UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended: March 31, 2004

OR

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

For the transition period from __________ to __________.

American HomePatient, Inc.

5200 Maryland Way, Suite 400, Brentwood, Tennessee    37027

(615) 221-8884

None

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

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

16,436,689

(Outstanding shares of the issuer’s common stock as of April 30, 2004)

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AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES

INDEX

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PART I. FINANCIAL INFORMATION

ITEM 1 — FINANCIAL STATEMENTS

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

INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS

(Continued)

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AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS

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

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AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME

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

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

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Continued)

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

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

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

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AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

American HomePatient, Inc. was incorporated in Delaware in September 1991. 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. American HomePatient, Inc. and subsidiaries (the “Company”) provides home health care services and products consisting primarily of respiratory therapies, infusion therapies and the rental and sale of home medical equipment and home health care supplies. For the three months ended March 31, 2004, these services represented 70%, 13% and 17% of revenues, respectively. These services and products are paid for primarily by Medicare, Medicaid and other third-party payors. As of March 31, 2004, the Company provided these services to patients primarily in the home through 285 centers in 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.

The interim condensed consolidated financial statements of the Company for the three months ended March 31, 2004 and 2003 herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. In the opinion of management of the Company, the accompanying unaudited interim condensed consolidated financial statements reflect all adjustments (consisting of only normally recurring accruals) necessary to present fairly the financial position at March 31, 2004 and the results of operations and the cash flows for the three months ended March 31, 2004 and 2003.

The results of operations for the three months ended March 31, 2004 and 2003 are not necessarily indicative of the operating results for the entire respective years. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s 2003 Annual Report on Form 10-K.

Certain reclassifications have been made to the 2003 interim condensed consolidated financial statements to conform to the 2004 presentation.

2. PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE

On July 1, 2003, American HomePatient, Inc. emerged from bankruptcy pursuant to a “100% pay plan” whereby the Company’s shareholders retain their equity interest and all of the Company’s creditors and vendors will be paid 100% of all amounts they are owed, either immediately or

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over time with interest. American HomePatient, Inc. and 24 of its subsidiaries (collectively, the “Debtors”) originally filed voluntary petitions for relief on July 31, 2002 to reorganize under Chapter 11 of the U.S. Bankruptcy Code (the “Bankruptcy Filing”) in the United States Bankruptcy Court for the Middle District of Tennessee (the “Bankruptcy Court”).

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

On July 1, 2003, the Company’s Approved Plan became effective and the Company successfully emerged from bankruptcy protection. The Lenders filed an appeal to the District Court of the order confirming the Approved Plan. On September 12, 2003 the District Court issued an opinion affirming in all respects the Confirmation Order. The Lenders have filed an appeal to the order confirming the Approved Plan with the United States Court of Appeals for the Sixth Circuit under Case Number 03-6500. The Company intends to vigorously defend the Confirmation Order entered by the Bankruptcy Court and upheld by the District Court, but no assurances can be given as to the outcome of that appeal.

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

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

Pursuant to the Approved Plan, the Company’s secured debt to the Lenders is quantified at $250.0 million and is evidenced by a promissory note in that amount and is secured by various security agreements. To the Company’s knowledge, the Lenders have not executed the agreements as of March 31, 2004. The Company is no longer a party to a credit agreement. The remainder of the amounts due to the Lenders at July 1, 2003 over and above the $250.0 million is treated as unsecured.

The Approved Plan provides that principal is payable annually on the $250.0 million secured debt on March 31 of each year, beginning March 31, 2005, in the amount of one-third of the

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

The Approved Plan treats the general unsecured debt and the Lenders’ unsecured debt in the same manner. Principal and accrued interest is payable semi-annually (on June 30 and December 31 of each year) in six equal installments beginning December 31, 2003. Interest accrues on this unsecured debt at an annual rate of 8.3675%. In addition to the six scheduled payments, the holders of the unsecured debt also received an estimated prepayment of the Pro Rata Payment (as defined in the Approved Plan) on September 30, 2003. Because the Company did not have Excess Cash Flow for fiscal year 2003 (as defined by the Approved Plan), there was no Pro Rata Payment due on March 31, 2004. The Pro Rata Payment due on March 31, 2005 is in the amount of two-thirds of the Company’s Excess Cash Flow, if any, for the 2004 fiscal year. Additionally, an estimated prepayment is due on September 30, 2004 in an amount equal to one-half of the anticipated March 2005 Pro Rata Payment.

