.

     Health care law is an area of extensive and dynamic regulatory oversight. Changes in laws or regulations or new interpretations of existing laws or regulations can have a dramatic effect on permissible activities, the relative costs associated with doing business, and the amount and availability of reimbursement from government and other third-party payors. There can be no assurance that federal, state, or local governments will not impose additional standards or change existing standards or interpretations.

     Enforcement Activities. In recent years, various state and federal regulatory agencies have stepped up investigative and enforcement activities with respect to the health care industry, and many health care providers, including the Company and other durable medical equipment suppliers, have received subpoenas and other requests for information in connection with their business operations and practices. From time to time, the Company also receives notices and subpoenas from various government agencies concerning plans to audit the Company, or requesting information regarding certain aspects of the Company’s business. The Company cooperates with the various agencies in responding to such subpoenas and requests. The Company expects to incur additional legal expenses in the future in connection with existing and future investigations.

     The government has broad authority and discretion in enforcing applicable laws and regulations; therefore, the scope and outcome of any such investigations, inquiries, or legal actions cannot be predicted. There can be no assurance that federal, state or local governments will not impose additional regulations upon the Company’s activities nor that the Company’s past activities will not be found to have violated some of the governing laws and regulations. Any such regulatory changes or findings of violations of laws could adversely affect the Company’s business and financial position, and could even result in the exclusion of the Company from participating in Medicare, Medicaid, and other contracts for goods or services reimbursed by the government.

     Legal Proceedings. The following is a summary of the Company’s material legal proceedings:

     On June 11, 2001, a settlement agreement (the “OIG Settlement” or “Government Settlement”) was entered among the Company, the United States of America, acting through the United States Department of Justice (“DOJ”) and on behalf of the OIG and the TRICARE Management Activity, and a former Company employee, as relator. The Government Settlement was approved by the United States District Court for the Western District of Kentucky, the court in which the relator’s false claim action was filed. The Government Settlement covers alleged improprieties by the Company during the period from January 1, 1995 through December 31, 1998, including allegedly improper billing activities and allegedly improper remuneration to and contracts

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with physicians, hospitals and other healthcare providers. Pursuant to the Government Settlement, the Company made an initial payment of $3,000,000 in the second quarter of 2001 and agreed to make additional payments in the principal amount of $4,000,000, together with interest on this amount, in installments due at various times until March 2006. An installment of $880,000, including interest of $380,000, was due and paid on March 11, 2004. The Company also paid the relator’s attorneys fees and expenses. Pursuant to the Approved Plan, the amounts owed pursuant to the Government Settlement will be paid in full in accordance with the Government Settlement. As of December 31, 2003, the Company had reserved $4,380,000 for its future obligations pursuant to the Government Settlement.

     On July 1, 2003, the Approved Plan became effective and the Company successfully emerged from bankruptcy protection. The Lenders filed an appeal of the order confirming the Approved Plan to the United States District Court. That court affirmed the order confirming the Approved Plan on September 12, 2003. On October 14, 2003, the Lenders filed a notice of appeal to the United States Court of Appeals for the Sixth Circuit. That appeal is pending. If the appeal is successful, it could have a material adverse effect on the Company and its ability to continue as a going concern. See “Business – Proceedings Under Chapter 11 of the Bankruptcy Code.”

     The Bankruptcy Court issued an opinion ruling in favor of the Company’s request to reject the warrants originally issued to the Company’s Lenders to purchase 3,265,315 shares of the Company’s common stock for $.01 per share. As a result of the ruling, the warrants, which represented approximately 20% of the Company’s outstanding common stock, were rejected by the Company. The Company has recorded a liability of $846,000, which is the damages claim owing to the Lenders because of the rejection of the warrants as determined by the Bankruptcy Court. This liability will be paid to the warrant holders as an unsecured claim pursuant to the terms of the Approved Plan if they are unsuccessful in their appeal. The warrant holders have appealed the damages calculation determined in this ruling. If the appeal is successful, the amount owed to the warrant holders could be substantially higher, which could have a material adverse affect on the Company’s cash flow and results from operations.

Risk Factors

     This section summarizes certain risks, among others, that should be considered by stockholders and prospective investors in the Company. Many of these risks are also discussed in other sections of this report.

     Medicare Reimbursement Reductions. In the last quarter of 2003, Congress enacted the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”). The Act reduces Medicare reimbursement levels for a variety of the Company’s products and services, with some reductions beginning in January 2004 and others beginning in January 2005. See “Business - Revenues.” These reductions will have a material adverse effect on the Company’s revenues, net income, cash flows and capital resources. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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     Dependence on Reimbursement by Third-Party Payors. For the year ended December 31, 2003, the percentage of the Company’s revenues derived from Medicare, Medicaid and private pay was 53%, 9% and 38%, respectively. The revenues and profitability of the Company may be impacted by the efforts of payors to contain or reduce the costs of health care by lowering reimbursement rates, narrowing the scope of covered services, increasing case management review of services and negotiating reduced contract pricing. Reductions in reimbursement levels under Medicare, Medicaid or private pay programs and any changes in applicable government regulations could have a material adverse effect on the Company’s revenues and net income. Changes in the mix of the Company’s patients among Medicare, Medicaid and private pay categories and among different types of private pay sources may also affect the Company’s revenues and profitability. There can be no assurance that the Company will continue to maintain its current payor or revenue mix. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

     Substantial Leverage. The Company maintains a significant amount of debt. The secured claim of the Lenders as of December 31, 2003 was $250.0 Million. The unsecured claim of the Lenders as of December 31, 2003 was approximately $11.2 million. The amount of general unsecured debt (excluding the Government Settlement) due to other creditors at December 31, 2003 was $6.3 million. Required payments to the Lenders and general unsecured creditors are detailed in “Business – Proceedings Under Chapter 11 of the Bankruptcy Code.” Due to the amount of debt, a substantial portion of our cash flow from operations will be dedicated to servicing debt. The substantial leverage could adversely affect the Company’s ability to grow its business or to withstand adverse economic conditions or competitive pressures and the inability to pay debt would have a material adverse effect on the Company. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.”

     Bankruptcy Appeal. On July 1, 2003, the Approved Plan became effective and the Company successfully emerged from bankruptcy protection. The Lenders filed an appeal of the order confirming the Approved Plan to the United States District Court. That court affirmed the order confirming the Approved Plan on September 12, 2003. On October 14, 2003, the Lenders filed a notice of appeal to the United States Court of Appeals for the Sixth Circuit. That appeal is pending. If the appeal is successful, it could have a material adverse effect on the Company. See “Business – Proceedings Under Chapter 11 of the Bankruptcy Code.”

     Warrant Rejection Appeal. The Bankruptcy Court issued an opinion ruling in favor of the Company’s request to reject the warrants originally issued to the Company’s Lenders to purchase 3,265,315 shares of the Company’s common stock for $.01 per share. As a result of the ruling, the warrants, which represented approximately 20% of the Company’s outstanding common stock, were rejected by the Company. The Bankruptcy Court determined the damages stemming from rejection of the warrants were $846,000, which is payable by the Company to the warrant holders as an unsecured debt. The warrant holders have appealed the damages calculation determined in this ruling. If the appeal is successful, the amount owed to the warrant holders could substantially increase, which could materially adversely affect the Company’s cash flow and results from operations.

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     Government Regulation. The Company is subject to extensive and frequently changing federal, state and local regulation. In addition, new laws and regulations are adopted periodically to regulate products and services in the health care industry. Changes in laws or regulations or new interpretations of existing laws or regulations can have a dramatic effect on operating methods, costs and reimbursement amounts provided by government and other third-party payors. There can be no assurance that the Company is in compliance with all applicable existing laws and regulations or that the Company will be able to comply with any new laws or regulations that may be enacted in the future. Changes in applicable laws, any failure by the Company to comply with existing or future laws, regulations or standards, or discovery of past regulatory noncompliance by the Company could have a material adverse effect on the Company’s results of operations, financial condition, business or prospects. See “Business – Government Regulation.”

     Collectibility of Accounts Receivable. The Company has substantial accounts receivable, representing DSO of 60 days as of December 31, 2003. No assurances can be given that future bad debt expense will not increase above current operating levels as a result of difficulties associated with the Company’s billing activities and meeting payor documentation requirements and claim submission deadlines. Increased bad debt expense or delays in collecting accounts receivable could have a material adverse effect on cash flows and results of operations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies – Revenue Recognition and Allowance for Doubtful Accounts.”

