<PAGE>
                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: MARCH 31, 2002
                                                                OR
[ ]             TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
                    OF THE SECURITIES EXCHANGE ACT OF 1934
                FOR THE TRANSITION PERIOD FROM ______ TO ______.

                           AMERICAN HOMEPATIENT, INC.
                           --------------------------
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<CAPTION>
<S>                                      <C>                   <C>
            DELAWARE                       0-19532                        62-1474680
            --------                       -------                        ----------
(STATE OR OTHER JURISDICTION OF          (COMMISSION           (IRS EMPLOYER IDENTIFICATION NO.)
 INCORPORATION OR ORGANIZATION)          FILE NUMBER)
</TABLE>

            5200 MARYLAND WAY, SUITE 400, BRENTWOOD, TENNESSEE 37027
            --------------------------------------------------------
            (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)      (ZIP CODE)

                                 (615) 221-8884
                                 --------------
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

                                      NONE
   --------------------------------------------------------------------------
   (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGES SINCE LAST
                                    REPORT.)

INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]

                                   16,367,389
   --------------------------------------------------------------------------

      (OUTSTANDING SHARES OF THE ISSUER'S COMMON STOCK AS OF MAY 9, 2002)

                          TOTAL NUMBER OF SEQUENTIALLY
                              NUMBERED PAGES IS 36


                                       1
<PAGE>

                         PART I. FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

                  AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES

                 INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
                                  (unaudited)

<TABLE>
<CAPTION>
ASSETS
                                                                              March 31,             December 31,
                                                                                2002                    2001
                                                                            -------------           -------------
<S>                                                                         <C>                     <C>

CURRENT ASSETS:
    Cash and cash equivalents                                               $   6,307,000           $   9,159,000
    Restricted cash                                                                53,000                 265,000
    Accounts receivable, less allowance for doubtful accounts
       of $31,164,000 and $32,152,000, respectively                            60,290,000              61,661,000
    Inventories                                                                13,385,000              13,257,000
    Prepaid expenses and other current assets                                   2,208,000               1,583,000
                                                                            -------------           -------------
          Total current assets                                                 82,243,000              85,925,000
                                                                            -------------           -------------

PROPERTY AND EQUIPMENT, at cost:                                              172,618,000             171,266,000
    Less accumulated depreciation and amortization                           (126,143,000)           (125,043,000)
                                                                            -------------           -------------
          Property and equipment, net                                          46,475,000              46,223,000
                                                                            -------------           -------------

OTHER ASSETS:
    Excess of cost over fair value of net assets acquired, net                121,214,000             189,699,000
    Investment in joint ventures                                                9,067,000               9,492,000
    Deferred financing costs, net                                               2,434,000               2,939,000
    Other assets, net                                                          10,076,000              10,386,000
                                                                            -------------           -------------
          Total other assets                                                  142,791,000             212,516,000
                                                                            -------------           -------------
                                                                            $ 271,509,000           $ 344,664,000
                                                                            =============           =============
</TABLE>

                                  (Continued)


                                       2
<PAGE>

                  AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES

                 INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
                                  (unaudited)
                                  (Continued)

<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
                                                                                  March 31,             December 31,
                                                                                    2002                    2001
                                                                                -------------           -------------
<S>                                                                             <C>                     <C>

CURRENT LIABILITIES:
    Current portion of long-term debt and capital leases                        $ 277,958,000           $ 282,087,000
    Accounts payable                                                               17,625,000              19,360,000
    Other payables                                                                  2,437,000               2,600,000
    Accrued expenses:
       Payroll and related benefits                                                 7,662,000               8,054,000
       Interest                                                                       745,000                 907,000
       Insurance                                                                    5,764,000               5,229,000
       Other                                                                        6,496,000               6,024,000
                                                                                -------------           -------------
          Total current liabilities                                               318,687,000             324,261,000
                                                                                -------------           -------------

NONCURRENT LIABILITIES:
    Long-term debt and capital leases, less current portion                           684,000                 723,000
    Other noncurrent liabilities                                                    4,788,000               4,783,000
                                                                                -------------           -------------
          Total noncurrent liabilities                                              5,472,000               5,506,000
                                                                                -------------           -------------

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY (DEFICIT):
    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                                                          (226,799,000)           (159,241,000)
                                                                                -------------           -------------
          Total shareholders' equity (deficit)                                    (52,650,000)             14,897,000
                                                                                -------------           -------------
                                                                                $ 271,509,000           $ 344,664,000
                                                                                =============           =============
</TABLE>

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


                                       3
<PAGE>

                  AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES

            INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (unaudited)

<TABLE>
<CAPTION>
                                                                                    Three Months Ended March 31,
                                                                                -------------------------------------
                                                                                    2002                    2001
                                                                                -------------           -------------
<S>                                                                             <C>                     <C>

REVENUES:
    Sales and related service revenues                                          $  34,823,000           $  43,868,000
    Rentals and other revenues                                                     45,200,000              46,194,000
    Earnings from joint ventures                                                    1,295,000               1,059,000
                                                                                -------------           -------------
          Total revenues                                                           81,318,000              91,121,000
                                                                                -------------           -------------

