##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

CHECK ONE

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

For the Quarterly Period Ended: September 30, 2002

OR

|  |  |                                                                                         
|- |  | ----------------------------------------------------------------------------------------
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________.



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|                                                               |  |                          |  |                                  
|-------------------------------------------------------------- |  | ------------------------ |  | ---------------------------------
|Delaware                                                       |  | 0-19532                  |  | 62-1474680                       
|                                                               |  |                          |  |                                  
|(State or other jurisdiction of
incorporation or organization) |  | (Commission
File Number) |  | (IRS Employer Identification No.)



---



---



---

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 o No x

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

16,367,389

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(Outstanding shares of the issuers common stock as of March 24, 2003)



Total number of sequentially
numbered pages is 67

1



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TABLE OF CONTENTS



|                                                                         |                                                              |  |  |  |  |  |  | 
|------------------------------------------------------------------------ | ------------------------------------------------------------ |  |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION                                           
|ITEM 1  FINANCIAL STATEMENTS                                           
|                                                                         | INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS               
|                                                                         | INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                                                                         | INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                                                                         | NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|PART II. OTHER INFORMATION                                              
|SIGNATURES                                                              
|CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
|INDEX TO EXHIBITS                                                       
|Ex-99.1 Section 906 Certification of the CEO                            
|Ex-99.2 Section 906 Certification of the CFO                            



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##### Table of Contents






PART I. FINANCIAL INFORMATION




ITEM 1  FINANCIAL STATEMENTS




AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)

|                                 |                                                                                                        |              |                             |              |               |             |              |              |                   |             | 
|-------------------------------- | ------------------------------------------------------------------------------------------------------ | ------------ | --------------------------- | ------------ | ------------- | ----------- | ------------ | ------------ | ----------------- | ----------- | 
|                                 |                                                                                                        |              |                             |              | September 30, |             | December 31,
|                                 |                                                                                                        |              |                             |              | 2002          |             | 2001        
|                                 |                                                                                                        |              |                             |              |               |             |             
|                                 |                                                                                                        |              |                             |              |               |             |              |              | (As restated, see
|                                 |                                                                                                        |              |                             |              |               |             |              |              | Note 13)         
|ASSETS                           |                                                                                                        |              |                             |              |               |             |              |             
|CURRENT ASSETS:                  |                                                                                                        |              |                             |              |               |             |              |             
|                                 | Cash and cash equivalents                                                                              |              | $                           | 23,262,000   |               |             | $            | 9,129,000    |                  
|                                 | Restricted cash                                                                                        |              |                             | 67,000       |               |             |              | 265,000      |                  
|                                 | Accounts receivable, less allowance for
doubtful accounts of $26,222,000 and
$32,152,000, respectively |              |                             | 54,647,000   |               |             |              | 62,154,000   |                  
|                                 | Inventories, net of inventory reserves of
$1,094,000 and $1,191,000, respectively                      |              |                             | 15,057,000   |               |             |              | 14,001,000   |                  
|                                 | Prepaid expenses and other current assets                                                              |              |                             | 1,513,000    |               |             |              | 1,582,000    |                  
|                                 | Federal income tax receivable                                                                          |              |                             | 2,112,000    |               |             |              |             |                  
|                                 |                                                                                                        |              |                             |              |               |             |              |              |                  
|                                 |                                                                                                        |              | Total current assets        |              |               | 96,658,000  |              |              |                   | 87,131,000  | 
|                                 |                                                                                                        |              |                             |              |               |             |              |              |                  
|PROPERTY AND EQUIPMENT, at cost: |                                                                                                        |              | 172,544,000                 |              |               |             | 172,626,000  |             
|                                 | Less accumulated depreciation and amortization                                                         |              |                             | (123,592,000 | )             |             |              | (125,538,000 | )                
|                                 |                                                                                                        |              |                             |              |               |             |              |              |                  
|                                 |                                                                                                        |              | Property and equipment, net |              |               | 48,952,000  |              |              |                   | 47,088,000  | 
|                                 |                                                                                                        |              |                             |              |               |             |              |              |                  
|OTHER ASSETS:                    |                                                                                                        |              |                             |              |               |             |              |             
|                                 | Goodwill, net                                                                                          |              |                             | 121,214,000  |               |             |              | 189,699,000  |                  
|                                 | Investment in joint ventures                                                                           |              |                             | 8,881,000    |               |             |              | 9,450,000    |                  
|                                 | Deferred financing costs, net of accumulated
amortization of $0 and $9,518,000,
respectively           |              |                             |             |               |             |              | 3,383,000    |                  
|                                 | Other assets                                                                                           |              |                             | 9,325,000    |               |             |              | 10,289,000   |                  
|                                 |                                                                                                        |              |                             |              |               |             |              |              |                  
|                                 |                                                                                                        |              | Total other assets          |              |               | 139,420,000 |              |              |                   | 212,821,000 | 
|                                 |                                                                                                        |              |                             |              |               |             |              |              |                  
|                                 |                                                                                                        | TOTAL ASSETS |                             | $            | 285,030,000   |             |              | $            | 347,040,000       |            
|                                 |                                                                                                        |              |                             |              |               |             |              |              |                  

(Continued)

2



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##### Table of Contents



AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(Continued)

LIABILITIES AND SHAREHOLDERS (DEFICIT) EQUITY

|                                       |                                                                                                                                    |                     |                                                      |                                              |              |               |             |              |              |                   |             | 
|-------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------- | ------------------- | ---------------------------------------------------- | -------------------------------------------- | ------------ | ------------- | ----------- | ------------ | ------------ | ----------------- | ----------- | 
|                                       |                                                                                                                                    |                     |                                                      |                                              |              | September 30, |             | December 31,
|                                       |                                                                                                                                    |                     |                                                      |                                              |              | 2002          |             | 2001        
|                                       |                                                                                                                                    |                     |                                                      |                                              |              |               |             |             
|                                       |                                                                                                                                    |                     |                                                      |                                              |              |               |             |              |              | (As restated, see
|                                       |                                                                                                                                    |                     |                                                      |                                              |              |               |             |              |              | Note 13)         
|LIABILITIES NOT SUBJECT TO COMPROMISE: |                                                                                                                                    |                     |                                                      |                                              |              |               |             |             
|CURRENT LIABILITIES:                   |                                                                                                                                    |                     |                                                      |                                              |              |               |             |             
|                                       | Current portion of long-term debt and capital leases                                                                               |                     | $                                                    |                                             |              |               | $           | 282,554,000  |             
|                                       | Accounts payable                                                                                                                   |                     |                                                      | 10,295,000                                   |              |               |             | 19,819,000   |             
|                                       | Other payables                                                                                                                     |                     |                                                      | 1,855,000                                    |              |               |             | 2,600,000    |             
|                                       | Accrued expenses:                                                                                                                  |                     |                                                      |                                              |              |               |             |              |             
|                                       |                                                                                                                                    |                     |                                                      | Payroll and related benefits                 |              |               | 9,279,000   |              |              |                   | 8,054,000   | 
|                                       |                                                                                                                                    |                     |                                                      | Interest                                     |              |               |            |              |              |                   | 2,231,000   | 
|                                       |                                                                                                                                    |                     |                                                      | Insurance, including self-insurance reserves |              |               | 6,003,000   |              |              |                   | 5,229,000   | 
|                                       |                                                                                                                                    |                     |                                                      | Other                                        |              |               | 912,000     |              |              |                   | 7,080,000   | 
|                                       |                                                                                                                                    |                     |                                                      |                                              |              |               |             |              |             
|                                       |                                                                                                                                    |                     |                                                      | Total current liabilities                    |              |               | 28,344,000  |              |              |                   | 327,567,000 | 
|                                       |                                                                                                                                    |                     |                                                      |                                              |              |               |             |              |             
|NONCURRENT LIABILITIES:                |                                                                                                                                    |                     |                                                      |                                              |              |               |             |             
|                                       | Long-term debt and capital leases, less current portion                                                                            |                     |                                                      |                                             |              |               |             | 1,142,000    |             
|                                       | Other noncurrent liabilities                                                                                                       |                     |                                                      | 748,000                                      |              |               |             | 4,782,000    |             
|                                       |                                                                                                                                    |                     |                                                      |                                              |              |               |             |              |             
|                                       |                                                                                                                                    |                     |                                                      | Total noncurrent liabilities                 |              |               | 748,000     |              |              |                   | 5,924,000   | 
|                                       |                                                                                                                                    |                     |                                                      |                                              |              |               |             |              |             
|LIABILITIES SUBJECT TO COMPROMISE      |                                                                                                                                    |                     | 311,723,000                                          |                                              |              |               |            |             
|SHAREHOLDERS (DEFICIT) EQUITY         |                                                                                                                                    |                     |                                                      |                                              |              |               |             |             
|                                       | Preferred stock, $.01 par value; authorized 5,000,000
shares; none issued and outstanding                                          |                     |                                                      |                                             |              |               |             |             |             
|                                       | Common stock, $.01 par value; authorized 35,000,000
shares; issued and outstanding, 16,367,000 and
16,327,000 shares, respectively |                     |                                                      | 164,000                                      |              |               |             | 163,000      |             
|                                       | Paid-in capital                                                                                                                    |                     |                                                      | 173,985,000                                  |              |               |             | 173,975,000  |             
|                                       |                                                                                                                                    | Accumulated deficit |                                                      |                                              | (229,934,000 | )             |             |              | (160,589,000 | )                
|                                       |                                                                                                                                    |                     |                                                      |                                              |              |               |             |              |             
|                                       |                                                                                                                                    |                     |                                                      | Total shareholders (deficit) equity         |              |               | (55,785,000 | )            |              |                   | 13,549,000  | 
|                                       |                                                                                                                                    |                     |                                                      |                                              |              |               |             |              |             
|                                       |                                                                                                                                    |                     | TOTAL LIABILITIES AND SHAREHOLDERS (DEFICIT) EQUITY |                                              | $            | 285,030,000   |             |              | $            | 347,040,000       |            
|                                       |                                                                                                                                    |                     |                                                      |                                              |              |               |             |              |             

(Concluded)

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

3



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##### Table of Contents






AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)

|                                                                                                                                |                                                                                                                                                  |                |            |                                  |            |                                 |            |                   |            |      |             |             |             |                   |             |             |             | 
|------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------ | -------------- | ---------- | -------------------------------- | ---------- | ------------------------------- | ---------- | ----------------- | ---------- | ---- | ----------- | ----------- | ----------- | ----------------- | ----------- | ----------- | ----------- | 
|                                                                                                                                |                                                                                                                                                  |                |            | Three Months Ended September 30, |            | Nine Months Ended September 30,
|                                                                                                                                |                                                                                                                                                  |                |            |                                  |            |                                
|                                                                                                                                |                                                                                                                                                  |                |            | 2002                             |            | 2001                            |            | 2002              |            | 2001
|                                                                                                                                |                                                                                                                                                  |                |            |                                  |            |                                 |            |                   |            |     
|                                                                                                                                |                                                                                                                                                  |                |            |                                  |            |                                 |            | (As restated, see |            |      |             |             |             | (As restated, see
|                                                                                                                                |                                                                                                                                                  |                |            |                                  |            |                                 |            | Note 13)          |            |      |             |             |             | Note 13)         
|REVENUES:                                                                                                                       |                                                                                                                                                  |                |            |                                  |            |                                 |            |                   |            |      |             |             |             |                   |             |            
|                                                                                                                                | Sales and related service revenues                                                                                                               |                | $          | 33,423,000                       |            |                                 | $          | 40,131,000        |            |      | $           | 102,003,000 |             |                   | $           | 126,452,000 |            
|                                                                                                                                | Rentals and other revenues                                                                                                                       |                |            | 44,947,000                       |            |                                 |            | 46,346,000        |            |      |             | 135,583,000 |             |                   |             | 138,845,000 |            
|                                                                                                                                |                                                                                                                                                  |                |            |                                  |            |                                 |            |                   |            |      |             |             |             |                   |             |             |            
|                                                                                                                                |                                                                                                                                                  | Total revenues |            |                                  | 78,370,000 |                                 |            |                   | 86,477,000 |      |             |             | 237,586,000 |                   |             |             | 265,297,000 | 
|                                                                                                                                |                                                                                                                                                  |                |            |                                  |            |                                 |            |                   |            |      |             |             |             |                   |             |             |            
|EXPENSES AND OTHER:                                                                                                             |                                                                                                                                                  |                |            |                                  |            |                                 |            |                   |            |      |             |             |             |                   |             |            
|                                                                                                                                | Cost of sales and related services                                                                                                               |                |            | 15,110,000                       |            |                                 |            | 18,305,000        |            |      |             | 47,175,000  |             |                   |             | 62,176,000  |            
|                                                                                                                                | Cost of rentals and other revenues, including rental equipment
depreciation of $5,428,000, $5,596,000, $14,834,000 and $16,260,000,
respectively |                |            | 9,295,000                        |            |                                 |            | 9,230,000         |            |      |             | 26,061,000  |             |                   |             | 26,726,000  |            
|                                                                                                                                | Operating, including bad debt expense of $2,681,000, $5,254,000,
$9,550,000 and $12,498,000, respectively                                        |                |            | 46,084,000                       |            |                                 |            | 49,296,000        |            |      |             | 137,273,000 |             |                   |             | 147,079,000 |            
|                                                                                                                                | General and administrative                                                                                                                       |                |            | 3,748,000                        |            |                                 |            | 3,768,000         |            |      |             | 12,066,000  |             |                   |             | 11,805,000  |            
|                                                                                                                                | Earnings from joint ventures                                                                                                                     |                |            | (1,000,000                       | )          |                                 |            | (1,137,000        | )          |      |             | (3,392,000  | )           |                   |             | (3,336,000  | )          
|                                                                                                                                | Depreciation, excluding rental equipment, and amortization                                                                                       |                |            | 982,000                          |            |                                 |            | 2,639,000         |            |      |             | 3,084,000   |             |                   |             | 8,200,000   |            
|                                                                                                                                | Amortization of deferred financing costs                                                                                                         |                |            | 236,000                          |            |                                 |            | 828,000           |            |      |             | 1,779,000   |             |                   |             | 2,209,000   |            
|                                                                                                                                | Interest (excluding post-petition contractual interest of $5,113,000, $0,
$5,113,000 and $0, respectively)                                       |                |            | 1,798,000                        |            |                                 |            | 6,737,000         |            |      |             | 12,144,000  |             |                   |             | 22,940,000  |            
|                                                                                                                                | (Gain) loss on sales of assets of centers                                                                                                        |                |            |                                 |            |                                 |            | 2,629,000         |            |      |             | (667,000    | )           |                   |             | 2,629,000   |            
|                                                                                                                                | Chapter 11 financial advisory expenses incurred prior to filing
bankruptcy                                                                       |                |            | 504,000                          |            |                                 |            |                  |            |      |             | 818,000     |             |                   |             |            |            
|                                                                                                                                |                                                                                                                                                  |                |            |                                  |            |                                 |            |                   |            |      |             |             |             |                   |             |             |            
|                                                                                                                                |                                                                                                                                                  | Total expenses |            |                                  | 76,757,000 |                                 |            |                   | 92,295,000 |      |             |             | 236,341,000 |                   |             |             | 280,428,000 | 
|                                                                                                                                |                                                                                                                                                  |                |            |                                  |            |                                 |            |                   |            |      |             |             |             |                   |             |             |            
|INCOME (LOSS) FROM OPERATIONS BEFORE REORGANIZATION ITEMS, INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE |                                                                                                                                                  |                | 1,613,000  |                                  |            |                                 | (5,818,000 | )                 |            |      | 1,245,000   |             |             |                   | (15,131,000 | )          
|                                                                                                                                | REORGANIZATION ITEMS                                                                                                                             |                |            | 3,917,000                        |            |                                 |            |                  |            |      |             | 3,917,000   |             |                   |             |            |            
|                                                                                                                                |                                                                                                                                                  |                |            |                                  |            |                                 |            |                   |            |      |             |             |             |                   |             |             |            
|LOSS FROM OPERATIONS BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE                                |                                                                                                                                                  |                | (2,304,000 | )                                |            |                                 | (5,818,000 | )                 |            |      | (2,672,000  | )           |             |                   | (15,131,000 | )          
|PROVISION FOR (BENEFIT FROM) INCOME TAXES                                                                                       |                                                                                                                                                  |                | 100,000    |                                  |            |                                 | 150,000    |                   |            |      | (1,812,000  | )           |             |                   | 450,000     |            
|                                                                                                                                |                                                                                                                                                  |                |            |                                  |            |                                 |            |                   |            |      |             |             |             |                   |             |             |            
|LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE                                                                 |                                                                                                                                                  |                | (2,404,000 | )                                |            |                                 | (5,968,000 | )                 |            |      | (860,000    | )           |             |                   | (15,581,000 | )          
|CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE WITH NO RELATED TAX
EFFECT                                                  |                                                                                                                                                  |                |           |                                  |            |                                 |           |                   |            |      | (68,485,000 | )           |             |                   |            |            
|                                                                                                                                |                                                                                                                                                  |                |            |                                  |            |                                 |            |                   |            |      |             |             |             |                   |             |             |            
|NET LOSS                                                                                                                        |                                                                                                                                                  | $              | (2,404,000 | )                                |            | $                               | (5,968,000 | )                 |            | $    | (69,345,000 | )           |             | $                 | (15,581,000 | )          
|                                                                                                                                |                                                                                                                                                  |                |            |                                  |            |                                 |            |                   |            |      |             |             |             |                   |             |             |            

(Continued)

4



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##### Table of Contents



AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(Continued)

|                                                                                  |           |  |   |            |   |  |   |            |   |  |   |            |   |  |   |            |  
|--------------------------------------------------------------------------------- | --------- |  | - | ---------- | - |  | - | ---------- | - |  | - | ---------- | - |  | - | ---------- | -
|LOSS PER COMMON SHARE BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE: |           |  |   |            |   |  |   |            |   |  |   |            |   |  |   |           
|                                                                                  | - Basic   |  | $ | (0.15      | ) |  | $ | (0.37      | ) |  | $ | (0.05      | ) |  | $ | (0.96      | )
|                                                                                  |           |  |   |            |   |  |   |            |   |  |   |            |   |  |   |            |  
|                                                                                  | - Diluted |  | $ | (0.15      | ) |  | $ | (0.37      | ) |  | $ | (0.05      | ) |  | $ | (0.96      | )
|                                                                                  |           |  |   |            |   |  |   |            |   |  |   |            |   |  |   |            |  
|CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE PER COMMON SHARE:             |           |  |   |            |   |  |   |            |   |  |   |            |   |  |   |           
|                                                                                  | - Basic   |  | $ |           |   |  | $ |           |   |  | $ | (4.19      | ) |  | $ |           |  
|                                                                                  |           |  |   |            |   |  |   |            |   |  |   |            |   |  |   |            |  
|                                                                                  | - Diluted |  | $ |           |   |  | $ |           |   |  | $ | (4.19      | ) |  | $ |           |  
|                                                                                  |           |  |   |            |   |  |   |            |   |  |   |            |   |  |   |            |  
|NET LOSS PER COMMON SHARE:                                                        |           |  |   |            |   |  |   |            |   |  |   |            |   |  |   |           
|                                                                                  | - Basic   |  | $ | (0.15      | ) |  | $ | (0.37      | ) |  | $ | (4.24      | ) |  | $ | (0.96      | )
|                                                                                  |           |  |   |            |   |  |   |            |   |  |   |            |   |  |   |            |  
|                                                                                  | - Diluted |  | $ | (0.15      | ) |  | $ | (0.37      | ) |  | $ | (4.24      | ) |  | $ | (0.96      | )
|                                                                                  |           |  |   |            |   |  |   |            |   |  |   |            |   |  |   |            |  
|WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:                                       |           |  |   |            |   |  |   |            |   |  |   |            |   |  |   |           
|                                                                                  | - Basic   |  |   | 16,367,000 |   |  |   | 16,327,000 |   |  |   | 16,355,000 |   |  |   | 16,235,000 |  
|                                                                                  |           |  |   |            |   |  |   |            |   |  |   |            |   |  |   |            |  
|                                                                                  | - Diluted |  |   | 16,367,000 |   |  |   | 16,327,000 |   |  |   | 16,355,000 |   |  |   | 16,235,000 |  
|                                                                                  |           |  |   |            |   |  |   |            |   |  |   |            |   |  |   |            |  

(Concluded)