     Health Care Initiatives. The health care industry continues to undergo dramatic changes influenced in large part by federal legislative initiatives. New federal health care initiatives likely will continue to arise. There can be no assurance that these or other federal legislative and regulatory initiatives will not be adopted in the future. One or more of these initiatives could limit patient access to, or the Company’s reimbursement for, products and services provided by the Company. Some states are adopting health care programs and initiatives as a replacement for Medicaid. There can be no assurance that the adoption of such legislation or other changes in the administration or interpretation of government health care programs or initiatives will not have a material adverse effect on the Company.

     Role of Managed Care. As managed care plays an increasingly significant role in markets in which the Company operates, the Company’s success will, in part, depend on retaining and obtaining profitable managed care contracts. There can be no assurance that the Company will retain or obtain such managed care contracts. In addition, reimbursement rates under managed care contracts are likely to continue to experience downward pressure as a result of payors’ efforts to contain or reduce the costs of health care by increasing case management review of services, retrospective payment audits, and negotiating reduced contract pricing. Therefore, even if the Company is successful in retaining and obtaining managed care contracts, it will experience declining profitability, unless the Company also decreases its cost for providing services and increases higher margin services.

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     Liquidity. Trading of the Company’s common stock under its current trading symbol, AHOM, is conducted on the over-the-counter bulletin board which may limit the Company’s ability to raise additional capital and the ability of shareholders to sell their shares.

     HIPAA Compliance. HIPAA has mandated an extensive set of regulations to protect the privacy of individually identifiable health information. The regulations consist of three sets of standards, each with a different date for required compliance: (1) Privacy Standards had a compliance date of April 14, 2003; (2) Transactions and Code Sets Standards required compliance by October 16, 2002, except as extended by one year to October 16, 2003 for providers that filed a compliance extension form by October 15, 2002; and (3) Security Standards which were published in final form on February 2, 2003 and have a compliance date of April 21, 2005. The Company has filed its compliance extension form and is actively pursuing its strategies toward compliance with the final Privacy Standards and Transaction and Code Sets Standards. The Company’s HIPAA compliance plan will require modifications to existing information management systems and physical security mechanisms, and may require additional personnel as well as extensive training of existing personnel, the full cost of which has not yet been determined. The Company cannot predict the impact that final regulations, when fully implemented, will have on its operations. The Company’s implementation of mandated HIPAA Transaction and Code Sets has resulted in disruptions to cash collections, and additional disruptions may occur in the future. Further, the Company cannot predict whether all payors and clearinghouses will be fully HIPAA Transaction compliant and able to process electronic claims by the final implementation deadline. Alternative methods of claims submission may be required, possibly resulting in delay in payment, which could have a material adverse effect on the Company’s result of operations, cash flow, and financial condition.

     Ability to Attract and Retain Management. The Company is highly dependent upon its senior management, and competition for qualified management personnel is intense. The Company’s historical financial results and reimbursement environment, among other factors, may limit the Company’s ability to attract and retain qualified personnel, which in turn could adversely affect profitability.

     Competition. The home health care market is highly fragmented and competition varies significantly from market to market. In the small and mid-size markets in which the Company primarily operates, the majority of its competition comes from local independent operators or hospital-based facilities, whose primary competitive advantage is market familiarity. There are relatively few barriers to entry in the local markets served by the Company, and it encounters substantial competition from new market entrants. In the larger markets, regional and national providers account for a significant portion of competition. Some of the Company’s present and potential competitors are significantly larger than the Company and have, or may obtain, greater financial and marketing resources than the Company.

     Liability and Adequacy of Insurance. The provision of healthcare services entails an inherent risk of liability. Certain participants in the home healthcare industry may be subject to lawsuits that may involve large claims and significant defense costs. It is expected that the Company periodically will be subject to such suits as a result of the nature of its business. The

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Company currently maintains product and professional liability insurance intended to cover such claims in amounts which management believes are in keeping with industry standards. There can be no assurance that the Company will be able to obtain liability insurance coverage in the future on acceptable terms, if at all. There can be no assurance that claims in excess of the Company’s insurance coverage will not arise. A successful claim against the Company in excess of the Company’s insurance coverage could have a material adverse effect upon the results of operations, financial condition or prospects of the Company. Claims against the Company, regardless of their merit or eventual outcome, may also have a material adverse effect upon the Company’s ability to attract patients or to expand its business. In addition, the Company is self-insured for its workers’ compensation insurance and employee health insurance and is at risk for claims up to individual stop loss and aggregate stop loss amounts.

ITEM 2. PROPERTIES

     As of December 31, 2003, the Company’s corporate headquarters occupied approximately 29,000 square feet leased in the Parklane Building, Maryland Farms Office Park, Brentwood, Tennessee. The Company entered into an amended lease effective January 1, 2003 that reduced this leased space to 12,000 square feet. The amended lease has a base monthly rent of $42,000 and expires in January 2009.

     The Company owns a facility in Waterloo, Iowa, which consists of approximately 35,000 square feet and owns a 50% interest in its center in Little Rock, Arkansas, which consists of approximately 15,000 square feet.

     The Company leases the operating space required for its remaining home health care and billing centers. A typical center occupies between 2,000 and 6,000 square feet and generally combines showroom, office and warehouse space, with approximately two-thirds of the square footage consisting of warehouse space. Lease terms on most of the leased centers range from three to five years. Management believes that the Company’s owned and leased properties are adequate for its present needs and that suitable additional or replacement space will be available as required.

ITEM 3. LEGAL PROCEEDINGS

     A summary of the Company’s material legal proceedings is set forth in “The Business – Government Regulation – Legal Proceedings.”

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

     None.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

     Trading of the Company’s common stock is conducted on the Over the Counter Bulletin Board (OTCBB) using the trading symbol, AHOM.OB. The following table sets forth representative bid quotations of the common stock for each quarter of calendar years 2003 and 2002. The following bid quotations reflect interdealer prices without retail mark-ups, mark-downs or commissions, and may not necessarily represent actual transactions. See “Business – Risk Factors – Liquidity.”

     On March 25, 2004, there were 1,686 holders of record of the common stock and the closing sale price for the common stock was $1.68 per share.

     The Company has not paid cash dividends on its common stock and anticipates that, for the foreseeable future, any earnings will be retained for use in its business or for debt service and no cash dividends will be paid. See – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”

     Information regarding the Company’s equity compensation plans is incorporated by reference to the Company’s definitive proxy statement (“Proxy Statement”) for its 2004 annual meeting of stockholders.

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ITEM 6. SELECTED FINANCIAL DATA

     The following selected financial data below is derived from the audited financial statements of the Company and should be read in conjunction with those statements, thereto. The dissolution of joint ventures in 1999 and 2000, the sales of non-core assets in 2001 and 2002, the bankruptcy filing in 2002, and the cumulative effect of a change in accounting principle in 2002 affect the comparability of the financial data presented.

     See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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(1)

Excluding adequate protection payments of $8.0 million.

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

General

     The Company provides home health care services and products to patients through its 286 centers in 35 states. These services and products are primarily paid for by Medicare, Medicaid and other third-party payors. As a result, prices for the Company’s products and services are set by the payors and not by the Company. Since the Company cannot affect pricing, it can improve operating results primarily by increasing revenues and controlling expenses. It can improve cash flow by limiting the amount of time that it takes to collect payment after delivering products and services. Key indicators of performance include:

     Sales and Rentals. Operating in an industry with pre-set prices makes it crucial to increase revenues by increasing the volume of sales and rentals. Over the past three years, the Company has increased its focus on sales and marketing efforts in an effort to improve revenues. Continuing these efforts will be critical to the Company’s success. Management closely tracks overall increases and decreases in sales and rentals as well as increases and decreases by product line and branch location and region. Management’s goal is to identify geographic or product line weaknesses and take corrective actions. Shareholders should realize that reductions in reimbursement levels can more than offset increased sales and rentals. See “Trends, Events, and Uncertainties - - Reimbursement Changes and the Company’s Response.”

