UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

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

For the fiscal year ended December 31, 2004
or

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___ TO ___.

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.

Yes þ           No o

     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. o

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

Yes o            No þ

     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, 2004 was $13,819,254.

     On March 23, 2005, 17,097,389 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 2005 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.

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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, 2004, the Company provided these services to patients primarily in the home through 276 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.

     On July 31, 2002, American HomePatient, Inc. and 24 of its subsidiaries filed voluntary petitions 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”). On July 1, 2003, American HomePatient, Inc. emerged from bankruptcy pursuant to a “100% pay plan” (the “Approved Plan”) whereby the Company’s shareholders retained 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. See “Management’s Discussion and Analysis of Financial Conditions and Results of Operations — Liquidity and Capital Resources.”

     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.

Recent Developments

     On March 30, 2005, the Office of Inspector General of the Department of Health and Human Services issued a report with the final oxygen fee schedule for 2005. These fee schedule amounts will be implemented as soon as possible but not later than April 8, 2005. Claims received after implementation will be paid at these rates, and claims received prior to implementation that were paid using the 2004 fee schedule amounts will not be adjusted retroactively. Management currently is assessing, but had not determined as of the date hereof, the magnitude of this impact, although it is anticipated that the impact on earnings will be material. The Company estimates that 23% of its 2004 revenue represented home oxygen reimbursed by Medicare. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Trends, Events, and Uncertainties — Reimbursement Changes and the Company’s Response” and “Risk Factors — Medicare Reimbursement Reductions”.

Business

     The Company provides home health care services and products consisting primarily of respiratory therapy services, home infusion therapy services and the rental and sale of home medical equipment and home health care supplies. For the year ended December 31, 2004, such services and products represented 71%, 12% and 17% 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.

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     As of December 31, 2004 the Company provided services to patients primarily in the home through 276 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.

     As of December 31, 2004 the Company was an investor in and a manager of eleven joint ventures.

     The Company does not anticipate pursuing acquisition or joint venture development activities during 2005 as it continues to focus its efforts on internal operations.

     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.

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 patients renting equipment,

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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 primary respiratory services that the Company provides are:

	•	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 and related inhalation drugs to assist patients with breathing. 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.
	•	Respiratory assist devices to force air through respiratory passage-ways during sleep. These treatments, which utilize continuous positive airway pressure (“CPAP”) or bi-level positive airway pressure therapy, are used on adults with obstructive sleep apnea (“OSA”), a condition in which a patient’s normal breathing patterns are disturbed during sleep.

     The other respiratory services that the Company provides include:

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

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     Oxygen systems comprised approximately 36% of the Company’s total 2004 revenues. Inhalation drugs and nebulizers comprised approximately 12% and 2%, respectively, of the Company’s total 2004 revenues. Respiratory assist devices comprised approximately 16% of 2004 revenues. All other respiratory products and services comprised approximately 5% of the Company’s total 2004 revenues. The Company provides respiratory therapy services at all but six of its 276 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 patients renting equipment, 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).
	•	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 2004. Antibiotic therapy, TPN, and pain management and other infusion revenues accounted for approximately 6% of the Company’s total revenues in 2004. Enteral nutrition services are provided

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at most of the Company’s centers, and the Company currently provides other infusion therapies in 45 of its 276 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 17% of the Company’s revenues in 2004. The Company sells home equipment and supplies at all but seven of its 276 centers.

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 11 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 Sr. Vice President of Revenue Management 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 (who is usually a registered nurse or respiratory therapist), registered nurses, clinical coordinators, respiratory therapists, service technicians and customer service representatives. In most of its markets the Company employs account executives who are responsible for local sales efforts. Effective in the fourth quarter of 2004, account executives began reporting to their respective area director of sales, rather than to the general manager of the operating center. This change is a part of the Company’s initiative to improve the Company’s sales and marketing efforts (See “Business – Sales and Marketing”). In addition, the Company employs a licensed pharmacist in all centers that provide a significant amount of infusion therapy.

     The Company tries to appropriately balance between centralized and decentralized management. Operating managers are encouraged to promptly and effectively respond to local market demands, while the Company provides through its corporate office 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. Management regularly analyzes the Company’s structure for opportunities to improve operations.

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     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 becoming accredited by 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 the Company’s business depends on its personnel. The Company attempts to recruit knowledgeable talent for all positions including account executives that 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 closely monitor 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-wide access to email and the Internet. The Company maintains a proprietary intranet, which is a productivity-driven, secure website 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, Sr. Vice President of Revenue Management, and both division vice presidents. The Compliance Committee is advised by the Company’s legal counsel. 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.”

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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, 2004. 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%-owned joint ventures are consolidated with the operations of the Company. The operations of the 50%-owned joint ventures are not consolidated with the operations of the Company and are instead accounted for by the Company under the equity method. The Company has not invested in 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.

     The following table lists the Company’s hospital joint venture partners and locations for all joint ventures as of December 31, 2004:

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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 is delivered, or equipment is 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 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 the sale of supplies and the provision of 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 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, delivery, set-up, instruction, maintenance, repairs, providing backup systems when needed, and providing periodic home visits.

     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 its revenues and, consequently, on its business operations and financial results. Reimbursement levels

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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 the fourth quarter of 2003 Congress enacted the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “MMA”). The MMA reduced 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.