EXPENSES:
    Cost of sales and related services                                             16,275,000              22,170,000
    Cost of rentals and other revenues, including rental equipment
       depreciation of $4,639,000 and $5,172,000, respectively                      8,198,000               8,518,000
    Operating                                                                      45,971,000              49,620,000
    General and administrative                                                      4,106,000               3,938,000
    Depreciation, excluding rental equipment, and amortization                        914,000               2,704,000
    Amortization of deferred financing costs                                          713,000                 639,000
    Interest                                                                        4,781,000               9,979,000
    Gain on sale of assets of center                                                 (667,000)                     --
                                                                                -------------           -------------
          Total expenses                                                           80,291,000              97,568,000
                                                                                -------------           -------------

INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAXES AND
   CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE                              1,027,000              (6,447,000)

PROVISION FOR INCOME TAXES                                                            100,000                 150,000
                                                                                -------------           -------------

INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN
   ACCOUNTING PRINCIPLE                                                               927,000              (6,597,000)

CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE                               (68,485,000)                     --
                                                                                -------------           -------------

NET LOSS                                                                        $ (67,558,000)          $  (6,597,000)
                                                                                =============           =============

NET INCOME (LOSS) PER COMMON SHARE BEFORE CHANGE IN
   ACCOUNTING PRINCIPLE:
       - Basic                                                                  $        0.06           $       (0.40)
                                                                                =============           =============
       - Diluted                                                                $        0.06           $       (0.40)
                                                                                =============           =============

NET LOSS PER COMMON SHARE:
       - Basic                                                                  $       (4.14)          $       (0.40)
                                                                                =============           =============
       - Diluted                                                                $       (4.03)          $       (0.40)
                                                                                =============           =============

WEIGHTED AVERAGE NUMBER OF COMMON SHARES
   OUTSTANDING:
       - Basic                                                                     16,331,000              16,352,000
                                                                                =============           =============
       - Diluted                                                                   16,769,000              16,352,000
                                                                                =============           =============
</TABLE>

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


                                       4
<PAGE>

                  AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES

            INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (unaudited)

<TABLE>
<CAPTION>

                                                                                  Three Months Ended March 31,
                                                                              -----------------------------------
                                                                                  2002                   2001
                                                                              ------------           ------------
<S>                                                                           <C>                    <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
    Income (loss) before cumulative effect of change in
      accounting principle                                                    $    927,000           $ (6,597,000)
    Adjustments to reconcile net income (loss) before
      cumulative effect of change in accounting principle to net
      cash provided from (used in) operating activities:
       Depreciation and amortization                                             5,553,000              7,876,000
       Amortization of deferred financing costs                                    713,000                639,000
       Equity in earnings of unconsolidated joint ventures                        (790,000)              (508,000)
       Minority interest                                                            70,000                 71,000
       Gain on sale of assets of center                                           (667,000)                    --

    Change in assets and liabilities, net of effects from
      sales of assets of centers:
       Restricted cash                                                             212,000                173,000
       Accounts receivable, net                                                    866,000              2,230,000
       Inventories                                                                (398,000)             1,523,000
       Prepaid expenses and other current assets                                  (625,000)               (86,000)
       Accounts payable, other payables and accrued expenses                    (1,636,000)             2,501,000
       Other noncurrent liabilities                                                (13,000)                18,000
       Other assets                                                                290,000                199,000
                                                                              ------------           ------------
          Net cash provided from operating activities                            4,502,000              8,039,000
                                                                              ------------           ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Proceeds from sales of assets of centers                                     1,805,000                     --
    Additions to property and equipment, net                                    (5,881,000)            (4,664,000)
    Distributions and loan payments from (advances to)
      unconsolidated joint ventures, net                                         1,141,000               (272,000)
    Distributions to minority interest owners                                      (55,000)               (63,000)
                                                                              ------------           ------------
       Net cash used in investing activities                                  $ (2,990,000)          $ (4,999,000)
                                                                              ------------           ------------
</TABLE>

                                  (Continued)


                                       5
<PAGE>

                  AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES

            INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (unaudited)
                                  (Continued)

<TABLE>
<CAPTION>
                                                                 Three Months Ended March 31,
                                                             -----------------------------------
                                                                 2002                   2001
                                                             ------------           ------------
<S>                                                          <C>                    <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
  Principal payments on debt and capital leases                (4,168,000)               (83,000)
  Proceeds from Employee Stock Purchase Plan                           --                202,000
  Proceeds from exercise of stock options                          11,000                     --
  Deferred financing costs                                       (207,000)              (133,000)
                                                             ------------           ------------
        Net cash used in financing activities                  (4,364,000)               (14,000)
                                                             ------------           ------------

INCREASE (DECREASE) IN CASH AND CASH
  EQUIVALENTS                                                  (2,852,000)             3,026,000

CASH AND CASH EQUIVALENTS, beginning of period                  9,159,000             12,081,000
                                                             ------------           ------------

CASH AND CASH EQUIVALENTS, end of period                     $  6,307,000           $ 15,107,000
                                                             ============           ============

SUPPLEMENTAL INFORMATION:
  Cash payments of interest                                  $  4,813,000           $  6,606,000
                                                             ============           ============

  Cash payments of income taxes                              $     49,000           $    172,000
                                                             ============           ============
</TABLE>

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


                                       6
<PAGE>

                  AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES

          NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                            MARCH 31, 2002 AND 2001

1.       ORGANIZATION AND BACKGROUND

American HomePatient, Inc. (the "Company") was incorporated in Delaware in
September 1991. The Company'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. 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 three months ended March 31, 2002, such services
represented 65%, 15% and 20%, respectively of revenues. These services and
products are paid for primarily by Medicare, Medicaid and other third-party
payors. As of March 31, 2002, the Company provided these services to patients
primarily in the home through 287 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. From its inception through
1997 the Company experienced substantial growth primarily as a result of its
strategy of acquiring and operating home health care businesses. Beginning in
1998, the Company's strategy shifted from acquiring new businesses to focusing
more on internal growth, integrating its acquired operations and achieving
operating efficiencies.