     Bad Debt Expense. Billing and collecting in the healthcare industry is extremely complex. Rigorous substantive and procedural standards are set by each third party payor, and failure to adhere to these standards can lead to non-payment, which can have a significant impact on the Company’s net income and cash flow. The Company measures bad debt as a percent of net sales and rentals, and management considers this percentage a key indicator in monitoring its billing and collection function. Bad debt expense as a percentage of net revenue has decreased in the past three years from 4.6% in 2001 to 3.6% for 2002 to 3.1% for 2003. Management’s goal is to further lower this percentage in 2004, but management anticipates that the rate of decrease may be less in 2004.

     Cash Flow. The Company’s funding of day-to-day operations going forward and all payments required under the Approved Plan will rely on cash flow and cash on hand as it has since the Lenders terminated the Company’s ability to access a revolving line of credit in 2000. The Approved Plan also obligates the Company to pay Excess Cash Flow (as defined in the Approved Plan attached as an exhibit hereto) to creditors to reduce the Company’s debt. The nature of the Company’s business requires substantial capital expenditures in order to buy the equipment used to generate revenues. As a result, management views cash flow as particularly critical to the Company’s operations. The Company’s future liquidity will continue to be dependent upon the relative amounts of current assets (principally cash, accounts receivable and inventories) and current liabilities (principally accounts payable and accrued expenses). Management attempts to monitor and improve cash flow in a number of ways, including inventory utilization analysis, cash flow forecasting, and accounts receivable collection. In that regard, the

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length of time that it takes to collect receivables can have a significant impact on the Company’s liquidity as described below in “Days Sales Outstanding.”

     Days Sales Outstanding. DSO is a tool used by management to assess collections and the consequent impact on cash flow. The Company calculates DSO by dividing the previous 90 days of revenue (excluding dispositions and acquisitions), net of bad debt expense into net patient accounts receivable and multiplying the ratio by 90 days. The Company attempts to minimize DSO by screening new patient cases for adequate sources of reimbursement and by providing complete and accurate claims data to relevant payor sources. The Company monitors DSO trends for each of its branches and billing centers, and for the Company in total, as part of the management of the billing and collections process. An increase in DSO usually indicates a breakdown in processes at the billing centers. A decline in DSO usually results from process improvements and improved cash collections. Management uses DSO trends to monitor, evaluate and improve the performance of the billing centers. The decrease in DSO in the past three years from 68 in 2001 to 61 in 2002 to 60 in 2003 is due to improved collection results on current billings and improved timeliness in obtaining necessary billing documentation. Management’s goal is to lower DSO in 2004.

     Another key indicator of the Company’s receivable collection efforts is the amount of unbilled revenue which reports the amount of sales and rental revenues which have not yet been billed to the payor’s due to incomplete documentation or the receipt of the CMN. At December 31, 2003 and 2002, the amount of unbilled revenue net of reserves was $10.2 million and $10.8 million, respectively

     Productivity and Profitability. As discussed above, the fixed priced reimbursement in our industry makes it particularly important to control expenses. Management considers many of the Company’s expenses to be either fixed costs or cost of goods sold, which are difficult to reduce or eliminate. As a result, management’s primary areas of focus for expense reduction and containment are productivity analysis and profitability analysis. For instance, management analyzes billing center productivity using measures such as monthly revenue processed per full time equivalent (FTE) and monthly claims processed per FTE, with the goal of increasing productivity and eliminating the resulting excess capacity. This analysis has enabled the Company to consolidate billing centers and reduce expenses. Moreover, it helps identify and standardize best practices and identify and correct deficiencies. Similarly, the Company monitors its business on a branch, region, and product-line basis to identify opportunities for gains in productivity and to target growth or contraction. This analysis has led to the past closure or sale of businesses and to the expansion of product lines and new sales initiatives. Management anticipates that further closures and consolidation will occur in light of the Medicare reimbursement reductions recently implemented. See “Trends, Events, and Uncertainties – Reimbursement Changes and the Company’s Response.”

Trends, Events, and Uncertainties

     From time to time changes occur in our industry or our business such that it is reasonably likely that aspects of our future operating results will be materially different than our historical operating results. Sometimes these matters have not occurred but their existence is sufficient as to

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raise doubt regarding the likelihood that historical operating results are an accurate gauge of future performance. The Company attempts to identify and describe these trends, events, and uncertainties to assist investors in assessing the likely future performance of the Company. Investors should understand that these matters typically are new, sometimes are unforeseen, and often are fluid in nature. Moreover, the matters described below are not the only issues that can result in variances between past and future performance nor are they necessarily the only material trends, events, and uncertainties that will effect the Company. As a result, investors are encouraged to use this and other information to ascertain for themselves the likelihood that past performance is indicative of future performance.

     The following trends, events, and uncertainties have been identified by the Company as reasonably likely to materially affect the comparison of historical operating results reported herein to either other past period results or to future operating results:

     Reimbursement Changes and the Company’s Response. The reimbursement reductions contained in the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“Act”) will negatively impact the Company’s future operating results, liquidity and capital resources. Management believes that the reimbursement reductions scheduled to take effect January 1, 2005 with respect to the Company’s inhalation drug business, which constitutes approximately 13% of the Company’s total 2003 revenues, will have the greatest impact on the Company’s operating results. Management believes that the scheduled reductions could force providers to exit the inhalation drug business, which in turn could create difficulties for Medicare beneficiaries needing inhalation drugs to obtain these drugs under current Medicare regulations. Management is taking a number of steps in an effort to reduce the expected impact of the reimbursement reductions contained in the Act including initiatives to grow revenues, improve productivity, and reduce costs. The Company also is undertaking a number of efforts, including lobbying lawmakers and regulators, aimed at addressing the Medicare patient drug availability issues created by the inhalation drug reimbursement reductions scheduled for January 1, 2005, with the hope of modifying the pricing changes for inhalation drugs to avoid patient drug availability issues. The magnitude of the adverse impact that the Act’s reimbursement reductions will have on the Company’s future operating results and financial condition will depend upon the success of these efforts, but the adverse impact will be material in 2005 and beyond. Management’s projections for 2004 indicate that the Company will likely offset much of the 2004 impact through revenue growth and cost reductions. However, as with all projections, there can be no guarantee that management’s projections will be achieved.

     The provision in the Medicare Prescription Drug, Improvement and Modernization Act of 2003 required that the reimbursement rate for inhalation drugs used with a nebulizer be reduced from 95% of the average wholesale price (AWP) to 80% of AWP. Beginning January 1, 2005, the reimbursement for inhalation drugs will be further reduced to the average manufacturer’s sales price plus six percent (ASP + 6%).

     Included in the Act is a freeze in the reimbursement rates for certain durable medical equipment at those in effect on October 1, 2003. These reimbursement rates will remain in effect until each of the Company’s locations is included in the competitive bidding process, which is scheduled to begin in 2007. In addition, the reimbursement for 16 durable medical and

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respiratory items will be reduced to the median Federal Employee Health Benefit Plan rate which some analysts estimate to be a cut of approximately 10% on average.

     In February 2004 the executive branch of the federal government released the fiscal year 2005 budget for the Department of Health and Human Services that contained a provision to eliminate the Medicare capped rental program. Under the current provisions of Medicare regulations, the Company receives rental payments for certain durable medical equipment for fifteen months and then receives a semi-annual maintenance payment which is equal to one month’s rent. The proposed budget would eliminate the rental payments for the fourteenth and fifteenth months and reimburse durable medical equipment repair costs at actual cost, eliminating the semi-annual payment. The items affected by this proposed budget and durable medical equipment items traditionally rented to Medicare and Medicaid patients, such as hospital beds, wheelchairs, nebulizers, etc. As the budget has not yet been approved, the magnitude of the adverse impact that the budget could have on the Company’s future operating results is not yet known.

