<PAGE>

                UNITED STATES SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

CHECK ONE                           FORM 10-Q

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

               FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 2001
                                               ------------------
                                      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>
<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 [ ]

                                   16,327,389
                     ------------------------------------


    (OUTSTANDING SHARES OF THE ISSUER'S COMMON STOCK AS OF NOVEMBER 8, 2001)

                          TOTAL NUMBER OF SEQUENTIALLY
                              NUMBERED PAGES IS 38


                                       1
<PAGE>

                          PART I. FINANCIAL INFORMATION


ITEM 1 - FINANCIAL STATEMENTS

                   AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES

                  INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
                  ---------------------------------------------
                                   (unaudited)


<TABLE>
<CAPTION>
ASSETS
                                                                         December 31,           September 30,
                                                                             2000                    2001
                                                                        -------------           -------------

<S>                                                                     <C>                     <C>
CURRENT ASSETS
    Cash and cash equivalents                                           $  12,081,000           $  13,857,000
    Restricted cash                                                           179,000                 166,000
    Accounts receivable, less allowance for doubtful accounts
      of $40,862,000 and $34,404,000, respectively                         75,465,000              63,471,000
    Inventories                                                            15,522,000              12,248,000
    Prepaid expenses and other current assets                               1,489,000               1,743,000
                                                                        -------------           -------------
          Total current assets                                            104,736,000              91,485,000
                                                                        -------------           -------------

PROPERTY AND EQUIPMENT, at cost                                           184,661,000             179,575,000
    Less accumulated depreciation and amortization                       (131,663,000)           (131,660,000)
                                                                        -------------           -------------
          Property and equipment, net                                      52,998,000              47,915,000
                                                                        -------------           -------------

OTHER ASSETS
    Excess of cost over fair value of net assets acquired, net            197,491,000             191,088,000
    Investment in joint ventures                                            7,918,000               8,200,000
    Deferred financing costs, net                                           3,269,000               3,290,000
    Other assets, net                                                      12,102,000              10,682,000
                                                                        -------------           -------------
          Total other assets                                              220,780,000             213,260,000
                                                                        -------------           -------------
                                                                        $ 378,514,000           $ 352,660,000
                                                                        =============           =============
</TABLE>



                                   (Continued)



                                       2
<PAGE>



                   AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES

                  INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
                  ---------------------------------------------
                                   (unaudited)
                                   (Continued)


<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
                                                                       December 31,          September 30,
                                                                          2000                    2001
                                                                     -------------           -------------

<S>                                                                  <C>                     <C>
CURRENT LIABILITIES
    Current portion of long-term debt and capital leases             $   2,679,000           $   7,435,000
    Accounts payable                                                    16,449,000              17,388,000
    Other payables                                                       2,478,000               3,295,000
    Accrued expenses:
       Payroll and related benefits                                      8,204,000               9,604,000
       Interest                                                          1,748,000               1,170,000
       Insurance                                                         5,162,000               6,137,000
       Other                                                            13,345,000               8,295,000
                                                                     -------------           -------------
          Total current liabilities                                     50,065,000              53,324,000
                                                                     -------------           -------------

NONCURRENT LIABILITIES
    Long-term debt and capital leases, less current portion            296,473,000             282,734,000
    Other noncurrent liabilities                                         5,737,000               4,723,000
                                                                     -------------           -------------
          Total noncurrent liabilities                                 302,210,000             287,457,000
                                                                     -------------           -------------

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY
    Preferred stock, $.01 par value; authorized 5,000,000
       shares; none issued and outstanding                                      --                      --
    Common stock, $.01 par value; authorized 35,000,000
       shares; issued and outstanding, 15,856,000 and
       16,327,000 shares, respectively                                     159,000                 163,000
    Paid-in capital                                                    173,777,000             173,975,000
    Accumulated deficit                                               (147,697,000)           (162,259,000)
                                                                     -------------           -------------
          Total shareholders' equity                                    26,239,000              11,879,000
                                                                     -------------           -------------
                                                                     $ 378,514,000           $ 352,660,000
                                                                     =============           =============
</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 Sept. 30,          Nine Months Ended Sept. 30,
                                                       ----------------------------          ---------------------------
                                                           2000              2001              2000              2001
                                                       -----------       -----------       ------------       ------------

<S>                                                    <C>               <C>               <C>                <C>
REVENUES
    Sales and related service revenues                 $42,914,000       $40,131,000       $128,372,000       $126,452,000
    Rentals and other revenues                          47,354,000        46,348,000        138,637,000        138,724,000
    Earnings from joint ventures                         1,236,000         1,136,000          3,519,000          3,335,000
                                                       -----------       -----------       ------------       ------------
          Total revenues                                91,504,000        87,615,000        270,528,000        268,511,000
                                                       -----------       -----------       ------------       ------------

EXPENSES
    Cost of sales and related services, excluding
       depreciation and amortization                    21,102,000        18,611,000         64,107,000         62,205,000
    Operating                                           53,699,000        53,183,000        161,654,000        158,127,000
    General and administrative                           4,110,000         3,792,000         11,141,000         11,682,000
    Depreciation and amortization                        9,572,000         8,109,000         28,556,000         24,086,000
    Amortization of deferred financing costs               550,000           662,000          1,660,000          1,960,000
    Interest                                             7,730,000         6,334,000         22,774,000         21,934,000
    Loss on sale of rehab centers                               --         2,629,000                 --          2,629,000
                                                       -----------       -----------       ------------       ------------
          Total expenses                                96,763,000        93,320,000        289,892,000        282,623,000
                                                       -----------       -----------       ------------       ------------

LOSS FROM OPERATIONS BEFORE INCOME
    TAXES                                               (5,259,000)       (5,705,000)       (19,364,000)       (14,112,000)

PROVISION FOR INCOME TAXES                                 150,000           150,000            450,000            450,000
                                                       -----------       -----------       ------------       ------------

NET LOSS                                               $(5,409,000)      $(5,855,000)      $(19,814,000)      $(14,562,000)
                                                       ===========       ===========       ============       ============

NET LOSS PER COMMON SHARE
       - Basic                                         $     (0.35)      $     (0.34)      $      (1.27)      $      (0.87)
                                                       ===========       ===========       ============       ============
       - Diluted                                       $     (0.35)      $     (0.34)      $      (1.27)      $      (0.87)
                                                       ===========       ===========       ============       ============

WEIGHTED AVERAGE NUMBER OF COMMON
    SHARES OUTSTANDING
       - Basic                                          15,661,000        17,020,000         15,620,000         16,704,000
                                                       ===========       ===========       ============       ============
       - Diluted                                        15,661,000        17,020,000         15,620,000         16,704,000
                                                       ===========       ===========       ============       ============
</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>
                                                                                     Nine Months Ended Sept. 30,
                                                                                 -----------------------------------
                                                                                     2000                   2001
                                                                                 ------------           ------------
<S>                                                                              <C>                    <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net loss                                                                     $(19,814,000)          $(14,562,000)
    Adjustments to reconcile net loss
      to net cash provided from (used in) operating activities:
       Depreciation and amortization                                               28,556,000             24,086,000
       Amortization of deferred financing costs                                     1,660,000              1,960,000
       Equity in earnings of unconsolidated joint ventures                         (1,315,000)            (1,802,000)
       Minority interest                                                              134,000                224,000
       Loss on sale of rehab centers                                                       --              2,629,000