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

5



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##### Table of Contents






AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

|                                      |                                                                                 |  |                                                       |             |                             |             |      |             |                   |            |  
|------------------------------------- | ------------------------------------------------------------------------------- |  | ----------------------------------------------------- | ----------- | --------------------------- | ----------- | ---- | ----------- | ----------------- | ---------- | -
|                                      |                                                                                 |  |                                                       |             | Nine Months Ended Sept. 30,
|                                      |                                                                                 |  |                                                       |             |                            
|                                      |                                                                                 |  |                                                       |             | 2002                        |             | 2001
|                                      |                                                                                 |  |                                                       |             |                             |             |     
|                                      |                                                                                 |  |                                                       |             |                             |             |      |             | (As restated, see
|                                      |                                                                                 |  |                                                       |             |                             |             |      |             | Note 13)         
|CASH FLOWS FROM OPERATING ACTIVITIES: |                                                                                 |  |                                                       |             |                             |             |      |            
|                                      | Net loss                                                                        |  | $                                                     | (69,345,000 | )                           |             | $    | (15,581,000 | )                
|                                      | Adjustments to reconcile net loss to net cash provided
by operating activities: |  |                                                       |             |                             |             |      |             |                  
|                                      |                                                                                 |  | Cumulative effect of change in accounting principle   |             |                             | 68,485,000  |      |             |                   |           |  
|                                      |                                                                                 |  | Depreciation and amortization                         |             |                             | 17,918,000  |      |             |                   | 24,460,000 |  
|                                      |                                                                                 |  | Amortization of deferred financing costs              |             |                             | 1,779,000   |      |             |                   | 2,209,000  |  
|                                      |                                                                                 |  | Provision for doubtful accounts                       |             |                             | (5,930,000  | )    |             |                   | (6,582,000 | )
|                                      |                                                                                 |  | Provision for inventory                               |             |                             | (97,000     | )    |             |                   | (837,000   | )
|                                      |                                                                                 |  | Equity in earnings of unconsolidated joint ventures   |             |                             | (1,934,000  | )    |             |                   | (1,802,000 | )
|                                      |                                                                                 |  | Minority interest                                     |             |                             | 214,000     |      |             |                   | 224,000    |  
|                                      |                                                                                 |  | (Gain) loss on sale of assets of centers              |             |                             | (667,000    | )    |             |                   | 2,629,000  |  
|                                      |                                                                                 |  | Reorganization items                                  |             |                             | 3,917,000   |      |             |                   |           |  
|                                      |                                                                                 |  | Reorganization items paid                             |             |                             | (176,000    | )    |             |                   |           |  
|                                      | Change in assets and liabilities, net of dispositions:                          |  |                                                       |             |                             |             |      |             |                  
|                                      |                                                                                 |  | Accounts receivable                                   |             |                             | 12,932,000  |      |             |                   | 13,197,000 |  
|                                      |                                                                                 |  | Inventories                                           |             |                             | (1,230,000  | )    |             |                   | 1,648,000  |  
|                                      |                                                                                 |  | Prepaid expenses and other current assets             |             |                             | 65,000      |      |             |                   | (108,000   | )
|                                      |                                                                                 |  | Federal income tax receivable                         |             |                             | (2,112,000  | )    |             |                   |           |  
|                                      |                                                                                 |  | Accounts payable, other payables and accrued
expenses |             |                             | 11,075,000  |      |             |                   | 543,000    |  
|                                      |                                                                                 |  | Other noncurrent liabilities                          |             |                             | (30,000     | )    |             |                   | (1,015,000 | )
|                                      |                                                                                 |  | Other assets and liabilities                          |             |                             | 936,000     |      |             |                   | 1,348,000  |  
|                                      |                                                                                 |  |                                                       |             |                             |             |      |             |                  
|                                      |                                                                                 |  | Net cash provided by operating activities             |             |                             | 35,800,000  |      |             |                   | 20,333,000 |  
|                                      |                                                                                 |  |                                                       |             |                             |             |      |             |                  
|CASH FLOWS FROM INVESTING ACTIVITIES: |                                                                                 |  |                                                       |             |                             |             |      |            
|                                      | Proceeds from sales of assets of centers                                        |  |                                                       | 1,805,000   |                             |             |      | 7,825,000   |                  
|                                      | Additions to property and equipment, net                                        |  |                                                       | (19,848,000 | )                           |             |      | (15,498,000 | )                
|                                      | Distributions and loan payments from unconsolidated
joint
ventures, net         |  |                                                       | 2,503,000   |                             |             |      | 1,520,000   |                  
|                                      |                                                                                 |  |                                                       |             |                             |             |      |             |                  
|                                      |                                                                                 |  | Net cash used in investing activities                 |             |                             | (15,540,000 | )    |             |                   | (6,153,000 | )
|                                      |                                                                                 |  |                                                       |             |                             |             |      |             |                  

(Continued)

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AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)
(Continued)

|                                               |                                                         |                                       |            |                             |            |      |            |               |             |  
|---------------------------------------------- | ------------------------------------------------------- | ------------------------------------- | ---------- | --------------------------- | ---------- | ---- | ---------- | ------------- | ----------- | -
|                                               |                                                         |                                       |            | Nine Months Ended Sept. 30,
|                                               |                                                         |                                       |            |                            
|                                               |                                                         |                                       |            | 2002                        |            | 2001
|                                               |                                                         |                                       |            |                             |            |     
|                                               |                                                         |                                       |            |                             |            |      |            | (As restated,
|                                               |                                                         |                                       |            |                             |            |      |            | see Note 13) 
|CASH FLOWS FROM FINANCING ACTIVITIES:          |                                                         |                                       |            |                             |            |      |            |              
|                                               | Principal payments on long-term debt and capital leases |                                       |            | (6,119,000                  | )          |      |            | (9,356,000    | )          
|                                               | Proceeds from employee stock purchase plan              |                                       |            |                            |            |      |            | 202,000       |            
|                                               | Proceeds from exercise of stock options                 |                                       |            | 11,000                      |            |      |            |              |            
|                                               | Deferred financing costs                                |                                       |            | (11,000                     | )          |      |            | (3,040,000    | )          
|                                               | Distributions to minority interest owners               |                                       |            | (206,000                    | )          |      |            | (223,000      | )          
|                                               | Restricted cash                                         |                                       |            | 198,000                     |            |      |            | 13,000        |            
|                                               |                                                         |                                       |            |                             |            |      |            |               |            
|                                               |                                                         | Net cash used in financing activities |            |                             | (6,127,000 | )    |            |               | (12,404,000 | )
|                                               |                                                         |                                       |            |                             |            |      |            |               |            
|INCREASE IN CASH AND CASH EQUIVALENTS          |                                                         |                                       | 14,133,000 |                             |            |      | 1,776,000  |              
|CASH AND CASH EQUIVALENTS, beginning of period |                                                         |                                       | 9,129,000  |                             |            |      | 12,081,000 |              
|                                               |                                                         |                                       |            |                             |            |      |            |               |            
|CASH AND CASH EQUIVALENTS, end of period       |                                                         | $                                     | 23,262,000 |                             |            | $    | 13,857,000 |              
|                                               |                                                         |                                       |            |                             |            |      |            |               |            
|SUPPLEMENTAL INFORMATION:                      |                                                         |                                       |            |                             |            |      |            |              
|                                               | Cash payments of interest                               |                                       | $          | 12,559,000                  |            |      | $          | 22,580,000    |            
|                                               |                                                         |                                       |            |                             |            |      |            |               |            
|                                               | Cash payments of income taxes                           |                                       | $          | 488,000                     |            |      | $          | 2,195,000     |            
|                                               |                                                         |                                       |            |                             |            |      |            |               |            
|NON-CASH OPERATING AND FINANCING ACTIVITIES:   |                                                         |                                       |            |                             |            |      |            |              
|                                               | Office equipment capital leases                         |                                       | $          |                            |            |      | $          | 1,343,000     |            
|                                               |                                                         |                                       |            |                             |            |      |            |               |            

(Concluded)

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)
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 and infusion therapies and the rental and
sale of home medical equipment and home health care supplies. For the nine
months ended September 30, 2002, such services represented 66%, 14% and 20%,
respectively of revenues. These services and products are paid for primarily
by Medicare, Medicaid and other third-party payors. As of September 30, 2002,
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
nine months ended September 30, 2002 and 2001 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 September 30, 2002 and the results of operations and the cash flows for the
nine months ended September 30, 2002 and 2001.

The results of operations for the nine months ended September 30, 2002 and 2001
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 Annual Report on Form 10-K.

Certain reclassifications have been made to the 2001 consolidated financial
statements to conform to the 2002 presentation.

2. BANK CREDIT FACILITY

At September 30, 2002 the Company had a working capital of $68.4 million and
current ratio of 3.4x as compared to a working capital deficit of $240.4
million and a current ratio of 0.3x at December 31, 2001.

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The Company is the borrower under the Bank Credit Facility between the Company
and Deutsche Bank Trust Company, successor to Bankers Trust Company, as agent
for the Lenders. The Companys breach of several of the financial covenants in
the Fourth Amended and Restated Credit Agreement and its failure to make a
scheduled principal payment due March 15, 2001 caused the Company to not be in
compliance with certain covenants of the Fourth Amended and Restated Credit
Agreement. On June 8, 2001, the Company entered into the Fifth Amended and
Restated Credit Agreement (the Amended Credit Agreement) that provided a new
loan to the Company from which the proceeds were used to pay off all existing
loans under the Credit Agreement. The Amended Credit Agreement also includes
modified financial covenants and a revised amortization schedule. In addition,
the Amended Credit Agreement no longer contains a revolving loan component; all
existing indebtedness is now in the form of a term loan which matured on
December 31, 2002. The Amended Credit Agreement requires principal payments of
$750,000 on September 30, 2001 and December 31, 2001; a principal payment of
$11.6 million on March 31, 2002; principal payments of $1.0 million on June 30,
2002 and September 30, 2002; and a Balloon Payment of $281.5 million on
December 31, 2002. As of November 14, 2002, the Company has paid the $750,000
principal payment due on September 30, 2001, the $750,000 principal payment due
on December 31, 2001, the $11.6 million principal payment due on March 31, 2002
as well as the $1.0 million principal payment due on June 30, 2002, the $1.0
million principal payment due on September 30, 2002, and $6.1 million of the
Balloon Payment due on December 31, 2002. The Bankruptcy Filing (as defined in
Note 3) stayed all remaining payments required by Amended Credit Agreement.
These early payments of 2002 principal were generated from operational cash
flows, from the sales of assets of centers, from the sales of the Companys
wholly-owned real estate and from the collection of patient receivables
associated with the asset sales. Cash flow from operations were not sufficient
to pay the debt upon its current maturity on December 31, 2002. There can be
no assurance that the Bank Credit Facility will be renewed, and if there is no
renewal, then the Companys ability to make the Balloon Payment is contingent
upon obtaining replacement financing. There can be no assurance that the
Company can obtain such financing on terms acceptable to the Company or at all.
Additional sources of funds may be required and there can be no assurance that
the Company will be able to obtain additional funds on terms acceptable to the
Company or at all. The Amended Credit Agreement further provides for mandatory
prepayments of principal from the Companys excess cash flow and from the
proceeds of the Companys sales of securities, sales of assets, tax refunds or
excess casualty loss payments. Substantially all of the Companys assets have
been pledged as security for borrowings under the Bank Credit Facility.
Indebtedness under the Bank Credit Facility, as of November 14, 2002, totals
$275.4 million (which excludes letters of credit totaling $3.4 million).

The Amended Credit Agreement further provided for the payment to the Lenders of
certain fees. These fees included a restructuring fee of $1.2 million (paid on
the effective date of the Amended Credit Agreement), and $200,000 paid on
December 31, 2001, March 31, 2002 and June 30, 2002. A restructuring fee of
$459,000 payable on September 30, 2002 is currently classified as a liability
subject to compromise in the accompanying consolidated balance sheet as of
September 30, 2002. In addition, the Company has an obligation to pay the
agent an annual administrative fee of $75,000 and an annual fee of 0.50% of the
average monthly outstanding indebtedness on each anniversary of the Amended
Credit Agreement. The last such payment of annual fees was made by the Company
in June 2002.

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The Amended Credit Agreement contains various financial covenants, the most
restrictive of which relate to measurements of EBITDA (as defined in the
Amended Credit Agreement), leverage, interest coverage ratios, and collections
of accounts receivable. The Amended Credit Agreement also contains provisions
for periodic reporting.

The Amended Credit Agreement also contains restrictions which, among other
things, impose certain limitations or prohibitions on the Company with respect
to the incurrence of indebtedness, the creation of liens, the payment of
dividends, the redemption or repurchase of securities, investments,
acquisitions, capital expenditures, sales of assets and transactions with
affiliates. The Company is not permitted to make acquisitions or investments
in joint ventures without the consent of Lenders holding a majority of the
lending commitments under the Bank Credit Facility. In addition, proceeds of
all of the Companys accounts receivable are transferred daily into a bank
account at PNC Bank, N.A. which, under the terms of a Concentration Bank
Agreement, requires that all amounts in excess of $3.0 million be transferred
to an account at Deutsche Bank Trust Company in the Companys name. Upon
occurrence of an event of default under the Amended Credit Agreement, the
Lenders have the right to instruct PNC Bank, N.A. and Deutsche Bank Trust
Company to cease honoring any drafts under the accounts and apply all amounts
in the bank accounts against the indebtedness owed to the Lenders.

Interest is payable on the unpaid principal amount under the Amended Credit
Agreement, at the election of the Company, at either a Base Lending Rate or an
Adjusted Eurodollar Rate (each as defined in the Amended Credit Agreement),
plus an applicable margin of 2.75% and 3.50%, respectively. The Company is
also required to pay additional interest in the amount of 4.50% per annum on
that principal portion outstanding of the Amended Credit Agreement that is in
excess of four times adjusted EBITDA, as defined by the Amended Credit
Agreement. For the seven months ended July 31, 2002, the weighted average
borrowing rate was 7.3%. Upon the occurrence and continuation of an event of
default under the Amended Credit Agreement, interest would be payable upon
demand at a rate that is 2.00% per annum in excess of the interest rate
otherwise payable under the Amended Credit Agreement and the Company no longer
would have the right to designate the Adjusted Eurodollar Rate plus the
applicable margin as the applicable interest rate.

The Company was required to issue, effective on March 31, 2001, warrants to the
Lenders representing 19.999% of the common stock of the Company issued and
outstanding as of March 31, 2001, pursuant to the terms of the Second Amendment
to the Fourth Amended and Restated Credit Agreement (which amendment was
entered into on April 14, 1999). To fulfill these obligations, warrants to
purchase 3,265,315 shares of common stock were issued to the Lenders on June 8,
2001. Fifty percent of these warrants are exercisable during the period
commencing June 1, 2001 and ending May 31, 2011, and the remaining fifty
percent are exercisable during the period commencing September 30, 2001 and
ending September 29, 2011. The exercise price of the warrants is $0.01 per
share. The Company accounted for the fair value of these warrants during the
fourth quarter of 2000 as the issuance of these warrants was determined to be
probable. As such, the Company increased deferred financing costs by $686,000
to recognize the estimated fair value of the warrants as of December 31, 2000.
As of November 14, 2002 these warrants have not been exercised.

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3. PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE

The Company is the borrower under the Bank Credit Facility evidenced by the
Amended Credit Agreement between the Company and Bank of Montreal, as agent for
a syndicate of lenders (the Lenders). Indebtedness under the Bank Credit
Facility as of July 31, 2002, (Bankruptcy Filing date, as defined herein),
totals approximately $275.4 million (which excludes letters of credit totaling
$3.4 million). Prior to August 12, 2002, Deutsche Bank Trust Company,
successor to Bankers Trust Company, served as agent for the Lenders. On August
12, 2002 the Company received written notice that Deutsche Bank Trust Company
intended to resign. Bank of Montreal was appointed by the Lenders as the new
agent.

On July 31, 2002, American HomePatient, Inc. and 24 of its subsidiaries
(collectively, the Debtors) 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). These cases (the Chapter 11 Cases) have
been consolidated for the purpose of joint administration under Case Number
02-08915-GP3-11. Pleadings in these cases may be viewed at the
Courts website, www.tnmb.uscourts.gov. On January 2, 2003, the Debtors filed their Second Amended Joint Plan of
Reorganization (the 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. A Disclosure Statement, the purpose of which is to
enable creditors entitled to vote on the Plan to make an informed decision
before exercising their right to vote, accompanied the Plan and was also filed
on January 2, 2003. The hearing before the Bankruptcy Court on confirmation of
the Plan has been set for April 23, 2003. The filing was prompted by the
impending December 31, 2002 maturity of the Companys Bank Credit Facility.

The Debtors operate their business as a debtor-in-possession in accordance with
the applicable provisions of the Bankruptcy Court. As a debtor-in-possession,
the Company is authorized to operate its business but may not engage in
transactions outside its ordinary course of business without the approval of
the Bankruptcy Court. The Company has not sought to obtain
debtor-in-possession secured financing (DIP Financing) and currently does not
intend to do so. Rather, the Company intends to use cash flow and cash on hand
to fund day-to day operations during the bankruptcy process, which is
consistent with its operations since the Lenders terminated the Companys
ability to access a revolving line of credit in 2000. At September 30, 2002
the Company had cash and cash equivalents of approximately $23.3 million. The
Bankruptcy Filing should have no impact on the Companys existing joint
ventures with unrelated parties, and the Company currently does not anticipate
that any other subsidiary or affiliate of the Company will file a voluntary
petition for relief.

On October 15, 2002, the Company, the Lenders and the unsecured creditors filed
an agreed order with the Bankruptcy Court authorizing the use of cash
collateral and granting adequate protection payments to the Lenders. This
order authorizes the Company to use cash collateral, but provides certain
restrictions on the Companys ability to make cash disbursements. The Company
is authorized to use cash collateral solely for the following purposes: (i) to
make cash disbursements as set forth in a cash forecast prepared by the
Company, not to exceed 5% in any four week rolling period, (ii) to pay fees
required by the Office of the United States Trustee, (iii)

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to make adequate protection payments to the Lenders, and (iv) to replace or
increase certain letters of credit. The Company agreed to make adequate
protection payments to the Lenders of $1,600,000 per month beginning with the
month of August 2002, subject to maintaining a required minimum cash balance of
$12,000,000 plus the amount necessary to fund incentive bonuses that will come
due through March 31, 2003, as well as any amounts necessary to replace or
increase letters of credit. An initial payment totaling $3,200,000 for August
and September 2002, in the aggregate, was made on October 15, 2002, and
additional adequate protection payments have been paid on the 15th of each
successive month. The application of such payments is subject to further order
of the Bankruptcy Court. The Bankruptcy Court may recharacterize the
application of any payment regardless of how characterized by the Company or
the Lenders.

The accompanying unaudited condensed consolidated interim financial statements
have been prepared on a going concern basis and in accordance with the American
Institute of Certified Public Accountants Statement of Position 90-7 (SOP
90-7), Financial Reporting by Entities in Reorganization Under the Bankruptcy
Code. Accordingly, these consolidated interim financial statements do not
reflect any adjustments that might result if the Company is unable to continue
as a going concern. All pre-petition liabilities subject to compromise have
been segregated in the unaudited condensed consolidated balance sheets and
classified as liabilities subject to compromise, at the estimated amount of
allowable claims. Liabilities not subject to compromise are separately
classified as current and non-current in the unaudited condensed consolidated
balance sheets. 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 unaudited condensed consolidated statements of cash
flows. Post-petition interest excluded from the statement of operations for
the three and nine months ended September 30, 2002, of $5,113,000, represents
the default rate of interest pursuant to the terms described in the Amended
Credit Agreement.

4. LIABILITIES SUBJECT TO COMPROMISE AND REORGANIZATION ITEMS

Liabilities subject to compromise refer to liabilities incurred prior to the
commencement of the Chapter 11 Cases. These liabilities consist primarily of
amounts outstanding under the Bank Credit Facility, the Government Settlement
(see Note 7), capital leases, and also include accounts payable, accrued
interest, amounts accrued for future lease rejections, professional fees
related to the reorganization, and other accrued expenses. Such claims remain
subject to future adjustments based on negotiations, actions of the Bankruptcy
Court, further developments with respect to disputed claims, and other events.
Payment terms for these amounts will be established in connection with the
Chapter 11 Cases.

The Company has received approval from the Bankruptcy Court to pay or otherwise
honor certain pre-petition liabilities, including wages and benefits of
employees, reimbursement of employee business expenses, insurance costs,
medical directors fees, utilities and patient refunds in the ordinary course of
business. The Company is also authorized to pay pre-petition liabilities to
certain vendors providing critical goods and services, provided these payments
do not exceed a predetermined amount. As a debtor-in-possession, the Company
also has the right, subject to Bankruptcy Court approval and certain other
limitations, to assume or reject executory contracts and unexpired leases. The
parties affected by these rejections may file claims with the

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Bankruptcy
Court in accordance with bankruptcy procedures. Any such damages resulting
from lease rejections will be treated as general unsecured claims in the
reorganization.

The principal categories of claims classified as liabilities subject to
compromise under reorganization proceedings are as follows:

|                                                    |                                         |   |             |             | 
|--------------------------------------------------- | --------------------------------------- | - | ----------- | ----------- | 
|Pre-petition accounts payable                       |                                         | $ | 20,035,000  |            
|State income taxes payable                          |                                         |   | 422,000     |            
|Other accruals                                      |                                         |   | 5,754,000   |            
|Accrued interest                                    |                                         |   | 1,551,000   |            
|Bank credit facility                                |                                         |   | 275,395,000 |            
|Other long-term debt and liabilities                |                                         |   | 2,194,000   |            
|Accrual for future lease rejection damages          |                                         |   | 1,341,000   |            
|Accrued professional fees related to reorganization |                                         |   | 785,000     |            
|Government settlement, including interest           |                                         |   | 4,246,000   |            
|                                                    |                                         |   |             |            
|                                                    | Total liabilities subject to compromise |   | $           | 311,723,000 | 
|                                                    |                                         |   |             |            

Reorganization items represent expenses that are incurred by the Company as a
result of reorganization under Chapter 11 of the Federal Bankruptcy Code.
These items are comprised of the following:

|                                             |                            |   |           |           | 
|-------------------------------------------- | -------------------------- | - | --------- | --------- | 
|Write-off of deferred financing costs        |                            | $ | 1,615,000 |          
|Provision for future lease rejection damages |                            |   | 1,341,000 |          
|Professional and other fees                  |                            |   | 961,000   |          
|                                             |                            |   |           |          
|                                             | Total reorganization items |   | $         | 3,917,000 | 
|                                             |                            |   |           |          

5. DEBTORS AND NON-DEBTORS FINANCIAL STATEMENTS

The Debtors filed voluntary petitions for relief to reorganize under Chapter 11
of the U.S. Bankruptcy Code. The joint ventures (both consolidated and
non-consolidated) are not part of the Bankruptcy Filing.