     The reimbursement reductions contained in the MMA have negatively impacted and will continue to negatively impact the Company’s operating results, liquidity and capital resources. A provision in the MMA required that, effective January 1, 2004, the reimbursement rate for inhalation drugs used with a nebulizer be reduced from 95% of the average wholesale price (“AWP”) to 80% of AWP. Revenues for 2004 were reduced by approximately $7.4 million as result of the reduced reimbursement rates for inhalation drugs that became effective January 1, 2004. Effective January 1, 2005, the MMA specifies that the reimbursement for inhalation drugs will be further reduced to the average manufacturer’s sales price plus six percent (“ASP + 6%”). In the fourth quarter of 2004, the Centers for Medicare and Medicaid Services (“CMS”) set a monthly dispensing fee of $57 for a 30 day supply and $80 for a 90 day supply of these drugs for the 2005 calendar year. Management expects that the reimbursement reductions that went into effect on January 1, 2005 with respect to the Company’s inhalation drug business (which constitutes approximately 12% of the Company’s 2004 revenues) will have a greater negative impact on the Company’s revenues than the inhalation drug reductions that went into effect in 2004. Management estimates that if the 2005 reimbursement reductions for inhalation drugs had gone into effect on January 1, 2004, the Company’s revenues for 2004 would have been further reduced by approximately $22.0 million, based on the Company’s inhalation drug product mix in effect for 2004. As a result of the dispensing fees set by CMS for 2005, the Company intends to continue to provide inhalation drugs to Medicare beneficiaries in 2005. The ability of the Company to continue to provide inhalation drugs after 2005 will depend on the reimbursement schedule to be determined by CMS for 2006 and beyond. Any further reductions in the reimbursement schedule could force providers to exit the inhalation drug business.

     The MMA also froze reimbursement rates for certain durable medical equipment (“DME”) at those rates in effect on October 1, 2003. These reimbursement rates will remain in effect until the start of a competitive bidding process which is scheduled to begin in 2007. At this time, the Company does not know which of its locations will be included in the competitive bidding process.

     In addition, the MMA specified that effective January 1, 2005, the reimbursement for 16 durable medical equipment items and home oxygen would be reduced to the median Federal Employee Health Benefit Plan (“FEHBP”) rates. The reimbursement reductions for the 16 DME items went into effect as scheduled on January 1, 2005. Management estimates that if the 2005 reimbursement reductions for the 16 DME items had gone into effect on January 1, 2004, the

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Company’s revenues for 2004 would have been reduced by approximately $2.3 million, based on the Company’s DME product mix in effect for 2004. The reimbursement changes for home oxygen that were scheduled to go into effect on January 1, 2005 have not yet occurred. As mandated by the MMA, the Office of Inspector General of the Department of Health and Human Services (“OIG”) conducted a study to determine the median FEHBP rates for home oxygen. This study, which was published on March 30, 2005, indicated the median FEHBP rate for stationary home oxygen equipment was $201.60 compared to a median Medicare rate of $230.17. For portable home oxygen equipment, the median FEHBP rate was $32.27 compared to a median Medicare rate of $36.19. Also on March 30, 2005 the 2005 fee schedule for home oxygen was issued by CMS. These fee schedule amounts will be implemented by the Medicare contractors as soon as possible and by no later than April 8, 2005. All claims for home oxygen furnished on or after January 1, 2005, that are received after the fees are implemented will be paid using the 2005 fee schedule amounts. Claims with dates of service on or after January 1, 2005, that were previously paid using the 2004 fee schedule amounts will not be retroactively adjusted. Management is currently in the process of assessing the magnitude of the financial impact of the 2005 fee schedule for home oxygen, however it is expected that this fee schedule will materially and adversely impact the Company’s operating results and financial condition. The Company estimates that 23% of its 2004 revenues represented home oxygen reimbursed by Medicare. Management is working to counter the impact of the 2005 reimbursement reductions contained in the MMA, including initiatives to grow revenues, improve productivity, and reduce costs.

     The magnitude of the adverse impact that the MMA’s reimbursement reductions will have on the Company’s future operating results and financial condition will depend upon the success of the Company’s revenue growth and cost reduction initiatives as well as the final oxygen reimbursement rates; nevertheless, the adverse impact will be material in 2005 and beyond. To improve revenue growth, management took a number of actions in the fourth quarter of 2004 including revisions to the sales commission plans for account executives and a restructuring of the sales organization. Additionally, a senior vice president of sales and marketing was hired in February 2005. (See “Business – Sales and Marketing”). Management also took a number of actions during 2004 to improve productivity and reduce costs in the Company’s operating centers and billing centers. (See “Management’s Discussion and Analysis of Financial Condition – General – Productivity and Profitability.) Management estimates that as a result of these cost reduction initiatives, operating expenses were reduced on an annualized run rate basis by approximately $16.4 million as of December 31, 2004 compared to the annualized run rate in effect one year earlier. Management intends to continue to improve productivity and reduce costs during 2005 through a number of initiatives including centralization of certain customer service functions currently residing at the operating center level, consolidation of certain billing center functions, and continued productivity improvements in operating centers and billing centers.

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, 2004 was $50.9 million compared to net patient accounts receivable of $56.9 million at December 31, 2003.

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     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 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 (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). The amount of unbilled revenue was $10.8 million and $10.2 million for December 31, 2004 and December 31, 2003, respectively, net of valuation allowances.

     During 2004 the Company closed three of its stand-alone billing centers. 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 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, 2004 the Company operated 16 stand-alone billing centers.

Sales and Marketing

     Relatively few barriers exist to entry into local markets served by the Company which could result in 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. The sales and marketing efforts did not produce satisfactory results in 2004. As a result, in the fourth quarter of 2004, management implemented several changes designed to improve the effectiveness of the Company’s selling efforts. These include revisions to the account executive commission plans and a restructuring of

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the sales organization. After this restructuring, each area was assigned an area director of sales who reports to the respective area vice president. All account executives within a given area report to their respective area director of sales. Previously, account executives reported to the general manager of the operating center. Additionally, in February 2005, a senior vice president of sales and marketing was hired. Management believes these actions will result in a more focused sales management team. Improvement in the Company’s ability to grow revenues will be critical to the Company’s success in 2005 and beyond. Management will continue to review and monitor progress with its sales and marketing efforts.

