UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended: September 30, 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                     .

American HomePatient, Inc.

(exact name of registrant as specified in its charter)

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

5200 Maryland Way, Suite 400, Brentwood, Tennessee	37027
(Address of principal executive offices)	(Zip Code)

(615) 221-8884

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. 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 þ

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

17,573,389

(Outstanding shares of the issuer’s common stock as of October 29, 2007)

AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES

INDEX

	Page No.
PART I Financial Information
Item 1. Financial Statements (Unaudited)
Interim Condensed Consolidated Balance Sheets		3
Interim Condensed Consolidated Statements of Operations – Three and Nine months ended September 30, 2007 and 2006		5
Interim Condensed Consolidated Statements of Cash Flows – Nine months ended September 30, 2007 and 2006		6
Notes to Interim Condensed Consolidated Financial Statements		8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
Item 3. Quantitative and Qualitative Disclosures about Market Risk		35
Item 4. Controls and Procedures		35
Report of Independent Registered Public Accounting Firm		36
PART II Other Information and Signatures
Item 1. Legal Proceedings		37
Item 1A. Risk Factors		37
Item 6. Exhibits		43
Signatures		44
EX-15.1 AWARENESS LETTER 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 302 CERTIFICATION OF THE CEO
EX-32.2 SECTION 302 CERTIFICATION OF THE CFO

2

PART I. FINANCIAL INFORMATION

ITEM 1 — FINANCIAL STATEMENTS

AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

	September 30,			December 31,
	2007			2006
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	22,155,000		$	6,786,000
Restricted cash		250,000			650,000
Accounts receivable, less allowance for doubtful accounts of $13,853,000 and $17,076,000, respectively		44,295,000			54,314,000
Inventories, net of inventory valuation allowances of $654,000 and $792,000, respectively		10,836,000			12,288,000
Prepaid expenses and other current assets		11,247,000			4,430,000
Total current assets		88,783,000			78,468,000
Property and equipment		155,969,000			163,666,000
Less accumulated depreciation and amortization		(114,380,000	)		(112,255,000	)
Property and equipment, net		41,589,000			51,411,000
Goodwill		121,834,000			121,834,000
Investment in joint ventures		6,800,000			8,691,000
Other assets		15,980,000			16,267,000
Total other assets		144,614,000			146,792,000
TOTAL ASSETS	$	274,986,000		$	276,671,000

(Continued)

3

AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

(Continued)

	September 30,			December 31,
	2007			2006
LIABILITIES AND SHAREHOLDERS’ DEFICIT
CURRENT LIABILITIES:
Current portion of long-term debt and capital leases	$	10,819,000		$	1,063,000
Accounts payable		17,560,000			19,345,000
Other payables		1,356,000			1,304,000
Short-term note payable		764,000			248,000
Deferred revenue		6,448,000			7,097,000
Accrued expenses:
Payroll and related benefits		5,977,000			8,706,000
Insurance, including self-insurance accruals		6,089,000			6,246,000
Other		10,635,000			3,119,000
Total current liabilities		59,648,000			47,128,000
NONCURRENT LIABILITIES:
Long-term debt and capital leases, less current portion		238,234,000			250,194,000
Deferred tax liability		2,365,000			—
Other noncurrent liabilities		51,000			47,000
Total noncurrent liabilities		240,650,000			250,241,000
Total liabilities		300,298,000			297,369,000
MINORITY INTEREST		509,000			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		175,755,000			175,083,000
Accumulated deficit		(201,752,000	)		(196,575,000	)
Total shareholders’ deficit		(25,821,000	)		(21,316,000	)
TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT	$	274,986,000		$	276,671,000

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

4

AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

	Three Months Ended Sept. 30,						Nine Months Ended Sept. 30,
	2007			2006			2007			2006
REVENUES:				(Restated)						(Restated)
Sales and related service revenues, net	$	29,607,000		$	33,334,000		$	92,020,000		$	98,862,000
Rental revenues, net		41,684,000			47,085,000			129,538,000			139,811,000
Total revenues, net		71,291,000			80,419,000			221,558,000			238,673,000
EXPENSES:
Cost of sales and related services		15,834,000			20,777,000			55,072,000			61,397,000
Cost of rentals and other revenues, including rental equipment depreciation of $7,965,000, $8,789,000, $23,337,000 and $22,629,000, respectively		10,301,000			12,777,000			31,372,000			34,312,000
Operating expenses		34,896,000			37,423,000			104,347,000			113,975,000
Bad debt expense		2,341,000			2,533,000			6,914,000			8,065,000
General and administrative		4,586,000			4,396,000			13,976,000			13,040,000
Depreciation, excluding rental equipment, and amortization		842,000			915,000			2,375,000			2,769,000
Interest expense, net		4,014,000			4,297,000			12,073,000			12,988,000
Other income, net		(476,000	)		(349,000	)		(1,528,000	)		(477,000	)
Change of control (income) expense ( See Note 8)		(1,012,000	)		—			5,577,000			—
Total expenses		71,326,000			82,769,000			230,178,000			246,069,000
Earnings from unconsolidated joint ventures		1,368,000			1,203,000			4,214,000			3,811,000
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE REORGANIZATION ITEMS AND INCOME TAXES		1,333,000			(1,147,000	)		(4,406,000	)		(3,585,000	)
Reorganization expense		—			33,000			—			284,000
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		1,333,000			(1,180,000	)		(4,406,000	)		(3,869,000	)
Provision for income taxes		1,229,000			87,000			2,901,000			261,000
NET INCOME (LOSS) FROM CONTINUING OPERATIONS	$	104,000		$	(1,267,000	)	$	(7,307,000	)	$	(4,130,000	)
DISCONTINUED OPERATIONS:
Income from discontinued operations, including gain on disposal of assets of $3,001,000, net of tax		24,000			228,000			2,130,000			161,000
NET INCOME (LOSS)	$	128,000		$	(1,039,000	)	$	(5,177,000	)	$	(3,969,000	)
NET INCOME (LOSS) PER COMMON SHARE — BASIC
Income (loss) from continuing operations	$	0.01		$	(0.07	)	$	(0.41	)	$	(0.24	)
Income from discontinued operations		—			0.01		$	0.12			0.01
NET INCOME (LOSS) PER COMMON SHARE — BASIC	$	0.01		$	(0.06	)	$	(0.29	)	$	(0.23	)
NET INCOME (LOSS) PER COMMON SHARE — DILUTED
Income (loss) from continuing operations	$	0.01		$	(0.07	)	$	(0.41	)	$	(0.24	)
Income from discontinued operations		—			0.01			0.12			0.01
NET INCOME (LOSS) PER COMMON SHARE — DILUTED	$	0.01		$	(0.06	)	$	(0.29	)	$	(0.23	)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
— Basic		17,573,000			17,573,000			17,573,000			17,533,000
— Diluted		17,891,000			17,573,000			17,573,000			17,533,000