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

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

The Company has made all payments due under the Approved Plan as of March 31, 2004, and has also prepaid some of its obligations thereunder. As of March 31, 2004, the Lenders were owed approximately $261.2 million, comprised of $250.0 million of secured debt and $11.2 million of unsecured debt. The remaining general unsecured claims (excluding the Government Settlement) as of March 31, 2004 were approximately $6.4 million.

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

The Bankruptcy Court issued an opinion ruling in favor of the Company’s request to reject the warrants originally issued to the Company’s Lenders to purchase 3,265,315 shares of the Company’s common stock for $.01 per share. As a result of the ruling, the warrants, which represented approximately 20% of the Company’s outstanding common stock, were rejected by the Company. The Bankruptcy Court determined the damages stemming from rejection of the warrants were $846,000, which is payable by the Company to the warrant holders as an unsecured debt. The warrant holders have appealed the damages calculation determined in this

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ruling. If the Lenders if are unsuccessful in their appeal, they will be entitled to receive payment from the Company on the $846,000 as a general unsecured claim. If the appeal is successful, the amount owed to the warrant holders could substantially increase, which could materially adversely affect the Company’s cash flow and results from operations. The Company intends to vigorously defend the damages calculation determined by the Bankruptcy Court, but no assurances can be given as to the outcome of that appeal.

3. STOCK BASED COMPENSATION

The Company applies the intrinsic-value-based method of accounting prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”) and related interpretations including FIN 44, “Accounting for Certain Transactions Involving Stock Compensation, an interpretation of APB Opinion No. 25”, to account for its fixed-plan stock options. Under this method, compensation expense is recorded only if the current market price of the underlying stock exceeds the exercise price on the date of grant. SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”), and SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure, an amendment to FASB Statement No. 123” (“SFAS No. 148”), established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As permitted by existing accounting standards, the Company has elected to continue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of SFAS No. 123, as amended. The following table illustrates the effect on net income (loss) if the fair-value-based method had been applied to all outstanding and unvested awards in each period.

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4. REORGANIZATION ITEMS

Reorganization items represent expenses that are incurred by the Company as a result of reorganization under Chapter 11 of the Federal Bankruptcy Code. Reorganization items for the three months ended March 31, 2004 and March 31, 2003 were $0 and $852,000, respectively, and are comprised primarily of professional fees.

5. LIQUIDITY

As discussed in Note 2, on May 27, 2003, the Bankruptcy Court entered the Approved Plan and on July 1, 2003, the Company’s Approved Plan became effective and the Company emerged from bankruptcy protection. In connection with the Approved Plan, the Amended Credit Agreement was terminated. Pursuant to the Approved Plan, as of the effective date of the Approved Plan the Company had secured debt to the Lenders of $250,000,000 and unsecured debt of $30,100,000. The secured debt is evidenced by a promissory note in that amount and is secured by various security agreements.

The financial statements were prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

During the year ended December 31, 2003 the Company emerged from bankruptcy, achieved net income of $14,025,000 and improved operating results from the prior years. The 2003 results were favorably impacted by the exclusion of $12,510,000 in post-petition interest expense while the Company was in bankruptcy in 2003. The Company is focused on generating positive cash flow from operating activities, primarily through improvements in its operating results. For the year ended December 31, 2003, net cash provided by operating activities was $17,238,000. Notwithstanding this net cash provided by operating activities , the Company did not have Excess Cash Flow (as defined in the Approved Plan). For the three months ended March 31, 2004, the Company achieved net income of $959,000 and had $10,399,000 of cash provided by operating activities.

Total long-term debt and capital leases have decreased by $722,000 from $262,914,000 to $262,192,000 at December 31, 2003 and March 31, 2004, respectively. All of the Company’s debt has fixed interest rates, which on a weighted average was 6.86% at March 31, 2004.

The Company has scheduled current debt principal payments of $11,720,000, pre-petition accounts payable payments of $5,624,000, and minimum rental obligations of $11,607,000 under long-term operating leases due during the twelve months ending December 31, 2004. The Company is also obligated to make excess cash payments on the Lenders’ secured and unsecured debt as well as to holders of Allowed General Unsecured Claims (primarily pre-petition accounts payable) as defined by the Approved Plan. During 2003, the Company made payments, including some pre-payments, on the Lenders’ secured and unsecured debt, as well as the holders of Allowed General Unsecured Claims, totaling $26.9 million. The Company has the option to apply the pre-payments against the required 2004 payments; however, the Company intends to continue making payments to the Lenders and general unsecured creditors (as defined in the Approved Plan) if it has sufficient cash.