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 could encounter 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, 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 healthcare 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 276 home health care centers as of December 31, 2004.

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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 $500,000 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. The Company retains the first $250,000 of each claim. The Company provides accruals for the settlement of outstanding claims and claims incurred but not reported at amounts believed to be adequate. The differences between actual settlements and accruals are included in expense once a probable amount is known. The Company did not maintain annual aggregate stop-loss coverage for the years 2004, 2003 and 2002, 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 $14.4 million for 2004. The health insurance policies are limited to maximum lifetime reimbursements of $2.0 million per person for 2004, 2003 and 2002. 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 accruals are included in expense once a probable amount is known.

     See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies.”

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     The Company has purchased insurance protecting its directors and officers for a limit of $20.0 million.

     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, 2004, the Company had approximately 2,700 full-time employees, 122 part-time employees and 174 employees used on an “as needed” basis only. Approximately 115 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 ^asm; EnterCare^sm; Resource^sm; EnSpire^sm; OPUS^sm; SLEEP^sm; Go Paperless^sm; Personal Caring Service^sm; CHF Heart Matters^sm; and Breathe, Nourish, Move, Thrive^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

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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.

     The Company is also subject to 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 also to claims submitted 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. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Trends, Events, and Uncertainties – HIPAA.”

     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. 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 in order 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 July 1, 2003, the Approved Plan became effective and the Company successfully emerged from bankruptcy protection. The holders of the Company’s senior debt (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 under Case Number 03-6500. That appeal is pending. If the appeal is successful, it could

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have a material adverse effect on the Company. See also “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”

     The Bankruptcy Court issued an opinion ruling in favor of the Company’s request to reject 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 determination in this ruling in the United States Court of Appeals for the Sixth Circuit, Case Number 04-00188. The outcome of the appeal cannot be predicted, and an adverse ruling could have a material adverse effect on the Company. These adverse effects could include, without limitation, adverse changes in the interest rate related to its secured and unsecured debt, a change in the proportion of debt treated as secured debt, issuance of equity securities or an adverse change in the capitalization of the Company to the detriment of equity holders. There can be no assurance as to the extent or nature of the adverse effects of a successful Lenders’ appeal. See also “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”

     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 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 aggregate principal amount of $4,000,000, together with interest on this amount, in installments due at various times until March 2006. An installment of $529,000, including interest of $29,000, was due and paid on January 11, 2005. As of December 31, 2004, the Company has liabilities of $3,529,000 for its obligations pursuant to the Government Settlement, of which $1,529,000 is classified as a current liability and $2,000,000 is included in other noncurrent liabilities. See also “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Trends, Events, and Uncertainties – Approved Plan.”

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 “MMA”). The MMA reduces Medicare reimbursement levels for a variety of the Company’s products and

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services, with some reductions beginning in 2004 and others beginning in 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.”

     Dependence on Reimbursement by Third-Party Payors. For the year ended December 31, 2004 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 delaying payments, 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, 2004 was $250.0 million. The unsecured claim of the Lenders as of December 31, 2004 was approximately $1.0 million. The amount of general unsecured debt (excluding the Government Settlement) due to other creditors at December 31, 2004 was $0.5 million. Required payments to the Lenders and general unsecured creditors are detailed in “Management’s Discussion and Analysis – Liquidity and Capital Resources.” Due to the amount of debt, a substantial portion of the Company’s 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 – Liquidity and Capital Resources.”

     Bankruptcy Appeal. On July 1, 2003, the Approved Plan became effective and the Company successfully emerged from bankruptcy protection. The Company’s 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 – Legal Proceedings.”

     Warrant Rejection Appeal. The Bankruptcy Court issued an opinion ruling in favor of the Company’s request to reject 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

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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. See “Business – Legal Proceedings.”

     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 operations, financial condition, business, or prospects. See “Business – Government Regulation.”

     Collectibility of Accounts Receivable. The Company has substantial accounts receivable as evidenced by DSO of 55 days as of December 31, 2004. 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. It is likely new federal health care initiatives 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 a 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, by increasing retrospective payment audits, and by 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:

	•	Privacy Standards had a compliance date of April 14, 2003 – the Company was materially compliant by this date;
	•	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 – the Company was materially compliant by the final compliance date; and
	•	Security Standards which were published in final form on February 2, 2003 and have a compliance date of April 20, 2005 – the Company expects to be materially compliant by this date.

The Company’s implementation of mandated HIPAA Transaction and Code Sets has previously resulted in temporary 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 could encounter 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.

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     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 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 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.

Available Information

     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.

ITEM 2. PROPERTIES

     As of December 31, 2004, the Company leased space for its corporate headquarters in the Parklane Building, Maryland Farms Office Park, Brentwood, Tennessee. The Company entered into an amended lease effective January 1, 2003 that provided for 29,000 square feet of leased space. 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.

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     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. Approximately two-thirds of the square footage consisting of a typical center consists 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 – 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, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

     The Company’s common stock is currently traded in the over-the-counter market or, on application by broker-dealers, in the NASD’s Electronic Bulletin Board under the symbol AHOM or AHOM.OB. The following table sets forth representative bid quotations of the common stock for each quarter of calendar years 2004 and 2003. 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 23, 2005, there were 1,613 holders of record of the common stock and the closing sale price for the common stock was $4.25 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 2005 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 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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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 276 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 subject to reimbursement reductions 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 with mixed results. Improving 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 intent is to identify geographic or product line weaknesses and take corrective actions. Reductions in reimbursement levels can more than offset an increased volume of 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 decreased from 3.6% for 2002 to 3.1% for 2003. In 2004 bad debt expense as a percentage of net revenue increased slightly to 3.2%. Management’s goal is to further lower this percentage in 2005.