    Change in assets and liabilities, net of effects from joint venture
      dissolutions and sales of centers:
       Restricted cash                                                                     --                 13,000
       Accounts receivable, net                                                     2,566,000              6,739,000
       Inventories                                                                  2,706,000                839,000
       Prepaid expenses and other current assets                                     (163,000)              (606,000)
       Income tax payable                                                             397,000             (1,637,000)
       Accounts payable, other payables and accrued expenses                       (2,097,000)               294,000
       Other non current liabilities                                                   (9,000)               101,000
       Other assets                                                                   304,000                581,000
                                                                                 ------------           ------------
          Net cash provided from operating activities                              12,925,000             18,859,000
                                                                                 ------------           ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Proceeds from sales of centers                                                         --              7,825,000
    Proceeds from joint venture dissolutions                                          931,000                     --
    Additions to property and equipment, net                                      (13,877,000)           (15,443,000)
    Distributions from unconsolidated joint
       ventures, net                                                                1,319,000              1,520,000
    Distributions to minority interest owners                                        (179,000)              (223,000)
                                                                                 ------------           ------------
       Net cash used in investing activities                                      (11,806,000)            (6,321,000)
                                                                                 ------------           ------------
</TABLE>


                                   (Continued)



                                       5
<PAGE>



                   AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES

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


<TABLE>
<CAPTION>
                                                               Nine Months Ended Sept. 30,
                                                           -----------------------------------
                                                                2000                   2001
                                                           ------------           ------------
<S>                                                        <C>                    <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
    Principal payments on debt and capital leases           (12,189,000)            (8,983,000)
    Proceeds from issuance of debt                              377,000                     --
    Proceeds from Employee Stock Purchase Plan                  168,000                202,000
    Deferred financing costs                                 (1,221,000)            (1,981,000)
                                                           ------------           ------------
          Net cash used in financing activities             (12,865,000)           (10,762,000)
                                                           ------------           ------------

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS            (11,746,000)             1,776,000


CASH AND CASH EQUIVALENTS, beginning of period               28,123,000             12,081,000
                                                           ------------           ------------

CASH AND CASH EQUIVALENTS, end of period                   $ 16,377,000           $ 13,857,000
                                                           ============           ============

SUPPLEMENTAL INFORMATION:
    Cash payments of interest                              $ 21,619,000           $ 22,419,000
                                                           ============           ============

    Cash payments of income taxes                          $    300,000           $  2,195,000
                                                           ============           ============
</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

                           SEPTEMBER 30, 2001 AND 2000

        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 nine months
        ended September 30, 2001, such services represented 59%, 17% and 24%,
        respectively of revenues. These services and products are paid for
        primarily by Medicare, Medicaid and other third-party payors. As of
        September 30, 2001, the Company provided these services to patients
        primarily in the home through 293 centers in 36 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, Rhode Island, 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") 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 its Credit Agreement and its failure to make
        a scheduled principal payment due March 15, 2001 caused the Company to
        be not in compliance with certain covenants of its Credit Agreement. The
        Company, on June 8, 2001, entered into a Fifth Amended and Restated
        Credit Agreement (the "Amended Credit Agreement") that provided a new
        loan to the Company from which the proceeds were used to pay off all
        existing loans under the Credit Agreement. The Amended Credit Agreement
        also includes modified financial covenants and a revised amortization
        schedule. In addition, the Amended Credit Agreement no longer contains a
        revolving loan component; all existing indebtedness is now in the form
        of a term loan which matures on December 31, 2002. The Amended Credit
        Agreement requires principal payments of $750,000 on September 30, 2001
        and December 31, 2001; a principal payment of $11.6 million on March 31,
        2002; principal payments of $1.0 million on June 30, 2002 and September
        30, 2002; and a balloon payment of $281.5 million on December 31, 2002.
        As of November 8, 2001 the Company has paid the $750,000 principal
        payment due on September 30, 2001, as well as the $750,000 principal
        payment due on December 31, 2001 and $9.3 million of the $11.6 million
        principal payment due on March 31, 2002. However, there currently is no
        commitment as to how the balloon payment due on December 31, 2002 will
        be satisfied. The Amended Credit Agreement further provides for
        mandatory prepayments of principal from the Company's excess cash flow
        and



                                       7
<PAGE>


        from the proceeds of the Company's sales of securities, sales of assets,
        tax refunds or excess casualty loss payments. Substantially all of the
        Company's assets have been pledged as security for borrowings under the
        Bank Credit Facility. Indebtedness under the Bank Credit Facility, as of
        November 8, 2001, totals $289.2 million (which includes letters of
        credit totaling $3.4 million).

        As part of the Second Amendment to the Fourth Amended and Restated
        Credit Agreement, the Company agreed 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. 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 at any time after issuance and the remaining fifty
        percent are exercisable on and after September 30, 2001. The exercise
        price of the warrants is $0.01 per share. As of November 8, 2001 these
        warrants have not been exercised.

        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
        throughout 2001. However, as with all projections, there is uncertainty
        as to whether management's projections can be achieved. 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 the 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.
        There can be no assurance that future cash flow from operations will be
        sufficient to cover debt obligations, especially those obligations due
        at maturity of the Bank Credit Facility.

        3.      GOVERNMENT INVESTIGATION

        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. The Company has
        been dealing with the issues covered by the Settlement since February
        1998, when the OIG served a subpoena on the Company at its Pineville,
        Kentucky center. Pursuant to the Settlement, the Company made an initial
        payment of $3.0 million in the second quarter of 2001 and has 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 over the next 57 months. The Company has also agreed to pay the
        relator's attorneys fees and expenses, the amount of which will be
        determined by binding arbitration. The Company recorded a $7.5 million
        reserve in the fourth quarter of 2000 based upon the expectation of a
        settlement. The Settlement does not resolve the relator's claims that
        the Company discriminated against him as a



                                       8
<PAGE>


        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. Mr. Corsello has appealed the dismissal 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 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 government
        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 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 pending or future investigation by the
        government. 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 and investigations could have a
        material adverse effect on the Company.

        4.      MEDICARE REIMBURSEMENT ISSUES

        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 (the "Medicare Oxygen Reimbursement Reduction") 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 27% of the Company's year-to-date revenues and will
        account for approximately 29% of the Company's ongoing revenues
        following the September 2001 sale of the rehab centers (See Note 5). 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



                                       9
<PAGE>


        equipment, excluding oxygen related services, based on the consumer
        price index (CPI). The Company estimates that this CPI increase will
        increase revenue and pre-tax income by approximately $1.0 million over
        the third and fourth quarters of 2001 and $1.0 million on an annual
        basis thereafter.

        5.      SALES OF ASSETS OF CENTERS

        In the quarter ended September 30, 2001, the Company recorded a pre-tax
        loss of $2.6 million related to the sale of the assets of its rehab
        centers. Effective September 1, 2001, the Company sold substantially all
        of the assets of its rehab centers to United Seating and Mobility,
        L.L.C., a Missouri limited liability company. United Seating and
        Mobility, L.L.C. is owned in part by a former employee of the rehab
        centers, who is no longer an employee of the Company effective with the
        sale. The rehab centers were sold for approximately $7.7 million, of
        which $7.2 million was received in cash at closing with the remainder to
        be paid on February 28, 2002. The cash proceeds of the sale were used to
        pay down debt under the Company's Bank Credit Facility. The rehab
        centers provided custom-built seating and positioning systems and
        custom-built wheelchairs to patients with impaired mobility and
        generated approximately $22.0 million in annualized revenues with
        minimal earnings before interest, taxes, depreciation and amortization.