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

5

AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Nine Months Ended Sept. 30,
	2007			2006
				(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(5,177,000	)	$	(3,969,000	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Change of control expense		5,577,000			—
Gain on sale of nursing facility		(3,001,000	)		—
Deferred tax expense		2,365,000			—
Depreciation and amortization		25,731,000			25,426,000
Bad debt expense		7,676,000			8,104,000
Stock compensation expense		522,000			426,000
Equity in earnings from unconsolidated joint ventures		(2,786,000	)		(2,401,000	)
Minority interest		278,000			318,000
Change in assets and liabilities:
Restricted cash		400,000			—
Accounts receivable		2,498,000			(7,670,000	)
Inventories		1,436,000			1,417,000
Prepaid expenses and other current assets		(6,850,000	)		5,066,000
Deferred revenue		(649,000	)		308,000
Accounts payable, other payables and accrued expenses		(2,829,000	)		(4,763,000	)
Other assets and liabilities		139,000			(666,000	)
Due to unconsolidated joint ventures, net		4,677,000			4,878,000
Net cash provided by operating activities		30,007,000			26,474,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment, net		(10,722,000	)		(19,536,000	)
Proceeds from sale of nursing facility		2,790,000			—
Net cash used in investing activities	$	(7,932,000	)	$	(19,536,000	)

(Continued)

6

AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

(Continued)

	Nine Months Ended Sept. 30,
	2007			2006
				(Restated)
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to minority interest owners	$	(387,000	)	$	(335,000	)
Proceeds from exercise of employee stock options		—			457,000
Principal payments on long-term debt and capital leases		(6,835,000	)		(158,000	)
Proceeds (principal payments) on short-term note payable		516,000			(2,949,000	)
Net cash used in financing activities		(6,706,000	)		(2,985,000	)
INCREASE IN CASH AND CASH EQUIVALENTS		15,369,000			3,953,000
CASH AND CASH EQUIVALENTS, beginning of period		6,786,000			4,444,000
CASH AND CASH EQUIVALENTS, end of period	$	22,155,000		$	8,397,000
SUPPLEMENTAL INFORMATION:
Cash payments of interest	$	11,277,000		$	12,881,000
Cash payments of income taxes	$	491,000		$	426,000
NON-CASH ACTIVITY:
Capital leases entered into for property and equipment and change in accounts payable related to purchases of property and equipment	$	4,930,000		$	927,000
Write-off of related notes receivable and notes payable	$	—		$	570,000
CHANGE OF CONTROL EXPENSE:
Other liabilities	$	5,427,000		$	—
Additional paid-in capital	$	(273,000	)	$	—
NURSING AGENCY ASSETS SOLD:
Inventories	$	16,000		$	—
Property and equipment, net	$	50,000		$	—
PROMISSORY NOTE RECEIVED FROM SALE OF NURSING AGENCY	$	310,000		$	—

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

7

AMERICAN HOMEPATIENT, INC. AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. BASIS OF PRESENTATION

The interim condensed consolidated financial statements of American HomePatient, Inc. and subsidiaries (the “Company”) for the three and nine months ended September 30, 2007 and 2006 herein are unaudited and have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements reflect all adjustments (consisting of only normally recurring accruals) necessary to present fairly the Company’s financial position at September 30, 2007, its results of operations for the three and nine months ended September 30, 2007 and 2006, and its cash flows for the nine months ended September 30, 2007 and 2006.

The results of operations for the three and nine months ended September 30, 2007 and 2006 are not necessarily indicative of the operating results for the entire respective years. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s 2006 Annual Report on Form 10-K.

Certain reclassifications of prior year amounts have been made to conform to the current year presentation.

The unaudited interim condensed consolidated financial statements of the Company for the three and nine months ended September 30, 2006 have been restated to properly reflect deferred revenues associated with rental arrangements in accordance with Staff Accounting Bulletin No. 108, “Considering Effects of Prior Year Misstatements in Current Year Financial Statements,” which was adopted effective as of January 1, 2006.

2. STOCK BASED COMPENSATION

Effective January 1, 2006, the Company adopted the fair value recognition provisions of Financial Accounting Standards Board (“FASB”) Statements of Financial Accounting Standards (“SFAS”) No. 123R “Share-Based Payment,” using the modified prospective method. Under this method, compensation costs for fixed plan stock options are based on the estimated fair value of the respective options and the proportion vesting in the period. Deductions for stock-based employee compensation expense 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 since the emergence from bankruptcy.

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

8

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.

The Company recognized $113,000 and $522,000 of stock-based compensation expense in the three and nine months ended September 30, 2007, respectively.

Under the 1991 Nonqualified Stock Option Plan (the “1991 Plan”), as amended, 5,000,000 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 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, 2006		2,221,250		$	3.45
Granted		450,000			1.60
Exercised		—			—
Canceled		(162,750	)		9.43
Outstanding at March 31, 2007		2,508,500		$	2.73
Granted		35,000			2.40
Exercised		—			—
Canceled		(500	)		18.13
Outstanding at June 30, 2007		2,543,000		$	2.73
Granted		—			—
Exercised		—			—
Canceled		(40,000	)		7.01
Outstanding at September 30, 2007		2,503,000		$	2.66

9

There were no stock options exercised during the three and nine months ended September 30, 2007. At September 30, 2007, there was $0.6 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 period of 1.5 years.

