10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2007

or

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

FOR THE TRANSITION PERIOD FROM                      TO                     .

Commission file number 0-19532

AMERICAN HOMEPATIENT, INC.

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of Incorporation or organization)	62-1474680 (I.R.S. Employer Identification No.)
5200 Maryland Way, Suite 400 Brentwood TN (Address of principal executive offices)	37027-5018 (Zip Code)

Registrant’s telephone number, including area code: (615) 221-8884

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o No þ

Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o No þ

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one).

Large accelerated filer o      Accelerated filer o      Non –accelerated filer o      Smaller reporting company þ

(do not check if a smaller
reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12-b-2). Yes o No þ

The aggregate market value of registrant’s voting stock held by non-affiliates of the registrant, computed by reference to the price at which the stock was last sold as of June 30, 2007 was $14,385,396. Solely for the purposes of this calculation, all persons who are executive officers or directors of the registrant and all persons who have filed a Schedule 13D or 13G with respect to the registrant’s stock have been deemed to be affiliates.

On March 6, 2008, 17,573,389 shares of the registrant’s $0.01 par value Common Stock were outstanding.

Documents Incorporated by Reference

The following documents are incorporated by reference into Part II, Item 5 and Part III, Items 10, 11, 12, 13 and 14 of this Form 10-K: portions of the Registrant’s definitive proxy statement for its 2008 Annual Meeting of Stockholders.

Table of Contents

	Page #
PART I
Item 1. Business		4
Item 1A. Risk Factors		19
Item 1B. Unresolved Staff Comments		24
Item 2. Properties		24
Item 3. Legal Proceedings		24
Item 4. Submission of Matters to a Vote of Security Holders		24
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		25
Item 6. Selected Financial Data		27
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations		29
Item 7A. Quantitative and Qualitative Disclosures about Market Risk		53
Item 8. Financial Statements and Supplementary Data		53
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		53
Item 9A(T). Controls and Procedures		53
Item 9B. Other Information		54
PART III
Item 10. Directors, Executive Officers, and Corporate Governance		55
Item 11. Executive Compensation		55
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		55
Item 13. Certain Relationships and Related Transactions, and Director Independence		55
Item 14. Principal Accounting Fees and Services		55
PART IV
Item 15. Exhibits and Financial Statement Schedules		56
Signatures		57
EX-21 Subsidiary List
EX-23 Consent of KPMG LLP.
EX-31.1 Section 302 Certification of the CEO
EX-31.2 Section 302 Certification of the CFO
EX-32.1 Section 906 Certification of the CEO
EX-32.2 Section 906 Certification of the CFO

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     This Annual Report on Form 10-K includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including, without limitation, statements containing the words “believes,” “anticipates,” “intends,” “expects,” “estimates,” “may,” “will,” “likely,” “could” and words of similar import. Such statements include statements concerning the Company’s business strategy, operations, cost savings initiatives, future compliance with accounting standards, industry, economic performance, financial condition, liquidity and capital resources, existing government regulations and changes in, or the failure to comply with, governmental regulations, legislative proposals for health care reform, the ability to enter into strategic alliances and arrangements with managed care providers on an acceptable basis, and changes in reimbursement policies. Such statements are not guarantees of future performance and are subject to various risks and uncertainties. The Company’s actual results may differ materially from the results discussed in such forward-looking statements because of a number of factors, including those identified in the “Risk Factors” section and elsewhere in this Annual Report on Form 10-K. The forward-looking statements are made as of the date of this Annual Report on Form 10-K and the Company does not undertake to update the forward-looking statements or to update the reasons that actual results could differ from those projected in the forward-looking statements.

Available Information

     The Company files reports with the Securities and Exchange Commission (“SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K. Copies of the Company’s reports filed with the SEC may be obtained by the public at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549, or by calling the SEC at 1-800-SEC-0330. The Company files such reports with the SEC electronically, and the SEC maintains an Internet site at www.sec.gov that contains the Company’s periodic and current reports, proxy and information statements, and other information filed electronically. The Company’s website address is www.ahom.com. The Company also makes available, free of charge through the Company’s website, a direct link to its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and other materials filed with the SEC electronically. The information provided on the Company’s website is not part of this report, and is therefore not incorporated by reference unless such information is otherwise specifically referenced elsewhere in this report.

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PART I

ITEM 1. BUSINESS

Introduction

     American HomePatient, Inc. and its subsidiaries (collectively, the “Company”) provide home health care services and products consisting primarily of respiratory and infusion therapies and the rental and sale of home medical equipment and home health care supplies. These services and products are paid for primarily by Medicare, Medicaid, and other third-party payors. As of December 31, 2007, the Company provided these services to patients primarily in the home through 245 centers in 33 states.

     American HomePatient, Inc. was incorporated in Delaware in September 1991. American HomePatient, Inc.’s principal executive offices are located at 5200 Maryland Way, Suite 400, Brentwood, Tennessee 37027-5018, and its telephone number at that address is (615) 221-8884.

Business

     The Company provides home health care services and products consisting primarily of respiratory therapy services, home infusion therapy services, and the rental and sale of home medical equipment and home health care supplies. For the year ended December 31, 2007, such services and products represented 78%, 11%, and 11% of revenues, respectively. These services and products are paid for primarily by Medicare, Medicaid, and other third-party payors. The Company’s objective is to be a leading provider of home health care products and services in the markets in which it operates.

     As of December 31, 2007, the Company provided services to patients primarily in the home through 245 centers in the following 33 states: Alabama, Arizona, Arkansas, Colorado, Connecticut, Delaware, Florida, Georgia, Illinois, Iowa, Kansas, Kentucky, Maine, Maryland, Michigan, Minnesota, Mississippi, Missouri, Nebraska, Nevada, New Mexico, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas, Virginia, Washington, West Virginia, and Wisconsin. As of December 31, 2007 the Company was an investor in and a manager of eleven joint ventures.

     Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information,” (“SFAS No. 131”) applies to enterprises that are required to file financial statements with the Securities and Exchange Commission (“SEC”) and establishes standards for reporting information about operating segments in annual financial statements and interim financial reports. SFAS No. 131 also establishes standards for related disclosures about products and services, geographic areas, and major customers. The Company manages its business as one reporting segment.

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Services and Products

     The Company provides a diversified range of home health care services and products. The following table sets forth the percentage of revenues represented by each line of business for the periods presented:

	Year Ended December 31,
	2007			2006			2005
Home respiratory therapy services		78	%		75	%		73	%
Home infusion therapy services		11			12			12
Home medical equipment and home health supplies		11			13			15
Total		100	%		100	%		100	%

     Home Respiratory Therapy Services. The Company provides a wide variety of home respiratory services primarily to patients with severe and chronic pulmonary diseases. Patients are referred to a Company center most often by primary care and pulmonary physicians as well as by hospital discharge planners and case managers. After reviewing pertinent medical records on the patient and confirming insurance coverage information, a Company service technician or respiratory therapist visits the patient’s home to deliver and to prepare the prescribed therapy or equipment. Company representatives coordinate the prescribed therapy with the patient’s physician and train the patient and caregiver in the correct use of the equipment. For patients renting equipment, Company representatives also make periodic follow-up visits to the home to provide additional instructions, perform required equipment maintenance, and deliver oxygen and other supplies.

     The primary respiratory services that the Company provides are:

• Oxygen systems to assist patients with breathing. There are three types of oxygen systems: (i) oxygen concentrators, which are stationary units that filter ordinary room air to provide a continuous flow of oxygen; (ii) liquid oxygen systems, which are thermally-insulated containers of liquid oxygen which can be used as stationary units and/or as portable options for patients; and (iii) high pressure oxygen cylinders, which are used primarily for portability as an adjunct to oxygen concentrators. Oxygen systems are prescribed by physicians for patients with chronic obstructive pulmonary disease, cystic fibrosis, and neurologically-related respiratory problems.

• Nebulizers and related inhalation drugs to assist patients with breathing. Nebulizer compressors are used to administer aerosolized medications (such as albuterol) to patients with asthma, bronchitis, chronic obstructive pulmonary disease, and cystic fibrosis. “AerMedsÒ” is the Company’s registered marketing name for its aerosol medications program.

• Respiratory assist devices to force air through respiratory passage-ways during sleep. These treatments, which utilize continuous positive airway pressure (“CPAP”) or bi-level positive airway pressure therapy, are used on adults with obstructive sleep apnea

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(“OSA”), a condition in which a patient’s normal breathing patterns are disturbed during sleep.

     The other respiratory services that the Company provides include:

• Home ventilators to sustain a patient’s respiratory function mechanically in cases of severe respiratory failure when a patient can no longer breathe independently;

• Non-invasive positive pressure ventilation (“NPPV”) to provide ventilation support via a face mask for patients with chronic respiratory failure and neuromuscular diseases. This therapy enables patients to receive positive pressure ventilation without the invasive procedure of intubation;

• Apnea monitors to monitor and to warn parents of apnea episodes in newborn infants as a preventive measure against sudden infant death syndrome; and

• Home respiratory evaluations and related diagnostic equipment to assist physicians in identifying, monitoring and managing their respiratory patients.

     Oxygen systems comprised approximately 38% of the Company’s total 2007 revenues. Inhalation drugs and nebulizers comprised approximately 11% and 1%, respectively, of the Company’s total 2007 revenues. Respiratory assist devices and supplies comprised approximately 25% of 2007 revenues. All other respiratory products and services comprised approximately 3% of the Company’s total 2007 revenues. The Company provides respiratory therapy services in 228 of its 245 centers.

     Home Infusion Therapy Services. The Company provides a wide range of home infusion therapy services. Patients are referred to a Company center most often by primary care and specialist physicians (such as infectious disease physicians and oncologists) as well as by hospital discharge planners and case managers. After confirming the patient’s treatment plan with the physician, the pharmacist mixes the medications and coordinates with the nurse the delivery of necessary equipment, medication and supplies to the patient’s home. The Company provides the patient and caregiver with detailed instructions on the patient’s prescribed medication, therapy, pump and supplies. For patients renting equipment, the Company also schedules follow-up visits and deliveries in accordance with physicians’ orders.

     Home infusion therapy involves the administration of nutrients, antibiotics, and other medications intravenously (into the vein), subcutaneously (under the skin), intramuscularly (into the muscle), intrathecally (via spinal routes), epidurally (also via spinal routes), or through feeding tubes into the digestive tract. The primary infusion therapy services that the Company provides include the following:

• Enteral nutrition is the infusion of nutrients through a feeding tube inserted directly into the functioning portion of a patient’s digestive tract. This long-term therapy is often prescribed for patients who are unable to eat or to drink normally as a result of a neurological impairment such as a stroke or a neoplasm (tumor).

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• Anti-infective therapy is the infusion of anti-infective medications into a patient’s bloodstream, typically for 5 to 14 days, to treat a variety of serious bacterial and viral infections and diseases.

• Total parenteral nutrition (“TPN”) is the long-term provision of nutrients through central vein catheters that are surgically implanted into patients who cannot absorb adequate nutrients enterally due to a chronic gastrointestinal condition.

• Pain management involves the infusion of certain drugs into the bloodstream of patients, primarily terminally or chronically ill patients, suffering from acute or chronic pain.

• Other infusion therapies include chemotherapy, hydration, growth hormone and immune globulin therapies.

     Enteral nutrition services account for approximately 6% of the Company’s total revenues in 2007 and are provided at most of the Company’s centers. Anti-infective therapy, TPN, pain management, and other infusion revenues accounted for approximately 5% of the Company’s total revenues in 2007. The Company currently provides other infusion therapies in 5 of its 245 centers.

     Home Medical Equipment and Medical Supplies. The Company provides a variety of equipment and supplies to serve the needs of home care patients. Revenues from home medical equipment and supplies are derived principally from the rental and sale of wheelchairs, hospital beds, ambulatory aids, bathroom aids and safety equipment, and rehabilitation equipment. Sales of home medical equipment and medical supplies account for 11% of the Company’s revenues in 2007 and are provided in 218 of the Company’s 245 centers.

Operations

     Organization. Currently, the Company’s operations are divided into 11 geographic areas with each area headed by an area vice president. Each area vice president oversees the operations of approximately 20 to 30 branches. Area vice presidents focus on revenue development and cost control and assist local management with decision-making to improve responsiveness and ensure quality in local markets. The Company operates regional billing centers that report directly to the corporate reimbursement department under the leadership of the Vice President of Revenue Management and three regional vice presidents of reimbursement. Additionally, the Company has five regional patient service centers that perform certain customer service functions and also report to the Vice President of Revenue Management. This organizational structure adds specialized knowledge and focused management resources to the billing, compliance, and reimbursement functions.

     The Company’s branches are typically staffed with a general manager, clinicians such as respiratory therapists, service technicians, and customer service representatives. In most of its markets, the Company employs account executives who are responsible for local sales efforts.

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Account executives report directly to the general manager of their respective branch and indirectly to their respective area director of sales.

     The Company tries to appropriately balance between centralized and decentralized management with an increased emphasis on centralizing functions to improve productivity. Operating managers are encouraged to promptly and effectively respond to local market demands, while the Company provides through its corporate office management support, compliance oversight and training, marketing and managed care expertise, sales training and support, product development, and financial and information systems. The Company retains centralized control over those functions necessary to monitor quality of patient care and to maximize operational efficiency. Services performed at the corporate office include financial and accounting functions, treasury, corporate compliance, human resources, reimbursement oversight, sales and marketing support, clinical policy and procedure development, regulatory affairs and licensure, and information system design. The Company’s patient service centers provide centralized order intake and revenue qualification. Additionally, the Company has centralized its distribution of inhalation drugs and CPAP supplies. Management regularly analyzes the Company’s structure for opportunities to improve operations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – General – Productivity and Profitability” for additional discussion of centralization initiatives to improve productivity.

     Commitment to Quality. The Company maintains quality and performance improvement programs related to the proper implementation of its service standards. Management believes that the Company has developed and implemented service policies and procedures that comply with the standards required by the Joint Commission, its former accreditation organization, and the Accreditation Commission for Health Care, Inc. (ACHC), its current accrediting agency. As of January 1, 2008, the Company transitioned its accrediting agency from the Joint Commission to ACHC, which, like the Joint Commission, is a deemed accreditation organization for suppliers of durable medical equipment, prosthetics, orthotics, and supplies. As a deemed accreditation organization, ACHC’s accreditation is recognized by Centers for Medicare and Medicaid Services (“CMS”) as proof that the Company has met or exceeds CMS’ quality standards in order to bill the Medicare Part B program. All of the company’s operating branch locations are ACHC-accredited. The Company has Quality Improvement Advisory Boards at many of its branches, and branch general managers conduct quarterly quality improvement reviews. Area Quality Managers (AQMs) conduct quality compliance audits at each branch to ensure compliance with state and federal regulations, accreditation and quality standards, FDA regulations and internal standards. The AQMs also help train all new clinical personnel on the Company’s policies and procedures.

     Training and Retention of Quality Personnel. Management recognizes that the Company’s business depends on its personnel. The Company attempts to recruit knowledgeable talent for all positions including account executives who are capable of gaining new business from the local medical community. In addition, the Company provides sales training and orientation to general managers and account executives.

     Management Information Systems. Management believes that periodic refinement and upgrading of its management information systems, which permit management to closely monitor

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the activities of the Company’s centers, is important to the Company’s business. The Company’s financial systems provide, among other things, monthly budget analyses, trended financial data, financial comparisons to prior periods, and comparisons among Company centers. These systems also provide a means for management to monitor key statistical data for each center, such as accounts receivable, payor mix, cash collections, revenue mix and expense trends. Additionally, Medicare and other third party claims are billed electronically through the Company’s systems thereby facilitating and improving the timeliness of accounts receivable collections. The Company also maintains a communication network that provides company-wide access to email and the Internet. The Company maintains a proprietary intranet, which is a productivity-driven, secure website focused on reducing paperwork, disseminating information throughout the Company, and facilitating communication among the Company’s employees.

     Corporate Compliance. The Company’s goal is to operate its business with honesty and integrity and in compliance with the numerous laws and regulations that govern its operations. The Company’s corporate compliance program is designed to help accomplish these goals through employee training and education, a confidential disclosure program, written policy guidelines, periodic reviews, compliance audits, and other programs. The Company’s corporate compliance program is monitored by its Vice President of Compliance and Governmental Affairs and the Compliance Committee. The Compliance Committee, which meets quarterly, is comprised of the Company’s President and CEO, Chief Operating Officer, Chief Financial Officer, Vice President of Revenue Management, and Vice President of Operations Initiatives. The Compliance Committee is advised by legal counsel. There can be no assurance that the Company’s compliance activities will prevent or detect violations of the governing laws and regulations. See “Business – Government Regulation.”

Hospital Joint Ventures

     As of December 31, 2007, the Company owns 50% of nine home health care businesses and 70% of two other home health care businesses. The remaining ownership interest of each of these businesses is owned by local hospitals. Through management agreements, the Company is responsible for the management of these businesses and receives fixed monthly management fees or monthly management fees based upon a percentage of net revenues, net income or cash collections. The operations of the 70%-owned joint ventures are consolidated with the operations of the Company. The operations of the 50%-owned joint ventures are not consolidated with the operations of the Company and are instead accounted for by the Company under the equity method.

     The Company’s joint ventures typically are 50/50 equity partnerships with an initial term of between three and ten years and with the following typical provisions: (i) the Company contributes assets of an existing business in the designated market or contributes cash to fund half of the initial working capital required for the hospital joint venture to commence operations; (ii) the hospital partner contributes similar assets and/or an amount of cash equal in the aggregate to the fair market value of the Company’s net contribution; (iii) the Company is the managing partner for the hospital joint venture and receives a monthly management and administrative fee; and (iv) distributions, to the extent made, are generally made on a quarterly basis and are consistent with each partner’s capital contributions. Within the hospital joint venture’s designated market, all services provided

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within the geographic market are deemed to be revenues of the hospital joint venture including revenues from sources other than the hospital joint venture partner.

Revenues

     The Company derives substantially all of its revenues from third-party payors including Medicare, private insurers, and Medicaid. Medicare is a federally-funded and administered health insurance program that provides coverage for beneficiaries who require certain medical services and products. Medicaid is a state-administered reimbursement program that provides reimbursement for certain medical services and products. Amounts paid under these programs are generally based upon fixed rates. Revenues are recorded at the expected reimbursement rates when the services are provided, merchandise is delivered, or equipment is rented to patients. Revenues are recorded at net realizable amounts estimated to be paid by customers and third party payors. Although amounts earned under the Medicare and Medicaid programs are subject to review by such third-party payors, subsequent adjustments to such reimbursements are historically insignificant as these reimbursements are based on fixed fee schedules. In the opinion of management, adequate provision has been made for any adjustment that may result from such reviews. Any differences between estimated settlements and final determinations are reflected in operations in the period known.

     Sales revenues and related services include all product sales to patients and are derived from the sale of aerosol medications and respiratory therapy equipment, the provision of infusion therapies, the sale of home health care equipment and medical supplies, and the sale of supplies and the provision of services related to the delivery of these products. Sales revenues are recognized at the time of delivery and recorded at the expected payment amount based upon the type of product and the payor when the Company has obtained the properly completed Certificate for Medical Necessity (“CMN”) from the health care provider, when applicable. Rentals and other patient revenues are derived from the rental of equipment related to the provision of respiratory therapy, home health care equipment, and enteral pumps. All rentals of the equipment are provided by the Company on a month-to-month basis and revenue is recorded at the expected payment amount based upon the type of rental and the payor when the Company has obtained the properly completed CMN from the health care provider, when applicable. Certain pieces of equipment are subject to capped rental arrangements, whereby title to the equipment transfers to the patient at the end of the capped rental payment period.

     Once initial delivery of rental equipment is made to the patient, a monthly billing cycle is established based on the initial date of delivery. The Company recognizes rental revenue ratably over the monthly service period and defers revenue for the portion of the monthly bill which is unearned. The fixed monthly rental encompasses the rental of the product, delivery, set-up, instruction, maintenance, repairs, and providing backup systems when needed, and as such, no separate revenue is earned from the initial equipment delivery and setup process. Routine maintenance and servicing of the equipment is the responsibility of the Company for as long as the patient is renting the equipment.

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     Sales taxes collected from customers and remitted to governmental authorities are accounted for on a net basis, and therefore, are excluded from revenues in the consolidated statements of operations.

     The following table sets forth the percentage of the Company’s revenues from each source indicated for the years presented:

	Year Ended December 31,
	2007			2006			2005
Medicare		53	%		52	%		52	%
Private pay, primarily private insurance		39			39			39
Medicaid		8			9			9
Total		100	%		100	%		100	%

     Because the Company derives a significant portion of its revenues from Medicare and Medicaid reimbursement, material changes in Medicare and Medicaid reimbursement have a material impact on its revenues and, consequently, on its business operations and financial results. Reimbursement levels typically are subject to downward pressure as the federal and state governments and managed care payors seek to reduce payments. Thus, since its inception the Company has experienced numerous reimbursement reductions related to its products and services and regularly learns of proposals for other reductions, some of which are subsequently implemented as proposed or in a modified form. The Company anticipates that future reductions will occur whether through administrative action, legislative changes, or otherwise.

     Management is working to counter the adverse impact of the reimbursement reductions currently in effect as well as any future reimbursement reductions through a variety of initiatives designed to grow revenues, improve productivity, and reduce costs. See “Business – Sales and Marketing” for a discussion of the Company’s initiatives to grow revenues and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – General – Productivity and Profitability” for a discussion of the Company’s initiatives to improve productivity and reduce costs. The magnitude of the adverse impact that reimbursement reductions will have on the Company’s future operating results and financial condition will depend upon the success of the Company’s revenue growth and cost reduction initiatives. Nevertheless, the adverse impact could be material. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – General – Trends, Events, and Uncertainties” for a discussion of reimbursement changes already enacted that will further affect the Company in 2008 and beyond.

Collections

     The Company has three key initiatives in place to maintain and/or improve collections of accounts receivable: (i) proper staffing and training; (ii) process redesign and standardization; and (iii) billing center specific goals geared toward improved cash collections and reduced accounts receivable.

     Net patient accounts receivable at December 31, 2007 was $44.5 million compared to net patient accounts receivable of $53.7 million at December 31, 2006.

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     An important indicator of the Company’s accounts receivable collection efforts is the monitoring of the days sales outstanding (“DSO”). The Company monitors DSO trends for each of its branches and billing centers and for the Company in total as part of the management of the billing and collections process. An increase in DSO usually results from certain revenue management processes at the billing centers and/or branches not functioning at optimal levels or a slow-down in the timeliness of payment processing by payors. A decline in DSO usually results from process improvements or more timely payment processing by payors. Management uses DSO trends to monitor, evaluate and improve the performance of the billing centers. The table below shows the Company’s DSO, net of discontinued operations, for the periods indicated and is calculated by dividing net patient accounts receivable by the average daily revenue for the previous 90 days (excluding dispositions and acquisitions), net of bad debt expense:

	Year Ended December 31,
	2007	2006	2005
DSO	57 days	58 days	61 days

     The decrease in DSO at December 31, 2007 compared to December 31, 2006 is the result of improved cash collections and a decrease in unbilled revenue.

     The Company attempts to minimize DSO by screening new patient cases for adequate sources of reimbursement and by providing complete and accurate claims data to relevant payor sources. The Company’s level of DSO and net patient receivables is affected by the extended time required to obtain necessary billing documentation.

     Another key indicator of the Company’s receivable collection efforts is the amount of unbilled revenue (the amount of sales and rental revenues which have not yet been billed to the payor’s due to incomplete documentation or the receipt of the CMN). The amount of unbilled revenue was $6.7 million and $10.7 million for December 31, 2007 and December 31, 2006, respectively, net of valuation allowances. This decrease primarily is the result of improvements made in CMN procurement processes.

Sales and Marketing

     The Company has increased its focus on sales and marketing efforts over the past several years in an effort to improve revenues. During this time, management implemented changes designed to improve the effectiveness of the Company’s selling efforts. These include revisions to the Account Executive commission plans and a restructuring of the sales organization. Additionally, the position of Sr. Vice President of Sales and Marketing was added and a Vice President of Managed Care was hired. Management believes these actions have resulted in a more focused sales management team.

     The Company’s sales and marketing focus for 2008 and beyond includes: (i) emphasizing profitable revenue growth by focusing on oxygen and sleep-related products and services and by increasing the Company’s mix of Medicare and profitable managed care business; (ii) strengthening its sales and marketing efforts through a variety of programs and initiatives; (iii) heightened emphasis on sleep therapy through the opening of sleep centers, addition of more

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sleep specialists, and partnering with sleep vendors; and (iv) expanding managed care revenue through greater management attention and prioritization of payors to secure managed care contracts at acceptable levels of profitability. Improvement in the Company’s ability to grow revenues will be critical to the Company’s success. Management will continue to review and monitor progress with its sales and marketing efforts.