        In addition, the Company sold two unprofitable infusion centers in
        April, 2001 and an unprofitable respiratory and home medical equipment
        center in July, 2001 for approximately $0.6 million in cash. The cash
        proceeds of these sales were used to pay down debt under the Company's
        Bank Credit Facility.

        6.      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 by the weighted average number
        of common shares outstanding during the year. Diluted earnings per share
        is computed by dividing net income 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.
        However, these incremental shares were excluded from the computation of
        diluted earnings


                                       10
<PAGE>


        per share as the effect of their inclusion was anti-dilutive. The
        following information is necessary to calculate earnings per share for
        the periods presented:


<TABLE>
<CAPTION>
                                                                                (unaudited)
                                                     -------------------------------------------------------------------
                                                      Three Months Ended Sept. 30,         Nine Months Ended Sept. 30,
                                                     -----------------------------       -------------------------------
                                                         2000              2001               2000               2001
                                                     -----------       -----------       ------------       ------------

        <S>                                          <C>               <C>               <C>                <C>
        Net loss                                     $(5,409,000)      $(5,855,000)      $(19,814,000)      $(14,562,000)
                                                     ===========       ===========       ============       ============
        Weighted average common
        shares outstanding                            15,661,000        17,020,000         15,620,000         16,704,000
                                                     -----------       -----------       ------------       ------------

        Effect of dilutive options and warrants               --                --                 --                 --

        Adjusted diluted common shares
            outstanding                               15,661,000        17,020,000         15,620,000         16,704,000
                                                     ===========       ===========       ============       ============

        Net loss per common share
            - Basic                                  $     (0.35)      $     (0.34)      $      (1.27)      $      (0.87)
                                                     ===========       ===========       ============       ============
            - Diluted                                $     (0.35)      $     (0.34)      $      (1.27)      $      (0.87)
                                                     ===========       ===========       ============       ============
</TABLE>

        7.      BASIS OF FINANCIAL STATEMENTS

        The interim condensed consolidated financial statements of the Company
        for the nine months ended September 30, 2001 and 2000 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 September 30, 2001
        and the results of operations and the cash flows for the nine months
        ended September 30, 2001 and 2000.

        The results of operations for the nine months ended September 30, 2001
        and 2000 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/A for the year ended December 31, 2000.

        Certain reclassifications have been made to the 2000 consolidated
        financial statements to conform to the 2001 presentation.

        8.      COMPREHENSIVE LOSS

        Comprehensive loss for the nine months ended September 30, 2001 and 2000
        was comprised solely of net losses.



                                       11
<PAGE>


        9.      NEW FINANCIAL ACCOUNTING STANDARDS

        Statement of Financial Accounting Standards No. 133, as amended,
        "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
        No. 133") has been issued effective for fiscal years beginning after
        June 15, 2000. SFAS No. 133, as amended, requires companies to record
        derivatives on the balance sheet as assets or liabilities, measured at
        fair value. The Company adopted the provisions of SFAS No. 133, as
        amended, effective January 1, 2001, as required; however, the Company's
        adoption of SFAS No. 133, as amended, did not have a material effect on
        the Company's financial position or results of operations.

        In December 1999, the Securities and Exchange Commission issued Staff
        Accounting Bulletin No. 101 ("SAB 101") regarding revenue recognition in
        financial statements. SAB 101 was effective January 1, 2000 but
        implementation was delayed until the fourth quarter of 2000. The
        Company's implementation of SAB 101 in the fourth quarter of 2000 did
        not have a material impact on its financial position, results of
        operations or cash flows on a quarterly or annual basis.

        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. 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."

        The Company is required to adopt the provisions of SFAS No. 141
        immediately and SFAS No. 142 effective January 1, 2002. Furthermore, any
        goodwill and any intangible asset determined to have an indefinite
        useful life that are acquired in a purchase business combination
        completed after June 30, 2001 will not be amortized, but will continue
        to 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 will
        continue to be amortized until the adoption of SFAS No. 142.

        As of the date of adoption, the Company expects to have unamortized
        goodwill in the amount of $189.7 million which will be subject to the
        transition provisions of SFAS No. 141 and 142. Amortization expense
        related to goodwill was $1.4 million and $4.2 million for the quarter
        and the nine months ended September 30, 2001, respectively. Because of
        the extensive effort needed to comply with adopting SFAS No. 141 and
        142, it is not practicable to reasonably estimate the impact of adopting
        these Statements on the Company's financial statements at the

                                       12
<PAGE>


        date of this report, including whether any transitional impairment
        losses will be required to be recognized as a cumulative effect of a
        change in accounting principle.

        In June 2001, the Financial Accounting Standards Board issued Statement
        of Financial Standards No. 143, "Accounting for Asset Retirement
        Obligations" ("SFAS 143") effective for fiscal years beginning after
        June 15, 2002. SFAS 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 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 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 has not yet determined the impact of the
        January, 2002 adoption of SFAS 144 on its financial position or results
        of operations.



                                       13
<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" 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, PROJECTIONS, FUTURE COMPLIANCE WITH BANK CREDIT FACILITY
        COVENANTS, LEGISLATIVE PROPOSALS FOR HEALTHCARE REFORM, THE ABILITY TO
        ENTER INTO JOINT VENTURES, 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 293 centers in 36 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.



                                       14
<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>
                                                             Nine Months Ended Sept. 30,
                                                             ---------------------------
                                                               2000               2001
                                                               ----               ----

       <S>                                                     <C>                <C>
       Home respiratory therapy services                        56%                59%
       Home infusion therapy services                           20                 17
       Home medical equipment and medical supplies              24                 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, as well as internal growth. In 1998, the Company purposefully
        slowed its growth by acquisitions compared to prior years to focus more
        on existing operations. As amended, the Company's Credit Agreement
        requires bank consent for acquisitions or investments in new joint
        ventures.

        During 2000, the Company converted six of its previously 50% owned joint
        ventures to wholly owned operations as a result of the withdrawal of the
        hospital partners from the partnerships. As a result of these
        transactions, the results of operations of these joint ventures have
        been consolidated into the financial results of the Company. Previously,
        these joint ventures were accounted for under the equity method. In the
        fourth quarter of 2000, the Company and its hospital partner sold
        substantially all of the assets of the Amarillo, Texas partnership to a
        third party and discontinued operations in preparation for dissolving
        the Amarillo partnership in 2001. The Company did not acquire any
        businesses or develop any new joint ventures during 2000 and 2001 other
        than the conversion of previously 50% owned joint ventures to wholly
        owned operations.

        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.

        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



                                       15
<PAGE>


        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. There can be no assurance that federal, state or
        local governments will not change existing standards or impose
        additional standards.

        In addition, the Balanced Budget Act of 1997 introduced several
        government initiatives which are either in the planning or
        implementation stages and which, when fully implemented, could have a
        material adverse impact on reimbursement for products and services
        provided by the Company. These initiatives include: (i) Prospective
        Payment System ("PPS") 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



                                       16
<PAGE>


        equipment ("DME"), under which Medicare reimbursements for certain items
        are reduced between 17% and 31% from the current fee schedules (the
        Company is participating in both pilot projects); and (iii) deadlines
        (as yet undetermined) for obtaining Medicare and Medicaid surety bonds
        for home health agencies and DME suppliers.

        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 federal government may 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. Compliance with these extensive, complex and
        frequently changing laws and regulations is difficult.

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

        The government has broad authority and discretion in enforcing
        applicable laws and regulations; therefore, the scope and outcome of any
        such investigations, inquiries, or legal actions cannot be predicted.
        There can be no assurance that federal, state or local governments will
        not impose additional regulations upon the Company's activities nor that
        the Company's 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



                                       17
<PAGE>


        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. The Company has
        been dealing with the issues covered by the Settlement since February
        1998, when the OIG served a subpoena on the Company at its Pineville,
        Kentucky center. Pursuant to the Settlement, the Company made an initial
        payment of $3.0 million in the second quarter of 2001 and has 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 over the next 57 months. The Company has also agreed to pay the
        relator's attorneys fees and expenses, the amount of which will be
        determined by binding arbitration. The Company recorded a $7.5 million
        reserve in the fourth quarter of 2000 based upon the expectation of a
        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. Mr. Corsello has appealed the dismissal 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 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. The
        outcome of any pending lawsuits could have a material adverse effect on
        the Company.



                                       18
<PAGE>



        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 (the "Medicare Oxygen Reimbursement Reduction") 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 27% of the Company's year-to-date revenues and will
        account for approximately 29% of the Company's ongoing revenues
        following the September 2001 sale of the rehab centers. 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
        will increase revenue and pre-tax income by approximately $1.0 million
        over the third and fourth quarters of 2001 and $1.0 million on an annual
        basis thereafter.

        RESULTS OF OPERATIONS

        The Company reports its revenues as follows: (i) sales and related
        services; (ii) rentals and other income; and (iii) earnings from
        hospital joint ventures. Sales and related services revenues are derived
        from the provision of infusion therapies, the sale of home medical
        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. Operating
        expenses include center labor costs, delivery expenses, selling costs,
        occupancy costs, costs related to rentals other than depreciation,
        billing center costs, provision for doubtful accounts, field management
        and other operating costs. General and administrative expenses include
        corporate and senior management expenses.

        In the quarter ended September 30, 2001, the Company recorded a pre-tax
        loss of $2.6 million related to the sale of the assets of its rehab
        centers. Effective September 1, 2001, the Company sold substantially all
        of the assets of its rehab centers to United Seating and Mobility,
        L.L.C., a Missouri limited liability company. United Seating and
        Mobility, L.L.C. is owned in part by a former employee of the rehab
        centers, who is no longer an employee of the Company effective with the
        sale. The rehab centers were sold for approximately $7.7 million, of
        which $7.2 million was received in cash at closing with the remainder to
        be paid on February 28, 2002. The cash proceeds of the sale were used to
        pay down debt under the Company's Bank Credit Facility. The rehab
        centers provided custom-built seating and positioning systems and
        custom-built wheelchairs to patients with impaired mobility and
        generated approximately $22.0 million in annualized revenues with
        minimal earnings before interest, taxes, depreciation and amortization.



                                       19
<PAGE>


        In addition, the Company sold two unprofitable infusion centers in
        April, 2001 and an unprofitable respiratory and home medical equipment
        center in July, 2001 for approximately $0.6 million in cash. The cash
        proceeds of these sales were used to pay down debt under the Bank Credit
        Facility.

        The following table and discussion sets forth items from the statements
        of operations, excluding the previously discussed non-recurring charge,
        as a percentage of revenues:

                             PERCENTAGE OF REVENUES
                        (EXCLUDING NON-RECURRING CHARGE)

<TABLE>
<CAPTION>
                                                      Three Months Ended                Nine Months Ended
                                                          September 30                    September 30
                                                     ---------------------           ---------------------
                                                      2000            2001            2000            2001
                                                     -----           -----           -----           -----
         <S>                                         <C>             <C>             <C>             <C>
         Revenues                                    100.0%          100.0%          100.0%          100.0%

         Costs and expenses:
             Cost of sales and related
                services                              23.1            21.2            23.7            23.2
             Operating expenses                       58.7            60.7            59.8            58.9
             General and administrative                4.5             4.3             4.1             4.4
             Depreciation and amortization            10.4             9.3            10.6             8.9
             Amortization of deferred
                financing costs                        0.6             0.8             0.6             0.7
             Interest                                  8.4             7.2             8.4             8.2
                                                     -----           -----           -----           -----
                  Total costs and expenses           105.7%          103.5%          107.2%          104.3%
                                                     -----           -----           -----           -----
             Loss from operations
                before income taxes                   (5.7)%          (3.5)%          (7.2)%          (4.3)%
                                                     =====           =====           =====           =====
</TABLE>



        The Company's operating results since 1998 have been negatively impacted
        by the following factors. First, the Company has been greatly impacted
        by the 30% reduction in Medicare oxygen reimbursement rates (25%
        reduction effective January 1, 1998 with an additional 5% reduction
        effective January 1, 1999). The Company estimates that revenue and
        pre-tax income have been reduced by approximately $21.9 million in the
        nine months of 2000 and 2001, as a result of the 25% and the additional
        5% reductions. Second, beginning in the latter half of 1998, the Company
        experienced a decline in revenues attributable to the exit and
        de-emphasis of certain lower margin business lines and by the
        termination of several managed care contracts (with continued effect
        into 1999, 2000 and 2001). Third, the Company has halted the acquisition
        of home health care businesses and its joint venture development
        program. Fourth, accounts receivable have been adversely affected by a
        tougher payor environment and by process problems at the operating and
        billing center levels (caused by the consolidation of billing centers
        and employee turnover) which has resulted in higher bad debt expense in
        1998 and 1999. Further, the Company's implementation of process
        improvements in the billing and collection functions was slower than
        anticipated.

        In order to drive internal revenue growth during the latter half of
        1998, the Company embarked on a strategy to increase market share by
        focusing primarily on increasing respiratory revenues in existing
        centers. Concurrently, the Company determined that certain "non-core",
        lower margin products and services should be eliminated during the year.
        It also exited certain



                                       20
<PAGE>


        contracts and businesses perceived to be lower margin during the third
        and fourth quarters of 1998. The result was a substantial decrease in
        revenues as well as in profitability beginning in the latter half of
        1998.

        A new management team joined the Company in the fourth quarter of 1998,
        consisting of a new president and chief executive officer, a new chief
        operating officer and a new chief financial officer. Recognizing the
        negative impacts of the Company's business strategy, the new management
        ceased the exiting of business lines and contracts by mid-December of
        1998. Subsequently, a new strategy was developed and implemented to
        restore the Company's revenues and decrease expenses. Key points of this
        strategy are:

        1.      Stabilize and increase profitable revenues - respiratory
        therapies remain a primary focus of the Company. However, the Company
        has broadened its offering and sales focus to include other profitable
        business lines such as enteral nutrition, HME rental, and select
        infusion therapy services. The Company has also re-directed its efforts
        to increase revenues for certain managed care contracts - both new and
        existing. The Company is actively pursuing, and has entered into, new
        managed care contracts that it considers an opportunity for profitable
        revenue.

        2.      Decrease and control operating expenses - the Company took
        aggressive steps beginning in 1999 to decrease operating and general and
        administrative expenses. The Company continues to monitor and closely
        manage its field and overhead expenses.

        3.      Decrease DSO and bad debt - the Company has four key initiatives
        in place to improve accounts receivable performance: (i) proper staffing
        and training; (ii) process redesign and standardization; (iii)
        consolidation of billing center activities; and (iv) billing center
        specific goals geared toward improved cash collections and reduced
        accounts receivable.

        The Company's recovery of revenues is taking longer than originally
        anticipated. During 2000, the Company determined that additional sales
        infrastructure would be required to accelerate revenue growth and in
        May, 2000, the Company hired a new Vice President of Sales and
        Marketing. Six directors of sales were subsequently hired with the
        directive of working in conjunction with the Vice President of Sales and
        Marketing and the vice presidents of the Company's geographic operating
        areas to facilitate the implementation of revenue growth strategies at
        the field level. The Company also analyzed market data and
        referral/utilization trends to identify a subset of approximately forty
        centers with the greatest potential for market share gain. The directors
        of sales are accountable for sales activity specifically for these
        "target centers". These target centers also serve as primary pilot sites
        for new sales and marketing initiatives. In addition, a new Director of
        Managed Care joined the Company at the end of 2000. With new expertise
        in place, the Company is now focusing its efforts on maximizing revenues
        both with existing and new contracts through more strategic price
        negotiations and improved operational strategies for implementation.

        Effective April 1, 2001 rather than reporting to the area vice
        presidents, the Company's billing centers began reporting directly to
        the Corporate Reimbursement Department under the leadership of the Vice
        President of Reimbursement and six directors of compliance and
        reimbursement. This new organizational structure allows field management
        more time to focus



                                       21
<PAGE>


        on revenue growth as well as add specialized knowledge and focused
        management resources to the billing function.

        The Company does not anticipate renewing its acquisition activities nor
        its joint venture development during 2001 as it continues focusing its
        efforts on existing operations.

        THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED
        SEPTEMBER 30, 2000

        The results of operations between 2001 and 2000 are impacted by the
        conversions of several unconsolidated joint ventures to wholly owned
        businesses during 2000, as well as the asset sales of several centers in
        2001.

        REVENUES. Revenues decreased from $91.5 million for the quarter ended
        September 30, 2000 to $87.6 million for the same period in 2001, a
        decrease of $3.9 million, or 4%. The termination of a services contract
        in January, the sale of two unprofitable infusion centers in April, the
        sale of an unprofitable respiratory and home medical equipment center in
        July, and the sale of the rehab centers in September have negatively
        impacted current quarter revenues by approximately $4.8 million. This
        decrease is also attributable to a decline of approximately $0.3 million
        in revenues as a result of the loss of patients from a dissolved joint
        venture to a new service provider. Beginning in the second quarter of
        2000, the Company consolidated six previously 50% owned joint ventures,
        partially offsetting the lost revenues and adding approximately $0.3
        million in revenue to the current quarter. Without these occurrences,
        revenue for the quarter would have increased by $0.9 million compared to
        last year, or 1%. Following is a discussion of the components of
        revenues:

             Sales and Related Services Revenues. Sales and related services
             revenues decreased from $42.9 million for the quarter ended
             September 30, 2000 to $40.1 million for the same period in 2001, a
             decrease of $2.8 million, or 7%. This decrease is attributable to
             approximately $2.0 million in lost sales revenues related to a
             January 1, 2001 services contract termination, and $2.6 million in
             lost sales revenues due to the sale of two unprofitable infusion
             centers in April, the sale of an unprofitable respiratory and home
             medical center in July, and the sale of the rehab centers in
             September. These decreases were offset by additional sales revenues
             of approximately $0.1 million from the accounting consolidation of
             six of the Company's previously 50% owned joint ventures and
             increased sales as a result of the Company's sales and marketing
             initiatives.

             Rentals and Other Revenues. Rentals and other revenues decreased
             from $47.4 million for the quarter ended September 30, 2000 to
             $46.3 million for the same period in 2001, a decrease of $1.1
             million, or 2%. This decrease is attributable to a decline of
             approximately $0.3 million in rental revenues as a result of the
             loss of patients from a dissolved joint venture to a new service
             provider, and $0.2 million related to the sale of an unprofitable
             respiratory and home medical center in July 2001. These decreases
             were offset by additional rental revenues of approximately $0.2
             million from the accounting consolidation of six of the Company's
             previously 50% owned joint ventures.

             Earnings from Hospital Joint Ventures. Earnings from hospital joint
             ventures decreased slightly from $1.2 million for the quarter ended
             September 30, 2000 to $1.1 million for the quarter ended September
             30, 2001.



                                       22
<PAGE>


        COST OF SALES AND RELATED SERVICES. Cost of sales and related services
        decreased from $21.1 million for the quarter ended September 30, 2000 to
        $18.6 million for the same period in 2001, a decrease of $2.5 million,
        or 12%. As a percentage of sales and related services revenues, cost of
        sales and related services decreased from 49% for the quarter ended
        September 30, 2000 to 46% for the same period in 2001. This decrease is
        attributable to a higher level of favorable physical inventory
        adjustments, the Company's reassessment of required reserve levels due
        to additional corporate oversight of the physical inventory process, and
        the sale of the rehab centers, which contributed lower margins.

        Recently in 2001, Dey Labs received FDA approval for "DuoNeb", a mixture
        of albuterol sulfate and ipratropium bromide. The Company currently
        compounds the drug for use in its aerosol medications business. When
        DuoNeb becomes commercially available, providers may be required by law
        to purchase the premixed drug, as the FDA prohibits compounding without
        a medical justification when an FDA approved drug is already
        commercially available. The Company expects that its costs for DuoNeb
        will be substantially higher than the Company's cost to compound, which
        may have a material impact on cost of sales and the results of
        operations. The Company is investigating various alternatives to
        minimize the potential negative impact related to the sale and marketing
        of DuoNeb.

        OPERATING EXPENSES. Operating expenses decreased from $53.7 million for
        the quarter ended September 30, 2000 to $53.2 million for the same
        period in 2001, a decrease of $0.5 million, or 1%. This decrease is
        attributable to a reduction of $0.7 million in operating expenses as a
        result of the sale of the rehab centers, offset somewhat by additional
        operating expenses of $0.2 million from the accounting consolidation of
        six of the Company's previously 50% owned joint ventures. Bad debt
        expense was 5.7% of revenue for the quarter ended September 30, 2000
        compared to 6.1% of revenue for the same period in 2001. Bad debt
        expense in the current quarter reflects a temporary slow down in cash
        collections in September, resulting primarily from payment processing
        problems experienced by Texas Medicaid during the month and a general
        delay in payments received by the Company during the first few weeks
        following the September 11th terrorist attacks.

        GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
        decreased from $4.1 million for the quarter ended September 30, 2000 to
        $3.8 million for the same period in 2001, a decrease of $0.3 million, or
        7%. As a percentage of revenues, general and administrative expenses
        were 4.5% and 4.3% for the quarters ended September 30, 2000 and 2001,
        respectively. This decrease is attributable to lower consulting and
        legal fees, offset somewhat by higher personnel expenses as a result of
        the billing initiatives, corporate compliance activities and increased
        marketing efforts.

        DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
        decreased from $9.6 million for the quarter ended September 30, 2000 to
        $8.1 million for the same period in 2001, a decrease of $1.5 million, or
        16%. This decrease is primarily attributable to lower levels of rental
        equipment depreciation due to certain property and equipment becoming
        fully depreciated, and a lower level of unfavorable physical inventory
        adjustments in the quarter ended September, 2001 compared to the same
        period in 2000.

        AMORTIZATION OF DEFERRED FINANCING COSTS. Amortization of deferred
        financing costs increased from $0.6 million for the quarter ended
        September 30, 2000 to $0.7 million for the


                                       23
<PAGE>


        same period in 2001, an increase of $0.1 million or 17%. This increase
        is primarily attributable to additional deferred financing costs
        associated with amendments to the Credit Agreement. In addition, in the
        fourth quarter of 2000, the Company recorded the estimated fair value of
        warrants ($686,000) to be issued to the Lenders in connection with the
        Second Amendment to the Credit Agreement and the related amortization of
        these costs using the effective interest rate method.