				Weighted
				Average
				Grant-date
Nonvested Options	Options			Fair Value
Balance at December 31, 2006		730,000		$	2.52
Granted		450,000			1.22
Vested		(212,500	)		2.56
Forfeited		(72,500	)		3.05
Balance at March 31, 2007		895,000		$	1.81
Granted		35,000			1.86
Vested		(416,250	)		1.74
Forfeited		—			—
Balance at June 30, 2007		513,750		$	1.87
Granted		—			—
Vested		(2,500	)		0.47
Forfeited		(20,000	)		2.52
Balance at September 30, 2007		491,250			1.85

10

Options granted under the 1991 Plan as of September 30, 2007 have the following characteristics:

																Weighted
														Weighted		Average
														Average		Remaining
														Exercise		Contractual		Aggregate
								Weighted						Price of		Life in		Intrinsic
								Average				Options		Options		Years of		Value
						Weighted		Remaining				Exercisable		Exercisable		Options		of Options
						Average		Contractual		Aggregate		at		at		Exercisable		Exercisable
Year of		Options		Exercise		Exercise		Life in		Intrinsic		Sept. 30,		Sept. 30,		at Sept. 30,		at Sept. 30,
Grant		Outstanding		Prices		Price		Years		Value		2007		2007		2007		2007
	1998		473,000	$	2.13 to $18.13	$	5.95		1.02		—		473,000	$	5.95		1.02		—
	1999		200,000	$	0.56	$	0.56		2.12		112,000		200,000	$	0.56		2.12		112,000
	2000		220,000	$	0.17 to $0.30	$	0.18		3.10		207,700		220,000	$	0.18		3.10		207,700
	2004		450,000	$	1.31 to $1.80	$	1.64		6.64		—		412,500	$	1.67		6.60		—
	2005		170,000	$	2.21 to $3.83	$	2.97		7.35		—		125,000	$	2.96		7.34		—
	2006		505,000	$	3.30	$	3.25		8.40		—		327,500	$	3.28		8.39		—
	2007		485,000	$	1.60 to $2.40	$	1.66		9.44		—		253,750	$	1.63		9.43		—
			2,503,000							$	319,700		2,011,750					$	319,700

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

																Weighted
														Weighted		Average
														Average		Remaining
														Exercise		Contractual		Aggregate
								Weighted						Price of		Life in		Intrinsic
								Average				Options		Options		Years of		Value
						Weighted		Remaining				Exercisable		Exercisable		Options		of Options
						Average		Contractual		Aggregate		at		at		Exercisable		Exercisable
Year of		Options		Exercise		Exercise		Life in		Intrinsic		Dec. 31,		Dec. 31,		at Dec. 31,		at Dec. 31,
Grant		Outstanding		Prices		Price		Years		Value		2006		2006		2006		2006
	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 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 three or 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

11

September 30, 2007 and December 31, 2006, shares available for future grants of options under the 1991 Plan total 43,109 and 324,859, respectively.

Under the 1995 Nonqualified Stock Option Plan for Directors (the “1995 Plan”), as amended, 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, 2006 and September 30, 2007		468,000	$	1.62

Options granted under the 1995 Plan as of December 31, 2006 and September 30, 2007 have the following characteristics:

								Weighted		Weighted
								Average		Average				Weighted		Aggregate		Aggregate
								Remaining		Remaining				Average		Intrinsic		Intrinsic
						Weighted		Contractual		Contractual				Exercise		Value		Value
						Average		Life in		Life in				Price of		of Options		of Options
Year of		Options		Exercise		Exercise		Years		Years		Options		Options		Exercisable		Exercisable
Grant		Outstanding		Prices		Price		12/31/2006		9/30/2007		Exercisable		Exercisable		12/31/2006		9/30/2007
	1997		6,000	$	21.06	$	21.06		1.00		0.25		6,000	$	21.06	$	—	$	—
	1998		6,000	$	1.69	$	1.69		2.00		1.25		6,000	$	1.69		—		—
	1999		6,000	$	0.53	$	0.53		3.00		2.25		6,000	$	0.53		5,220		3,540
	2000		140,000	$	0.20 to $0.30	$	0.26		3.61		2.87		140,000	$	0.26		159,800		120,600
	2001		15,000	$	0.75	$	0.75		5.00		4.25		15,000	$	0.75		9,750		5,550
	2002		15,000	$	0.15	$	0.15		6.00		5.26		15,000	$	0.15		18,750		14,550
	2003		80,000	$	1.29	$	1.29		7.00		6.26		80,000	$	1.29		8,800		—
	2004		100,000	$	1.18 to $3.46	$	2.32		7.72		6.97		100,000	$	2.32		—		—
	2005		50,000	$	3.27	$	3.27		9.00		8.26		50,000	$	3.27		—		—
	2006		50,000	$	1.40	$	1.40		10.00		9.26		50,000	$	1.40		—		—
			468,000										468,000			$	202,320	$	144,240

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

3. NET INCOME (LOSS) PER COMMON SHARE

Net income (loss) per share is measured at two levels: basic net income (loss) per share and diluted net income (loss) per share. Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the year. Diluted net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding and excludes stock options as they would be antidilutive. Diluted

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net 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 net income per share, the stock options are considered dilutive using the treasury stock method.

The following information is necessary to calculate net income (loss) per share for the periods presented:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2007		2006			2007			2006
Net income (loss)	$	128,000	$	(1,039,000	)	$	(5,177,000	)	$	(3,969,000	)
Weighted average common shares outstanding		17,573,000		17,573,000			17,573,000			17,533,000
Effect of dilutive options		318,000		—			—			—
Adjusted diluted common shares outstanding		17,891,000		17,573,000			17,573,000			17,533,000
Net income (loss) per common share — basic
Income (loss) from continuing operations	$	0.01	$	(0.07	)	$	(0.41	)	$	(0.24	)
Income from discontinued operations		—		0.01			0.12			0.01
Net income (loss) per common share — basic	$	0.01	$	(0.06	)	$	(0.29	)	$	(0.23	)
Net income (loss) per common share — diluted
Income (loss) from continuing operations	$	0.01	$	(0.07	)	$	(0.41	)	$	(0.24	)
Income from discontinued operations		—		0.01			0.12			0.01
Net income (loss) per common share — diluted	$	0.01	$	(0.06	)	$	(0.29	)	$	(0.23	)

4. 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 7.

The Approved Plan provides that principal is payable annually on the 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 estimates having Excess Cash Flow at December 31, 2007 of $9.0 million. As such, this amount is reflected in the current portion of long-term debt and capital leases at September 30, 2007. On October 1, 2007, the Company made a payment of $4.5 million, which is one-half of the anticipated March 2008 payment. The

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actual Excess Cash Flow at December 31, 2007 may be higher or lower than our estimate and will be used to determine the actual March 2008 payment. The maturity date of the Secured Debt is August 1, 2009. The Approved Plan provides that interest is payable monthly on the Secured Debt at a rate of 6.785% per annum.