2.       BANK CREDIT FACILITY

The Company is the borrower under a credit facility (the "Bank Credit
Facility") evidenced by a Fifth Amended and Restated Credit Agreement (the
"Amended Credit Agreement") between the Company and Bankers Trust Company, as
agent for a syndicate of lenders (the "Lenders"). Indebtedness under the Bank
Credit Facility as of May 9, 2002 totals $279.9 million (which includes letters
of credit totaling $3.4 million). The Bank Credit Facility matures on December
31, 2002, and payment of the entire outstanding balance (the "Balloon Payment")
is due at that time. Anticipated future cash flow from operations will not be
sufficient to pay the Balloon Payment. 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. As a result, the Company's
independent auditors added an explanatory paragraph to their unqualified
opinion covering the Company's consolidated financial statements for the year
ended December 31, 2001 that expressed substantial doubt as to the Company's
ability to continue as a going concern.

See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."


                                       7
<PAGE>

3.       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
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 2001, the
infusion center generated approximately $9.4 million in total annualized
revenues. The proceeds of this sale were used to pay down debt under the
Company's Bank Credit Facility.

4.       EARNINGS PER SHARE

Under the standards established by Statement of Financial Accounting Standards
No. 128, 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. The following information is necessary to
calculate earnings per share for the periods presented:

<TABLE>
<CAPTION>
                                                                               (unaudited)
                                                                   -----------------------------------
                                                                       Three Months Ended March 31,
                                                                   -----------------------------------
                                                                       2002                   2001
                                                                   ------------           ------------
         <S>                                                       <C>                    <C>

         Income (loss) before cumulative effect of
             change in accounting principle                        $    927,000           $ (6,597,000)
                                                                   ------------           ------------
         Cumulative effect of change in accounting
             principle                                              (68,485,000)                    --
                                                                   ------------           ------------
         Net loss                                                  $(67,558,000)          $ (6,597,000)
                                                                   ============           ============

         Weighted average common shares outstanding                  16,331,000             16,352,000
         Effect of dilutive options and warrants                        438,000                     --
                                                                   ------------           ------------
         Adjusted diluted common shares outstanding                  16,769,000             16,352,000
                                                                   ============           ============

         Net income (loss) per common share before
             cumulative effect of change in accounting
             principle
             - Basic                                               $       0.06           $      (0.40)
                                                                   ============           ============
             - Diluted                                             $       0.06           $      (0.40)
                                                                   ============           ============
         Net loss per common share
             - Basic                                               $      (4.14)          $      (0.40)
                                                                   ============           ============
             - Diluted                                             $      (4.03)          $      (0.40)
                                                                   ============           ============
</TABLE>


                                       8
<PAGE>

5.       BASIS OF FINANCIAL STATEMENTS

The interim condensed consolidated financial statements of the Company for the
three months ended March 31, 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 generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management of the Company, the accompanying
unaudited interim consolidated financial statements reflect all adjustments
(consisting of only normally recurring accruals) necessary to present fairly
the financial position at March 31, 2002 and the results of operations and the
cash flows for the three months ended March 31, 2002 and 2001.

The results of operations for the three months ended March 31, 2002 and 2001
are not necessarily indicative of the operating results for the entire
respective years. These unaudited interim 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 for the year ended
December 31, 2001.

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

6.       COMPREHENSIVE LOSS

Comprehensive loss for the three months ended March 31, 2002 and 2001 was
comprised solely of net losses.

7.       NEW FINANCIAL ACCOUNTING STANDARDS

In June 2001, the Financial Accounting Standards Board 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. SFAS No. 142 addresses the initial
recognition and measurement of intangible assets acquired outside of a business
combination and the accounting for goodwill and other intangible assets
subsequent to their acquisition. 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, but instead be tested for
impairment at least annually. Specifically, goodwill and intangible assets with
indefinite useful lives will not be amortized but will be subject to impairment
tests based on their estimated fair value. SFAS No. 142 also requires that
intangible assets with definite useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and reviewed for
impairment in accordance with Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of."


                                       9
<PAGE>

The Company was required to adopt the provisions of SFAS No. 141 immediately
upon issuance and the provisions of SFAS No. 142 effective January 1, 2002.
Furthermore, any goodwill and any intangible asset determined to have an
indefinite useful life that was acquired in a purchase business combination
completed after June 30, 2001 would not be amortized, but would be evaluated
for impairment in accordance with the appropriate pre-SFAS No. 142 accounting
literature. Goodwill and intangible assets acquired in business combinations
completed before July 1, 2001 continued to be amortized until the adoption of
SFAS No. 142. See Note 8 - "Adoption of SFAS No. 142."

In June 2001, the Financial Accounting Standards Board issued Statement of
Financial 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 Financial Accounting Standards Board 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 has not had a material impact on its financial
position or results of operations.

8.       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, which goodwill amortization
expense was $1.4 million for the quarter ended March 31, 2001. 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 primarily due to the Company's highly leveraged
capital structure.

Based upon the results of the Company's initial impairment tests, the Company
has 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. 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.