Competition

     The home health care industry is consolidating but remains highly fragmented and competition varies significantly from market to market. There are still relatively few barriers to entry in the local markets served by the Company, and the Company could encounter competition from new market entrants. In small and mid-size markets, a large percentage of the Company’s competition comes from local independent operators or hospital-based facilities. In the larger markets, regional and national providers account for a significant portion of competition and may have more resources to market their business. Management believes that the competitive factors most important in the Company’s lines of business are quality of service, reputation with referral sources, ease of doing business with the provider, ability to develop and to maintain relationships with referral sources, clinical expertise, and the range of services offered.

     Third-party payors and their case managers actively monitor and direct the care delivered to their beneficiaries. Accordingly, relationships with such payors and their case managers and inclusion within preferred provider and other networks of approved or accredited providers has become a prerequisite in many cases to the Company’s ability to serve many of the patients it treats. Similarly, the ability of the Company and its competitors to align themselves with other healthcare service providers may increase in importance as managed care providers and provider networks seek out providers who offer a broad range of services, substantially discounted prices, and geographic coverage.

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Branch Locations

     The Company’s 245 home health care centers as of December 31, 2007 are listed below:

Alabama	Florida	Kentucky	Nebraska	Ohio	Tennessee	Virginia
Birmingham	Ft. Myers	Bowling Green	Hastings1	Bryan	Chattanooga	Charlottesville
Dothan	Ft. Walton	Lexington	Lincoln1	Chillicothe	Clarksville	Chesapeake
Huntsville	Gainesville	London	Norfolk1	Cincinnati	Cookeville	Farmville
Mobile	Holly Hill	Louisville	Omaha1	Dayton	Dayton	Harrisonburg
Montgomery1	Jacksonville	Paducah		Heath	Dickson	Newport News
	Leesburg	Pineville	Nevada	Mansfield	Erin	Onancock1
Arizona	Longwood		Las Vegas	Marion	Jackson	Richmond
Globe	Lynn Haven	Maine		Maumee	Johnson City	Salem
Phoenix	Pensacola	Auburn	New Mexico	Middleburg Heights	Kingsport	Springfield
	Rockledge	Bangor	Alamogordo	Springfield	Knoxville
Arkansas	St. Augustine		Albuquerque	Twinsburg	Nashville	Washington
Batesville	Tallahassee (2)	Maryland	Clovis	Worthington	Oneida	Lakewood
Benton1	Tampa (2)	Cumberland	Farmington	Zanesville	Tullahoma	Yakima
El Dorado		Salisbury1	Grants		Union City
Ft. Smith (2)	Georgia		Las Cruces	Oklahoma		West Virginia
Harrison	Albany	Michigan	Roswell	Oklahoma City	Texas	Lewisburg
Heber Springs1	Brunswick	West Branch1		Tulsa	Austin	Rainelle
Hot Springs	Dublin		New York		Bay City	Wheeling
Jonesboro	Eastman	Minnesota	Albany	Pennsylvania	Bryan
Little Rock1 (2)	Evans	Rochester	Auburn	Brookville	Conroe	Wisconsin
Lowell	Rossville		Corning	Camp Hill	Corpus Christi	Marshfield
Mena	Savannah	Mississippi	Depew	Chambersburg	Dallas (2)	Milwaukee
Mtn. Home	Valdosta	Tupelo	Geneva	Clearfield	Georgetown	Minocqua
N. Little Rock1	Waycross		Marcy	Danville	Harlingen	Onalaska
Paragould		Missouri	Oneonta	Erie	Houston	Racine
Pine Bluff	Illinois	Cameron	Poughkeepsie	Johnstown	Lake Jackson
Russellville	Collinsville	Columbia	Syracuse	Lewistown	Longview
Warren	Mt. Vernon	Festus	Watertown	Mill Hall	Lubbock
	Peoria	Hannibal	Webster	Philipsburg	Lufkin
Colorado	Springfield	Kansas City		Pittsburgh	McAllen
Cortez		Kirksville	North Carolina	Pottsville	Mount Pleasant
Denver	Iowa	Mountain Grove	Asheboro	Scottdale	Nacogdoches
Durango	Atlantic1	Perryville	Asheville1	State College	Paris
Pagosa Springs	Davenport	Potosi	Boone	Trevose	San Angelo
	Decorah	Rolla	Brevard	Waynesboro	San Antonio
Connecticut	Dubuque	Springfield	Charlotte	Wilkes-Barre	Temple
New Britain	Marshalltown	St. Louis	Concord	York	Tyler
Waterbury	Mason City	St. Peters	Durham		Victoria
	North Liberty	Warrensburg	Gastonia	South Carolina	Woodway
Delaware	Ottumwa	Waynesville	Hickory1	Columbia
Dover	Pleasant Hill		Maiden1	Conway1
Newark	Sioux City		Marion1	Florence
	Waterloo		Monroe	Greenville
			Newland	Hartsville
	Kansas		Salisbury	Lancaster
	Pittsburg		Sanford1	Myrtle Beach1
			Spruce Pine1	Pawley’s Island1
			Whiteville	Rock Hill1
			Wilmington	Summerville
			Winston-Salem	Union

1	Owned by a joint venture.
2	City has multiple locations.

14

Supplies and Equipment

     The Company centrally purchases home medical and respiratory equipment and other materials and products required in connection with the Company’s business from select suppliers.

Insurance

     The Company maintains a commercial general liability policy which is on a claims-made basis. This insurance is renewed annually and includes product liability coverage on the medical equipment that it sells or rents with per claim coverage limits of up to $1.0 million per claim with a $3.0 million product liability annual aggregate and a $5.0 million general liability annual aggregate. The Company’s professional liability policy is on a claims-made basis and is renewable annually with per claim coverage limits of up to $1.0 million per claim and $5.0 million in the aggregate. The Company’s commercial general liability policy and the professional liability policy have a maximum policy aggregate of $7.0 million. Defense costs are included within the limits of insurance. The Company retains the first $50,000 of each professional or general liability claim subject to a $500,000 aggregate for all such claims. After the $500,000 aggregate has been reached, a $10,000 per claim deductible applies to all future claims applicable to this policy period. The Company also maintains excess liability coverage with limits of $20.0 million per claim and $20.0 million in the aggregate. Management believes the manufacturers of the equipment it sells or rents currently maintain their own insurance, and for many of the Company’s significant vendors, a certificate of insurance has been received and the Company has been added by endorsement as an additional insured. However, there can be no assurance that such manufacturers will continue to maintain their own insurance, that such insurance will be adequate or available to protect the Company, or that the Company will not have liability independent of that of such manufacturers and/or their insurance coverage.

     The Company retains the first $250,000 of each vehicle liability claim and is insured for the next $1.0 million of each claim. The Company retains the first $250,000 of each workers compensation claim and is insured for any additional liabilities from each such claim. The Company did not maintain annual aggregate stop-loss coverage for the years 2005, 2006, and 2007, as such coverage was not economically available. The Company has not maintained aggregate stop-loss coverage since 2001.

     The Company is self-insured for health insurance for substantially all employees for the first $150,000 on a per person, per year basis and has maintained annual aggregate stop-loss coverage of $8.8 million for 2007. Liabilities in excess of this aggregate amount (up to $1.0 million) are the responsibility of the insurer. The health insurance policies are limited to maximum lifetime reimbursements of $2.0 million per person for 2005, 2006, and 2007.

     The Company provides accruals for its portion of the settlement of outstanding claims and claims incurred but not reported at amounts believed to be adequate. The differences between actual settlements and accruals are included in expense once a probable amount is known.

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

15

     The Company has purchased insurance protecting its directors and officers.

     There can be no assurance that any of the Company’s insurance will be sufficient to cover any judgments, settlements or costs relating to any pending or future legal proceedings or that any such insurance will be available to the Company in the future on satisfactory terms, if at all. If the insurance carried by the Company is not sufficient to cover any judgments, settlements or costs relating to pending or future legal proceedings, the Company’s business and financial condition could be materially adversely affected.

Employees

     At December 31, 2007, the Company had approximately 2,362 full-time employees, 113 part-time employees, and 111 employees used on an “as needed” basis only. Approximately 96 individuals were employed at the corporate office in Brentwood, Tennessee. None of the employees work under a union contract.

Trademarks

     The Company owns and uses a variety of marks, including American HomePatient^®, AerMeds^®; Rediü^sm; EnterCare^sm; Resource^sm; EnSpire^sm; OPUS^sm; SLEEP^sm; Go Paperless^sm; Personal Caring Service^sm; CHF Heart Matters^sm; Rest Assured...We’re the Home Sleep Specialists^sm; and Breathe, Nourish, Move, Thrive^sm, which have either been registered at the federal or state level or are being used pursuant to common law rights.

Government Regulation

     General. The Company, as a participant in the health care industry, is subject to extensive federal, state, and local regulation. In addition to the Federal False Claims Act (“False Claims Act”) and other federal and state anti-kickback and self-referral laws applicable to all of the Company’s operations (discussed more fully below), the operations of the Company’s home health care centers are subject to federal laws covering the repackaging and dispensing of drugs (including oxygen) and regulating interstate motor-carrier transportation. Such centers also are subject to state laws (most notably licensing and controlled substances registration) governing pharmacies, nursing services and certain types of home health agency activities.

     The Federal False Claims Act imposes civil liability on individuals or entities that submit false or fraudulent claims to the government for payment. False Claims Act penalties for violations can include sanctions, including civil monetary penalties.

     As a provider of services under the federal reimbursement programs such as Medicare, Medicaid and TRICARE, the Company is subject to the federal statute known as the anti-kickback 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.

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     The Company is also subject to the federal physician self-referral prohibition, known as the “Stark Law,” which, with certain exceptions, prohibits physicians from referring patients to entities with which they have a financial relationship. Many states in which the Company operates have adopted similar fraud and abuse and self-referral laws, as well as laws that prohibit certain direct or indirect payments or fee-splitting arrangements between health care providers, under the theory that such arrangements are designed to induce or to encourage the referral of patients to a particular provider. In many states these laws apply to services reimbursed by all payor sources.

     In 1996, the Health Insurance Portability and Accountability Act (“HIPAA”) introduced a new category of federal criminal health care fraud offenses relating to health care benefits, which are referred to as Federal Health Care Offenses. The specific offenses are: health care fraud, theft or embezzlement, false statements, obstruction of an investigation, and money laundering. These crimes can apply to claims submitted not only to government reimbursement programs such as Medicare, Medicaid, and TRICARE but also to claims submitted to any third-party payor, and they carry penalties including fines and imprisonment. HIPAA has mandated an extensive set of regulations to protect the privacy and security of individually identifiable health information.

     The Company must follow strict requirements relating to documentation. 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 of medical necessity signed by a physician. In January 1999 the OIG published a draft Model Compliance Plan for the Durable Medical Equipment, Prosthetics, Orthotics, and Supply Industry. The OIG has stressed the importance for all health care providers to have an effective compliance plan. The Company has created and implemented a compliance program which it believes meets the elements of the OIG’s Model Plan for the industry. As part of its compliance program, the Company performs internal audits of the adequacy of billing documentation. The Company’s policy is to voluntarily refund to the government any reimbursements previously received for claims with insufficient documentation that are identified in this process and that cannot be corrected. The Company periodically reviews and updates its policies and procedures in an effort to comply with applicable laws and regulations; however, certain proceedings have been and may in the future be commenced against the Company alleging violations of applicable laws governing the operation of the Company’s business and its billing practices.

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

     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

17

screening entities and individuals they employ or do business with in order to avoid contracting with an excluded provider. No one may bill government programs for services or supplies provided by an excluded provider, and the federal government may also impose sanctions, including financial penalties, on companies that contract with excluded providers.

     Health care law is an area of extensive and dynamic regulatory oversight. Changes in laws or regulations or new interpretations of existing laws or regulations can have a dramatic effect on permissible activities, the relative costs associated with doing business, and the amount and availability of reimbursement from government and other third-party payors. There can be no assurance that federal, state, or local governments will not impose additional standards or change existing standards or interpretations.

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

     The government has broad authority and discretion in enforcing applicable laws and regulations; therefore, the scope and outcome of any such investigations, inquiries, or legal actions cannot be predicted. There can be no assurance that federal, state or local governments will not impose additional regulations upon the Company’s activities nor that the Company’s past activities will not be found to have violated some of the governing laws and regulations. Any such regulatory changes or findings of violations of laws could adversely affect the Company’s business and financial position, and could even result in the exclusion of the Company from participating in Medicare, Medicaid, and other contracts for goods or services reimbursed by the government.

Legal Proceedings

     The following is a summary of the Company’s material legal proceedings:

     In 2006, an employee working in the Company’s branch location in Harrisonburg, Virginia, shot and killed two co-workers and then himself. The surviving spouses of the co-workers sued the Company alleging, among other things, negligent hiring and retention of the employee who shot their spouses, and sought in their complaints compensatory and punitive damages. These cases are styled Sharon A. Gibson v. American HomePatient, Inc., et al. (Circuit Court, Rockingham County, Va., civil action no. CL06-00549) and George W. Crump, IV v. American HomePatient, Inc., et al. (Circuit Court, Rockingham County, Va., civil action no. CL06-00547). The Crump case was tried in late September 2007, and the jury returned a verdict against the Company for negligent retention and negligent failure to maintain a safe work environment. At a mediation occurring after entry of the verdict, both cases were settled, and the

18

settlements have been approved by the court. The Company’s insurance carriers funded the settlements and the Company and its carriers executed a mutual release of any claims between them relating to these cases. Thus, these cases have been resolved.

ITEM 1A. RISK FACTORS

     This section summarizes certain risks, among others, that should be considered by stockholders and prospective investors in the Company. Many of these risks are also discussed in other sections of this report.

Continued reductions in Medicare and Medicaid reimbursement rates could have a material adverse effect on the Company’s results of operations and financial condition.

     In the last quarter of 2003, Congress enacted the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “MMA”). The MMA reduced Medicare reimbursement levels for a variety of the Company’s products and services, with some reductions beginning in 2004 and others beginning in 2005. On February 8, 2006, the Deficit Reduction Act of 2005 (“DRA”) was signed into law. The DRA reduced the reimbursement of certain products provided by the Company. These reductions have had and will have a material adverse effect on the Company’s revenues, net income, cash flows and capital resources. There are also pending reimbursement cuts, as well as proposed reimbursement cuts including a reduction in the rental period on oxygen equipment that may negatively affect the Company’s business and prospects. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Trends, Events and Uncertainties – Reimbursement Changes and the Company’s Response.”

Reductions in reimbursement rates from third-party payors could have a material adverse effect on the Company’s revenues, net income, cash flows and capital resources.

     For the year ended December 31, 2007, the percentage of the Company’s revenues derived from Medicare, Medicaid and all other payors was 53%, 8%, and 39%, respectively. The revenues and profitability of the Company may be impacted by the efforts of payors to contain or reduce the costs of health care by delaying payments, lowering reimbursement rates, narrowing the scope of covered services, increasing case management review of services, and negotiating reduced contract pricing. Reductions in reimbursement levels under Medicare, Medicaid or private pay programs and any changes in applicable government regulations could have a material adverse effect on the Company’s revenues and net income. Additional Medicare reimbursement reductions have been proposed that would have a substantial and material adverse effect on the Company’s revenues, net income, cash flows and capital resources. 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 mix, revenue mix, or reimbursement levels, a change in which could have a material adverse effect on the Company’s revenues, net income, cash flows and capital resources. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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The Company’s substantial leverage could adversely affect its ability to grow or to withstand adverse business conditions.

     The Company maintains a significant amount of debt. The secured claim of the Lenders as of December 31, 2007 was $242.7 million. The principal balance of the Company’s long-term debt, which consists entirely of amounts owed to the Lenders, is due to be repaid in full August 1, 2009. The Company currently estimates that approximately $233 million will be due to the Lenders at that time. If the unfavorable conditions in the current debt market do not improve, the Company believes that refinancing of the debt may be difficult to achieve. Failure to timely refinance the secured debt would have a material adverse effect on the Company’s prospects. Required payments to the Lenders are detailed in “Management’s Discussion and Analysis – Liquidity and Capital Resources.” As a result of the amount of debt, a substantial portion of the Company’s cash flow from operations will be dedicated to servicing debt. The substantial leverage could adversely affect the Company’s ability to grow its business or to withstand adverse economic conditions, reimbursement changes or competitive pressures, and the inability to pay or refinance debt when due would have a material adverse effect on the Company. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”

Highland Capital Management, L.P. controls approximately 48% of the Company’s common stock and holds a majority of the Company’s $242.7 million secured debt, which may allow Highland to exert significant influence on certain aspects of our business.

     On April 13, 2007, Highland Capital Management, L.P. filed a Schedule 13D/A with the Securities and Exchange Commission reporting beneficial ownership of 8,437,164 shares of Company common stock, which represents approximately 48% of the outstanding shares of the Company. Highland also is believed to be the largest holder of the Company’s secured promissory note representing the Company’s $242.7 million secured debt. Highland could exert significant influence on all matters requiring shareholder approval including the election of directors and the approval of significant corporate transactions.

The Company is subject to extensive government regulation, and the Company’s inability to comply with existing or future laws, regulations or standards could have a material adverse effect on the Company’s operations, financial condition, business, or prospects.

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

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Because of reimbursement reductions, the Company must continue to find ways to grow revenues and reduce expenses in order to generate earnings and cash flow.

     The Company has implemented, and is currently implementing, a number of expense reduction initiatives in response to existing and proposed reimbursement reductions. As described in this report, reimbursement reductions proposed in the United States government’s proposed federal budget for fiscal year 2009, if enacted, would require the Company to alter significantly its business model and cost structure, as well as the services it provides to patients, in order to avoid substantial losses. Measures undertaken to reduce expenses by improving efficiency can have a negative impact on revenues, referrals, billing, collections and other aspects of the Company’s business, any of which can have a material adverse effect on the Company’s operations, financial condition, business, or prospects. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The Company has substantial accounts receivable, and increased bad debt expense or delays in collecting accounts receivable could have a material adverse effect on the Company’s cash flows and results of operations.

     The Company has substantial accounts receivable as evidenced by DSO, net of discontinued operations, of 57 days as of December 31, 2007. No assurances can be given that future bad debt expense will not increase above current operating levels as a result of difficulties associated with the Company’s billing activities and meeting payor documentation requirements and claim submission deadlines. Increased bad debt expense or delays in collecting accounts receivable could have a material adverse effect on cash flows and results of operations.

New healthcare legislation or other changes in the administration or interpretation of government health care programs or initiatives may have a material adverse effect on the Company.

     The health care industry continues to undergo dramatic changes influenced in large part by federal legislative initiatives. It is likely that new federal health care initiatives will continue to arise. The MMA and the DRA have had a material negative impact on the level of reimbursement. Furthermore, additional reductions have been proposed. There can be no assurance that these or other federal legislative and regulatory initiatives will not be adopted in the future. One or more of these initiatives could materially limit patient access to, or the Company’s reimbursement for, products and services provided by the Company. Some states are adopting health care programs and initiatives as a replacement for Medicaid. There can be no assurance that the adoption of such legislation or other changes in the administration or interpretation of government health care programs or initiatives will not have a material adverse effect on the Company. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Trends, Events, and Uncertainties – Reimbursement Changes and the Company’s Response.”

21

The Company depends on retaining and obtaining profitable managed care contracts, and the Company’s business may be materially adversely affected if it is unable to retain or obtain such managed care contracts.

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

The Company’s common stock trades on the over-the-counter bulletin board, which reduces the liquidity of an investment in the Company.

     Trading of the Company’s common stock under its current trading symbol, AHOM, is conducted on the over-the-counter bulletin board which may limit the Company’s ability to raise additional capital and the ability of shareholders to sell their shares.

Compliance with privacy regulations under HIPAA could result in significant costs to the Company and delays in its collection of accounts receivable.

     HIPAA Administrative Simplification requires all entities engaged in certain electronic transactions to meet specific standards to ensure the confidentiality and security of individually identifiable health information. In addition, HIPAA mandates the standardization of various types of electronic transactions and the codes and identifiers used for these transactions. While the Company has implemented all standards issued to date, including the standards for the National Provider Identifier, there are some state Medicaid programs that are not fully compliant with the electronic transaction standards which could result in delays in collections of accounts receivable.

     On February 16, 2006, the Department of Health and Human Services published the final rule relative to the enforcement of the HIPAA Administrative Simplification standards. Entities found to be in violation of an Administrative Simplification provision may be subject to a civil money penalty of not more than $100 for each violation or not more than $25,000 for identical violations during a calendar year. Prior to the imposition of a penalty, however, the Secretary will seek the cooperation of the entity in obtaining compliance and may provide technical assistance to help the entity comply voluntarily with the applicable Administrative Simplification provisions.

22

The Company is highly dependent upon its senior management. The Company’s historical financial results and reimbursement environment, among other factors, may limit the Company’s ability to attract and retain qualified personnel, which in turn could adversely affect profitability. 

The market in which the Company operates is highly competitive, and if the Company is unable to compete successfully, its business will be materially adversely affected.

     The home health care market is highly fragmented and competition varies significantly from market to market. There are relatively few barriers to entry in the local markets served by the Company, and it could encounter competition from new market entrants. In small and mid-size markets, the majority of the Company’s competition comes from local independent operators or hospital-based facilities. In larger markets, regional and national providers account for a significant portion of competition. Some of the Company’s present and potential competitors are significantly larger than the Company and have, or may obtain, greater financial and marketing resources than the Company.

The provision of healthcare services entails an inherent risk of liability, and the Company’s insurance may not be sufficient to effectively protect the Company from all claims.

     The provision of healthcare services entails an inherent risk of liability. Certain participants in the home healthcare industry may be subject to lawsuits that may involve large claims and significant defense costs. It is expected that the Company periodically will be subject to such suits as a result of the nature of its business. The Company currently maintains product and professional liability insurance intended to cover such claims in amounts which management believes are in keeping with industry standards. There can be no assurance that the Company will be able to obtain liability insurance coverage in the future on acceptable terms, if at all. There can be no assurance that claims in excess of the Company’s insurance coverage will not arise. A successful claim against the Company in excess of the Company’s insurance coverage could have a material adverse effect upon the operations, financial condition or prospects of the Company. Claims against the Company, regardless of their merit or eventual outcome, may also have a material adverse effect upon the Company’s ability to attract patients or to expand its business. In addition, the Company maintains a large deductible for its workers’ compensation, auto liability, commercial general and professional liability insurance. The Company is self-insured for its employee health insurance and is at risk for claims up to individual stop loss and aggregate stop loss amounts.

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ITEM 1B. UNRESOLVED STAFF COMMENTS

     None.

ITEM 2. PROPERTIES

     As of December 31, 2007, the Company leased space for its corporate headquarters in the Parklane Building, Maryland Farms Office Park, Brentwood, Tennessee. The Company entered into an amended lease effective April 5, 2006 that provided for 29,000 square feet of leased space. The amended lease has a base monthly rent of $45,000 and expires in July 2010.

     The Company owns a facility in Waterloo, Iowa, which consists of approximately 35,000 square feet and owns a 50% interest in its center in Little Rock, Arkansas, which consists of approximately 16,000 square feet.

     The Company leases the operating space required for its remaining home health care and billing centers. A typical center occupies between 1,500 and 5,000 square feet and generally combines office and warehouse space. Approximately one-half of the square footage of a typical center consists of warehouse space. Lease terms on most of the leased centers range from three to five years. Management believes that the Company’s owned and leased properties are adequate for its present needs and that suitable additional or replacement space will be available as required.

ITEM 3. LEGAL PROCEEDINGS

     A summary of the Company’s material legal proceedings is set forth in “Business – Legal Proceedings.”

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS

     None.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

     The Company’s common stock is currently traded in the over-the-counter market or, on application by broker-dealers, in the NASD’s Electronic Bulletin Board under the symbol AHOM or AHOM.OB. The following table sets forth representative bid quotations of the common stock for each quarter of calendar years 2007 and 2006. The following bid quotations reflect interdealer prices without retail mark-ups, mark-downs or commissions, and may not necessarily represent actual transactions. See “Business — Risk Factors – Liquidity.”

	Bid Quotations
Fiscal Period	High		Low
2007 1st Quarter	$	2.99	$	1.21
2007 2nd Quarter	$	3.21	$	2.25
2007 3rd Quarter	$	2.37	$	1.02
2007 4th Quarter	$	1.93	$	0.95
2006 1st Quarter	$	3.79	$	2.45
2006 2nd Quarter	$	3.50	$	1.30
2006 3rd Quarter	$	1.75	$	0.46
2006 4th Quarter	$	1.51	$	0.57

     On March 11, 2008, there were 1,402 holders of record of the common stock and the closing sale price for the common stock was $0.83 per share.

     The Company has not paid cash dividends on its common stock and anticipates that, for the foreseeable future, any earnings will be retained for use in its business or for debt service and no cash dividends will be paid. See – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”

     Information regarding the Company’s equity compensation plans is incorporated by reference to the Company’s definitive proxy statement (“Proxy Statement”) for its 2008 annual meeting of stockholders.