In accordance with SOP 90-7, the Company is presenting the following condensed
combining financial statements as of and for the nine months ended September
30, 2002:

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American HomePatient, Inc. and Subsidiaries
Condensed Combining Balance Sheets as of September 30, 2002
(unaudited)

|                                      |                                                           |                                                      |                              |              |             |             |             |           |            |           |             |              |             |             | 
|------------------------------------- | --------------------------------------------------------- | ---------------------------------------------------- | ---------------------------- | ------------ | ----------- | ----------- | ----------- | --------- | ---------- | --------- | ----------- | ------------ | ----------- | ----------- | 
|                                      |                                                           |                                                      |                              |              | Debtors     |             | Non-Debtors |           | Combined  
|                                      |                                                           |                                                      |                              |              |             |             |             |           |           
|ASSETS                                |                                                           |                                                      |                              |              |             |             |             |           |            |           |             |             
|CURRENT ASSETS:                       |                                                           |                                                      |                              |              |             |             |             |           |            |           |             |             
|                                      | Cash and cash equivalents                                 |                                                      | $                            | 23,213,000   |             |             | $           | 49,000    |            |           | $           | 23,262,000   |            
|                                      | Restricted cash                                           |                                                      |                              | 67,000       |             |             |             |          |            |           |             | 67,000       |            
|                                      | Accounts receivable, less allowance for doubtful accounts |                                                      |                              | 54,260,000   |             |             |             | 387,000   |            |           |             | 54,647,000   |            
|                                      | Inventories, net of inventory reserves                    |                                                      |                              | 15,002,000   |             |             |             | 55,000    |            |           |             | 15,057,000   |            
|                                      | Prepaid expenses and other current assets                 |                                                      |                              | 1,512,000    |             |             |             | 1,000     |            |           |             | 1,513,000    |            
|                                      | Federal income tax receivable                             |                                                      |                              | 2,112,000    |             |             |             |          |            |           |             | 2,112,000    |            
|                                      |                                                           |                                                      |                              |              |             |             |             |           |            |           |             |              |            
|                                      |                                                           |                                                      | Total current assets         |              |             | 96,166,000  |             |           |            | 492,000   |             |              |             | 96,658,000  | 
|                                      |                                                           |                                                      |                              |              |             |             |             |           |            |           |             |              |            
|PROPERTY AND EQUIPMENT, at cost:      |                                                           |                                                      | 171,108,000                  |              |             |             | 1,436,000   |           |            |           | 172,544,000 |             
|                                      | Less accumulated depreciation and amortization            |                                                      |                              | (122,764,000 | )           |             |             | (828,000  | )          |           |             | (123,592,000 | )          
|                                      |                                                           |                                                      |                              |              |             |             |             |           |            |           |             |              |            
|                                      |                                                           |                                                      | Property and equipment, net  |              |             | 48,344,000  |             |           |            | 608,000   |             |              |             | 48,952,000  | 
|                                      |                                                           |                                                      |                              |              |             |             |             |           |            |           |             |              |            
|OTHER ASSETS:                         |                                                           |                                                      |                              |              |             |             |             |           |            |           |             |             
|                                      | Goodwill, net                                             |                                                      |                              | 121,214,000  |             |             |             |          |            |           |             | 121,214,000  |            
|                                      | Investment in joint ventures                              |                                                      |                              | (352,000     | )           |             |             | 9,233,000 |            |           |             | 8,881,000    |            
|                                      | Other assets                                              |                                                      |                              | 9,325,000    |             |             |             |          |            |           |             | 9,325,000    |            
|                                      |                                                           |                                                      | Total other assets           |              |             | 130,187,000 |             |           |            | 9,233,000 |             |              |             | 139,420,000 | 
|                                      |                                                           |                                                      |                              |              |             |             |             |           |            |           |             |              |            
|                                      |                                                           | TOTAL ASSETS                                         |                              | $            | 274,697,000 |             |             | $         | 10,333,000 |           |             | $            | 285,030,000 |            
|                                      |                                                           |                                                      |                              |              |             |             |             |           |            |           |             |              |            
|LIABILITIES AND SHAREHOLDERS DEFICIT |                                                           |                                                      |                              |              |             |             |             |           |            |           |             |             
|CURRENT LIABILITIES:                  |                                                           |                                                      |                              |              |             |             |             |           |            |           |             |             
|                                      | Accounts payable                                          |                                                      | $                            | 10,295,000   |             |             | $           |          |            |           | $           | 10,295,000   |            
|                                      | Other payables                                            |                                                      |                              | 1,855,000    |             |             |             |          |            |           |             | 1,855,000    |            
|                                      | Accrued expenses:                                         |                                                      |                              |              |             |             |             |           |            |           |             |              |            
|                                      |                                                           | Payroll and related benefits                         |                              |              | 9,260,000   |             |             |           | 19,000     |           |             |              | 9,279,000   |            
|                                      |                                                           | Insurance, including self-insurance reserves         |                              |              | 6,003,000   |             |             |           |           |           |             |              | 6,003,000   |            
|                                      |                                                           | Other                                                |                              |              | 899,000     |             |             |           | 13,000     |           |             |              | 912,000     |            
|                                      |                                                           |                                                      |                              |              |             |             |             |           |            |           |             |              |            
|                                      |                                                           |                                                      | Total current liabilities    |              |             | 28,312,000  |             |           |            | 32,000    |             |              |             | 28,344,000  | 
|                                      |                                                           |                                                      |                              |              |             |             |             |           |            |           |             |              |            
|NONCURRENT LIABILITIES:               |                                                           |                                                      |                              |              |             |             |             |           |            |           |             |             
|                                      | Other noncurrent liabilities                              |                                                      |                              | 282,000      |             |             |             | 466,000   |            |           |             | 748,000      |            
|                                      |                                                           |                                                      |                              |              |             |             |             |           |            |           |             |              |            
|                                      |                                                           |                                                      | Total noncurrent liabilities |              |             | 282,000     |             |           |            | 466,000   |             |              |             | 748,000     | 
|                                      |                                                           |                                                      |                              |              |             |             |             |           |            |           |             |              |            
|LIABILITIES SUBJECT TO COMPROMISE:    |                                                           |                                                      | 311,723,000                  |              |             |             |            |           |            |           | 311,723,000 |             
|                                      | SHAREHOLDERS (DEFICIT) EQUITY                            |                                                      |                              | (65,620,000  | )           |             |             | 9,835,000 |            |           |             | (55,785,000  | )          
|                                      |                                                           |                                                      |                              |              |             |             |             |           |            |           |             |              |            
|                                      |                                                           | TOTAL LIABILITIES AND SHAREHOLDERS (DEFICIT) EQUITY |                              | $            | 274,697,000 |             |             | $         | 10,333,000 |           |             | $            | 285,030,000 |            
|                                      |                                                           |                                                      |                              |              |             |             |             |           |            |           |             |              |            

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American HomePatient, Inc. and Subsidiaries
Condensed Combining Statements of Operations
for the Nine Months Ended September 30, 2002
(unaudited)

|                                                                                                                         |                                                                                                        |                |                |             |             |             |             |            |          |           |             |             |             |             | 
|------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------ | -------------- | -------------- | ----------- | ----------- | ----------- | ----------- | ---------- | -------- | --------- | ----------- | ----------- | ----------- | ----------- | 
|                                                                                                                         |                                                                                                        |                |                |             | Debtors     |             | Non-Debtors |            | Combined
|                                                                                                                         |                                                                                                        |                |                |             |             |             |             |            |         
|REVENUES:                                                                                                                |                                                                                                        |                |                |             |             |             |             |            |          |           |             |            
|                                                                                                                         | Sales and related service revenues                                                                     |                | $              | 101,425,000 |             |             | $           | 578,000    |          |           | $           | 102,003,000 |            
|                                                                                                                         | Rentals and other revenues                                                                             |                |                | 133,985,000 |             |             |             | 1,598,000  |          |           |             | 135,583,000 |            
|                                                                                                                         |                                                                                                        |                |                |             |             |             |             |            |          |           |             |             |            
|                                                                                                                         |                                                                                                        |                | Total revenues |             |             | 235,410,000 |             |            |          | 2,176,000 |             |             |             | 237,586,000 | 
|                                                                                                                         |                                                                                                        |                |                |             |             |             |             |            |          |           |             |             |            
|EXPENSES:                                                                                                                |                                                                                                        |                |                |             |             |             |             |            |          |           |             |            
|                                                                                                                         | Cost of sales and related services                                                                     |                |                | 46,828,000  |             |             |             | 347,000    |          |           |             | 47,175,000  |            
|                                                                                                                         | Cost or rentals and other revenues, including rental equipment depreciation                            |                |                | 25,798,000  |             |             |             | 263,000    |          |           |             | 26,061,000  |            
|                                                                                                                         | Operating, including bad debt expense                                                                  |                |                | 136,214,000 |             |             |             | 1,059,000  |          |           |             | 137,273,000 |            
|                                                                                                                         | General and administrative                                                                             |                |                | 12,066,000  |             |             |             |           |          |           |             | 12,066,000  |            
|                                                                                                                         | Earnings from joint ventures                                                                           |                |                | (2,295,000  | )           |             |             | (1,097,000 | )        |           |             | (3,392,000  | )          
|                                                                                                                         | Depreciation, excluding rental equipment, and amortization                                             |                |                | 3,079,000   |             |             |             | 5,000      |          |           |             | 3,084,000   |            
|                                                                                                                         | Amortization of deferred financing costs                                                               |                |                | 1,779,000   |             |             |             |           |          |           |             | 1,779,000   |            
|                                                                                                                         | Interest (excluding post-petition contractual interest of $5,113,000, $0
and $5,113,000, respectively) |                |                | 12,144,000  |             |             |             |           |          |           |             | 12,144,000  |            
|                                                                                                                         | Gain on sale of assets of center                                                                       |                |                | (667,000    | )           |             |             |           |          |           |             | (667,000    | )          
|                                                                                                                         | Chapter 11 financial advisory expenses incurred prior to filing bankruptcy                             |                |                | 818,000     |             |             |             |           |          |           |             | 818,000     |            
|                                                                                                                         |                                                                                                        |                |                |             |             |             |             |            |          |           |             |             |            
|                                                                                                                         |                                                                                                        | Total expenses |                |             | 235,764,000 |             |             |            | 577,000  |           |             |             | 236,341,000 |            
|                                                                                                                         |                                                                                                        |                |                |             |             |             |             |            |          |           |             |             |            
|INCOME FROM OPERATIONS BEFORE REORGANIZATION ITEMS, INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE |                                                                                                        |                | (354,000       | )           |             |             | 1,599,000   |            |          |           | 1,245,000   |            
|REORGANIZATION ITEMS                                                                                                     |                                                                                                        |                | 3,917,000      |             |             |             |            |            |          |           | 3,917,000   |            
|                                                                                                                         |                                                                                                        |                |                |             |             |             |             |            |          |           |             |             |            
|(LOSS) INCOME FROM OPERATIONS BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE                |                                                                                                        |                | (4,271,000     | )           |             |             | 1,599,000   |            |          |           | (2,672,000  | )          
|BENEFIT FROM INCOME TAXES                                                                                                |                                                                                                        |                | (1,812,000     | )           |             |             |            |            |          |           | (1,812,000  | )          
|                                                                                                                         |                                                                                                        |                |                |             |             |             |             |            |          |           |             |             |            
|(LOSS) INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE                                                 |                                                                                                        |                | (2,459,000     | )           |             |             | 1,599,000   |            |          |           | (860,000    | )          
|CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE WITH NO RELATED TAX EFFECT                                           |                                                                                                        |                | (68,485,000    | )           |             |             |            |            |          |           | (68,485,000 | )          
|                                                                                                                         |                                                                                                        |                |                |             |             |             |             |            |          |           |             |             |            
|NET (LOSS) INCOME                                                                                                        |                                                                                                        | $              | (70,944,000    | )           |             | $           | 1,599,000   |            |          | $         | (69,345,000 | )          
|                                                                                                                         |                                                                                                        |                |                |             |             |             |             |            |          |           |             |             |            

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American HomePatient, Inc. and Subsidiaries
Condensed Combining Statements of Cash Flows
for the Nine Months Ended September 30, 2002
(unaudited)

|                                               |                                                                                          |                                                       |                                       |                                           |            |             |            |             |            |          |            |             |            |             |            |  
|---------------------------------------------- | ---------------------------------------------------------------------------------------- | ----------------------------------------------------- | ------------------------------------- | ----------------------------------------- | ---------- | ----------- | ---------- | ----------- | ---------- | -------- | ---------- | ----------- | ---------- | ----------- | ---------- | -
|                                               |                                                                                          |                                                       |                                       |                                           |            | Debtors     |            | Non-Debtors |            | Combined
|                                               |                                                                                          |                                                       |                                       |                                           |            |             |            |             |            |         
|CASH FLOWS FROM OPERATING ACTIVITIES:          |                                                                                          |                                                       |                                       |                                           |            |             |            |             |            |          |            |            
|                                               | Net (loss) income                                                                        |                                                       | $                                     | (70,943,000                               | )          |             | $          | 1,598,000   |            |          | $          | (69,345,000 | )         
|                                               | Adjustments to reconcile net (loss) income to net cash
provided by operating activities: |                                                       |                                       |                                           |            |             |            |             |            |          |            |             |           
|                                               |                                                                                          | Cumulative effect of change in accounting principle   |                                       |                                           | 68,485,000 |             |            |             |           |          |            |             | 68,485,000 |            
|                                               |                                                                                          | Depreciation and amortization                         |                                       |                                           | 17,746,000 |             |            |             | 172,000    |          |            |             | 17,918,000 |            
|                                               |                                                                                          | Amortization of deferred financing costs              |                                       |                                           | 1,779,000  |             |            |             |           |          |            |             | 1,779,000  |            
|                                               |                                                                                          | Provision for doubtful accounts                       |                                       |                                           | (5,940,000 | )           |            |             | 10,000     |          |            |             | (5,930,000 | )          
|                                               |                                                                                          | Provision for inventory                               |                                       |                                           | (97,000    | )           |            |             |           |          |            |             | (97,000    | )          
|                                               |                                                                                          | Equity in earnings of unconsolidated joint ventures   |                                       |                                           | (838,000   | )           |            |             | (1,096,000 | )        |            |             | (1,934,000 | )          
|                                               |                                                                                          | Minority interest                                     |                                       |                                           |           |             |            |             | 214,000    |          |            |             | 214,000    |            
|                                               |                                                                                          | Gain on sale of assets of center                      |                                       |                                           | (667,000   | )           |            |             |           |          |            |             | (667,000   | )          
|                                               |                                                                                          | Reorganization items                                  |                                       |                                           | 3,917,000  |             |            |             |           |          |            |             | 3,917,000  |            
|                                               |                                                                                          | Reorganization items paid                             |                                       |                                           | (176,000   | )           |            |             |           |          |            |             | (176,000   | )          
|                                               | Change in assets and liabilities, net of dispositions:                                   |                                                       |                                       |                                           |            |             |            |             |            |          |            |             |           
|                                               |                                                                                          | Accounts receivable                                   |                                       |                                           | 12,927,000 |             |            |             | 5,000      |          |            |             | 12,932,000 |            
|                                               |                                                                                          | Inventories                                           |                                       |                                           | (1,259,000 | )           |            |             | 29,000     |          |            |             | (1,230,000 | )          
|                                               |                                                                                          | Prepaid expenses and other current assets             |                                       |                                           | 65,000     |             |            |             |           |          |            |             | 65,000     |            
|                                               |                                                                                          | Federal income tax receivable                         |                                       |                                           | (2,112,000 | )           |            |             |           |          |            |             | (2,112,000 | )          
|                                               |                                                                                          | Accounts payable, other payables and accrued expenses |                                       |                                           | 11,074,000 |             |            |             | 1,000      |          |            |             | 11,075,000 |            
|                                               |                                                                                          | Other noncurrent liabilities                          |                                       |                                           | (30,000    | )           |            |             |           |          |            |             | (30,000    | )          
|                                               |                                                                                          | Other assets and liabilities                          |                                       |                                           | 936,000    |             |            |             |           |          |            |             | 936,000    |            
|                                               |                                                                                          |                                                       |                                       |                                           |            |             |            |             |            |          |            |             |           
|                                               |                                                                                          |                                                       |                                       | Net cash provided by operating activities |            |             | 34,867,000 |             |            |          | 933,000    |             |            |             | 35,800,000 |  
|                                               |                                                                                          |                                                       |                                       |                                           |            |             |            |             |            |          |            |             |           
|CASH FLOWS FROM INVESTING ACTIVITIES:          |                                                                                          |                                                       |                                       |                                           |            |             |            |             |            |          |            |            
|                                               | Proceeds from sale of assets of center                                                   |                                                       |                                       | 1,805,000                                 |            |             |            |            |            |          |            | 1,805,000   |           
|                                               | Additions to property and equipment, net                                                 |                                                       |                                       | (19,669,000                               | )          |             |            | (179,000    | )          |          |            | (19,848,000 | )         
|                                               | Distributions and loan payments from (advances to)
unconsolidated joint ventures, net    |                                                       |                                       | 3,040,000                                 |            |             |            | (537,000    | )          |          |            | 2,503,000   |           
|                                               |                                                                                          |                                                       |                                       |                                           |            |             |            |             |            |          |            |             |           
|                                               |                                                                                          |                                                       | Net cash used in investing activities |                                           |            | (14,824,000 | )          |             |            | (716,000 | )          |             |            | (15,540,000 | )         
|                                               |                                                                                          |                                                       |                                       |                                           |            |             |            |             |            |          |            |             |           
|CASH FLOWS FROM FINANCING ACTIVITIES:          |                                                                                          |                                                       |                                       |                                           |            |             |            |             |            |          |            |            
|                                               | Principal payments on long-term debt and capital leases                                  |                                                       |                                       | (6,119,000                                | )          |             |            |            |            |          |            | (6,119,000  | )         
|                                               | Proceeds from exercise of employee stock options                                         |                                                       |                                       | 11,000                                    |            |             |            |            |            |          |            | 11,000      |           
|                                               | Deferred financing costs                                                                 |                                                       |                                       | (11,000                                   | )          |             |            |            |            |          |            | (11,000     | )         
|                                               | Distributions to minority interest owners                                                |                                                       |                                       |                                          |            |             |            | (206,000    | )          |          |            | (206,000    | )         
|                                               | Restricted cash                                                                          |                                                       |                                       | 198,000                                   |            |             |            |            |            |          |            | 198,000     |           
|                                               |                                                                                          |                                                       |                                       |                                           |            |             |            |             |            |          |            |             |           
|                                               |                                                                                          |                                                       |                                       | Net cash used in financing activities     |            |             | (5,921,000 | )           |            |          | (206,000   | )           |            |             | (6,127,000 | )
|                                               |                                                                                          |                                                       |                                       |                                           |            |             |            |             |            |          |            |             |           
|INCREASE IN CASH AND CASH EQUIVALENTS          |                                                                                          |                                                       | 14,122,000                            |                                           |            |             | 11,000     |             |            |          | 14,133,000 |            
|CASH AND CASH EQUIVALENTS, beginning of period |                                                                                          |                                                       | 9,090,000                             |                                           |            |             | 39,000     |             |            |          | 9,129,000  |            
|                                               |                                                                                          |                                                       |                                       |                                           |            |             |            |             |            |          |            |             |           
|CASH AND CASH EQUIVALENTS, end of period       |                                                                                          | $                                                     | 23,212,000                            |                                           |            | $           | 50,000     |             |            | $        | 23,262,000 |            
|                                               |                                                                                          |                                                       |                                       |                                           |            |             |            |             |            |          |            |             |           
|SUPPLEMENTAL INFORMATION:                      |                                                                                          |                                                       |                                       |                                           |            |             |            |             |            |          |            |            
|                                               | Cash payments of interest                                                                |                                                       | $                                     | 12,559,000                                |            |             | $          |            |            |          | $          | 12,559,000  |           
|                                               |                                                                                          |                                                       |                                       |                                           |            |             |            |             |            |          |            |             |           
|                                               | Cash payments of income taxes                                                            |                                                       | $                                     | 488,000                                   |            |             | $          |            |            |          | $          | 488,000     |           
|                                               |                                                                                          |                                                       |                                       |                                           |            |             |            |             |            |          |            |             |           

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6. GOING CONCERN

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has incurred net losses
of $2,404,000, $69,345,000 and $12,892,000 for the three and nine months ended
September 30, 2002 and for the year ended December 31, 2001, respectively, and
has a shareholders deficit of $55,785,000 at September 30, 2002. The Company
has substantial debt balances related to the Amended Credit Agreement, of which
$275.4 million is due on or before December 31, 2002. There is currently no
commitment as to how any such payment would be satisfied by the Company. This
amount is included in liabilities subject to compromise as of September 30,
2002. See Note 3 for further information related to the Bankruptcy Filing.
These factors among others raise substantial doubt about the Companys ability
to continue as a going concern. The accompanying financial statements do not
include any adjustments of recorded asset carrying amounts or the amounts and
classification of liabilities that might result should the Company be unable to
continue as a going concern.

See Note 3 for a discussion of the Companys proceedings under Chapter 11 of
the bankruptcy code. Through the bankruptcy proceedings, the Company plans to
extend the maturity on the Bank Credit Facility, reduce the related interest
cost on such debt, and to pay all of its reported liabilities. Under this
plan, the Company will continue to be highly leveraged and subject to
substantial interest costs. In addition, the Company has plans to improve
financial performance through consolidating operations, stabilizing and
increasing profitable revenues, decreasing and controlling operating expenses
and improving accounts receivable performance. The Company is unable to
predict whether the Plan will be accepted, or it will be able to successfully
execute its operating plan after bankruptcy. If the Company is unable to
successfully emerge from bankruptcy and continue to improve its operations, its
financial position, results of operations and cash flows would be impacted
adversely.

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 its proposed Plan of Reorganization. However, as with
all projections, there can be no guarantee that managements projections will
be achieved. The Bankruptcy Filing and the related uncertainties could disrupt
operations and could negatively affect the Companys business, financial
condition, results of operations and cash flows. The Company has taken a
number of steps designed to minimize any such disruptions including requesting
critical vendor status for certain vendors, communicating with other vendors
regarding ongoing operations, requesting Bankruptcy Court permission to assume
certain executory contracts, seeking approval of a Key Employee Retention Plan,
establishing an employee communication program regarding the Bankruptcy Filing
and related issues, and communicating with referral sources and patients as
needed. The uncertainty regarding the outcome of the Bankruptcy Filing may
impair the Companys ability to receive trade credit from its vendors and could
have a material adverse effect on the Companys business, financial condition,
results of operations and cash flows.

7. GOVERNMENT INVESTIGATION AND LITIGATION

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

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(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 agreed to pay the relators attorneys fees and
expenses. The Companys Plan of Reorganization proposes that the Company will
timely pay all amounts owed in accordance with the Government Settlement. The
Company has reserved $4,236,000 for its future obligations pursuant to the
Government Settlement. The Government Settlement does not resolve the
relators claims that the Company discriminated against him as a result of his
reporting alleged violations of the law to the government. The Company denies
and intends to vigorously defend these claims.

The Company also was named as a defendant in two other False Claims Act cases.
In each of those cases, the DOJ declined to intervene and both cases were
subsequently dismissed in March 2001. The first of these cases, United States
ex rel. Kirk S. Corsello v. Lincare, et al. (N.D. Ga.), was dismissed with
prejudice on motion of the Company on March 9, 2001. The appeal of that
dismissal was argued in November 2001; however, in December 2001 the Court of
Appeals for the Eleventh Circuit dismissed the appeal on jurisdictional grounds
and returned the case to the trial court. In January 2002, one of the other
defendants filed a Motion for Reconsideration with the Court of Appeals, and
the Court of Appeals denied the motion on July 10, 2002. On August 5, 2002 the
Company filed a Notice of Bankruptcy which stays the proceedings as to the
Company. Mr. Corsellos qui tam complaint alleged that the Company and numerous
other unrelated defendants, including other large DME suppliers, engaged in a
kickback scheme to provide free or below market value equipment and medicine to
physicians who would in turn refer patients to the defendants in violation of
the False Claims Act. The other case, United States ex rel. Alan D. Hutchison
v. Respironics, et al. (S.D. NY and N.D. Ga.), was dismissed without prejudice
on Mr. Hutchisons own motion on March 22, 2001. Since that date, the Company
has not been served with any additional papers in this case. Mr. Hutchisons
qui tam complaint alleged that the Company and numerous other unrelated
defendants filed false claims with Medicare for ventilators that the defendants
allegedly knew were not medically necessary.