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As of March 31, 2004, the Company had approximately $6,919,000 in unrestricted cash and cash equivalents and $21,933,000 of working capital. The Company’s consolidated cash flows from operations for the year ended December 31, 2003 and through March 31, 2004 were sufficient to meet 2003 and 2004 debt and lease obligations. The Company believes that its current cash and cash equivalents and expected cash flow from operations will be sufficient to fund its operating requirements, capital expenditure requirements, debt service requirements (including a full year of interest expense pursuant to the Approved Plan), and lease obligations during the next twelve months.

In order to meet its future payment obligations, the Company must continue to improve its cash flow from operations. There can be no assurance that the Company’s operations will improve as rapidly as anticipated. The failure to make its periodic debt, lease and other financial obligations, or the failure to extend, refinance or repay any of its debt obligations as they become due would have a material adverse effect upon the Company.

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, the level and quality of accounts receivable can have a significant impact on the Company’s liquidity. The Company has various types of accounts receivable, such as receivables from patients, contracts, and former owners of acquisitions. The majority of the Company’s accounts receivable are patient receivables. Accounts receivable are generally outstanding for longer periods of time in the health care industry than many other industries because of requirements to provide third-party payors with additional information subsequent to billing and the time required by such payors to process claims. Certain accounts receivable frequently are outstanding for more than 90 days, particularly where the account receivable relates to services for a patient receiving a new medical therapy or covered by private insurance or Medicaid. Net patient accounts receivable were $58,137,000 and $56,940,000 at March 31, 2004 and December 31, 2003, respectively. Average days’ sales in accounts receivable (“DSO”) was approximately 64 and 60 days at March 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 DSO for the quarter ended March 31, 2004 was impacted negatively by delays in billing and collection caused by HIPAA implementation in the last quarter of 2003.

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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Trends, Events, and Uncertainties – Reimbursement Changes and the Company’s Response.”

In accordance with the Approved Plan, none of the Company’s current debt and lease agreements contain financial and other restrictive covenants. However, any non-payment, or other default with respect to the Company’s debt obligations could cause the Company’s lenders to declare defaults, accelerate payment obligations or foreclose upon the assets securing such indebtedness or exercise their remedies with respect to such assets, which would have a material adverse impact on the Company.

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6. GOVERNMENT INVESTIGATION AND LITIGATION

     Government Settlement. On June 11, 2001, a settlement agreement (the “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 Office of Inspector General of the Department of Health and Human Services (“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 principal amount of $4,000,000, together with interest on this amount, in installments due at various times until March 2006. The Company also paid the relator’s attorneys’ fees and expenses. Pursuant to the Approved Plan, amounts owed pursuant to the Government Settlement will be paid in full in accordance with the Government Settlement, and the Company has made all payments due to date under the Government Settlement. During the three month period ended March 31, 2004, the Company paid $500,000 pursuant to the Government Settlement. At March 31, 2004, the Company had an accrual of $3,502,000 for its remaining obligations pursuant to the Government Settlement. Of the total accrual related to the Government Settlement, $500,000 is included in other accrued expenses and $3,000,000 is included in other noncurrent liabilities on the accompanying interim condensed consolidated balance sheets at March 31, 2004.

7. INCOME PER COMMON SHARE

Income per share is measured at two levels: basic income per share and diluted income per share. Basic income per share is computed by dividing net income by the weighted average number of common shares outstanding during the year. Diluted income per share is computed by dividing net income by the weighted average number of common shares after considering the additional dilution related to stock options and warrants. In computing diluted income per share, the outstanding stock warrants and stock options are considered dilutive using the treasury stock method.

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The following information is necessary to calculate earnings per share for the periods presented:

8. RECENT ACCOUNTING PRONOUNCEMENTS

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

The Company adopted FIN 46R to existing VIEs in which it has variable interests. The adoption of FIN 46R did not have an impact on the Company’s consolidated balance sheet. As the Company continues to evaluate the impact of applying FIN 46R, entities may be identified that would need to be consolidated by the Company.

FASB Statement No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”, was issued in May 2003. This Statement establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. The Statement also includes required disclosures for financial instruments within its scope. For the Company, the Statement was effective for instruments entered into or modified after May 31, 2003 and otherwise will be effective as of January 1, 2004, except for mandatorily redeemable financial instruments. For certain manditorily redeemable financial

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instruments, the Statement will be effective for the Company on January 1, 2005. The effective date has been deferred indefinitely for certain other types of manditorily redeemable financial instruments. The Company currently does not have any financial instruments that are within the scope of this Statement.