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     The following graph compares the cumulative total returns of the Company’s Common Stock with those of NASDAQ Market (U.S.) Index and the Home Health Care Services Group (SIC number 8082) Index, a peer group index. The peer group includes approximately 15 companies, excluding the Company.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among American HomePatient, Inc., The NASDAQ Composite Index
And SIC Code 8082

     The performance graph shown above and related information shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that the Company specifically incorporates it by reference into such a filing.

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ITEM 6. SELECTED FINANCIAL DATA

     The selected financial data below is derived from the Company’s financial statements and should be read in conjunction with the related financial statements. Medicare reimbursement reductions in 2004, 2005 and 2006, the bankruptcy filing in 2002, and the cumulative effect of a change in accounting principle in 2002 affect the comparability of the financial data presented.

     See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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	Year Ended December 31,
	2007			2006			2005			2004			2003
	(dollars in thousands, except per share data)
Income Statement Data:
Revenues	$	293,027		$	321,768		$	321,965		$	329,855		$	329,966
Cost of sales and related services		70,601			84,322			79,012			71,512			69,128
Cost of rentals and other revenues, including rental equipment depreciation expense		41,412			45,106			39,879			38,779			36,265
Operating expenses		140,028			150,559			153,468			161,940			172,150
Bad debt expense		8,164			10,771			9,396			10,652			10,360
General and administrative expenses		19,194			18,052			16,749			16,597			17,212
Depreciation, excluding rental equipment, and amortization		3,361			3,598			3,610			3,363			3,532
Interest expense (excluding post-petition interest), net		15,828			17,162			17,141			18,290			8,945
Other income, net		(2,249	)		(335	)		(365	)		(344	)		(708	)
Change of control expense		5,637			—			—			—			—
Total expenses		301,976			329,235			318,890			320,789			316,884
Earnings from unconsolidated joint ventures		(5,754	)		(5,373	)		(4,816	)		(4,751	)		(4,778	)
(Loss) income from continuing operations before reorganization items and income taxes		(3,195	)		(2,094	)		7,891			13,817			17,860
Reorganization items		—			291			384			658			4,082
Provision for income taxes		4,097			348			327			50			400
Net (loss) income from continuing operations	$	(7,292	)	$	(2,733	)	$	7,180		$	13,109		$	13,378
Income from discontinued operations, including gain on disposal of assets, net of tax		1,770			146			564			122			647
Net (loss) income	$	(5,522	)	$	(2,587	)	$	7,744		$	13,231		$	14,025
Basic (loss) income per common share — Continuing operations	$	(0.41	)	$	(0.16	)	$	0.42		$	0.79		$	0.82
Basic income per common share — Discontinued operations		0.10			0.01			0.03			0.01			0.04
Basic (loss) income per common share	$	(0.31	)	$	(0.15	)	$	0.45		$	0.80		$	0.86
Diluted (loss) income per common share — Continuing operations	$	(0.41	)	$	(0.16	)	$	0.40		$	0.77		$	0.70
Diluted income per common share — Discontinued operations		0.10			0.01			0.03			0.01			0.04
Diluted (loss) income per common share	$	(0.31	)	$	(0.15	)	$	0.43		$	0.78		$	0.74
Weighted average shares outstanding — basic		17,573,000			17,543,000			17,296,000			16,481,000			16,368,000
Weighted average shares outstanding — diluted		17,573,000			17,543,000			17,973,000			17,066,000			19,000,000

	Year Ended December 31,
	2007			2006			2005			2004			2003
	(dollars in thousands)
Balance Sheet Data:
Working capital	$	24,846		$	31,340		$	35,135		$	31,569		$	20,117
Total assets		270,128			276,671			287,634			283,064			284,040
Total debt and capital leases, including current portion		244,410			251,257			251,019			251,918			262,914
Shareholders’ deficit		(26,415	)		(21,316	)		(12,456	)		(20,729	)		(34,249	)

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

     The Company provides home health care services and products to patients through its 245 centers in 33 states. These services and products are primarily paid for by Medicare, Medicaid, and other third-party payors. As a result, prices for the Company’s products and services are set by the payors and not by the Company. Since the Company cannot affect pricing, it can improve operating results primarily by increasing revenues through increased volume of sales and rentals and by controlling expenses. The Company can also improve cash flow by limiting the amount of time that it takes to collect payment after delivering products and services. Key indicators of performance include:

     Sales and Rentals. Over the past three years the Company has increased its focus on sales and marketing efforts in an effort to improve revenues, though the Company’s efforts have produced mixed results. While growth has been achieved in certain respiratory product lines such as sleep therapy, other lines have not increased or have declined. See “Year Ended December 31, 2007 Compared to Year ended December 31, 2006 – Revenues” for a discussion of revenue decreases. Continuing to improve the Company’s sales and marketing efforts will be critical to the Company’s success. Management closely tracks overall increases and decreases in sales and rentals as well as increases and decreases by product-line and branch location and region. Management’s intent is to identify geographic or product line weaknesses and take corrective actions. Reductions in reimbursement levels can more than offset an increased volume of sales and rentals. See “Trends, Events, and Uncertainties – Reimbursement Changes and the Company’s Response.”

     Bad Debt Expense. Billing and collecting in the healthcare industry is extremely complex. Rigorous substantive and procedural standards are set by each third party payor, and failure to adhere to these standards can lead to non-payment, which can have a significant impact on the Company’s net income and cash flow. The Company measures bad debt as a percent of net sales and rentals, and management considers this percentage a key indicator in monitoring its billing and collection function. Bad debt expense as a percentage of net revenue decreased from 3.3% in 2006 to 2.8% in 2007. This decrease in bad debt expense as a percentage of net revenue is due to improved cash collections and a decrease in unbilled revenues.

     Cash Flow. The Company’s funding of day-to-day operations and all payments required under the Approved Plan will rely on cash flow and cash on hand. The Company currently does not have access to a revolving line of credit. The Approved Plan also obligates the Company to pay Excess Cash Flow (defined in the Approved Plan as cash in excess of $7.0 million at the end of the Company’s fiscal year) to creditors to reduce the Company’s debt. The nature of the Company’s business requires substantial capital expenditures in order to buy the equipment used to generate revenues. As a result, management views cash flow as particularly critical to the Company’s operations. The Company’s future liquidity will continue to be dependent upon the relative amounts of current assets (principally cash, accounts receivable, and inventories) and current liabilities (principally accounts payable and accrued expenses). Management attempts to

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monitor and improve cash flow in a number of ways, including inventory utilization analysis, cash flow forecasting, and accounts receivable collection. In that regard, the length of time that it takes to collect receivables can have a significant impact on the Company’s liquidity as described below in “Days Sales Outstanding.”

     Days Sales Outstanding. Days sales outstanding (“DSO”) is a tool used by management to assess collections and the consequential impact on cash flow. The Company calculates DSO by dividing net patient accounts receivable by the average daily revenue for the previous 90 days (excluding dispositions and acquisitions), net of bad debt expense. The Company attempts to minimize DSO by screening new patient cases for adequate sources of reimbursement and by providing complete and accurate claims data to relevant payor sources. The Company also monitors DSO trends for each of its branches and billing centers and for the Company in total as part of the management of the billing and collections process. An increase in DSO usually results from certain revenue management processes at the billing centers and/or branches not functioning at optimal levels or a slow-down in the timeliness of payment processing by payors. A decline in DSO usually results from process improvements or timelier payment processing by payors. Management uses DSO trends to monitor, evaluate and improve the performance of the billing centers. DSO, net of discontinued operations, decreased from 58 days at December 31, 2006 to 57 days at December 31, 2007 due to improved cash collections on current billings and improved timeliness in obtaining necessary billing documentation.

     Unbilled Revenues. Another key indicator of the Company’s receivable collection efforts is the amount of unbilled revenue (the amount of sales and rental revenues which have not yet been billed to the payor’s due to incomplete documentation or the receipt of the CMN). The amount of unbilled revenue was $6.7 million and $10.7 million for December 31, 2007 and December 31, 2006, respectively, net of valuation allowances. This decrease primarily is the result of improvements made in CMN procurement processes.

     Productivity and Profitability. In light of the reimbursement reductions affecting the Company over the past several years and the likelihood of continued reimbursement reductions in the future, management has placed significant emphasis on improving productivity and reducing costs over the past several years and will continue to do so going forward. Management considers many of the Company’s expenses to be either fixed costs or cost of goods sold, which are difficult to reduce or eliminate. As a result, management’s primary areas of focus for expense reduction and containment are through productivity improvements related to the Company’s branches and billing centers. These improvements have focused on centralization of certain functions previously residing at branches, consolidation of certain billing center functions, and reduction in costs associated with delivery of products and services to patients. Examples of recent centralization initiatives include the centralization of revenue qualification processes, the centralization of order processing, the establishment of patient service centers and a CPAP support center, and the centralization of pharmacy activities. Initiatives are also in place to improve asset utilization through a newly implemented asset management system, reduce capital expenditures, reduce bad debt expense and revenue deductions, reduce costs of delivery of products to patients through improved routing, and reduce facility costs through more effective utilization of leased space. Management utilizes a variety of monitoring tools and analyses to help identify and standardize best practices and to identify and correct deficiencies. Similarly, the Company monitors its

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business on a branch and product basis to identify opportunities to target growth or contraction. These analyses have led to the closure or consolidation of branches and to the emphasis on certain products and new sales initiatives. During 2007, the Company closed or consolidated 13 branch locations and opened 9 branch locations. The Company did not close or consolidate any billing centers in 2007. The Company did not exit any lines of business as a result of these 13 branch closures, and as such, they are not deemed discontinued operations. See “Trends, Events, and Uncertainties – Reimbursement Changes and the Company’s Response” for additional discussion.

     Discontinued Operations. Effective April 1, 2007, the Company sold the assets of its home nursing business located in Tallahassee, Florida to Amedisys Home Health, Inc. of Florida. The sales price was $3.1 million, of which $2.8 million was received in cash at closing, with the remainder to be received according to the terms of a promissory note. The Company recorded a gain of $3.0 million associated with this sale. The cash and note proceeds from this transaction were utilized to pay down long-term debt.

     Since the Company is exiting its home nursing line of business, the Company has presented the nursing business as discontinued operations in 2007, with comparable presentation for prior years.

     Change of Control. On April 13, 2007, Highland Capital Management, L.P. filed a Schedule 13D/A with the Securities and Exchange Commission reporting beneficial ownership of 8,437,164 shares of Company common stock, which represents approximately 48% of the outstanding shares of the Company as of that date. Under the terms of the employment agreement between the Company and Joseph F. Furlong, III, the Company’s chief executive officer, the acquisition by any person of more than 35% of the Company’s shares constitutes a change of control. Under Mr. Furlong’s employment agreement, this event gives Mr. Furlong the right to receive a lump sum payment if he or the Company terminates his employment within one year after the change of control. The Company accrued a liability for this potential payment in the second quarter of 2007 since the ultimate requirement to make this payment was outside of the Company’s control. As such, the Company recorded an expense of $6.6 million in the second quarter of 2007, which was shown as “change of control expense” in the consolidated statements of operations, and a liability in the amount of $6.9 million, which was reflected in other accrued expenses on the consolidated balance sheets. These items consisted of 300% of Mr. Furlong’s current year salary and maximum bonus, immediate vesting of all unvested options, the buyout of outstanding options, reimbursement of certain personal tax obligations associated with the lump sum payment, as well as payment of certain insurance for up to three years after termination, and office administrative expenses for up to one year after termination.

     The Company also established an irrevocable trust in the second quarter of 2007 to pay the various components of the change of control obligation. At December 31, 2007, the trust has a balance of $6.4 million and is reflected in prepaid expenses and other current assets on the consolidated balance sheets.

     For the remainder of 2007, the Company reduced the change of control expense and related liability by $1.0 million due to revaluation of the fair value of Mr. Furlong’s outstanding

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stock options as of December 31, 2007. This decrease in expense is the result of a decline in the market value of the Company’s common stock from June 30, 2007 to December 31, 2007.

     On December 21, 2007, Mr. Furlong’s employment agreement was amended. Under the terms of the amendment, Mr. Furlong received a $3.3 million lump sum payment on January 2, 2008 in order to induce him to continue his employment with the Company. This payment was made from the irrevocable trust and reduced the change of control liability. The payment is in lieu of certain amounts Mr. Furlong would otherwise be entitled to under the amended employment agreement as a result of the termination of his employment with the Company. The amendment also stipulates that all of Mr. Furlong’s stock options shall be deemed vested and exercisable as of January 2, 2008 and caps the potential buyout of outstanding options at $1.4 million. The $1.4 million shall be maintained in the irrevocable trust until these options expire or until 90 days after Mr. Furlong’s termination, whichever occurs first. In addition, the amendment stipulates the Company will pay for office administrative expenses for up to 6 months after termination, instead of up to one year as originally agreed.

Trends, Events, and Uncertainties

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

     The trends, events, and uncertainties set out in the remainder of this section have been identified by the Company as reasonably likely to materially affect the comparison of historical operating results reported herein to either other past period results or to future operating results.

     Reimbursement Changes and the Company’s Response. The Company regularly is faced with reimbursement reductions and the prospect of additional reimbursement cuts. The following reimbursement changes already enacted will further impact the Company in 2008 and beyond:

     Competitive Bidding: The Medicare Prescription Drug, Improvement and Modernization Act of 2003 froze reimbursement rates for certain durable medical equipment (“DME”) at those rates in effect on October 1, 2003. These reimbursement rates will remain in effect until the competitive bidding process establishes a single payment amount for those items, which amount must be less than the current fee schedule. Competitive bidding will be implemented in phases with ten of the largest metropolitan statistical areas (“MSAs”) included in the program in 2008, 80

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of the largest MSAs included in 2009, and additional areas after 2009. Suppliers who are successful in the bidding process will become contract suppliers for those items for which they submit winning bids. Multiple suppliers will be awarded contracts in each competitive bidding area (“CBA”), however the number of suppliers may be limited to the number needed to meet projected demand. With a few exceptions, only contract suppliers may bill Medicare for competitively-bid items in CBAs. However, rental agreements between beneficiaries and non-contract suppliers that existed prior to the effective date of competitive bidding in a CBA can be “grandfathered”. In this case, non-contract suppliers may continue to provide the items as a grandfathered supplier without participating in the competitive bidding program only as it relates to rental agreements in effect at the time competitive bidding is implemented in the CBA. In the first round of competitive bidding, grandfathered suppliers providing oxygen will be paid at the single payment amount as determined through the competitive bidding process for the CBA. All other rental items will be paid in accordance with the fee schedule for areas not included in competitive bidding. In future rounds of competitive bidding, grandfathered suppliers will be paid the single payment amount for all items.

     On April 2, 2007, the Department of Health and Human Services (“HHS”) announced the first 10 CBAs. The Company currently has 19 branch locations providing services within seven of the 10 CBAs. With the announcement of the first 10 CBAs, HHS also announced 10 categories of items that will be competitively bid, which include: oxygen supplies and equipment; standard power wheelchairs, scooters, and related accessories; complex rehabilitative power wheelchairs and related accessories; mail-order diabetic supplies; enteral nutrients, equipment, and supplies; Continuous Positive Airway Pressure (“CPAP”) devices, Respiratory Assist Devices (“RADs”), and related supplies and accessories; hospital beds and related accessories; Negative Pressure Wound Therapy (“NPWT”) pumps and related supplies and accessories; walkers and related accessories; and support surfaces (group 2 and 3 mattresses and overlays) in Miami and San Juan only.

     The bidding process for the first 10 CBAs began in May 2007 with a deadline for submitting bids of September 25, 2007. The Company submitted bids on a timely basis. CMS is expected to announce the winning suppliers in March 2008. The contract period for this first round of bidding is July 1, 2008 through June 30, 2011.

     In January 2008, CMS announced the additional 70 MSAs to be included in the second round of competitive bidding. Products included in the second round were also announced and are similar to those included in the first round, with the exception of mail order diabetic supplies, which will be subject to a national bid at a later date, and support surfaces which are not included in the second round. CMS expects to begin pre-bidding activities for the second round in the spring of 2008. The bidding process is expected to run for 60 days beginning in the summer of 2008. Specific dates have not been announced. The Company currently operates 51 branch locations in 40 of the 70 MSAs included in the second round.

     At this time, the outcome of the competitive bidding process is not known and therefore the Company is not able to estimate the financial impact of the competitive bidding process, but the impact could be material. The Company’s Medicare revenue associated with competitively

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bid product categories in the first round and the second round of competitive bidding is approximately 3% and 9% of the Company’s total revenue, respectively.

     Accreditation: The Secretary of the Department of Health and Human Services is required to establish and implement quality standards for suppliers of durable medical equipment, prosthetics, orthotics, and supplies. The Centers for Medicare and Medicaid Services (“CMS”) published the standards on its website on August 14, 2006. In order to continue to bill under Medicare Part B, DMEPOS suppliers will be required to meet these standards through an accreditation process outlined in the CMS final rule on accreditation issued August 18, 2006. In order to participate in the first round of competitive bidding, all suppliers were required to obtain accreditation by October 31, 2007. All of the Company’s branch locations were accredited by the Joint Commission prior to this date. However, the Company’s inhalation drug pharmacy was not accredited by the Joint Commission. On August 3, 2007, the Company’s inhalation drug pharmacy gained accreditation through the Accreditation Commission for Health Care (ACHC), which like the Joint Commission, is a deemed accreditation organization accepted by CMS. In addition, as of January 1, 2008, all of the Company’s branch locations transitioned from accreditation with the Joint Commission to accreditation with ACHC.

     In December of 2007, CMS announced that all existing suppliers must be accredited no later than September 30, 2009. New suppliers who submit applications to the National Supplier Clearinghouse (NSC) for a National Provider Identifier (NPI) prior to March 1, 2008 must be accredited before January 1, 2009. Suppliers who submit applications to the NSC for an NPI on or after March 1, 2008, must submit evidence of accreditation prior to the submission of the application. Failure to meet these deadlines could result in the revocation of the suppliers Medicare billing privileges. As all of the Company’s operations are accredited through ACHC, these deadlines are not expected to impact the Company’s operations.

     DRA Reimbursement Impact: The Deficit Reduction Act of 2005 (the “DRA”), which was signed into law on February 8, 2006, affects the Company’s reimbursement in a number of ways including:

• The DRA contains a provision that eliminated the Medicare capped rental methodology for certain items of durable medical equipment, including wheelchairs, beds, and respiratory assist devices. The DRA changes the rental period to thirteen months, at which time the rental payments stop and title to the equipment is transferred to the beneficiary. The effective date of the provision to eliminate the capped rental methodology applies to items for which the first rental month occurs on or after January 1, 2006 and, as a result, there was no impact to the Company’s revenue in 2006. The impact of this change will be realized over a period of several years which began in 2007. When fully phased in, the Company estimates that the annual impact of the elimination of the capped rental payment methodology will be a reduction in rental revenue of approximately $3.0 million, but this could be offset to some degree by additional maintenance and service revenue paid by Medicare to the Company, which the Company is not able to quantify at this time.

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• The DRA also contains a provision that limits the duration of monthly Medicare rental payments on oxygen equipment to 36 months. Prior to the DRA, Medicare provided indefinite monthly reimbursement for the rental of oxygen equipment as long as the patient needed the equipment and met medical qualifications. The effective date for the implementation of the 36 month rental cap for oxygen equipment was January 1, 2006. In the case of individuals who received oxygen equipment on or prior to December 31, 2005, the 36 month period began on January 1, 2006. Therefore, the transfer of title of oxygen equipment from the Company to the beneficiary will begin in 2009. The financial impact beginning in 2009 of the 36 month cap for oxygen equipment cannot be accurately estimated as the Company is not able to quantify additional revenue associated with maintenance and supplies that would partially offset the loss of rental revenue after the 36 month cap; however, such impact will be material.

• On August 3, 2006, CMS published a Proposed Rule to implement the changes required by the DRA relating to the payment for oxygen, oxygen equipment, and capped rental DME items. The rule, which became final November 9, 2006 (“DRA Implementation Rule”), establishes revised payment classes and reimbursement rates for oxygen and oxygen equipment effective January 1, 2007, including revised rates for concentrators, liquid and gas stationary systems, and portable liquid and gas equipment. The DRA Implementation Rule also establishes a reimbursement rate for portable oxygen generating equipment and changes regulations related to maintenance reimbursement and equipment replacement reimbursement. Under the DRA Implementation Rule, during the initial 36 months of rental, the reimbursement rate for concentrators and stationary liquid and gas systems is $198.40 per month for calendar years 2007 and 2008, $193.21 per month for 2009, and $189.39 per month for 2010. For liquid or gas portable equipment, the reimbursement rate is a $31.79 add-on per month from 2007 through 2010, and for oxygen generating portable equipment, the reimbursement rate is an add-on of $51.63 per month for 2007 through 2010. During 2006, the Company’s average Medicare reimbursement rate for concentrators and stationary equipment was $199.84 per month, with a portable add-on of $31.79 per month. Under the competitive bidding process, the single payment rate for oxygen in the 10 CBAs cannot exceed those established by the DRA.

     NPPV Changes: In the first quarter of 2006, CMS announced that non-invasive positive pressure ventilators (“NPPVs”) will no longer be considered an item requiring frequent and substantial servicing and therefore will no longer be rented for an indefinite period. As a result, rental payments for NPPVs will be capped at 13 months and the title to the equipment will transfer to the patient. The effective date for this reimbursement change was April 1, 2006, but CMS is allowing for a transition period for devices that were being rented by Medicare beneficiaries at that date. Therefore rental payments in the months prior to April 1, 2006 will not count toward the rental payment cap. As a result, the reduction in revenue associated with this reimbursement change began in 2007. The Company estimates that the annual impact of this reimbursement change will be a revenue reduction of approximately $0.6 million.

     Inhalation Drug Changes: Effective July 1, 2007 Xopenex was moved into the same reimbursement code as albuterol and the two drugs received a new blended reimbursement rate, which decreased the reimbursement for Xopenex and increased the reimbursement for albuterol.

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This new blended reimbursement rate is lower than the cost to acquire Xopenex and as a result, the Company no longer provides Xopenex to its patients except in certain isolated instances. The Medicare, Medicaid, and SCHIP Extension Act of 2007 (S 2499), which was signed by the President on December 29, 2007, among other things, implements HHS OIG recommendations to require CMS to adjust its Average Sales Price (ASP) calculation to use volume-weighted ASPs based on actual sales volume which could reduce reimbursement for certain drugs provided by the Company. The act also requires that the ASP for albuterol be calculated by itself rather than with Xopenex. The ASP for Xopenex, however, will continue to be calculated with albuterol. The implementation date for these changes is April 1, 2008. The Company cannot estimate the financial impact of these changes until CMS publishes the new quarterly reimbursement amounts, however, the Company believes such impact could be material.

     The following proposed changes, if enacted in their proposed or a modified form, could have a significant impact on the Company:

     Reduction in the Reimbursement for Oxygen Equipment: In September 2006, the Office of Inspector General of the Department of Health and Human Services issued a report entitled “Medicare Home Oxygen Equipment: Cost and Servicing.” This report recommended, among other things, that CMS work with Congress to reduce the current 36 month rental period for oxygen equipment and specifically noted the anticipated savings to the Medicare program if the rental period was capped at 13 months. Subsequently, CMS issued a response indicating agreement with this recommendation. The proposed budget of the United States Government for fiscal year 2009 includes a proposal to limit Medicare reimbursement of rental payments for most oxygen equipment to 13 months from the current 36 months as specified in the DRA. On August 1, 2007, the U.S. House of Representatives passed H.R. 3162, “The Children’s Health and Medicare Protection Act.” This legislation would increase funding for the State Children’s Health Insurance Plan (SCHIP) by $50 billion over five years. This legislation also would reduce the oxygen equipment rental period from 36 months to 18 months. On August 2, 2007, the U.S. Senate passed S 1893. This legislation would reauthorize SCHIP but unlike the House SCHIP reauthorization bill, the Senate bill did not contain any Medicare provisions. Compromise SCHIP legislation, which excluded any Medicare reductions, was submitted to the President and subsequently vetoed by the President on October 3, 2007. The House of Representatives failed to override this veto on two separate occasions.

     On December 29, 2007, the president signed the Medicare, Medicaid, and SCHIP Extension Act of 2007 (S 2499). This act postpones the mandated 10.1% physician reimbursement reduction scheduled to take effect January 1, 2008 until July 1, 2008. The act also provides for a 0.5% increase in physician reimbursement, also until July 1, 2008. The act also extends current SCHIP funding levels through March 31, 2009 in order for states to maintain their current enrollments. This act does not affect the 36-month rental period for oxygen or the monthly reimbursement levels for oxygen.

     As the postponement of the physician reimbursement reduction will expire on June 30, 2008, it is highly likely that this issue will again be addressed by Congress in its current session. The Company believes that it is possible that a reduction in the 36-month rental period for

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oxygen or a reduction in the monthly reimbursement for oxygen could be considered by Congress at that time.

     The Company cannot predict future reimbursement for oxygen equipment, but it believes that any significant decrease in the current 36 month rental period or reimbursement rate will have a substantial and material negative financial impact to the Company. Such a decrease may require the Company to alter significantly its business model and cost structure as well as limit or eliminate certain products or services currently provided to patients in order to avoid substantial losses. There can be no assurance that the Company could successfully manage these changes. Additionally, management believes that a drastic reduction in reimbursement for oxygen equipment would limit access to life-sustaining oxygen required by numerous Medicare beneficiaries.

     Surety Bond Proposal: CMS recently issued a proposed rule implementing section 4312 of the Balanced Budget Act of 1997, which would require all suppliers of durable medical equipment, prosthetics, orthotics and supplies, except those that are government operated, to obtain and retain a surety bond in the amount of $65,000. The proposed rule by CMS would require the Company to obtain a surety bond for each of its 245 branch locations billing Medicare using a unique National Provider Identifier number. CMS sought comments on this proposed rule and specifically requested comments related to establishing an exception to the surety bond requirement for large, publicly traded chain suppliers, such as American HomePatient. The Company submitted comments to CMS on September 27, 2007 in favor of an exception to the surety bond requirements on the basis that public companies are already subject to extensive scrutiny under the reporting requirements of the SEC and Sarbanes-Oxley Act of 2002, and are generally less likely to default on Medicare debts given their financial resources. On December 10, 2007, the Department of Health and Human Services (HHS) published its Semiannual Regulatory Agenda in the Federal Register. The Agenda states that HHS is to publish the final rule on the Surety Bond Requirement for Suppliers of Durable Medical Equipment, Prosthetics, Orthotics and Supplies by August of 2010. If the surety bond proposal were enacted and no exemption was included for large publicly traded chain suppliers, the Company would likely incur significant additional costs and would likely be required to provide significant cash collateral which could adversely affect its financial results. Additionally, in February 2008, a bill was introduced in the Senate to increase the surety bond requirement to $500,000. Industry representatives have contacted the Senators sponsoring this bill to express their concerns that the significant cost and cash collateral required for a surety bond of this magnitude would severely penalize law-abiding providers and could limit access of needed products and services to Medicare beneficiaries. Senators sponsoring this bill have agreed to reconsider the proposed increase in the surety bond requirement. The Company cannot predict the ultimate outcome of this legislation.

     Proposed Supplier and Quality Standards: In February of 2008, CMS published proposed supplier standards to address concerns about the easy entry into the Medicare program by unqualified and fraudulent providers. The proposed standards include, among other things, prohibition of contracting licensed services to other entities, requirements to maintain a minimum square footage for a business location, maintaining an operating business telephone number, a prohibition on the forwarding of telephone calls from the primary business location to

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another location, and a requirement for the business location to be open to the public a minimum of 30 hours per week. The proposed standards also include a requirement to maintain a minimum level of comprehensive liability insurance, a prohibition on directly soliciting patients, and a requirement to obtain oxygen only from state licensed oxygen suppliers. The comment period for the proposed supplier standards expires March 25, 2008. The Company plans to provide comments by the stated deadline. Certain of the proposed supplier standards, if enacted in the current form, could significantly increase the Company’s costs of providing services to patients. The Company cannot predict the ultimate outcome of these proposed standards.

     In February 2008, CMS also published proposed quality standards that are designed to improve the quality of service provided to Medicare beneficiaries. Many of the proposed quality standards include procedures and processes already performed by the Company. The comment period for the proposed quality standards expires March 18, 2008. The Company plans to provide comments by this date. The Company cannot predict the ultimate outcome of these proposed standards.

     Management is working to counter the adverse impact of the reimbursement reductions currently in effect as well as any future reimbursement reductions through a variety of initiatives designed to grow revenues. See “Overview — Revenue Growth” for a discussion of the Company’s initiatives to grow revenues. In addition, management will continue to be focused on evolving the Company’s business model to improve productivity and reduce costs. These efforts will particularly emphasize centralization and consolidation of functions. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Productivity and Profitability” for a discussion of the Company’s initiatives to improve productivity and reduce costs. The magnitude of the adverse impact that reimbursement reductions will have on the Company’s future operating results and financial condition will depend upon the success of the Company’s revenue growth and cost reduction initiatives. Nevertheless, the adverse effect of reimbursement reductions could be material in 2008 and beyond. See “Risk Factors.”

     Product Mix. The Company’s strategy for 2007 was to maintain a diversified offering of home health care services reflective of its current business mix with a strong emphasis on respiratory services, primarily oxygen and sleep-related products and services. For 2008, respiratory services will remain a primary focus along with enteral nutrition products. This emphasis could impact the overall product mix of the Company, which in turn could affect revenues and profitability.

Critical Accounting Policies and Estimates

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

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

     Revenue Recognition and Allowance for Doubtful Accounts. The Company provides credit for a substantial part of its non third-party reimbursed revenues and continually monitors the creditworthiness and collectibility of amounts due from its patients. Approximately 61% of the Company’s 2007 revenues are derived from participation in Medicare and state Medicaid programs. Amounts paid under these programs are generally based upon a fixed rate. Revenues are recorded at the expected reimbursement rates when the services are provided or when merchandise or equipment is delivered to patients. Revenues are recorded net of estimated adjustments for billing errors or other reimbursement adjustments. Although amounts earned under the Medicare and Medicaid programs are subject to review by such third-party payors, subsequent adjustments to reimbursements as a result of such reviews are historically insignificant as these reimbursements are based on fixed fee schedules. In the opinion of management, adequate provision has been made for any adjustment that may result from such reviews. Any differences between estimated settlements and final determinations are reflected as an adjustment to revenue in the period known.

     Sales revenues and related services include all product sales to patients and are derived from the sale of aerosol medications and respiratory therapy equipment, the provision of infusion therapies, the sale of home health care equipment and medical supplies, and the sale of supplies and the provision of services related to the delivery of these products. Sales revenues are recognized at the time of delivery and recorded at the expected payment amount based upon the type of product and the payor when the Company has obtained the properly completed Certificate for Medical Necessity (“CMN”) from the health care provider, when applicable. Rentals and other patient revenues are derived from the rental of equipment related to the provision of respiratory therapy, home health care equipment, and enteral pumps. All rentals of the equipment are provided by the Company on a month-to-month basis and revenue is recorded at the expected payment amount based upon the type of rental and the payor when the Company has obtained the properly completed CMN from the health care provider, when applicable. Certain pieces of equipment are subject to capped rental arrangements, whereby title to the equipment transfers to the patient at the end of the capped rental payment period.

     Once initial delivery of rental equipment is made to the patient, a monthly billing cycle is established based on the initial date of delivery. The Company recognizes rental revenue ratably over the monthly service period and defers revenue for the portion of the monthly bill which is unearned. The fixed monthly rental encompasses the rental of the product, delivery, set-up, instruction, maintenance, repairs, and providing backup systems when needed, and as such, no separate revenue is earned from the initial equipment delivery and setup process. Routine maintenance and servicing of the equipment is the responsibility of the Company for as long as the patient is renting the equipment.

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     Sales taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from revenues in the consolidated statements of operations.

     The Company recognizes revenues at the time services are performed or products are delivered. As such, a portion of patient receivables consists of unbilled revenue for which the Company has not obtained all of the necessary medical documentation required to produce a bill, but has provided the service or equipment. The Company calculates its allowance for doubtful accounts based upon the type of receivable (billed or unbilled) as well as the age of the receivable. As a receivable balance ages, an increasingly larger allowance is recorded for the receivable. All billed receivables over one year old and all unbilled receivables over 180 days old are fully reserved. Management believes that the recorded allowance for doubtful accounts is adequate, and that historical collections substantiate the percentages used in the allowance valuation process. However, the Company is subject to further loss to the extent uncollectible receivables exceed its allowance for doubtful accounts. If the Company were to experience a deterioration in the aging of its accounts receivable due to disruptions or a slow down in cash collections, the Company’s allowance for doubtful accounts and bad debt expense would likely increase from current levels. Conversely, an improvement in the Company’s cash collection trends and in its receivable aging would likely result in a decrease in both the allowance for doubtful accounts and bad debt expense.

     The Company’s allowance for doubtful accounts totaled approximately $11.8 million and $17.1 million as of December 31, 2007 and 2006, respectively.

     Included in the Company’s accounts receivable are amounts pending approval from third- party payors, primarily balances due from patients applying for Medicaid benefits for the first time. Since the vast majority of the Company’s receivables are for established patients and for patients already having coverage prior to receiving services, amounts pending third-party approval are immaterial.

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     The table below details an aging by payor of the Company’s gross patient accounts receivable as of December 31, 2007.

Gross Patient Accounts Receivable by Payor

(In thousands)

				Days Outstanding
						Unbilled &
						Open Orders										Unbilled		Unbilled						Unapplied
	Total			Current		0-90		31-60		61-90		91-120		121-180		91-180		>180		181-360		>360		Cash
Managed Care	$	14,903		$	5,141	$	984	$	2,733	$	1,469	$	953	$	1,151	$	213	$	109	$	1,780	$	370	$	—
Medicaid		5,297			1,414		522		974		607		343		396		172		123		561		185		—
Medicare		21,273			11,252		2,060		2,239		900		548		764		579		481		1,547		903		—
Other Payors		4,982			1,372		170		1,018		537		332		388		38		22		779		326		—
Private Pay		4,920			891		2		834		651		467		447		1		2		1,190		435		—
A/R Aged by Payor	$	51,375		$	20,070	$	3,738	$	7,798	$	4,164	$	2,643	$	3,146	$	1,003	$	737	$	5,857	$	2,219	$	—
Other Billed A/R		2,091			307		—		214		120		80		145		—		—		528		697		—
Other Unbilled A/R		3,172			—		3,120		—		—		—		—		23		29		—		—		—
Unapplied Cash		(267	)		—		—		—		—		—		—		—		—		—		—		(267	)
Total Aged A/R	$	56,371		$	20,377	$	6,858	$	8,012	$	4,284	$	2,723	$	3,291	$	1,026	$	766	$	6,385	$	2,916	$	(267	)

     Other billed accounts receivable in the table above is primarily comprised of accounts receivable tracked by billing systems that are unable to provide aging data by payor. Other unbilled accounts receivable is primarily comprised of open orders and manually accrued accounts receivable for which aging data by payor is not available.

     Inventory Valuation and Cost of Sales Recognition. Inventories represent certain equipment and supplies and are priced at the lower of cost (on a first-in, first-out basis) or market value. The Company recognizes cost of sales and relieves inventory on an interim basis using an estimated gross margin percentage, based upon the type of product sold and payor mix, and performs physical counts of inventory at each center on an annual basis. The Company records a valuation allowance for obsolete and slow moving items and for specific inventory. The Company is subject to loss for inventory adjustments in excess of the recorded inventory valuation allowance. The inventory valuation allowance was $0.6 million and $0.8 million at December 31, 2007 and 2006, respectively.

     Rental Equipment Valuation. Equipment is rented to patients on a month-to-month basis for use in their homes and is depreciated over the equipment’s estimated useful life. On an annual basis, the Company performs physical counts of rental equipment on hand at each branch and reconciles all recorded rental assets to internal billing reports. Any resulting adjustment for unlocated, damaged, or obsolete equipment is charged to rental equipment depreciation expense. Since rental equipment is maintained in the patient’s home, the Company is subject to loss resulting from lost equipment as well as losses for damaged, outdated, or obsolete equipment. Management records a valuation allowance for its estimated lost, damaged, outdated, or obsolete rental equipment based upon analytical data derived from the Company’s automated asset management system.

     Valuation of Long-lived Assets. Management evaluates the Company’s long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of

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an asset may not be recoverable. Management utilizes estimated undiscounted future cash flows to determine if an impairment exists. When this analysis indicates an impairment exists, the amount of loss is determined based upon a comparison of the estimated fair value with the carrying value of the asset. While management believes that the estimates of future cash flows are reasonable, different assumptions regarding such cash flows could materially affect the evaluations.

     Valuation of Goodwill and Other Intangible Assets. Goodwill represents the excess of cost over the fair value of net assets acquired. Goodwill and intangible assets with indefinite lives are required to be tested for impairment on an annual basis and when an event occurs or circumstances change such that it is reasonably possible that an impairment may exist. The Company selected September 30 as its annual testing date. Goodwill is tested for impairment by comparing the fair value of goodwill to the carrying value of goodwill. The fair value is determined using a combination of analyses which include discounted cash flow calculations, market multiples, and other market information. Key assumptions used in these estimates include projected operating results, discount rates, and peer market multiples.

     There was no impairment recognized as a result of the Company’s annual impairment testing as of September 2007.

     Self Insurance. Self-insurance accruals primarily represent the accrual for self-insurance or large deductible risks associated with workers’ compensation insurance, auto liability, commercial general and professional liability insurance. The Company is insured for workers’ compensation and auto liability but retains the first $250,000 of risk exposure for each claim. The Company did not maintain annual aggregate stop loss coverage for the years 2007, 2006, and 2005, as such coverage was not available. The Company’s liability includes known claims and an estimate of claims incurred but not yet reported. The estimated liability for workers’ compensation claims totaled approximately $3.1 million and $3.4 million as of December 31, 2007 and 2006, respectively. The estimated liability for auto claims totaled approximately $1.0 million and $0.7 million as of December 31, 2007 and 2006, respectively. The estimated total liability for commercial general and professional liability claims was $0.8 million and $1.1 million as of December 31, 2007 and 2006, respectively. The Company utilizes analyses prepared by a third-party administrator based on historical claims information to determine the required accrual and related expense associated with workers’ compensation, auto liability, commercial general and professional liability insurance. The Company records claims expense by plan year based on the lesser of the aggregate stop loss (if applicable) or the developed losses as calculated by the third-party administrator.

     The Company is also self-insured for health insurance for substantially all employees for the first $150,000 on a per person, per year basis. The Company maintained annual aggregate stop loss coverage of $8.8 million for 2007. The health insurance policies are limited to maximum lifetime reimbursements of $2.0 million per person for 2007, 2006, and 2005. The estimated liability for health insurance claims totaled approximately $0.9 million and $1.2 million as of December 31, 2007 and 2006, respectively. The Company reviews health insurance trends and payment history and maintains an accrual for incurred but unpaid reported claims and for incurred but not yet reported claims based upon its assessment of the lag time in

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reporting and paying claims. Judgments made by the Company include: assessing historical paid claims; average lags between the claims’ incurred dates, reported dates and paid dates; the frequency of claims; and the severity of claims.

     The Company is required to maintain cash collateral accounts with the insurance companies related to its self-insurance obligations. The Company maintained cash collateral balances of $6.0 million at December 31, 2007, related to its self-insured obligations, which is included in other assets.

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

RESULTS OF OPERATIONS

Summary of Statement of Operations Reporting

     The Company reports its revenues as follows: (i) sales and related services revenues; and (ii) rentals and other revenues. Sales and related services revenues are derived from the sale of aerosol medications and respiratory therapy equipment, the provision of infusion therapies, the sale of home health care equipment and medical supplies, and the sale of supplies and services related to the delivery of these products. Rentals and other revenues are derived from the rental of equipment related to the provision of respiratory therapies, home health care equipment, and enteral pumps. Cost of sales and related services includes the cost of equipment and drugs and related supplies sold to patients. Cost of rentals and other revenues includes the costs of oxygen and rental supplies, demurrage for leased oxygen cylinders, rent expense for leased equipment, and rental equipment depreciation expense and excludes delivery expenses and salaries associated with the rental set-up. Operating expenses include operating branch labor costs, delivery expenses, area management expenses, selling costs, occupancy costs, billing center costs, and other operating costs. General and administrative expenses include corporate and senior management expenses. The majority of the Company’s joint ventures are not consolidated for financial statement reporting purposes. Earnings from unconsolidated joint ventures with hospitals represent the Company’s equity in earnings from unconsolidated joint ventures and management and administrative fees from unconsolidated joint ventures.

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

	Year Ended December 31,
	2007			2006			2005
Revenues		100	%		100	%		100	%
Cost of sales and related services		24			26			25
Cost of rentals, including rental equipment depreciation		14			14			12
Operating expenses		48			47			48
Bad debt expense		3			3			3
General and administrative		7			6			5
Depreciation, excluding rental equipment, and amortization		1			1			1
Interest expense, net		5			5			5
Other income, net		(1	)		—			—
Change of control expense		2			—			—
Total expenses		103			102			99
Earnings from unconsolidated joint ventures		(2	)		(2	)		(1	)
(Loss) income from continuing operations before reorganization items and income taxes		(1	)		—			2
Reorganization items		—			—			—
Provision for income taxes		1			—			—
Net (loss) income from continuing operations		(2	)%		0	%		2	%
Operating income from discontinued operations, including gain on disposal, net of tax		1			—			—
Net (loss) income		(1	)%		0	%		2	%

Year Ended December 31, 2007 Compared to Year Ended December 31, 2006

     Revenues. Revenues decreased from $321.8 million in 2006 to $293.0 million in 2007, a decrease of $28.8 million, or 8.9%. A significant portion of this revenue decrease is due to a decrease in revenues associated with non-focus product lines such as non-respiratory durable medical equipment and infusion therapy. Also contributing to the decrease in revenues was the effect of Company initiatives implemented in late 2006 to improve patient co-pay collections and to provide appropriate service levels to patients. The Company believes most of the revenue lost as a result of these initiatives was unprofitable. The Company’s revenue was also negatively affected in 2007 by temporary disruptions in certain sales and marketing processes during the Company’s recent implementation of various operational initiatives, which have resulted in improved operating efficiencies and reduced costs. In addition, Medicare reimbursement reductions implemented in 2007 associated with the Deficit Reduction Act of 2005 decreased revenues in 2007 by approximately $4.6 million. The following is a discussion of the components of revenues:

     Sales and Related Services Revenues. Sales and related services revenues decreased from $134.6 million in 2006 to $122.2 million in 2007, a decrease of $12.4 million, or 9.2%. This decrease is primarily the result of a decrease in revenue associated with non-focus product lines and temporary disruptions in sales and marketing processes as described above.

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          Rental Revenues. Rental revenues decreased from $187.1 million in 2006 to $170.8 million in 2007, a decrease of $16.3 million, or 8.7%. This decrease is primarily the result of a decrease in revenue associated with non-focus product lines, a decrease in revenue associated with initiatives to improve patient co-pay collections and provide appropriate service levels to patients, temporary disruptions in sales and marketing processes, and the impact of 2007 reimbursement reductions, all of which are described above.

     Cost of Sales and Related Services. Cost of sales and related services decreased from $84.3 million in 2006 to $70.6 million in 2007, a decrease of $13.7 million, or 16.3%. As a percentage of revenues, cost of sales and related services decreased from 26.2% for 2006 to 24.1% for 2007. As a percentage of sales and related services revenues, cost of sales and related services decreased from 62.6% for 2006 to 57.7% for 2007. This decrease is primarily attributable to changes in product mix associated with inhalation drugs.

     Cost of Rental Revenues. Cost of rental revenues decreased from $45.1 million in 2006 to $41.4 million in 2007, a decrease of $3.7 million, or 8.2%. This decrease is primarily attributable to a decrease in oxygen purchases associated with a shift in oxygen product mix, partially offset by an increase in rental equipment depreciation associated with a decrease in depreciable lives of certain equipment affected by a decrease in the Medicare rental period.

     Operating Expenses. Operating expenses decreased from $150.6 million in 2006 to $140.0 million in 2007, a decrease of $10.6 million or 7.0%. The decrease is primarily the result of reduced personnel expenses associated with improved operating efficiencies. As a percentage of revenues, operating expenses were 46.8% and 47.8% for 2006 and 2007, respectively.

     Bad Debt Expense. Bad debt expense decreased from $10.8 million in 2006 to $8.2 million in 2007, a decrease of $2.6 million, or 24.1%. As a percentage of revenues, bad debt expense was 3.3% and 2.8% for 2006 and 2007, respectively. This decrease is due to improved cash collections and a decrease in unbilled revenue.

     General and Administrative Expenses. General and administrative expenses increased from $18.1 million in 2006 to $19.2 million in 2007, an increase of $1.1 million, or 6.1%. General and administrative expenses continue to be affected in the current year by increases in certain expenses associated with the implementation of enhancements to information systems and processes and additional centralization of field activities. General and administrative expenses were also affected in the current year by an increase in management incentive expense. As a percentage of revenues, general and administrative expenses were 5.6% and 6.6% for 2006 and 2007, respectively.

     Depreciation and Amortization. Depreciation (excluding rental equipment) and amortization expenses decreased from $3.6 million in 2006 to $3.4 million in 2007, a decrease of $0.2 million, or 5.6%. The decrease is primarily due to certain software licensing agreements becoming fully amortized in the first quarter of 2007.

     Interest Expense, Net. Interest expense, net, decreased from $17.2 million in 2006 to $15.8 million in 2007, a decrease of $1.4 million, or 8.1%. This decrease is attributable to a

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reduced debt balance and an increase in interest income on cash balances which is netted against interest expense.

     Other Income, Net. Other income, net, was $0.3 million for 2006 and $2.2 million for 2007. The increase is primarily due to income related to various life insurance polices and income related to services performed for one of the Company’s vendors in connection with a product recall associated with that vendor.

     Change of Control Expense. Change of control expense was $5.6 million in 2007. In April 2007 an investor acquired more than 35% of the Company’s common stock, which constituted a change of control under the terms of the employment agreement between the Company and Joseph F. Furlong, III, the Company’s chief executive officer. This change of control gave Mr. Furlong the right to receive a lump sum severance payment in the event he or the Company terminates his employment within one year after the change of control. In the second quarter of 2007, the Company initially recorded an expense of $6.6 million related to this potential liability, which includes the lump sum severance payment, expense related to the acceleration of options and the potential buyout of options, and reimbursement of certain taxes related to the payment. For the remainder of 2007, the Company reduced this expense and related liability by $1.0 million due to revaluation of the fair value of Mr. Furlong’s outstanding stock options. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — General — Change of Control” for additional discussion.

     Earnings from Unconsolidated Joint Ventures. Earnings from unconsolidated joint ventures were $5.4 million for 2006 and $5.8 million for 2007. This increase is due to improved earnings of several joint ventures.

     Provision for Income Taxes. The provision for income taxes was $0.3 million and $4.1 million for 2006 and 2007, respectively. The 2006 expense primarily relates to state income tax expense. The 2007 expense primarily relates to non-cash deferred state and federal income taxes associated with indefinite lived intangible assets and state income tax expense.

Year Ended December 31, 2006 Compared to Year Ended December 31, 2005

     Revenues. Revenues decreased from $322.0 million in 2005 to $321.8 million in 2006, a decrease of $0.2 million, or 0.1%. Medicare reimbursement reductions reduced revenues by approximately $6.6 million in 2006 compared to 2005. Without these reductions, revenues would have increased $6.4 million, or 2.0%. This revenue growth was primarily the result of internal growth associated with the Company’s respiratory-related product lines, including sleep therapy, oxygen, and inhalation drugs, partially offset by decreases in revenues associated with non-focus product lines, including certain durable medical equipment items and infusion therapy. Following is a discussion of the components of revenues:

          Sales and Related Services Revenues. Sales and related services revenues decreased from $135.1 million in 2005 to $134.6 million in 2006, a decrease of $0.5 million, or 0.4%. Medicare reimbursement reductions reduced sales and related services revenues by $5.0 million in

46

2006 compared to 2005. Without these reductions, sales and related services revenues would have increased $4.5 million, or 3.3%, compared to the prior year.

          Rentals and Other Revenues. Rentals and other revenues increased from $186.8 million in 2005 to $187.1 million in 2006, an increase of $0.3 million, or 0.2%. Medicare reimbursement reductions reduced rental revenues by approximately $1.6 million in 2006 compared to 2005. Without these reductions, rental revenues in 2006 would have increased $1.9 million, or 1.0%.

     Cost of Sales and Related Services. Cost of sales and related services increased from $79.0 million in 2005 to $84.3 million in 2006, an increase of $5.3 million, or 6.7%. As a percentage of revenues, cost of sales and related services increased from 24.5% for 2005 to 26.2% for 2006. As a percentage of sales and related services revenues, cost of sales and related services increased from 58.5% for 2005 to 62.6% for 2006. This increase was primarily attributable to reduced reimbursement and increased cost of sales of inhalation drugs associated with the Medicare Prescription Drug, Improvement, and Modernization Act of 2003.