As of September 30, 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 September 30, 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.

5. INCOME TAXES

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.

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 $1.2 million, as of June 30, 2007 and $2.4 million at September 30, 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 quarters ended June 30, 2007 and September 30, 2007, the Company recognized a non-cash charge totaling $1.2 million, for each quarter, to income tax expense to increase the valuation allowance against the Company’s deferred tax assets, primarily consisting of net operating loss carry-forwards.

6. RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENT

In July 2006, the FASB issued its Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (FIN 48), which clarifies the accounting and disclosure for uncertainty in tax positions, as defined. FIN 48 seeks to reduce the diversity in practice associated with certain aspects of the recognition and measurement related to accounting for income taxes. The Company is subject to the provisions of FIN 48 as of January 1, 2007, and has analyzed filing positions in all of the federal and state jurisdictions as of September 30, 2007, where it is required to file income tax returns, as well as all open tax years in these jurisdictions.

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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 September 30, 2007, there were no active federal, state or local income tax audits. The Company’s policy for recording interest and penalties associated with audits is to record such items as a component of income before taxes.

The Company believes that any income tax filing positions and deductions not sustained on audit will not result in a material change to its financial position or results of operations. Therefore, adoption of FIN 48 did not have a material effect on the Company’s consolidated financial position or results of operations.

7. 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 2006.

8. 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 is outside of the Company’s control. As such, the Company recorded an expense of $6.6 million, which is shown as “change of control expense” in the interim condensed consolidated statements of operations, and a liability in the amount of $6.9 million, which is reflected in other accrued expenses on the interim condensed consolidated balance sheets. These items are 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 amount of $6.3 million, which will be used to pay the change of control obligation if it arises. This amount is reflected in prepaid expenses and other current assets on the interim condensed consolidated balance sheets. If the

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change of control obligation does not arise within one year after the change of control, the trust principal and related proceeds will revert back to the Company at the end of the trust period.

In the third quarter of 2007, the Company reduced the change of control expense by $1.0 million and the related liability by $1.4 million due to revaluation of the fair value of Mr. Furlong’s outstanding stock options as of September 30, 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 September 30, 2007.

9. GOODWILL IMPAIRMENT ANALYSIS

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.

The Company performed its annual impairment review as of September 30, 2007 and concluded there was no impairment.

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

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including, without limitation, statements containing the words “believes,” “anticipates,” “intends,” “expects,” “estimates,” “projects,” “may,” “plan,” “will,” “likely,” “could” and words of similar import. Such statements include statements concerning the Company’s Approved Plan (as defined in Note 4 to the interim condensed consolidated financial statements), other effects and consequences of the Bankruptcy Filing (as defined in Note 4 to the interim condensed consolidated financial statements), forecasts upon which the Approved Plan is based, business strategy, the ability to satisfy interest expense and principal repayment obligations, operations, cost savings initiatives, industry, economic performance, financial condition, liquidity and capital resources, adoption of, or changes in, accounting policies and practices, existing government regulations and changes in, or the failure to comply with, governmental regulations, legislative proposals for healthcare reform, the ability to enter into strategic alliances and arrangements with managed care providers on an acceptable basis, and current and future reimbursement rates, as well as reimbursement reductions and the Company’s ability to mitigate the impact of the reductions. Such statements are not guarantees of future performance and are subject to various risks and uncertainties. The Company’s actual results may differ materially from the results discussed in such forward-looking statements because of a number of factors, including those identified in the “Risk Factors” section and elsewhere in this Quarterly Report on Form 10-Q. The forward-looking statements are made as of the date of this Quarterly Report on Form 10-Q and the Company does not undertake to update the forward-looking statements or to update the reasons that actual results could differ from those projected in the forward-looking statements.

Overview

     American HomePatient, with operations in 33 states, provides home health care services and products consisting primarily of respiratory and infusion therapies, the rental and sale of home medical equipment, and the sale of home health care supplies.

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

	Nine Months Ended Sept. 30,
	2007			2006
Oxygen systems		38	%		37	%
Inhalation drugs		11			10
Nebulizers		1			2
Respiratory assist devices		24			23
Other respiratory		3			3
Total home respiratory therapy services		77	%		75	%
Enteral nutrition services		6			6
Other infusion services		6			6
Total home infusion therapy services		12	%		12	%
Total home medical equipment and supplies		11	%		13	%
		100	%		100	%

     The Company’s products and services are primarily paid for by Medicare, Medicaid, and other third-party payors. Since amounts paid under these programs are generally based upon fixed rates, the Company generally is not able to set the prices that it receives for products and services provided to patients. Thus, the Company improves 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 providing products and services. Key indicators of performance are:

     Revenue Growth. The Company operates in an industry with pre-set prices subject to reimbursement reductions. Therefore, in order to increase revenue, the Company must increase the volume of sales and rentals. Reductions in reimbursement levels can more than offset an increase in volume. Management closely tracks overall increases and decreases in sales and rentals as well as increases and decreases by product-line and by branch location and region in order to identify product line or geographic weaknesses and take corrective actions. The Company’s sales and marketing focus for 2007 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 new locations focused on sleep only, addition of more sleep specialists, and working 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 long-term success. Management will continue to review and monitor progress with its sales and marketing efforts. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Trends, Events, and Uncertainties – Reimbursement Changes and the Company’s Response.”

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     Bad Debt Expense. Billing and collecting in the healthcare industry is extremely complex. Rigorous substantive and procedural standards are set by each third party payor, and failure to adhere to these standards can lead to non-payment, which can have a significant impact on the Company’s net income and cash flow. The Company measures bad debt as a percent of net sales and rentals, and management considers this percentage a key indicator in monitoring its billing and collection function. For the nine months ended September 30, 2007 and September 30, 2006, bad debt expense as a percentage of net revenue was 3.1% and 3.4%, respectively. The 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 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.” See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”

     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 more timely payment processing by payors. Management uses DSO trends to monitor, evaluate and improve the performance of the billing centers. DSO, net of discontinued operations, was 56 and 58 days at September 30, 2007 and December 31, 2006, respectively. This decrease is primarily the result of improved collections and a decrease in unbilled revenue.

     Unbilled Revenue. Another key indicator of the Company’s receivable collection efforts is the amount of unbilled revenue, which reports the amount of sales and rental revenues that have not yet been billed to the respective payors due to incomplete documentation or the lack of the Certificate of Medical Necessity (“CMN”) from the physicians. Unbilled revenue net of allowances decreased from $10.7 million at December 31, 2006 to $7.7 million at September 30, 2007, primarily due to improvements made in obtaining supporting documentation needed for billing.