     HIPAA. HIPAA has mandated an extensive set of regulations to protect the privacy of individually identifiable health information. The regulations consist of three sets of standards, each with a different date for required compliance: (1) Privacy Standards had a compliance date of April 14, 2003; (2) Transactions and Code Sets Standards required compliance by October 16, 2002, except as extended by one year to October 16, 2003 for providers that filed a compliance extension form by October 15, 2002; and (3) Security Standards which were published in final form on February 2, 2003 and have a compliance date of April 21, 2005. The Company has filed its compliance extension form and is actively pursuing its strategies toward compliance with the final Privacy Standards and Transaction and Code Sets Standards. The Company’s HIPAA compliance plan will require modifications to existing information management systems and physical security mechanisms, and may require additional personnel as well as extensive training of existing personnel, the full cost of which has not yet been determined. The Company cannot predict the impact that final regulations, when fully implemented, will have on its operations. The Company’s implementation of mandated HIPAA Transaction and Code Sets has resulted in disruptions to cash collections, and additional disruptions may occur in the future. Further, the Company cannot predict whether all payors and clearinghouses will be fully HIPAA Transaction compliant and able to process electronic claims by the final implementation deadline. Alternative methods of claims submission may be required, possibly resulting in delay in payment, which could have a material adverse effect on the Company’s result of operations, cash flow, and financial condition

     Approved Plan. On July 1, 2003, American HomePatient, Inc. and 24 of its subsidiaries (collectively, the “Debtors”) emerged from bankruptcy pursuant to a 100% pay plan (the “Approved Plan”) whereby shareholders retained their equity interest and the Company’s creditors and vendors will be paid 100% of amounts they are owed, either immediately or over time with interest. The Approved Plan fixed the interest on the Company’s debt at 6.785% for the secured debt and 8.3675% for the unsecured debt, thus eliminating all material interest rate risk for the Company. Pursuant to the Approved Plan, the Bankruptcy Court issued an opinion ruling in favor of the Company’s request to reject warrants held by the Lenders that represented approximately 20% of the Company’s outstanding common stock. The Lenders now are entitled to an additional unsecured claim of approximately $846,000, which is the judicially determined

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damages claim stemming from rejection of the warrants as of July 30, 2002, the date immediately prior to the Company’s bankruptcy filing. The warrant holders have appealed the damages determination in this ruling. If the appeal is successful, the amount owed to the warrant holders could substantially increase, which could materially adversely affect the Company’s cash flow and results from operations. The Approved Plan set terms for repayment of the Company’s outstanding debt and other terms, all as described in more detail in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”

     The Lenders have also filed an appeal of the order confirming the Approved Plan with the United States Court of Appeals for the Sixth Circuit appealing both the Bankruptcy Court’s determination of the amount of their secured claim and the interest rates on both the secured and unsecured portions of their claims. The Company intends to vigorously defend the Confirmation Order entered by the Bankruptcy Court and upheld by the District Court, and the Company anticipates professional and other fees will be incurred in 2004 in connection with the appeal process. See “Recent Developments – Proceedings under Chapter 11 of the Bankruptcy Code.”

     Sale of Assets. The Company sold various assets during 2001 and used $12.7 million in proceeds to repay secured debt. In March 2002, the Company sold the assets of an infusion business and a nursing agency for $1.3 million in cash and used the proceeds to repay secured debt.

     Product Mix. The Company’s strategy for 2003 was to maintain a diversified offering of home health care services reflective of its current business mix. For 2004, respiratory services will remain a primary focus along with home medical equipment rental and enteral nutrition products and services.

     Financial Presentation. The accompanying consolidated financial statements for 2003 have been prepared on a going concern basis and in accordance with American Institute of Certified Public Accountants Statement of Position (“SOP”) 90-7. Accordingly, these consolidated financial statements do not reflect any adjustments that might result if the Company is unable to continue as a going concern. Revenues, expenses, realized gains and losses, and provisions for losses and expenses resulting from the reorganization are reported separately as reorganization items. Cash used for reorganization items is disclosed separately in the consolidated statements of cash flows. Since the Company emerged from bankruptcy, the accompanying consolidated financial statements for 2003 have not been presented, as during the bankruptcy proceedings, to reflect liabilities subject to compromise.

Critical Accounting Policies and Estimates

     Management’s Discussion and Analysis of Financial Condition and Results of Operations are based upon the Company’s consolidated financial statements. The preparation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenues and

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expenses during the reporting periods. On an on-going basis, management evaluates its critical accounting policies and estimates.

     A “critical accounting policy” is one which is both important to the understanding of the financial condition and results of operations of the Company and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Management believes the following accounting policies fit this definition:

     Revenue Recognition and Allowance for Doubtful Accounts. The Company provides credit for a substantial part of its non third-party reimbursed revenues and continually monitors the credit-worthiness and collectibility of amounts due from its patients. Approximately 62% of the Company’s 2003 revenues are derived from participation in Medicare and state Medicaid programs. Amounts paid under these programs are generally based upon a fixed rate. Revenues are recorded at the expected reimbursement rates when the services are provided or when merchandise or equipment are delivered to patients. Revenues are recorded net of estimated adjustments for billing errors or other reimbursement adjustments. Although amounts earned under the Medicare and Medicaid programs are subject to review by such third-party payors, subsequent adjustments to reimbursements as a result of such reviews are historically insignificant as these reimbursements are based on fixed fee schedules. In the opinion of management, adequate provision has been made for any adjustment that may result from such reviews. Any differences between estimated settlements and final determinations are reflected as an adjustment to revenue in the year finalized.

     Sales and related services revenues include all product sales to patients and are derived from the provision of infusion therapies, the sale of home health care equipment and supplies, the sale of aerosol medications and respiratory therapy equipment and supplies, and services related to the delivery of these products. Sales revenues are recognized at the time of delivery using fixed fee schedules based upon the type of product and the payor, and are billed when the Company has obtained the properly completed CMN from the healthcare provider, where applicable. Rentals and other patient revenues are derived from the rental of home health care equipment, enteral pumps and equipment related to the provision of respiratory therapy. All rentals of equipment are provided by the Company on a month-to-month basis and are billed using fixed monthly fee schedules based upon the type of rental and the payor, when the Company has obtained the properly completed CMN from the healthcare provider, where applicable. The fixed monthly fee encompasses the rental of the product as well as the delivery and the set-up and instruction by the product technician.

     The Company recognizes revenues at the time services are performed or products are delivered. As such, a portion of patient receivables consists of unbilled revenue for which the Company has not obtained all of the necessary medical documentation, but has provided the service or equipment. The Company calculates its allowance for doubtful accounts based upon the type of receivable (billed or unbilled) as well as the age of the receivable. As a receivable balance ages, an increasingly larger allowance is recorded for the receivable. All billed receivables over one year old and all unbilled receivables over 180 days old are fully reserved. Management believes that the recorded allowance for doubtful accounts is adequate and that

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historical collections substantiate the percentages used in the allowance valuation process. However, the Company is subject to further loss to the extent uncollectible receivables exceed its allowance for doubtful accounts. If the Company were to experience a deterioration in the aging of its accounts receivable due to disruptions or a slow down in cash collections, the Company’s allowance for doubtful accounts and bad debt expense would likely increase from current levels. Conversely, an improvement in the Company’s cash collection trends and in its receivable aging would likely result in a decrease in both the allowance for doubtful accounts and bad debt expense.

     The Company’s allowance for doubtful accounts totaled approximately $17.5 million and $23.0 million as of December 31, 2003 and 2002, respectively.

     Inventory Valuation and Cost of Sales Recognition. Inventories represent goods and supplies and are priced at the lower of cost (on a first-in, first-out basis) or market value. The Company recognizes cost of sales and relieves inventory on an interim basis at a standard rate, based upon the type of product sold and payor mix, and performs physical counts of inventory at each center on an annual basis. The Company records a valuation allowance for its estimated count adjustments and the difference between inventory actual costs and standard costs. The Company is subject to loss for inventory adjustments in excess of the recorded inventory valuation allowance. The inventory valuation allowance was $0.6 million at December 31, 2003 and 2002.

     Rental Equipment Valuation. Rental equipment is rented to patients for use in their homes and is depreciated over the equipment’s estimated useful life. On an annual basis, the Company performs physical counts of rental equipment at each center and reconciles all recorded rental assets to internal billing reports. Any resulting adjustment for unlocated, damaged, or obsolete equipment is charged to rental equipment depreciation expense. Since rental equipment is maintained in the patient’s home, the Company is subject to loss resulting from lost equipment as well as losses for damaged, outdated, or obsolete equipment. Management records a valuation allowance for its estimated lost, damaged, outdated, or obsolete rental equipment based upon historical adjustment amounts and believes the recorded rental allowance is adequate. The Company is subject to loss for unrecorded adjustments in excess of its recorded rental equipment valuation allowance. The Company’s rental equipment reserves totaled $0.9 million at December 31, 2003 and 2002.

     Valuation of Long-lived Assets. Management evaluates the Company’s long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Management utilizes estimated undiscounted future cash flows to determine if an impairment exists. When this analysis indicates an impairment exists, the amount of loss is determined based upon a comparison of estimated fair value with the carrying value of the asset. While management believes that the estimates of future cash flows are reasonable, different assumptions regarding such cash flows could materially affect the evaluations.