     Cost of Rental Revenues. Cost of rental revenues increased from $39.9 million in 2005 to $45.1 million in 2006, an increase of $5.2 million, or 13.0%. This increase was primarily the result of a higher level of rental equipment depreciation. Rental equipment depreciation increased in 2006 due to growth in the Company’s oxygen and sleep-related revenues, additional depreciation associated with reductions in estimated useful lives of rental equipment affected by the DRA, and write-offs associated with the disposal or obsolescence of certain rental equipment assets in connection with the Company’s implementation of an automated asset tracking system for its rental equipment assets. As a percentage of revenues, cost of rental revenues increased from 12.4% in 2005 to 14.0% in 2006. As a percentage of rental revenues, cost of rental revenue increased from 21.3% in 2005 to 24.1% in 2006 due to the increase in rental equipment depreciation expense described above and a higher percentage of revenue associated with respiratory assist devices, which have a relatively short depreciable life.

     Operating Expenses. Operating expenses decreased from $153.5 million in 2005 to $150.6 million in 2006, a decrease of $2.9 million, or 1.9%. As a percentage of revenues, operating expenses decreased from 47.7% to 46.8% for 2005 and 2006, respectively. The decrease was primarily the result of the Company’s initiatives to improve operating efficiencies and reduce operating costs. The majority of the decrease in operating expenses occurred in the fourth quarter of 2006.

     Bad Debt Expense. Bad debt expense increased from $9.4 million in 2005 to $10.8 million in 2006, an increase of $1.4 million, or 14.9%. As a percentage of revenues, bad debt expense was 2.9% and 3.3% for 2005 and 2006, respectively. The increase in bad debt expense is due to a deterioration in the aging of accounts receivable in 2006 primarily in three of the Company’s 13 billing centers. The deterioration in aging at these three billing centers was primarily the result of processing issues.

     General and Administrative Expenses. General and administrative expenses increased from $16.8 million in 2005 to $18.1 million in 2006, an increase of $1.3 million, or 7.7%. As a

47

percentage of revenues, general and administrative expenses were 5.2% for 2005 and 5.6% for 2006. General and administrative expenses were affected in the current year by increases in certain expenses associated with the start up of an inhalation drug pharmacy operation, enhancements to information systems and processes, and additional centralization of field activities. Also, the Company’s adoption of SFAS 123R “Share-Based Payment” effective January 1, 2006, significantly contributed to the increase in general and administrative expenses.

     Depreciation and Amortization. Depreciation (excluding rental equipment) and amortization expenses remained constant at $3.6 million for 2005 and 2006.

     Interest Expense, Net. Interest expense, net, increased from $17.1 million in 2005 to $17.2 million in 2006, an increase of $0.1 million, or 0.6%. This increase was the result of interest associated with payments made in connection with the rejected warrants.

     Other Income, Net. Other income, net, was $0.4 million for 2005 compared to $0.3 million for 2006. Other income, net, primarily related to investment gains or losses associated with collateral interest in split dollar life insurance policies.

     Earnings from Joint Ventures. Earnings from joint ventures were $4.8 million for 2005 compared to $5.4 million for 2006, an increase of $0.6 million, or 13%. This increase was due to improved operating results of several of the Company’s joint ventures in 2006.

     Reorganization Items. During 2005 and 2006, the Company incurred certain expenses totaling $0.4 million and $0.3 million, respectively as a result of certain on-going legal issues associated with the Company’s Chapter 11 filing in 2002. These expenses are comprised of professional and other fees.

     Provision for Income Taxes. The provision for income taxes remained constant at $0.3 million for 2005 and 2006. The provision for income taxes recorded in 2005 and 2006 was for state and local taxes.

Liquidity and Capital Resources

     At December 31, 2007 the Company had current assets of $81.1 million and current liabilities of $56.3 million, resulting in working capital of $24.8 million and a current ratio of 1.4x as compared to a working capital of $31.3 million and a current ratio of 1.7x at December 31, 2006.

     Pursuant to the Approved Plan associated with the Company’s emergence from Bankruptcy in July 2003, the Company has secured long-term debt of $242.7 million, as evidenced by a promissory note to the Lenders that is secured by various security agreements.

     The Approved Plan provides that the $242.7 million secured debt matures on August 1, 2009 and that interest is payable monthly on the $242.7 million secured debt at a rate of 6.785% per annum. Payments of principal are payable annually on March 31 of each year in the amount of the Company’s Excess Cash Flow (defined in the Approved Plan as cash in excess of $7.0 million at the end of the Company’s fiscal year) for the previous fiscal year end. An estimated

48

prepayment is due on each previous September 30 in an amount equal to one-half of the anticipated March payment. The Company initially estimated having Excess Cash Flow at December 31, 2007 of $9.0 million. On October 1, 2007, the Company made a payment of $4.5 million, which is one-half of the anticipated March 2008 payment. The Company’s remaining Excess Cash Flow payment at December 31, 2007 was $4.0 million, which is payable March 31, 2008. The Company has also included $2.8 million in the current portion of long-term debt and capital leases at December 31, 2007. This amount represents the estimated pre-payment due on September 30, 2008 based on the Company’s current estimated cash balance at December 31, 2008.

     The Company has made all payments due under the Approved Plan as of December 31, 2007. As of December 31, 2007, the Lenders were owed $242.7 million. In the fourth quarter of 2006, the Company paid the warrant holders $0.8 million, plus $0.2 million of accrued interest, related to damages associated with rejection of warrants. All pre-petition unsecured claims were paid in full as of December 31, 2007.

     The Company’s funding of day-to-day operations going forward and all payments required under the Approved Plan will rely on cash flow and cash on hand because the Company currently does not have access to a revolving line of credit. As of December 31, 2007, the Company had unrestricted cash and cash equivalents of approximately $11.0 million.

     The Company’s principal cash requirements are for working capital, capital expenditures, leases, and debt service. The Company has met and believes it can continue to meet these cash requirements with existing cash balances, net cash provided by operations, and other available capital expenditure financing vehicles. Management’s goal is to generate sufficient cash to meet these requirements by increasing revenues, decreasing and controlling expenses, increasing productivity, and improving accounts receivable collections.

     Management’s cash flow projections and related operating plans indicate that the Company can operate on its existing cash and cash flow and make all payments provided for in the Approved Plan through 2008. Further Medicare reimbursement reductions could have a material adverse impact on the Company’s ability to meet its debt service requirements, required capital expenditures, or working capital requirements. As with all projections, there can be no guarantee that existing cash and cash flow will be sufficient. If existing cash and cash flow are not sufficient, there can be no assurance the Company will be able to obtain additional funds from other sources on terms acceptable to the Company or at all.

     The principal balance of the Company’s long-term debt, which consists entirely of amounts owed to the Lenders, is due to be repaid in full August 1, 2009. The Company currently estimates that approximately $233 million will be due to the Lenders at that time. If the unfavorable conditions in the current debt market do not improve, the Company believes that refinancing of the debt may be difficult to achieve. Failure to timely refinance the secured debt would have a material adverse effect on the Company’s prospects.

     The Company’s future liquidity will continue to be dependent upon the respective amounts of current assets (principally cash, accounts receivable and inventories) and current liabilities

49

(principally accounts payable and accrued expenses). In that regard, accounts receivable can have a significant impact on the Company’s liquidity. The Company has various types of accounts receivable, such as receivables from patients, contracts, and former owners of acquired businesses. The majority of the Company’s accounts receivable are patient receivables. Accounts receivable are generally outstanding for longer periods of time in the health care industry than many other industries because of requirements to provide third-party payors with additional information subsequent to billing and the time required by such payors to process claims. Certain accounts receivable frequently are outstanding for more than 90 days, particularly where the account receivable relates to services for a patient receiving a new medical therapy or covered by private insurance or Medicaid. Net patient accounts receivable were $44.5 million and $53.7 million at December 31, 2007 and December 31, 2006, respectively. DSO, net of discontinued operations, was approximately 57 days and 58 days at December 31, 2007 and December 31, 2006, respectively. The Company calculates DSO by dividing net patient accounts receivable by the average daily revenue for the previous 90 days (excluding dispositions and acquisitions), net of bad debt expense. The Company’s level of DSO and net patient receivables is affected by the extended time required to obtain necessary billing documentation.

     The Company’s liquidity and capital resources have been, and will continue to be, materially adversely impacted by the Medicare reimbursement reductions. See “Trends, Events, and Uncertainties — Reimbursement Changes and the Company’s Response” and “Risk Factors.”

     Net cash provided by operating activities decreased from $34.7 million in 2006 to $32.5 million in 2007, a decrease of $2.2 million. Net cash used in investing activities decreased from $25.2 million in 2006 to $15.6 million in 2007, a decrease of $9.6 million, which relates primarily to a decrease in additions to property and equipment due to an increase in capital leases for rental equipment, improved controls over purchasing of rental equipment, and improved vendor pricing, partially offset by proceeds related to sale of nursing facility. Net cash used in financing activities increased from $7.1 million in 2006 to $12.7 million in 2007, an increase of $5.6 million. The increase is primarily attributable to principal payments on long-term debt and capital leases.

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Contractual Obligations and Commercial Commitments

     The following is a tabular disclosure of all contractual obligations and commitments, including all off-balance sheet arrangements of the Company as of December 31, 2007:

											2012 &
	Total		2008		2009		2010		2011		thereafter
Long-term debt and capital leases	$	244,410,000	$	8,221,000	$	236,139,000	$	47,000	$	3,000	$	—
Interest on long-term debt and capital leases		25,869,000		16,507,000		9,361,000		1,000		—		—
Operating lease obligations		15,189,000		7,580,000		5,757,000		1,667,000		185,000		—
Total contractual cash obligations	$	285,468,000	$	32,308,000	$	251,257,000	$	1,715,000	$	188,000	$	—

     Long-term debt is comprised entirely of amounts owed to the Lenders. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.” In addition to the scheduled principal payments above, the Company is obligated to make Excess Cash Flow payments on the Lenders’ secured debt, as defined by the Approved Plan as cash in excess of $7.0 million at the end of the Company’s fiscal year. The Company’s remaining Excess Cash Flow payment at December 31, 2007 is $4.0 million, which is payable March 31, 2008. The Company has also included $2.8 million in the current portion of long-term debt and capital leases at December 31, 2007. This amount, which is included in the 2008 column in the table above, represents the estimated pre-payment due on September 30, 2008 based on the Company’s current estimated cash balance at December 31, 2008.

Interest on the long-term debt in the above table is calculated assuming excess cash flow payments and prepayments are made as discussed previously. Capital leases consist primarily of leases of office and computer equipment. Operating leases are noncancelable leases on certain vehicles and buildings.

At December 31, 2007, the Company had no off-balance sheet commitments or guarantees outstanding.

At December 31, 2007, the Company had one letter of credit for $250,000 which expires in January 2009. The letter of credit secures the Company’s obligations with respect to its professional liability insurance. The letter of credit is secured by a certificate of deposit, which is included in restricted cash.

Recently Issued Accounting Standards

     In December 2007, the FASB issued FASB Statement No. 141R, “Business Combinations” (Statement 141R) and FASB Statement No. 160, “Noncontrolling Interest in Consolidated Financial Statements — an amendment to ARB No. 51” (Statement 160). Statements

51

141R and 160 require most identifiable assets, liabilities, noncontrolling interests, and goodwill acquired in a business combination to be recorded at “full fair value” and require noncontrolling interests (previously referred to as minority interests) to be reported as a component of equity, which changes the accounting for transactions with noncontrolling interest holders. Both Statements are effective for periods beginning on or after December 15, 2008, and earlier adoption is prohibited. Statement 141R will be applied to business combinations occurring after the effective date. Statement 160 will be applied prospectively to all noncontrolling interests, including any that arose before the effective date. The Company is currently evaluating the impact of adopting Statement 141R and Statement 160 on its results of operations and financial position.

     In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment of FASB Statement No. 115” (Statement 159). Statement 159 gives the Company the irrevocable option to carry most financial assets and liabilities at fair value that are not currently required to be measured at fair value. If the fair value option is elected, changes in fair value would be recorded in earnings at each subsequent reporting date. SFAS 159 is effective for the Company’s 2008 fiscal year. The Company does not anticipate that the adoption of Statement 159 will have a material impact on its results of operations or financial position.

     In September 2006, the FASB issued FASB Statement No. 157, “Fair Value Measurement” (Statement 157). Statement 157 defines fair value, establishes a framework for the measurement of fair value, and enhances disclosures about fair value measurements. The Statement does not require any new fair value measures. The Statement is effective for fair value measures already required or permitted by other standards for fiscal years beginning after November 15, 2007. The Company is required to adopt Statement 157 beginning on January 1, 2008. Statement 157 is required to be applied prospectively, except for certain financial instruments. Any transition adjustment will be recognized as an adjustment to opening retained earnings in the year of adoption. In November 2007, the FASB proposed a one-year deferral of Statement 157’s fair-value measurement requirements for nonfinancial assets and liabilities that are not required or permitted to be measured at fair value on a recurring basis. The Company does not anticipate that the adoption of Statement 157 will have a material impact on its results of operations or financial position.

     In September 2006, the FASB’s Emerging Issues Task Force reached a consensus on Issue No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements (EITF 06-4). EITF 06-4 provides guidance on the accounting for arrangements in which an employer owns and controls the insurance policy and has agreed to share a portion of the cash surrender value and/or death benefit with the employee. This guidance requires an employer to record a postretirement benefit, in accordance with FASB Statement No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions” or APB Opinion No. 12, “Omnibus Opinion-1967,” if there is an agreement by the employer to share a portion of the proceeds of a life insurance policy with the employee during the postretirement period. This guidance is effective for reporting periods beginning after December 15, 2007. The Company does not anticipate that the adoption of EITF-06-4 will have a material impact on its results of operations or financial position.

52

Recently Adopted Accounting Standards

     Effective January 1, 2007 the Company adopted provisions of FIN 48. FIN 48 addresses the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a threshold of more-likely-than-not for recognition and derecognition of tax positions taken or expected to be taken in a tax return. FIN 48 also provides related guidance on measurement, classification, interest and penalties, and disclosure. See Note 14 of the Consolidated Financial Statements for the impact of adopting FIN 48 on the Company’s results of operations and financial position, which was not considered material.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Company is not subject to material interest rate sensitivity since the Approved Plan provides for a fixed interest rate for both the $242.7 million secured debt and the Company’s unsecured debt. Interest expense associated with other debts would not materially impact the Company as most of those interest rates are fixed. The Company does not own and is not a party to any market risk sensitive instruments.

     The Company has not experienced large increases in either the cost of supplies or operating expenses due to inflation. With reductions in reimbursement by government and private medical insurance programs and pressure to contain the costs of such programs, we bear the risk that reimbursement rates set by such programs will not keep pace with inflation.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     Financial statements are contained on pages F-59 through F-93 of this Report and are incorporated herein by reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

     None.

ITEM 9A(T). CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

     In an effort to ensure that the information the Company must disclose in its filings with the Securities and Exchange Commission is recorded, processed, summarized, and reported on a timely basis, the Company’s chief executive officer and chief financial officer have evaluated the effectiveness of the Company’s disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) and 15d-15(e), as of December 31, 2007. Based on such evaluation, such

53

officers have concluded that, as of December 31, 2007, the Company’s disclosure controls and procedures were effective in timely alerting them to information relating to the Company required to be disclosed in the Company’s periodic reports filed with the SEC.

Management’s Report on Internal Control Over Financial Reporting

     The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Securities Exchange Act of 1934. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Under the supervision and with the participation of management, including the CEO and the CFO, an evaluation was conducted of the effectiveness of the Company’s internal control over financial reporting based on criteria established in the Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management concluded that the Company maintained effective internal control over financial reporting as of December 31, 2007. This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

Changes in Internal Control Over Financial Reporting

     There has been no change in the Company’s internal control over financial reporting during the quarter ended December 31, 2007 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

     None.

54

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

     Information concerning directors, executive officers, and corporate governance of the Company is incorporated herein by reference to the Proxy Statement to be filed under Regulation 14A in connection with the 2008 annual meeting of stockholders of the Company.

ITEM 11. EXECUTIVE COMPENSATION

     Executive compensation information is incorporated herein by reference to the Proxy Statement to be filed under Regulation 14A in connection with the 2008 annual meeting of stockholders of the Company.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

     The equity compensation plan information and the security ownership of certain beneficial owners and management information are incorporated herein by reference to the Proxy Statement to be filed under Regulation 14A in connection with the 2008 annual meeting of stockholders of the Company.

ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

     Information concerning certain relationships, related transactions, and director independence, of the Company is incorporated herein by reference to the Proxy Statement to be filed under Regulation 14A in connection with the 2008 annual meeting of stockholders of the Company.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

     Information concerning the Company’s principal accounting fees and services is incorporated herein by reference to the Proxy Statement to be filed under Regulation 14A in connection with the 2008 annual meeting of stockholders of the Company.

55

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

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

	Form 10-K Pages
Financial Statements
Report of Independent Registered Public Accounting Firm — KPMG LLP	F-59
Consolidated Balance Sheets, at December 31, 2007 and 2006	F-60 — F-61
Consolidated Statements of Operations for the Years Ended December 31, 2007, 2006, and 2005	F-62
Consolidated Statements of Shareholders’ Deficit and Comprehensive Income (Loss) for the Years Ended December 31, 2007, 2006, and 2005	F-63
Consolidated Statements of Cash Flows for the Years Ended December 31, 2007, 2006, and 2005	F-64 — F-65
Notes to Consolidated Financial Statements	F-66 — F-93
Financial Statement Schedules
Schedule I Condensed Financial Information of Registrant(1)
Schedule II Valuation and Qualifying Accounts	S-1
Schedule III Real Estate and Accumulated Depreciation(2)
Schedule IV Mortgage Loans on Real Estate(2)
Schedule V Supplemental Information Concerning Property-Casualty Insurance Operations(2)

(1)	Omitted because test for inclusion was not met.
(2)	Omitted because schedule not applicable to Company.

Exhibits

     The Exhibits filed as part of the Report on Form 10-K are listed in the Index to Exhibits immediately following the financial statement schedules.

56

     Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

AMERICAN HOMEPATIENT, INC.

/s/ JOSEPH F. FURLONG, III

Joseph F. Furlong, III, President,

Chief Executive Officer and Director

/s/ STEPHEN L. CLANTON

Stephen L. Clanton

Chief Financial Officer

/s/ ROBERT L. FRINGER

Robert L. Fringer

Principal Accounting Officer

     Date: March 12, 2008

57

     Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

/s/ Henry T. Blackstock	Director	March 12, 2008
Henry T. Blackstock
/s/ Joseph F. Furlong, III	Director, President,	March 12, 2008
Joseph F. Furlong, III	and Chief Executive Officer
/s/ Donald R. Millard	Director	March 12, 2008
Donald R. Millard
/s/ William C. O’Neil	Director	March 12, 2008
William C. O’Neil
/s/ W. Wayne Woody	Director	March 12, 2008
W. Wayne Woody

58

American HomePatient, Inc. and Subsidiaries

Consolidated Financial Statements
As of December 31, 2007 and 2006 and for each of the years in the three year period ended December 31, 2007
Together with Reports of Independent Registered Public Accounting Firms

Report of Independent Registered Public Accounting Firm

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

We have audited the accompanying consolidated balance sheets of American HomePatient, Inc. and subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of operations, stockholders’ deficit and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2007. In connection with our audits of the consolidated financial statements, we have also audited financial statement Schedule II – Valuation and Qualifying Accounts as of December 31, 2007 and 2006 and for each of the years in the three-year period ended December 31, 2007. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of American HomePatient, Inc. and subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 2 to the consolidated financial statements, effective January 1, 2006, the Company adopted the fair value method of accounting for stock-based compensation as required by Statement of Financial Accounting Standards No. 123R, Share-Based Payment. Also as discussed in Note 12 to the consolidated financial statements, the Company changed its method of quantifying errors in 2006 to conform to Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements.

/s/ KPMG LLP

Nashville, Tennessee
March 12, 2008

F -59

AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2007 AND 2006

	2007			2006
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	11,018,000		$	6,786,000
Restricted cash		250,000			650,000
Accounts receivable, less allowance for doubtful accounts of $11,822,000 and $17,076,000, respectively		45,142,000			54,314,000
Inventories, net of inventory valuation allowances of $639,000 and $792,000, respectively		11,616,000			12,288,000
Prepaid expenses and other current assets		13,099,000			4,430,000
Total current assets		81,125,000			78,468,000
Property and equipment		151,970,000			163,666,000
Less accumulated depreciation and amortization		(111,239,000	)		(112,255,000	)
Property and equipment, net		40,731,000			51,411,000
Goodwill		122,093,000			121,834,000
Investment in joint ventures		8,447,000			8,691,000
Other assets		17,732,000			16,267,000
Total other assets		148,272,000			146,792,000
TOTAL ASSETS	$	270,128,000		$	276,671,000

(Continued)

F -60

AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2007 AND 2006

(Continued)

	2007			2006
LIABILITIES AND SHAREHOLDERS’ DEFICIT
CURRENT LIABILITIES:
Current portion of long-term debt and capital leases	$	8,221,000		$	1,063,000
Accounts payable		16,558,000			19,345,000
Other payables		1,092,000			1,304,000
Short-term notes payable		274,000			248,000
Deferred revenue		6,265,000			7,097,000
Accrued expenses:
Payroll and related benefits		9,151,000			8,706,000
Insurance, including self-insurance accruals		5,778,000			6,246,000
Other		8,940,000			3,119,000
Total current liabilities		56,279,000			47,128,000
NONCURRENT LIABILITIES:
Long-term debt and capital leases, less current portion		236,189,000			250,194,000
Deferred tax liability		3,474,000			—
Other noncurrent liabilities		51,000			47,000
Total noncurrent liabilities		239,714,000			250,241,000
Total liabilities		295,993,000			297,369,000
MINORITY INTEREST		550,000			618,000
SHAREHOLDERS’ DEFICIT
Preferred stock, $.01 par value; authorized 5,000,000 shares; none issued and outstanding		—			—
Common stock, $.01 par value; authorized 35,000,000 shares; issued and outstanding, 17,573,000 shares		176,000			176,000
Additional paid-in capital		175,506,000			175,083,000
Accumulated deficit		(202,097,000	)		(196,575,000	)
Total shareholders’ deficit		(26,415,000	)		(21,316,000	)
TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT	$	270,128,000		$	276,671,000

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

F -61

AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005

	2007			2006			2005
REVENUES:
Sales and related service revenues, net	$	122,274,000		$	134,648,000		$	135,116,000
Rental revenues, net		170,753,000			187,120,000			186,849,000
Total revenues, net		293,027,000			321,768,000			321,965,000
EXPENSES:
Cost of sales and related services		70,601,000			84,322,000			79,012,000
Cost of rentals and other revenues, including rental equipment depreciation of $31,055,000, 29,851,000, and $24,307,000, respectively		41,412,000			45,106,000			39,879,000
Operating expenses		140,028,000			150,559,000			153,468,000
Bad debt expense		8,164,000			10,771,000			9,396,000
General and administrative		19,194,000			18,052,000			16,749,000
Depreciation, excluding rental equipment, and amortization		3,361,000			3,598,000			3,610,000
Interest expense, net		15,828,000			17,162,000			17,141,000
Other income, net		(2,249,000	)		(335,000	)		(365,000	)
Change of control expense		5,637,000			—			—
Total expenses		301,976,000			329,235,000			318,890,000
Earnings from unconsolidated joint ventures		5,754,000			5,373,000			4,816,000
(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE REORGANIZATION ITEMS AND INCOME TAXES		(3,195,000	)		(2,094,000	)		7,891,000
Reorganization expense		—			291,000			384,000
(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		(3,195,000	)		(2,385,000	)		7,507,000
Provision for income taxes		4,097,000			348,000			327,000
NET (LOSS) INCOME FROM CONTINUING OPERATIONS	$	(7,292,000	)	$	(2,733,000	)	$	7,180,000
DISCONTINUED OPERATIONS:
Income from discontinued operations, including gain on disposal of assets of $3,001,000 in 2007, net of tax		1,770,000			146,000			564,000
NET (LOSS) INCOME	$	(5,522,000	)	$	(2,587,000	)	$	7,744,000
NET (LOSS) INCOME PER COMMON SHARE — BASIC
(Loss) income from continuing operations	$	(0.41	)	$	(0.16	)	$	0.42
Income from discontinued operations		0.10			0.01			0.03
NET (LOSS) INCOME PER COMMON SHARE — BASIC		(0.31	)		(0.15	)		0.45
NET (LOSS) INCOME PER COMMON SHARE — DILUTED
(Loss) income from continuing operations	$	(0.41	)	$	(0.16	)	$	0.40
Income from discontinued operations		0.10			0.01			0.03
NET (LOSS) INCOME PER COMMON SHARE — DILUTED		(0.31	)		(0.15	)		0.43
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
- Basic		17,573,000			17,543,000			17,296,000
- Diluted		17,573,000			17,543,000			17,973,000

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

F -62

AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT AND
COMPREHENSIVE INCOME (LOSS)

FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005

	Common Stock				Additional			Accumulated
	Shares		Amount		paid-in Capital			Deficit			Total
BALANCE, December 31, 2004		17,047,000	$	170,000	$	173,588,000		$	(194,487,000	)	$	(20,729,000	)
Issuance of shares through exercise of employee stock options including tax benefits		341,000		4,000		525,000			—			529,000
Net income and comprehensive income		—		—		—			7,744,000			7,744,000
BALANCE, December 31, 2005		17,388,000		174,000		174,113,000			(186,743,000	)		(12,456,000	)
SAB 108 cumulative adjustment		—		—		—			(7,245,000	)		(7,245,000	)
Issuance of shares through exercise of employee stock options including tax benefits		185,000		2,000		342,000			—			344,000
Non-cash compensation expense for stock options		—		—		628,000			—			628,000
Net loss and comprehensive loss		—		—		—			(2,587,000	)		(2,587,000	)
BALANCE, December 31, 2006		17,573,000		176,000		175,083,000			(196,575,000	)		(21,316,000	)
Non-cash compensation expense for stock options		—		—		698,000			—			698,000
Non-cash change of control expense		—		—		(275,000	)		—			(275,000	)
Net loss and comprehensive loss		—		—		—			(5,522,000	)		(5,522,000	)
BALANCE, December 31, 2007		17,573,000	$	176,000	$	175,506,000		$	(202,097,000	)	$	(26,415,000	)

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

F -63

AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005

	2007			2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income	$	(5,522,000	)	$	(2,587,000	)	$	7,744,000
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Change of control expense		5,637,000			—			—
Gain on sale of nursing agency		(3,001,000	)		—			—
Deferred tax expense		3,474,000			—			—
Depreciation and amortization		34,440,000			33,487,000			27,952,000
Bad debt expense		9,240,000			10,829,000			9,438,000
Stock compensation expense		698,000			628,000			—
Equity in earnings of unconsolidated joint ventures		(3,852,000	)		(3,495,000	)		(3,003,000	)
Minority interest		390,000			421,000			417,000
Reorganization items		—			291,000			384,000
Reorganization items paid		—			(296,000	)		(437,000	)
Change in assets and liabilities, net of effects of acquisitions and dispositions:
Restricted cash		400,000			—			—
Accounts receivable		87,000			(9,249,000	)		(13,385,000	)
Inventories		691,000			1,909,000			1,750,000
Prepaid expenses and other current assets		(8,669,000	)		4,244,000			(2,313,000	)
Deferred revenue		(832,000	)		(148,000	)		—
Accounts payable, other payables and accrued expenses		(3,048,000	)		(3,123,000	)		(973,000	)
Other assets and liabilities		(1,724,000	)		(1,185,000	)		(4,069,000	)
Due to unconsolidated joint ventures, net		4,096,000			2,932,000			1,573,000
Net cash provided by operating activities		32,505,000			34,658,000			25,078,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment, net		(17,968,000	)		(25,189,000	)		(25,722,000	)
Proceeds from sale of nursing agency, net		2,757,000			—			—
Cash paid for acquisitions		(407,000	)		—			—
Net cash used in investing activities	$	(15,618,000	)	$	(25,189,000	)	$	(25,722,000	)

(Continued)

F -64

AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005

(Continued)

	2007			2006			2005
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to minority interest owners	$	(458,000	)	$	(438,000	)	$	(316,000	)
Proceeds from exercise of employee stock options		—			457,000			529,000
Principal payments on long-term debt and capital leases		(12,223,000	)		(743,000	)		(1,039,000	)
Proceeds (principal payments) on short-term note payable		26,000			(3,557,000	)		142,000
Payment for OIG settlement		—			(2,000,000	)		—
Payment of warrants		—			(846,000	)		—
Net cash used in financing activities		(12,655,000	)		(7,127,000	)		(684,000	)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		4,232,000			2,342,000			(1,328,000	)
CASH AND CASH EQUIVALENTS, beginning of year		6,786,000			4,444,000			5,772,000
CASH AND CASH EQUIVALENTS, end of year	$	11,018,000		$	6,786,000		$	4,444,000
SUPPLEMENTAL INFORMATION:
Cash payments of interest	$	16,884,000		$	18,304,000		$	17,498,000
Cash payments of income taxes	$	610,000		$	569,000		$	465,000
Non-Cash Activity:
Capital leases entered into for property and equipment and changes in accounts payable related to purchases of property and equipment	$	5,311,000		$	1,551,000		$	140,000
Write-off of related notes receivable and notes payable	$	—		$	570,000		$	—
Change of control:
Other liabilities	$	5,912,000		$	—		$	—
Additional paid-in capital	$	(275,000	)	$	—		$	—
Supplemental Disclosure of Investing Activities:
Disposition:
Gain on sale	$	3,001,000		$	—		$	—
Inventories sold		16,000			—			—
Property and equipment, net, sold		50,000			—			—
Promissory note received from sale of nursing agency		(310,000	)		—			—
Proceeds from sale	$	2,757,000		$	—		$	—
Acquisition:
Rental equipment acquired	$	113,000		$	—		$	—
Inventory acquired		35,000			—			—
Goodwill acquired		259,000			—			—
Cash paid for acquisition	$	407,000		$	—		$	—

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

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AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005

1.	ORGANIZATION AND BACKGROUND
	American HomePatient, Inc. and subsidiaries (the “Company” or “American HomePatient”) 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. These services and products are paid for primarily by Medicare, Medicaid, and other third-party payors. As of December 31, 2007, the Company provides these services to patients, primarily in the home, through 245 centers in 33 states.
2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
	Consolidation
	The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Investments in 50% owned joint ventures are accounted for using the equity method, and the results of 70% owned joint ventures are consolidated in the accompanying consolidated financial statements.
	In addition, the Company evaluates its relationships with other entities to identify whether they are variable interest entities as defined by Financial Accounting Standards Board (“FASB”) Interpretation No. 46 (R) Consolidation of Variable Interest Entities (“FIN 46 R”) and to assess whether it is the primary beneficiary of such entities. If the determination is made that the Company is the primary beneficiary, then that entity is included in the consolidated financial statements in accordance with FIN 46 (R). The Company has not identified any variable interest entities at December 31, 2007 or 2006, for which consolidation is required.
	Revenues
	The Company’s principal business is to provide home health care services and products to patients, primarily in the home. Approximately 61% of the Company’s revenues in 2007, 2006 and 2005 are from participation in Medicare and state Medicaid programs. Amounts paid under these programs are generally based upon fixed rates. Revenues are recorded at the expected reimbursement rates when the services are provided, merchandise delivered or equipment rented to patients. Revenues are recorded at net realizable amounts estimated to be paid by customers and third-party payors. Although amounts earned under the Medicare and Medicaid programs are subject to review by such third-party payors, subsequent adjustments to reimbursements as a result of such reviews are historically insignificant as these reimbursements are based on fixed fee schedules. In the opinion of management, adequate provision has been made for any adjustment that may result from such reviews. Any differences between estimated settlements and final determinations are reflected as a reduction to revenue in the period known.
	Sales revenues and related services include all product sales to patients and are derived from the sale of aerosol medications and respiratory therapy equipment, the provision of infusion therapies, the sale of home health care equipment and medical supplies, and the sale of supplies and the provision of services related to the delivery of these products. Sales revenues are recognized at the time of delivery and recorded at the expected payment amount based upon the type of product and the payor when the Company has obtained the properly completed Certificate for Medical Necessity (“CMN”) from the health care provider, when applicable. Rentals and other patient revenues are derived from the rental of equipment related to the provision of respiratory therapy, home health care equipment, and enteral pumps. All rentals of the equipment are provided by the Company on a month-to-month basis and revenue is recorded at the

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expected payment amount based upon the type of rental and the payor when the Company has obtained the properly completed CMN from the health care provider, when applicable. Certain pieces of equipment are subject to capped rental arrangements, whereby title to the equipment transfers to the patient at the end of the capped rental payment period.

Once initial delivery of rental equipment is made to the patient, a monthly billing cycle is established based on the initial date of delivery. The Company recognizes rental revenue ratably over the monthly service period and defers revenue for the portion of the monthly bill which is unearned. The fixed monthly rental encompasses the rental of the product, delivery, set-up, instruction, maintenance, repairs, and providing backup systems when needed, and as such, no separate revenue is earned from the initial equipment delivery and setup process. Routine maintenance and servicing of the equipment is the responsibility of the Company for as long as the patient is renting the equipment.

Sales taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from revenues in the consolidated statements of operations.

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

	Year Ended December 31,
	2007			2006			2005
Home respiratory therapy services		78	%		75	%		73	%
Home infusion therapy services		11			12			12
Home medical equipment and home health supplies		11			13			15
Total		100	%		100	%		100	%

Cash Equivalents

Cash equivalents at December 31, 2007 and 2006 consist of overnight repurchase agreements with an original term of less than three months. For the purpose of the consolidated statements of cash flows, the Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents.

Restricted Cash

Restricted cash at December 31, 2007 consists of one certificate of deposit, and at December 31, 2006 consists of two certificates of deposit, which are used as collateral for letters of credit associated with the Company’s professional liability insurance.

Accounts Receivable

The Company provides credit for a substantial portion of its non third-party reimbursed revenues and continually monitors the credit worthiness and collectibility of amounts due from its patients. The Company recognizes revenues at the time services are performed or products delivered. A portion of patient receivables consists of unbilled receivables for which the Company has not obtained all of the necessary medical documentation, but has provided the service or equipment. The Company determines its allowance for doubtful accounts based upon the type of receivable (billed or unbilled) as well as the age of the receivable. As a receivable balance ages, an increasingly larger allowance is recorded for the receivable. A 100% valuation allowance is provided for all billed receivables over one year old and all unbilled receivables over 180 days old. Historical collections substantiate the percentages of aged receivables for which an allowance is established. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance sheet credit exposure related to its customers.

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Inventories

Inventories represent goods and supplies and are priced at the lower of cost (on a first-in, first-out basis) or market value. The Company recognizes cost of sales and relieves inventory at estimated amounts on an interim basis based upon the type of product sold and payor mix, and performs physical counts of inventory at each center on an annual basis. Any resulting adjustment from these physical counts is charged to cost of sales. The allowance established by management for the valuation of inventory consists of an allowance for obsolete and slow moving items and for specific inventory. The valuation allowance is based on a percentage for specifically identified inventory items and a general percentage of inventory.

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets at December 31, 2007 and 2006 are primarily comprised of prepaid insurance premiums and include other deposits from which the Company expects to benefit within the next year. At December 31, 2007 and 2006, prepaid insurance premiums comprised $3,492,000 and $1,422,000 of prepaid expenses and other current assets, respectively.

Property and Equipment

Property and equipment are stated at cost and are depreciated or amortized primarily using the straight-line method over the estimated useful lives of the assets for financial reporting purposes and the accelerated cost recovery method for income tax reporting purposes. Assets under capital leases and leasehold improvements under operating leases are amortized and depreciated over the lesser of their estimated useful life or the base term of the lease for financial reporting purposes. The estimated useful lives are as follows: buildings and improvements, 25 years; rental equipment, 18 months to 5 years; furniture, fixtures and equipment, 4-7 years; leasehold improvements, 3-5 years; and delivery equipment, 3 years.

Equipment is rented to patients on a month-to-month basis for use in their homes and is depreciated over the equipment’s estimated useful life to the Company. On an annual basis the Company performs physical counts of rental equipment on hand at each branch and reconciles all recorded rental assets to internal billing reports. Any resulting adjustment for unlocated, damaged, or obsolete equipment is charged to rental equipment depreciation expense. Since rental equipment is maintained in the patient’s home, the Company is subject to loss resulting from lost equipment as well as losses for damaged, outdated, or obsolete equipment. Management records a valuation allowance for its estimated lost, damaged, outdated, or obsolete rental equipment based upon analytical data derived from the Company’s automated asset management system.

Maintenance and repairs are charged to expense as incurred, and major betterments and improvements are capitalized. The cost and accumulated depreciation of assets sold or otherwise disposed of are removed and the resulting gain or loss is reflected in the consolidated statements of operations.

Property and equipment obtained through purchase acquisitions are stated at their estimated fair value determined on their respective dates of acquisition.

Impairment of Long-Lived Assets

Long-lived assets, such as property and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount in which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets

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and liabilities of a disposal group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet.

Goodwill and Other Intangible Assets

Goodwill represents the excess of costs over fair value of assets of businesses acquired. Intangible assets with finite useful lives are amortized, and goodwill and intangible assets with indefinite lives are not amortized. Goodwill is tested annually for impairment and more frequently if events and circumstances indicate that the asset might be impaired. The Company has selected September 30 as its annual testing date. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. This determination is made at the reporting unit level and consists of two steps. First, the Company determines the fair value of the reporting unit and compares it to its carrying amount. Second, if the carrying amount of the reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordance with SFAS No. 141, “Business Combinations.” The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. The Company operates as one reporting unit.

During 2007 and 2006, the Company performed its annual impairment review of goodwill and concluded there was no impairment in either year.

Investments in Unconsolidated Joint Ventures

Investments in unconsolidated joint ventures of nine companies are accounted for by the equity method. The Company would recognize an impairment when there is a loss in value in the equity method investment which is determined to be an other than temporary decline.

Other Assets

Other assets consist of deposits with vendors and lessors which total $8,473,000 and $8,193,000 as of December 31, 2007 and 2006, respectively. The Company also has other assets of $7,565,000 and $6,141,000 at December 31, 2007 and 2006, respectively, relating to life insurance arrangements that were recorded in connection with the prior acquisitions of certain home health care businesses and in connection with bonuses for employees. These assets are recorded at the amount to be received discounted over the remaining life expectancy of the insured. These amounts are reflected in other assets in the accompanying consolidated balance sheets.

Short-Term Notes Payable

Short-term notes payable of $274,000 and $248,000 at December 31, 2007 and 2006, respectively, is comprised of borrowings to finance the Company’s insurance premiums for its general insurance policies for the policy year. At December 31, 2007 it was comprised of one note bearing an interest rate of 8.75%, payable in ten monthly installments with maturity on May 6, 2008.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and the tax credit carryforwards. Deferred tax assets and liabilities are measured using the expected tax rates that will be in effect when the differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

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Beginning with the adoption of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48) as of January 1, 2007, the Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. Prior to the adoption of FIN 48, the Company recognized the effect of income tax positions only if such positions were probable of being sustained.

The Company’s policy for recording interest and penalties associated with audits is to record such items as an other expense and not as a component of income tax expense.

Stock Based Compensation

Prior to January 1, 2006, the Company applied the intrinsic-value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations including Financial Accounting Standards Board (“FASB”) Interpretation No. 44, “Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25,” to account for its fixed-plan stock options. Under this method, compensation expense was recorded for fixed-plan stock options only if the current market price of the underlying stock exceeded the exercise price on the date of grant. Statement of Financial Accounting Standards (“SFAS”) No. 123 “Accounting for Stock- Based Compensation,” established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123 and SFAS No. 148 “Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123,” the Company had elected to continue to apply the intrinsic-value-based method of accounting described above, and had adopted only the disclosure requirements of these statements.

The following table illustrates the effect on net earnings if the fair-value-based method had been applied to all outstanding and unvested awards for the year ended December 31, 2005.

	2005
Net income — as reported	$	7,744,000
Additional compensation expense		(466,000	)
Net income — pro forma		7,278,000
Net income per common share — as reported
- Basic	$	0.45
- Diluted	$	0.43
Net income per common share — pro forma
- Basic	$	0.42
- Diluted	$	0.40

Deductions for stock-based employee compensation expense in the table above were calculated using the Black-Scholes option pricing model. Allocation of compensation expense was made using historical option terms for option grants made to the Company’s employees and historical Company stock price volatility. The Company applies a 39% tax rate to arrive at the after tax deduction.

Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123R “Share-Based Payment,” using the modified prospective method. Under this method, compensation costs are based on the estimated fair value of the respective options and the proportion vesting in the period. Deductions for stock-based employee compensation are calculated using the Black-Scholes option-pricing model. Allocation of compensation expense is made using historical option terms for option grants made to

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the Company’s employees and historical Company stock price volatility since the emergence from bankruptcy.

There were 560,000 options granted during the first quarter ended March 31, 2006. The estimated fair value of these options was $2.52 using the Black-Scholes option-pricing model with the following assumptions: dividend yield of 0%; expected volatility of 99%; expected life of 5 years; and risk-free interest rate of 4.55%. There were 10,000 options granted in the third quarter ended September 30, 2006. The estimated fair value of these options was $0.47 using the Black-Scholes option-pricing model with the following assumptions: dividend yield of 0%; expected volatility of 99%; expected life of 5 years; and risk-free interest rate of 4.78%. There were 50,000 options granted in the fourth quarter ended December 31, 2006. The estimated fair value of these options was $1.07 using the Black-Scholes option-pricing model with the following assumptions: dividend yield of 0%; expected volatility of 99%; expected life of 5 years; and risk-free interest rate of 4.70%.

There were 450,000 options granted during the first quarter ended March 31, 2007. The estimated fair value of these options was $1.22 per share using the Black-Scholes option-pricing model with the following assumptions: dividend yield of 0%; expected volatility of 99%; expected life of 5 years; and risk-free interest rate of 4.46%. There were 35,000 options granted during the second quarter ended June 30, 2007. The estimated fair value of these options was $1.86 per share using the Black-Scholes option-pricing model with the following assumptions: dividend yield of 0%; expected volatility of 102%; expected life of 5 years; and risk-free interest rate of 5.07%. There were no options granted during the third quarter ended September 30, 2007.

There were 40,000 options granted on October 31, 2007. The estimated fair value of these options was $0.95 using the Black-Scholes option-pricing model with the following assumptions: dividend yield of 0%; expected volatility of 99%; expected life of 5 years; and risk-free interest rate of 4.16%. There were 40,000 options granted on December 31, 2007. The estimated fair value of these options was $0.84 using the Black-Scholes option-pricing model with the following assumptions: dividend yield of 0%; expected volatility of 98%; expected life of 5 years; and risk-free interest rate of 3.45%.

The Company recognized $698,000 and $628,000 of stock-based compensation expense during the years ended December 31, 2007 and 2006, respectively.

Segment Disclosures

SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” establishes standards for the way that public business enterprises or other enterprises that are required to file financial statements with the Securities and Exchange Commission (“SEC”) report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. SFAS No. 131 also establishes standards for related disclosures about products and services, geographic areas, and major customers. The Company manages its business as one reporting segment.

Comprehensive Income (Loss)

The Company did not have any components of comprehensive income (loss) other than net income (loss) in all periods presented.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include the valuation of accounts receivable,

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inventory, goodwill, deferred tax assets, and deferred revenue; the carrying amount of property and equipment; and the amount of self insurance accruals for healthcare, vehicle, and workers’ compensation claims. Actual results could differ from those estimates.

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Fair Value of Financial Instruments

Management utilizes quoted market prices or pricing information of similar instruments to estimate the fair value of financial instruments. The carrying amounts of cash and cash equivalents, restricted cash, accounts receivable, and accounts payable approximate fair value because of the short-term nature of these items.

The fair value of the Company’s long-term debt at December 31, 2007 and 2006 is approximately $232.1 million and $241.5 million, respectively, and is estimated by discounting the future cash flows of each instrument at estimated rates currently attainable by the Company for similar debt instruments of comparable maturities.

Recently Issued Accounting Standards

In December 2007, the FASB issued FASB Statement No. 141R, “Business Combinations” (Statement 141R) and FASB Statement No. 160, “Noncontrolling Interest in Consolidated Financial Statements – an amendment to ARB No. 51” (Statement 160). Statements 141R and 160 require most identifiable assets, liabilities, noncontrolling interests, and goodwill acquired in a business combination to be recorded at “full fair value” and require noncontrolling interests (previously referred to as minority interests) to be reported as a component of equity, which changes the accounting for transactions with noncontrolling interest holders. Both Statements are effective for periods beginning on or after December 15, 2008, and earlier adoption is prohibited. Statement 141R will be applied to business combinations occurring after the effective date. Statement 160 will be applied prospectively to all noncontrolling interests, including any that arose before the effective date. The Company is currently evaluating the impact of adopting Statement 141R and Statement 160 on its results of operations and financial position.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – including an amendment of FASB Statement No. 115” (Statement 159). Statement 159 gives the Company the irrevocable option to carry most financial assets and liabilities at fair value that are not currently required to be measured at fair value. If the fair value option is elected, changes in fair value would be recorded in earnings at each subsequent reporting date. SFAS 159 is effective for the Company’s 2008 fiscal year. The Company does not anticipate that the adoption of Statement 159 will have a material impact on its results of operations or financial position.

In September 2006, the FASB issued FASB Statement No. 157, “Fair Value Measurement” (Statement 157). Statement 157 defines fair value, establishes a framework for the measurement of fair value, and enhances disclosures about fair value measurements. The Statement does not require any new fair value measures. The Statement is effective for fair value measures already required or permitted by other standards for fiscal years beginning after November 15, 2007. The Company is required to adopt Statement 157 beginning on January 1, 2008. Statement 157 is required to be applied prospectively, except for certain financial instruments. Any transition adjustment will be recognized as an adjustment to opening retained earnings in the year of adoption. In November 2007, the FASB proposed a one-year deferral of Statement 157’s fair-value measurement requirements for nonfinancial assets and liabilities that are not required or permitted to be measured at fair value on a recurring basis. The Company does not anticipate that the adoption of Statement 157 will have a material impact on its results of operations or financial position.

In September 2006, the FASB’s Emerging Issues Task Force reached a consensus on Issue No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements (EITF 06-4). EITF 06-4 provides guidance on the accounting for arrangements in which an employer owns and controls the insurance policy and has agreed to share a portion of the cash surrender value and/or death benefit with the employee. This guidance requires an employer to record a postretirement benefit, in accordance with FASB Statement No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions” or APB Opinion No. 12, “Omnibus Opinion-1967,” if there is an agreement by the employer to share a portion of the proceeds of a life insurance policy with the employee during the postretirement period. This guidance is effective for reporting periods beginning after December 15, 2007. The Company does not anticipate that the adoption of EITF-06-4 will have a material impact on its results of operations or financial position.