     Cash Flow. The Company’s funding of day-to-day operations and all payments required under the Approved Plan will rely on cash flow and cash on hand. The Company currently does not have access to a revolving line of credit. The Approved Plan also obligates the Company to pay Excess Cash Flow (defined in the Approved Plan as cash and equivalents in excess of $7.0 million at the end of the Company’s fiscal year) 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 resulting in a disruption in cash collections. 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 resulting in a disruption in cash collections. The decrease in DSO in the past three years from 61 in 2002 to 60 in 2003 to 55 in 2004 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 2005.

     Unbilled Revenues. Another key indicator of the Company’s receivable collection efforts is the amount of unbilled revenue which represents the amount of sales and rental revenues that have not yet been billed to the respective payors, due to incomplete documentation or the non-receipt of the CMN. At December 31, 2004 and 2003, the amount of unbilled revenue, net of valuation allowances, was $10.8 million and $10.2 million, respectively.

     Productivity and Profitability. As discussed above, the fixed price reimbursement in the Company’s 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. Additionally, the Company monitors productivity of its operating centers by measuring each center’s personnel costs against a predetermined productivity standard. This measurement highlights opportunities for improved productivity and reductions in personnel expenses on a branch and area basis. These analyses have enabled the Company to consolidate billing centers, improve productivity at operating centers and reduce expenses. Moreover, they help identify and standardize best practices and identify and correct deficiencies. Similarly, the Company monitors its business on an operating center and product basis to identify opportunities to target growth or contraction. These analyses have led to the closure or consolidation of locations and to the emphasis on products and new sales initiatives. During 2004, the Company closed or consolidated sixteen operating centers, opened six operating centers and closed three billing centers. Management anticipates that further productivity improvements, cost reductions, closures, and consolidations will occur in light of the Medicare reimbursement reductions recently implemented. See “Trends, Events, and Uncertainties – Reimbursement Changes and the Company’s Response.”

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Trends, Events, and Uncertainties

     From time to time changes occur in the Company’s industry or its business that make it reasonably likely that aspects of its future operating results will be materially different than its historical operating results. Sometimes these matters have not occurred, but their existence is sufficient to 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 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 affect 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 trends, events, and uncertainties set out in the remainder of this section 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 MMA have negatively impacted and will continue to negatively impact the Company’s operating results, liquidity and capital resources. A provision in the MMA required that, effective January 1, 2004, the reimbursement rate for inhalation drugs used with a nebulizer be reduced from 95% of the average wholesale price (“AWP”) to 80% of AWP. Revenues for 2004 were reduced by approximately $7.4 million as result of the reduced reimbursement rates for inhalation drugs that became effective January 1, 2004. Effective January 1, 2005, the MMA specifies that the reimbursement for inhalation drugs will be further reduced to the average manufacturer’s sales price plus six percent (“ASP + 6%”). In the fourth quarter of 2004, the Centers for Medicare and Medicaid Services (“CMS”) set a monthly dispensing fee of $57 for a 30 day supply and $80 for a 90 day supply of these drugs for the 2005 calendar year. Management expects that the reimbursement reductions that went into effect on January 1, 2005 with respect to the Company’s inhalation drug business (which constitutes approximately 12% of the Company’s 2004 revenues) will have a greater negative impact on the Company’s revenues than the inhalation drug reductions that went into effect in 2004. Management estimates that if the 2005 reimbursement reductions for inhalation drugs had gone into effect on January 1, 2004, the Company’s revenues for 2004 would have been further reduced by approximately $22.0 million, based on the Company’s inhalation drug product mix in effect for 2004. As a result of the dispensing fees set by CMS for 2005, the Company intends to continue to provide inhalation drugs to Medicare beneficiaries in 2005. The ability of the Company to continue to provide inhalation drugs after 2005 will depend on the reimbursement schedule to be determined by CMS for 2006 and beyond. Any further reductions in the reimbursement schedule could force providers to exit the inhalation drug business.

     The MMA also froze reimbursement rates for certain durable medical equipment (“DME”) at those rates in effect on October 1, 2003. These reimbursement rates will remain in effect until the start of a competitive bidding process which is scheduled to begin in 2007. At

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this time, the Company does not know which of its locations will be included in the competitive bidding process.

     In addition, the MMA specified that effective January 1, 2005, the reimbursement for 16 DME items and home oxygen would be reduced to the median Federal Employee Health Benefit Plan (“FEHBP”) rates. The reimbursement reductions for the 16 DME items went into effect as scheduled on January 1, 2005. Management estimates that if the 2005 reimbursement reductions for the 16 DME items had gone into effect on January 1, 2004, the Company’s revenues for 2004 would have been reduced by approximately $2.3 million, based on the Company’s DME product mix in effect for 2004. The reimbursement reductions for home oxygen that were scheduled to go into effect on January 1, 2005 have not yet occurred. As mandated by the MMA, the Office of Inspector General of the Department of Health and Human Services (“OIG”) conducted a study to determine the median FEHBP rates for home oxygen. This study, which was published on March 30, 2005, indicated the median FEHBP rate for stationary home oxygen equipment was $201.60 compared to a median Medicare rate of $230.17. For portable home oxygen equipment, the median FEHBP rate was $32.27 compared to a median Medicare rate of $36.19. Also on March 30, 2005 the 2005 fee schedule for home oxygen was issued by CMS. These fee schedule amounts will be implemented by the Medicare contractors as soon as possible and by no later than April 8, 2005. All claims for home oxygen furnished on or after January 1, 2005, that are received after the fees are implemented will be paid using the 2005 fee schedule amounts. Claims with dates of service on or after January 1, 2005, that were previously paid using the 2004 fee schedule amounts will not be retroactively adjusted. Management is currently in the process of assessing the magnitude of the financial impact of the 2005 fee schedule for home oxygen, however it is expected that this fee schedule will materially and adversely impact the Company’s operating results and financial condition. The Company estimates that 23% of its 2004 revenues represented home oxygen reimbursed by Medicare. Management is working to counter the impact of the 2005 reimbursement reductions contained in the MMA, including initiatives to grow revenues, improve productivity, and reduce costs.