     Valuation of Goodwill and Other Intangible Assets. Goodwill represents the excess of cost over the fair value of net assets acquired. In June 2001, the Financial Accounting Standards

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Board (“FASB”) issued Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”). The Company was required to adopt the provisions of this statement effective January 1, 2002. SFAS No. 142 requires that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives no longer be amortized. Instead, goodwill and intangible assets with indefinite lives are required to be tested for impairment on an annual basis and when an event occurs or circumstances change such that it is reasonably possible that an impairment may exist. The Company selected September 30 as its annual testing date.

     Upon adoption of SFAS No. 142, goodwill was tested for impairment by comparing the fair value of goodwill to the carrying value of goodwill. The fair value was determined using a combination of analyses which included discounted cash flow calculations, market multiples and other market information. Key assumptions used in these estimates include projected operating results, discount rates and peer market multiples. The implied fair value of goodwill did not support the carrying value of goodwill primarily due to the Company’s highly leveraged capital structure, which resulted in impairment of $68.5 million. This impairment charge was recorded as a cumulative effect of a change in accounting principle in the first quarter of 2002. There was no tax effect on the impairment loss due to the fact that the majority of the related goodwill was non-tax deductible and because of the Company’s federal net operating loss position. There was no additional impairment recognized in 2002 or as a result of the Company’s annual impairment testing in September 2003. Additionally, as a result of the potential impact of the Medicare Prescription Drug Impact and Modernization Act of 2003, which was enacted in December 2003, the Company performed an impairment test of goodwill at December 31, 2003 and concluded that the carrying value of goodwill did not exceed its fair value.

     Self Insurance. Self-insurance accruals primarily represent managements’ loss estimate for self-insurance or large deductible risks associated with workers’ compensation insurance. The Company is insured for workers’ compensation, but retains the first $250,000 of risk exposure for each claim. The Company is not maintaining annual aggregate stop loss coverage for claims made in 2003 and did not maintain annual aggregate stop loss coverage for claims made in 2002, as such coverage was not available. Judgments used in determining the accruals related to workers’ compensation include loss development factors, frequency of claims and severity of claims. The Company’s liability includes known claims and an estimate of claims incurred but not yet reported. The liability for estimated workers’ compensation claims totaled approximately $2.9 million and $3.3 million as of December 31, 2003 and 2002, respectively. The Company utilizes analyses prepared by its third-party administrator based on historical claims information to support the required reserve and related expense associated with workers’ compensation. The Company records claims expense by plan year based on the lesser of the aggregate stop loss (if applicable) or the developed losses as calculated by its third-party administrator.

     The Company is also self-insured for health insurance for substantially all employees for the first $150,000 on a per person, per year basis and maintained annual aggregate stop loss coverage of $13.3 million for 2003. The health insurance policies are limited to maximum lifetime reimbursements of $2.0 million per person for 2003 and 2002 and had unlimited lifetime reimbursements for 2001. The estimated liability for health insurance claims totaled approximately $2.0 million and $1.8 million as of December 31, 2003 and 2002, respectively. The Company reviews health insurance trends and payment history and maintains an accrual for incurred unpaid reported claims and for but not reported claims based upon its assessment of lag time in reporting and paying claims. Judgments include

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assessing historical paid claims, average lags between the claims’ incurred dates, reported dates and paid dates, the frequency of claims and the severity of claims.

     The Company is required to maintain cash collateral accounts with the insurance companies related to its self-insurance obligations. The Company currently maintains cash collateral balances of $4.2 million related to its self-insured obligations, which is included in other assets.

     Management continually analyzes its accrued liabilities for incurred but not reported claims, and for reported but not paid claims related to its self-insurance programs and believes these accruals to be adequate. However, significant judgment is involved in assessing these accruals, and the Company is at risk for differences between actual settlement amounts and recorded accruals, and any resulting adjustments are included in expense once a probable amount is known.

RESULTS OF OPERATIONS

Summary of Statement of Operations Reporting

     The Company reports its revenues as follows: (i) sales and related services revenues; and (ii) rentals and other revenues. Sales and related services revenues are derived from the provision of infusion therapies, the sale of home health care equipment and medical supplies, the sale of aerosol medications and respiratory therapy equipment and supplies and services related to the delivery of these products. Rentals and other revenues are derived from the rental of home health care equipment, enteral pumps and equipment related to the provision of respiratory therapies. Cost of sales and related services includes the cost of equipment, drugs and related supplies sold to patients. Cost of rentals and other revenues includes the costs of oxygen and rental supplies, demurrage for leased oxygen cylinders, rent expense for leased equipment, and rental equipment depreciation expense, and excludes delivery expenses and salaries associated with the rental set-up. Operating expenses include operating center labor costs, delivery expenses, division and area management expenses, selling costs, occupancy costs, billing center costs, bad debt expense and other operating costs. General and administrative expenses include corporate and senior management expenses. The majority of the Company’s joint ventures are not consolidated for financial statement reporting purposes. Earnings from joint ventures with hospitals represent the Company’s equity in earnings from unconsolidated joint ventures and management and administrative fees from unconsolidated joint ventures.

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     The following table and related discussion set forth items from the Company’s consolidated statements of operations as a percentage of revenues for the periods indicated:

Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

Revenues. Revenues increased from $319.7 million in 2002 to $336.2 million in 2003, an increase of $16.5 million, or 5.2%. During the first quarter of 2002, the Company sold the assets of an infusion business and nursing agency. Excluding the revenues recorded in the first quarter of 2002 associated with the asset sale, revenue for the current year would have increased $18.4 million or 5.8% compared to last year. The increase in revenue is the result of the Company’s sales and marketing efforts. Following is a discussion of the components of revenues:

     Sales and Related Services Revenues. Sales and related services revenues increased from $137.7 million in 2002 to $148.1 million in 2003, an increase of $10.4 million, or 7.6%. Excluding the revenue recorded in the first quarter of 2002 associated with the asset sale, sales revenue for the current year would have increased $12.3 million or 9.1%. The increase in sales revenues is primarily the result of increased sales in aerosol medications and respiratory assist devices, due to the Company’s addition of sales personnel and an increase in selling costs in a focused effort to increase this line of business.

     Rentals and Other Revenues. Rentals and other revenues increased from $182.0 million in 2002 to $188.1 million in 2003, an increase of $6.1 million, or 3.4%. The increase in

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rental revenues is primarily the result of increased rentals in oxygen equipment and respiratory assist devices, which is the result of the Company’s sales and marketing efforts.

     Cost of Sales and Related Services. Cost of sales and related services increased from $63.5 million in 2002 to $69.5 million in 2003, an increase of $6.0 million, or 9.5%. As a percentage of sales and related services revenues, cost of sales and related services increased from 46.1% for 2002 to 46.9% for 2003. This increase is primarily attributable to a greater level of rental equipment items converted to sales transactions in the current year.

     Cost of Rentals and Other Revenues. Cost of rentals and other revenues increased from $35.0 million in 2002 to $36.3 million in 2003, an increase of $1.3 million, or 3.7%. This increase is primarily the result of a higher level of rental equipment depreciation and a higher level of purchases of oxygen and rental supplies associated with the Company’s growth in oxygen rentals and respiratory assist devices. As a percentage of rentals and other revenues, cost of rentals and other revenues increased from 19.2% in 2002 to 19.3% in 2003.

     Operating Expenses. Operating expenses increased from $180.9 million in 2002 to $187.6 million in 2003, an increase of $6.7 million, or 3.7%. This increase is attributable to higher personnel-related expenses and increased liability and workers’ compensation insurance costs. Bad debt expense as a percentage of net revenue decreased from 3.6% for 2002 to 3.1% for 2003. The decrease is primarily the result of continued operational improvements and processing efficiencies at the Company’s billing centers.

     General and Administrative Expenses. General and administrative expenses increased from $16.2 million in 2002 to $17.2 million in 2003, an increase of $1.0 million, or 6.2%. This increase is attributable to higher personnel expenses and professional fees. As a percentage of revenues, general and administrative expenses remained constant at 5.1% for 2002 and 2003.

     Earnings from Joint Ventures. Earnings from joint ventures increased slightly from $4.6 million in 2002 to $4.8 million in 2003, an increase of $0.2 million, or 4.4%.