                                      10
<PAGE>

The change in the carrying amount of goodwill for the quarter ended March 31,
2002 is as follows:

<TABLE>

         <S>                                                                                 <C>
         Goodwill, net of accumulated amortization, as of January 1, 2002                    $  189,699,000
         Transitional impairment loss                                                           (68,485,000)
                                                                                             --------------
         Goodwill, net of accumulated amortization, as of March 31, 2002                     $  121,214,000
                                                                                             ==============
</TABLE>

Actual results of operations for the three months ended March 31, 2002 and pro
forma results of operations for the three months ended March 31, 2001 had the
Company applied the non-amortization provisions of SFAS No. 142 in that period
are as follows:

<TABLE>
<CAPTION>
                                                             (unaudited)
                                                     Three Months Ended March 31,
                                                 -----------------------------------
                                                     2002                   2001
                                                 ------------           ------------
         <S>                                     <C>                    <C>

         Reported net loss                       $(67,558,000)          $ (6,597,000)
         Add: Goodwill amortization                        --              1,419,000
                                                 ------------           ------------

              Adjusted net loss                  $(67,558,000)          $ (5,178,000)
                                                 ============           ============

         Basic loss per share
           Reported net loss                     $      (4.14)          $      (0.40)
           Goodwill amortization                           --                   0.08
                                                 ------------           ------------

              Adjusted net loss                  $      (4.14)          $      (0.32)
                                                 ============           ============

         Diluted loss per share
           Reported net loss                     $      (4.03)          $      (0.40)
           Goodwill amortization                           --                   0.08
                                                 ------------           ------------

              Adjusted net loss                  $      (4.14)          $      (0.32)
                                                 ============           ============
</TABLE>


                                      11
<PAGE>

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 BUSINESS STRATEGY, OPERATIONS, COST SAVINGS INITIATIVES, FUTURE
COMPLIANCE WITH ACCOUNTING STANDARDS, INDUSTRY, ECONOMIC PERFORMANCE, FINANCIAL
CONDITION, LIQUIDITY AND CAPITAL RESOURCES, EXISTING GOVERNMENT REGULATIONS AND
CHANGES IN, OR THE FAILURE TO COMPLY WITH, GOVERNMENTAL REGULATIONS, FUTURE
COMPLIANCE WITH BANK CREDIT FACILITY COVENANTS, 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 SUBJECT TO VARIOUS RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE
RESULTS DISCUSSED IN SUCH FORWARD-LOOKING STATEMENTS BECAUSE OF A NUMBER OF
FACTORS, INCLUDING THOSE IDENTIFIED IN THE "RISK FACTORS" SECTION AND ELSEWHERE
IN THIS QUARTERLY REPORT ON FORM 10-Q. THE FORWARD-LOOKING STATEMENTS ARE MADE
AS OF THE DATE OF THIS QUARTERLY REPORT ON FORM 10-Q AND THE COMPANY DOES NOT
UNDERTAKE TO UPDATE THE FORWARD-LOOKING STATEMENTS OR TO UPDATE THE REASONS
THAT ACTUAL RESULTS COULD DIFFER FROM THOSE PROJECTED IN THE FORWARD-LOOKING
STATEMENTS.

GENERAL

The Company provides home health care services and products to patients through
its 287 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
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.


                                      12
<PAGE>

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

<TABLE>
<CAPTION>
                                                                   Three Months Ended March 31,
                                                                   ----------------------------
                                                                      2002               2001
                                                                      ----               ----
         <S>                                                          <C>                <C>

         Home respiratory therapy services                             65%                58%
         Home infusion therapy services                                15                 18
         Home medical equipment and medical supplies                   20                 24
                                                                      ---                ---
             Total                                                    100%               100%
                                                                      ===                ===
</TABLE>

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 the assets of
its rehab centers, three infusion centers, and two respiratory and home medical
equipment centers for $11.1 million in cash in order 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. 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 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.


                                      13
<PAGE>

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; 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


                                      14
<PAGE>

adverse impact on reimbursement for products and services provided by the
Company. These initiatives include: (i) Prospective Payment System ("PPS") and
Consolidated Billing 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 (the consolidated
billing requirement was subsequently reversed by the Omnibus Budget bill,
signed into law by President Clinton on November 23, 1999); (ii) pilot projects
in Polk County, Florida and San Antonio, Texas which began on October 1, 1999
and February 1, 2001, respectively, to determine the efficacy of competitive
bidding for certain durable medical equipment ("DME"), under which Medicare
reimbursements for certain items are reduced between 17% and 31% from the
current fee schedules (the Company is participating to some extent in both
pilot projects); and (iii) deadlines (as yet undetermined) for obtaining
Medicare and Medicaid surety bonds for home health agencies and DME suppliers.
In addition, in early 2002 the State of Florida Agency for Health Care
Administration ("AHCA") established statewide competitive bidding for all
Medicaid hospital beds and respiratory equipment and supplies. The entire state
of Florida has been divided into eleven geographical areas, and each area will
be bid separately. The program initially was to be effective May 2002 through
April 2004. However, the AHCA has agreed to delay the bid process until May 31,
2002. The Company is currently evaluating to what extent, if any, it will bid
to participate in each of the various areas.