     The magnitude of the adverse impact that the MMA’s reimbursement reductions will have on the Company’s future operating results and financial condition will depend upon the success of the Company’s revenue growth and cost reduction initiatives as well as the final oxygen reimbursement rates; nevertheless, the adverse impact will be material in 2005 and beyond. To improve revenue growth, management took a number of actions in the fourth quarter of 2004 including revisions to the sales commission plans for account executives and a restructuring of the sales organization. Additionally, a senior vice president of sales and marketing was hired in February 2005. (See “Business – Sales and Marketing”). Management also took a number of actions during 2004 to improve productivity and reduce costs in the Company’s operating centers and billing centers. (See “Management’s Discussion and Analysis of Financial Condition – General – Productivity and Profitability”.) Management estimates that as a result of these cost reduction initiatives, operating expenses were reduced on an annualized run rate basis by approximately $16.4 million as of December 31, 2004 compared to the annualized run rate in effect one year earlier. Management intends to continue to improve productivity and reduce costs during 2005 through a number of initiatives including centralization of certain customer service functions currently residing at the operating center level, consolidation of certain billing center functions, and continued productivity improvements in operating centers and billing centers.

     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:

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	•	Privacy Standards had a compliance date of April 14, 2003 – the Company was materially compliant by this date;
	•	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 – the Company was materially compliant by the final compliance date; and
	•	Security Standards which were published in final form on February 2, 2003 and have a compliance date of April 20, 2005 – the Company expects to be materially compliant by this date.

     The Company’s implementation of mandated HIPAA Transaction and Code Sets has previously resulted in temporary disruptions to cash collections, and additional disruptions may occur in the future. Further, the Company cannot predict when all payors and clearinghouses will be fully HIPAA Transaction-compliant and able to process electronic claims. 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.

     Medicaid. The Company has experienced delays in reimbursement from several state Medicaid programs. These delays are primarily the result of the state budgetary concerns and state programs becoming compliant with the HIPAA Transaction and Code Sets and/or changing the intermediary contracted by the state to process claims submitted by the providers. Some states have renewed processing claims, however, there has been a delay in cash collections by the Company as these states address the processing of backlog claims. There can be no assurance that these delays will not continue.

     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. 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 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 Case Number for this appeal, which is still pending, is 03-6500. The Company intends to vigorously defend the Confirmation Order entered by the Bankruptcy Court and upheld by the District Court, and the Company anticipates additional professional and other fees will be incurred in 2005 in connection with the appeal process. The

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outcome of the appeal cannot be predicted, and an adverse ruling could have a material adverse effect on the Company. These adverse effects could include, without limitation, adverse changes in the interest rate related to its secured and unsecured debt, a change in the proportion of debt treated as secured debt, issuance of equity securities or an adverse change in the capitalization of the Company to the detriment of equity holders. There can be no assurance as to the extent or nature of the adverse effects of a successful Lenders’ appeal. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”

     Pursuant to a motion filed by the Company, 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 damages 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 in the United States Court of Appeals for the Sixth Circuit, Case Number 04-00188. 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.

     Product Mix. The Company’s strategy for 2004 was to maintain a diversified offering of home health care services reflective of its current business mix. For 2005, respiratory services will remain a primary focus along with home medical equipment rental and enteral nutrition products and services.

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 U.S. generally accepted accounting principles 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 expenses during the reporting periods. On an ongoing 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, and often requires management 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 creditworthiness and collectibility of amounts due from its patients. Approximately 62% of the Company’s 2004 revenues are derived from participation in Medicare and state Medicaid programs. Amounts paid under these programs are generally based upon a fixed rate. Revenues

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are recorded at the expected reimbursement rates when the services are provided or when merchandise or equipment is 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 product 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, delivery, set-up, instruction, maintenance, repairs, providing backup systems when needed, and providing periodic home visits.

     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 required to produce a bill, 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 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 $16.9 million and $17.5 million as of December 31, 2004 and 2003, respectively.

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     Inventory Valuation and Cost of Sales Recognition. Inventories represent equipment 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 $0.4 million and $0.6 million at December 31, 2004 and 2003, respectively.

     Rental Equipment Valuation. Rental equipment is rented to patients on a month-to-month basis 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 adjustments in excess of its recorded rental equipment valuation allowance. The Company’s rental equipment valuation allowance totaled $1.0 and $0.9 million at December 31, 2004 and 2003, respectively.

     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 the 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.

     Accounting for Leases. In recent months, numerous companies have announced accounting restatements to correct prior errors in their accounting for leases. In response, the Company has examined its prior and current lease accounting policies and practices. The following three issues were addressed – the recognition of lease expense over the lease term, the length of time over which the Company amortizes leasehold improvements and accounting for tenant improvement allowances or other incentives provided by lessors at the inception of a lease.

     Prior to the fourth quarter of 2004, the Company did not recognize rent expense on leases with escalating rent payments under the straight-line method. With regard to leasehold improvements, prior to the fourth quarter of 2004, the Company’s policy has been to depreciate leasehold improvements over a five-year period. Generally, the Company’s leases have initial terms ranging from 3 to 10 years. The Company’s analysis identified several leasehold improvements, which were being depreciated over a period in excess of the initial lease term.

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The Company does not receive tenant improvement allowances or other incentives from its lessors.

     Although the Company’s past practices regarding the accounting for leases with escalating rent payments and depreciation of certain leasehold improvements was not in compliance with lease accounting standards and related interpretations, the Company has determined that the resulting errors were immaterial to all prior period consolidated financial statements and restatement was not necessary. During the fourth quarter of 2004, the Company recognized the cumulative impact to all prior period consolidated financial statements as additional lease and depreciation expense totaling approximately $368,000.