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ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q 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,” “projects,” “may,” “plan,” “will,” “likely,” “could” and words of similar import. Such statements include statements concerning the Company’s Approved Plan (as defined in Note 2 to the interim condensed consolidated financial statements), other effects and consequences of the Bankruptcy Filing (as defined in Note 2 to the interim condensed consolidated financial statements), forecasts upon which the Approved Plan is based, business strategy, the ability to satisfy interest expense and principal repayment obligations, operations, cost savings initiatives, industry, economic performance, financial condition, liquidity and capital resources, adoption of, or changes in, accounting policies and practices, existing government regulations and changes in, or the failure to comply with, governmental regulations, legislative proposals for healthcare 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 Quarterly Report on Form 10-Q. The forward-looking statements are made as of the date of this Quarterly Report on Form 10-Q 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.

General

The Company provides home health care services and products to patients through its 285 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 the number of units sold and rented and controlling expenses. It can improve cash flow by limiting the amount of time that it takes to collect payment after delivering products and services. Key indicators of performance include:

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

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     Bad Debt Expense. Billing and collecting in the healthcare industry is extremely complex. Rigorous substantive and procedural standards are set by each third party payor, and failure to adhere to these standards can lead to non-payment, which can have a significant impact on the Company’s net income and cash flow. The Company measures bad debt as a percent of net sales and rentals, and management considers this percentage a key indicator in monitoring its billing and collection function. Bad debt expense as a percentage of net revenue has decreased in the past three years from 4.6% in 2001 to 3.3% for the three months ended March 31, 2004. Management’s goal is to further lower this percentage in 2004, but management anticipates that the rate of decrease may be less in 2004.

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

     Days Sales Outstanding. DSO is a tool used by management to assess collections and the consequent impact on cash flow. The Company calculates DSO by dividing the previous 90 days of revenue (excluding dispositions and acquisitions), net of bad debt expense into net patient accounts receivable and multiplying the ratio by 90 days. The Company attempts to minimize DSO by screening new patient cases for adequate sources of reimbursement and by providing complete and accurate claims data to relevant payor sources. The Company monitors DSO trends for each of its branches and billing centers, and for the Company in total, as part of the management of the billing and collections process. An increase in DSO usually indicates a breakdown in processes at the billing centers. A decline in DSO usually results from process improvements and improved cash collections. Management uses DSO trends to monitor, evaluate and improve the performance of the billing centers. The decrease in DSO in the past three years from 68 in 2001 to 61 in 2002 to 60 in 2003 is due to improved collection results on current billings and improved timeliness in obtaining necessary billing documentation. Management’s goal is to lower DSO in 2004. The Company’s DSO for the quarter ended March 31, 2004 was 64, having been impacted negatively by delays in billing and collection caused by HIPAA implementation in the last quarter of 2003. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Trends, Events, and Uncertainties – HIPAA.”

Another key indicator of the Company’s receivable collection efforts is the amount of unbilled revenue which reports the amount of sales and rental revenues which have not yet been billed to the payor’s due to incomplete documentation or the receipt of the Certificate of Medical Necessity (“CMN”). At March 31, 2004 and December 31, 2003, the amount of unbilled revenue net of reserves was $11.0 million and $10.2 million, respectively.

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

Trends, Events, and Uncertainties

From time to time changes occur in our industry or our business such that it is reasonably likely that aspects of our future operating results will be materially different than our historical operating results. Sometimes these matters have not occurred but their existence is sufficient as to raise doubt regarding the likelihood that historical operating results are an accurate gauge of future performance. The Company attempts to identify and describe these trends, events, and uncertainties to assist investors in assessing the likely future performance of the Company. Investors should understand that these matters typically are new, sometimes are unforeseen, and often are fluid in nature. Moreover, the matters described below are not the only issues that can result in variances between past and future performance nor are they necessarily the only material trends, events, and uncertainties that will effect the Company. As a result, investors are encouraged to use this and other information to ascertain for themselves the likelihood that past performance is indicative of future performance.