        INTEREST. Interest expense decreased from $7.7 million for the quarter
        ended September 30, 2000, to $6.3 million for the same period in 2001, a
        decrease of $1.4 million, or 18% which is attributable to reductions in
        the prime borrowing rate and lower principal amounts outstanding.

        NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED
        SEPTEMBER 30, 2000

        The results of operations between 2001 and 2000 are impacted by the
        conversions of several unconsolidated joint ventures to wholly owned
        businesses during 2000, as well as the asset sales of several centers in
        2001.

        REVENUES. Revenues decreased from $270.5 million for the nine months
        ended September 30, 2000 to $268.5 million for the same period in 2001,
        a decrease of $2.0 million, or 1%. The termination of a services
        contract in January, the sale of two unprofitable infusion branches in
        April, the sale of an unprofitable respiratory and home medical
        equipment branch in July, and the sale of the rehab centers in September
        have negatively impacted revenues by approximately $9.5 million during
        the first nine months of 2001. This decrease is also attributable to a
        decline of approximately $1.3 million in revenues as a result of the
        loss of patients from a dissolved joint venture to a new service
        provider. Beginning in the second quarter of 2000 the Company
        consolidated six previously 50% owned joint ventures, adding
        approximately $3.5 million in revenue to the current nine month period.
        Without these occurrences, revenue for the nine months ended September
        30, 2001 would have increased by $5.3 million, or 2%, compared to the
        same period last year. This increase is primarily attributable to
        revenue growth as a result of the Company's sales and marketing
        initiatives. Following is a discussion of the components of revenues:

             Sales and Related Services Revenues. Sales and related services
             revenues decreased from $128.4 million for the nine months ended
             September 30, 2000 to $126.5 million for the same period in 2001, a
             decrease of $1.9 million, or 1%. This decrease is attributable to
             approximately $5.9 million in lost sales revenues related to a
             January 1, 2001 services contract termination, and $3.4 million in
             lost sales revenues due to the sale of two unprofitable infusion
             centers in April, the sale of an unprofitable respiratory and home
             medical center in July, and the sale of the rehab centers in
             September. These decreases were offset by additional sales revenues
             of approximately $1.0 million from the accounting consolidation of
             six of the Company's previously 50% owned joint ventures and
             increased sales as a result of the Company's sales and marketing
             initiatives.

             Rentals and Other Revenues. Rentals and other revenues increased
             from $138.6 million for the nine months ended September, 2000 to
             $138.7 million for the same period in 2001, an increase of $0.1
             million. This increase is primarily attributable to additional
             rental revenues of approximately $2.8 million from the accounting
             consolidation of six of the Company's previously 50% owned joint
             ventures. This increase was offset by an approximate $1.3 million
             decline in rental revenues as a result of the loss of patients from
             a dissolved joint venture to a new service provider and $0.2
             million related to the sale of an unprofitable



                                       24
<PAGE>


             respiratory and home medical center in July 2001.

             Earnings from Hospital Joint Ventures. Earnings from hospital joint
             ventures decreased from $3.5 million for the nine months ended
             September 30, 2000 to $3.3 million for the same period in 2001, a
             decrease of $0.2 million, or 6%, which is primarily attributable to
             the accounting consolidation of six of the Company's previously 50%
             owned joint ventures. These previously 50% owned joint ventures
             contributed $0.3 million in earnings from hospital joint ventures
             to the nine month period ended September 30, 2000.

        COST OF SALES AND RELATED SERVICES. Cost of sales and related services
        decreased from $64.1 million for the nine months ended September 30,
        2000 to $62.2 million for the same period in 2001, a decrease of $1.9
        million, or 3%. As a percentage of sales and related services revenues,
        cost of sales and related services decreased from 50% for the nine
        months ended September 30, 2000 to 49% for the same period in 2001. This
        decrease is attributable to a higher level of favorable physical
        inventory adjustments, the Company's reassessment of required reserve
        levels due to additional corporate oversight of the physical inventory
        process, and the sale of the rehab centers, which contributed lower
        margins.

        Recently in 2001, Dey Labs received FDA approval for "DuoNeb", a mixture
        of albuterol sulfate and ipratropium bromide. The Company currently
        compounds the drug for use in its aerosol medications business. When
        DuoNeb becomes commercially available, providers may be required by law
        to purchase the premixed drug, as the FDA prohibits compounding without
        a medical justification when an FDA approved drug is already
        commercially available. The Company expects that its costs for DuoNeb
        will be substantially higher than the Company's cost to compound, which
        may have a material impact on cost of sales and the results of
        operations. The Company is investigating various alternatives to
        minimize the potential negative impact related to the sale and marketing
        of DuoNeb.

        OPERATING EXPENSES. Operating expenses decreased from $161.7 million for
        the nine months ended September 30, 2000 to $158.1 million for the same
        period in 2001, a decrease of $3.6 million, or 2%. This decrease is
        attributable to lower bad debt expense and a reduction of $0.7 million
        in operating expenses as a result of the sale of the rehab centers,
        offset somewhat by additional operating expenses of $2.8 million from
        the accounting consolidation of six of the Company's previously 50%
        owned joint ventures. Bad debt expense was 7.0% of revenue for the nine
        months ended September 30, 2000 compared to 4.7% of revenue for the same
        period in 2001. The improvement in bad debt expense is attributable to
        improved cash collections resulting from the process redesign,
        standardization and consolidation of billing center activities. Also, in
        the second quarter of 2001, bad debt expense was favorably impacted by
        the reversal of approximately $0.7 million in previously established
        reserves as a result of the collection of past due balances associated
        with a terminated services contract. Without this reserve reversal, bad
        debt expense as a percentage of revenues would have been 5.0% for the
        nine months ended September 30, 2001.

        GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
        increased from $11.1 million for the nine months ended September 30,
        2000 to $11.7 million for the same period in 2001, an increase of $0.6
        million, or 5%. This increase is attributable to higher personnel
        expenses in the nine months ended September 30, 2001 as a result of the
        billing



                                       25
<PAGE>


        initiatives, corporate compliance activities and increased marketing
        efforts, offset by lower consulting and legal fees. As a percentage of
        revenues, general and administrative expenses were 4.1% and 4.4% for the
        nine months ended September 30, 2000 and 2001, respectively.

        DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
        decreased from $28.6 million for the nine months ended September 30,
        2000 to $24.1 million for the same period in 2001, a decrease of $4.5
        million, or 16%. This decrease is primarily attributable to lower levels
        of rental equipment depreciation due to certain property and equipment
        becoming fully depreciated, and a lower level of unfavorable physical
        inventory adjustments in the nine months ended September 30, 2001
        compared to the same period in 2000.

        AMORTIZATION OF DEFERRED FINANCING COSTS. Amortization of deferred
        financing costs increased from $1.7 million for the nine months ended
        September 30, 2000 to $2.0 million for the same period in 2001, an
        increase of $0.3 million, or 18%. This increase is primarily
        attributable to additional deferred financing costs associated with
        amendments to the Credit Agreement. In addition, in the fourth quarter
        of 2000, the Company recorded the estimated fair value of warrants
        ($686,000) to be issued to the Lenders in connection with the Second
        Amendment to the Credit Agreement and the related amortization of these
        costs using the effective interest rate method.