     Valuation of Goodwill and Other Intangible Assets. Goodwill represents the excess of cost over the fair value of net assets acquired. 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. Goodwill is tested for impairment by comparing the fair value of goodwill to the carrying value of goodwill. The fair value is determined using a combination of analyses which include 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.

     There was no impairment recognized as a result of the Company’s annual impairment testing in September 2004.

     Self Insurance. Self-insurance accruals primarily represent management’s 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 2004, 2003 and 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 $3.6 million and $2.9 million as of December 31, 2004 and 2003, respectively. The Company utilizes analyses prepared by a third-party administrator based on historical claims information to support the required liability 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 the 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. The Company maintained annual aggregate stop loss coverage of $14.4 million for 2004. The health insurance policies are limited to maximum lifetime reimbursements of $2.0 million per person for 2004, 2003 and 2002. The estimated liability for health insurance claims totaled approximately $2.6 million and $2.0 million as of December 31, 2004 and 2003, respectively. The Company reviews health insurance trends and payment history and maintains an accrual for incurred but unpaid reported claims and

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for incurred but not yet reported claims based upon its assessment of the lag time in reporting and paying claims. Judgments include: 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 maintained cash collateral balances of $4.1 million at December 31, 2004, 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. 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 and 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 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, 2004 Compared to Year Ended December 31, 2003

     Revenues. Revenues decreased from $336.2 million in 2003 to $335.8 million in 2004, a decrease of $0.4 million, or 0.1%. Effective January 1, 2004, Medicare reduced the reimbursement rate for inhalation drugs by approximately 15.8%, which reduced revenues in 2004 by approximately $7.4 million. Without the inhalation drug reimbursement reduction, revenues would have increased $7.0 million, or 2.1%. Following is a discussion of the components of revenues:

          Sales and Related Services Revenues. Sales and related services revenues decreased from $148.1 million in 2003 to $145.2 million in 2004, a decrease of $2.9 million, or 2.0%. Without the inhalation drug reimbursement reduction, sales and related services revenues would have increased $4.5 million, or 3.0%, compared to the prior year.

          Rentals and Other Revenues. Rentals and other revenues increased from $188.1 million in 2003 to $190.6 million in 2004, an increase of $2.5 million, or 1.3%. The increase in 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.

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     Cost of Sales and Related Services. Cost of sales and related services increased from $69.5 million in 2003 to $71.9 million in 2004, an increase of $2.4 million, or 3.5%. As a percentage of sales and related services revenues, cost of sales and related services increased from 46.9% for 2003 to 49.8% for 2004. This increase is primarily attributable to lower gross margins in the Company’s inhalation drug sales in 2004, due to lower reimbursements as a result of the Medicare Prescription Drug, Improvement and Modernization Act of 2003.

     Cost of Rentals and Other Revenues. Cost of rentals and other revenues increased from $36.3 million in 2003 to $38.8 million in 2004, an increase of $2.5 million, or 6.9%. Due to growth in the Company’s home respiratory therapy services, the Company purchased additional oxygen equipment and respiratory assist devices resulting in a higher level of rental equipment depreciation in 2004. The Company also incurred a higher level of purchases of oxygen associated with the Company’s growth in oxygen rentals. As a percentage of rentals and other revenues, cost of rentals and other revenues increased from 19.3% in 2003 to 20.4% in 2004.

     Operating Expenses. Operating expenses decreased from $177.2 million in 2003 to $167.3 million in 2004, a decrease of $9.9 million, or 5.6%. The decrease is the result of the Company’s initiatives to improve productivity and reduce personnel and other costs in operating centers. Additionally, billing center costs decreased in 2004 due to productivity improvements resulting from the full year impact of eight billing center closures and consolidations in 2003 and the partial year impact of three billing center closures and consolidations in 2004.

     Bad Debt Expense. Bad debt expense increased from $10.4 million in 2003 to $10.7 million in 2004, an increase of $0.3 million, or 2.9%. As a percentage of revenues, bad debt expense was 3.1% and 3.2% for 2003 and 2004, respectively.

     General and Administrative Expenses. General and administrative expenses decreased from $17.2 million in 2003 to $16.6 million in 2004, a decrease of $0.6 million, or 3.5%. This decrease is primarily attributable to decreased salary and professional services expenses. As a percentage of revenues, general and administrative expenses decreased from 5.1% for 2003 to 4.9% for 2004.

     Earnings from Joint Ventures. Earnings from joint ventures remained unchanged at $4.8 million for 2003 and 2004.

     Depreciation and Amortization. Depreciation (excluding rental equipment) and amortization expenses decreased from $3.6 million in 2003 to $3.4 million in 2004, a decrease of $0.2 million, or 5.6%. The decrease is attributable to certain property and equipment becoming fully depreciated.

     Amortization of Deferred Financing Costs. Amortization of deferred financing costs decreased from $0.2 million in 2003 to $0.0 million in 2004, a decrease of $0.2 million, or 100%. 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 the write-off of all deferred financing costs.

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     Interest Expense, Net. Interest expense increased from $8.8 million in 2003 to $18.3 million in 2004, an increase of $9.5 million, or 108.0%. The increase 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 accrue or pay interest on the Lender debt.

     Other Income, Net. Other (income) expense, net primarily relates to investment gains or losses associated with collateral interest in split dollar life insurance policies. Other income was $0.7 million for 2003 compared to $0.3 million for 2004.

     Reorganization Items. During 2003 and 2004, the Company incurred certain expenses totaling $4.1 million and $0.7 million, respectively as a result of reorganization under Chapter 11 of the Federal Bankruptcy Code. These expenses are comprised of professional and other fees.