     Depreciation and Amortization. Depreciation (excluding rental equipment) and amortization expenses decreased from $4.1 million in 2002 to $3.6 million in 2003, a decrease of $0.5 million, or 12.2%. The decrease is attributable to certain property and equipment becoming fully depreciated. Effective January 1, 2002 the Company adopted the provisions of SFAS No. 142 and accordingly, ceased the amortization of its goodwill.

     Amortization of Deferred Financing Costs. Amortization of deferred financing costs decreased from $1.8 million in 2002 to $0.2 million in 2003, a decrease of $1.6 million, or 88.9%. This decrease is mainly attributable to the cessation of finance cost amortization and the accelerated write-off of deferred financing costs to reorganization items as of July 31, 2002 as a result of the Bankruptcy Filing on July 31, 2002. The amortization of deferred financing costs in 2003 relates to a 2003 ruling by the Bankruptcy Court regarding the valuation of warrants, which resulted in an additional deferred financing cost of $0.2 million.

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     Interest Expense (Income), Net. Interest expense decreased from $11.5 million in 2002 to $8.8 million in 2003, a decrease of $2.7 million, or 23.5%. The decrease is the result of the timing of the Company’s filing for and emergence from bankruptcy protection. During the period the Company was in bankruptcy, from July 31, 2002, through July 1, 2003, the Company was not required to pay interest on the Lender debt.

     Other (Income) Expense, Net. Other (income) expense, net primarily relates to investment gains or losses associated with collateral interest in split dollar life insurance policies. Other expense was $0.2 million for 2002 compared to $0.7 million of other income for 2003.

     Chapter 11 Financial Advisory Expenses Incurred Prior to Filing Bankruptcy. During 2002, the Company incurred $0.8 million related to financial advisory and legal services in preparation of the bankruptcy filing due to the Company’s December 2002 debt maturity. All bankruptcy related fees incurred during the period the Company was in bankruptcy are included in reorganization items.

     Gain on Sales of Assets of Centers. In the first quarter of 2002, the Company recorded a gain of $0.7 million on the sale of the assets of an infusion business and nursing agency. The Company did not sell assets of centers in 2003.

     Reorganization Items. During 2002 and 2003, the Company incurred certain expenses totaling $5.5 million and $4.1 million, respectively as a result of reorganization under Chapter 11 of the Federal Bankruptcy Code. These expenses are comprised of the write-off of deferred financing costs, provision for future lease rejection damages, and professional and other fees.

     Provision for (Benefit from) Income Taxes. The provision for (benefit from) income taxes increased from $(1.9) million in 2002 to $0.4 million in 2003, an increase of $2.3 million, or 121.1%. The benefit recorded in 2002 was the result of the enactment of the Job Creation and Workers Assistance Act of 2002. This act provides the Company with the ability to carryback additional net operating losses. The provision for income taxes recorded in 2003 is primarily for state and local taxes.

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

     Revenues. Revenues decreased from $347.0 million in 2001 to $319.7 million in 2002, a decrease of $27.3 million, or 7.9%. During 2001, the Company sold the assets of three infusion centers, two respiratory and home medical equipment centers, and all of its rehab centers, in addition to the sale of substantially all of the assets of one infusion center during the first quarter of 2002. As a result of these asset sales, revenues were negatively impacted by $33.4 million for the year ended 2002. Without these asset sales, revenue for 2002 would have increased by $6.1 million or 1.8% compared to 2001. Following is a discussion of the components of revenues:

     Sales and Related Services Revenues. Sales and related services revenues decreased from $163.6 million in 2001 to $137.7 million in 2002, a decrease of $25.9 million, or 15.8%. The 2001 sales of assets of three infusion centers, two respiratory and home medical equipment centers,

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and all of the rehab centers, as well as the sale of the assets of an infusion center during the first quarter of 2002, negatively impacted sales in 2002 by approximately $31.8 million.

     Rentals and Other Revenues. Rentals and other revenues decreased from $183.4 million in 2001 to $182.0 million in 2002, a decrease of $1.4 million, or 0.8%. The 2001 sales of two respiratory and home medical equipment centers negatively impacted rental revenue in 2002 by approximately $1.6 million.

     Cost of Sales and Related Services. Cost of sales and related services decreased from $78.9 million in 2001 to $63.5 million in 2002, a decrease of $15.4 million, or 19.5%. As a percentage of sales and related services revenues, cost of sales and related services decreased from 48.2% for 2001 to 46.1% for 2002. This decrease is primarily attributable to the sales of the infusion centers and the rehab centers, which contributed lower margins.

     Cost of Rentals and Other Revenues. Cost of rentals and other revenues decreased from $35.2 million in 2001 to $35.0 million in 2002, a decrease of $0.2 million, or 0.6%. As a percentage of rentals and other revenues, cost of rentals and other revenues remained constant at 19.2% for 2001 and 2002.

     Operating Expenses. Operating expenses decreased from $192.9 million in 2001 to $180.9 million in 2002, a decrease of $12.0 million, or 6.2%. This decrease is attributable to reduced operating expense as a result of the sales of certain centers during 2001 and the first quarter of 2002 as well as a $4.4 million reduction in bad debt expense. Bad debt expense as a percentage of net revenue decreased from 4.5% for 2001 to 3.6% for 2002.

     General and Administrative Expenses. General and administrative expenses increased from $15.7 million in 2001 to $16.2 million in 2002, an increase of $0.5 million, or 3.2%. This increase is attributable to higher personnel expenses, rent expense, and consulting fees. As a percentage of revenues, general and administrative expenses were 4.5% for 2001 and 5.1% for 2002.

     Earnings from Joint Ventures. Earnings from Joint Ventures decreased slightly from $4.8 million in 2001 to $4.6 million in 2002, a decrease of $0.2 million, or 4.2%.

     Depreciation and Amortization. Depreciation (excluding rental equipment) and amortization expenses decreased from $10.8 million in 2001 to $4.1 million in 2002, a decrease of $6.7 million, or 62.0%. Effective January 1, 2002 the Company adopted the provisions of SFAS No. 142 and accordingly, ceased the amortization of its goodwill. Amortization expense related to goodwill was $5.6 million for 2001. The remaining decrease is primarily attributable to certain property and equipment becoming fully depreciated.

     Amortization of Deferred Financing Costs. Amortization of deferred financing costs decreased from $3.1 million in 2001 to $1.8 million in 2002, a decrease of $1.3 million, or 41.9%. This decrease is primarily attributable to the cessation of finance cost amortization and the accelerated write-off of deferred financing costs to reorganization items as of July 31, 2002 as a result of the Bankruptcy Filing.

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     Interest, net. Interest expense, net decreased from $27.8 million in 2001 to $11.5 million in 2002, a decrease of $16.3 million, or 58.6%. This decrease is attributable to reductions in the prime borrowing rate and reduced principal amounts outstanding as well as the Company ceasing to record provisions for interest as of the July 31, 2002 Chapter 11 filing date.

     (Gain) Loss on Sales of Assets of Centers. In the first quarter of 2002, the Company recorded a gain of $0.7 million on the sale of the assets of an infusion business and nursing agency. During 2001, the Company recorded a loss of $2.7 million on the sale of assets of its rehab centers, a gain of $0.1 million on the sale of assets of a respiratory and HME center and a gain of $2.5 million on the sale of the assets of an infusion center.

     Chapter 11 Financial Advisory Expenses Incurred Prior to Filing Bankruptcy. During 2002, the Company incurred $0.8 million related to financial advisory and legal services in preparation of the bankruptcy filing due to the Company’s December 2002 debt maturity. No such fees were incurred in 2001.

     Reorganization Items. During 2002, the Company incurred certain expenses totaling $5.5 million as a result of reorganization under Chapter 11 of the Federal Bankruptcy Code. These expenses are comprised of the write-off of deferred financing costs, provision for future lease rejection damages, and professional and other fees.

     (Benefit from) Provision for Income Taxes. The (benefit from) provision for income taxes decreased from $0.5 million in 2001 to $(1.9) million in 2002. The benefit recorded in 2002 was the result of the enactment of the Job Creation and Workers Assistance Act of 2002. This act provides the Company with the ability to carryback additional net operating losses.