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     Productivity and Profitability. As discussed above, the fixed price reimbursement in the Company’s industry makes it particularly important to control expenses. Management considers many of the Company’s expenses to be either fixed costs or cost of goods sold, which are difficult to reduce or eliminate. As a result, management’s primary areas of focus for expense reduction and containment are productivity analysis and profitability analysis. For instance, management analyzes billing center productivity using measures such as monthly revenue processed per full time equivalent (FTE) and monthly claims processed per FTE, with the goal of increasing productivity and eliminating the resulting excess capacity. Additionally, the Company monitors productivity of its branches by measuring each branch’s personnel costs against a predetermined productivity standard. This measurement highlights opportunities for improved productivity and reductions in personnel expenses on a branch and area basis. These analyses have enabled the Company to consolidate billing centers and branches, improve productivity and reduce expenses. Moreover, they have helped identify and standardize best practices and identify and correct deficiencies. Similarly, the Company monitors its 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 branch locations, changes in the emphasis of certain products, and new sales initiatives. During the nine months ended September 30, 2007, the Company closed or consolidated twelve branch locations and opened seven branch locations.

     In light of the reimbursement reductions affecting the Company over the past several years and given the likelihood of continued reimbursement reductions in the future, management will continue to be focused on evolving the Company’s business model to improve productivity and reduce costs throughout 2007 and beyond. Initiatives include centralization of certain functions currently residing at the branch level, consolidation of certain billing center functions, and continued productivity improvements in branches and billing centers. Examples of centralization initiatives include the centralization of revenue qualification processes, the centralization of order processing, the establishment of patient service centers and a centralized service center supporting the Company’s sleep therapy business, and the centralization of pharmacy activities. Initiatives are also in place in an effort to improve asset utilization, reduce capital expenditures, reduce bad debt expense and revenue deductions, and reduce costs of delivery of products to patients. See “Trends, Events, and Uncertainties – Reimbursement Changes and the Company’s Response.”

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 changes have not occurred, but their possibility 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.

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     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. These past changes and any future changes will affect the Company’s operating results, liquidity and capital resources.

     The following reimbursement changes already enacted will further affect the Company in 2007 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. Suppliers who are successful in the bidding process will become contract suppliers for those items for which they submit winning bids. With a few exceptions, only contract suppliers may bill Medicare for competitively-bid items in competitive bidding areas (“CBAs”).

     On April 2, 2007, the Department of Health and Human Services (“HHS”) announced the first 10 CBAs, as follows:

• Charlotte-Gastonia-Concord, NC-SC

• Cincinnati-Middletown, OH-KY-IN

• Cleveland-Elyria-Mentor, OH

• Dallas-Fort Worth-Arlington, TX

• Kansas City, MO-KS

• Miami-Fort Lauderdale-Miami Beach, FL

• Orlando, FL

• Pittsburgh, PA

• Riverside-San Bernardino-Ontario, CA

• San Juan-Caguas-Guaynabo, PR

     The Company currently has 19 branch locations providing services within seven of the 10 CBAs. The Company does not have locations in the greater Miami area, California, or Puerto Rico.

     With the announcement of the first 10 CBAs, HHS also announced the following 10 categories of items that will be competitively bid:

• 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

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• 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

• Support surfaces (group 2 and 3 mattresses and overlays) – Miami and San Juan only

     The bidding process for the first 10 categories of items in the first 10 CBAs began in May 2007. The deadline for submitting bids was September 25, 2007. The contract period for this first round of bidding is July 1, 2008 through June 30, 2011.

     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 these 10 product categories within the seven CBAs in which the Company currently operates is less than 3% of the Company’s total revenue.

     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. The new quality standards reflect many of those currently required by certain healthcare accreditation organizations, such as the Joint Commission on Accreditation of Healthcare Organizations (“JCAHO”), coupled with elements comprising the Company’s existing compliance, Federal Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) privacy, and HIPAA security programs. All of the Company’s operating branch locations are currently accredited by JCAHO. The effective date of required compliance with these quality standards has not yet been determined by CMS. However, CMS has recently announced that suppliers must be accredited or be pending accreditation to submit a bid in the competitive bidding process as described above. Additionally, suppliers must be accredited by October 31, 2007 to be awarded a contract in the first round of the competitive bidding process for the CBAs.

     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 beginning in 2007.

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	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.
•	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 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

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change will begin in 2007. The Company estimates that the annual impact of this reimbursement change will be a revenue reduction of approximately $0.6 million.

     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: The proposed budget of the United States Government for fiscal year 2008 included 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. Additionally, 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. Additionally, 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 reduce payments to Medicare Advantage plans and increase the federal cigarette tax by 45 cents per pack to 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 – which produced a savings score of $1.8 billion over 5 years and $6 billion over 10 years. On August 2, 2007, the U.S. Senate passed S 1893. This legislation would reauthorize SCHIP and increase the cigarette tax by 61 cents per pack to fund an SCHIP program expansion of $35 billion over 5 years. 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 did not override this veto. The Company cannot predict the ultimate outcome of proposed reductions in 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 such a drastic reduction in reimbursement for oxygen equipment would limit access to life-sustaining oxygen required by numerous Medicare beneficiaries.

     Inhalation Drug Proposals: 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. 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. Included in the House of Representatives version of the SCHIP legislation, as described above, was a provision to reduce the reimbursement rate for albuterol to its historic rate while reimbursing Xopenx at the lower of the blended rate or historic rate beginning January 1, 2008. However, this provision was not included in the compromise bill that was ultimately vetoed by the President. The Company cannot predict future changes in reimbursement for albuterol and Xopenex; however,

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any additional decrease in reimbursement could have a material negative effect on the Company’s financial results and financial position.

     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 would require the Company to obtain a $65,000 surety bond for each of its 248 branch locations billing Medicare using a unique National Provider Identifier number, rather than a single $65,000 surety bond for the Company as a whole. CMS is seeking comments on this proposed rule and has 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.

     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 will be material in 2007 and beyond. See “Risk Factors.”