The Company was informed in May 2001 that the United States is investigating
its conduct during periods after December 31, 1998, and the Company believes
that this investigation was prompted by another qui tam complaint against the
Company under the False Claims Act. The Company has not seen a complaint in
this action, but believes that it contains allegations similar to the ones
investigated by the government in connection with the False Claims Act case
covered by the Government Settlement discussed above. The Company believes
that this second case will be limited to allegedly improper activities
occurring after December 31, 1998.

There can be no assurances as to the final outcome of any pending False Claims
Act lawsuits. Possible outcomes include, among other things, the repayment of
reimbursements previously

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received by the Company related to improperly billed
claims, the imposition of fines or penalties,
and the suspension or exclusion of the Company from participation in the
Medicare, Medicaid and other government reimbursement programs. Other than the
$4,236,000 reserve discussed above which relates to the Government Settlement,
the Company has not recorded any reserves related to the unsettled government
investigations. The outcome of any pending lawsuits or future settlements
could have a material adverse effect on the Company.

The Company is a party to other legal proceedings incidental to its business.
In the opinion of management, any ultimate liability with respect to these
other actions will not have a material adverse effect on its financial position
or results of operations.

8. RELATED PARTY TRANSACTIONS

A partner in the law firm of Harwell Howard Hyne Gabbert & Manner, P.C.
(H3GM), which the Company engaged during 2002 and 2001 to render legal advice
in a variety of activities, was a director of the Company until July 2002. The
Company paid H3GM $460,000, $852,000, $265,000 and $517,000 during the three
and nine months ended September 30, 2002 and 2001, respectively.

The Company maintains an employee benefit trust for the purpose of paying
health insurance claims for its employees. The trust was established in June
2002 and was funded with an initial deposit of $0.5 million in July 2002.
Disbursements from the trust began in late July 2002. The Company deposits
funds into the trust on an as needed basis to pay claims.

9. SALE OF ASSETS OF CENTER

In the quarter ended March 31, 2002, the Company recorded a pre-tax gain of
approximately $0.7 million related to the sale of the assets of an infusion
business and nursing agency (collectively, the Center). Effective March 19,
2002 substantially all of the assets of the Center were sold for approximately
$1.3 million in cash. Funds representing the value of the remaining assets of
the Center have been escrowed pending regulatory approvals and will be released
once these are obtained. During the three and nine months ended September 30,
2002 and 2001, the Center generated approximately $0.1 million, $2.0 million,
$2.2 million and $6.7 million, respectively, in total revenues. The proceeds
of this sale were used to pay down debt under the Companys Bank Credit
Facility.

Effective September 1, 2001, the Company sold substantially all of the assets
of its rehab centers and recorded a pre-tax loss of $2.6 million related to the
sale. The rehab centers were sold for approximately $7.7 million, of which
$7.2 million was received in cash at closing with the remainder paid on
February 28, 2002. The cash proceeds of the sale were used to pay down debt
under the Companys Bank Credit Facility. During the three and nine months
ended September 30, 2001, the rehab centers generated approximately $3.3
million and $14.2 million, respectively, in total revenues.

In July 2001, the Company sold an unprofitable respiratory and home medical
equipment center for approximately $0.6 million in cash. The cash proceeds of
the sale were used to pay down debt under the Companys Bank Credit Facility.
During the three and nine months ended September
30,

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2001, the respiratory and home medical equipment center generated
approximately $0 and $0.5 million, respectively, in total revenues.

In addition, the Company sold two unprofitable infusion centers in April 2001.
During the three and six months ended June 30, 2001, the infusion centers
generated approximately $0 and $0.9 million, respectively, in total revenues.
The proceeds of the sale were used to pay down debt under the Companys Bank
Credit Facility.

10. EARNINGS PER SHARE

Under the standards established by Statement of Financial Accounting Standards
No. 128, Earnings Per Share, earnings per share is measured at two levels:
basic earnings per share and diluted earnings per share. Basic earnings per
share is computed by dividing net income (loss) by the weighted average number
of common shares outstanding during the year. Diluted earnings per share is
computed by dividing net income (loss) by the weighted average number of common
shares after considering the additional dilution related to convertible
preferred stock, convertible debt, options and warrants. In computing diluted
earnings per share, the outstanding stock warrants and stock options are
considered dilutive using the treasury stock method. For the three months
ended September 30, 2002 and 2001, and for the nine months ended September 30,
2002 and 2001, approximately 3,998,000, 3,603,000, 4,099,000 and 2,891,000
shares, respectively, were attributable to the exercise of outstanding options
and were excluded from the calculation of diluted earnings per share because
the effect was antidilutive.

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

|                                                                                 |           |   |                              |       |                             |   |            |       |      |   |             |       |   |   |             |       |  
|-------------------------------------------------------------------------------- | --------- | - | ---------------------------- | ----- | --------------------------- | - | ---------- | ----- | ---- | - | ----------- | ----- | - | - | ----------- | ----- | -
|                                                                                 |           |   | Three Months Ended Sept. 30, |       | Nine Months Ended Sept. 30,
|                                                                                 |           |   |                              |       |                            
|                                                                                 |           |   | 2002                         |       | 2001                        |   | 2002       |       | 2001
|                                                                                 |           |   |                              |       |                             |   |            |       |     
|Loss before cumulative effect of
change in accounting principle                  |           | $ | (2,404,000                   | )     |                             | $ | (5,968,000 | )     |      | $ | (860,000    | )     |   | $ | (15,581,000 | )    
|Cumulative effect of change in accounting
principle                              |           |   |                             |       |                             |   |           |       |      |   | (68,485,000 | )     |   |   |            |      
|                                                                                 |           |   |                              |       |                             |   |            |       |      |   |             |       |   |   |             |      
|Net loss                                                                         |           | $ | (2,404,000                   | )     |                             | $ | (5,968,000 | )     |      | $ | (69,345,000 | )     |   | $ | (15,581,000 | )    
|                                                                                 |           |   |                              |       |                             |   |            |       |      |   |             |       |   |   |             |      
|Weighted average common shares outstanding                                       |           |   | 16,367,000                   |       |                             |   | 16,327,000 |       |      |   | 16,355,000  |       |   |   | 16,235,000  |      
|Effect of dilutive options and warrants                                          |           |   |                             |       |                             |   |           |       |      |   |            |       |   |   |            |      
|                                                                                 |           |   |                              |       |                             |   |            |       |      |   |             |       |   |   |             |      
|Adjusted diluted common shares outstanding                                       |           |   | 16,367,000                   |       |                             |   | 16,327,000 |       |      |   | 16,355,000  |       |   |   | 16,235,000  |      
|                                                                                 |           |   |                              |       |                             |   |            |       |      |   |             |       |   |   |             |      
|Loss per common share before
cumulative effect of change in
accounting
principle |           |   |                              |       |                             |   |            |       |      |   |             |       |   |   |             |      
|                                                                                 | - Basic   |   | $                            | (0.15 | )                           |   | $          | (0.37 | )    |   | $           | (0.05 | ) |   | $           | (0.96 | )
|                                                                                 |           |   |                              |       |                             |   |            |       |      |   |             |       |   |   |             |      
|                                                                                 | - Diluted |   | $                            | (0.15 | )                           |   | $          | (0.37 | )    |   | $           | (0.05 | ) |   | $           | (0.96 | )
|                                                                                 |           |   |                              |       |                             |   |            |       |      |   |             |       |   |   |             |      
|Cumulative effect of change in accounting
principle per common share             |           |   |                              |       |                             |   |            |       |      |   |             |       |   |   |             |      
|                                                                                 | - Basic   |   | $                            |      |                             |   | $          |      |      |   | $           | (4.19 | ) |   | $           |      |  
|                                                                                 |           |   |                              |       |                             |   |            |       |      |   |             |       |   |   |             |      
|                                                                                 | - Diluted |   | $                            |      |                             |   | $          |      |      |   | $           | (4.19 | ) |   | $           |      |  
|                                                                                 |           |   |                              |       |                             |   |            |       |      |   |             |       |   |   |             |      
|Net loss per common share                                                        |           |   |                              |       |                             |   |            |       |      |   |             |       |   |   |             |      
|                                                                                 | - Basic   |   | $                            | (0.15 | )                           |   | $          | (0.37 | )    |   | $           | (4.24 | ) |   | $           | (0.96 | )
|                                                                                 |           |   |                              |       |                             |   |            |       |      |   |             |       |   |   |             |      
|                                                                                 | - Diluted |   | $                            | (0.15 | )                           |   | $          | (0.37 | )    |   | $           | (4.24 | ) |   | $           | (0.96 | )
|                                                                                 |           |   |                              |       |                             |   |            |       |      |   |             |       |   |   |             |      

11. RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 141, Business Combinations
(SFAS No. 141) and Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets (SFAS No. 142). SFAS No. 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. SFAS No. 141 also specifies criteria which
intangible assets acquired in a purchase method business combination must meet
to be recognized and reported apart from goodwill. The Company adopted SFAS
No. 141 effective July 1, 2001. See Note 12 Adoption of SFAS No. 142 for
disclosure of the impact of SFAS No. 142. The Company adopted SFAS No. 142 on
January 1, 2002.

In June 2001, the FASB issued Statement of Financial Accounting Standards No.
143, Accounting for Asset Retirement Obligations (SFAS No. 143) effective
for fiscal years beginning after June 15, 2002. SFAS No. 143 requires that a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
Company does not expect the future adoption of SFAS No. 143 to have a material
effect on its financial position or results of operations.

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In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS
No. 144) effective for fiscal years beginning after December 15, 2001. SFAS
No. 144 establishes a single accounting model for long-lived assets to be
disposed of by sale, whether previously held and used or newly acquired, and
broadens the presentation of discontinued operations to include more disposal
transactions. The Companys January 1, 2002 adoption of SFAS No. 144 did not
have a material impact on its financial position or results of operations.

In April 2002, the FASB issued Statement of Financial Accounting Standards No.
145,  Rescission of FASB Statement No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections (SFAS No. 145). SFAS No. 145
rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt,
and an amendment of that Statement, SFAS No. 64, Extinguishment of Debt Made
to Satisfy Sinking-Fund Requirements. SFAS No. 145 also rescinds SFAS No. 44,
Accounting for Intangible Assets of Motor Carriers. SFAS No. 145 amends SFAS
No. 13, Accounting for Leases, to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the required accounting
for certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This Statement also makes several technical
corrections and clarifications to other existing authoritative pronouncements.
The provisions of this Statement related to the rescission of SFAS No. 4 are
effective for fiscal years beginning after May 15, 2002. The provisions of
this Statement related to SFAS No. 13 are effective for transactions occurring
after May 15, 2002. All other provisions of this Statement are effective for
financial statements issued on or after May 15, 2002. The Companys adoption
of the provisions of SFAS No. 145 which were effective for transactions after
May 15, 2002 did not have a material effect on its financial statements. The
Company is evaluating the remaining provisions of SFAS No. 145 and will adopt
the remaining provisions prospectively on January 1, 2003.

In June 2002, the FASB issued Statement of Financial Accounting Standards No.
146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS
No. 146) effective for exit or disposal activities that are initiated after
December 31, 2002. SFAS No. 146 addresses financial accounting and reporting
for costs associated with exit or disposal activities and nullifies Emerging
Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)(Issue 94-3). The principal difference
between SFAS No. 146 and Issue 94-3 relates to the requirements for recognition
of a liability for a cost associated with an exit or disposal activity. SFAS
No. 146 requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred. Under Issue
94-3, a liability for an exit cost as defined in Issue 94-3 was recognized at
the date of an entitys commitment to an exit plan. The Company is currently
evaluating the impact of SFAS No. 146 on its financial statements and will
adopt the provisions of this Statement prospectively on January 1, 2003.

In November 2002, the FASB issued Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an Interpretation of FASB Statements No.
5, 57, and 107 and Rescission of FASB Interpretation No. 34 (FIN No. 45).
This Interpretation requires guarantors to account at fair value for and
disclose certain types of guarantees. The Interpretations disclosure
requirements are effective for the Companys year ended December 31, 2002; the
Interpretations accounting
requirements are

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effective for guarantees issued or modified after December 31,
2002. The Company is assessing the effects, if any, of this Interpretation.

12. ADOPTION OF SFAS NO. 142

The Company adopted the provisions of SFAS No. 142 effective January 1, 2002.
As of the adoption date, the Company had unamortized goodwill in the amount of
$189.7 million. In accordance with SFAS No. 142, effective January 1, 2002 the
Company discontinued amortization of goodwill. Goodwill was tested for
impairment by comparing the fair value of goodwill to the carrying value of
goodwill. Fair value was determined using projected operating results and a
combination of analyses which included discounted cash flow calculations,
market multiples and other market information. Key assumptions used in these
estimates include projected operating results, discount rates and peer market
multiples. The implied fair value of goodwill did not support the carrying
value of goodwill primarily due to the Companys highly leveraged capital
structure.

Based upon the results of the Companys initial impairment tests, the Company
recorded an impairment loss of $68.5 million in the quarter ended March 31,
2002, recognized as a cumulative effect of change in accounting principle.
There was no tax effect on the impairment loss due to the fact that the
majority of the related goodwill was non-tax deductible and because of the
Companys federal net operating loss position. The Company will conduct annual
impairment tests hereafter, unless specific events arise which warrant more
immediate testing. Any subsequent impairment loss will be recognized as an
operating expense in the Companys consolidated statements of operations. The
Company recorded goodwill amortization expense of $1.4 million and $4.2 million
in the three and nine months ended September 30, 2001, respectively.

The change in the carrying amount of goodwill for the nine month period ended
September 30, 2002 is as follows:

|                                                               |  |      |             |  
|-------------------------------------------------------------- |  | ---- | ----------- | -
|                                                               |  | 2002
|                                                               |  |     
|Goodwill, net of accumulated amortization, beginning of
period |  | $    | 189,699,000 |  
|Transitional impairment loss                                   |  |      | (68,485,000 | )
|                                                               |  |      |             |  
|Goodwill, net of accumulated amortization, end of period       |  | $    | 121,214,000 |  
|                                                               |  |      |             |  

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Actual results of operations for the three months and nine months ended
September 30, 2002 and pro forma results of operations for the three months and
nine months ended September 30, 2001 had the Company applied the
non-amortization provisions of SFAS No. 142 in that period are as follows:

|                                       |                       |                   |            |                              |            |                             |            |       |            |      |             |       |             |   |             |       |             |  
|-------------------------------------- | --------------------- | ----------------- | ---------- | ---------------------------- | ---------- | --------------------------- | ---------- | ----- | ---------- | ---- | ----------- | ----- | ----------- | - | ----------- | ----- | ----------- | -
|                                       |                       |                   |            | Three Months Ended Sept. 30, |            | Nine Months Ended Sept. 30,
|                                       |                       |                   |            |                              |            |                            
|                                       |                       |                   |            | 2002                         |            | 2001                        |            | 2002  |            | 2001
|                                       |                       |                   |            |                              |            |                             |            |       |            |     
|Reported net loss                      |                       | $                 | (2,404,000 | )                            |            | $                           | (5,968,000 | )     |            | $    | (69,345,000 | )     |             | $ | (15,581,000 | )    
|Add: Goodwill amortization             |                       |                   |           |                              |            |                             | 1,409,000  |       |            |      |            |       |             |   | 4,248,000   |      
|                                       |                       |                   |            |                              |            |                             |            |       |            |      |             |       |             |   |             |      
|                                       |                       | Adjusted net loss |            | $                            | (2,404,000 | )                           |            | $     | (4,559,000 | )    |             | $     | (69,345,000 | ) |             | $     | (11,333,000 | )
|                                       |                       |                   |            |                              |            |                             |            |       |            |      |             |       |             |   |             |      
|Basic loss per share
Reported net loss |                       | $                 | (0.15      | )                            |            | $                           | (0.37      | )     |            | $    | (4.24       | )     |             | $ | (0.96       | )    
|                                       | Goodwill amortization |                   |            |                             |            |                             |            | 0.09  |            |      |             |      |             |   |             | 0.26  |            
|                                       |                       |                   |            |                              |            |                             |            |       |            |      |             |       |             |   |             |      
|                                       |                       | Adjusted net loss |            | $                            | (0.15      | )                           |            | $     | (0.28      | )    |             | $     | (4.24       | ) |             | $     | (0.70       | )
|                                       |                       |                   |            |                              |            |                             |            |       |            |      |             |       |             |   |             |      
|Diluted loss per share                 |                       |                   |            |                              |            |                             |            |       |            |      |             |       |             |   |             |      
|                                       | Reported net loss     |                   | $          | (0.15                        | )          |                             | $          | (0.37 | )          |      | $           | (4.24 | )           |   | $           | (0.96 | )          
|                                       | Goodwill amortization |                   |            |                             |            |                             |            | 0.09  |            |      |             |      |             |   |             | 0.26  |            
|                                       |                       |                   |            |                              |            |                             |            |       |            |      |             |       |             |   |             |      
|                                       |                       | Adjusted net loss |            | $                            | (0.15      | )                           |            | $     | (0.28      | )    |             | $     | (4.24       | ) |             | $     | (0.70       | )
|                                       |                       |                   |            |                              |            |                             |            |       |            |      |             |       |             |   |             |      

13. RESTATEMENT

Subsequent to the issuance of the Companys June 30, 2002 consolidated
financial statements, the Companys management determined that the accounting
treatment initially afforded to certain transactions was not correct. A
summary of these items is provided below.

In June 2001, the Company executed the Amended Credit Agreement (see Note 2)
incurring restructuring fees of approximately $2,259,000. These fees were
initially expensed as paid but should have been accrued and recorded as
deferred financing costs and amortized over the appropriate term. In addition,
in connection with the Amended Credit Agreement, the Company issued warrants to
its Lenders. The Company initially amortized these warrants incorrectly. The
Amended Credit Agreement also stipulated that the Company pay an administrative
fee of $75,000 and an annual fee of 0.50% of the average monthly outstanding
indebtedness. These fees were capitalized as deferred financing costs when
paid, which were subsequently amortized instead of accruing the costs as
interest expense as incurred. Finally, the Amended Credit Agreement and its
predecessor agreement (the Agreements), called for the payment of additional
interest in the amount of 4.5% per annum on that principal portion outstanding
in excess of four times Adjusted EBITDA, as defined by the Agreements. The
initial accounting for this interest was not appropriate. As a result of the
above, deferred financing costs, net were understated by approximately
$636,000, accrued financing costs and accrued interest were
overstated by approximately $1,059,000 and $862,000, respectively, at September
30, 2001.

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Interest expense should have been approximately $321,000 and $862,000
higher for the three and nine months ended September 30, 2001, and amortization
of deferred financing costs should have been approximately $127,000 and
$423,000 higher for the three and nine months ended September 30, 2001,
respectively. Deferred financing costs, net, accrued interest and accrued
financing costs were understated by approximately $309,000, $1,188,000 and
$859,000, respectively, at December 31, 2001.

During the year ended December 31, 2001, the Company accounted for certain
leases as operating leases, which should have been recorded as capital leases.

As a result, property and equipment, net and capital lease obligations were
understated by approximately $968,000 and $969,000 at September 30, 2001.
Interest expense should have been approximately $21,000 and $68,000 higher for
the three and nine months ended September 30, 2001, respectively, depreciation
expense should have been approximately $126,000 and $374,000 higher for the
three and nine months ended September 30, 2001, respectively. Rent expense was
overstated by approximately $146,000 and $441,000 for the three and nine months
ended September 30, 2001, respectively. Property and equipment, net and
capital lease obligations were understated by approximately $883,000 and
$885,000, respectively, at December 31, 2001.

In addition, the Company determined the following related to its September 30,
2001 consolidated financial statements:



| |  |  | Interest expense related to the Government Settlement was not
recorded resulting in an understatement of interest expense of
approximately $60,000 and $76,000 for the three and nine months ended
September 30, 2001, respectively;                                                                                                                                                                                 
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Certain reserves and accruals related to inventory required
adjustment resulting in an decrease in cost of sales and related
services of approximately $305,000 and $28,000 for the three and nine
months ended September 30, 2001, respectively;                                                                                                                                                                    
|
| |  |  | Certain reserves and accruals related to insurance required
adjustment resulting in an increase in operating expenses of
approximately $51,000 for the three months ended September 30, 2001,
and a decrease in operating expenses of approximately $150,000 for the
nine months ended September 30, 2001;                                                                                                           
|
| |  |  | Certain costs that were improperly capitalized in the three months
ended March 31, 2001 resulted in amortization that was improperly
included in operating expense. This resulted in an overstatement of
operating expenses of approximately $47,000 for the three months ended
September 30, 2001 and an understatement of operating expense of
approximately $147,000 for the nine months ended September 30, 2001;
|
| |  |  | Certain reserves related to accounts receivable resulting in a
decrease in operating expenses of approximately $124,000 for the three
and nine months ended September 30, 2001; and                                                                                                                                                                                                                                  

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| |  |  | Amortization expense related to the warrants was improperly
recorded resulting in an understatement of expense of approximately
$39,000 for the three months ended September 30, 2001, and an
understatement of expense of approximately $217,000 for the nine months
ended September 30, 2001.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In addition, the Company determined the following related to its December 31,
2001 consolidated financial statements:



| |  |  | Certain of its investments in bonds were not appropriately
accounted for resulting in an understatement of assets of approximately
$88,000;                                                                                                                                                          
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Certain reserves and accruals related to inventory and property and
equipment required adjustment resulting in an increase in inventory of
approximately $392,000, an increase in property and equipment of
approximately $126,000 and an increase in accounts payable of
approximately $338,000; and
|
| |  |  | Certain costs totaling $150,000 that were capitalized should have
been expensed.                                                                                                                                                                                                                     

The Company also made other miscellaneous adjustments to its previously issued
September 30, 2001 financial statements that had the effect of decreasing
previously reported net loss by approximately $19,000 for the three months
ended September 30, 2001, and increasing previously reported net loss by
approximately $72,000 for the nine months ended September 30, 2001.

In addition to the aforementioned restatement items, adjustments pertaining to
the amortization of warrants, certain of the Companys investments and general
and administrative expenses related to the year ended December 31, 2000 were
also identified. The Company recorded the effects of these adjustments, which
would have decreased previously reported 2000 net loss by approximately $0 and
$477,000, during the three and nine months ended September 30, 2001.