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
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


                                      15
<PAGE>

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
"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. This 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 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 Settlement, the Company made an initial payment of $3.0 million
in the second quarter of 2001 and agreed to make additional payments in the
principal amount of $4.0 million, 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 recorded a $7.5
million reserve in the fourth quarter of 2000 based upon the expectation of a
settlement and has made all payments that have come due under the Settlement.
The 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 such 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 the 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
parties are awaiting the court's decision in the case. The Company cannot
predict when the appeals court decision will be handed down, or the outcome of
the appeal. 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


                                      16
<PAGE>

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 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 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 $7.5 million reserve
discussed above which relates to the settled government investigation, 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 approximately 32% 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). The Company estimates that
this CPI increase increased revenue and pre-tax income by approximately $1.0
million over the third and fourth quarters of 2001 and will increase revenue by
approximately $1.0 million on an annual basis thereafter. 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% without industry
consultation, publication or public comment, if the rates are "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


                                      17
<PAGE>

Operations - Significant Accounting Policies" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Government
Regulation."

SIGNIFICANT 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
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the dates of the
financial statements, and the reported amounts of revenues and expenses during
the reporting periods. On an on-going basis, management evaluates its critical
accounting policies and estimates.

In December 2001, the Securities and Exchange Commission ("SEC") requested that
all registrants discuss their three to five critical accounting policies in the
text of "Management's Discussion and Analysis of Financial Condition and
Results of Operations." The SEC indicated that a "critical accounting policy"
is one which is both important to the understanding of the financial condition
and results of operations of the Company and requires management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain.
Management believes the following accounting policies fit this definition:

         Revenue Recognition and Allowance for Doubtful Accounts. The Company
provides credit for a substantial part of its non third-party reimbursed
revenues and continually monitors the credit worthiness and collectibility of
amounts due from its patients. Approximately 62% of the Company's 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 such
reimbursements are historically insignificant as these reimbursements are based
on fixed fee schedules. In the opinion of management, adequate provision has
been made for any adjustment that may result from such reviews. Any differences
between estimated settlements and final determinations are reflected in
operations in the year finalized.

Sales and related services revenues include all product sales to patients and
are derived from the provision of infusion therapies, the sale of home health
care equipment and 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 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.


                                      18
<PAGE>

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 net realizable 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. Management
applies a reserve methodology as a benchmark to measure the valuation reserve
necessary for inventory balances and believes the recorded inventory reserve is
adequate. 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 June 2001, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("SFAS No. 142"). The Company adopted
the provisions of SFAS No. 142 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, but instead
be tested for impairment at least annually. The Company recorded goodwill
amortization expense of $5.6 million in 2001 and ceased amortizing goodwill
effective January 2002. Upon adoption of SFAS No. 142, the Company performed an
initial impairment review of


                                      19
<PAGE>

goodwill, and in the quarter ended March 31, 2002 recorded an impairment charge
of $68.5 million as a cumulative effect of change in accounting principle.
Hereafter, the Company will conduct annual impairment reviews of goodwill.

         Self Insurance. Self-insurance reserves primarily represent the
accrual for self-insurance risks associated with workers' compensation
insurance and employee health insurance. The Company is self-insured for
workers' compensation and maintains specific stop loss coverage in the amount
of $250,000 on a per claim basis. The Company did not maintain annual aggregate
stop loss coverage for the years 2002 and 2001. The estimated liability for
workers' compensation claims totaled $3.4 million and $3.2 million as of March
31, 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 maintained
annual aggregate stop loss coverage of $14.7 million and $8.6 million as of
March 31, 2002 and December 31, 2001, respectively. The health insurance
policies have maximum lifetime reimbursements of $2.0 million for 2002 and had
unlimited lifetime reimbursements for 2001. The estimated liability for health
insurance claims totaled $2.1 million and $1.9 million as of March 31, 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.

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 in the year finalized.

RESULTS OF OPERATIONS

The Company reports its revenues as follows: (i) sales and related services;
(ii) rentals and other revenues; and (iii) earnings from hospital joint
ventures. 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. 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. 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


                                      20
<PAGE>

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.

NON-RECURRING ITEMS

         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 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 2001, the infusion center generated approximately $9.4 million in
annualized 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, which goodwill amortization expense was
$1.4 million for the quarter ended March 31, 2001. 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 primarily due to the Company's highly leveraged capital
structure.

Based upon the results of the Company's initial impairment tests, the Company
has 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. 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.


                                      21
<PAGE>

The following table and discussion sets forth items from the Company's
consolidated statements of operations as a percentage of revenues, excluding
the previously discussed non-recurring items, for the periods indicated:

                             PERCENTAGE OF REVENUES
                        (EXCLUDING NON-RECURRING ITEMS)
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                        Three Months Ended March 31,
                                                                        ----------------------------
                                                                          2002               2001
                                                                        --------           ---------

         <S>                                                            <C>               <C>
         Revenues                                                         100.0%             100.0%

         Cost of sales and related services                                20.0               24.3
         Cost of rentals and other revenues, including rental
             equipment depreciation expense                                10.1                9.3
         Operating expenses                                                56.5               54.5
         General and administrative                                         5.1                4.3
         Depreciation, excluding rental equipment, and
             amortization expense                                           1.1                3.0
         Amortization of deferred financing costs                           0.9                0.7
         Interest expense                                                   5.9               11.0
                                                                          -----              -----
                  Total expenses                                           99.6              107.1
                                                                          -----              -----

         Income (loss) from operations before taxes                         0.4               (7.1)
         Provision for income taxes                                         0.1                0.1
                                                                          -----              -----
                  Income (loss) from operations                             0.3%              (7.2)%
                                                                          =====              =====
         OTHER DATA:
         EBITDA (1)                                                        14.0%              13.2%
                                                                          =====              =====
</TABLE>

         (1) EBITDA represents income before interest, taxes, depreciation and
amortization. While EBITDA should not be construed as a substitute for
operating income, net income, or cash flows from operating activities as
determined under GAAP, in analyzing the referenced company's operating
performance, financial position or cash flows, the referenced company has
included EBITDA because it is commonly used by certain investors, lenders and
analysts to analyze and compare companies on the basis of operating
performance, leverage and liquidity and to determine a company's ability to
service debt. As all companies may not calculate EBITDA in the same manner,
these amounts may not be comparable to other companies. This EBITDA definition
differs from the definition of EBITDA utilized in the Bank Credit Facility.