        INTEREST. Interest expense decreased from $22.8 million for the nine
        months ended September 30, 2000, to $21.9 million for the same period in
        2001, a decrease of $0.9 million, or 4%. This decrease is attributable
        to reductions in the prime borrowing rate and lower principal amounts
        outstanding.

        LIQUIDITY AND CAPITAL RESOURCES

        At September 30, 2001 the Company's working capital was $38.2 million
        and the current ratio was 1.72x as compared to working capital of $54.7
        million and a current ratio of 2.09x at December 31, 2000.

        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 its Credit Agreement and its failure to make
        a scheduled principal payment due March 15, 2001 caused the Company to
        be not in compliance with certain covenants of its Credit Agreement. The
        Company, on June 8, 2001, entered into a Fifth Amended and Restated
        Credit Agreement (the "Amended Credit Agreement") that provided a new
        loan to the Company from which the proceeds were used to pay off all
        existing loans under the Credit Agreement. The Amended Credit Agreement
        also includes modified financial covenants and a revised amortization
        schedule. In addition, the Amended Credit Agreement no longer contains a
        revolving loan component; all existing indebtedness is now in the form
        of a term loan which matures on December 31, 2002. The Amended Credit
        Agreement requires principal payments of $750,000 on September 30, 2001
        and December 31, 2001; a principal payment of $11.6 million on March 31,
        2002; principal payments of $1.0 million on June 30, 2002 and September
        30, 2002; and a balloon payment of $281.5 million on December 31, 2002.
        As of November 8, 2001 the Company has paid the $750,000 principal
        payment due on September 30, 2001 as well as the $750,000 principal
        payment due on December 31, 2001 and $9.3 million of the $11.6 million
        principal payment due on March 31, 2002. However, there currently is no
        commitment as to how the balloon



                                       26
<PAGE>


        payment due on December 31, 2002 will be satisfied. The Amended Credit
        Agreement further provides for mandatory prepayments of principal from
        the Company's excess cash flow and from the proceeds of the Company's
        sales of securities, sales of assets, tax refunds or excess casualty
        loss payments. Substantially all of the Company's assets have been
        pledged as security for borrowings under the Bank Credit Facility.
        Indebtedness under the Bank Credit Facility, as of November 8, 2001,
        totals $289.2 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, 2002, as well as $459,000 payable on September 30, 2002. In
        addition, the Company has an obligation to pay the agent an annual
        administrative fee of $75,000 and an annual fee of .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, 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. As of September 30, 2001 the weighted average borrowing
        rate was 9.8%. 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. Upon the occurrence
        and continuation of an event of default under the Amended Credit
        Agreement, interest is 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 has the right to borrow at
        the Adjusted Eurodollar Rate plus the applicable margin. Upon the
        occurrence and continuation of an event of default under the Amended
        Credit Agreement, new borrowings would have to be made at the Base
        Lending Rate plus the applicable margin, which is a substantially higher
        rate of interest.



                                       27
<PAGE>


        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 at any time after issuance and the remaining fifty
        percent are exercisable on and after September 30, 2001. The exercise
        price of the warrants is $0.01 per share. As of November 8, 2001 these
        warrants have not been exercised.

        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
        throughout 2001. However, as with all projections, there is uncertainty
        as to whether management's projections can be achieved. 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 the 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.
        There can be no assurance that future cash flow from operations will be
        sufficient to cover debt obligations, especially those obligations due
        upon maturity of the Bank Credit Facility.

        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
        $74.5 million and $62.2 million at December 31, 2000 and September 30,
        2001, respectively. The decrease in net patient accounts receivable is
        due in part to the sale of the rehab centers, which included net patient
        accounts receivable of $5.6 million. Average days' sales in accounts
        receivable was approximately 76 and 71 days at December 31, 2000 and
        September 30, 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 from operating activities was $12.9 million and $18.9
        million for the nine months ended September 30, 2000 and 2001,
        respectively, which is primarily due to the current year decrease in net
        accounts receivable, offset by the current year payment of $3.0 million
        related to the government investigation and income taxes paid of $1.8
        million related



                                       28
<PAGE>


        to a federal income tax audit assessment covering the period 1994
        through 1998. Net cash used in investing activities was $11.8 million
        and $6.3 million for the nine months ended September 30, 2000 and 2001,
        respectively. Capital expenditures were $13.9 million for the nine
        months ended September 30, 2000 compared to $15.4 million for the same
        period in 2001, proceeds from joint venture dissolutions contributed
        $0.9 million for the nine months ended September 30, 2000, and the sale
        of centers contributed $7.8 million for the same period in 2001. Net
        cash used in financing activities was $12.9 million and $10.8 million
        for the nine months ended September 30, 2000 and 2001, respectively. The
        cash used in financing activities for the nine months ended September
        30, 2000 and 2001 primarily relates to principal payments and deferred
        financing costs for the Bank Credit Facility offset by proceeds from the
        Employee Stock Purchase Plan.

        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. Management believes that these sources
        will support the Company's current level of operations assuming the
        Company maintains compliance with its debt covenants and the due dates
        of amounts outstanding under the Bank Credit Facility are not
        accelerated. A principal payment of $11.6 million is due March 31, 2002
        under the Bank Credit Facility. As of November 8, 2001 the Company has
        paid $9.3 million in principal towards this requirement with existing
        cash balances and proceeds from the sales of its centers. 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,
        the Company currently has no commitment as to how the balloon payment
        due on December 31, 2002 under the Bank Credit Facility will be
        satisfied.

        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. If an event of default
        occurs under the Amended Credit Agreement or the indebtedness is not
        paid at maturity, the Lenders have the right to exercise remedies
        detailed in the Bank Credit Facility section of this document. 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 the 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 borrowings 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 a margin of 2.75% and 3.50%, respectively. Also,
        additional interest of 4.50% accrues on that portion of the outstanding
        indebtedness of the Bank Credit Facility that is in excess of four times
        Adjusted EBITDA as defined by the



                                       29
<PAGE>


        Amended Credit Agreement. Upon the occurrence of an event of default
        under the Amended Credit Agreement, interest is payable by the Company
        at 2.00% per annum in excess of the rate provided by the Amended Credit
        Agreement and the Company no longer has the right to utilize the
        Adjusted Eurodollar Rate plus the applicable margin. Upon the occurrence
        of or event of default under the Amended Credit Agreement, all new loans
        would bear interest at the Base Lending Rate plus the applicable margin,
        which is currently a substantially higher rate of interest.

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

        The occurrence of a default by the Company under the Amended Credit
        Agreement could have a material adverse effect on the Company's
        liquidity, business, financial condition and results of operations. The
        degree to which the Company is leveraged may impair the Company's
        ability to finance, through its own cash flow or from additional
        financing, its future operations or pursue its business strategy and
        could make the Company more vulnerable to economic downturns,
        competitive and payor pricing pressures and adverse changes in
        government regulation. There can be no assurance that future cash flow
        from operations will be sufficient to cover scheduled debt obligations.
        Additional sources of funds may be required and there can be no
        assurance the Company will be able to obtain additional funds on
        acceptable terms, if at all. 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 new and
        existing 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 legislative enactments of new laws or regulations.
        Changes in applicable laws or any failure to comply with existing or
        future laws, regulations or standards 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 -
        Legal Proceedings."

                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 better to 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 Settlement recently
        entered in connection with the False Claims Act case originating with
        the Pineville, Kentucky



                                       30
<PAGE>


        center described above. The Company believes that this 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 of 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 "Business - Government Regulation and Legal Proceedings."