     Product Mix. The Company’s strategy for 2006 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 2007, 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 Company’s management considers the following accounting policies to be the most critical in relation to the Company’s consolidated financial statements: revenue recognition and allowance for doubtful accounts, inventory valuation and cost of sales recognition, rental equipment valuation, valuation of long-lived assets, valuation of goodwill and other intangible assets, and self insurance accruals. These policies are presented in detail within “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006.

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Results of Operations

     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 and enteral nutrition, 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 center 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 discussion sets forth items from the Company’s interim condensed consolidated statements of income as a percentage of revenues for the periods indicated:

	Percentage of Revenues
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2006			2007			2006
Revenues		100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales and related services		22.2			25.8			24.9			25.7
Cost of rentals, including rental equipment depreciation		14.4			15.9			14.2			14.4
Operating expenses		48.9			46.5			47.1			47.8
Bad debt expense		3.3			3.1			3.1			3.4
General and administrative		6.4			5.5			6.3			5.5
Depreciation, excluding rental equipment, and amortization		1.2			1.1			1.1			1.2
Interest expense, net		5.6			5.3			5.4			5.4
Other income, net		(0.7	)		(0.4	)		(0.7	)		(0.2	)
Change of control (income) expense		(1.4	)		—			2.5			—
Total expenses		99.9			102.8			103.9			103.2
Earnings from unconsolidated joint ventures		1.9			1.5			1.9			1.6
Income (loss) from continuing operations before reorganization items and income taxes		2.0			(1.3	)		(2.0	)		(1.6	)
Reorganization items		—			—			—			0.1
Provision for income taxes		1.7			0.1			1.3			0.1
Net income (loss) from continuing operations		0.3			(1.4	)		(3.3	)		(1.8	)
Operating income from discontinued operations, including gain on disposal, net of tax		—			0.3			1.0			0.1
Net income (loss)		0.3	%		(1.1	)%		(2.3	)%		(1.7	)%

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Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006

Revenues. Revenues decreased from $80.4 million for the quarter ended September 30, 2006 to $71.3 million for the same period in 2007, a decrease of $9.1 million, or 11.3%. A significant portion of this revenue decrease is due to a decrease in revenues associated with non-focus product lines such as durable medical equipment and infusion therapy and changes in inhalation drug product mix. Also contributing to the decrease in revenues was the effect of Company initiatives implemented in late 2006 to improve patient co-pay collections and 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 the third quarter 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 the third quarter of 2007 by approximately $0.8 million. The following is a discussion of the components of revenues:

Sales and Related Services Revenues. Sales and related services revenues decreased from $33.3 million for the quarter ended September 30, 2006 to $29.6 million for the same period of 2007, a decrease of $3.7 million, or 11.1%. 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.

Rental Revenues. Rental revenues decreased from $47.1 million for the quarter ended September 30, 2006 to $41.7 million for the same period in 2007, a decrease of $5.4 million, or 11.5%. 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 Medicare reimbursement reductions, all of which are described above.

Cost of Sales and Related Services. Cost of sales and related services decreased from $20.8 million for the quarter ended September 30, 2006 to $15.8 million for the same period in 2007, a decrease of $5.0 million, or 24.0%. As a percentage of revenues, cost of sales and related services decreased from 25.8% for the quarter ended September 30, 2006 to 22.2% for the same period in 2007. As a percentage of sales and related services revenues, cost of sales and related services decreased from 62.3% for the quarter ended September 30, 2006 to 53.5% for the same period in 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 $12.8 million for the quarter ended September 30, 2006 to $10.3 million for the same period in 2007, a decrease of $2.5 million, or 19.5% primarily attributable to a decrease in rental equipment depreciation and oxygen purchases. Rental equipment depreciation in the third quarter of the prior year included write-offs associated with the disposal or obsolescence of rental equipment assets in connection with the implementation of an automated asset tracking system for its fleet of rental equipment assets. As a

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percentage of revenues, cost of rental revenues decreased from 15.9% for the quarter ended September 30, 2006 to 14.4% for the same period in 2007. As a percentage of rental revenues, cost of rental revenue decreased from 27.1% for the quarter ended September 30, 2006 to 24.7% for the same period in 2007.

Operating Expenses. Operating expenses decreased from $37.4 million for the quarter ended September 30, 2006 to $34.9 million for the same period in 2007, a decrease of $2.5 million or 6.7%. The decrease is primarily the result of improved operating efficiencies and the resulting reduced operating costs. As a percentage of revenues, operating expenses were 46.5% and 48.9% for the three months ended September 30, 2006 and 2007, respectively. This increase is primarily attributable to a decrease in revenues.

Bad Debt Expense. Bad debt expense decreased from $2.5 million for the quarter ended September 30, 2006 to $2.3 million for the same period in 2007, a decrease of $0.2 million, or 8.0%. As a percentage of revenues, bad debt expense was 3.1% and 3.3% for the three months ended September 30, 2006 and 2007, respectively. Bad debt expense as a percentage of net revenue increased in the current-year quarter as a result of delays in Medicare payments due to a change in the Jurisdiction C DME Medicare Contract Administrator that occurred June 1, 2007, and the realignment of two states previously processed by Jurisdiction B, that were moved to Jurisdiction D on the same date.

General and Administrative Expenses. General and administrative expenses increased from $4.4 million for the quarter ended September 30, 2006 to $4.6 million for the same period in 2007, an increase of $0.2 million, or 4.5%. 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. As a percentage of revenues, general and administrative expenses were 5.5% and 6.4% for the quarters ended September 30, 2006 and 2007, respectively.

Depreciation and Amortization. Depreciation (excluding rental equipment) and amortization expenses decreased from $0.9 million for the quarter ended September 30, 2006 to $0.8 million for the same period in 2007.

Interest Expense, Net. Interest expense, net, decreased from $4.3 million for the quarter ended September 30, 2006 to $4.0 million for the same period in 2007, a decrease of $0.3 million, or 7.0%. This decrease is attributable to a 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 the quarter ended September 30, 2006 and $0.5 million for the quarter ended September 30, 2007. The increase is primarily due to 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. 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 gives Mr. Furlong the right to receive a lump sum severance payment in the event he or the Company terminates his employment within one year

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after the change of control. In the second quarter of 2007, the Company 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. In the third quarter of 2007, the Company reduced this expense by $1.0 million and the related liability by $1.4 million due to revaluation of the fair value of Mr. Furlong’s outstanding stock options as of September 30, 2007.

Earnings from Unconsolidated Joint Ventures. Earnings from unconsolidated joint ventures increased from $1.2 million for the quarter ended September 30, 2006 to $1.4 million for the same period in 2007. The increase is due to improved earnings of several joint ventures.