                                      22
<PAGE>

THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31, 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 $91.1 million for the quarter ended March 31,
2001 to $81.3 million for the same period in 2002, a decrease of $9.8 million,
or 11%. 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 $9.7 million in the current quarter. Without these
occurrences, revenue for the quarter would have decreased by $0.1 million
compared to last year. Following is a discussion of the components of revenues:

         Sales and Related Services Revenues. Sales and related services
         revenues decreased from $43.9 million for the quarter ended March 31,
         2001 to $34.8 million for the same period in 2002, a decrease of $9.1
         million, or 21%. 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 $9.1 million.

         Rentals and Other Revenues. Rentals and other revenues decreased from
         $46.2 million for the quarter ended March 31, 2001 to $45.2 million
         for the same period in 2002, a decrease of $1.0 million, or 2%. 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.

         Earnings from Hospital Joint Ventures. Earnings from hospital joint
         ventures increased from $1.1 million for the quarter ended March 31,
         2001 to $1.3 million for the same period in 2002, an increase of $0.2
         million, or 18%. This increase is primarily attributable to continued
         improvements in performance of certain joint ventures.

COST OF SALES AND RELATED SERVICES. Cost of sales and related services
decreased from $22.2 million for the quarter ended March 31, 2001 to $16.3
million for the same period in 2002, a decrease of $5.9 million, or 27%. As a
percentage of sales and related services revenues, cost of sales and related
services decreased from 51% for the quarter ended March 31, 2001 to 47% for the
same period in 2002. This decrease is primarily attributable to the sale of the
infusion centers and the rehab centers which contributed lower margins.

In March 2001, DeyLabs received FDA approval for a new drug branded "DuoNeb", a
mixture of albuteral sulfate and ipratropium bromide. As a result, it is
unclear whether the Company may continue its historical practice of compounding
this drug mixture when requested by a physician for an individual patient and
supported by a valid prescription. The Company has been negotiating with Dey
Labs to purchase DuoNeb rather than compound the drug mixture itself. At this
time the Company continues to compound the drug mixture. The Company expects
that the cost to acquire DuoNeb will exceed its cost to compound the drug,
which may have a material adverse impact on


                                      23
<PAGE>

cost of sales and results of operations given that Medicare will reimburse the
Company for DuoNeb at the same rate at which it reimburses for the compounded
drug.

COST OF RENTALS AND OTHER REVENUES. Cost of rentals and other revenues
decreased from $8.5 million for the quarter ended March 31, 2001 to $8.2
million for the same period in 2002, a decrease of $0.3 million, or 4%. As a
percentage of rentals and other revenue, cost of rentals and other revenues
were 18.4 % and 18.1% for the three months ended March 31, 2001 and 2002,
respectively.

OPERATING EXPENSES. Operating expenses decreased from $49.6 million for the
quarter ended March 31, 2001 to $46.0 million for the same period in 2002, a
decrease of $3.6 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, offset by higher overall bad debt expense. Bad debt
expense was 4.3% of revenues for the quarter ended March 31, 2001 compared to
5.1% of revenues for the same period in 2002. The increase in bad debt expense
is attributable to a temporary slowdown in cash collections during January and
February of 2002.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased from $3.9 million for the quarter ended March 31, 2001 to $4.1
million for the same period in 2002, an increase of $0.2 million, or 5%. As a
percentage of revenues, general and administrative expenses were 4.3% and 5.0%
for the three months ended March 31, 2001 and 2002, respectively. This increase
is attributable to higher personnel expenses in the quarter ended March 31,
2002 as a result of the continued billing initiatives, corporate compliance
activities and increased marketing efforts as well as higher consulting fees
and higher rent expense.

DEPRECIATION AND AMORTIZATION. Depreciation (excluding rental equipment) and
amortization expenses decreased from $2.7 million for the quarter ended March
31, 2001 to $0.9 million for the same period in 2002, a decrease of $1.8
million, or 66%. 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
March 31, 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 increased from $0.6 million in 2001 to $0.7 million in 2002, an increase
of $0.1 million or 17%. This increase is primarily attributable to additional
deferred financing costs associated with the Amended Credit Agreement.

INTEREST. Interest expense decreased from $10.0 million for the quarter ended
March 31, 2001, to $4.8 million for the same period in 2002, a decrease of $5.2
million, or 52%. The Company recorded a provision of $1.6 million for default
interest in the quarter ended March 31, 2001, in addition to interest due under
the Bank Credit Facility prior to any events of default. Based upon the Amended
Credit Agreement signed June 8, 2001, all default rate interest was forgiven
and this provision for default rate interest was reversed in the second quarter
of 2001. This decrease is also attributable to reductions in the prime
borrowing rate and reduced principal amounts outstanding.


                                      24
<PAGE>

PROVISION FOR INCOME TAXES. The provision for income taxes decreased from
$150,000 in 2001 to $100,000 in 2002. This decrease is due to reduced state
income taxes paid in 2002 versus 2001.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2002 the Company had a working capital deficit of $236.4 million
and current ratio of 0.3x as compared to a working capital deficit of $238.4
million and a current ratio of 0.3x at December 31, 2001.