                Collectibility of Accounts Receivable. The Company has
        substantial accounts receivable, as well as days sales outstanding of 71
        days as of September 30, 2001. The Company has implemented four key
        initiatives to improve accounts receivable performance: (i) proper
        staffing and training; (ii) process redesign and standardization; (iii)
        consolidation of billing center activities; and (iv) billing center
        specific goals geared toward improved cash collections and reduced
        accounts receivable. No assurances can be given, however, 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.

                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 have
        limited the Company's ability to raise additional capital.

                Infrastructure. As the Company continues to refine its business
        model, it may need to implement enhanced operational and financial
        systems and may require additional employees and management, and
        operational and financial resources. There can be no assurance that the
        Company will successfully (i) implement and maintain any such
        operational and financial systems, or (ii) apply the human, operational
        and financial resources needed to manage a developing and expanding
        business. Failure to implement such systems successfully and use such
        resources effectively could have a material adverse effect on the
        Company's results of operations, financial condition or prospects.

                Medicare Reimbursement for Oxygen Therapy and Other Services.
        Oxygen therapy reimbursement from Medicare accounts for approximately
        27% of the Company's year-to-date revenues and will account for
        approximately 29% of the Company's ongoing revenues following the
        September 2001 sale of the rehab centers. The Balanced Budget Act of
        1997, as amended, reduced Medicare reimbursement rates for oxygen and
        certain oxygen equipment to 75% of 1997 levels beginning January 1, 1998
        and to 70% of 1997 levels beginning January 1, 1999. Reimbursement for
        drugs and biologicals was reduced by 5% beginning January 1, 1998.
        Effective January 1, 1998, payments for parenteral and enteral nutrition
        ("PEN") were frozen at 1995 levels, through the year 2002. Effective
        October 1, 1999, Medicare established new guidelines for respiratory
        assist devices ("RAD"), which include



                                       31
<PAGE>


        continuous positive airway pressure devices, bi-level respiratory
        devices (without backup) and bi-level respiratory devices with back up.
        The changes require additional documentation in order to continue
        coverage on existing patients as well as new coverage and qualifying
        criteria for new patients. In addition, the bi-level respiratory device
        (without backup) was transferred from a frequently serviced item to
        "capped rental." Currently, respiratory assist devices account for
        approximately $35.5 million in annualized revenues. Medicare is also
        considering the transfer of non-invasive positive pressure ventilators
        from a frequently serviced item to "capped rental." The effective date
        of this change is unknown. 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, the Centers
        for Medicare and Medicaid Services ("CMS"), formerly known as the
        Healthcare Financing Administration ("HCFA"), 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." Possible future changes in the basis for
        calculating Medicare's reimbursement rates for Albuterol and other
        respiratory medications could result in a reimbursement reduction for
        these products, the timing and extent of which are not known at this
        time. 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. 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.

                Dependence on Reimbursement by Third-Party Payors. For the nine
        months ended September 30, 2001, the percentage of the Company's
        revenues derived from Medicare, Medicaid and private pay was 49%, 10%
        and 41%, 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 changes 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.

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



                                       32
<PAGE>


                Health Care Initiatives. The health care industry continues to
        undergo dramatic changes. With the change in administration, new federal
        health care initiatives, particularly concerning Medicare, may be
        launched. For example, in June of this year, Department of Health and
        Human Services Secretary Tommy Thompson unveiled a new name for the
        agency formerly known as the Health Care Financing Administration. 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. 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 governmental 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,
        which are currently scheduled to become effective in April, 2003. The
        Company has created a HIPAA Compliance working group that is in the
        process of identifying information inflow and outflow throughout the
        organization, which will then be analyzed to determine the appropriate
        privacy protections the Company will need to put in place to be
        HIPAA-compliant. The Company is unable to project the cost of HIPAA
        compliance until the assessment process is complete. Substantial changes
        to the Company's information management systems required for HIPAA
        compliance could have a material adverse effect on the Company.

                No Assurance of Growth. The Company reported a net loss of $14.6
        million for the nine months ended September 30, 2001. No assurance can
        be given that the Company will achieve profitable operations in the near
        term. The Company intends to expand its business primarily through
        internal growth of existing operations. There can be no assurance that
        the Company can achieve growth in revenues. The price of the Company's
        common stock may fluctuate substantially in response to quarterly
        variations in the Company's operating and financial results,
        announcements by the Company or other developments affecting the
        Company, as well as general economic and other external factors.

                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.

                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



                                       33
<PAGE>


        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 or claims not covered by 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 and health insurance and is at risk for claims up
        to individual stop loss and aggregate stop loss amounts.

        NEW FINANCIAL ACCOUNTING STANDARDS

        Statement of Financial Accounting Standards No. 133, as amended,
        "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
        No. 133") has been issued effective for fiscal years beginning after
        June 15, 2000. SFAS No. 133, as amended, requires companies to record
        derivatives on the balance sheet as assets or liabilities, measured at
        fair value. The Company adopted the provisions of SFAS No. 133, as
        amended, effective January 1, 2001, as required; however, the Company's
        adoption of SFAS No. 133, as amended, did not have a material effect on
        the Company's financial position or results of operations.

        In December 1999, the Securities and Exchange Commission issued Staff
        Accounting Bulletin No. 101 ("SAB 101") regarding revenue recognition in
        financial statements. SAB 101 was effective January 1, 2000 but
        implementation was delayed until the fourth quarter of 2000. The
        Company's implementation of SAB 101 in the fourth quarter of 2000 did
        not have a material impact on its financial position, results of
        operations or cash flows on a quarterly or annual basis.

        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



                                       34
<PAGE>


        intangible assets with indefinite lives no longer be amortized, but
        instead be tested for impairment at least annually. 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."

        The Company is required to adopt the provisions of SFAS No. 141
        immediately and SFAS No. 142 effective January 1, 2002. Furthermore, any
        goodwill and any intangible asset determined to have an indefinite
        useful life that are acquired in a purchase business combination
        completed after June 30, 2001 will not be amortized, but will continue
        to 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 will
        continue to be amortized until the adoption of SFAS No. 142.

        As of the date of adoption, the Company expects to have unamortized
        goodwill in the amount of $189.7 million which will be subject to the
        transition provisions of SFAS No. 141 and 142. Amortization expense
        related to goodwill was $1.4 million and $4.2 million for the quarter
        and the nine months ended September 30, 2001, respectively. Because of
        the extensive effort needed to comply with adopting SFAS No. 141 and
        142, it is not practicable to reasonably estimate the impact of adopting
        these Statements on the Company's financial statements at the date of
        this report, including whether any transitional impairment losses will
        be required to be recognized as a cumulative effect of a change in
        accounting principle.

        In June 2001, the Financial Accounting Standards Board issued Statement
        of Financial Standards No. 143, "Accounting for Asset Retirement
        Obligations" ("SFAS 143") effective for fiscal years beginning after
        June 15, 2002. SFAS 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 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 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 has not yet determined the impact of the
        January, 2002 adoption of SFAS 144 on its financial position or results
        of operations.



                                       35
<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
        September 30, 2001, the Company had outstanding borrowings of
        approximately $287.8 million, which excludes letters of credit totaling
        $3.4 million. In the event that interest rates associated with this
        facility were to increase by 10%, the impact on future cash flows would
        be approximately $1.0 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.



                                       36
<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.

        November 14, 2001              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



                                       37
<PAGE>



                                INDEX TO EXHIBITS

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

    <S>           <C>
      3.1         Certificate  of  Incorporation  of the Company  (incorporated  by  reference  to Exhibit  3.1 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>



                                       38