The consolidated financial statements as of December 31, 2001 and for the three
and nine months ended September 30, 2001, contained herein have been restated
to reflect the above discussed adjustments. The following are reconciliations
of the Companys financial statements previously filed to the restated
financial statements:

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|                                     |                                                                                                      |                                            |                            |                              |             |                   |             |              |             |            |             | 
|------------------------------------ | ---------------------------------------------------------------------------------------------------- | ------------------------------------------ | -------------------------- | ---------------------------- | ----------- | ----------------- | ----------- | ------------ | ----------- | ---------- | ----------- | 
|                                     |                                                                                                      |                                            |                            |                              |             | December 31, 2001
|                                     |                                                                                                      |                                            |                            |                              |             |                  
|                                     |                                                                                                      |                                            |                            |                              |             | As Previously     |             |              |             |           
|                                     |                                                                                                      |                                            |                            |                              |             | Reported          |             | As Restated 
|                                     |                                                                                                      |                                            |                            |                              |             |                   |             |             
|ASSETS                               |                                                                                                      |                                            |                            |                              |             |                   |             |             
|CURRENT ASSETS:                      |                                                                                                      |                                            |                            |                              |             |                   |             |             
|                                     | Cash and cash equivalents                                                                            |                                            | $                          | 9,159,000                    |             |                   | $           | 9,129,000    |            
|                                     | Restricted cash                                                                                      |                                            |                            | 265,000                      |             |                   |             | 265,000      |            
|                                     | Accounts receivable, less allowance for doubtful accounts                                            |                                            |                            | 61,661,000                   |             |                   |             | 62,154,000   |            
|                                     | Inventories, net of inventory reserves of $1,384,000 and
$1,191,000, respectively                    |                                            |                            | 13,257,000                   |             |                   |             | 14,001,000   |            
|                                     | Prepaid expenses and other current assets                                                            |                                            |                            | 1,583,000                    |             |                   |             | 1,582,000    |            
|                                     |                                                                                                      |                                            |                            |                              |             |                   |             |              |            
|                                     |                                                                                                      |                                            |                            | Total current assets         |             |                   | 85,925,000  |              |             |            | 87,131,000  | 
|                                     |                                                                                                      |                                            |                            |                              |             |                   |             |              |            
|PROPERTY AND EQUIPMENT, at cost:     |                                                                                                      |                                            | 171,266,000                |                              |             |                   | 172,626,000 |             
|                                     | Less accumulated depreciation and amortization                                                       |                                            |                            | (125,043,000                 | )           |                   |             | (125,538,000 | )          
|                                     |                                                                                                      |                                            |                            |                              |             |                   |             |              |            
|                                     |                                                                                                      |                                            |                            | Property and equipment, net  |             |                   | 46,223,000  |              |             |            | 47,088,000  | 
|                                     |                                                                                                      |                                            |                            |                              |             |                   |             |              |            
|OTHER ASSETS:                        |                                                                                                      |                                            |                            |                              |             |                   |             |             
|                                     | Goodwill, net                                                                                        |                                            |                            | 189,699,000                  |             |                   |             | 189,699,000  |            
|                                     | Investment in joint ventures                                                                         |                                            |                            | 9,492,000                    |             |                   |             | 9,450,000    |            
|                                     | Deferred financing costs, net of accumulated amortization
of $9,352,000 and $9,518,000, respectively |                                            |                            | 2,939,000                    |             |                   |             | 3,383,000    |            
|                                     | Other assets                                                                                         |                                            |                            | 10,386,000                   |             |                   |             | 10,289,000   |            
|                                     |                                                                                                      |                                            |                            |                              |             |                   |             |              |            
|                                     |                                                                                                      |                                            |                            | Total other assets           |             |                   | 212,516,000 |              |             |            | 212,821,000 | 
|                                     |                                                                                                      |                                            |                            |                              |             |                   |             |              |            
|                                     |                                                                                                      | TOTAL ASSETS                               |                            | $                            | 344,664,000 |                   |             | $            | 347,040,000 |           
|                                     |                                                                                                      |                                            |                            |                              |             |                   |             |              |            
|LIABILITIES AND SHAREHOLDERS EQUITY |                                                                                                      |                                            |                            |                              |             |                   |             |             
|CURRENT LIABILITIES:                 |                                                                                                      |                                            |                            |                              |             |                   |             |             
|                                     | Current portion of long-term debt and capital leases                                                 |                                            | $                          | 282,087,000                  |             |                   | $           | 282,554,000  |            
|                                     | Accounts payable                                                                                     |                                            |                            | 19,360,000                   |             |                   |             | 19,819,000   |            
|                                     | Other payables                                                                                       |                                            |                            | 2,600,000                    |             |                   |             | 2,600,000    |            
|                                     | Accrued expenses:                                                                                    |                                            |                            |                              |             |                   |             |              |            
|                                     |                                                                                                      | Payroll and related benefits               |                            |                              | 8,054,000   |                   |             |              | 8,054,000   |           
|                                     |                                                                                                      | Interest                                   |                            |                              | 907,000     |                   |             |              | 2,231,000   |           
|                                     |                                                                                                      | Insurance                                  |                            |                              | 5,229,000   |                   |             |              | 5,229,000   |           
|                                     |                                                                                                      | Other                                      |                            |                              | 6,024,000   |                   |             |              | 7,080,000   |           
|                                     |                                                                                                      |                                            |                            |                              |             |                   |             |              |            
|                                     |                                                                                                      |                                            |                            | Total current liabilities    |             |                   | 324,261,000 |              |             |            | 327,567,000 | 
|                                     |                                                                                                      |                                            |                            |                              |             |                   |             |              |            
|NONCURRENT LIABILITIES:              |                                                                                                      |                                            |                            |                              |             |                   |             |             
|                                     | Long-term debt and capital leases, less current portion                                              |                                            |                            | 723,000                      |             |                   |             | 1,142,000    |            
|                                     | Other noncurrent liabilities                                                                         |                                            |                            | 4,783,000                    |             |                   |             | 4,782,000    |            
|                                     |                                                                                                      |                                            |                            |                              |             |                   |             |              |            
|                                     |                                                                                                      |                                            |                            | Total noncurrent liabilities |             |                   | 5,506,000   |              |             |            | 5,924,000   | 
|                                     |                                                                                                      |                                            |                            |                              |             |                   |             |              |            
|SHAREHOLDERS EQUITY                 |                                                                                                      |                                            |                            |                              |             |                   |             |             
|                                     | Preferred stock, $.01 par value; authorized 5,000,000
shares; none issued and outstanding            |                                            |                            |                             |             |                   |             |             |            
|                                     | Common stock; $.01 par value; authorized 35,000,000 shares;
16,327,000 issued and outstanding        |                                            |                            | 163,000                      |             |                   |             | 163,000      |            
|                                     | Paid-in capital                                                                                      |                                            |                            | 173,975,000                  |             |                   |             | 173,975,000  |            
|                                     | Accumulated deficit                                                                                  |                                            |                            | (159,241,000                 | )           |                   |             | (160,589,000 | )          
|                                     |                                                                                                      |                                            |                            |                              |             |                   |             |              |            
|                                     |                                                                                                      |                                            | Total shareholders equity |                              |             | 14,897,000        |             |              |             | 13,549,000 |            
|                                     |                                                                                                      |                                            |                            |                              |             |                   |             |              |            
|                                     |                                                                                                      | TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |                            | $                            | 344,664,000 |                   |             | $            | 347,040,000 |           
|                                     |                                                                                                      |                                            |                            |                              |             |                   |             |              |            

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|                                            |                                                                                  |           |                |            |                    |            |             |            |            |            | 
|------------------------------------------- | -------------------------------------------------------------------------------- | --------- | -------------- | ---------- | ------------------ | ---------- | ----------- | ---------- | ---------- | ---------- | 
|                                            |                                                                                  |           |                |            | Three Months Ended
|                                            |                                                                                  |           |                |            | September 30, 2001
|                                            |                                                                                  |           |                |            |                   
|                                            |                                                                                  |           |                |            | As Previously      |            |             |            |           
|                                            |                                                                                  |           |                |            | Reported           |            | As Restated
|                                            |                                                                                  |           |                |            |                    |            |            
|REVENUES:                                   |                                                                                  |           |                |            |                    |            |             |           
|                                            | Sales and related service revenues                                               |           | $              | 40,131,000 |                    |            | $           | 40,131,000 |           
|                                            | Rentals and other revenues                                                       |           |                | 46,348,000 |                    |            |             | 46,346,000 |           
|                                            |                                                                                  |           |                |            |                    |            |             |            |           
|                                            |                                                                                  |           | Total revenues |            |                    | 86,479,000 |             |            |            | 86,477,000 | 
|                                            |                                                                                  |           |                |            |                    |            |             |            |           
|EXPENSES AND OTHER:                         |                                                                                  |           |                |            |                    |            |             |           
|                                            | Cost of sales and related services                                               |           |                | 18,611,000 |                    |            |             | 18,305,000 |           
|                                            | Cost of rentals and other revenues, including rental
equipment depreciation      |           |                | 9,230,000  |                    |            |             | 9,230,000  |           
|                                            | Operating, including bad debt expense of $5,378,000 and
$5,254,000, respectively |           |                | 49,549,000 |                    |            |             | 49,296,000 |           
|                                            | General and administrative                                                       |           |                | 3,792,000  |                    |            |             | 3,768,000  |           
|                                            | Earnings from joint ventures                                                     |           |                | (1,136,000 | )                  |            |             | (1,137,000 | )         
|                                            | Depreciation, excluding rental equipment, and amortization                       |           |                | 2,513,000  |                    |            |             | 2,639,000  |           
|                                            | Amortization of deferred financing costs                                         |           |                | 662,000    |                    |            |             | 828,000    |           
|                                            | Interest                                                                         |           |                | 6,334,000  |                    |            |             | 6,737,000  |           
|                                            | Gain on sale of assets of center                                                 |           |                | 2,629,000  |                    |            |             | 2,629,000  |           
|                                            |                                                                                  |           |                |            |                    |            |             |            |           
|                                            |                                                                                  |           | Total expenses |            |                    | 92,184,000 |             |            |            | 92,295,000 | 
|                                            |                                                                                  |           |                |            |                    |            |             |            |           
|LOSS FROM OPERATIONS BEFORE INCOME TAXES    |                                                                                  |           | (5,705,000     | )          |                    |            | (5,818,000  | )         
|PROVISION FOR INCOME TAXES                  |                                                                                  |           | 150,000        |            |                    |            | 150,000     |           
|                                            |                                                                                  |           |                |            |                    |            |             |           
|NET LOSS                                    |                                                                                  | $         | (5,855,000     | )          |                    | $          | (5,968,000  | )         
|                                            |                                                                                  |           |                |            |                    |            |             |            |           
|NET LOSS PER COMMON SHARE:                  |                                                                                  |           |                |            |                    |            |             |           
|                                            |                                                                                  | - Basic   |                | $          | (0.34              | )          |             | $          | (0.37      | )         
|                                            |                                                                                  |           |                |            |                    |            |             |            |           
|                                            |                                                                                  | - Diluted |                | $          | (0.34              | )          |             | $          | (0.37      | )         
|                                            |                                                                                  |           |                |            |                    |            |             |            |           
|WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: |                                                                                  |           |                |            |                    |            |             |           
|                                            |                                                                                  | - Basic   |                |            | 17,020,000         |            |             |            | 16,327,000 |           
|                                            |                                                                                  |           |                |            |                    |            |             |            |           
|                                            |                                                                                  | - Diluted |                |            | 17,020,000         |            |             |            | 16,327,000 |           
|                                            |                                                                                  |           |                |            |                    |            |             |            |           

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|                                            |                                                                                    |           |                |             |                    |             |             |             |            |             | 
|------------------------------------------- | ---------------------------------------------------------------------------------- | --------- | -------------- | ----------- | ------------------ | ----------- | ----------- | ----------- | ---------- | ----------- | 
|                                            |                                                                                    |           |                |             | Nine Months Ended 
|                                            |                                                                                    |           |                |             | September 30, 2001
|                                            |                                                                                    |           |                |             |                   
|                                            |                                                                                    |           |                |             | As Previously      |             |             |             |           
|                                            |                                                                                    |           |                |             | Reported           |             | As Restated
|                                            |                                                                                    |           |                |             |                    |             |            
|REVENUES:                                   |                                                                                    |           |                |             |                    |             |             |            
|                                            | Sales and related service revenues                                                 |           | $              | 126,455,000 |                    |             | $           | 126,452,000 |           
|                                            | Rentals and other revenues                                                         |           |                | 138,721,000 |                    |             |             | 138,845,000 |           
|                                            |                                                                                    |           |                |             |                    |             |             |             |           
|                                            |                                                                                    |           | Total revenues |             |                    | 265,176,000 |             |             |            | 265,297,000 | 
|                                            |                                                                                    |           |                |             |                    |             |             |             |           
|EXPENSES AND OTHER:                         |                                                                                    |           |                |             |                    |             |             |            
|                                            | Cost of sales and related services                                                 |           |                | 62,205,000  |                    |             |             | 62,176,000  |           
|                                            | Cost of rentals and other revenues, including rental
equipment depreciation        |           |                | 26,726,000  |                    |             |             | 26,726,000  |           
|                                            | Operating, including bad debt expense of $12,622,000 and
$12,498,000, respectively |           |                | 147,661,000 |                    |             |             | 147,079,000 |           
|                                            | General and administrative                                                         |           |                | 11,682,000  |                    |             |             | 11,805,000  |           
|                                            | Earnings from joint ventures                                                       |           |                | (3,335,000  | )                  |             |             | (3,336,000  | )         
|                                            | Depreciation, excluding rental equipment, and amortization                         |           |                | 7,826,000   |                    |             |             | 8,200,000   |           
|                                            | Amortization of deferred financing costs                                           |           |                | 1,960,000   |                    |             |             | 2,209,000   |           
|                                            | Interest                                                                           |           |                | 21,934,000  |                    |             |             | 22,940,000  |           
|                                            | Gain on sale of assets of center                                                   |           |                | 2,629,000   |                    |             |             | 2,629,000   |           
|                                            |                                                                                    |           |                |             |                    |             |             |             |           
|                                            |                                                                                    |           | Total expenses |             |                    | 279,288,000 |             |             |            | 280,428,000 | 
|                                            |                                                                                    |           |                |             |                    |             |             |             |           
|LOSS FROM OPERATIONS BEFORE INCOME TAXES    |                                                                                    |           | (14,112,000    | )           |                    |             | (15,131,000 | )          
|PROVISION FOR INCOME TAXES                  |                                                                                    |           | 450,000        |             |                    |             | 450,000     |            
|                                            |                                                                                    |           |                |             |                    |             |             |             |           
|NET LOSS                                    |                                                                                    | $         | (14,562,000    | )           |                    | $           | (15,581,000 | )          
|                                            |                                                                                    |           |                |             |                    |             |             |             |           
|NET LOSS PER COMMON SHARE:                  |                                                                                    |           |                |             |                    |             |             |            
|                                            |                                                                                    | - Basic   |                | $           | (0.87              | )           |             | $           | (0.96      | )          
|                                            |                                                                                    |           |                |             |                    |             |             |             |           
|                                            |                                                                                    | - Diluted |                | $           | (0.87              | )           |             | $           | (0.96      | )          
|                                            |                                                                                    |           |                |             |                    |             |             |             |           
|WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: |                                                                                    |           |                |             |                    |             |             |            
|                                            |                                                                                    | - Basic   |                |             | 16,704,000         |             |             |             | 16,235,000 |            
|                                            |                                                                                    |           |                |             |                    |             |             |             |           
|                                            |                                                                                    | - Diluted |                |             | 16,704,000         |             |             |             | 16,235,000 |            
|                                            |                                                                                    |           |                |             |                    |             |             |             |           

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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, will, likely, could
and words of similar import. Such statements include statements concerning the
Companys Plan of Reorganization, other effects and consequences of the
Bankruptcy Filing, forecasts upon which the Plan of Reorganization is based,
business strategy, operations, cost savings initiatives, industry, economic
performance, financial condition, liquidity and capital resources, 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.

Subsequent to the issuance of the Companys interim consolidated financial
statements as of and for the three and six months ended June 30, 2002,
the Companys management determined that the accounting treatment initially
afforded to certain transactions was not correct. As a result, the Companys
condensed consolidated financial statements for the three and nine months ended
September 30, 2001 and as of December 31, 2001 have been restated. See Note 13
to the interim condensed consolidated financial statements for a summary of the
significant effects of the restatement. The following discussion and analysis
gives effect to the statement.

Recent Developments

American HomePatient, Inc. and 24 of its subsidiaries filed voluntary petitions
for protection under the Bankruptcy Code on July 31, 2002. The Company is
operating its business as a debtor-in-possession subject to the jurisdiction of
the United States Bankruptcy Court for the Middle District of Tennessee. See
Note 3 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.

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. The Company has three
principal services or product lines: home respiratory

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services, home infusion
services and home medical equipment and supplies. Home respiratory services include oxygen systems, nebulizers, aerosol medications and home
ventilators and are provided primarily to patients with severe and chronic
pulmonary diseases. Home infusion services are used to administer nutrients,
antibiotics and other medications to patients with medical conditions such as
neurological impairments, infectious diseases or cancer. The Company also
sells and rents a variety of home medical equipment and supplies, including
wheelchairs, hospital beds and ambulatory aids.

The following table sets forth the percentage of the Companys revenues
represented by each line of business for the periods presented:

|                                            |       |  |                             |     |      |  |    |     |  
|------------------------------------------- | ----- |  | --------------------------- | --- | ---- |  | -- | --- | -
|                                            |       |  | Nine Months Ended Sept. 30,
|                                            |       |  |                            
|                                            |       |  | 2002                        |     | 2001
|                                            |       |  |                             |     |     
|Home respiratory therapy services           |       |  | 66                          | %   |      |  | 59 | %  
|Home infusion therapy services              |       |  | 14                          |     |      |  | 17 |    
|Home medical equipment and medical supplies |       |  | 20                          |     |      |  | 24 |    
|Home infusion therapy services              |       |  |                             |     |      |  |    |    
|                                            | Total |  |                             | 100 | %    |  |    | 100 | %
|Home infusion therapy services              |       |  |                             |     |      |  |    |    

Prior to 1998, the Company had significantly expanded its operations through a
combination of home health care acquisitions and joint ventures and strategic
alliances with integrated health care delivery systems. In 1998, the Company
purposefully slowed its acquisition activity compared to prior years to focus
on existing operations. Since 1998, the Company has not acquired any home
health care businesses or developed any new joint ventures other than
converting several of its previously owned 50% joint ventures to wholly-owned
operations during 1999 and 2000. During 2001, the Company sold certain
non-core assets. These consisted of its rehab centers, three infusion centers,
and two respiratory and home medical equipment centers which were sold for an
aggregate of $11.1 million in cash. The Company used the proceeds from those
sales to pay down the Bank Credit Facility. In addition, during 2001 the
Company used $1.0 million in proceeds from the sales of its wholly-owned real
estate and $0.5 million in proceeds from the collection of patient receivables
associated with the sold centers to pay down the Bank Credit Facility. In
March 2002, the Company sold substantially all of the assets of an infusion
center for $1.3 million in cash and used the proceeds to pay down the Bank
Credit Facility. Funds representing the value of the remaining assets of the
Center have been escrowed pending regulatory approvals and will be released
once these are obtained. In addition, during 2002 the Company used $1.2
million in proceeds from the collection of patient receivables associated with
the sold centers to pay down the Bank Credit Facility.

The Companys strategy for 2002 is to maintain a diversified offering of home
health care services reflective of its current business mix. Respiratory
services will remain a primary focus along with home medical equipment rental
and enteral nutrition products and services.

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
False Claims Act and other federal and state

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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 the Omnibus Budget Reconciliation Act of 1987 (OBRA 1987)
which apply to the Companys operation. Periodic changes have occurred from
time to time since the enactment of OBRA 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 (formerly CHAMPUS), the Company
is subject to the anti-kickback statute, also known as the fraud and abuse
law. This law prohibits any bribe, kickback, rebate or remuneration of any
kind in return for, or as an inducement for, the referral of patients for
government-reimbursed health care services. The Company may also be affected
by the federal physician self-referral prohibition, known as the Stark Law,
which, with certain exceptions, prohibits physicians from referring patients to
entities with which they have a financial relationship. Many states in which
the Company operates have adopted similar self-referral laws, as well as laws
that prohibit certain direct or indirect payments or fee-splitting arrangements
between health care providers, under the theory that such arrangements are
designed to induce or to encourage the referral of patients to a particular
provider. In many states, these laws apply to services reimbursed by all payor
sources.

In 1996, the Health Insurance Portability and Accountability Act (HIPAA)
introduced a new category of federal criminal health care fraud offenses. If a
violation of a federal criminal law relates to a health care benefit, then an
individual is guilty of committing a Federal Health Care Offense. The specific
offenses are: health care fraud; theft or embezzlement; false statements,
obstruction of an investigation; and money laundering. These crimes can apply
to claims submitted not only to government reimbursement programs such as
Medicare, Medicaid and TRICARE, but to any third-party payor, and carry
penalties including fines and imprisonment.

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 Certificate for
Medical Necessity (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;

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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 Balanced Budget Act of 1997 introduced several government initiatives which
are either in the planning or implementation stages and which, when fully
implemented, could have a material adverse impact on reimbursement for products
and services provided by the Company. These initiatives include: (i)
Prospective Payment System (PPS) requirements for skilled nursing facilities
and PPS for home health agencies, which do not affect the Company directly but
could affect the Companys contractual relationships with such entities; (ii)
deadlines (as yet undetermined) for obtaining Medicare and Medicaid surety
bonds for home health agencies and DME suppliers; and (iii) pilot projects in
Polk County, Florida and San Antonio, Texas which were effective between
October 1, 1999 and September 30, 2002, and February 1, 2002 and December 31,
2002, respectively, to determine the efficacy of competitive bidding for
certain durable medical equipment (DME), under which Medicare reimbursements
for certain items are reduced between 19% to 34% from the current fee schedules
(the Company participated to some extent in both pilot projects). At
expiration, the DME items reverted to normal Medicare fees and procedures,
although the Bush administration has announced that it intends to expand
competitive bidding on a national basis, building on these two pilot projects
that yielded savings to Medicare. The United States House of Representatives
recently passed a bill that includes provisions for a national competitive
bidding program for durable medical equipment, including home oxygen equipment.
The United States Senate has recently considered three separate bills that
include some provision for national competitive bidding. At the present time,
the Senate has not voted on any of these three bills under consideration. The
Company cannot predict at this time the outcome of proposed legislation related
to a national competitive bidding program or the financial impact of such a
program on the Companys business, if it should become law.