The Company is the borrower under a credit facility (the "Bank Credit
Facility") between the Company and Bankers Trust Company, as agent for a
syndicate of Lenders (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 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 May 9, 2002 the Company has paid 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. However,
there currently is no commitment as to how the remaining Balloon Payment due on
December 31, 2002 will be satisfied. Anticipated future cash flow from
operations will not be 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 May 9,
2002, totals $279.9 million (which includes letters of credit totaling $3.4
million).

The Amended Credit Agreement further provides for the payment to the Lenders of
certain fees. These fees include a restructuring fee of $1.2 million (paid on
the effective date of the Amended Credit Agreement), $200,000 payable on each
of December 31, 2001, March 31, 2002 and June 30,


                                      25
<PAGE>

2002, as well as $459,000 payable on September 30, 2002, all payable if the
debt remains outstanding at such dates. In addition, the Company has an
obligation to pay the agent an annual administrative fee of $75,000 and an
annual fee of .50% of the average outstanding indebtedness on each anniversary
of the Amended Credit Agreement.

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
Bankers 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 Bankers 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. As of
March 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 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. As
of May 9, 2002 these warrants have not been exercised.


                                      26
<PAGE>

Management intends to improve financial performance through stabilizing and
increasing profitable revenues, decreasing and controlling operating expenses
and improving accounts receivable performance. Management's cash flow
projections and related operating plans indicate the Company can remain in
compliance with the new financial covenants under the Amended Credit Agreement
and meet its expected obligations until December 31, 2002, when the Balloon
Payment is due. However, as with all projections, there is uncertainty as to
whether management's projections can be achieved. Management currently believes
that the Company also can remain in compliance with all other covenants in the
Amended Credit Agreement until the Balloon Payment is due. In any event of
noncompliance or default under the Amended Credit Agreement, the Lenders have
the ability to demand payment of all outstanding amounts and there is currently
no commitment as to how any such demand would be satisfied by the Company. Any
demands for repayment by Lenders, or the inability to obtain waivers in the
event of noncompliance with covenants, or the inability to refinance the
related debt upon maturity at December 31, 2002 would have a material adverse
impact on the financial position, results of operations and cash flows of the
Company. As a result, the Company's independent auditors added an explanatory
paragraph to their unqualified opinion covering the Company's consolidated
financial statements for the year ended December 31, 2001 that expressed
substantial doubt as to the Company's ability to continue as a going concern.
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
unqualified opinion with an explanatory paragraph expressing substantial doubt
as to the Company's ability to continue as a going concern, as well as the
uncertainty regarding the Company's ability to make the Balloon Payment or
obtain replacement financing, 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 $59.4 million and $60.1 million at March
31, 2002 and December 31, 2001, respectively. Average days' sales in accounts
receivable ("DSO") was approximately 69 and 67 days at March 31, 2002 and
December 31, 2001, respectively. The Company's level of DSO and net patient
receivables reflect the extended time required to obtain necessary billing
documentation, the ongoing efforts to implement a standardized model for
reimbursement and the consolidation of billing activities.

Net cash provided by operating activities was $4.5 million and $8.0 million for
the three months ended March 31, 2002 and 2001, respectively. This decrease of
$3.5 million is primarily due to


                                      27
<PAGE>

the current year change in accounts payable, other payables and accrued
expenses. These items used cash of $1.6 million for the three months ended
March 31, 2002, while these same items provided cash of $2.5 million for the
same period in 2001. Net cash used in investing activities was $3.0 million and
$5.0 million for the three months ended March 31, 2002 and 2001, respectively.
Capital expenditures were $5.9 million for the three months ended March 31,
2002 compared to $4.7 million for the same period in 2001, and the sales of
assets of centers contributed $1.8 million for the same period in 2002. Net
cash used in financing activities was $4.4 million and $14,000 for the three
months ended March 31, 2002 and 2001, respectively. The cash used in financing
activities for the three months ended March 31, 2002 and 2001 primarily relates
to principal payments and deferred financing costs.

In addition to the Balloon Payment, the Company's principal capital
requirements are for working capital, capital expenditures and debt service.
The Company has financed and intends to continue to finance these requirements
with existing cash balances, net cash provided by operations and other
available capital expenditure financing vehicles. Until maturity of the Bank
Credit Facility on December 31, 2002, management believes that these sources
will support the Company's current level of operations as long as the Company
maintains compliance with its debt covenants and the due dates of amounts
outstanding under the Bank Credit Facility are not accelerated. Management also
believes these sources are adequate to fund the Settlement in the government
investigation based upon the payment terms, as more fully described in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Government Regulation." However, as referenced above, anticipated
future cash flow from operations will not be sufficient to pay the Balloon
Payment at December 31, 2002.

RISK FACTORS

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

         Substantial Leverage. The Company maintains a significant amount of
debt pursuant to the Bank Credit Facility. Indebtedness under the Bank Credit
Facility totals $279.9 million (including letters of credit totaling $3.4
million) as of May 9, 2002. The Bank Credit Facility matures on December 31,
2002, at which time the Balloon Payment is due. Anticipated future cash flow
from operations will not be sufficient to pay the Balloon Payment. 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.
If the Bank Credit Facility is not renewed and the Company is not able to
obtain replacement financing or if an event of default occurs under the Amended
Credit Agreement, the Lenders have the right to exercise all remedies provided
under the Amended Credit Agreement, including but not limited to, accelerating
all indebtedness, substantially increasing the interest rate for such
indebtedness, offsetting amounts in most of the Company's bank accounts, and
selling all assets of the Company to repay such indebtedness.