     Provision for Income Taxes. The provision for income taxes decreased from $0.4 million in 2003 to $0.1 million in 2004, a decrease of $0.3 million, or 75%. The provision for income taxes recorded in 2003 and 2004 is for state and local taxes.

     2004 Fourth Quarter Results. The Company’s net income for the fourth quarter of 2004 was favorably impacted by approximately $1.1 million in certain items, the most significant of which were adjustments to the Company’s valuation of inventory, accrual for income taxes and accrual for cash bonuses. The Company revised it valuation of inventory to reflect favorable results from recent inventory observations and changes in estimates of standard costs. These revisions totaled approximately $0.5 million. Additionally, the Company revised its estimate of potential income tax exposure items and reduced the accrual for income taxes by approximately $0.4 million. The Company determined that it would not achieve certain pre-established incentive targets and reduced its estimated accrual for cash bonuses by approximately $1.0 million.

     The fourth quarter also includes the full impact of cost reductions implemented in the third quarter as well as further reductions achieved in the fourth quarter (see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – General – Productivity and Profitability”). Additionally, bad debt expense for the fourth quarter of 2004 reflects a reduction in the allowance for doubtful accounts resulting from improved cash collections in the quarter. Bad debt expense in the fourth quarter of 2004 was 1.8% of revenues versus 3.2% for the full year. The Company does not anticipate the fourth quarter’s bad debt expense of 1.8% of revenue to be indicative of future performance. Also, the fourth quarter benefited from higher interest income, higher miscellaneous income, and higher earnings from joint ventures, none of which represents expected future trends.

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

     Revenues. Revenues increased from $319.6 million in 2002 to $336.2 million in 2003, an increase of $16.6 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

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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 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 $169.4 million in 2002 to $177.2 million in 2003, an increase of $7.8 million, or 4.6%. This increase is attributable to higher personnel-related expenses and increased liability and workers’ compensation insurance costs.

     Bad Debt Expense. Bad debt expense decreased from $11.4 million in 2002 to $10.4 million in 2003, a decrease of $1.0 million, or 8.8%. As a percentage of revenues, bad debt expense was 3.6% and 3.1% for 2002 and 2003, respectively.

     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%.

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     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 the write-off of all deferred financing costs.

     Interest Expense, 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 accrue or 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.

44

Liquidity and Capital Resources

     At December 31, 2004 the Company had current assets of $81.2 million and current liabilities of $49.7 million, resulting in working capital of $31.6 million and current ratio of 1.6x as compared to a working capital of $20.1 million and a current ratio of 1.3x at December 31, 2003.

     On July 31, 2002, the Company and 24 of its subsidiaries (collectively, the “Debtors”) filed for bankruptcy due to its inability to meet significant debt maturities due in December 2002. On July 1, 2003, 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 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. 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 $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 and amounts that were due to other creditors is treated as unsecured.

     The Approved Plan provides that the $250.0 million secured debt matures on 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. Payments of principal are payable annually on March 31 of each year, beginning March 31, 2005, in the amount of one-third of the Company’s Excess Cash Flow (defined in the Approved Plan as cash and equivalents in excess of $7.0 million at the end of the Company’s fiscal year) for the previous fiscal year end. No payment is due March 31, based on the Company’s Excess Cash Flow as of December 31, 2004. 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 Approved Plan provides that the general unsecured debt and the unsecured debt of the Lenders matures on June 30, 2006. The Approved Plan provides that interest is payable monthly on the general unsecured debt and the unsecured debt of the Lenders at a rate of 8.3675% per annum. Principal is payable in six equal semi-annual installments on June 30 and December 31 of each year beginning December 31, 2003. The Approved Plan also provides that principal was payable effective on the general unsecured debt and the unsecured debt of the Lenders on March 31, 2004 in the amount of 100% of the Company’s Excess Cash Flow for

45

fiscal 2003 and on March 31 of each year thereafter in the amount of two-thirds of the Company’s Excess Cash Flow for the previous fiscal year end. An estimated prepayment of the Company’s Excess Cash Flow payment is due on September 30 of each year in an amount equal to one-half of the anticipated March 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.

     The Company has made all payments due under the Approved Plan as of December 31, 2004, and has also prepaid some of its obligations thereunder. As of December 31, 2004, the Lenders were owed approximately $251.0 million, comprised of $250.0 million of secured debt and $1.0 million of unsecured debt. The remaining general unsecured claims (excluding the Government Settlement and the amounts due to the warrant holders) as of December 31, 2004 were approximately $0.5 million.

     The Lenders have 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 Case Number for this appeal, which is still pending, is 03-6500. The Company intends to vigorously defend the Confirmation Order entered by the Bankruptcy Court and upheld by the District Court, and the Company anticipates additional professional and other fees will be incurred in 2005 in connection with the appeal process. The outcome of the appeal cannot be predicted, and an adverse ruling could have a material adverse effect on the Company. These adverse effects could include, without limitation, adverse changes in the interest rate related to its secured and unsecured debt, a change in the proportion of debt treated as secured debt, issuance of equity securities or an adverse change in the capitalization of the Company to the detriment of equity holders. There can be no assurance as to the extent or nature of the adverse effects of a successful Lenders’ appeal.

     The Bankruptcy Court issued an opinion ruling in favor of the Company’s request to reject warrants originally issued to the 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 claim and is recorded as a component of other accrued expenses on the consolidated balance sheets at December 31, 2004 and 2003. The warrant holders have appealed the damages determination in this ruling in the United States Court of Appeals for the Sixth Circuit, Case Number 04-00188. If the Lenders are unsuccessful in their appeal, they will be entitled to receive payment from the Company for damages in the amount of $846,000, which will be treated as a general unsecured claim. If the Lenders’ 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 Company intends to vigorously defend the damages calculation determined by the Bankruptcy Court, but no assurances can be given as to the outcome of the Lenders’ appeal.