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

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

Health care law is an area of extensive and dynamic regulatory oversight.
Changes in laws or regulations or new interpretations of existing laws or
regulations can have a dramatic effect on permissible activities, the relative costs associated with doing business, and
the amount and availability of reimbursement from government and other
third-party payors. There can be no

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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 current 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 government reimbursement programs.

Legal Proceedings.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 agreed to pay the relators attorneys fees and
expenses. The Companys Plan of Reorganization proposes that the Company will
timely pay all amounts owed in accordance with the Government Settlement. The
Company has reserved $4,246,000 for its future obligations pursuant to the
Government Settlement. The Government Settlement does not resolve the
relators claims that the Company discriminated against him as a result of his
reporting alleged violations of the law to the government. The Company denies
and intends to vigorously defend these claims.

The Company also was named as a defendant in two other False Claims Act cases.
In each of those cases, the DOJ declined to intervene and both cases were
subsequently dismissed in March 2001.
The first of these cases, United States ex rel. Kirk S. Corsello v. Lincare, et
al. (N.D. Ga.), was dismissed with prejudice on motion of the Company on March
9, 2001. The appeal of that dismissal was argued in November 2001; however, in
December 2001 the Court of Appeals for the

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Eleventh Circuit dismissed the
appeal on jurisdictional grounds and returned the case to the trial court. In
January 2002, one of the other defendants filed a Motion for Reconsideration
with the Court of Appeals, and the Court of Appeals denied the motion on July
10, 2002. On August 5, 2002 the Company filed a Notice of Bankruptcy which
stays the proceedings as to the Company. Mr. Corsellos qui tam complaint
alleged that the Company and numerous other unrelated defendants, including
other large DME suppliers, engaged in a kickback scheme to provide free or
below market value equipment and medicine to physicians who would in turn refer
patients to the defendants in violation of the False Claims Act. The other
case, United States ex rel. Alan D. Hutchison v. Respironics, et al. (S.D. NY
and N.D. Ga.), was dismissed without prejudice on Mr. Hutchisons own motion on
March 22, 2001. Since that date, the Company has not been served with any
additional papers in this case. Mr. Hutchisons qui tam complaint alleged that
the Company and numerous other unrelated defendants filed false claims with
Medicare for ventilators that the defendants allegedly knew were not medically
necessary.

The Company was informed in May 2001 that the United States is investigating
its conduct during periods after December 31, 1998, and the Company believes
that this investigation was prompted by another qui tam complaint against the
Company under the False Claims Act. The Company has not seen a complaint in
this action, but believes that it contains allegations similar to the ones
investigated by the government in connection with the False Claims Act case
covered by the Government Settlement discussed above. The Company believes
that this second case will be limited to allegedly improper activities
occurring after December 31, 1998.

There can be no assurances as to the final outcome of any pending False Claims
Act lawsuits. Possible outcomes include, among other things, the repayment of
reimbursements previously received by the Company related to billed claims that
are found to be improper, the imposition of fines or penalties, and the
suspension or exclusion of the Company from participation in the Medicare,
Medicaid and other government reimbursement programs. Other than the
$4,246,000 reserve discussed above which relates to the Government Settlement,
the Company has not recorded any reserves related to the unsettled government
investigations. The outcome of any pending lawsuits or future settlements
could have a material adverse effect on the Company.

Medicare Reimbursement for Oxygen Therapy Services

The Medicare reimbursement rate for oxygen related services was reduced by 25%
beginning January 1, 1998 as a result of the Balanced Budget Act of 1997 with
an additional reduction of 5% beginning January 1, 1999. The reimbursement
rate for certain drugs and biologicals covered under Medicare was also reduced
by 5% beginning January 1, 1998. The Company is one of the nations largest
providers of home oxygen services to patients, many of whom are Medicare
recipients, and is therefore significantly affected by this legislation.
Medicare oxygen reimbursements account for a significant part of the Companys
on-going revenues. In January 2001, federal legislation was signed into law
that provided for a one-time increase, beginning July 1, 2001, in Medicare
reimbursement rates for home medical equipment, excluding oxygen related
services, based on the consumer price index (CPI). Medicare also has the
option of developing fee schedules for PEN
and home dialysis supplies and equipment, although currently there is no
timetable for the development or implementation of such fee schedules.
Following promulgation of a final rule, CMS will also have inherent
reasonableness authority to modify payment rates for all Medicare Part B items
and services by as much as 15% per year without industry consultation,
publication or

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public comment, if the rates are determined to be grossly
excessive or grossly deficient. Therefore, the Company cannot be certain
that additional reimbursement reductions for oxygen therapy services or other
services and products provided by the Company will not occur. See Managements
Discussion and Analysis of Financial Condition and Results of Operations 
Significant Accounting Policies and Managements Discussion and Analysis of
Financial Condition and Results of Operations  Government Regulation.

Critical Accounting Policies

Managements Discussion and Analysis of Financial Condition and Results of
Operations are based upon the Companys consolidated financial statements. The
preparation of these consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the dates of the financial statements, and the reported amounts
of revenues and expenses during the reporting periods. On an on-going basis,
management evaluates its critical accounting policies and estimates.

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

Revenue Recognition and Allowance for Doubtful Accounts.The Company
provides credit for a substantial part of its non third-party reimbursed
revenues and continually monitors the credit-worthiness and collectibility of
amounts due from its patients. Approximately 61% of the Companys year to date
2002 revenues are derived from participation in Medicare and state Medicaid
programs. Amounts paid under these programs are generally based upon a fixed
rate. Revenues are recorded at the expected reimbursement rates when the
services are provided, merchandise delivered or equipment rented to patients.
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 in operations in the year finalized.

Sales and related services revenues include all product sales to patients and
are derived from the provision of infusion therapies, the sale of home health
care equipment and supplies, the sale of aerosol medications and respiratory
therapy equipment and supplies, and services related to the delivery of these
products. Sales revenues are recognized at the time of delivery and are billed
using fixed fee schedules based upon the type of product and the payor.
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

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based upon the type of rental and the payor. The fixed monthly fee encompasses the
rental of the product as well as the delivery and the set-up and instruction by
the product technician.

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

Inventory Valuation Reserves and Cost of Sales Recognition. Inventories
represent goods and supplies and are priced at the lower of cost (on a
first-in, first-out basis) or market value. The Company recognizes cost of
sales and relieves inventory at estimated amounts on an interim basis based
upon the type of product sold and payor mix, and performs physical counts of
inventory at each center on an annual basis. Any resulting adjustment from
these physical counts is charged to cost of sales. A reserve established by
management for the valuation of inventory consisting of reserves for incorrect
cost of sales percentage estimates, inaccurate counts, obsolete and slow moving
items and reserves for specific inventory. The reserves are based on a
percentage of gross sales, a percentage of inventory or an amount for
specifically identified inventory items. Management believes the current
reserve is adequate to absorb estimated reductions in the account balance. The
Company is subject to loss for unrecorded inventory adjustments in excess of
its recorded inventory reserves.

Rental Equipment Reserves. Rental equipment is rented to patients for use
in their homes and is depreciated over the equipments estimated useful life.
On an annual basis, the Company performs physical counts of rental equipment at
each center and reconciles all recorded rental assets to internal billing
reports. Any resulting adjustment for unlocated 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 outdated or obsolete equipment.
Management records a reserve for potentially lost, broken, or obsolete rental
equipment based upon historical adjustment amounts and believes the recorded
rental reserve is adequate. The Company is subject to loss for unrecorded
adjustments in excess of its recorded rental equipment reserves.

Valuation of Long-lived Assets. In accordance with Statement of Financial
Accounting Standards No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (SFAS No. 144), management evaluates long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable.

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Management utilizes
estimated undiscounted future cash flows to determine if an impairment exists.
When this analysis indicates an impairment exists, the amount of loss is
determined based upon a comparison of estimated fair value with the carrying
value of the asset. While management believes that the estimates of future
cash flows are reasonable, different assumptions regarding such cash flows
could materially affect the evaluations.

Valuation of Goodwill and Other Intangible Assets.Goodwill represents
the excess of cost over the fair value of net assets acquired. In June 2001,
the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS No.
142). The Company was required to adopt the provisions of this statement
effective January 1, 2002. SFAS No. 142 requires that intangible assets with
finite useful lives be amortized and that goodwill and intangible assets with
indefinite lives no longer be amortized. Instead, goodwill and intangible
assets with indefinite lives are required to be tested for impairment on an
annual basis and when an event occurs or circumstances change such that it is
reasonably possible that an impairment may exist. The Company selected
September 30 as our annual testing date. The Company recorded goodwill
amortization expense of $1.4 million and $4.2 million in the three and nine
months ended September 30, 2001, respectively, and ceased amortizing goodwill
effective January 1, 2002.

Upon adoption of SFAS No. 142, goodwill was tested for impairment by comparing
the fair value of goodwill to the carrying value of goodwill. The fair value
was determined using a combination of analyses which included discounted cash
flow calculations, market multiples and other market information. Key
assumptions used in these estimates include projected operating results,
discount rates and peer market multiples. The implied fair value of goodwill
did not support the carrying value of goodwill primarily due to the Companys
highly leveraged capital structure, which resulted in impairment of $68.5
million. This impairment charge was recorded as a cumulative effect of change
in accounting principle in the first quarter of 2002. There was no tax effect
on the impairment loss due to the fact that the majority of the related
goodwill was non-tax deductible and because of the Companys federal net
operating loss position.

Self Insurance.Self-insurance reserves primarily represent the accrual
for self-insurance or large deductible risks associated with workers
compensation insurance and employee health insurance. The Company is insured
for workers compensation but retains the first $250,000 of each claim. The
Company is not maintaining annual aggregate stop loss coverage for 2002 and did
not maintain annual aggregate stop loss coverage for 2001, as such coverage was
not available. Judgments used in determining the self-insurance reserves
related to workers compensation include loss development factors, frequency of
claims and severity of claims. The estimated liability for workers
compensation claims totaled approximately $4.0 million and $3.2 million as of
September 30, 2002 and December 31, 2001, respectively. The Company utilizes
analyses prepared by its third-party administrator based on historical claims
information to support the required reserve and related expense associated with
workers compensation. The
Company records claims expense by plan year based on the lesser of the
aggregate stop loss (if applicable) or the developed losses as calculated by
its third-party administrator.

The Company is also self-insured for health insurance for substantially all
employees for the first $150,000 on a per person, per year basis and maintains
annual aggregate stop loss coverage of $14.5 million and $8.9 million for 2002
and 2001, respectively. The health insurance policies

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are limited to maximum
lifetime reimbursements of $2.0 million per person for 2002 and had unlimited
lifetime reimbursements for 2001. The estimated liability for health insurance
claims totaled approximately $1.6 million and $1.9 million as of September 30,
2002 and December 31, 2001, respectively. The Company reviews health insurance
trends and payment history and maintains a reserve for incurred but not
reported claims based upon its assessment of 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.

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

Results of Operations

The Company reports its revenues as follows: (i) sales and related services
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 supplies, the sale of aerosol and respiratory therapy equipment
and supplies and services related to the delivery of these products. Rentals
and other revenues are derived from the rental of home health care equipment,
enteral pumps and equipment related to the provision of respiratory therapies.
Cost of sales and related services includes the cost of equipment, drugs and
related supplies sold to patients. Cost of rentals and other revenues includes
the costs of oxygen and rental supplies, demurrage for leased oxygen tanks,
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, provision for doubtful accounts, and other operating costs.
General and administrative expenses include corporate and senior management
expenses.

The majority of the Companys hospital joint ventures are not consolidated for
financial statement reporting purposes. Earnings from hospital joint ventures
represent the Companys equity in earnings from unconsolidated hospital joint
ventures and management and administrative fees from unconsolidated hospital
joint ventures.

Sale of Assets of Center.In the quarter ended March 31, 2002, the
Company recorded a pre-tax gain of $0.7 million related to the sale of the
assets of an infusion business and nursing agency (collectively, the Center).
Effective March 19, 2002, substantially all of the assets of
the Center were sold for approximately $1.3 million in cash. Funds
representing the value of the remaining assets of the Center have been escrowed
pending regulatory approvals and will be released once these are obtained.
During the three and nine months ended September 30, 2002 and 2001, the Center
generated approximately $0.1 million, $2.0 million, $2.2 million and $6.7
million, respectively, in total revenues. The proceeds of the sale were used
to pay down debt under the Companys Bank Credit Facility.

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Effective September 1, 2001, the Company sold substantially all of the assets
of its rehab centers and recorded a pre-tax loss of $2.6 million related to the
sale. The rehab centers were sold for approximately $7.7 million, of which
$7.2 million was received in cash at closing with the remainder paid on
February 28, 2002. The cash proceeds of the sale were used to pay down debt
under the Companys Bank Credit Facility. During the three and nine months
ended September 30, 2001, the rehab centers generated approximately $3.3
million and $14.2 million, respectively, in total revenues.

In July 2001, the Company sold an unprofitable respiratory and home medical
equipment center for approximately $0.6 million in cash. The cash proceeds of
the sale were used to pay down debt under the Companys Bank Credit Facility.
During the three and nine months ended September 30, 2001, the respiratory and
home medical equipment center generated approximately $0 and $0.5 million,
respectively, in total revenues.

In addition, the Company sold two unprofitable infusion centers in April 2001.
During the three and six months ended June 30, 2001, the infusion centers
generated approximately $0 and $0.9 million, respectively, in total revenues.
The proceeds of the sale were used to pay down debt under the Companys Bank
Credit Facility

Cumulative Effect of Change in Accounting Principle.The Company adopted
the provisions of SFAS No. 142 effective January 1, 2002. As of the adoption
date, the Company had unamortized goodwill in the amount of $189.7 million. In
accordance with SFAS No. 142, effective January 1, 2002 the Company
discontinued amortization of goodwill. Goodwill was tested for impairment by
comparing the fair value of goodwill to the carrying value of goodwill. Fair
value was determined using a combination of analyses which included discounted
cash flow calculations, market multiples and other market information. The
implied fair value of goodwill did not support the carrying value of goodwill.

Based upon the results of the Companys initial impairment tests, the Company
recorded an impairment loss of $68.5 million, with no related tax effect, in
the quarter ended March 31, 2002, recognized as a cumulative effect of change
in accounting principle. There was no tax effect on the impairment loss due to
the fact that the majority of the related goodwill was non-tax deductible and
because of the Companys federal net operating loss position. The Company will
conduct annual impairment tests hereafter, unless specific events arise which
warrant more immediate testing. Any subsequent impairment losses will be
recognized as an operating expense in the Companys consolidated statements of
operations. The Company recorded goodwill amortization expense of $1.4 million
and $4.2 million in the three and nine months ended September 30, 2001,
respectively.

Reorganization Items.The Company has incurred reorganization expenses as
a result of reorganization under Chapter 11 of the Federal Bankruptcy Code. In
accordance with the American Institute of Certified Public Accountants
Statement of Position 90-7, Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code (SOP 90-7), all revenues, expenses, realized gains
and losses, and provisions for losses and expenses resulting from the
reorganization are reported separately as Reorganization Items. These items
include, but are not limited to, professional fees and other expenses incurred
related to the Chapter 11

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proceedings, write-off of deferred financing costs,
and provision for damages from future lease rejections.

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

Percentage of Revenues

|                                                                                    |                                                                                                                                 |  |                    |      |                   |  |       |       |      |  |       |       |    |  |       |       |   
|----------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ---- | ----------------- |  | ----- | ----- | ---- |  | ----- | ----- | -- |  | ----- | ----- | --
|                                                                                    |                                                                                                                                 |  | Three Months Ended |      | Nine Months Ended
|                                                                                    |                                                                                                                                 |  | September 30,      |      | September 30,    
|                                                                                    |                                                                                                                                 |  |                    |      |                  
|                                                                                    |                                                                                                                                 |  | 2002               |      | 2001              |  | 2002  |       | 2001
|                                                                                    |                                                                                                                                 |  |                    |      |                   |  |       |       |     
|Revenues                                                                            |                                                                                                                                 |  | 100.0              | %    |                   |  | 100.0 | %     |      |  | 100.0 | %     |    |  | 100.0 | %    
|Cost of sales and related services                                                  |                                                                                                                                 |  | 19.3               |      |                   |  | 21.1  |       |      |  | 19.9  |       |    |  | 23.4  |      
|Cost of rentals and other revenues,
including rental equipment depreciation
expense |                                                                                                                                 |  | 11.9               |      |                   |  | 10.6  |       |      |  | 11.0  |       |    |  | 10.1  |      
|Operating expenses                                                                  |                                                                                                                                 |  | 58.8               |      |                   |  | 57.0  |       |      |  | 57.8  |       |    |  | 55.4  |      
|General and administrative                                                          |                                                                                                                                 |  | 4.7                |      |                   |  | 4.4   |       |      |  | 5.1   |       |    |  | 4.4   |      
|Earnings from joint ventures                                                        |                                                                                                                                 |  | (1.3               | )    |                   |  | (1.3  | )     |      |  | (1.4  | )     |    |  | (1.2  | )    
|Depreciation, excluding rental
equipment, and amortization expense                  |                                                                                                                                 |  | 1.3                |      |                   |  | 3.1   |       |      |  | 1.3   |       |    |  | 3.1   |      
|Amortization of deferred financing costs                                            |                                                                                                                                 |  | 0.3                |      |                   |  | 1.0   |       |      |  | 0.7   |       |    |  | 0.8   |      
|Interest expense                                                                    |                                                                                                                                 |  | 2.3                |      |                   |  | 7.8   |       |      |  | 5.1   |       |    |  | 8.7   |      
|Loss (gain) on sales of assets of centers                                           |                                                                                                                                 |  |                   |      |                   |  | 3.0   |       |      |  | (0.3  | )     |    |  | 1.0   |      
|Chapter 11 financial advisory expenses

incurred prior to filing bankruptcy         |                                                                                                                                 |  | 0.6                |      |                   |  |      |       |      |  | 0.3   |       |    |  |      |      
|                                                                                    |                                                                                                                                 |  |                    |      |                   |  |       |       |      |  |       |       |    |  |       |      
|                                                                                    | Total expenses                                                                                                                  |  |                    | 97.9 | %                 |  |       | 106.7 | %    |  |       | 99.5  | %  |  |       | 105.7 | % 
|                                                                                    |                                                                                                                                 |  |                    |      |                   |  |       |       |      |  |       |       |    |  |       |      
|                                                                                    | Income (loss) from operations
before reorganization items,
income taxes and cumulative
effect of change in accounting
principle |  |                    | 2.1  | %                 |  |       | (6.7  | )%   |  |       | 0.5   | %  |  |       | (5.7  | )%
|Reorganization items                                                                |                                                                                                                                 |  | 5.0                |      |                   |  |      |       |      |  | 1.6   |       |    |  |      |      
|Provision for (benefit from) income taxes                                           |                                                                                                                                 |  | 0.1                |      |                   |  | 0.2   |       |      |  | (0.7  | )     |    |  | 0.2   |      
|Cumulative effect of change in
accounting principle with no related tax
effect      |                                                                                                                                 |  |                   |      |                   |  |      |       |      |  | 28.8  |       |    |  |      |      
|                                                                                    |                                                                                                                                 |  |                    |      |                   |  |       |       |      |  |       |       |    |  |       |      
|                                                                                    | Net loss                                                                                                                        |  |                    | (3.0 | )%                |  |       | (6.9  | )%   |  |       | (29.2 | )% |  |       | (5.9  | )%
|                                                                                    |                                                                                                                                 |  |                    |      |                   |  |       |       |      |  |       |       |    |  |       |      

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Three Months Ended September 30, 2002 Compared to Three Months Ended September
30, 2001

The results of operations between 2002 and 2001 are impacted by the asset sales
of several centers in 2002 and 2001.

Revenues. Revenues decreased from $86.5 million for the quarter ended
September 30, 2001 to $78.4 million for the same period in 2002, a decrease of
$8.1 million, or 9%. During 2001, the Company sold the assets of three
infusion centers, two respiratory and home medical equipment centers, and all
of its rehab centers, in addition to the sale of substantially all of the
assets of one infusion center during the first quarter of 2002. As a result of
these asset sales, revenues were negatively impacted by $8.3 million in the
current quarter. Without these asset sales, revenue for the quarter would have
increased by $0.2 million. Following is a discussion of the components of
revenues:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Sales and Related Services Revenues. Sales and related services revenues
decreased from $40.1 million for the quarter ended September 30, 2001 to
$33.4 million for the same period in 2002, a decrease of $6.7 million, or
17%. The 2001 sales of assets of three infusion centers, two respiratory
and home medical equipment centers, and all of the rehab centers, as well
as the sale of the assets of an infusion center during the first quarter
of 2002 have negatively impacted sales in the current quarter by
approximately $7.7 million.



| |                                                                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Rentals and Other Revenues. Rentals and other revenues decreased from
$46.3 million for the quarter ended September 30, 2001 to $44.9 million
for the same period in 2002, a decrease of $1.4 million, or 3%. The 2001
sales of two respiratory and home medical equipment centers have
negatively impacted rental revenue in the current quarter by
approximately $0.6 million.

Cost of Sales and Related Services. Cost of sales and related services
decreased from $18.3 million for the quarter ended September 30, 2001 to $15.1
million for the same period in 2002, a decrease of $3.2 million, or 17%. As a
percentage of sales and related services revenues, cost of sales and related
services decreased from 45.6% for the quarter ended September 30, 2001 to 45.2%
for the same period in 2002. This decrease is primarily attributable to the
sales of the infusion centers and the rehab centers, which contributed lower
margins.

Cost of Rentals and Other Revenues.Cost of rentals and other revenues
increased slightly from $9.2 million for the quarter ended September 30, 2001
to $9.3 million for the same period in 2002, an increase of $0.1 million. As a
percentage of rentals and other revenue, cost of rentals and other revenues
increased slightly from 19.9% to 20.7% for the quarters ended September 30,
2001 and 2002, respectively.

Operating Expenses. Operating expenses decreased from $49.3 million for the
quarter ended September 30, 2001 to $46.1 million for the same period in 2002,
a decrease of $3.2 million, or 6%. This decrease is attributable to reduced
operating expense as a result of the sales of certain centers during 2001 and
the first quarter of 2002, as well as lower overall bad debt expense. Bad debt
expense was 6.1% of revenues for the quarter ended September 30, 2001 compared
to 3.4% of

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revenues for the same period in 2002. The decrease in bad debt
expense is attributable to strong cash collections during the third quarter of
2002 resulting from operational improvements and processing efficiencies in the
Companys billing and collection functions.