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	Recently Adopted Accounting Standards
	Effective January 1, 2007 the Company adopted provisions of FIN 48. FIN 48 addresses the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a threshold of more-likely-than-not for recognition and derecognition of tax positions taken or expected to be taken in a tax return. FIN 48 also provides related guidance on measurement, classification, interest and penalties, and disclosure. See Note 14 for the impact of adopting FIN 48 on the Company’s results of operations and financial position, which was not considered to be material.
3.	DISCONTINUED OPERATIONS
	Effective April 1, 2007, the Company sold the assets of its home nursing business located in Tallahassee, Florida to Amedisys Home Health, Inc. of Florida. The sales price was $3.1 million, of which $2.8 million was received in cash at closing, with the remainder to be received according to the terms of a promissory note. The Company recorded a gain of $3.0 million associated with this sale. The cash and note proceeds from this transaction were utilized to pay down long-term debt.
	Since the Company is exiting its home nursing line of business, the Company has presented the nursing business as discontinued operations in 2007, with comparable presentation for prior years.
4.	CHANGE OF CONTROL
	On April 13, 2007, Highland Capital Management, L.P. filed a Schedule 13D/A with the Securities and Exchange Commission reporting beneficial ownership of 8,437,164 shares of Company common stock, which represents approximately 48% of the outstanding shares of the Company as of that date. Under the terms of the employment agreement between the Company and Joseph F. Furlong, III, the Company’s chief executive officer, the acquisition by any person of more than 35% of the Company’s shares constitutes a change of control. Under Mr. Furlong’s employment agreement, this event gives Mr. Furlong the right to receive a lump sum payment in the event he or the Company terminates his employment within one year after the change of control. The Company accrued a liability for this potential payment in the second quarter of 2007 since the ultimate requirement to make this payment was outside of the Company’s control. As such, the Company recorded an expense of $6.6 million in the second quarter of 2007, which was shown as “change of control expense” in the consolidated statements of operations, and a liability in the amount of $6.9 million, which was reflected in other accrued expenses on the consolidated balance sheets. These items were comprised of 300% of Mr. Furlong’s current year salary and maximum bonus, immediate vesting of all unvested options, the buyout of outstanding options, reimbursement of certain personal tax obligations associated with the lump sum payment, as well as payment of certain insurance for up to 3 years after termination and office administrative expenses for up to one year after termination.
	The Company also established an irrevocable trust in the second quarter of 2007 to pay the various components of the change of control obligation. At December 31, 2007, the trust has a balance of $6.4 million and is reflected in prepaid expenses and other current assets on the consolidated balance sheets.
	For the remainder of 2007, the Company reduced the change of control expense and related liability by $1.0 million due to revaluation of the fair value of Mr. Furlong’s outstanding stock options as of December 31, 2007. This decrease in expense is the result of a decline in the market value of the Company’s common stock from June 30, 2007 to December 31, 2007.
	On December 21, 2007, Mr. Furlong’s employment agreement was amended. Per the terms of the amendment, Mr. Furlong received a $3.3 million lump sum payment on January 2, 2008 in order to induce him to continue his employment with the Company. This payment was made from the irrevocable trust and reduced the change of control liability. The payment is in lieu of certain amounts Mr. Furlong would otherwise be entitled to under the amended employment agreement as a result of the termination of his employment with the Company. The amendment also stipulates that all of Mr. Furlong’s stock options shall be deemed vested and exercisable as of January 2, 2008 and caps the potential buyout of outstanding options at $1.4 million. The $1.4 million shall be maintained in the irrevocable trust until these options expire or until 90 days after Mr. Furlong’s termination, whichever occurs first. In addition, the amendment stipulates

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	the Company will pay for office administrative expenses for up to 6 months after termination instead of up to one year as originally agreed.
5.	PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
	In 2002 American HomePatient, Inc. filed a voluntary petition for relief to reorganize under Chapter 11 of the U.S. Bankruptcy Code (“Bankruptcy Filing”). On July 1, 2003, the Company successfully emerged from bankruptcy protection under a Joint Plan of Reorganization (the “Approved Plan”).
	Pursuant to the Approved Plan, the Company had long-term debt of $250.0 million (the “Secured Debt”), as evidenced by a promissory note to the lenders (the “Lenders”) under a previous senior debt facility that is secured by substantially all of the Company’s assets. On April 3, 2007, a $2.8 million principal payment was made that reduced the Secured Debt to $247.2 million. This payment was required by the Lenders as a result of the sale of certain assets of the Company’s home nursing business, see Note 3.
	As of December 31, 2007, all administrative, priority and unsecured claims to be paid under the Approved Plan have been paid in full. The Company has made all payments due under the Approved Plan as of December 31, 2007.
	On April 5, 2007, the Company filed a Motion for Final Decree which is the final step required to close out the Chapter 11 case. On June 14, 2007, the Bankruptcy Court signed an Order Granting Motion for Final Decree and Closing Case, officially closing the Company’s Chapter 11 case.
	Reorganization Items
	Reorganization items represent expenses that were incurred by the Company as a result of reorganization under Chapter 11 of the Federal Bankruptcy Code. Professional and other fees related to the reorganization were $291,000 and $384,000 during the years ended December 31, 2006 and 2005, respectively.
6.	INVESTMENT IN JOINT VENTURES
	The Company owns 50% of nine home health care businesses, and 70% of two home health care businesses as of December 31, 2007 and 2006 (the “Joint Ventures”). The remaining ownership percentage of each joint venture is owned by local hospitals or other investors within the same community. Under management agreements, the Company is responsible for the management of these businesses and receives fixed monthly management fees or monthly management fees based upon a percentage of net revenues, net income or cash collections. The operations of the two 70% owned joint ventures are consolidated with the operations of the Company. The operations of the nine 50% owned joint ventures are not consolidated with the operations of the Company and are accounted for by the Company under the equity method of accounting.
	The Company provides accounting and receivable billing services to the joint ventures. The joint ventures are charged for their share of such costs based on contract terms. The Company’s earnings from unconsolidated joint ventures include equity in earnings of 50% owned joint ventures, management fees and fees for accounting and receivable billing services. Management fees and fees for accounting and receivable billing services were approximately $1,902,000, $1,877,000 and $1,829,000 for 2007, 2006, and 2005, respectively. The Company’s investment in unconsolidated joint ventures includes notes payable to joint ventures, totaling $104,000 and $513,000 as of December 31, 2007 and 2006, respectively. Minority interest represents the outside partners’ 30% ownership interests in the consolidated joint ventures, and totals $550,000 and $618,000 as of December 31, 2007 and 2006, respectively.

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Summarized unaudited financial information of all 50% owned joint ventures at December 31, 2007 and 2006 and for the years then ended is as follows:

	2007		2006
Cash	$	4,830,000	$	4,346,000
Accounts receivable, net		4,651,000		5,042,000
Property and equipment, net		4,527,000		5,508,000
Other assets		3,639,000		4,196,000
Total assets	$	17,647,000	$	19,092,000
Accounts payable and accrued expenses	$	856,000	$	933,000
Partners’ capital		16,791,000		18,159,000
Total liabilities and partners’ capital	$	17,647,000	$	19,092,000
Net sales and rental revenues	$	35,969,000	$	34,823,000
Cost of sales and rentals, including rental depreciation		9,409,000		10,230,000
Operating and management fees		18,683,000		17,435,000
Depreciation, excluding rental equipment, amortization and interest expense		169,000		175,000
Total expenses		28,261,000		27,840,000
Pre-tax income	$	7,708,000	$	6,983,000

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7.	ACCOUNTS RECEIVABLE
	The Company’s accounts receivable consist of the following components:

	December 31,
	2007		2006
Patient receivables:
Medicare and related copay portions	$	21,273,000	$	24,012,000
All other, principally commercial insurance companies, and related copay portions		35,098,000		46,775,000
		56,371,000		70,787,000
Other receivables, principally due from vendors and former owners of acquired businesses		593,000		603,000
Total accounts receivable		56,964,000		71,390,000
Less: Allowance for doubtful accounts		11,822,000		17,076,000
Accounts receivable, net	$	45,142,000	$	54,314,000

	Of the patient receivables, $8.6 million and $14.3 million are unbilled as of December 31, 2007 and 2006, respectively.
8.	PROPERTY AND EQUIPMENT
	Property and equipment, at cost, consists of the following:

	December 31,
	2007		2006
Land		51,000		51,000
Buildings and improvements		4,789,000		4,447,000
Rental equipment		108,570,000		120,595,000
Furniture, fixtures and equipment		38,126,000		38,079,000
Delivery equipment		434,000		494,000
	$	151,970,000	$	163,666,000

Property and equipment under capital leases are included under the various equipment categories. As of December 31, 2007 and 2006, gross property held under capital leases totals $7,073,000 and $3,070,000, respectively, and related accumulated amortization was $2,861,000 and $1,642,000, respectively.

Rental equipment is net of valuation allowances of $1,259,000 and $684,000 at December 31, 2007 and 2006, respectively.

As of December 31, 2007 and 2006, respectively, accumulated depreciation includes $74,398,000 and $76,077,000 of accumulated depreciation related to rental equipment.

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9.	GOODWILL
	The changes in the carrying amount of goodwill are as follows:

Balances at December 31, 2006 and 2005	$	121,834,000
Acquisition		259,000
Balance at December 31, 2007	$	122,093,000

	In October 2007, the Company purchased certain assets of a home medical equipment business.
10.	LONG-TERM DEBT AND CAPITAL LEASES
	At December 31, 2007 and 2006 long-term debt and capital lease obligations consist of the following:

	December 31,
	2007			2006
Long-term debt which is secured by substantially all assets of the Company and is due August 1, 2009. As a result of the Approved Plan, the secured debt bears interest at 6.785%, payable monthly	$	242,742,000		$	250,000,000
Capital lease obligations, monthly payments until 2011		1,668,000			1,257,000
Total long-term debt and capital leases		244,410,000			251,257,000
Less: current portion		(8,221,000	)		(1,063,000	)
Long-term debt and capital leases, less current portion	$	236,189,000		$	250,194,000

Pursuant to the Approved Plan, the Company’s secured debt to the Lenders is $242.7 million at December 31, 2007 which is due August 1, 2009, and is evidenced by a promissory note in that amount which is secured by various security agreements. To the Company’s knowledge, the Lenders have not executed the agreements. The Company is no longer a party to a credit agreement or formal covenant requirements.

The Approved Plan provides that principal is payable annually on the $242.7 million secured debt on March 31 of each year in the amount of the Company’s Excess Cash Flow (defined in the Approved Plan as cash in excess of $7.0 million at the end of the Company’s fiscal year) for the previous fiscal year, with an estimated prepayment due on each previous September 30 in an amount equal to one-half of the anticipated March payment. The Company initially estimated having Excess Cash Flow at December 31, 2007 of $9.0 million. On October 1, 2007, the Company made a payment of $4.5 million, which is one-half of the anticipated March 2008 payment. The Company’s remaining Excess Cash Flow payment at December 31, 2007 is $4.0 million, which is payable March 31, 2008. The Company has also included $2.8 million in the current portion of long-term debt and capital leases at December 31, 2007. This amount represents the estimated pre-payment due on September 30, 2008 based on the Company’s current estimated cash balance at December 31, 2008.

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Capital Leases

The Company leases certain equipment under capital leases. Future minimum rental payments required on capital leases beginning January 1, 2008 are as follows:

2008	$	1,278,000
2009		353,000
2010		48,000
2011		3,000
		1,682,000
Less amounts representing interest ranging from 0.8% to 7.1%		(14,000	)
	$	1,668,000

11.	COMMITMENTS AND CONTINGENCIES
	Operating Lease Commitments
	The Company has noncancelable operating leases on certain land, vehicles, buildings and equipment. Some of the leases contain renewal options and require the Company to pay all executory costs such as maintenance. The Company accounts for operating leases on a straight-line basis over the base term of the leases, with the difference between actual lease payments and straight-line expenses over the lease term included in deferred rent. The minimum future rental commitments on noncancelable operating leases (with initial or remaining lease terms in excess of one year), net of sublease proceeds, for the next five years and thereafter beginning January 1, 2008 are as follows:

	Minimum Lease		Sublease			Net Lease
	Payments		Proceeds			Commitments
2008	$	7,580,000	$	(277,000	)	$	7,303,000
2009		5,757,000		(145,000	)		5,612,000
2010		1,667,000		(104,000	)		1,563,000
2011		185,000		(65,000	)		120,000
	$	15,189,000	$	(591,000	)	$	14,598,000

Rent expense for all operating leases was approximately $13,591,000, $14,639,000 and $15,115,000 in 2007, 2006 and 2005, respectively.

Litigation

The Company is subject to certain known or possible litigation incidental to the Company’s business, which, in management’s opinion, will not have a material adverse effect on the Company’s results of operations or financial condition.

The Company maintains insurance for general liability, director and officer liability and property. Certain policies are subject to deductibles. In addition to the insurance coverage provided, the Company indemnifies certain officers and directors for actions taken on behalf of the Company.

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Employment and Consulting Agreements

The Company has employment agreements with certain members of management which provide for the payment to these members of amounts from one-half to two times their annual compensation in the event of a termination without cause, a constructive discharge (as defined in the employment agreements) or upon a change in control of the Company (as defined in the employment agreements). The terms of such agreements automatically renew for one year. The maximum contingent liability under these agreements at December 31, 2007 is approximately $4,282,000.

Self-Insurance

Self-insurance accruals primarily represent the accrual for self-insurance or large deductible risks associated with workers’ compensation insurance, vehicle liability, commercial general and professional liability insurance. The Company is insured for workers’ compensation and vehicle liability but retains the first $250,000 of risk exposure for each claim. The Company did not maintain annual aggregate stop loss coverage for the years 2007, 2006 and 2005, as such coverage was not available. The Company’s liability includes known claims and an estimate of claims incurred but not yet reported. The estimated liability for workers’ compensation claims totaled approximately $3,084,000 and $3,366,000 as of December 31, 2007 and 2006, respectively. The estimated liability for vehicle claims totaled approximately $1,001,000 and $659,000 as of December 31, 2007 and 2006, respectively. The estimated total liability for commercial general and professional liability claims was $762,000 and $1,066,000 as of December 31, 2007 and 2006, respectively. The Company utilizes analyses prepared by a third-party administrator based on historical claims information to determine the required accrual and related expense associated with workers’ compensation, vehicle liability, commercial general and professional liability insurance. The Company records claims expense by plan year based on the lesser of the aggregate stop loss (if applicable) or the developed losses as calculated by the third-party administrator.

The Company is also self-insured for health insurance for substantially all employees for the first $150,000 on a per person, per year basis and maintains annual aggregate stop loss coverage of $8.8 million for 2007. The health insurance policies are limited to maximum lifetime reimbursements of $2,000,000 per person for 2007, 2006 and 2005. The estimated liability for health insurance claims totaled $931,000 and $1,157,000 as of December 31, 2007 and 2006, respectively. The Company reviews health insurance trends and payment history and maintains an accrual for incurred but unpaid reported claims and for incurred but not yet reported claims based upon its assessment of lag time in reporting and paying claims.

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

The Company is required to maintain cash collateral accounts with the insurance companies related to its self-insurance obligations. As of December 31, 2007 and 2006, the Company maintained cash collateral balances of $6.0 million, which is included in other assets.

Letters of Credit

At December 31, 2007, the Company had one letter of credit for $250,000 which expires in January 2009. The letter of credit secures the Company’s obligations with respect to its professional liability insurance. The letter of credit is secured by a certificate of deposit, which is included in restricted cash.

401K Retirement Savings Plan

The Company maintains a 401k Retirement Savings Plan (the “401k”), administered by Massachusetts Mutual Life Insurance Company, to provide a tax deferred retirement savings plan to its employees. To

F-80

qualify, employees must be at least 21 years of age, with twelve months of continuous employment and must work at least twenty hours per week. Employees may contribute up to 100% of their compensation, not exceeding a limit set annually by the Internal Revenue Service. The Company matches 25% of the first 3% of employee contributions. For the years ended December 31, 2007, 2006, and 2005, expense of $282,000, $283,000 and $258,000, respectively, associated with the Company’s matching is included in the consolidated statements of operations.

Government Regulation

The Company, as a participant in the health care industry, is subject to extensive federal, state and local regulation. In addition to the Federal False Claims Act (“False Claims Act”) and other federal and state anti-kickback and self-referral laws applicable to all of the Company’s operations (discussed more fully below), the operations of the Company’s home health care centers are subject to federal laws covering the repackaging and dispensing of drugs (including oxygen) and regulating interstate motor-carrier transportation. Such centers also are subject to state laws (most notably licensing and controlled substances registration) governing pharmacies, nursing services and certain types of home health agency activities.

The Federal False Claims Act imposes civil liability on individuals or entities that submit false or fraudulent claims to the government for payment. False Claims Act penalties for violations can include sanctions, including civil monetary penalties.

As a provider of services under the federal reimbursement programs such as Medicare, Medicaid and TRICARE, the Company is subject to the federal statute known as the anti-kickback statute, also known as the “fraud and abuse law.” This law prohibits any bribe, kickback, rebate or remuneration of any kind in return for, or as an inducement for, the referral of patients for government-reimbursed health care services.

The Company is also subject to the federal physician self-referral prohibition, known as the “Stark Law,” which, with certain exceptions, prohibits physicians from referring patients to entities with which they have a financial relationship. Many states in which the Company operates have adopted similar fraud and abuse and self-referral laws, as well as laws that prohibit certain direct or indirect payments or fee-splitting arrangements between health care providers, under the theory that such arrangements are designed to induce or to encourage the referral of patients to a particular provider. In many states, these laws apply to services reimbursed by all payor sources.

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

HIPPA mandated an extensive set of regulations to protect the privacy of individually identifiable health information.

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 Office of Inspector General of the Department of Health and Human Services (“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

F-81

to comply with applicable laws and regulations; however, certain proceedings have been and may in the future be commenced against the Company alleging violations of applicable laws governing the operation of the Company’s business and its billing practices.

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

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

Health care law is an area of extensive and dynamic regulatory oversight. Changes in laws or regulations or new interpretations of existing laws or regulations can have a dramatic effect on permissible activities, the relative costs associated with doing business, and the amount and availability of reimbursement from government and other third-party payors. There can be no assurance that federal, state, or local governments will not impose additional standards or change existing standards or interpretations.

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

The government has broad authority and discretion in enforcing applicable laws and regulations; therefore, the scope and outcome of any such investigations, inquiries, or legal actions cannot be predicted. There can be no assurance that federal, state or local governments will not impose additional regulations upon the Company’s activities nor that the Company’s past activities will not be found to have violated some of the governing laws and regulations. Any such regulatory changes or findings of violations of laws could adversely affect the Company’s business and financial position, and could even result in the exclusion of the Company from participating in Medicare, Medicaid, and other contracts for goods or services reimbursed by the government.

On June 11, 2001, a settlement agreement (the “Government Settlement”) was entered among the Company, the United States of America, acting through the United States Department of Justice (“DOJ”) and on behalf of the OIG and the TRICARE Management Activity, and a former Company employee, as relator. The Government Settlement was approved by the United States District Court for the Western District of Kentucky, the court in which the relator’s false claim action was filed. The Government Settlement covers alleged improprieties by the Company during the period from January 1, 1995 through December 31, 1998, including allegedly improper billing activities and allegedly improper remuneration to and contracts with physicians, hospitals and other healthcare providers. Pursuant to the Government Settlement, the Company made an initial payment of $3,000,000 in the second quarter of 2001 and agreed to make additional payments in the principal amount of $4,000,000, together with interest on this amount, in installments due at various times until March 2006. At December 31, 2005, the Company also paid the relator’s attorneys fees and expenses. Pursuant to the Approved Plan, the amounts owed pursuant to the Government Settlement will be paid in full in accordance with the Government Settlement. The Company made the final payment of $2,000,000, plus interest of $17,000, on March 10, 2006.

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12.	STAFF ACCOUNTING BULLETIN NO. 108 (SAB 108)
	In September 2006, the SEC issued Staff Accounting Bulleting No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”), which provides guidance on quantifying financial statement misstatements. SAB 108 was issued to eliminate the diversity of practice surrounding how public companies quantify financial statement misstatements. SAB 108 requires an entity to quantify misstatements using a balance sheet and income statement approach and to evaluate whether either approach results in quantifying an error that is material in light of relevant quantitative and qualitative factors.
	During the fourth quarter of 2006, the Company adopted the provisions of SAB 108 effective as of January 1, 2006. During 2006, the Company identified prior year misstatements related to not recognizing deferred revenues associated with rental arrangements. The Company instead recognized revenue in the month of billing. The Company assessed the materiality for each of the years impacted by the misstatements, using the permitted rollover method, and determined that the effect on the financial statements, taken as a whole, was not material. As allowed by SAB 108, the Company elected to not restate prior year financial statements, and instead, as permitted by SAB 108, recorded a cumulative adjustment on January 1, 2006 which increased deferred revenue and increased accumulated deficit by $7,245,000.
13.	SHAREHOLDERS’ EQUITY AND STOCK PLANS
	Nonqualified Stock Option Plans
	During 2004, under the 1991 Nonqualified Stock Option Plan (the “1991 Plan”), as amended as of November 8, 2000, 5,000,000 shares of the Company’s common stock had been reserved for issuance upon exercise of options granted thereunder. The maximum term of any option granted pursuant to the 1991 Plan is ten years. Shares subject to options granted under the 1991 Plan which expire, terminate or are canceled without having been exercised in full become available again for future grants.
	An analysis of stock options outstanding under the 1991 Plan is as follows:

				Weighted
				Average
	Options			Exercise Price
Outstanding at December 31, 2004		2,429,738		$	5.59
Granted		245,000			3.23
Exercised		(335,000	)		1.26
Canceled		(234,238	)		13.16
Outstanding at December 31, 2005		2,105,500		$	5.16
Granted		570,000			3.25
Exercised		(185,000	)		1.86
Canceled		(269,250	)		18.13
Outstanding at December 31, 2006		2,221,250		$	3.45
Granted		525,000			1.63
Exercised		—			—
Canceled		(207,100	)		9.14
Outstanding at December 31, 2007		2,539,150		$	2.61

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The total intrinsic value of stock options exercised in 2006 was $303,000. There were no stock options exercised in 2007. At December 31, 2007, there was $0.5 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted average of 1.4 years.

				Weighted
				Average
				Grant-date
Nonvested Options	Options			Fair Value
Balance at January 1, 2006		358,750		$	2.30
Granted		570,000			2.48
Vested		(198,750	)		2.04
Forfeited		—			—
Balance at December 31, 2006		730,000		$	2.52
Granted		525,000			1.24
Vested		(681,250	)		1.98
Forfeited		(92,500	)		1.97
Balance at December 31, 2007		481,250		$	1.82

Options granted under the 1991 Plan as of December 31, 2007 have the following characteristics:

												Weighted
												Average
												Exercise
						Weighted						Price of		Weighted
						Average				Options		Options		Average
				Weighted		Remaining				Exercisable		Exercisable		Remaining
				Average		Contractual		Aggregate		at		at		Contractual		Aggregate
Year of	Options		Exercise	Exercise		Life in		Intrinsic		Dec. 31,		Dec. 31,		Life in		Intrinsic
Grant	Outstanding		Prices	Price		Years		Value		2007		2007		Years		Value
1998		469,150	$2.13 to $18.13	$	5.85		0.77		—		469,150	$	5.85		0.77		—
1999		200,000	$0.56	$	0.56		1.86		98,000		200,000	$	0.56		1.86		98,000
2000		220,000	$0.17 to $0.30	$	0.18		2.85		192,300		220,000	$	0.18		2.85		192,300
2004		450,000	$1.31 to $1.80	$	1.64		6.39		—		450,000	$	1.64		6.39		—
2005		170,000	$2.21 to $3.55	$	2.97		7.10		—		127,500	$	2.97		7.10		—
2006		505,000	$0.61 to $3.30	$	3.25		8.15		—		327,500	$	3.28		8.14		—
2007		525,000	$1.25 to $2.40	$	1.63		9.24		—		263,750	$	1.61		9.21		—
		2,539,150						$	290,300		2,057,900					$	290,300

Options granted during 1998 to all employees, except officers and directors, have one, two, three and four year vesting periods and expire in ten years. Options granted during 1999 vested upon grant or have a three year vesting period and expire in ten years. Options granted during 2000 and 2001 have a three year vesting period and expire in ten years. No options were granted during 2002 or 2003. Options granted during 2004 have a two or three year vesting period and expire in ten years. Options granted during 2005 have a three year vesting period and expire in ten years. Options granted during 2006 have a four year vesting period and expire in ten years. Options granted in 2007 have a three year vesting period and expire in ten years. As of December 31, 2007, shares available for future grants of options under the 1991 Plan total 6,959.

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Options granted under the 1991 Plan as of December 31, 2006 have the following characteristics:

												Weighted
												Average
												Exercise
						Weighted						Price of		Weighted
						Average				Options		Options		Average
				Weighted		Remaining				Exercisable		Exercisable		Remaining
				Average		Contractual		Aggregate		at		at		Contractual		Aggregate
Year of	Options		Exercise	Exercise		Life in		Intrinsic		Dec. 31,		Dec. 31,		Life in		Intrinsic
Grant	Outstanding		Prices	Price		Years		Value		2006		2006		Years		Value
1997		52,000	$21.50	$	21.50		0.15	$	—		52,000	$	21.50		0.15	$	—
1998		484,250	$2.13 to $18.13	$	6.23		1.76		—		484,250	$	6.23		1.76		—
1999		200,000	$0.56	$	0.56		2.86		168,000		200,000	$	0.56		2.86		168,000
2000		220,000	$0.17 to $0.30	$	0.18		3.85		269,300		220,000	$	0.18		3.85		269,300
2004		450,000	$1.31 to $1.80	$	1.64		7.39		—		412,500	$	1.67		7.35		—
2005		245,000	$2.21 to $3.83	$	3.23		8.13		—		122,500	$	3.23		8.13		—
2006		570,000	$0.61 to $3.30	$	3.25		9.15		—		—	$	—		—		—
		2,221,250						$	437,300		1,491,250					$	437,300

Options granted during 1997 have two and three year vesting periods and expire in ten years. Options granted during 1998 to all employees, except officers and directors, have one, two, three and four year vesting periods and expire in ten years. Options granted during 1999 vested upon grant or have a three year vesting period and expire in ten years. Options granted during 2000 and 2001 have a three year vesting period and expire in ten years. No options were granted during 2002 or 2003. Options granted during 2004 have a two or three year vesting period and expire in ten years. Options granted during 2005 have a three year vesting period and expire in ten years. Options granted during 2006 have a four year vesting period and expire in ten years. As of December 31, 2006, shares available for future grants of options under the 1991 Plan total 324,859.

F-85

Under the 1995 Nonqualified Stock Option Plan for Directors (the “1995 Plan”), as amended as of February 10, 2000, 600,000 shares of the Company’s common stock have been reserved for issuance upon exercise of options granted thereunder. The maximum term of any option granted pursuant to the 1995 Plan is ten years. Shares subject to options granted under the 1995 Plan which expire, terminate or are canceled without having been exercised in full become available for future grants.