Provision for Income Taxes. The provision for income taxes was $0.1 million and $1.2 million for the quarters ended September 30, 2006 and 2007, respectively. The 2006 expense primarily relates to state income tax expense. The 2007 expense primarily relates to deferred state and federal income taxes and state income tax expense. See Note 5 “Income Taxes” for additional discussion.

Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006

Revenues. Revenues decreased from $238.7 million for the quarter ended September 30, 2006 to $221.6 million for the same period in 2007, a decrease of $17.1 million, or 7.2%. A significant portion of this revenue decrease is due to a decrease in revenues associated with non-focus product lines such as 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 the first nine months of 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 the first three quarters of 2007 by approximately $1.6 million. The following is a discussion of the components of revenues:

Sales and Related Services Revenues. Sales and related services revenues decreased from $98.9 million for the nine months ended September 30, 2006 to $92.0 million for the same period of 2007, a decrease of $6.9 million, or 7.0%. 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.

Rental Revenues. Rental revenues decreased from $139.8 million for the nine months ended September 30, 2006 to $129.5 million for the same period in 2007, a decrease of $10.3 million, or 7.4%. 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 Medicare reimbursement reductions, all of which are described above.

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Cost of Sales and Related Services. Cost of sales and related services decreased from $61.4 million for the nine months ended September 30, 2006 to $55.1 million for the same period in 2007, a decrease of $6.3 million, or 10.3%. As a percentage of revenues, cost of sales and related services decreased from 25.7% for the nine months ended September 30, 2006 to 24.9% for the same period in 2007. As a percentage of sales and related services revenues, cost of sales and related services decreased from 62.1% for the nine months ended September 30, 2006 to 59.8% for the same period in 2007. This decrease is primarily attributable to changes in product mix.

Cost of Rental Revenues. Cost of rental revenues decreased from $34.3 million for the nine months ended September 30, 2006 to $31.4 million for the same period in 2007, a decrease of $2.9 million, or 8.5%. This decrease is primarily attributable to a decrease in purchases of oxygen and rental supplies. As a percentage of revenues, cost of rental revenues decreased from 14.4% for the nine months ended September 30, 2006 to 14.2% for the same period in 2007. As a percentage of rental revenues, cost of rental revenue decreased from 24.5% for the nine months ended September 30, 2006 to 24.2% for the same period in 2007.

Operating Expenses. Operating expenses decreased from $114.0 million for the nine months ended September 30, 2006 to $104.3 million for the same period in 2007, a decrease of $9.7 million or 8.5%. The decrease is primarily the result of improved operating efficiencies and the resulting reduced operating costs. As a percentage of revenues, operating expenses were 47.8% and 47.1% for the nine months ended September 30, 2006 and 2007, respectively.

Bad Debt Expense. Bad debt expense decreased from $8.1 million for the nine months ended September 30, 2006 to $6.9 million for the same period in 2007, a decrease of $1.2 million, or 14.8%. As a percentage of revenues, bad debt expense was 3.4% and 3.1% for the nine months ended September 30, 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 $13.0 million for the nine months ended September 30, 2006 to $14.0 million for the same period in 2007, an increase of $1.0 million, or 7.7%. 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 5.5% and 6.3% for the nine months ended September 30, 2006 and 2007, respectively.

Depreciation and Amortization. Depreciation (excluding rental equipment) and amortization expenses decreased from $2.8 million for the nine months ended September 30, 2006 to $2.4 million for the same period in 2007, a decrease of $0.4 million, or 14.3%. 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 $13.0 million for the nine months ended September 30, 2006 to $12.1 million for the same period in 2007, a decrease of $0.9 million, or 6.9%. This decrease is attributable to a reduced debt balance and an increase in interest income on cash balances which is netted against interest expense.

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Other Income, Net. Other income, net, was $0.5 million for the nine months ended September 30, 2006 and $1.5 million for the nine months ended September 30, 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 for the nine months ended September 30, 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 gives 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 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. In the third quarter of 2007, the Company reduced this expense by $1.0 million and the related liability by $1.4 million due to revaluation of the fair value of Mr. Furlong’s outstanding stock options.

Earnings from Unconsolidated Joint Ventures. Earnings from unconsolidated joint ventures were $3.8 million for the nine months ended September 30, 2006 and $4.2 million for the nine months ended September 30, 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 $2.9 million for the nine months ended September 30, 2006 and 2007, respectively. The 2006 expense primarily relates to state income tax expense. The 2007 expense primarily relates to deferred state and federal income taxes and state income tax expense. See Note 5 “Income Taxes” for additional discussion.

Liquidity and Capital Resources

     At September 30, 2007 the Company had current assets of $88.8 million and current liabilities of $59.6 million, resulting in working capital of $29.2 million and a current ratio of 1.5x 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 currently has long-term debt of $247.2 million (the “Secured Debt”), as evidenced by a promissory note to the Lenders that is secured by substantially all of the assets of the Company.

     The Approved Plan provides that the Secured Debt matures on August 1, 2009 and that interest is payable monthly on the 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 prepayment is due on each previous September 30 in an amount equal to one-half of the anticipated March payment. The Company estimates having Excess Cash Flow at December 31, 2006 of $9.0 million. As such, this amount is reflected in the current portion of long-term debt and capital leases at September

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30, 2007. 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 has made all payments due under the Approved Plan as of September 30, 2007. As of September 30, 2007, the Lenders were owed $247.2 million. All pre-petition unsecured claims were paid in full as of September 30, 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 September 30, 2007, the Company had unrestricted cash and cash equivalents of approximately $22.2 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 for the twelve months ending September 30, 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 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 (principally current portion of long-term debt and capital leases, accounts payable and accrued expenses). In that regard, accounts receivable can have a significant impact on the Company’s liquidity. 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 covered by private insurance or Medicaid. Net patient accounts receivable were $43.7 million and $53.7 million at September 30, 2007 and December 31, 2006, respectively. Average DSO, net of discontinued operations, was approximately 56 days and 58 days at September 30, 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.

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

     Net cash provided by operating activities was $30.0 million and $26.5 million for the nine months ended September 30, 2007 and 2006. Net loss increased from $(4.0) million for the nine months ended September 30, 2006 to $(5.2) million for the nine months ended September 30, 2007. Additions to net property and equipment for the nine months ended September 30, 2007 were $10.7 million, excluding capital leases entered into in 2007 as described below, compared to $19.5 million for the same period in 2006. During the first three quarters of 2007, the Company entered into $4.6 million of capital leases for equipment compared to $0.9 million for the first three quarters of 2006. Net cash used in financing activities was $6.7 million and $3.0 million for the nine months ended September 30, 2007 and 2006, respectively. Net cash used in financing for the nine months ended September 30, 2007, includes proceeds of $0.5 million for the short-term note payable and principal payments on long-term debt and capital leases of $6.8 million. Net cash used in financing for the nine months ended September 30, 2006, included principal payments on the short-term note of $2.9 million.

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 September 30, 2007:

	Twelve Months Ending September 30,										After Sept., 30
	Total		2008		2009		2010		2011		2011
Long-term debt and capital leases	$	249,053,000	$	10,819,000	$	238,170,000	$	52,000	$	12,000	$	—
Interest on long-term debt and capital leases		29,090,000		16,596,000		12,493,000		1,000		—		—
Operating lease obligations		18,001,000		8,626,000		6,525,000		2,524,000		326,000		—
Total contractual cash obligations	$	296,144,000	$	36,041,000	$	257,188,000	$	2,577,000	$	338,000	$	—

Long-term debt is comprised entirely of amounts owed to the Lenders. Capital leases consist primarily of leases of medical, office and computer equipment. Operating leases are noncancelable leases on certain vehicles and buildings.

In addition to the scheduled cash payments above, the Company is obligated to make Excess Cash Flow payments on the Lenders’ secured and unsecured debt, defined by the Approved Plan as cash in excess of $7.0 million at the end of the Company’s fiscal year. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.” The Company estimates having Excess Cash Flow at December 31, 2007 of $9.0 million, and this amount is reflected in the 2008 column above. All other payments will be based on excess cash at future dates, and the Company is not able to project the amounts of these

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payments. As such, the remaining balance of the secured debt, which is classified in the 2009 column above, could require additional principal payments in the twelve months ending September 30, 2008.

Interest on the long-term debt in the above table assumes a $9.0 million payment for the twelve months ending September 30, 2008. All other interest payments do not assume any cash flow payments or pre-payments in the twelve months ended September 30, 2009.

At September 30, 2007 the Company had one letter of credit for $250,000, which expires in January 2008. 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.

Off-Balance Sheet Arrangements

At September 30, 2007 the Company had no off-balance sheet commitments or guarantees outstanding.

ITEM 3 — 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 the $247.2 million secured debt. Interest expense associated with other debts would not materially impact the Company as most interest rates are fixed. The Company does not own and is not a party to any material market risk sensitive instruments.

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

ITEM 4 – CONTROLS AND PROCEDURES

Based on management’s evaluation, with the participation of the Company’s chief executive officer and chief financial officer, as of the end of the period covered by this report, the Company’s chief executive officer and chief financial officer have concluded that the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”)) are effective to ensure that information required to be disclosed in reports that are filed or submitted by the Company under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and is accumulated and communicated to management, including the Company’s chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure. There has been no change in the Company’s internal control over financial reporting during the quarter ended September 30, 2007 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Report of Independent Registered Public Accounting Firm

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

We have reviewed the interim condensed consolidated balance sheet of American HomePatient, Inc. and subsidiaries as of September 30, 2007, the related interim condensed consolidated statements of operations for the three-month and nine-month periods ended September 30, 2007 and 2006, and the related condensed consolidated statements of cash flows for the nine-month periods ended September 30, 2007 and 2006. These condensed consolidated financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the interim condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of American HomePatient, Inc. and subsidiaries as of December 31, 2006, and the related consolidated statements of operations, shareholders’ deficit and comprehensive loss, and cash flows for the year then ended (not presented herein); and in our report dated March 13, 2007, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying interim condensed consolidated balance sheet as of December 31, 2006, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ KPMG LLP

Nashville, TN
November 14, 2007

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PART II. OTHER INFORMATION

ITEM 1 – 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 $3.1 million verdict against the Company for negligent retention of the shooter and negligent failure to maintain a safe work environment. As a result of mediation occurring on November 7, 2007, both cases were settled, and the settlement has been approved by the court. The Company’s insurance carriers funded the settlement and have not, since prior to the mediation, made any demand on the Company to pay any portion of the settlement amount. If any carrier ever makes a claim against the Company for any portion of the settlement amount, the Company will vigorously oppose that claim and may assert counterclaims against the carriers.

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.”

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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 nine months ended September 30, 2007, the percentage of the Company’s revenues derived from Medicare, Medicaid and all other payors was 54%, 8%, and 38%, 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.”

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 September 30, 2007 was $247.2 million. 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 $247.2 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 $247.2 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.

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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.”

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 2008, 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 an unintended 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 of 56 days as of September 30, 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

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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.”

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 due to state budgetary concerns or changes to the intermediary contracted by the state to process claims submitted by the providers. Some states have renewed processing claims; however, there has been a delay in cash collections by the Company as these states address the processing of backlog claims. There can be no assurance that these delays will not continue.

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       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.

The Company is highly dependent upon its senior management and, as a result of an investor’s acquisition of 48% of our common stock, our chief executive officer has the right to receive a significant payment in the event he or the Company terminates his employment within one year after the change of control. 

     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.  Also, 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.  Such a change of control occurred in the second quarter of 2007.  Under Mr. Furlong’s employment agreement, he has the right to receive a significant payment in the event he or the Company terminates his employment within one year after the change of control.  

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 whose primary competitive advantage is market familiarity. 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 claims in excess of its insurance coverage.

     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

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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 6 — EXHIBITS

EXHIBIT
NUMBER	DESCRIPTION OF EXHIBITS
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).
10.1	Amendment to Confidentiality, Non-Competition and Severance Pay Agreement between the Company and John D. Gouy (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated July 3, 2007).
15.1	Awareness Letter of KPMG LLP.
31.1	Certification pursuant to Rule 13a-14(a)/15d-14(a) – Chief Executive Officer.
31.2	Certification pursuant to Rule 13a-14(a)/15d-14(a) – 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.

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SIGNATURES

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

	AMERICAN HOMEPATIENT, INC.
November 14, 2007	By:	/s/ Stephen L. Clanton
		Stephen L. Clanton
		Chief Financial Officer and An Officer Duly Authorized to Sign on Behalf of the registrant

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