General and Administrative Expenses. General and administrative expenses
decreased from $3.8 million for the quarter ended September 30, 2001, to $3.7
million for the same period in 2002, a decrease of $0.1 million, or 3%. As a
percentage of revenues, general and administrative expenses were 4.4% and 4.8%
for the quarters ended September 30, 2001 and 2002, respectively. This
increase is attributable to the lower revenue base as a result of the sales of
assets in 2001 and 2002.

Earnings from Hospital Joint Ventures.Earnings from hospital joint ventures
decreased slightly from $1.1 million for the quarter ended September 30, 2001
to $1.0 million for the quarter ended September 30, 2002.

Depreciation and Amortization. Depreciation (excluding rental equipment) and
amortization expenses decreased from $2.6 million for the quarter ended
September 30, 2001 to $1.0 million for the same period in 2002, a decrease of
$1.6 million, or 62%. Effective January 1, 2002 the Company adopted the
provisions of SFAS No. 142 and accordingly, ceased the amortization of its
goodwill. Amortization expense related to goodwill was $1.4 million in the
quarter ended September 30, 2001. The remaining decrease is primarily
attributable to certain property and equipment becoming fully depreciated.

Amortization of Deferred Financing Costs.Amortization of deferred financing
costs decreased from $0.8 million in 2001 to $0.2 million in 2002, a decrease
of $0.6 million or 75%. This decrease is primarily attributable to the
cessation of finance cost amortization and the accelerated write-off of
deferred financing costs to reorganization items as of July 31, 2002 as a
result of the Bankruptcy Filing on July 31, 2002.

Interest. Interest expense decreased from $6.7 million for the quarter ended
September 30, 2001 to $1.8 million for the same period in 2002, a decrease of
$4.9 million, or 73%. This decrease is attributable to the Company ceasing to
record provisions for interest as of the July 31, 2002 Chapter 11 filing date.

(Gain) Loss on Sales of Assets of Centers.In the third quarter of 2001, the
Company recorded a loss of $2.6 million on the sale of the assets of its rehab
centers.

Chapter 11 Financial Advisory Expenses Incurred Prior to Filing Bankruptcy.In
the quarter ended September 30, 2002 the Company incurred $504,000 related to
financial advisory and legal services in preparation of a possible Chapter 11
filing due to the Companys December 2002 debt maturity. No such fees were
incurred in the same quarter of 2001.

Provision for Income Taxes.The provision for income taxes decreased from
$150,000 for the quarter ended September 30, 2001 to $100,000 for the same
quarter in 2002. This decrease is due to reduced state income taxes paid in
2002 versus 2001.

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Nine Months Ended September 30, 2002 Compared to Nine Months Ended September
30, 2001

The results of operations between 2002 and 2001 are impacted by the asset sales
of several centers in 2002 and 2001.

Revenues.Revenues decreased from $265.3 million for the nine months ended
September 30, 2001 to $237.6 million for the same period in 2002, a decrease of
$27.7 million, or 10%. During 2001, the Company sold the assets of three
infusion centers, two respiratory and home medical equipment centers, and all
of its rehab centers, in addition to the sale of substantially all of the
assets of one infusion center during the first quarter of 2002. As a result of
these asset sales, revenues were negatively impacted by $29.3 million for the
nine months ended September 30, 2002. Without these asset sales, revenue for
the current nine months would have increased by $1.6 million or 1% compared to
the same period last year. Following is a discussion of the components of
revenues:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Sales and Related Services Revenues. Sales and related services revenues
decreased from $126.5 million for the nine months ended September 30,
2001 to $102.0 million for the same period in 2002, a decrease of $24.5
million, or 19%. The 2001 sales of assets of three infusion centers, two
respiratory and home medical equipment centers, and all of the rehab
centers, as well as the sale of the assets of an infusion center during
the first quarter of 2002, have negatively impacted sales in the nine
months ended September 30, 2002 by approximately $27.8 million.



| |                                                                                                                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Rentals and Other Revenues. Rentals and other revenues decreased from
$138.8 million for the nine months ended September 30, 2001 to $135.6
million for the same period in 2002, a decrease of $3.2 million, or 2%.
The 2001 sales of two respiratory and home medical equipment centers have
negatively impacted rental revenue in the nine months ended September 30,
2002 by approximately $1.5 million.

Cost of Sales and Related Services. Cost of sales and related services
decreased from $62.2 million for the nine months ended September 30, 2001 to
$47.2 million for the same period in 2002, a decrease of $15.0 million, or 24%.
As a percentage of sales and related services revenues, cost of sales and
related services decreased from 49.2% for the nine months ended September 30,
2001 to 46.2% for the same period in 2002. This decrease is primarily
attributable to the sales of the infusion centers and the rehab centers, which
contributed lower margins.

Cost of Rentals and Other Revenues.Cost of rentals and other revenues
decreased from $26.7 million for the nine months ended September 30, 2001 to
$26.1 million for the same period in 2002, a decrease of $0.6 million, or 2%.
As a percentage of rentals and other revenue, cost of rentals and other
revenues remained constant at 19.2% for the nine months ended September 30,
2001 and 2002.

Operating Expenses. Operating expenses decreased from $147.1 million for the
nine months ended September 30, 2001 to $137.3 million for the same period in
2002, a decrease of $9.8

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million, or 7%. This decrease is attributable to reduced operating expense as
a result of the sales of certain centers during 2001 and the first quarter of
2002.

General and Administrative Expenses. General and administrative expenses
increased from $11.8 million for the nine months ended September 30, 2001 to
$12.0 million for the same period in 2002, an increase of $0.2 million, or 2%.
As a percentage of revenues, general and administrative expenses were 4.4% and
5.1% for the nine months ended September 30, 2001 and 2002, respectively. This
percentage increase is primarily attributable to rent expense in the nine
months ended September 30, 2002 as well as a lower revenue base in 2002 due to
the asset sales.

Earnings from Hospital Joint Ventures.Earnings from hospital joint ventures
increased slightly from $3.3 million for the nine months ended September 30,
2001 to $3.4 million for the same period in 2002, an increase of $0.1 million.

Depreciation and Amortization. Depreciation (excluding rental equipment) and
amortization expenses decreased from $8.2 million for the nine months ended
September 30, 2001 to $3.1 million for the same period in 2002, a decrease of
$5.1 million, or 62%. Effective January 1, 2002 the Company adopted the
provisions of SFAS No. 142 and accordingly, ceased the amortization of its
goodwill. Amortization expense related to goodwill was $4.2 million for the
nine months ended September 30, 2001. The remaining decrease is primarily
attributable to certain property and equipment becoming fully depreciated.

Amortization of Deferred Financing Costs.Amortization of deferred financing
costs decreased slightly from $2.2 million for the nine months ended September
30, 2001 to $1.8 million for the same period in 2002, a decrease of $0.4
million. This decrease is primarily attributable to the cessation of finance
cost amortization and the accelerated write-off of deferred financing costs to
reorganization items as of July 31, 2002 as a result of the Bankruptcy Filing,
as defined in Risk Factors section on July 31, 2002.

Interest. Interest expense decreased from $22.9 million for the nine months
ended September 30, 2001, to $12.1 million for the same period in 2002, a
decrease of $10.8 million, or 47%. This decrease is attributable to reductions
in the prime borrowing rate and reduced principal amounts outstanding as well
as the Company ceasing to record provisions for interest as of the July 31,
2002 Chapter 11 filing date.

(Gain) Loss on Sales of Assets of Centers.In the third quarter of 2001, the
Company recorded a loss of $2.6 million on the sale of the assets of its rehab
centers. In the first quarter of 2002, the Company recorded a gain on $0.7
million on the sale of the assets of an infusion business and nursing agency.

Chapter 11 Financial Advisory Expenses Incurred Prior to Filing Bankruptcy.In
the nine months ended September 30, 2002 the Company incurred $818,000 related
to financial advisory and legal services in preparation of a possible Chapter
11 filing due to the Companys December 2002 debt maturity. No such fees were
incurred in the same period of 2001.

Provision for (Benefit from) Income Taxes.The provision for (benefit from)
income taxes was $450,000 for the nine months ended September 30, 2001 and
$(1.8) million for the same period in

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2002.     The benefit recorded in 2002 was
the result of the enactment of the Job Creation and Workers Assistance Act of
2002.

Liquidity and Capital Resources

At September 30, 2002, the Company had current assets of $96.7 million and
current liabilities of $28.3 million, resulting in working capital of $68.4
million and current ratio of 3.4x as compared to a working capital deficit of
$240.4 million and a current ratio of 0.3x at December 31, 2001.

On July 31, 2002, American HomePatient, Inc. and 24 of its subsidiaries
(collectively, the Debtors) 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). These cases (the Chapter 11 Cases) have
been consolidated for the purpose of joint administration under Case Number
02-08915-GP3-11. Pleadings in these cases may be viewed at the Courts
website, www.tnmb.uscourts.gov. On January 2, 2003, the Company filed the Plan, proposed by the
Company and the Official Committee of Unsecured Creditors appointed by the
Office of the United States Trustee in the Chapter 11 Cases. A Disclosure
Statement, the purpose of which is to enable creditors entitled to vote on the
Plan to make an informed decision before exercising their right to vote,
accompanied the Plan and was also filed on January 2, 2003. The hearing before
the Bankruptcy Court on confirmation of the Plan has been set for April 23,
2003. The filing was prompted by the impending December 31, 2002 maturity of
the Companys Bank Credit Facility. Over the last several years, the Company
unsuccessfully attempted to reach a long-term agreement to restructure its Bank
Credit Facility outside of court, but this restructuring has not been possible,
primarily due to the diversity of its large lender group, which is largely
comprised of non-traditional participants. Therefore, the Company determined
that filing for protection under Chapter 11 of the Bankruptcy Code was in the
best interests of all constituents.

The Company is operating as a debtor-in-possession under the supervision of the
Bankruptcy Court. As a debtor-in-possession, the Company is authorized to
operate its business but may not engage in transactions outside its ordinary
course of business without the approval of the Bankruptcy Court. The Company
has not sought to obtain debtor-in-possession secured financing (DIP) and
currently does not intend to do so. Rather, the Company has operated using
cash flow and cash on hand to fund day-to day operations during the bankruptcy
process, which is consistent with its operations since the Lenders terminated
the Companys ability to access a revolving line of credit in 2000. The
Bankruptcy Filing should have no impact on the Companys existing joint
ventures with unrelated parties, and the Company currently does not anticipate
that any other subsidiary or affiliate of the Company will file a voluntary
petition for relief.

On October 15, 2002, the Company, the Lenders and the unsecured creditors filed
an agreed order with the Bankruptcy Court authorizing the use of cash
collateral and granting adequate protection payments to the Lenders. This
order authorizes the Company to use cash collateral, but provides certain
restrictions on the Companys ability to make cash disbursements. The
Company is authorized to use cash collateral solely for the following purposes:
(i) to make cash disbursements as set forth in a cash forecast prepared by the
Company, not to exceed 5% in any four week rolling period, (ii) to pay fees
required by the Office of the United States Trustee, (iii)

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to make adequate
protection payments to the Lenders, and (iv) to replace or increase certain
letters of credit. The Company agreed to make adequate protection payments to
the Lenders of $1,600,000 per month beginning with the month of August 2002,
subject to maintaining a required minimum cash balance of $12,000,000 plus the
amount necessary to fund incentive bonuses that will come due through March 31,
2003, as well as any amounts necessary to replace or increase letters of
credit. An initial payment totaling $3,200,000 for August and September 2002,
in the aggregate, was made on October 15, 2002, and additional adequate
protection payments have been paid on the 15th of each successive month. The
application of such payments is subject to further order of the Bankruptcy
Court. The Bankruptcy Court may recharacterize the application of any
payment regardless of how characterized by the Company or the Lenders.

The Company is the borrower under the Bank Credit Facility between the Company
and Deutsche Bank Trust Company, successor to Bankers Trust Company, as agent
for the Lenders. The Companys breach of several of the financial covenants in
the Fourth Amended and Restated Credit Agreement and its failure to make a
scheduled principal payment due March 15, 2001 caused the Company to not be in
compliance with certain covenants of the Fourth Amended and Restated Credit
Agreement. On June 8, 2001, the Company entered into the Amended Credit
Agreement that provided a new loan to the Company from which the proceeds were
used to pay off all existing loans under the Credit Agreement. The Amended
Credit Agreement also includes modified financial covenants and a revised
amortization schedule. In addition, the Amended Credit Agreement no longer
contains a revolving loan component; all existing indebtedness is now in the
form of a term loan which matures on December 31, 2002. The Amended Credit
Agreement requires principal payments of $750,000 on September 30, 2001 and
December 31, 2001; a principal payment of $11.6 million on March 31, 2002;
principal payments of $1.0 million on June 30, 2002 and September 30, 2002; and
a Balloon Payment of $281.5 million on December 31, 2002. As of November 14,
2002, the Company has paid the $750,000 principal payment due on September 30,
2001, the $750,000 principal payment due on December 31, 2001, the $11.6
million principal payment due on March 31, 2002 as well as the $1.0 million
principal payment due on June 30, 2002, $0.6 million of the $1.0 million

principal payment due on September 30, 2002, and $5.3 million of the Balloon
Payment due on December 31, 2002. These early payments of 2002 principal were
generated from operational cash flows, from the sales of assets of centers,
from the sales of the Companys wholly-owned real estate and from the
collection of patient receivables associated with the asset sales. The
Bankruptcy Filing stayed all remaining payments required by Amended Credit
Agreement. These early payments of 2002 principal were generated from
operational cash flows, from the sales of assets of centers, from the sales of
the Companys wholly-owned real estate and from the collection of patient
receivables associated with the asset sales. Cash flow from operations were
not sufficient to pay the debt upon its current maturity on December 31, 2002.
There can be no assurance that the Bank Credit Facility will be renewed, and if
there is no renewal, then the Companys ability to make the Balloon Payment is
contingent upon obtaining replacement financing. There can be no assurance
that the Company can obtain such financing on terms acceptable to the Company
or at all. Additional sources of funds may be required and there can be no
assurance that the Company will be able to obtain additional funds on
terms acceptable to the Company or at all. The Amended Credit Agreement
further provides for mandatory prepayments of principal from the Companys
excess cash flow and from the proceeds of the Companys sales of securities,
sales of assets, tax refunds or excess casualty loss payments. Substantially
all of the Companys assets have been pledged as security for borrowings under
the

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Bank Credit Facility. Indebtedness under the Bank Credit Facility, as of
November 14, 2002, totals $275.4 million (which excludes letters of credit
totaling $3.4 million).

The Amended Credit Agreement further provided for the payment to the Lenders of
certain fees. These fees included a restructuring fee of $1.2 million (paid on
the effective date of the Amended Credit Agreement), and $200,000 paid on
December 31, 2001, March 31, 2002 and June 30, 2002. A restructuring fee of
$459,000 payable on September 30, 2002 is currently classified as a liability
subject to compromise in the accompanying consolidated balance sheet as of
September 30, 2002. In addition, the Company has an obligation to pay the
agent an annual administrative fee of $75,000 and an annual fee of 0.50% of the
average monthly outstanding indebtedness on each anniversary of the Amended
Credit Agreement. The last such payment of annual fees was made by the Company
in June 2002.

The Amended Credit Agreement contains various financial covenants, the most
restrictive of which relate to measurements of EBITDA (as defined in the
Amended Credit Agreement), leverage, interest coverage ratios, and collections
of accounts receivable. The Amended Credit Agreement also contains provisions
for periodic reporting.

The Amended Credit Agreement also contains restrictions which, among other
things, impose certain limitations or prohibitions on the Company with respect
to the incurrence of indebtedness, the creation of liens, the payment of
dividends, the redemption or repurchase of securities, investments,
acquisitions, capital expenditures, sales of assets and transactions with
affiliates. The Company is not permitted to make acquisitions or investments
in joint ventures without the consent of Lenders holding a majority of the
lending commitments under the Bank Credit Facility. In addition, proceeds of
all of the Companys accounts receivable are transferred daily into a bank
account at PNC Bank, N.A. which, under the terms of a Concentration Bank
Agreement, requires that all amounts in excess of $3.0 million be transferred
to an account at Deutsche Bank Trust Company in the Companys name. Upon
occurrence of an event of default under the Amended Credit Agreement, the
Lenders have the right to instruct PNC Bank, N.A. and Deutsche Bank Trust
Company to cease honoring any drafts under the accounts and apply all amounts
in the bank accounts against the indebtedness owed to the Lenders.

Interest is payable on the unpaid principal amount under the Amended Credit
Agreement, at the election of the Company, at either a Base Lending Rate or an
Adjusted Eurodollar Rate (each as defined in the Amended Credit Agreement),
plus an applicable margin of 2.75% and 3.50%, respectively. The Company is
also required to pay additional interest in the amount of 4.50% per annum on
that principal portion outstanding of the Amended Credit Agreement that is in
excess of four times adjusted EBITDA, as defined by the Amended Credit
Agreement. For the seven months ended July 31, 2002, the weighted average
borrowing rate was 7.3%. Upon the occurrence and continuation of an event of
default under the Amended Credit Agreement, interest would be payable upon
demand at a rate that is 2.00% per annum in excess of the interest rate
otherwise payable under the Amended Credit Agreement and the Company no longer
would have
the right to designate the Adjusted Eurodollar Rate plus the applicable margin
as the applicable interest rate.

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The Company was required to issue, effective on March 31, 2001, warrants to the
Lenders representing 19.999% of the common stock of the Company issued and
outstanding as of March 31, 2001, pursuant to the terms of the Second Amendment
to the Fourth Amended and Restated Credit Agreement (which amendment was
entered into on April 14, 1999). To fulfill these obligations, warrants to
purchase 3,265,315 shares of common stock were issued to the Lenders on June 8,

2001. Fifty percent of these warrants are exercisable during the period
commencing June 1, 2001 and ending May 31, 2011, and the remaining fifty
percent are exercisable during the period commencing September 30, 2001 and
ending September 29, 2011. The exercise price of the warrants is $0.01 per
share. The Company accounted for the fair value of these warrants during the
fourth quarter of 2000 as the issuance of these warrants was determined to be
probable. As such, the Company increased deferred financing costs by $686,000
to recognize the estimated fair value of the warrants as of December 31, 2000.
As of November 14, 2002 these warrants have not been exercised.

The accompanying condensed consolidated interim financial statements have been
prepared on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business, and in
accordance with SOP 90-7. Accordingly, these consolidated interim financial
statements do not reflect any adjustments that might result if the Company is
unable to continue as a going concern. The Company has incurred net losses of
$2,404,000, $69,345,000 and $12,892,000 for the three and nine months ended
September 30, 2002, and for the year ended December 31, 2001, respectively, and
has a shareholders deficit of $55,785,000 at September 30, 2002. As discussed
above, the Company has substantial debt balances, which, pursuant to the
Amended Credit Agreement becomes due on December 31, 2002. These factors among
others raise substantial doubt about the Companys ability to continue as a
going concern. The accompanying financial statements do not include any
adjustments of recorded asset carrying amounts or the amounts and
classification of liabilities that might result should the Company be unable to
continue as a going concern. All pre-petition liabilities subject to
compromise have been segregated in the condensed consolidated balance sheets
and classified as liabilities subject to compromise, at the estimated amount of
allowable claims. Liabilities not subject to compromise are separately
classified as current and non-current in the condensed consolidated balance
sheets. 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 condensed consolidated statements of cash flows.

Liabilities subject to compromise refer to liabilities incurred prior to the
commencement of the Chapter 11 Cases. These liabilities consist primarily of
amounts outstanding under the Bank Credit Facility, the Government Settlement,
capital leases, and also include accounts payable, accrued interest, amounts
accrued for future lease rejections, professional fees related to the
reorganization, and other accrued expenses. Such claims remain subject to
future adjustments based on negotiations, actions of the Bankruptcy Court,
further developments with respect to disputed claims, and other events.
Payment terms for these amounts will be established in connection with the
Chapter 11 Cases.

The Company has received approval from the Bankruptcy Court to pay or otherwise
honor certain pre-petition liabilities, including wages and benefits of
employees, reimbursement of

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employee business expenses, insurance costs,
medical directors fees, utilities and patient refunds in the ordinary course of
business. The Company is also authorized to pay pre-petition liabilities to
vendors providing critical goods and services provided these amounts do not
exceed a predetermined target. As a debtor-in-possession, the Company also has
the right, subject to Bankruptcy Court approval and certain other limitations,
to assume or reject executory contracts and unexpired leases. The parties
affected by these rejections may file claims with the Bankruptcy Court in
accordance with bankruptcy procedures. Any such damages resulting from lease
rejections are treated as general unsecured claims in the reorganization.

The principal categories of claims classified as liabilities subject to
compromise under reorganization proceedings are as follows:

|                                                    |                                         |   |             |             | 
|--------------------------------------------------- | --------------------------------------- | - | ----------- | ----------- | 
|Pre-petition accounts payable                       |                                         | $ | 20,035,000  |            
|State income taxes payable                          |                                         |   | 422,000     |            
|Other accruals                                      |                                         |   | 5,754,000   |            
|Accrued interest                                    |                                         |   | 1,551,000   |            
|Bank credit facility                                |                                         |   | 275,395,000 |            
|Other long-term debt and liabilities                |                                         |   | 2,194,000   |            
|Accrual for future lease rejection damages          |                                         |   | 1,341,000   |            
|Accrued professional fees related to reorganization |                                         |   | 785,000     |            
|Government settlement, including interest           |                                         |   | 4,246,000   |            
|                                                    |                                         |   |             |            
|                                                    | Total liabilities subject to compromise |   | $           | 311,723,000 | 
|                                                    |                                         |   |             |            

Reorganization items represent expenses that are incurred by the Company as a
result of reorganization under Chapter 11 of the Federal Bankruptcy Code.
These items are comprised of the following:

|                                             |                            |   |           |           | 
|-------------------------------------------- | -------------------------- | - | --------- | --------- | 
|Write-offs of deferred financing costs       |                            | $ | 1,615,000 |          
|Provision for future lease rejection damages |                            |   | 1,341,000 |          
|Professional and other fees                  |                            |   | 961,000   |          
|                                             |                            |   |           |          
|                                             | Total reorganization items |   | $         | 3,917,000 | 
|                                             |                            |   |           |          

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 intends to improve financial performance through stabilizing and
increasing profitable revenues, decreasing and controlling expenses and
improving accounts receivable performance. 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 its proposed
Plan of Reorganization. However, as with all projections, there can be no
guarantee that managements projections will be achieved. The Bankruptcy
Filing and the related
uncertainties could disrupt operations and could negatively affect the
Companys business, financial condition, results of operations and cash flows.
See Risk Factors. The Company has

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taken a number of steps designed to
minimize any such disruptions including requesting critical vendor status for
certain vendors, communicating with other vendors regarding ongoing operations,
requesting Bankruptcy Court permission to assume certain executory contracts,
seeking approval of a Key Employee Retention Plan, establishing an employee
communication program regarding the Bankruptcy Filing and related issues, and
communicating with referral sources and patients as needed. The consolidated
financial statements do not include any adjustments related to the
recoverability of asset carrying amounts or the amounts of liabilities that
might result should the Company be unable to continue as a going concern. The
uncertainty regarding the outcome of the Bankruptcy Filing may impair the
Companys ability to receive trade credit from its vendors and could have a
material adverse effect on the Companys business, financial condition, results
of operations and cash flows.