An analysis of stock options outstanding under the 1995 Plan is as follows:

				Weighted
				Average
	Options			Exercise Price
Outstanding at December 31, 2004		386,000		$	2.09
Granted		50,000			3.27
Exercised		(6,000	)		1.11
Canceled		(6,000	)		19.67
Outstanding at December 31, 2005		424,000		$	1.99
Granted		50,000			1.40
Exercised		—			—
Canceled		(6,000	)		26.25
Outstanding at December 31, 2006		468,000		$	1.62
Granted		40,000			1.12
Exercised		—			—
Canceled		(6,000	)		21.06
Outstanding at December 31, 2007		502,000		$	1.35

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     Options granted under the 1995 Plan as of December 31, 2007 have the following characteristics:

						Weighted				Weighted
						Average				Average
				Weighted		Remaining				Exercise
				Average		Contractual				Price of		Aggregate
Year of	Options		Exercise	Exercise		Life in		Options		Options		Intrinsic
Grant	Outstanding		Prices	Price		Years		Exercisable		Exercisable		Value
1998		6,000	$1.69	$	1.69		1.00		6,000	$	1.69	$	—
1999		6,000	$0.53	$	0.53		2.00		6,000	$	0.53		3,120
2000		140,000	$0.20 to $0.30	$	0.26		2.62		140,000	$	0.26		110,800
2001		15,000	$0.75	$	0.75		4.00		15,000	$	0.75		4,500
2002		15,000	$0.15	$	0.15		5.00		15,000	$	0.15		13,500
2003		80,000	$1.29	$	1.29		6.00		80,000	$	1.29		—
2004		100,000	$1.18 to $3.46	$	2.32		6.72		100,000	$	2.32		—
2005		50,000	$3.27	$	3.27		8.00		50,000	$	3.27		—
2006		50,000	$1.40	$	1.40		9.00		50,000	$	1.40		—
2007		40,000	$1.12	$	1.12		10.00		40,000	$	1.12		—
		502,000							502,000			$	131,920

Options granted under the 1995 Plan as of December 31, 2006 have the following characteristics:

						Weighted				Weighted
						Average				Average
				Weighted		Remaining				Exercise
				Average		Contractual				Price of		Aggregate
Year of	Options		Exercise	Exercise		Life in		Options		Options		Intrinsic
Grant	Outstanding		Prices	Price		Years		Exercisable		Exercisable		Value
1997		6,000	$21.06	$	21.06		1.00		6,000	$	21.06	$	—
1998		6,000	$1.69	$	1.69		2.00		6,000	$	1.69		—
1999		6,000	$0.53	$	0.53		3.00		6,000	$	0.53		5,220
2000		140,000	$0.20 to $0.30	$	0.26		3.61		140,000	$	0.26		159,800
2001		15,000	$0.75	$	0.75		5.00		15,000	$	0.75		9,750
2002		15,000	$0.15	$	0.15		6.00		15,000	$	0.15		18,750
2003		80,000	$1.29	$	1.29		7.00		80,000	$	1.29		8,800
2004		100,000	$1.18 to $3.46	$	2.32		7.72		100,000	$	2.32		—
2005		50,000	$3.27	$	3.27		9.00		50,000	$	3.27		—
2006		50,000	$1.40	$	1.40		10.00		50,000	$	1.40		—
		468,000							468,000			$	202,320

The Directors’ options are fully vested upon issuance and expire ten years from date of issuance.

Preferred Stock

The Company’s certificate of incorporation was amended in 1996 to authorize the issuance of up to 5,000,000 shares of preferred stock. The Company’s Board of Directors is authorized to establish the terms and rights of each such series, including the voting powers, designations, preferences, and other special rights, qualifications, limitations or restrictions thereof. As of December 31, 2007, no preferred shares have been issued.

F-87

	Income Per Common Share
	Income per share is measured at two levels: basic income per share and diluted income per share. Basic income per share is computed by dividing net income by the weighted average number of common shares outstanding during the year. Diluted income per share is computed by dividing net income by the weighted average number of common shares after considering the additional dilution related to stock options. In computing diluted income per share, the outstanding stock options are considered dilutive using the treasury stock method.
	For the years ended December 31, 2007, 2006 and 2005, approximately 1,310,000, 1,391,000 and 587,000 shares, respectively, attributable to the exercise of outstanding options were excluded from the calculation of diluted earnings per share because their effect was antidilutive.
14.	INCOME TAXES
	The provision (benefit) for income taxes is comprised of the following components:

	For the Years Ended December 31,
	2007		2006		2005
Current
Federal	$	—	$	—	$	—
State		623,000		348,000		327,000
		623,000		348,000		327,000
Deferred
Federal		3,116,000		—		—
State		358,000		—		—
		3,474,000		—		—
Provision for income taxes	$	4,097,000	$	348,000	$	327,000

The difference between the actual income tax provision and the tax provision computed by applying the statutory federal income tax rate to income from operations before income taxes is attributable to the following:

	For the Years Ended December 31,
	2007			2006			2005
(Benefit) provision for federal income taxes at statutory rate	$	(499,000	)	$	(784,000	)	$	2,825,000
State income taxes, net of federal tax benefit		405,000			226,000			212,000
Valuation allowance		1,637,000			823,000			(3,104,000	)
Other, principally non-deductible goodwill and other expenses		2,554,000			83,000			394,000
Provision for income taxes	$	4,097,000		$	348,000		$	327,000

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The net deferred tax assets and liabilities are as follows:

	December 31,
	2007			2006
Current deferred tax assets:
Allowance for doubtful accounts		4,551,000			6,599,000
Accrued liabilities and other		3,313,000			3,089,000
		7,864,000			9,688,000
Less valuation allowance		(7,864,000	)		(9,688,000	)
Net current deferred tax assets	$	—		$	—
Noncurrent deferred tax assets (liabilities):
Tax amortization in excess of financial reporting amortization	$	(3,474,000	)	$	1,950,000
Financial reporting amortization in excess of tax amortization		240,000			321,000
Net operating loss carryforwards		62,582,000			59,470,000
Noncurrent asset valuation reserves		491,000			267,000
Financial reporting depreciation in excess of tax depreciation		4,734,000			3,117,000
Other		982,000			444,000
		65,555,000			65,569,000
Less valuation allowance		(69,029,000	)		(65,569,000	)
Net noncurrent deferred tax assets	$	(3,474,000	)	$	—

During 2007 the Company determined that the total gross deferred tax asset was understated by $4.2 million and the valuation allowance was understated by $4.2 million as of December 31, 2006. As the Company has recorded a valuation allowance to fully reserve all deferred tax assets as of December 31, 2006, the restatement of the net deferred tax assets as of December 31, 2006, had no impact on the Company’s consolidated financial statements for the year ended December 31, 2006.

Upon implementation of FASB Statement No. 142, “Goodwill and Other Intangible Assets” effective for the year ended December 31, 2002, amortization of the Company’s indefinite-life intangible assets, consisting of goodwill, ceased for financial statement purposes. As of December 31, 2006, the Company’s deferred tax asset relating to indefinite-life intangibles was $1.2 million, which was fully reserved by a valuation allowance. As a result of additional tax amortization during 2007, this deferred tax asset relating to indefinite-life intangibles became a deferred tax liability of $3.5 million as of December 31, 2007. The Company cannot determine when the reversal of the deferred tax liability relating to its indefinite-life intangible assets will occur, or whether such reversal would occur within the Company’s net operating loss carry-forward period. Therefore, for the year ended December 31, 2007, the Company recognized a non-cash charge totaling $3.5 million to income tax expense to increase the valuation allowance against the Company’s deferred tax assets, primarily consisting of net operating loss carry-forwards.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. In order to fully realize the deferred tax assets, the Company will need to generate future taxable income of approximately $134,900,000 prior to the expiration of the federal net operating loss carryforwards beginning in 2019. Taxable loss for the year ended December 31, 2007 is estimated to be $3,890,000 and the actual taxable loss for the year ended December 31, 2006 was $6,571,000. Based upon the historical taxable losses, management believes it is more likely than not that the Company will not realize the benefits of these

F-89

deductible differences; thus, the Company recorded a valuation allowance to fully reserve all net deferred tax assets as of December 31, 2007 and 2006. The increase in the valuation allowance in 2007 and 2006 was $1,636,000 and $5,530,000, respectively.

The Company adopted the provisions of FIN 48 on January 1, 2007 and has analyzed filing positions in all of the federal and state jurisdictions as of December 31, 2007, where it is required to file income tax returns, as well as all open tax years in these jurisdictions. The Company has identified its federal tax return and its state income tax returns filed in Texas, Florida, New York, Pennsylvania, Arkansas, Ohio, Iowa and Tennessee as its “major” tax jurisdictions. The periods subject to examination for the Company’s federal return are the 2004 through 2006 tax years. The periods subject to examination for the Company’s state returns in major tax jurisdictions are years 2003 through 2006. As of December 31, 2007, there were no active federal, state or local income tax audits.

As a result of the implementation of FIN 48, the Company recognized no material adjustment in the liability for unrecognized tax benefits. A reconciliation of the beginning and ending amount of total gross unrecognized tax benefits is as follows:

Gross unrecognized tax benefits at January 1, 2007	$	225,000
Increases for tax positions of prior years		1,141,000
Decreases for tax positions of prior years		—
Lapse of statute of limitations		(78,000	)
Gross unrecognized tax benefits at December 31, 2007	$	1,288,000

The Company had approximately $22,000 and $24,000 of accrued interest related to uncertain tax positions at December 31, 2007 and January 1, 2007, respectively. The total amount of unrecognized tax benefits that would affect the Company’s tax rate if recognized relates solely to certain state matters and is $196,000 and $225,000 as of December 31, 2007 and January 1, 2007, respectively.

On April 10, 2007, the acquisition of 5,368,982 shares of the Company’s common stock by Highland Capital resulted in an “ownership change” for purposes of Section 382 of the Internal Revenue Code. As a result, the future utilization of certain net operating loss carryforwards which existed at the time of the “ownership change” will be limited on an annual basis. The Company’s annual Section 382 federal limitation will be approximately $2.0 million, without consideration of the impact of the future potential recognition of built-in gains or losses as provided by Section 382. The Company is in the process of assessing the potential limitation of its state net operating loss carryforwards resulting from the ownership change.

15. INSURANCE

The Company maintains a commercial general liability policy which is on a claims-made basis. This insurance is renewed annually and includes product liability coverage on the medical equipment that it sells or rents with per claim coverage limits of up to $1.0 million per claim with a $5.0 million product liability annual aggregate and a $3.0 million general liability annual aggregate. The Company’s professional liability policy is on a claims-made basis and is renewable annually with per claim coverage limits of up to $1.0 million per claim and $5.0 million in the aggregate. The Company’s commercial general liability policy and the professional liability policy have a maximum policy aggregate of $7.0 million, including defense costs. The Company retains the first $50,000 of each professional or general liability claim subject to a $500,000 aggregate. After the $500,000 aggregate has been reached, a $10,000 per claim deductible applies to all future claims applicable to this policy period. The Company also maintains excess liability coverage with limits of $20.0 million per claim and $20.0 million in the aggregate. Management believes the manufacturers of the equipment it sells or rents currently maintain their own insurance, and in some cases the Company has received evidence of such coverage and has been added by endorsement as an additional insured; however, there can be no assurance that such manufacturers will continue to do so, that such insurance will be adequate or available to protect the Company,

F-90

or that the Company will not have liability independent of that of such manufacturers and/or their insurance coverage.

The Company is insured for vehicle liability coverage for $1.0 million per accident; subject to a per claim deductible of $250,000. The Company is insured for workers compensation losses; subject to a per claim deductible of $250,000. The Company also provides accruals for the settlement of outstanding claims and claims incurred but not reported at amounts believed to be adequate. The differences between actual settlements and accruals are included in expense once a probable amount is known. The Company did not maintain annual aggregate stop-loss coverage for the years 2005, 2006 and 2007, as such coverage was not available.

There can be no assurance that any of the Company’s insurance will be sufficient to cover any judgments, settlements or costs relating to any pending or future legal proceedings or that any such insurance will be available to the Company in the future on satisfactory terms, if at all. If the insurance protection purchased by the Company is not sufficient to cover any judgments, settlements or costs relating to pending or future legal proceedings, the Company’s business and financial condition could be materially adversely affected.

16. SUBSEQUENT EVENTS

On February 26, 2008, the Compensation Committee of the Company approved an amendment to the 1991 Plan that increased the number of shares of the Company’s common stock reserved for issuance under the 1991 Plan by 500,000 shares. The Compensation Committee also awarded 485,000 stock options to certain executive officers of the Company.

F-91

16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The following are the Company’s 2007 and 2006 quarterly financial information (amounts in thousands, except per share data):

	First			Second			Third		Fourth			Full
2007	Quarter			Quarter			Quarter		Quarter			Year
Revenues, net	$	76,933		$	73,334		$	71,291	$	71,469		$	293,027
Income (loss) from continuing operations before income taxes		1,236			(6,975	)		1,333		1,211			(3,195	)
Provision for income taxes		87			1,585			1,229		1,196			4,097
Net income (loss) from continuing operations	$	1,149		$	(8,560	)	$	104	$	15		$	(7,292	)
(Loss) income from discontinued operations, including gain on disposal, net of tax		(76	)		2,182			24		(360	)		1,770
Net income (loss)	$	1,073		$	(6,378	)	$	128	$	(345	)	$	(5,522	)
Net income (loss) per common share — Basic
Income (loss) from continuing operations	$	0.07		$	(0.49	)	$	0.01	$	—		$	(0.41	)
(Loss) income from discontinued operations		(0.01	)		0.13			—		(0.02	)		0.10
Net income (loss) per common share — Basic	$	0.06		$	(0.36	)	$	0.01	$	(0.02	)	$	(0.31	)
Net income (loss) per common share — Diluted
Income (loss) from continuing operations	$	0.07		$	(0.49	)	$	0.01	$	—		$	(0.41	)
(Loss) income from discontinued operations		(0.01	)		0.13			—		(0.02	)		0.10
Net income (loss) per common share — Diluted	$	0.06		$	(0.36	)	$	0.01	$	(0.02	)	$	(0.31	)

F-92

	First			Second			Third			Fourth			Full
2006	Quarter			Quarter			Quarter			Quarter			Year
Revenues, net	$	79,036		$	79,218		$	80,419		$	83,095		$	321,768
(Loss) income from continuing operations before income taxes		(621	)		(2,068	)		(1,180	)		1,484			(2,385	)
Provision for income taxes		87			87			87			87			348
Net (loss) income from continuing operations	$	(708	)	$	(2,155	)	$	(1,267	)	$	1,397		$	(2,733	)
(Loss) income from discontinued operations, including gain on disposal, net of tax		(31	)		(36	)		228			(15	)		146
Net (loss) income	$	(739	)	$	(2,191	)	$	(1,039	)	$	1,382		$	(2,587	)
Net (loss) income per common share — Basic
(Loss) income from continuing operations	$	(0.04	)	$	(0.13	)	$	(0.07	)	$	0.08		$	(0.16	)
Income from discontinued operations		—			—			0.01			—			0.01
Net income (loss) per common share — Basic	$	(0.04	)	$	(0.13	)	$	(0.06	)	$	0.08		$	(0.15	)
Net (loss) income per common share — Diluted
(Loss) income from continuing operations	$	(0.04	)	$	(0.13	)	$	(0.07	)	$	0.08		$	(0.16	)
Income from discontinued operations		—			—			0.01			—		$	0.01
Net income (loss) per common share — Diluted	$	(0.04	)	$	(0.13	)	$	(0.06	)	$	0.08		$	(0.15	)

F-93

INDEX TO EXHIBITS

Exhibit Number	Description of Exhibit
2.1	Second Amended Joint Plan of Reorganization Proposed by the Debtors and the Official Unsecured Creditors Committee dated January 2, 2003 (incorporated by reference to Exhibit 99.3 to the Company’s Current Report on Form 8-K filed on March 27, 2003).
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 the Company’s 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 June 8, 1996 (incorporated by reference to Exhibit 3.5 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004).
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).
3.7	Amendment to the Bylaws of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K dated November 5, 2007).
10.1	Amended and Restated American HomePatient, Inc. 1991 Non-Qualified Stock Option Plan (incorporated by reference to Exhibit 10 to the Company’s Registration Statement on Form S-8 filed on April 5, 2004).
10.2	Amendment No. 1 to Amended and Restated American HomePatient, Inc. 1991 Nonqualified Stock Option Plan (incorporated by reference to Exhibit 10.1 to the Company’s Registration Statement on Form S-8 filed on May 17, 2005).
10.3	1995 Nonqualified Stock Option Plan for Directors (incorporated by reference to Exhibit 10.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004).

Exhibit Number	Description of Exhibit
10.4	Amendment No. 1 to 1995 Nonqualified Stock Option Plan for Directors (incorporated by reference to Exhibit 10.3 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004).
10.5	Amendment No. 2 to 1995 Nonqualified Stock Option Plan for Directors (incorporated by reference to Exhibit 10.2 to the Company’s Registration Statement on Form S-8 filed on May 17, 2005).
10.6	Lease and addendum as amended dated October 25, 1995, by and between Principal Mutual Life Insurance Company and American HomePatient, Inc. (incorporated by reference to Exhibit 10.5 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004).
10.7	Employment Agreement effective December 1, 2000 between the Company and Joseph F. Furlong, III (incorporated by reference to Exhibit 10.6 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004).
10.8	Form of Promissory Note dated July 1, 2003, by American HomePatient, Inc. and certain of its direct and indirect subsidiaries (incorporated by reference to Exhibit 10.23 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003).
10.9	Second Amended and Restated Assignment and Borrower Security Agreement dated July 1, 2003, by and between American HomePatient, Inc. and Bank of Montreal, as agent (incorporated by reference to Exhibit 10.24 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003).
10.10	Second Amended and Restated Assignment and Subsidiary Security Agreement dated July 1, 2003, by and between certain direct and indirect subsidiaries of American HomePatient, Inc. and Bank of Montreal, as agent (incorporated by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003).
10.11	Amended and Restated Borrower Partnership Security Agreement dated July 1, 2003, by and between American HomePatient, Inc. and Bank of Montreal, as agent (incorporated by reference to Exhibit 10.26 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003).
10.12	Amended and Restated Subsidiary Partnership Security Agreement dated July 1, 2003, by and between certain direct and indirect subsidiaries of American HomePatient, Inc. and Bank of Montreal, as agent (incorporated by reference to Exhibit 10.27 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003).
10.13	Second Amended and Restated Borrower Pledge Agreement dated July 1, 2003, by and between American HomePatient, Inc. and Bank of Montreal, as agent (incorporated by reference to Exhibit 10.28 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003).

Exhibit Number	Description of Exhibit
10.14	Second Amended and Restated Subsidiary Pledge Agreement dated July 1, 2003, by and between certain direct and indirect subsidiaries of American HomePatient, Inc. and Bank of Montreal, as agent (incorporated by reference to Exhibit 10.29 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003).
10.15	Amended and Restated Concentration Bank Agreement dated July 1, 2003, by and between American HomePatient, Inc., PNC Bank, National Association, and Bank of Montreal, as agent (incorporated by reference to Exhibit 10.30 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003).
10.16	Second Amended and Restated Collection Bank Agreement dated July 1, 2003, by and between American HomePatient, Inc., PNC Bank, National Association, and Bank of Montreal, as agent (incorporated by reference to Exhibit 10.31 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003).
10.17	Employment Agreement effective January 21, 2005 between the Company and Stephen Clanton (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated January 26, 2005).
10.18	Employment Agreement effective February 9, 2005 between the Company and Frank Powers (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated April 28, 2005).
10.19	Amendment No. 1 to Employment Agreement effective November 10, 2006 between the Company and Joseph F. Furlong, III (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated November 13, 2006).
10.20	Amendment No. 1 to Employment Agreement effective November 10, 2006 between the Company and Stephen Clanton (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K dated November 13, 2006).
10.21	Amendment No. 1 to Employment Agreement effective November 10, 2006 between the Company and Frank Powers (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K dated November 13, 2006).
10.22	Amendment to lease dated April 5, 2006, by and between Principal Mutual Life Insurance Company and American HomePatient, Inc. (attached hereto).
10.23	Amendment to Confidentiality, Non-Competition and Severance Pay Agreement dated June 18, 2007 with John D. Gouy (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated July 3, 2007).
10.24	Offer Letter accepted by James P. Reichmann on June 18, 2007 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated June 21, 2007).

Exhibit Number	Description of Exhibit
10.25	Confidentiality, Non-Competition and Severance Pay Agreement dated June 18, 2007 with James P. Reichmann (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K dated June 21, 2007).
10.26	Amendment No. 2 to Employment Agreement dated December 21, 2007 with Joseph F. Furlong, III (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated December 27, 2007).
21	Subsidiary List.
23	Consent of KPMG LLP.
31.1	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 — Chief Executive Officer.
31.2	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 — Chief Financial Officer.
32.1	Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 — Chief Executive Officer.
32.2	Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 — Chief Financial Officer.

AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES

SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2007, 2006 and 2005

ALLOWANCE FOR DOUBTFUL ACCOUNTS:

Column A	Column B		Column C		Column D		Column E
			Additions		Deductions
	Balance at				Write-offs		Balance at
	Beginning		Bad Debt		Net of		End of
Description	of Period		Expense		Recoveries		Period
For the year ended December 31, 2007:	$	17,076,000	$	9,240,000	$	14,494,000	$	11,822,000
For the year ended December 31, 2006:	$	15,964,000	$	10,829,000	$	9,717,000	$	17,076,000
For the year ended December 31, 2005:	$	16,912,000	$	9,438,000	$	10,386,000	$	15,964,000

 S-1 

EX-21

Exhibit 21

SUBSIDIARIES OF AMERICAN HOMEPATIENT, INC.

NAME OF SUBSIDIARY	STATE OF INCORPORATION
AHP Alliance of Columbia	South Carolina
AHP Delmarva, LLP	Maryland
AHP Home Care Alliance of Gainesville	Florida
AHP Home Care Alliance of Tennessee	Tennessee
AHP Home Care Alliance of Virginia	Virginia
AHP Home Medical Equipment Partnership of Texas	Texas
AHP Knoxville Partnership	Tennessee
AHP, L.P.	Tennessee
AHP-MHR Home Care, LLP	Nebraska
American HomePatient Arkansas Ventures, Inc.	Delaware
American HomePatient Delaware Ventures, Inc.	Delaware
American HomePatient of New York, Inc.	New York
American HomePatient of Sanford, LLC	North Carolina
American HomePatient of Texas, L.P.	Texas
American HomePatient of Unifour, LLC	North Carolina
American HomePatient Tennessee Ventures, Inc.	Delaware
American HomePatient Ventures, Inc.	Tennessee
American HomePatient, Inc.	Tennessee
Baptist Ventures — AHP Homecare Alliance of Montgomery	Alabama
Blue Ridge Home Care	North Carolina
Coastal Home Care	South Carolina
Colorado Home Medical Equipment Alliance, LLC	Colorado
Designated Companies, Inc.	New York
Homelink Home Health Care	Arkansas
Neogenesis, Inc.	South Carolina
Northeast Pennsylvania Alliance, LLC	Pennsylvania
Northwest Washington Alliance, LLC	Washington
Outpatient Medical Network, Inc.	Washington
Piedmont Medical Equipment	South Carolina
Promed Home Care	South Carolina
Shared Care — West Branch, LLC	Michigan
Total Home Care of East Alabama, LLC	Alabama

EX-23

Exhibit 23

Consent of Independent Registered Public Accounting Firm

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

We consent to the incorporation by reference in the registration statement No. 333-56313, No. 333-56317, No. 033-64292, No. 333-117758, No. 333-125013, and No. 333-125015 on Form 10-K of American HomePatient, Inc. and subsidiaries of our report dated March ___, 2008, with respect to the consolidated balance sheets of American HomePatient, Inc. and subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of operations, shareholders’ deficit, comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2007, and the related financial statement schedule, which report appears in the December 31, 2007, annual report on Form 10-K of American HomePatient, Inc.

As discussed in Note 2 to the consolidated financial statements, effective January 1, 2006, the Company adopted the fair value method of accounting for stock-based compensation as required by Statement of Financial Accounting Standards No. 123R, Share-Based Payment. Also as discussed in Note 13 to the consolidated financial statements, the Company changed its method of quantifying errors in 2006 to conform to Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements.

/s/ KPMG LLP

Nashville, Tennessee
March 12, 2008

EX-31.1

Exhibit 31.1

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

I, Joseph F. Furlong, III, certify that:

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

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

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

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 12, 2008

/s/ Joseph F. Furlong, III  

Joseph F. Furlong, III 

Chief Executive Officer 

EX-31.2

Exhibit 31.2

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

I, Stephen L. Clanton, certify that:

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

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

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

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 12, 2008

/s/ Stephen L. Clanton  

Stephen L. Clanton 

Chief Financial Officer 

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of American HomePatient, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Joseph F. Furlong, III, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(1)	the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

This Certification is executed as of March 12, 2008.

/s/ Joseph F. Furlong, III  

Joseph F. Furlong, III 

Chief Executive Officer 

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of American HomePatient, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Stephen L. Clanton, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(1)	the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

This Certification is executed as of March 12, 2008.

/s/ Stephen L. Clanton  

Stephen L. Clanton 

Chief Financial Officer 

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.