46

     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 Company currently does not have access to a revolving line of credit. At December 31, 2004 the Company had cash and cash equivalents of approximately $5.8 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 sufficient cash to meet these requirements 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 2005. Further Medicare reimbursement reductions 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 acquired businesses. 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 $50.9 million and $56.9 million at December 31, 2004 and December 31, 2003, respectively. Average days’ sales in accounts receivable (“DSO”) was approximately 55 and 60 days at December 31, 2004 and December 31, 2003, 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.”

47

     Net cash provided by operating activities increased from $17.2 million in 2003 to $33.0 million in 2004, an increase of $15.8 million. The primary sources of cash in 2004 were the decrease in accounts receivable and the reduction in reorganization costs. Net cash used in investing activities decreased from $27.8 million in 2003 to $22.3 million in 2004, a decrease of $5.5 million, and primarily relates to net borrowing activities between the Company and its unconsolidated joint ventures. Additions to property and equipment, decreased from $29.9 million in 2003 to $27.6 million in 2004, a decrease of $2.3 million. Net cash used in financing activities decreased from $9.7 million in 2003 to $7.5 million in 2004, a decrease of $2.2 million. The cash used in financing activities for 2004 primarily relates to principal payments on long-term debt and capital leases and for 2003, adequate protection payments under the bankruptcy plan. At December 31, 2004, the Company had cash and cash equivalents of approximately $5.8 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, 2004:

In addition to the scheduled cash payments above, the Company is obligated to make Excess Cash Flow 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 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 2009 and thereafter column per the table above, could require principal payments in years 2005, 2006, 2007 and 2008. In addition, the Approved Plan allows the Company to use prepayments to reduce and be a credit against any subsequent mandatory payments.

48

Long-term debt is comprised entirely 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.

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, 2004, the Company has no off-balance sheet commitments or guarantees outstanding.

At December 31, 2004, the Company had two letters of credit totaling $650,000, of which $400,000 and $250,000 expire in May 2005 and January 2006, respectively, in place securing its obligations with respect to the Company’s professional liability insurance. The letters of credit are secured by a certificate of deposit, which is included in restricted cash.

Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”). This statement requires that the compensation cost relating to share-based payment transactions be recognized in the financial statements. Compensation cost is to be measured based on the estimated fair value of the equity-based compensation awards issued as of the grant date. The related compensation expense will be based on the estimated number of awards expected to vest and will be recognized over the requisite service period for each grant. The statement requires the use of assumptions and judgments about future events and input to valuation models, which will require considerable judgment by management. SFAS No. 123R replaces SFAS No. 123, “Accounting for Stock-Based Compensation”, rescinds SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure, an amendment to FASB Statement No. 123”, and supersedes Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees” (“APB Opinion No. 25”). The provisions of SFAS No. 123R are required to be applied by public companies as of the first interim or annual reporting period that begins after June 15, 2005. The Company continued applying APB Opinion No. 25 to equity-based compensation awards through December 31, 2004. At the effective date of SFAS No. 123R, the Company expects to use the modified prospective application transition method without restatement of prior interim periods in the year of adoption. This will result in the Company recognizing compensation cost based on the requirements of SFAS No. 123R for all equity-based compensation awards issued after July 1, 2005. For all equity-based compensation awards that are unvested as of July 1, 2005, compensation cost will be recognized. The Company is currently evaluating the impact that adoption of the SFAS No. 123R may have on its results of operations or financial position.

49

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 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-98 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, 2004. Based on such evaluation, such officers have concluded that, as of December 31, 2004, 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, 2004 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

     None.

50

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     Information concerning directors and executive officers of the Company is incorporated herein by reference to the Proxy Statement to be filed under Regulation 14A in connection with the 2005 annual meeting of stockholders of the Company.

ITEM 11. EXECUTIVE COMPENSATION

     Executive compensation information is incorporated herein by reference to the Proxy Statement to be filed under Regulation 14A in connection with the 2005 annual meeting of stockholders of the Company.

     The equity compensation plan information and the security ownership of certain beneficial owners and management information are incorporated herein by reference to the Proxy Statement to be filed under Regulation 14A in connection with the 2005 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 herein by reference to the Proxy Statement to be filed under Regulation 14A in connection with the 2005 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 herein by reference to the Proxy Statement to be filed under Regulation 14A in connection with the 2005 annual meeting of stockholders of the Company.

51

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

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

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.

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.

Date: March 30, 2005

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

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying consolidated balance sheets of American HomePatient, Inc. and subsidiaries, as of December 31, 2004 and 2003, and the related consolidated statements of operations, shareholders’ (deficit) equity and comprehensive income (loss), and cash flows for the years then ended. In connection with our audits of the consolidated financial statements, we have also audited financial statement Schedule II – Valuation and Qualifying Accounts as of December 31, 2004 and 2003 and for the years 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 audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of American HomePatient, Inc. and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/ KPMG LLP

Nashville, Tennessee
March 30, 2005

F-55

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the consolidated statements of operations, shareholders’ (deficit) equity and comprehensive income (loss) and cash flows of American HomePatient, Inc. and subsidiaries (the “Company”) (Debtor-in-Possession from July 31, 2002 to July 1, 2003) for the year ended December 31, 2002. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our 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 of these financial statements provides a reasonable basis for our opinion.

In our opinion, the 2002 financial statements present fairly, in all material respects, the results of American HomePatient, Inc. and subsidiaries operations and their cash flows for the year ended December 31, 2002, 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.

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.

F-56

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, 2004 AND 2003

(Continued)

F-58

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

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2004 AND 2003

(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, 2004, 2003 AND 2002

(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, 2004, 2003 AND 2002

(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 AND COMPREHENSIVE INCOME (LOSS)

FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002