The Companys future liquidity will continue to be dependent upon the relative
amounts of current assets (principally cash, accounts receivable and
inventories) and current liabilities (principally accounts payable and accrued
expenses). In that regard, accounts receivable can have a significant impact
on the Companys liquidity. The Company has various types of accounts
receivable, such as receivables from patients, contracts, and former owners of
acquisitions. The majority of the Companys accounts receivable are patient
receivables. Accounts receivable are generally outstanding for longer periods
of time in the health care industry than many other industries because of
requirements to provide third-party payors with additional information
subsequent to billing and the time required by such payors to process claims.
Certain accounts receivable frequently are outstanding for more than 90 days,
particularly where the account receivable relates to services for a patient
receiving a new medical therapy or covered by private insurance or Medicaid.
Net patient accounts receivable were $53.6 million and $60.1 million at
September 30, 2002 and December 31, 2001, respectively. Average days sales in
accounts receivable (DSO) was approximately 64 and 68 days at September 30,
2002 and December 31, 2001, 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 accompanying condensed financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company has
incurred net losses of $2,404,000, $69,345,000 and $12,892,000 for the three
and nine months ended September 30, 2002 and for the year ended December 31,
2001, respectively, and has a shareholders deficit of $55,785,000 at September
30, 2002. As discussed above, the Company has substantial debt balances,
which, pursuant to the Amended Credit Agreement become due on December 31, 2002.
These factors among others raise substantial doubt about the Companys ability
to continue as a going concern. The accompanying financial statements do not
include any adjustments related to the recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities that
might be necessary should the Company be unable to continue as a going concern.

Net cash provided by operating activities was $35.8 million and $20.3 million
for the nine months ended September 30, 2002 and 2001, respectively. This
increase of $15.5 million is primarily due to the change in accounts payable,
other payables and accrued expenses. These items provided cash of $11.1
million and $0.5 million for the nine months ended September 30,

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2002 and 2001,
respectively. This variance is primarily due to 2001 payments of $3.0 million
related to the Government Settlement and income tax payments of $1.8 million
related to a federal income tax audit assessment covering the period 1994
through 1998 as well as the Bankruptcy Filing, in which all actions to collect
pre-petition indebtedness and other contractual obligations against the Company
are stayed. In addition, the Companys recognition of a federal income tax
receivable related to a carryback of additional operating losses in the quarter
ended March 31, 2002 resulted in a decrease of cash provided by operating
activities of $2.1 million. Net cash used for reorganization items totaled $0.2
million for the nine months ended September 30, 2002 and consists primarily of
professional fees. Net cash used in investing activities was $15.5 million and
$6.2 million for the nine months ended September 30, 2002 and 2001,
respectively. Capital expenditures were $19.8 million for the nine months
ended September 30, 2002 compared to $15.5 million for the same period in 2001,
and the sales of assets of centers contributed $1.8 million for the nine months
ended September 30, 2002 compared to $7.8 million for same period in 2001. Net
cash used in financing activities was $6.1 million and $12.4 million for the
nine months ended September 30, 2002 and 2001, respectively. The cash used in
financing activities for the nine months ended September 30, 2002 and 2001
primarily relates to principal payments and deferred financing costs. At
September 30, 2002 the Company had cash and cash equivalents of approximately
$23.3 million.

Risk Factors

This section summarizes certain risks, among others, that should be considered
by stockholders and prospective investors in the Company.

Bankruptcy Proceeding.The Debtors filed the Bankruptcy Filing on July
31, 2002. The Debtors are operating as a debtor-in-possession subject to the
jurisdiction of the Bankruptcy Court. The Debtors and the Official Committee
of Unsecured Creditors jointly proposed the Second Amended Joint Plan of
Reorganization that, among other terms, proposed paying all creditors of the
Debtors in full and allowing the stockholders of the Company to retain their
ownership interest. However, there can be no assurance that the proposed plan
will be approved with these proposed terms or at all. Furthermore, the Debtors
are subject to a number of uncertainties while operating its business during
bankruptcy proceedings including maintaining its relationships with vendors,
referral sources, business partners, employees, and patients. If the proposed
plan is approved, the Companys future results of operations will be subject to
the business risks associated with the Companys operations and the markets in
which it operates as described in Risk Factors-Business Risks. See Note 3
Proceedings Under Chapter 11 of the Bankruptcy Code.

Business Risks

Substantial Leverage.The Company maintains a significant amount of debt.
Indebtedness under the Bank Credit Facility totaled approximately $275.4
million (which
excludes letters of credit totaling $3.4 million) as of July 31, 2002, the
Bankruptcy Filing date. The Lenders have asserted that additional sums are due
that will increase their claims to in excess of $280.0 million. If a plan of
reorganization is not approved and confirmed that restructures this debt, other
outcomes likely would have a material adverse effect on the current
shareholders of the Company and also could have a material adverse effect on
the Company or its business

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prospects. If the proposed plan is approved, a
substantial portion of its cash flow from operations will be dedicated to
repaying debt. If the Company is unable to generate sufficient cash flow to
meet its obligations, it likely would have a material adverse effect on the
Company. The substantial leverage could adversely affect the Companys ability
to grow its business or to withstand adverse economic conditions or competitive
pressures. See Note 3 Proceedings Under Chapter 11 of the Bankruptcy Code.

Medicare Reimbursement for Oxygen Therapy and Other Services.The Company
has been affected by previous cuts in Medicare reimbursement rates for oxygen
therapy and other services. Additional reimbursement reductions for oxygen
therapy services or other services and products provided by the Company could
occur. Reimbursement reductions already implemented have materially adversely
affected the Companys revenues and net income, and any such future reductions
could have a similar material adverse effect. See Managements Discussion and
Analysis of Financial Condition and Results of Operations  Medicare
Reimbursement for Oxygen Therapy Services.

Dependence on Reimbursement by Third-Party Payors.For the nine months
ended September 30, 2002, the percentage of the Companys revenues derived from
Medicare, Medicaid and private pay was 52%, 9% and 39%, respectively. The
revenues and profitability of the Company may be impacted by the efforts of
payors to contain or reduce the costs of health care by lowering reimbursement
rates, narrowing the scope of covered services, increasing case management
review of services and negotiating reduced contract pricing. Reductions in
reimbursement levels under Medicare, Medicaid or private pay programs and any
changes in applicable government regulations could have a material adverse
effect on the Companys revenues and net income. Changes in the mix of the
Companys patients among Medicare, Medicaid and private pay categories and
among different types of private pay sources may also affect the Companys
revenues and profitability. There can be no assurance that the Company will
continue to maintain its current payor or revenue mix. See Managements
Discussion and Analysis of Financial Condition and Results of Operations 
Significant Accounting Policies  Revenue Recognition and Allowance for
Doubtful Accounts.

Collectibility of Accounts Receivable.The Company has substantial
accounts receivable, as well as DSO of 64 days as of September 30, 2002. 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  Significant Accounting Policies  Revenue
Recognition and Allowance for Doubtful Accounts.

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

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regulations that may be enacted in the future. Changes in
applicable laws, any failure by the Company to comply with existing or future
laws, regulations or standards, or discovery of past regulatory noncompliance
by the Company could have a material adverse effect on the Companys results of
operations, financial condition, business or prospects. See Managements
Discussion and Analysis of Financial Condition and Results of Operations 
Government Regulation.

Government Investigations and Federal False Claims Act Cases.In addition
to the regulatory initiatives mentioned above, the OIG has received funding to
expand and intensify its auditing of the health care industry in an effort to
better detect and remedy errors in Medicare and Medicaid billing. The Company
has reason to believe a qui tam complaint has been filed against the Company
under the False Claims Act alleging violations of law occurring after December
31, 1998. The Company has not seen a complaint in this action, but believes
that it contains allegations similar to the ones alleged in the 2001 settlement
of another False Claims Act case. The Company believes that this second case
will be limited to allegedly improper activities occurring after December 31,
1998. There can be no assurances as to the final outcome of the pending False
Claims Act lawsuits or any lawsuits that may be filed in the future. Possible
outcomes include, among other things, the repayment of reimbursements
previously received by the Company related to billed claims found to be
improper, the imposition of fines or penalties, and the suspension or exclusion
of the Company from participation in the Medicare, Medicaid and other
government reimbursement programs. The outcome of any of the pending lawsuits
could have a material adverse effect on the Company. See Managements
Discussion and Analysis of Financial Condition and Results of Operations 
Government Regulation.

Liquidity.Effective at the close of business on September 1, 1999,
Nasdaq de-listed the Companys common stock and it is no longer listed for
trading on the Nasdaq National Market. As a result, between September 1, 1999
and September 30, 2002, trading of the Companys common stock was conducted on
the over-the-counter market (OTC) or, on application by broker-dealers, in
the NASDs Electronic Bulletin Board using the Companys current trading
symbol, AHOM. Because the Company was unable to timely file its Form 10-Q for
the quarter ended September 30, 2002, the Companys common stock has traded
only in the pink sheets since that date. While the Company intends to seek
to have its common stock again traded on the OTC, there can be no assurance
that it will be able to obtain that result. As a result, the liquidity of the
Companys common stock and its price have been adversely affected, which may
limit the Companys ability to raise additional capital and the ability of
shareholders to sell their shares.

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

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Health Care Initiatives.The health care industry continues to undergo
dramatic changes influenced in larger part by federal legislative initiatives.
Under the Bush administration, new federal health care initiatives may be
launched. For example, adding a prescription drug benefit to Medicare, a
patients bill of rights, providing an array of protections for managed care
patients, and changes to Medicare funding are a few of the initiatives
currently under discussion. There can be no assurance that these or other
federal legislative and regulatory initiatives will not be adopted in the
future. It is also possible that proposed federal legislation will include
language that provides incentives to further encourage Medicare recipients to
shift to Medicare at-risk managed care programs, potentially limiting patient
access to, and 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.

HIPAA Compliance.HIPAA has mandated an extensive set of regulations to
protect the privacy of individually identifiable health information. The
regulations consist of three sets of standards, each with a different date for
required compliance: (1) Privacy Standards have 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 are yet to be published in final form and therefore have no
compliance date. The Company has filed its compliance extension form and is
actively pursuing its strategies toward compliance with the final Privacy
Standards and Transaction and Code Sets Standards. The Companys HIPAA
compliance plan will require modifications to existing information management
systems and physical security mechanisms, and may require additional personnel
as well as extensive training of existing personnel, the full cost of which has
not yet been determined. The Company cannot predict the impact that final
regulations, when fully implemented, will have on its operations.

Ability to Attract and Retain Management.The Company is highly dependent
upon its senior management, and competition for qualified management personnel
is intense. Although there has been no material adverse impact to date from
the Bankruptcy Filing, the Companys Bankruptcy Filing and current financial
results, 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. 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. In
addition, there are relatively few barriers to entry in the local markets
served by the Company, and it encounters substantial competition from new
market entrants. The Companys competitors may attempt to use the Bankruptcy
Filing to convince referral sources and patients to use the Company less
frequently or not at all.

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Liability and Adequacy of Insurance.The provision of health care
services entails an inherent risk of liability. Certain participants in the
home health care 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 results of operations, financial condition or prospects
of the Company. Claims against the Company, regardless of their merit or
eventual outcome, may also have a material adverse effect upon the Companys
ability to attract patients or to expand its business. In addition, the
Company is self-insured for its workers compensation insurance and employee
health insurance and is at risk for claims up to individual stop loss and
aggregate stop loss amounts.

Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 141, Business Combinations
(SFAS No. 141) and SFAS No. 142. SFAS No. 141 requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001. SFAS No. 141 also specifies criteria which intangible assets
acquired in a purchase method business combination must meet to be recognized
and reported apart from goodwill. The Company adopted SFAS No. 141 effective
July 1, 2001. See Footnote 12 Adoption of SFAS No. 142 for disclosure of the
impact of SFAS No. 142. The Company adopted SFAS No. 142 on January 1, 2002.

In June 2001, the FASB issued Statement of Financial Accounting Standards No.
143, Accounting for Asset Retirement Obligations (SFAS No. 143) effective
for fiscal years beginning after June 15, 2002. SFAS No. 143 requires that a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
Company does not expect the future adoption of SFAS No. 143 to have a material
effect on its financial position or results of operations.

In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS
No. 144) effective for fiscal years beginning after December 15, 2001. SFAS
No. 144 establishes a single accounting
model for long-lived assets to be disposed of by sale, whether previously held
and used or newly acquired, and broadens the presentation of discontinued
operations to include more disposal transactions. The Companys January 1,
2002 adoption of SFAS No. 144 did not have a material impact on its financial
position or results of operations.

In April 2002, the FASB issued Statement of Financial Accounting Standards No.
145, Rescission of FASB Statement No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections (SFAS No. 145). SFAS No. 145
rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt,
and an amendment of that Statement, SFAS No. 64,

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Extinguishment of Debt Made
to Satisfy Sinking-Fund Requirements. SFAS No. 145 also rescinds SFAS No. 44,
Accounting for Intangible Assets of Motor Carriers. SFAS No. 145 amends SFAS
No. 13, Accounting for Leases, to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the required accounting
for certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This Statement also makes several technical
corrections and clarifications to other existing authoritative pronouncements.
The provisions of this Statement related to the rescission of SFAS No. 4 are
effective for fiscal years beginning after May 15, 2002. The provisions of
this Statement related to SFAS No. 13 are effective for transactions occurring
after May 15, 2002. All other provisions of this Statement are effective for
financial statements issued on or after May 15, 2002. The Companys adoption
of the provisions of SFAS No. 145 which were effective for transactions after
May 15, 2002 has not had a material effect on its financial statements. The
Company is evaluating the remaining provisions of SFAS No. 145 and will adopt
the remaining provisions prospectively on January 1, 2003.

In June 2002, the FASB issued Statement of Financial Accounting Standards No.
146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS
No. 146) effective for exit or disposal activities that are initiated after
December 31, 2002. SFAS No. 146 addresses financial accounting and reporting
for costs associated with exit or disposal activities and nullifies Emerging
Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)(Issue 94-3). The principal difference
between SFAS No. 146 and Issue 94-3 relates to the requirements for recognition
of a liability for a cost associated with an exit or disposal activity. SFAS
No. 146 requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred. Under Issue
94-3, a liability for an exit cost as defined in Issue 94-3 was recognized at
the date of an entitys commitment to an exit plan. The Company is currently
evaluating the impact of SFAS No. 146 on its financial statements and will
adopt the provisions of this Statement prospectively on January 1, 2003.

In November 2002, the FASB issued Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an Interpretation of FASB Statements No.
5, 57, and 107 and Rescission of FASB Interpretation No. 34 (FIN No. 45).
This Interpretation requires guarantors to account at fair value for and
disclose certain types of guarantees. The Interpretations disclosure
requirements are effective for the Companys year ended December 31, 2002; the
Interpretations accounting requirements are effective for guarantees issued or
modified after December 31, 2002. The Company is assessing the effects, if
any, of this Interpretation.

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ITEM 3  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The chief market risk factor affecting the financial condition and operating
results of the Company is interest rate risk. The Companys Bank Credit
Facility provides for a floating interest rate. As of September 30, 2002, the
Company had outstanding borrowings of approximately $275.4 million, which
excludes letters of credit totaling $3.4 million. In the event that interest
rates associated with this facility were to increase by 10%, the impact on
future cash flows would be approximately $1.3 million (excluding the effects of
the stay on interest payments in connection with the Bankruptcy Filing) for the
12 months in the period ending September 30, 2003. Interest expense associated
with other debts would not materially impact the Company as most interest rates
are fixed. The Company is not required to pay interest during its bankruptcy
proceedings, but is required to make adequate protection payments and is
authorized to use cash collateral during the course of the bankruptcy.
Additionally, the Company requests a fixed interest rate on all debt to be
restructured under its proposed Plan of Reorganization, but there can be no
assurance that the plan will be confirmed. See Note 3, Proceedings Under
Chapter 11 of the Bankruptcy Code.

ITEM 4  CONTROLS AND PROCEDURES

Based on their evaluation of the Companys disclosure controls and procedures
as of a date within 90 days of the filing of this Report, the Chief Executive
Officer and Chief Financial Officer have concluded that such controls and
procedures are adequate.

There were no significant changes in the Companys internal controls or in
other factors that could significantly affect such controls subsequent to the
date of their evaluation.

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PART II. OTHER INFORMATION

ITEM 1  LEGAL PROCEEDINGS

A description of the Chapter 11 Cases is set forth in Note 3 to the Companys
condensed consolidated financial statements contained in this Report and is
incorporated herein by reference. All of the civil legal proceedings against
the Company were stayed by the Bankruptcy Filing. A summary of the Companys
material legal proceedings that existed as of the Bankruptcy Filing is set
forth in Managements Discussion and Analysis of Financial Condition and
Results of Operations  Government Regulation  Legal Proceedings.

ITEM 3  DEFAULTS UPON SENIOR SECURITIES

A discussion of defaults and certain matters of non-compliance with certain
covenants contained in the Companys principal debt agreements is set forth in
Note 2 to the Companys condensed consolidated financial statements contained
in this Report and is incorporated herein by reference.

ITEM 6  EXHIBITS AND REPORTS ON FORM 8-K



|(A) |  | Exhibits. The exhibits filed as part of this Report are listed on the
Index to Exhibits immediately following the signature page. 
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------
|   
|(B) |  | Reports on Form 8-K. The following reports on Form 8-K were filed by the
Company during the three months ended September 30, 2002:



| | (1) |  | A current report on Form 8-K on July 5, 2002 was filed to announce
the Companys dismissal of its independent accountants, Arthur Andersen
LLP.                                                                                                                                           
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (2) |  | A current report on Form 8-K on August 9, 2002 was filed to announce
that on August 1, 2002 it had filed voluntary petitions for
reorganization under Chapter 11 of the United States Bankruptcy Code in
order to restructure its bank debt.                                              
|
| | (3) |  | A current report on Form 8-K on August 27, 2002 was filed to
announce that the Company had engaged Deloitte & Touche LLP as its
principal independent accountants, subject to the approval of the
United States Bankruptcy Court for the Middle District of Tennessee,
Nashville Division.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

|               |  |                            |  |                                                                                                             
|-------------- |  | -------------------------- |  | ------------------------------------------------------------------------------------------------------------
|               |  | AMERICAN HOMEPATIENT, INC.
|               |  |                            |  |                                                                                                             
|April 29, 2003 |  | By:                        |  | /s/ Marilyn A. OHara                                                                                       
|               |  |                            |  |                                                                                                             
|               |  |                            |  | Marilyn A. OHara
Chief Financial Officer and An Officer Duly
Authorized to Sign on Behalf of the registrant

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CERTIFICATIONS PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION

I, Joseph F. Furlong, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of American
HomePatient, Inc.;

2.     Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



| |                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
|
| | (b) Evaluated the effectiveness of the registrants disclosure
controls and procedures as of the date within 90 days prior to the filing
date of this quarterly report (the Evaluation Date); and                                                                                                
|
| | (c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        

5.     The registrants other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):



| |                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants ability
to record, process, summarize and report financial data and have
identified for the registrants auditors any material weaknesses in
internal controls; and

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| |                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| | (b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants internal
controls; and

6.     The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: April 29, 2003



/s/ Joseph F. Furlong
Joseph F. Furlong
Chief Executive Officer

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CERTIFICATION

I, Marilyn OHara, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of American
HomePatient, Inc.;

2.     Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



| |                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
|
| | (b) Evaluated the effectiveness of the registrants disclosure
controls and procedures as of the date within 90 days prior to the filing
date of this quarterly report (the Evaluation Date); and                                                                                                
|
| | (c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        

5.     The registrants other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):



| |                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants ability
to record, process, summarize and report financial data and have
identified for the registrants auditors any material weaknesses in
internal controls; and



| |                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| | (b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants internal
controls; and

6.     The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that

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could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: April 29, 2003



/s/ Marilyn OHara
Marilyn OHara
Chief Financial Officer

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INDEX TO EXHIBITS

|        |  |                                                                                                                                                                                                                                    |  |  |  |  |  | 
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  | 
|EXHIBIT |  |                                                                                                                                                                                                                                    |  | 
|NUMBER  |  | DESCRIPTION OF EXHIBITS                                                                                                                                                                                                            | 
|        |  |                                                                                                                                                                                                                                   
|3.1     |  | Certificate of Amendment to the Certificate of Incorporation
of the Company dated October 31, 1991 (incorporated by reference to Exhibit 3.2
to Amendment No. 2 to the Company's Registration Statement No. 33-42777 on Form S-1).
|3.2     |  | Certificate of Amendment to the Certificate of
Incorporation of the Company dated October 31, 1991 (incorporated by reference to
Exhibit 3.2 to Amendment No. 2 to the Company's Registration Statement No. 33-42777 on Form S-1).
|3.3     |  | Certificate of Amendment to the Certificate of
Incorporation of the Company dated May 14, 1992 (incorporated by reference to
Registration Statement on Form S-8 dated February 16, 1993).                                         
|3.4     |  | Certificate of Ownership and Merger merging American HomePatient,
Inc. into Diversicare Inc. dated May 11, 1994 (incorporated by reference
to Exhibit 4.4 to the Company's Registration Statement No. 33-89568 on Form S-2).      
|3.5     |  | Certificate of Amendment to the Certificate of
Incorporation of the Company dated July 8, 1996 (incorporated by reference to
Exhibit 3.5 to the Company's Report of Form 10-Q for the quarter ended June 30, 1996).               
|3.6     |  | Bylaws of the Company, as amended (incorporated by
reference to Exhibit 3.3 to the Company's Registration Statement No. 33-42777 on
Form S-1).                                                                                    
|99.1    |  | Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  Chief Executive Officer.                                                                                  
|99.2    |  | Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  Chief Financial Officer.                                                                                  

65