The maturity of the term of the Amended Credit Agreement, without renewal or
refinancing, likely would have a material adverse effect on the Company's
liquidity, business, financial


                                      28
<PAGE>

condition and results of operations. The degree to which the Company is
leveraged likely will impair the Company's ability to finance, through its own
cash flow or from additional financing, its future operations or pursue its
business strategy. As a result, the Company's independent auditors added an
explanatory paragraph to their unqualified opinion covering the Company's
consolidated financial statements for the year ended December 31, 2001 that
expressed substantial doubt as to the Company's ability to continue as a going
concern. The unqualified opinion with an explanatory paragraph expressing
substantial doubt as to the Company's ability to continue as a going concern,
as well as the uncertainty regarding the Company's ability to make the Balloon
Payment or obtain replacement financing, 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. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."

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


                                      29
<PAGE>

         Collectibility of Accounts Receivable. The Company has substantial
accounts receivable, as well as days sales outstanding of 69 days as of March
31, 2002. No assurances can be given that future bad debt expense will not
increase above current operating levels as a result of continuing difficulties
associated with the Company's billing activities and meeting payor
documentation requirements and claim submission deadlines. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Significant Accounting Policies - Revenue Recognition and Allowance for
Doubtful Accounts."

         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, trading of the Company's
common stock is 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. As a result of the de-listing, 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.

         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 three
months ended March 31, 2002, the percentage of the Company's revenues derived
from Medicare, Medicaid and private pay was 51%, 11% and 38%, respectively. The
revenues and profitability of the Company are affected by the continuing
efforts of all 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. Any
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."

         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


                                      30
<PAGE>

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
profit margins.

         Health Care Initiatives. The health care industry continues to undergo
dramatic changes. Under the Bush administration, new federal health care
initiatives, particularly concerning Medicare, may be launched. In June of
2001, the Department of Health and Human Services Secretary unveiled a new name
for the agency formerly known as the Health Care Financing Administration, or
HCFA. The name change to CMS, Centers for Medicare and Medicaid Services,
signaled a restructuring of the agency, as well as reforms designed to make the
Medicare and Medicaid programs more effective and responsive to providers and
beneficiaries. For example, adding a prescription drug benefit, a patient's
bill of rights, and new "business partner" status in provider enrollment are a
few of the initiatives currently under discussion. There can be no assurance
that other equally sweeping federal legislative and regulatory initiatives will
not be adopted in the future. It is also possible that proposed federal
legislation will include language which 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 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 require compliance by October 16, 2002
(this compliance date may be extended by one year, if a compliance extension
form is submitted 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 is actively pursuing its strategies toward compliance with the final
Privacy Standards and Transaction Standards with a plan flexible enough to
adapt to any modifications to the rules that may be issued by HHS. The
Company's HIPAA compliance plan will require modifications to existing
information management systems and physical security mechanisms, and may
require additional personnel, the full cost of which has not yet been
determined. HIPAA compliance could impose significant costs on the Company, and
the Company cannot predict the final form these regulations will take or 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. The Company's current financial results and the ongoing
OIG investigation, among other factors, may limit the Company's ability to
attract and retain qualified personnel, which in turn could adversely affect
profitability.


                                      31
<PAGE>

         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.

         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 which 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.

NEW FINANCIAL ACCOUNTING STANDARDS

In June 2001, the Financial Accounting Standards Board 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. SFAS No. 142 addresses the initial
recognition and measurement of intangible assets acquired outside of a business
combination and the accounting for goodwill and other intangible assets
subsequent to their acquisition. 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, but instead be tested for
impairment at least annually. Specifically, goodwill and intangible assets with
indefinite useful lives will not be amortized but will be subject to impairment
tests based on their estimated fair value. SFAS No. 142 also requires that
intangible assets with definite useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and reviewed for
impairment in accordance with Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of."


                                      32
<PAGE>

The Company was required to adopt the provisions of SFAS No. 141 immediately
upon issuance and the provisions of SFAS No. 142 effective January 1, 2002.
Furthermore, any goodwill and any intangible asset determined to have an
indefinite useful life that was acquired in a purchase business combination
completed after June 30, 2001 would not be amortized, but would be evaluated
for impairment in accordance with the appropriate pre-SFAS No. 142 accounting
literature. Goodwill and intangible assets acquired in business combinations
completed before July 1, 2001 continued to be amortized until the adoption of
SFAS No. 142. See Note 8 - "Adoption of SFAS No. 142."

In June 2001, the Financial Accounting Standards Board issued Statement of
Financial 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 Financial Accounting Standards Board 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 has not had a material impact on its financial
position or results of operations.


                                      33
<PAGE>

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 March 31, 2002, the
Company had outstanding borrowings of approximately $276.9 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 $0.5 million. Interest expense
associated with other debts would not materially impact the Company as most
interest rates are fixed.

                           PART II. OTHER INFORMATION

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. No reports on Form 8-K have been filed during the
quarter for which this report is filed.


                                      34
<PAGE>

                                   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.



May 15, 2002                           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


                                      35
<PAGE>

                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER        DESCRIPTION OF EXHIBITS
-------       -----------------------
<S>           <C>

 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).
</TABLE>


                                                 36