Liquidity and Capital Resources

     At December 31, 2003, the Company had current assets of $82.5 million and current liabilities of $62.3 million, resulting in working capital of $20.1 million and current ratio of 1.3x as compared to a working capital of $67.1 million and a current ratio of 3.2x at December 31, 2002.

     On July 31, 2002, the Company filed for bankruptcy due to its inability to pay significant debt maturities due in December 2002. On July 1, 2003, American HomePatient, Inc. and 24 of its subsidiaries (collectively, the “Debtors”) emerged from bankruptcy pursuant to a 100% pay plan (the “Approved Plan”) whereby shareholders retained their equity interest and creditors and vendors will be paid 100% of all amounts they are owed, either immediately or over time with interest.

     The Approved Plan provides for the treatment of all of the claims subject to compromise in the bankruptcy filing. The Approved Plan provides for the extension of the maturity on the debt to the Lenders, a reduction of the related interest cost on such debt, and the payment of all of the Company’s reported liabilities. The Lenders retained their liens on substantially all of the assets of the Company.

44

     Pursuant to the Approved Plan, the Company’s secured debt to the Lenders is quantified at $250.0 million and is evidenced by a promissory note in that amount and is secured by various security agreements. To the Company’s knowledge, the Lenders have not executed the agreements as of the date of this filing. The Company is no longer a party to a credit agreement. The remainder of the amounts due to the Lenders at July 1, 2003 over and above the $250 million is treated as unsecured.

     The Approved Plan provides that principal is payable annually on the $250.0 million secured debt on March 31 of each year, beginning March 31, 2005, in the amount of one-third of the Company’s Excess Cash Flow (as defined in the Approved Plan) for the previous fiscal year. Thus, an estimated prepayment is due on September 30, 2004 in an amount equal to one-half of the anticipated payment due on March 31, 2005. After the unsecured debt of the Lenders and the general unsecured debt is paid in full, 100% of the Company’s Excess Cash Flow is paid as a principal payment on the $250.0 million secured debt on March 31 of each year, with an estimated prepayment due on each previous September 30 in an amount equal to one-half of the anticipated March payment. The maturity date of the $250.0 million secured debt is July 1, 2009. The Approved Plan provides that interest is payable monthly on the $250.0 million secured debt at a rate of 6.785% per annum.

     The Approved Plan treats the general unsecured debt and the Lenders’ unsecured debt in the same manner. Principal and accrued interest is payable semi-annually in six equal installments (on June 30 and December 31 of each year) beginning December 31, 2003. Interest accrues on this unsecured debt at an annual rate of 8.3675%. In addition to the six scheduled payments, the holders of the unsecured debt also received an estimated prepayment of the Pro Rata Payment (as defined in the Approved Plan) on September 30, 2003, and will receive a payment on March 31, 2004 in the amount of 100% of the Company’s Excess Cash Flow for fiscal year 2003, if any and a payment on March 31, 2005 in the amount of two-thirds of the Company’s Excess Cash Flow for the previous fiscal year, if any. Additionally, an estimated prepayment is due on September 30, 2004 in an amount equal to one-half of the anticipated March 2005 payment.

     The Company has made all payments due under the Approved Plan as of December 31, 2003, and has also prepaid some of its obligations thereunder. As of December 31, 2003, the Lenders were owed approximately $261.2 million, comprised of $250.0 million of secured debt and $11.2 million of unsecured debt. The remaining general unsecured claims (excluding the Government Settlement) as of December 31, 2003 were approximately $6.3 million.

     The Company’s funding of day-to-day operations going forward and all payments required under the Approved Plan will rely on cash flow and cash on hand as it has since the Lenders terminated the Company’s ability to access a revolving line of credit in 2000. At December 31, 2003 the Company had cash and cash equivalents of approximately $2.6 million.

     The Company’s principal cash requirements are for working capital, capital expenditures and debt service. The Company has met and intends to continue to meet these requirements with existing cash balances, net cash provided by operations and other available capital expenditure financing vehicles. Management’s goal is to generate cash sufficient to meet these requirements

45

by increasing profitable revenues, decreasing and controlling expenses, increasing productivity, and improving accounts receivable collections.

     Management’s cash flow projections and related operating plans indicate that the Company can operate on its existing cash and cash flow and make all payments provided for in the Approved Plan through 2004. Implementation of the Act’s 2005 reductions to the Medicare inhalation drug reimbursement could have a material adverse impact on the Company’s ability to meet its debt service requirements, required capital expenditures, or working capital requirements. As with all projections, there can be no guarantee that existing cash and cash flow will be sufficient. There can be no assurance that in such event the Company will be able to obtain additional funds from other sources on terms acceptable to the Company or at all.

     The Company’s future liquidity will continue to be dependent upon the relative amounts of current assets (principally cash, accounts receivable and inventories) and current liabilities (principally accounts payable and accrued expenses). In that regard, accounts receivable can have a significant impact on the Company’s liquidity. The Company has various types of accounts receivable, such as receivables from patients, contracts, and former owners of acquisitions. The majority of the Company’s accounts receivable are patient receivables. Accounts receivable are generally outstanding for longer periods of time in the health care industry than many other industries because of requirements to provide third-party payors with additional information subsequent to billing and the time required by such payors to process claims. Certain accounts receivable frequently are outstanding for more than 90 days, particularly where the account receivable relates to services for a patient receiving a new medical therapy or covered by private insurance or Medicaid. Net patient accounts receivable were $56.9 million and $54.2 million at December 31, 2003 and December 31, 2002, respectively. Average days’ sales in accounts receivable (“DSO”) was approximately 60 and 61 days at December 31, 2003 and December 31, 2002, respectively. The Company calculates DSO by dividing the previous 90 days of revenue (excluding dispositions and acquisitions), net of bad debt expense into net patient accounts receivable and multiplying the ratio by 90 days. The Company’s level of DSO and net patient receivables is affected by the extended time required to obtain necessary billing documentation.

     The Company’s future liquidity and capital resources will be materially adversely impacted by the Medicare reimbursement reductions contained in the Medicare Prescription Drug, Improvement and Modernization Act of 2003. See “Trends, Events, and Uncertainties — Reimbursement changes and the Company’s response.”

     Net cash provided by operating activities decreased from $51.1 million in 2002 to $17.2 million in 2003, a decrease of $33.9 million. This decrease is primarily due to the bankruptcy process. During 2002 the Company’s liabilities subject to compromise were not paid while the Company was in bankruptcy. Another source of cash in 2002 was the decrease in accounts receivable. Net cash used in investing activities increased from $23.1 million in 2002 to $27.8 million in 2003, an increase of $4.7 million, and primarily relates to increased additions to property and equipment. Additions to property and equipment, increased from $27.1 million in 2002 to $29.9 million in 2003, an increase of $2.8 million. Net cash used in financing activities decreased from $14.3 million in 2002 to $9.7 million in 2003, a decrease of $4.6 million. The cash used in financing activities for 2002 and 2003 primarily relates to principal payments on long-term

46

debt and capital leases as well as adequate protection payments. At December 31, 2003, the Company had cash and cash equivalents of approximately $2.6 million.

Contractual Obligations and Commercial Commitments

     The following is a tabular disclosure of all contractual obligations and commitments, including all off-balance sheet arrangements of the Company as of December 31, 2003:

In addition to the scheduled cash payments above, the Company is obligated to make Excess Cash Flow (as defined in the Plan) payments on the Lenders’ secured and unsecured debt as well as the pre-petition accounts payable as defined by the Approved Plan. As these payments will be based on excess cash (as defined by the Approved Plan) at future dates, the Company is not able to project the amounts of these payments. As such, the $250.0 million secured debt, which is all classified in the 2008 and thereafter column per the table above, will likely require principal payments in years 2005, 2006, and 2007. In addition, the Approved Plan allows the Company to use prepayments to reduce and be a credit against any subsequent mandatory payments. The operating lease obligations presented use information available as of December 31, 2003.

Long-term debt is comprised primarily of amounts owed to the Lenders. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”

Capital leases consist primarily of leases of office equipment.

Operating leases are noncancelable leases on certain vehicles, buildings and equipment.

47

The OIG Settlement represents the settlement regarding the alleged billing improprieties by the Company during the period from January 1, 1995 through December 31, 1998. See “Business-Government Regulation – Enforcement Activities.”

At December 31, 2003, the Company has no commitments or guarantees outstanding.

     At December 31, 2003, the Company has a $400,000 letter of credit in place securing obligations with respect to the Company’s professional liability insurance. The letter of credit expires in January 2005.

Recent Accounting Pronouncements

     In December 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46, revised December 2003, (“FIN 46R”), “Consolidation of Variable Interest Entities”, which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46, “Consolidations of Variable Interest Entities”, which was issued in January 2003. The Company will be required to apply FIN 46R to variable interests in variable interest entities (“VIEs”) created after December 31, 2003. For variable interest in VIEs created before January 1, 2004, the Interpretation will be applied beginning on January 1, 2004. For any VIEs that must be consolidated under FIN 46R that were created before January 1, 2004, the assets, liabilities and noncontrolling interests of the VIE initially would be measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN 46R first applies may be used to measure the assets, liabilities and noncontrolling interest of the VIE.

The Company is evaluating the impact of applying FIN 46R to existing VIEs in which it has variable interests and has not yet completed this analysis. At this time, it is anticipated that the adoption of FIN 46R will not have an impact on the Company’s consolidated balance sheet. As the Company continues to evaluate the impact of applying FIN 46R, entities may be identified that would need to be consolidated by the Company.

FASB Statement No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”, was issued in May 2003. This Statement establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. The Statement also includes required disclosures for financial instruments within its scope. For the Company, the Statement was effective for instruments entered into or modified after May 31, 2003 and otherwise will be effective as of January 1, 2004, except for mandatorily redeemable financial instruments. For certain manditorily redeemable financial instruments, the Statement will be effective for the Company on January 1, 2005. The effective date has been deferred indefinitely for certain other types of manditorily redeemable financial instruments. The Company currently does not have any financial instruments that are within the scope of this Statement.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Company is not subject to material interest rate sensitivity since the Approved Plan provides for a fixed interest rate for both the $250 million secured debt and the Company’s unsecured debt. Interest expense associated with other debts would not materially impact the Company as most interest rates are fixed. The Company does not own and is not a party to any material market risk sensitive instruments.

     We have not experienced large increases in either the cost of supplies or operating expenses due to inflation. With reductions in reimbursement by government and private medical insurance programs and pressure to contain the costs of such programs, we bear the risk that reimbursement rates set by such programs will not keep pace with inflation.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     Financial statements are contained on pages F-55 through F-101 of this Report and are incorporated herein by reference.

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

     The information required by Regulation S-K, Item 304(a) has previously been reported by the Company.

ITEM 9A. CONTROLS AND PROCEDURES

     In an effort to ensure that the information the Company must disclose in its filings with the Securities and Exchange Commission is recorded, processed, summarized, and reported on a timely basis, the Company’s chief executive officer and chief financial officer have evaluated the effectiveness of the Company’s disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15d-15(e), as of December 31, 2003. Based on such evaluation, such officers have concluded that, as of December 31, 2003, the Company’s disclosure controls and procedures were effective in timely alerting them to information relating to the Company required to be disclosed in the Company’s periodic reports filed with the SEC. There has been no change in the Company’s internal control over financial reporting during the quarter ended December 31, 2003 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     Information concerning directors and executive officers of the Company is incorporated by reference to the Proxy Statement to be filed under Regulation 14A in connection with the annual meeting of stockholders of the Company.

ITEM 11. EXECUTIVE COMPENSATION

     Executive compensation information is incorporated by reference to the Proxy Statement to be filed under Regulation 14A in connection with the annual meeting of stockholders of the Company.

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

     The equity compensation plan information and the security ownership of certain beneficial owners and management information are incorporated by reference to the Proxy Statement to be filed under Regulation 14A in connection with the annual meeting of stockholders of the Company.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Information concerning certain relationships and related transactions of the Company is incorporated by reference to the Proxy Statement to be filed under Regulation 14A in connection with the annual meeting of stockholders of the Company.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

     Information concerning the Company’s principal accountant fees and services is incorporated by reference of the Proxy Statement to be filed under Regulation 14A in connection with the annual meeting of stockholders of the Company.

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PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

     Financial statements and schedules of the Company required to be included in Part II, Item 8 are listed below.

Financial Statements

Financial Statement Schedules

	(1)		Omitted because test for inclusion was not met.
	(2)		Omitted because schedule not applicable to Company.

Exhibits

     The Exhibits filed as part of the Report on Form 10-K are listed in the Index to Exhibits immediately following the financial statement schedules.

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Reports on Form 8-K. The Company filed the following reports on Form 8-K during the quarterly period ended December 31, 2003:

(1)		A current report on Form 8-K was filed on October 14, 2003 to disclose, under Item 4, a change to the Company’s certifying accountant.
(2)		A current report on Form 8-K was filed on October 17, 2003 to disclose, under Item 7, a letter from the Company’s former certifying accountant stating its agreement with the statements made in the Company’s Form 8-K filed on October 14, 2003.
(3)		A current report on Form 8-K was filed on December 3, 2003 to disclose, under Items 7 and 12, a press release reporting results for the third quarter and nine months ended September 30, 2003.
(4)		A current report on Form 8-K was filed on December 17, 2003 to disclose, under Items 5 and 7, a press release announcing that the U.S. Bankruptcy Court for the Middle District of Tennessee issued an opinion ruling in favor of the Company’s request to reject the warrants held by the Company’s lenders to purchase 3,265,315 shares of the Company’s common stock for $.01 per share.

52

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

53

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

54

INDEPENDENT AUDITORS’ REPORT

The Board of Directors and Shareholders
American HomePatient, Inc.:

We have audited the accompanying consolidated balance sheet of American HomePatient, Inc. and subsidiaries, as of December 31, 2003, and the related consolidated statements of operations, shareholders’ (deficit) equity, and cash flows for the year then ended. In connection with our audit of the consolidated financial statements, we have also audited the financial statement Schedule II – Valuation and Qualifying Accounts as of December 31, 2003 and for the year then ended. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audit.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of American HomePatient, Inc. and subsidiaries as of December 31, 2003, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

KPMG LLP

Nashville, Tennessee
March 26, 2004

F-55

INDEPENDENT AUDITORS’ REPORT

To the Board of Directors and Shareholders of
American HomePatient, Inc.
Brentwood, Tennessee

We have audited the accompanying consolidated balance sheet of American HomePatient, Inc. and subsidiaries (the “Company”) (Debtor-in-Possession from July 31, 2002 to July 1, 2003) as of December 31, 2002, and the related statements of operations, shareholders’ (deficit) equity and cash flows for each of the two years in the period ended December 31, 2002. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audits.

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

In our opinion, the 2002 and 2001 financial statements present fairly, in all material respects, the financial position of American HomePatient, Inc. and subsidiaries as of December 31, 2002, and the results of their operations and their cash flows for the years ended December 31, 2002 and 2001, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 2, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, effective January 1, 2002.

F-56

As discussed in Note 3, the Company has filed for reorganization under Chapter 11 of the Federal Bankruptcy Code. The accompanying consolidated financial statements do not purport to reflect or provide for the consequences of the bankruptcy proceedings. In particular, such financial statements do not purport to show (a) as to assets, their realizable value on a liquidation basis or their availability to satisfy liabilities; (b) as to prepetition liabilities, the amounts that may be allowed for claims or contingencies, or the status and priority thereof; (c) as to shareholder accounts, the effect of any changes that may be made in the capitalization of the Company; or (d) as to operations, the effect of any changes that may be made in its business.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 4, the Company’s recurring net losses, shareholders’ deficit and its inability to satisfy its obligations under the Amended Credit Agreement raise substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also discussed in Note 4. The financial statements do not include adjustments that might result from the outcome of this uncertainty.

/s/ Deloitte & Touche LLP

Nashville, Tennessee
March 20, 2003

F-57

AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION FROM JULY 31, 2002 TO JULY 1, 2003)

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2003 AND 2002

(Continued)

F-58

AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION FROM JULY 31, 2002 TO JULY 1, 2003)

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2003 AND 2002

(Continued)

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

F-59

AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION FROM JULY 31, 2002 TO JULY 1, 2003)

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

(Continued)

F-60

AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION FROM JULY 31, 2002 TO JULY 1, 2003)

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

(Continued)

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

F-61

AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION FROM JULY 31, 2002 TO JULY 1, 2003)

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ (DEFICIT) EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

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

F-62

AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION FROM JULY 31, 2002 TO JULY 1, 2003)

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001