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

     Reimbursement Changes and the Company’s Response. The reimbursement reductions contained in the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“Act”) will negatively impact the Company’s future operating results, liquidity and capital resources. A provision in the Medicare Prescription Drug, Improvement and Modernization Act of 2003 required that the reimbursement rate for inhalation drugs used with a nebulizer be reduced from 95% of the average wholesale price (AWP) to 80% of AWP. Beginning January 1, 2005, the reimbursement for inhalation drugs will be further reduced to the average manufacturer’s sales price plus six percent (ASP + 6%). Revenue in the current quarter was reduced by approximately $1.9 million as result of an approximate 15.8% reduction in the Medicare reimbursement rates for inhalation drugs effective January 1, 2004. Management believes that the reimbursement reductions scheduled to take effect January 1, 2005 with respect

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to the Company’s inhalation drug business, which constitutes approximately 12% of the Company’s year to date 2004 revenues, will have the greatest impact on the Company’s operating results. Management believes that the scheduled reductions could force providers to exit the inhalation drug business, which in turn could create difficulties for Medicare beneficiaries needing inhalation drugs to obtain these drugs under current Medicare regulations. Management is taking a number of steps in an effort to reduce the expected impact of the reimbursement reductions contained in the Act including initiatives to grow revenues, improve productivity, and reduce costs. The Company also is undertaking a number of efforts, including lobbying lawmakers and regulators, aimed at addressing the Medicare patient drug availability issues created by the inhalation drug reimbursement reductions scheduled for January 1, 2005, with the hope of modifying the pricing changes for inhalation drugs to avoid patient drug availability issues. The magnitude of the adverse impact that the Act’s reimbursement reductions will have on the Company’s future operating results and financial condition will depend upon the success of these efforts, but the adverse impact will be material in 2005 and beyond. The Company expects to offset much of the 2004 impact through revenue growth and cost reductions. However, as with all projections, there can be no guarantee that management’s projections will be achieved.

Included in the Act is a freeze in the reimbursement rates for certain durable medical equipment at those in effect on October 1, 2003. These reimbursement rates will remain in effect until each of the Company’s locations is included in a competitive bidding process, which is scheduled to begin in 2007. In addition, the reimbursement for 16 durable medical and respiratory items will be reduced to the median Federal Employee Health Benefit Plan rate which some analysts estimate to be a cut of approximately 10% on average.

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

     HIPAA. HIPAA has mandated an extensive set of regulations to protect the privacy of individually identifiable health information. The regulations consist of three sets of standards, each with a different date for required compliance: (1) Privacy Standards had a compliance date of April 14, 2003; (2) Transactions and Code Sets Standards required compliance by October 16, 2002, except as extended by one year to October 16, 2003 for providers that filed a compliance extension form by October 15, 2002; and (3) Security Standards which were published in final form on February 2, 2003 and have a compliance date of April 21, 2005. The Company has filed its compliance extension form and is actively pursuing its strategies toward compliance with the final Privacy Standards and Transaction and Code Sets Standards. The Company’s HIPAA compliance plan will require modifications to existing information management systems and physical security mechanisms, and may require additional personnel as well as extensive training

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of existing personnel, the full cost of which has not yet been determined. The Company cannot predict the impact that final regulations, when fully implemented, will have on its operations. The Company’s implementation of mandated HIPAA Transaction and Code Sets has resulted in disruptions to cash collections, and additional disruptions may occur in the future. Further, the Company cannot predict whether all payors and clearinghouses will be fully HIPAA Transaction compliant and able to process electronic claims by the final implementation deadline. Alternative methods of claims submission may be required, possibly resulting in delay in payment, which could have a material adverse effect on the Company’s result of operations, cash flow, and financial condition.

     Approved Plan. On July 1, 2003, American HomePatient, Inc. and 24 of its subsidiaries (collectively, the “Debtors”) emerged from bankruptcy pursuant to a 100% pay plan (the “Approved Plan”) whereby shareholders retained their equity interest and the Company’s creditors and vendors will be paid 100% of amounts they are owed, either immediately or over time with interest. The Approved Plan fixed the interest on the Company’s debt at 6.785% for the secured debt and 8.3675% for the unsecured debt, thus eliminating all material interest rate risk for the Company. 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 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 professional and other fees will be incurred in 2004 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. See Note 2 to the interim condensed consolidated financial statements “Proceedings under Chapter 11 of the Bankruptcy Code” and “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 claim stemming from rejection of the warrants as of July 30, 2002, the date immediately prior to the Company’s bankruptcy filing. The warrant holders have appealed the damages determination in this ruling. If the appeal is successful, the amount owed to the warrant holders could substantially increase, which could materially adversely affect the Company’s cash flow and results from operations.

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

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

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: