UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

|(Mark One)
|----------
|[X]       

For the period ended
September 30, 2003

OR

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

Commission File Number:
1-14316

APRIA HEALTHCARE GROUP INC.
(Exact name of registrant as specified in its charter)

|                                                                                                                                                                 |                                                                       
|---------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------
|Delaware(State or other
      jurisdiction ofincorporation or organization)26220 Enterprise
      Court, Lake Forest, CA(Address of principal executive offices) | 33-0488566(I.R.S. Employer
      Identification Number)92630(Zip Code)

Registrants
telephone number: (949) 639-2000

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

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

There were 51,035,070 shares of common stock, $.001 par
value, outstanding at November 6, 2003.

---

APRIA HEALTHCARE GROUP INC.

FORM 10-Q

For the period ended September 30, 2003

|                                                                                        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|PART I.
Item 1.Item 2.Item 3.Item 4.PART II.Item 1.Item 2.Item 3.
Item 4.Item 5.Item 6. |  | FINANCIAL INFORMATION
Financial Statements (unaudited)       
Condensed Consolidated Balance Sheets       
Condensed Consolidated Income Statements       
Condensed Consolidated Statements of Cash Flows     
  
Notes to Condensed Consolidated Financial Statements
Management's Discussion and Analysis ofFinancial Condition and Results of
OperationsQuantitive and Qualitative Disclosures About Market Risk
Controls and ProceduresOTHER INFORMATIONLegal
ProceedingsChanges in SecuritiesDefaults Upon Senior Securities
Submission of Matters to a Vote of Security HoldersOther Information
Exhibits and Reports on Form 8-K

---

PART I  FINANCIAL INFORMATION

ITEM 1.     FINANCIAL STATEMENTS (unaudited)

APRIA HEALTHCARE GROUP INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)

|                                                                              | September 30, |  | December 31,
|----------------------------------------------------------------------------- | ------------- |  | ------------
|
|
|ASSETS                                                                        |               |  |             
|CURRENT ASSETS                                                                |               |  |             
|Cash and cash equivalents                                                     |               |  | $           
|Accounts receivable, less allowance
for doubtful accounts of $41,714          |               | 
|and $32,206 at September 30, 2003 and
December 31, 2002, respectively         |               |  |             
|Inventories, net                                                              |               |  |             
|Deferred income taxes                                                         |               |  |             
|Prepaid expenses and other current assets                                     |               |  |             
|                                                                              |               |  |             
|TOTAL CURRENT ASSETS                                                          |               |  |             
|PATIENT SERVICE EQUIPMENT, less accumulated depreciation of $391,572          |               | 
|and $368,420 at September 30, 2003 and December 31, 2002, respectively        |               |  |             
|PROPERTY, EQUIPMENT AND IMPROVEMENTS, NET                                     |               |  |             
|DEFERRED INCOME TAXES                                                         |               |  |             
|GOODWILL                                                                      |               |  |             
|INTANGIBLE ASSETS, NET                                                        |               |  |             
|DEFERRED DEBT ISSUANCE COSTS, NET                                             |               |  |             
|OTHER ASSETS                                                                  |               |  |             
|                                                                              |               |  |             
|                                                                              |               |  | $           
|                                                                              |               |  |             
|LIABILITIES AND STOCKHOLDERS' EQUITY                                          |               | 
|CURRENT LIABILITIES                                                           |               | 
|Accounts payable                                                              |               |  | $           
|Accrued payroll and related taxes and benefits                                |               |  |             
|Accrued insurance                                                             |               |  |             
|Income taxes payable                                                          |               |  |             
|Other accrued liabilities                                                     |               |  |             
|Current portion of long-term debt                                             |               |  |             
|                                                                              |               |  |             
|TOTAL CURRENT LIABILITIES                                                     |               |  |             
|LONG-TERM DEBT, net of current portion                                        |               |  |             
|DEFERRED INCOME TAXES                                                         |               |  |             
|COMMITMENTS AND CONTINGENCIES (Note G)                                        |               | 
|STOCKHOLDERS' EQUITY                                                          |               | 
|Preferred stock, $.001 par value: 10,000,000 shares authorized;               |               | 
|none issued                                                                   |               |  |             
|Common stock, $.001 par value: 150,000,000 shares authorized;                 |               | 
|57,188,477 and 56,580,677 shares issued at September 30, 2003 and             |               | 
|December 31, 2002, respectively; 50,978,921 and 54,897,521                    |               | 
|outstanding at September 30, 2003 and December 31, 2002, respectively         |               |  |             
|Additional paid-in capital                                                    |               |  |             
|Treasury stock, at cost; 6,209,556 and 1,683,156 shares at September 30, 2003 |               | 
|and December 31, 2002, respectively                                           |               |  |             
|Retained earnings (accumulated deficit)                                       |               |  |             
|Accumulated other comprehensive loss                                          |               |  |             
|                                                                              |               |  |             
|                                                                              |               |  |             
|                                                                              |               |  |             
|                                                                              |               |  | $           
|                                                                              |               |  |             

See notes to condensed
consolidated financial statements.

---

APRIA HEALTHCARE GROUP INC.

CONDENSED CONSOLIDATED INCOME STATEMENTS 
(unaudited)

|                                         | Three Months EndedSeptember 30, |  | Nine Months EndedSeptember 30,
|---------------------------------------- | ------------------------------- |  | ------------------------------
|
|
|
|Net revenues                             |                                 |  | $                             
|Costs and expenses:                      |                                 | 
|Cost of net revenues:                    |                                 | 
|Product and supply costs                 |                                 |  |                               
|Patient service equipment depreciation   |                                 |  |                               
|Nursing services                         |                                 |  |                               
|Other                                    |                                 |  |                               
|                                         |                                 |  |                               
|TOTAL COST OF NET REVENUES               |                                 |  |                               
|                                        
|Provision for doubtful accounts          |                                 |  |                               
|Selling, distribution and administrative |                                 |  |                               
|Amortization of intangible assets        |                                 |  |                               
|                                         |                                 |  |                               
|TOTAL COSTS AND EXPENSES                 |                                 |  |                               
|                                         |                                 |  |                               
|OPERATING INCOME                         |                                 |  |                               
|Interest expense, net                    |                                 |  |                               
|                                         |                                 |  |                               
|INCOME BEFORE TAXES                      |                                 |  |                               
|Income tax expense                       |                                 |  |                               
|                                         |                                 |  |                               
|NET INCOME                               |                                 |  | $                             
|                                         |                                 |  |                               
|                                         |                                 |  |                               
|                                         |                                 |  |                               
|Basic net income per common share        |                                 |  | $                             
|                                         |                                 |  |                               
|Diluted net income per common share      |                                 |  | $                             
|                                         |                                 |  |                               

See notes to condensed consolidated
financial statements.

---

APRIA HEALTHCARE GROUP INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

|                                                                                   | Nine Months EndedSeptember 30,
|---------------------------------------------------------------------------------- | ------------------------------
|
|
|
|OPERATING ACTIVITIES                                                               |                               
|Net income                                                                         |                               
|Items included in net income not requiring cash:                                   |                               
|Provision for doubtful accounts                                                    |                               
|Depreciation and amortization                                                      |                               
|Amortization of deferred debt issuance costs                                       |                               
|Deferred income taxes and other                                                    |                               
|Changes in operating assets and liabilities, exclusive
of effects of acquisitions: |                               
|Accounts receivable                                                                |                               
|Inventories, net                                                                   |                               
|Prepaid expenses and other assets                                                  |                               
|Accounts payable, exclusive of outstanding checks                                  |                               
|Accrued payroll and related taxes and benefits                                     |                               
|Income taxes payable                                                               |                               
|Accrued expenses                                                                   |                               
|                                                                                   |                               
|NET CASH PROVIDED BY OPERATING ACTIVITIES                                          |                               
|INVESTING ACTIVITIES                                                               |                               
|Purchases of patient service equipment and property,                               |                               
|equipment and improvements, exclusive of effects of acquisitions                   |                               
|Proceeds from disposition of assets                                                |                               
|Cash paid for acquisitions, including payments of deferred consideration           |                               
|                                                                                   |                               
|NET CASH USED IN INVESTING ACTIVITIES                                              |                               
|FINANCING ACTIVITIES                                                               |                               
|Proceeds from revolving credit facilities                                          |                               
|Payments on revolving credit facilities                                            |                               
|Payments on term loans                                                             |                               
|Proceeds from issuance of convertible
senior notes                                 |                               
|Payments on other long-term debt                                                   |                               
|Decrease in outstanding checks included in accounts payable                        |                               
|Capitalized debt issuance costs                                                    |                               
|Repurchases of common stock                                                        |                               
|Issuances of common stock                                                          |                               
|                                                                                   |                               
|NET CASH
PROVIDED BY (USED IN) FINANCING ACTIVITIES                                |                               
|                                                                                   |                               
|NET INCREASE IN CASH AND CASH EQUIVALENTS                                          |                               
|Cash and cash equivalents at beginning of period                                   |                               
|                                                                                   |                               
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                                         |                               
|                                                                                   |                               

See notes to condensed
consolidated financial statements.

---

APRIA HEALTHCARE GROUP INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS

NOTE A  CERTAIN SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation: The accompanying unaudited
condensed consolidated financial statements include the accounts of Apria Healthcare Group
Inc. (Apria or the company) and its subsidiaries. Intercompany
transactions and accounts have been eliminated.

In the opinion of management, all adjustments,
consisting of normal recurring accruals necessary for a fair presentation of the results
of operations for the interim periods presented, have been reflected herein. The unaudited
results of operations for interim periods are not necessarily indicative of the results to
be expected for the entire year. For further information, refer to the consolidated
financial statements and footnotes thereto for the year ended December 31, 2002, included
in the companys Annual Report on Form 10-K.

Certain amounts from prior periods have been
reclassified to conform to the current period presentation.

Use of Accounting Estimates:The preparation of
financial statements in conformity with accounting principles generally accepted in the
United States of America requires management to make assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results could differ
from those estimates.

Revenue Recognition and Concentration of Credit
Risk: Net revenues are recognized on the date services and related products are
provided to patients and are recorded at amounts expected to be received under
reimbursement arrangements with third-party payors, including private insurers, prepaid
health plans, Medicare and Medicaid. In 2003, approximately 34% of the companys
revenues are being reimbursed under arrangements with Medicare and Medicaid. No other
third-party payor group represents 10% or more of the companys revenues. The
majority of the companys revenues are derived from fees charged for patient care
under fee-for-service arrangements. Revenues derived from capitation arrangements
represent less than 10% of total net revenues.

Due to the nature of the industry and the reimbursement
environment in which Apria operates, certain estimates are required to record net revenues
and accounts receivable at their net realizable values. Inherent in these estimates is the
risk that they will have to be revised or updated as additional information becomes
available. Specifically, the complexity of many third-party billing arrangements and the
uncertainty of reimbursement amounts for certain services from certain payors may result
in adjustments to amounts originally recorded. Such adjustments are typically identified
and recorded at the point of cash application, claim denial or account review.

Management performs periodic analyses to evaluate
accounts receivable balances to ensure that recorded amounts reflect estimated net
realizable value. Specifically, management considers historical realization data, accounts
receivable aging trends, other operating trends and relevant business conditions.
Management also performs focused reviews of certain large and/or problematic payors. Due
to continuing changes in the healthcare industry and with third-party reimbursement, it is
possible that managements estimates may change in the near term, which could have an
impact on operations and cash flows.

Accounts receivable are reduced by an allowance for
doubtful accounts which provides for those accounts from which payment is not expected to
be received, although services were provided and revenue was earned.

Recent Accounting Pronouncements:In April 2002,
the Financial Accounting Standards Board (FASB) issued SFAS No. 145,
Rescission of FASB Statement Nos. 4, 44, and 64, Amendment of FASB Statement No. 13,
and Technical Corrections. SFAS No. 145 updates and clarifies existing accounting
pronouncements related to gains and losses from the extinguishment of debt and requires
that certain lease modifications be accounted for in the same manner as sale-leaseback
transactions. Apria adopted the provisions of SFAS No. 145 January 1, 2003. Adoption of
this statement did not have a material effect on the companys consolidated financial
statements.

In July 2002, SFAS No. 146, Accounting for Costs
Associated With Exit or Disposal Activities, was issued. This statement addresses
the financial accounting and reporting for costs associated with exit or disposal
activities and requires that a liability for such costs be recognized when the liability
is incurred rather than at the date of an entitys commitment to an exit plan. SFAS
No. 146 also establishes that the liability should be measured and recorded at fair value.
Adoption of the provisions of SFAS No. 146 is required for exit and disposal activities
that are initiated after December 31, 2002. Adoption of this interpretation did not have a
material effect on Aprias consolidated financial statements.

In December 2002, SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure  an amendment of FASB
Statement No. 123, was issued. This statement amends SFAS No. 123, Accounting
for Stock-Based Compensation, to provide alternative methods of transition and
guidance for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. SFAS No. 148 also amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The company has complied with the expanded
financial statement disclosure requirements in its consolidated financial statements.

In November 2002, the FASB issued FASB Interpretation
(FIN) No. 45, Guarantors Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees and Indebtedness of Others, an
interpretation of SFAS Nos. 5, 57 and 107 and rescission of FIN No. 34, Disclosure
of Indirect Guarantees of Indebtedness of Others. FIN No. 45 elaborates on the
disclosure requirements for the interim and annual financial statements of the guarantor.
It also requires that a guarantor recognize a liability at the inception of the guarantee
for the fair value of the obligation undertaken. The disclosure provisions became
effective at December 31, 2002 while the recognition provisions of FIN No. 45 became
effective January 1, 2003. Adoption of this interpretation did not have a material effect
on Aprias consolidated financial statements as the company did not issue any
guarantees during the nine-month period ended September 30, 2003.

In January 2003, FIN No. 46, Consolidation of
Variable Interest Entities, an interpretation of Accounting Research Bulletin No.
51, was issued. FIN No. 46 requires that a company consolidate variable interest entities
if that company is subject to a majority of the risk of loss from the entitys
activities or the company receives a majority of the entitys residual returns. FIN
No. 46 also requires certain disclosures about variable interest entities in which a
company has a significant interest, regardless of whether consolidation is required.
Adoption of the provisions of FIN No. 46 was required January 1, 2003. The company
currently has no variable interest entities, therefore the adoption of this interpretation
is not expected to have a material effect on the companys consolidated financial
statements.

In April 2003, the FASB issued SFAS No. 149,
Amendment of Statement 133 on Derivative Instruments and Hedging Activities.
SFAS No. 149 amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133,Accounting for Derivative Instruments and
Hedging Activities. The statement is generally effective for contracts entered into or
modified after June 30, 2003 and for hedging relationships designated after June 30, 2003.
The adoption of this statement is not expected to have a material effect on the
companys consolidated results of operations and financial condition for the year
ending December 31, 2003.

In May 2003, the FASB issued SFAS No. 150,Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity. SFAS No. 150 establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of both
liabilities and equity. The statement is effective for financial instruments entered into
or modified after May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. The adoption of this statement is not
expected to have a material effect on the companys consolidated results of
operations and financial condition for the year ending December 31, 2003.

---

Stock-based Compensation:The company accounts
for its stock-based compensation plans under the recognition and measurement principles of
Accounting Principles Board Opinion (APB) No. 25,Accounting for
Stock Issued to Employees,and related interpretations. Apria has adopted the
disclosure provisions of SFAS No. 123, Accounting for Stock-Based
Compensation, as amended by SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure  an amendment of FASB Statement No.
123. For the three-month and nine-month periods ended September 30, 2003, net income
reflects compensation expense for restricted stock awards and restricted stock purchase
rights valued in accordance with APB No. 25. Had compensation expense for the
companys stock-based compensation awards been recognized based on the fair value
recognition provisions of SFAS No. 123, Aprias net income and per share amounts
would have been adjusted to the pro forma amounts indicated below.

|                                                                                                                                      | Three Months EndedSeptember 30, |  |   | Nine Months EndedSeptember 30,
|------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------- |  | - | ------------------------------
|
|
|
|Net income as reported                                                                                                                |                                 |  | $ | 28,857                        
|Add:  stock-based compensation
expense included  in reported net income, net of related tax effects                                   |                                 |  |   | 232                           
|Deduct:  total stock-based
compensation expense  determined for all awards under fair
value-based  method, net of related tax effects |                                 |  |   | (2,386                        
|                                                                                                                                      |                                 |  |   |                               
|Pro forma net income                                                                                                                  |                                 |  | $ | 26,703                        
|                                                                                                                                      |                                 |  |   |                               
|                                                                                                                                      |                                 | 
|Basic net income per share:                                                                                                           |                                 | 
|As reported                                                                                                                           |                                 |  | $ | 0.55                          
|Pro forma                                                                                                                             |                                 |  | $ | 0.51                          
|                                                                                                                                      |                                 | 
|Diluted income per share:                                                                                                             |                                 | 
|As reported                                                                                                                           |                                 |  | $ | 0.54                          
|Pro forma                                                                                                                             |                                 |  | $ | 0.50                          

For purposes of the pro forma disclosure, the fair value
of each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for grants in
the three and nine-month periods ended September 30, 2003 and 2002: risk-free interest
rates ranging from 1.91% to 3.13% and 2.80% to 4.71%, respectively; dividend yield of 0%
for all periods; expected lives ranging from 3.98 to 4.49 and 4.13 years, respectively;
and volatility ranging from 48% to 58% and 59%, respectively.

NOTE B  BUSINESS COMBINATIONS

Apria periodically makes acquisitions of complementary
businesses in specific geographic markets. The results of operations of the acquired
companies are included in the accompanying consolidated income statements from the dates
of acquisition. During the nine-month period ended September 30, 2003, cash paid for
acquisitions was $88,791,000, which included deferred payments of $5,865,000 that were
related to prior year acquisitions. At September 30, 2003, outstanding deferred
consideration totaled $5,645,000 and is included on the balance sheet in other accrued
liabilities.

During the nine months ended September 30, 2003, Apria
acquired 21 companies comprised largely of home respiratory therapy businesses. Pending
receipt of additional valuation information, amounts preliminarily allocated to goodwill,
other intangible assets and patient service equipment were $73,957,000, $4,215,000 and
$8,356,000, respectively. This allocation is inclusive of amounts not yet paid.

---

The following supplemental unaudited pro forma
information presents the combined operating results of Apria and the businesses that were
acquired by Apria during the nine-month period ended September 30, 2003, as if the
acquisitions had occurred at the beginning of the periods presented. The pro forma
information is based on the historical financial statements of Apria and those of the
acquired businesses. Amounts are not necessarily indicative of the results that may have
been obtained had the combinations been in effect at the beginning of the periods
presented or that may be achieved in the future.

|                                    | Nine Months EndedSeptember 30,
|----------------------------------- | ------------------------------
|
|
|
|Net revenues                        |                               
|Net income                          |                               
|                                   
|Basic net income per common share   |                               
|Diluted net income per common share |                               

NOTE C  GOODWILL AND INTANGIBLE ASSETS

Apria accounts for intangible assets and goodwill under
the initial recognition provisions of SFAS No. 141, Business Combinations and
the financial accounting and reporting provisions of SFAS No. 142, Goodwill and
Other Intangible Assets. Goodwill and other intangible assets with indefinite lives
are no longer amortized, but are tested for impairment annually, or more frequently if
circumstances indicate that the possibility of impairment exists. If the carrying value of
goodwill or an intangible asset exceeds its fair value, an impairment loss is recognized.

For the nine months ended September 30, 2003, the net
change in the carrying amount of goodwill of $75,194,000 is the result of business
combinations. All of the goodwill recorded in conjunction with business combinations
completed during the periods presented is expected to be deductible for tax purposes.

Intangible assets, all of which are subject to
amortization, consist of the following:

|(dollars in thousands)   |  |  | September 30, 2003 |     | December 31, 2002
|------------------------ |  |  | ------------------ | --- | -----------------
|
|
|
|Covenants not to compete |  |  |                    | 4.9 |                  
|Tradename                |  |  |                    | 2.0 |                  
|                         |  |  |                    |     |                  
|                         |  |  |                    | 4.3 |                  
|                         |  |  |                    |     |                  

Amortization expense was $2,143,000 and $2,003,000 for
the nine-month periods ended September 30, 2003 and 2002, respectively. Estimated
amortization expense for the current year and each of the next five fiscal years ending
December 31, is presented below:

|For the Year Ending December 31, | (dollars in thousands)
|-------------------------------- | ----------------------
|
|2003                             |                       
|2004                             |                       
|2005                             |                       
|2006                             |                       
|2007                             |                       
|2008                             |                       

---

NOTE D  LONG-TERM DEBT

Convertible Senior Notes: On August 20, 2003,
Apria issued 3.375% convertible senior notes in the aggregate principal amount of
$250,000,000 under an indenture between Apria and U.S. Bank National Association. The
notes were issued in a private placement at an issue price of $1,000 per note (100% of the
principal amount at maturity). The notes will mature on September 1, 2033, unless earlier
converted, redeemed or repurchased by Apria. Apria may redeem some or all of the notes at
any time after September 8, 2010 at a redemption price equal to 100% of the principal
amount of the notes to be redeemed plus accrued and unpaid interest and contingent
interest, if any, to the redemption date. The holders of the notes may require Apria to
repurchase some or all of the notes at a repurchase price equal to 100% of the principal
amount of the notes plus accrued and unpaid interest, including contingent interest, up to
but excluding the applicable repurchase date initially on September 1, 2008, and
subsequently on September 1 of 2010, 2013, 2018, 2023 and 2028, or at any time prior to
their maturity following a fundamental change as defined in the indenture. Any notes that
Apria is required to repurchase on September 1, 2008 will be paid for in cash. For all
remaining repurchase dates, Apria may pay the repurchase price in cash or by delivering
shares of its common stock or a combination of cash and shares of its common stock.

The notes bear interest at the rate of 3.375% per year.
Interest on the notes is payable on September 1 and March 1 of each year, beginning on
March 1, 2004. The notes are convertible during certain periods into shares of Apria
common stock, initially at a conversion rate of 28.6852 shares of common stock per $1,000
principal amount of notes, subject to adjustment, under certain circumstances as outlined
in the indenture.

Apria received $244,375,000 in proceeds upon issuance of
the notes. Concurrent with the issuance and with a portion of the proceeds, Apria
repurchased 3,786,400 shares of its common stock for $100,000,000. Issuance costs deducted
from the proceeds plus those paid separately in cash totaled $5,787,000.

Credit Agreement: Aprias credit agreement
with Bank of America and a syndicate of lenders was amended and restated effective August
13, 2003. The amendment permitted the issuance of the 3.375% convertible senior notes and the
concurrent repurchase of $100,000,000 of Aprias outstanding common stock with a
portion of the proceeds. The amendment also eliminated limitations related to repurchases
of the companys common stock and expenditures for acquisitions so long as the
companys leverage ratio, as defined by the credit agreement, is less than 2.0 to
1.0. As the leverage ratio increases, limitations are imposed on acquisition expenditures
and common stock repurchases.

At September 30, 2003, there were no borrowings under
the revolving credit facility, outstanding letters of credit totaled $3,855,000, credit
available under the revolving facility was $96,145,000, and Apria was in compliance with
all of the financial covenants required by the credit agreement.

Hedging Activities: Apria utilizes interest rate
swap agreements to moderate its exposure to interest rate fluctuations on its underlying
variable rate long-term debt. Apria does not use derivative financial instruments for
trading or other speculative purposes. Until their March 31, 2003 expiration, Apria had
two interest rate swap agreements with a total notional amount of $100,000,000 and a
fixed-rate of 2.58% (before applicable interest margin specified in the applicable credit
agreement). In December 2002, Apria entered into four interest rate swap agreements with a
total notional amount of $100,000,000 that fix an equivalent amount of its variable rate
debt at rates ranging from 2.43% to 3.42% (before applicable margin). The terms of the new
swap agreements range from two to four years. The swap agreements are being accounted for
as cash flow hedges under SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. Accordingly, the difference between the interest received and
interest paid is reflected as an adjustment to interest expense. For the nine-month
periods ended September 30, 2003 and 2002, Apria paid net settlement amounts of $1,485,000
and $478,000, respectively. At September 30, 2003, the aggregate fair value of the swap
agreements was a deficit of $2,135,000 and is reflected in the accompanying balance sheet
in other accrued liabilities. Unrealized gains and losses on the fair value of the swap
agreements are reflected, net of taxes, in other comprehensive loss (See Note E 
Stockholders Equity). Aprias exposure to credit loss under the
swap agreements is limited to the interest rate spread in the event of counterparty
non-performance.

---

NOTE E  STOCKHOLDERS EQUITY

For the nine months ended September 30, 2003, changes to
stockholders equity are comprised of the following amounts:

|(dollars in thousands)                              
|----------------------------------------------------
|
|Net income                                          
|Proceeds from the exercise of stock options         
|Tax benefit related to the exercise of stock options
|Compensatory stock options and awards granted       
|Other comprehensive loss, net of taxes              
|Repurchased common shares held in treasury          
|                                                    
|                                                    
|                                                    

For the nine-month periods ended September 30, 2003 and
2002, net income and comprehensive income differed by unrealized losses related to
interest rate swap agreements in the amounts of $80,000 and $321,000, respectively. A
$399,000 unrealized gain and a $44,000 unrealized loss constitute the difference between
net income and comprehensive income for the three-month periods ended September 30, 2003
and 2002, respectively.

During the nine-month period ended September 30, 2003,
Apria repurchased 4,526,000 shares of its outstanding common stock for $118,471,000. All
repurchased common shares are being held in treasury. In October 2003, Aprias Board
of Directors authorized additional repurchases of up to $100,000,000. Depending on market
conditions and other considerations, the company plans to repurchase stock in open market
or privately negotiated transactions, with at least $50,000,000 in repurchases
contemplated by the end of the first quarter of 2004 and the balance by the end of 2004.

NOTE F  INCOME TAXES

Income taxes for the nine-month periods ended September
30, 2003 and 2002 were provided at the effective tax rates expected to be applicable for
the respective year. The annual rate for 2002 was reduced by a benefit of $11,073,000 that
resulted from prior year tax examinations that were settled in the fourth quarter.

At September 30, 2003, Apria had federal net operating
loss carryforwards of $10,000,000, which are limited to $5,000,000 of usage per year under
Internal Revenue code Section 382. Apria is currently utilizing such carryforwards and
expects they will be utilized to their limits in 2003 and 2004. The company has an
alternative minimum tax credit carryforward of $6,149,000, which is being utilized in
2003. Additionally, the company has various state net operating loss carryforwards.

NOTE G  COMMITMENTS AND CONTINGENCIES

As previously reported, since mid-1998 Apria has been
the subject of an investigation conducted by the U.S. Attorneys office in Los
Angeles and the U.S. Department of Health and Human Services. The investigation concerns
the documentation supporting Aprias billing for services provided to patients whose
healthcare costs are paid by Medicare and other federal programs. Apria is cooperating
with the government and has responded to various document requests and subpoenas.

Apria has been informed that the investigation is the
result of civil qui tam litigation filed on behalf of the government against Apria.
The complaints in the litigation are under seal, however, and the government has not
informed Apria of either the identities of the plaintiffs, the court or courts where the
proceedings are pending, the date or dates instituted or the factual bases alleged to
underlie the proceedings. To date, the U.S. Attorneys office has not informed Apria
of any decision to intervene in the qui tam actions; however, it could reach a
decision with respect to intervention at any time.

Government representatives and counsel for the
plaintiffs in the qui tam actions asserted in July 2001 that, by a process of
extrapolation from a sample of 300 patient files to all of Aprias billings to the
federal government during the three-and-one-half year sample period, Apria could be liable
to the government under the False Claims Act for more than $9 billion, consisting of
extrapolated overpayment liability, treble damages and penalties of up to $10,000 for each
allegedly false claim derived from the extrapolation.

Apria has acknowledged that there may be errors and
omissions in supporting documentation affecting a portion of its billings. However, it
considers the assertions and amounts described in the preceding paragraph to be
unsupported both legally and factually and believes that most of the alleged documentation
errors and omissions should not give rise to any liability, for overpayment refunds or
otherwise. Accordingly, Apria believes that the claims asserted are unwarranted and that
it is in a position to assert numerous meritorious defenses.

Apria has been exchanging information and having
discussions with government representatives in an attempt to explore whether it will be
possible to resolve this matter on a basis that would be considered fair and reasonable by
all parties. Apria cannot provide any assurances as to the outcome of these discussions,
however, or as to the outcome of the qui tam litigation in the absence of a
settlement. Management cannot estimate the possible loss or range of loss that may result
from these proceedings and therefore has not recorded any related accruals.

If a judge, jury or administrative agency were to
determine that false claims were submitted to federal healthcare programs or that there
were significant overpayments by the government, Apria could face civil and administrative
claims for refunds, sanctions and penalties for amounts that would be highly material to
its business, results of operations and financial condition, including the exclusion of
Apria from participation in federal healthcare programs.

Apria is also engaged in the defense of certain claims
and lawsuits arising out of the ordinary course and conduct of its business, the outcomes
of which are not determinable at this time. Apria has insurance policies covering such
potential losses where such coverage is cost effective. In the opinion of management, any
liability that might be incurred by Apria upon the resolution of these claims and lawsuits
will not, in the aggregate, have a material adverse effect on Aprias results of
operations or financial condition.

NOTE H  PER SHARE AMOUNTS

The following table sets forth the computation of basic
and diluted per share amounts:

|                                                    | Three Months EndedSeptember 30, |  |   | Nine Months EndedSeptember 30,
|--------------------------------------------------- | ------------------------------- |  | - | ------------------------------
|
|
|
|Numerator:                                          |                                 |  |   |                               
|Net income                                          |                                 |  | $ | 28,857                        
|Numerator for basic and diluted per share amounts - |                                 | 
|income available to common stockholders             |                                 |  | $ | 28,857                        
|                                                   
|Denominator:                                        |                                 | 
|Denominator for basic per share                     |                                 | 
|amounts - weighted average shares                   |                                 |  |   | 52,857                        
|                                                   
|Effect of dilutive securities:                      |                                 | 
|Employee stock options and awards -                 |                                 | 
|dilutive potential common shares                    |                                 |  |   | 675                           
|                                                    |                                 |  |   |                               
|Denominator for diluted per share amounts -         |                                 | 
|adjusted weighted average shares                    |                                 |  |   | 53,532                        
|                                                    |                                 |  |   |                               
|                                                   
|Basic net income per common share                   |                                 |  | $ | 0.55                          
|                                                    |                                 |  |   |                               
|Diluted net income per common share                 |                                 |  | $ | 0.54                          
|                                                    |                                 |  |   |                               
|                                                   
|Employee stock options excluded from the            |                                 | 
|computation of diluted per share amounts:           |                                 | 
|                                                   
|Shares for which exercise price exceeds             |                                 | 
|average market price of common stock                |                                 |  |   | 713                           
|                                                   
|Average exercise price per share that exceeds       |                                 | 
|average market price of common stock                |                                 |  | $ | 27.13                         
|                                                    |                                 |  |   |                               

---

---

Cautionary statement for purposes of the Safe
Harbor provisions of the Private Securities Litigation Reform Act of 1995:
Aprias business is subject to a number of risks which are partly or entirely beyond
the companys control. The company has described certain of those risks in its Annual
Report on Form 10-K for the fiscal year ended December 31, 2002, as filed with the
Securities and Exchange Commission on March 31, 2003. This report may be used for purposes
of the Private Securities Litigation Reform Act of 1995 as a readily available document
containing meaningful cautionary statements identifying important factors that could cause
actual results to differ materially from those projected in any forward-looking statements
the company may make from time to time. Key factors that may have an impact on Apria
include the following:

| |  | trends
 and developments affecting the collectibility of accounts receivable;                                                       
|- |  | ------------------------------------------------------------------------------------------------------------------------------------
| |  | government legislative
 and budget developments which could affect reimbursement levels for products and
services provided by Apria;
| |  | the ongoing government
investigation regarding patients covered by Medicare and other federal programs;                             
| |  | the effectiveness of the Apria's operating systems and controls;                                                                    
| |  | healthcare reform and the effect of federal and state healthcare regulations;                                                       
| |  | pricing pressures from large payors;                                                                                                
| |  | the successful implementation of the company's acquisition strategy and integration of acquired
businesses; and                     
| |  | other factors described in Apria's filings with the Securities and Exchange Commission.                                             

In addition,  the military and national security
 activities in which the United States is currently engaged,  have and could continue to
have significant  impacts on the economy and government spending  priorities.  The
effects of any further such  developments,  including  but not limited to a prolonged
 occupation  in Iraq,  pose  significant risks and  uncertainties  to Apria's  business.
 Among other  things,  deficit  spending by the  government  as the result of adverse
 developments in the economy and the costs of the military and national security activities
 could lead to increased  pressure  to reduce  government expenditures for other purposes, including
government-funded programs such as Medicare and Medicaid.

---

ITEM 2.    
 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
             
     OF OPERATIONS

Apria  operates in the
home  healthcare  segment of the healthcare  industry and provides  services in the home
 respiratory  therapy,  home infusion  therapy and home medical  equipment  areas.  In
all three lines,  Apria provides  patients  with a variety of  clinical  services  and
related  products  and  supplies,  most of which are prescribed  by a  physician  as part
of a care  plan.  Apria  provides  these  services  to  patients  in the  home throughout
the United States through approximately 425 branch locations.

Critical Accounting
Policies.Apria's management considers the accounting policies that govern revenue
recognition and the determination of the net realizable value of accounts receivable
to be the most critical in relation to the company's consolidated financial
statements. These policies require management's most complex and subjective
judgments. Other accounting policies requiring significant judgment are those related
to goodwill and long-lived assets. These policies are presented in detail in
Apria's Annual Report on Form 10-K for the fiscal year ended December 31, 2002 -
"Management's Discussion and Analysis of Financial Condition and Results of Operations."

Segment Reporting.Apria's branch locations are organized into geographic regions. Each region
consists of a number of branches and a regional office that provides key support
services, such as billing, purchasing, patient service equipment maintenance,
repair and warehousing. Management evaluates operating results on a geographic
basis, and therefore views each region as an operating segment. All regions provide
the same products and services, including respiratory therapy, infusion therapy
and home medical equipment and supplies. For financial reporting purposes, all the
company's operating segments are aggregated into one reportable segment in
accordance with the aggregation criteria of Statement of Financial Accounting
Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related
Information."

Recent Accounting
Pronouncements.In April 2002, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 145, "Rescission of FASB Statement Nos. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections." SFAS No. 145 updates and clarifies
existing accounting pronouncements related to gains and losses from the
extinguishment of debt and requires that certain lease modifications be accounted for
in the same manner as sale-leaseback transactions. Apria adopted the provisions
of SFAS No. 145 January 1, 2003. Adoption of this statement did not have a material
effect on the company's consolidated financial statements.

In July 2002,  SFAS No.
146,  "Accounting  for Costs  Associated  With Exit or Disposal  Activities,"  was
issued.  This  statement  addresses  the financial  accounting  and  reporting  for costs
 associated  with exit or disposal  activities  and requires  that a liability  for such
costs be  recognized  when the liability is incurred rather  than at the date of an
 entity's  commitment  to an exit  plan.  SFAS No.  146  also  establishes  that the
liability  should be measured and recorded at fair value.  Adoption of the  provisions
 of SFAS No. 146 is required for exit and disposal  activities that are initiated after
December 31, 2002.  Adoption of this  interpretation did not have a material effect on
Apria's consolidated financial statements.

In December 2002, SFAS
No. 148,  "Accounting  for  Stock-Based  Compensation - Transition and Disclosure - an
 amendment  of FASB  Statement  No.  123," was issued.  This  statement  amends SFAS No.
 123,  "Accounting  for Stock-Based  Compensation,"  to provide  alternative  methods of
transition and guidance for a voluntary  change to the fair value based method of
 accounting  for  stock-based  employee  compensation.  SFAS No. 148 also amends the
disclosure  requirements  of SFAS No. 123 to require  prominent  disclosures  in both
annual and interim  financial statements about the method of accounting for stock-based
 employee  compensation and the effect of the method used on reported results.  The
company has complied with the expanded  financial  statement  disclosure  requirements in
its consolidated financial statements.

In November  2002,  the
FASB issued  FASB  Interpretation  ("FIN")  No. 45,  "Guarantor's  Accounting  and
Disclosure   Requirements  for  Guarantees,   Including  Indirect   Guarantees  and
 Indebtedness  of  Others,"  an interpretation  of SFAS Nos. 5, 57 and 107 and
 rescission  of FIN No. 34,  "Disclosure  of Indirect  Guarantees of Indebtedness  of
 Others."  FIN No. 45  elaborates  on the  disclosure  requirements  for the  interim
 and  annual financial  statements of the  guarantor.  It also requires that a guarantor
 recognize a liability at the inception of the guarantee for the fair value of the
obligation  undertaken.  The disclosure  provisions  became effective at December 31,
2002 while the  recognition  provisions of FIN No. 45 became  effective  January 1, 2003.
 Adoption of this  interpretation  did not have a material effect on Apria's
 consolidated  financial  statements as the company did not issue any guarantees during
the nine-month period ended September 30, 2003.

In January  2003,  FIN
No. 46,  "Consolidation  of  Variable  Interest  Entities,"  an  interpretation  of
Accounting  Research  Bulletin  No.  51,  was  issued.  FIN No. 46  requires  that a
company  consolidate  variable interest  entities if that  company is subject to a
majority of the risk of loss from the  entity's  activities  or the company receives a
majority of the entity's  residual  returns.  FIN No. 46 also requires  certain
 disclosures about  variable  interest  entities  in  which  a  company  has  a
 significant  interest,  regardless  of  whether consolidation  is required.  Adoption of
the  provisions  of FIN No. 46 was required  January 1, 2003.  The company currently  has
no variable  interest  entities,  therefore the adoption of this  interpretation  is not
expected to have a material effect on the company's consolidated financial statements.

In April 2003,  the FASB
issued SFAS No. 149,  "Amendment of Statement 133 on Derivative  Instruments  and Hedging
 Activities."  SFAS No. 149  amends  and  clarifies  financial  accounting  and
 reporting  for  derivative instruments,  including  certain  derivative  instruments
 embedded in other  contracts and for hedging  activities under SFAS No. 133,  Accounting
 for  Derivative  Instruments  and Hedging  Activities.  The statement is generally
effective  for  contracts  entered into or modified  after June 30, 2003 and for hedging
 relationships  designated after June 30, 2003.  The adoption of this  statement  is not
expected to have a material  effect on the  company's consolidated results of operations
and financial condition for the year ending December 31, 2003.

In May  2003,  the  FASB
 issued  SFAS  No.  150,  "Accounting  for  Certain  Financial  Instruments  with
Characteristics  of both Liabilities and Equity." SFAS No. 150 establishes  standards for
how an issuer  classifies and measures certain financial  instruments with
 characteristics  of both liabilities and equity. The statement is effective  for
financial  instruments  entered into or modified  after May 31, 2003,  and otherwise is
effective at the beginning of the first interim  period  beginning  after June 15, 2003.
 The adoption of this  statement is not expected to have a material  effect on the
company's  consolidated  results of operations  and financial  condition for the year
ending December 31, 2003.

Results of Operations

Net Revenues.Net
revenues were $346.3 million in the third quarter of 2003, compared to $312.0 million
for the corresponding period in 2002, representing an increase of 11.0%. For the
nine-month period ended September 30, 2003, net revenues were $1,024.7 million, up
10.9% from $923.8 million last year. The growth is due to volume increases including
new contracts with regional and national payors and the acquisition of
complementary businesses. Apria is experiencing increasing pricing pressure from
its managed care partners as these organizations seek to lower their costs by
negotiating more favorable pricing and by evaluating alternative healthcare delivery
models.

Apria's  acquisition
 strategy  generally  results in the rapid  integration of acquired  businesses  into
existing  operating  locations.  This limits Apria's ability to separately track the
amount of revenue generated by an  acquired  business.   Estimating  the  revenue
 contribution  from  acquisitions   therefore  requires  certain assumptions.  Based on
its analysis,  Apria  estimates  that  approximately  one half of the revenue growth
between 2002 and 2003 was derived from acquisitions.

---

The following table sets
forth a summary of net revenues by service line:

|                             | Three Months Ended September 30, |  | Nine Months Ended September 30,
|---------------------------- | -------------------------------- |  | -------------------------------
|
|
|
|
|
|Respiratory therapy          |                                  |  | $                              
|Infusion therapy             |                                  |  |                                
|Home medical equipment/other |                                  |  |                                
|                             |                                  |  |                                
|Total net revenues           |                                  |  | $                              
|                             |                                  |  |                                

Respiratory
Therapy.Respiratory therapy revenues are derived primarily from the provision of
oxygen systems, home ventilators, sleep apnea equipment, nebulizers, respiratory
medications and related services. The respiratory therapy service line increased by 13.7%
in the third quarter of 2003 and 12.2% year-to-date, as compared to the corresponding
periods in 2002. This growth was primarily driven by volume increases and acquisitions of
respiratory therapy businesses.

Infusion
Therapy.The infusion therapy service line involves the administration of a drug
or nutrient directly into the body intravenously through a needle or catheter. Examples
include parenteral nutrition, antibiotics, pain management, chemotherapy and other
medications and related services. Infusion therapy services also include administering
enteral nutrients directly into the gastrointestinal tract through a feeding tube. When
compared to 2002, infusion therapy revenues increased by 3.5% and 6.1% in the third
quarter and first nine months of 2003, respectively. This growth was primarily in the
enteral nutrition and antibiotic therapies. The infusion line continues to benefit from
the increased focus placed on enteral nutrition as a result of the centralization, at the
regional level, of all related functions. This centralization commenced in mid-2001 and
was completed early in the second quarter of 2003.

Home Medical
Equipment/Other.Home medical equipment/other revenues are derived from the
provision of patient safety items, ambulatory and patient room equipment. Home medical
equipment/other revenues increased by 8.4% in the third quarter of 2003 versus the same
period in 2002. For the nine-month period ended September 30, 2003, the home medical
equipment/other line increased by 11.0% over the corresponding period last year. Much of
the growth in this line is due to a geographic expansion of the companys
rehabilitation business and volume increases in core product areas such as wheelchairs and
hospital beds.

Revenue Recognition
and Certain Concentrations.Revenues are recognized on the date services and
related products are provided to patients and are recorded at amounts estimated to be
received under reimbursement arrangements with third-party payors, including private
insurers, prepaid health plans, Medicare and Medicaid. Due to the nature of the industry
and the reimbursement environment in which Apria operates, certain estimates are required
to record net revenues and accounts receivable at their net realizable values. Inherent in
these estimates is the risk that they will have to be revised or updated as additional
information becomes available, which could have an impact on the consolidated financial
statements.

In 2003, approximately 34%
of Aprias revenues are being reimbursed under arrangements with Medicare and
Medicaid. No other third-party payor represents 10% or more of the companys
revenues. The majority of the companys revenues are derived from fees charged for
patient care under fee-for-service arrangements. Revenues derived from capitation
arrangements represent less than 10% of total net revenues for all periods presented.

Medicare and
Medicaid Reimbursement.The Balanced Budget Act of 1997 contained several
provisions that have affected Aprias Medicare reimbursement levels. Subsequent
legislation  the Medicare Balanced Budget Refinement Act of 1999 and the Medicare,
Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000  mitigated some
of the effects of the original legislation. However, there are several pending issues that
may further impact Medicare and Medicaid reimbursement to Apria in the future.

The Balanced Budget Act of
1997 granted streamlined authority to the Secretary of the U.S. Department of Health and
Human Services (HHS) to increase or reduce the reimbursement for Part B items
and services (other than physicians services), including home medical equipment and
oxygen, by up to 15% each year under a so-called inherent reasonableness authority. In
December 2002, the Centers for Medicare & Medicaid Services (CMS) issued
an interim final rule that establishes a process by which such adjustments may be made.
The rule applies to all Medicare Part B services except those paid under a physician fee
schedule or a prospective payment system. As of this date, neither CMS nor the durable
medical equipment regional carriers have used the expedited authority.

Further, the Balanced
Budget Act of 1997 mandated that CMS conduct up to five competitive bidding market
demonstrations for Medicare Part B-covered items and services. CMS conducted demonstration
projects in Polk County, Florida and San Antonio, Texas. These two demonstration projects
have been completed. The demonstrations could provide CMS and Congress with a model for
implementing competitive pricing in additional geographic markets or across the United
States. Initial reports from government agencies indicate cost savings that vary by
product line, but the reports do not reflect costs incurred by the government to
administer the program. If such a competitive bidding system were implemented, it could
result in lower reimbursement rates or impose limits on increases in reimbursement rates.

In June 2003, the U.S.
House of Representatives and the U.S. Senate passed separate bills that if enacted would
include provisions that would affect Medicare Part B reimbursement policies for items and
services provided by Apria. Through mid-November 2003, the two chambers worked to
reconcile the differences
between these bills through a conference committee, but as of this filing date it remains
uncertain whether Congress can agree to a consensus Medicare bill that can be enacted this
year. The Medicare bill that passed the House on June 27, 2003 would establish a
competitive acquisition program for durable medical equipment under Medicare Part B, which
would include a number of items, therapies and drugs provided by Apria. The competitive
acquisition program appears to be modeled on the prior demonstrations in Polk County,
Florida and San Antonio, Texas, although additional safeguards for suppliers were included
in this bill. This bill calls for the competitive bidding process for home infusion drug
therapies and inhalation drug therapies to take into account the standards, professional
services and related functions necessary to provide safe and effective care as determined
by a General Accounting Office study. In contrast, the Medicare bill passed by the Senate
on June 27, 2003 would not impose a competitive acquisition system on durable medical
equipment ("DME"). Rather, the Senate bill would place a 5-year freeze on payment levels for
durable medical equipment.

The House and Senate bills
also take differing approaches to reimbursement for the types of prescription drugs
typically provided by Apria under Medicare Part B. Under the House bill, reimbursement for
the drug component of home infusion and inhalation therapies covered under Medicare Part B
would be determined under the competitive acquisition program for durable medical
equipment. In contrast, the Senate bill would reduce the reimbursement level for
prescription drugs under Medicare Part B (currently set at 95 percent of the average
wholesale price) to the lesser of 85 percent of the average wholesale price or the widely
available market price. Any reductions below 85 percent of average wholesale price would
be limited to no more than a 15 percent reduction each year. The Senate bill would enable
the Medicare program to offset payment reductions for drugs by establishing additional
payments for services rendered in providing home infusion drug therapy up to current
payment levels and to partially offset such reductions for home inhalation drug therapy.

In a separate initiative,
the Administrator of CMS has stated often that if Congress does not enact prescription
drug pricing changes this year, CMS would implement drug reimbursement changes under its
regulatory authority. CMS issued a Notice of Proposed Rulemaking on August 20, 2003 in
which it outlined four possible models for changing Medicare Part B reimbursement levels
for covered drugs: The four options are the following:

| |  | Option #1 - Comparison to Private Health Plans-
Under this proposal, the Medicare payment for drugs
would be equal to what Medicare contractors pay when providing the same drug to their private plan
enrollees under comparable circumstances. Carriers would have initial authority for determining
whether circumstances are "comparable" such that the Medicare payment rate for a particular drug
should be equal to the carrier's private sector payment rate, although CMS will issue guidance to
assist carriers in making these decisions.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Option # 2 - Average Wholesale Price Discount-
The second payment option would lock-in the average
wholesale price at the April 1, 2003 list price and subsequently reduce the percentage of average
wholesale price that the Medicare program would pay for Part B drugs, from 95 percent to between 80
and 90 percent. In future years, these new payment rates would be adjusted annually by the
increase in the consumer price index for medical care.                                                                                          
| |  | Option #3 - Market Monitoring-
This pricing alternative would redefine CMS' interpretation of average
wholesale price to mean the widely available market price. "The widely available market price would
not be a list price that is commonly discounted, but would be the purchase price net of discounts,
rebates, and price concessions routinely available to prudent purchasers."                                                                                                                                                             
| |  | Option #4 - Competitive Acquisition and Average Sales Prices-
This method would establish a competitive
acquisition program for certain categories of covered drugs and use the average sales price to set
payment rates for other categories. This option largely mirrors the approach adopted by the House
in its Medicare bill passed in late June.                                                                                                                                                                                              

Some states have already
adopted, or are contemplating adopting, some form of the proposed alternate pricing
methodology for certain drugs and biologicals under the Medicaid program. In at least 20
states, these changes have reduced the level of reimbursement received by Apria without a
corresponding offset or increase to compensate for the service costs incurred. In several
of those states, Apria has elected to stop accepting new Medicaid patient referrals for
the affected drugs. The company is continuing to provide services to patients already on
service, and for those who receive other Medicaid-covered respiratory, home medical
equipment or infusion therapies. Proportionally, Medicaid represents a very small
percentage of Aprias home infusion and home-delivered respiratory medication
revenues.

It is not yet clear as to
which of the aforementioned proposals for reimbursement rate reductions will be effected
or whether alternative or additional reductions will be proposed. Any resulting
reimbursement reductions will adversely impact Aprias revenues, earnings and cash
flows.

Contractual Arrangements with Hospitals. CMS
officials have recently initiated actions to revoke the Medicare supplier numbers of a
variety of DME suppliers, including eleven
of Aprias current hospital customers. Under contractual arrangements, Apria provides home
healthcare items and services to hospitals on a wholesale basis to service the
hospitals discharged patients. Apria bills the hospitals for all such items and
services and the hospitals, in turn, bill patients and third party payors, including
Medicare. In order for a hospital to bill Medicare for these home healthcare items and
services, it must have a Medicare supplier number.      
  

In its revocation notices to Aprias eleven hospital customers,
CMS has asserted that these contractual arrangements do not comply with certain Medicare
regulations promulgating supplier standards, adherence to which is required as
a condition of having a supplier number. The government has construed the supplier
standards to require a supplier to perform directly through its own employees some types of
services that the hospitals have contracted to have Apria perform. The Medicare-funded revenues paid
to Apria by the eleven hospital customers who have received revocation notices represent approximately
one-half of one percent of the companys annual revenues. Apria believes its
arrangements with hospitals are consistent with all applicable regulations and that CMS is
acting improperly in revoking the hospitals supplier numbers.

The
revocations are presently scheduled to become effective on December 8, 2003, but Apria and
certain of the hospitals have requested that the revocations be delayed to allow for
consideration of, and adequate time to transition to, other appropriate arrangements for
the patients being served. Apria and certain of the hospitals are in discussions with CMS
regarding the hospitals retaining their Medicare supplier numbers and entering into
alternative arrangements with Apria that would satisfy CMS interpretation of the
regulations. Under most of the alternative arrangements being considered, Aprias
future revenues from the affected markets would be likely to decrease.

The
company cannot predict the outcome of these discussions with the government and the
hospitals, however, and no assurance can be given that the ultimate resolution of this
issue will not have an adverse effect on the companys financial results.

Gross Profit.Gross margins were 73.1% and 73.0% for the third quarter of 2003 and 2002,
respectively. For the nine-month periods ended September 30, 2003 and 2002, the margins
were 73.0% and 72.8%, respectively. Despite revenue pricing pressures, Apria was able to
maintain and slightly improve upon its gross margins due to favorable product pricing from
the companys suppliers.

Provision for
Doubtful Accounts.The provision for doubtful accounts results from
managements estimate of the net realizable value of accounts receivable after
considering actual write-offs of specific receivables. The provision was 3.6% of net
revenues for the third quarter and 3.7% for the nine-month period ended September 30,
2003. This is consistent with the corresponding periods in 2002, in which the rate was
3.7% for both the third quarter and nine-month period.

Selling,
Distribution and Administrative.Selling, distribution and administrative
expenses are comprised of expenses incurred in direct support of operations and those
associated with administrative functions. Expenses incurred by the operating locations
include salaries and other expenses in the following functional areas: selling,
distribution, clinical, intake, reimbursement, warehousing and repair. Many of these
operating costs are directly variable with revenue patterns. Certain expenses, such as
facility lease and fuel costs, are very sensitive to market-driven price fluctuations.
Administrative expenses include overhead costs incurred by the operating locations and
corporate support functions. These expenses do not vary as closely with revenue growth as
do the operating costs. Selling, distribution and administrative expenses, expressed as
percentages of net revenues, were 54.8% in the third quarter of 2003, up from 54.4% in the
third quarter of 2002 and were 54.5% for both nine-month periods of 2003 and 2002. The
primary reasons for the increase in the expense to revenue percentage in the third quarter
of 2003 is the effect of annual merit salary increases and incremental costs incurred in
conjunction with the integration of acquired businesses.

Amortization of
Intangible Assets.Amortization of intangible assets for the third quarter
of 2003 was $732,000 compared to $667,000 in the third quarter of 2002. For the nine-month
periods in 2003 and 2002, amortization was $2.1 million and $2.0 million, respectively.
See Liquidity and Capital Resources  Business Combinations.

Interest Expense.Interest expense was $3.7 million for the third quarter of 2003, up from
$3.5 million in the third quarter of 2002. During the first nine months of 2003, interest
expense was $10.0 million, compared to $11.6 million for the corresponding period in the
prior year. The increase in the third quarter of 2003 is due to additional interest
incurred on the $250 million convertible notes issued in August. For the nine-month period
ended September 30, 2003, this additional interest was offset by interest reductions
resulting from a $28.5 million decrease in borrowings under the credit agreement from the
end of the third quarter of 2002 to the end of the third quarter in 2003. Interest expense
was also reduced by a decrease in the applicable interest rate margin for the $175 million
term loan, which was effective with the amendment of the credit agreement in June 2002.
Further, interest expense was impacted by the expiration of two swap agreements that had
effectively fixed interest on a portion of Aprias debt at higher rates. See
Liquidity and Capital Resources  Long-term Debt.

Income
Taxes. Income taxes for the nine-month periods ended September 30, 2003 and
2002 were provided at the effective tax rates expected to be applicable for the respective
year. The annual rate for 2002 was reduced by a benefit of $11.1 million that resulted
from prior year tax examinations that were settled in the fourth quarter.

At September 30, 2003,
Apria had federal net operating loss carryforwards of $10 million, which are limited to $5
million of usage per year under Internal Revenue code Section 382. Apria is currently
utilizing such carryforwards and expects they will be utilized to their limits in 2003 and
2004. The company has an alternative minimum tax credit carryforward of $6.1 million,
which is being utilized in 2003. Additionally, the company has various state net operating
loss carryforwards.

Liquidity and Capital Resources

Aprias principal
source of liquidity is its operating cash flow, which is supplemented by a $100 million
revolving credit facility. Aprias ability to generate operating cash flows in excess
of its operating needs has afforded it the ability, among other things, to pursue its
acquisition strategy and fund patient service equipment expenditures to support revenue
growth. Management believes that its operating cash flow and revolving credit line will
continue to be sufficient to fund its operations and growth strategies. However,
sustaining the current cash flow levels is dependent on many factors, some of which are
not within Aprias control, such as government reimbursement levels and the financial
health of its payors.

Cash Flow.Cash provided by operating activities was $198.7 million in the first nine
months of 2003 compared with $188.9 million in the corresponding period in 2002. The
current year increase in operating cash flow occurred despite an increase in income tax
payments from $1.6 million for the nine-month period in 2002 to $29.2 million for the same
period in 2003. As Apria utilizes its available net operating loss carryforwards, the
company will continue to make significant income tax payments. Other items contributing to
the overall increase in operating cash flow were the increase in net income (before items
not requiring cash) and increases in payroll-related accruals. See Results of
Operations  Income Taxes.

Cash used in investing
activities increased to $204.9 million for the first nine months of 2003 compared to
$148.2 million during the same period last year. The increase is primarily due to
increased acquisition activity in 2003. The increase in acquisition activity also
contributed to the increase in patient service equipment expenditures. Often, the patient
service equipment acquired in business combinations does not meet Aprias standards
or is not adequate to support the companys delivery models, resulting in incremental
equipment purchases.

Cash provided by financing
activities was $114.4 million during the first nine months of 2003 compared to $37.3
million used in financing activities during the first nine months of 2002. The increase is
primarily due to the net proceeds received upon issuance of the $250 million convertible
notes as offset by the costs of the convertible debt offering and a concurrent repurchase
of $100 million of the companys common stock. At the end of 2001, Apria had prepaid
its scheduled quarterly debt amortization by two quarters, thereby reducing the payment
requirement in 2002.

Contractual Cash
Obligations.The following table summarizes Aprias long term cash
payment obligations to which the company is contractually bound. The years presented below
represent twelve-month rolling periods ending September 30.

|(dollars in millions)                                                                                                                                    | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6+ | Totals
|-------------------------------------------------------------------------------------------------------------------------------------------------------- | ------ | ------ | ------ | ------ | ------ | ------- | ------
|
|Term loans                                                                                                                                               |        |        | $      | 26     |        | $       | 29    
|Convertible senior notes                                                                                                                                 |        |        |        | -      |        |         | -     
|Other long-term debt                                                                                                                                     |        |        |        | 3      |        |         | 2     
|Operating leases                                                                                                                                         |        |        |        | 57     |        |         | 50    
|Deferred acquisition payments                                                                                                                            |        |        |        | 6      |        |         | -     
|                                                                                                                                                         |        |        |        |        |        |         |       
|Total contractual cash obligations                                                                                                                       |        |        | $      | 92     |        | $       | 81    
|                                                                                                                                                         |        |        |        |        |        |         |       
|                                                                                                                                                         |        |        |        |        |        |         |       
|The holders of the convertible senior notes
will first have the option to require Apria to repurchase all or a portion
of their notes in September 2008.

Accounts Receivable.Accounts receivable before allowance for doubtful accounts increased to
$237.1 million at September 30, 2003 from $217.5 million at December 31, 2002, which is
primarily attributable to the increase in revenues. Days sales outstanding (calculated as
of each period end by dividing accounts receivable, less allowance for doubtful accounts,
by the 90-day rolling average of net revenues) were 51 at September 30, 2003, December 31,
2002 and September 30, 2002.

Evaluation of Net
Realizable Value.Management performs various analyses to evaluate accounts
receivable balances to ensure that recorded amounts reflect estimated net realizable
value. Management applies specified percentages to the accounts receivable aging to
estimate the amount that will ultimately be uncollectible and therefore should be
reserved. The percentages are increased as the accounts age; accounts aged in excess of
360 days are reserved at 100%. Management establishes and monitors these percentages
through extensive analyses of historical realization data, accounts receivable aging
trends, other operating trends, the extent of contracted business and business
combinations. Also considered are relevant business conditions, such as governmental and
managed care payor claims processing procedures and system changes. If indicated by such
analyses, management may periodically adjust the uncollectible estimate and corresponding
percentages. Further, focused reviews of certain large and/or problematic payors are
performed to determine if additional reserves are necessary.

Unbilled
Receivables.Included in accounts receivable are earned but unbilled receivables
of $29.2 million at September 30, 2003 and December 31, 2002. Delays, ranging from a day
up to several months, between the date of service and billing can occur due to delays in
obtaining certain required payor-specific documentation from internal and external sources
Also, the time-consuming processes of converting patient files onto Aprias systems
and obtaining provider numbers from government payors routinely delay billing of the newly
acquired business. Earned but unbilled receivables are aged from date of service and are
considered in Aprias analysis of net realizable value.

Inventories and
Patient Service Equipment.Inventories consist primarily of pharmaceuticals
and disposable articles used in conjunction with patient service equipment. Patient
service equipment consists of respiratory and home medical equipment that is provided to
in-home patients for the course of their care plan and subsequently returned to Apria for
reuse. Continued revenue growth is directly dependent on Aprias ability to fund its
inventory and patient service equipment requirements.

Long-Term
Debt. The long-term debt balance at September 30, 2003 reflects the
issuance of $250 million in senior convertible notes as discussed below. Also at September
30, 2003, total borrowings under Aprias credit agreement were $250.5 million,
outstanding letters of credit totaled $3.9 million and credit available under the
revolving facility was $96.1 million. The company continues to be in compliance with all
of the financial covenants required by the credit agreement.

Credit Agreement
Amendment. Aprias credit agreement with Bank of America and a syndicate of
lenders was amended and restated effective August 13, 2003. The amendment permitted the
issuance of the 3.375% convertible senior notes and the concurrent repurchase of $100 million
of Aprias outstanding common stock with a portion of the proceeds. The amendment
also eliminated limitations related to repurchases of the companys common stock and
acquisitions so long as the companys leverage ratio, as defined by the credit
agreement, is under 2.0 to 1.0, and imparts limitations as the leverage ratio increases.
At September 30, 2003, Aprias leverage ratio was 1.5 to 1.0.

Convertible Senior
Notes.On August 20, 2003, Apria issued 3.375% convertible senior notes in the
aggregate principal amount of $250 million under an indenture between Apria and U.S. Bank
National Association. The notes were issued in a private placement at an issue price of
$1,000 per note (100% of the principal amount at maturity). The notes will mature on
September 1, 2033, unless earlier converted, redeemed or repurchased by Apria. Apria may
redeem some or all of the notes at any time after September 8, 2010 at a redemption price
equal to 100% of the principal amount of the notes to be redeemed plus accrued and unpaid
interest and contingent interest, if any, to the redemption date. The holders of the notes
may require Apria to repurchase some or all of the notes at a repurchase price equal to
100% of the principal amount of the notes plus accrued and unpaid interest, including
contingent interest, up to but excluding the applicable repurchase date initially on
September 1, 2008, and subsequently on September 1 of 2010, 2013, 2018, 2023 and 2028, or
at any time prior to their maturity following a fundamental change as defined in the
indenture. Any notes that Apria is required to repurchase on September 1, 2008 will be
paid for in cash. For all remaining repurchase dates, Apria may pay the repurchase price
in cash or by delivering shares of its common stock or a combination of cash and shares of
its common stock.

The notes bear interest at
the rate of 3.375% per year. Interest on the notes is payable on September 1 and March 1 of
each year, beginning on March 1, 2004. The notes are convertible during certain periods by
holders into shares of Apria common stock initially at a conversion rate of 28.6852 shares
of common stock per $1,000 principal amount of notes, subject to adjustment in certain
events, under certain circumstances as outlined in the indenture.

Apria received $244.4
million in proceeds upon issuance of the notes. Concurrent with the issuance and with a
portion of the proceeds, Apria repurchased approximately 3.8 million shares of its common
stock for $100 million. Issuance costs deducted from the proceeds plus those paid
separately in cash totaled $5.8 million.

Hedging
Activities.Apria is exposed to interest rate fluctuations on its underlying
variable rate long-term debt. Aprias policy for managing interest rate risk is to
evaluate and monitor all available relevant information, including but not limited to, the
structure of its interest-bearing assets and liabilities, historical interest rate trends
and interest rate forecasts published by major financial institutions. The tools Apria may
utilize to moderate its exposure to fluctuations in the relevant interest rate indices
include, but are not limited to: (1) strategic determination of repricing periods and
related principal amounts, and (2) derivative financial instruments such as interest rate
swap agreements, caps or collars. Apria does not use derivative financial instruments for
trading or other speculative purposes.

In December 2002, Apria
entered into four interest rate swap agreements to fix its variable rate debt. The terms
of such agreements are as follows: two two-year agreements with an aggregate notional
amount of $50 million and a fixed rate of 2.43%; a three-year agreement with a notional
amount of $25 million and a fixed rate of 3.04%; and a four-year agreement with a notional
amount of $25 million and a fixed rate of 3.42%. Apria also had two swap agreements with
an aggregate notional amount of $100 million and a fixed rate of 2.58% that expired on
March 31, 2003. All rates are stated before application of the interest margins specified
in the credit agreement.

The swap agreements are
being accounted for as cash flow hedges under SFAS No. 133, Accounting for
Derivative and Hedging Activities. Accordingly, the difference between the interest
received and interest paid is reflected as an adjustment to interest expense. During the
first nine-month periods of 2003 and 2002, Apria paid net settlement amounts of $1.5
million and $478,000, respectively. Unrealized gains and losses on the fair value of the
swap agreements are reflected, net of taxes, in other comprehensive income. At September
30, 2003, the aggregate fair value of the swap agreements was a deficit of $2.1 million
and, accordingly, is reflected in the accompanying balance sheet in other accrued
liabilities. Apria does not anticipate losses due to counterparty nonperformance as its
counterparties to the various swap agreements are nationally-recognized financial
institutions with strong credit ratings.

Treasury Stock.During the nine-month period of 2003, Apria repurchased 4.5 million shares
of its outstanding common stock for $118.5 million. All repurchased common shares are
being held in treasury. In October 2003, Apria announced that its Board of Directors
authorized additional share repurchases of up to $100 million. Depending on market
conditions and other considerations, the company plans to repurchase stock in open market
or privately negotiated transactions, with at least $50 million in repurchases
contemplated by the end of the first quarter of 2004 and the balance by the end of 2004.

Business
Combinations.Pursuant to one of its primary growth strategies, Apria
periodically acquires complementary businesses in specific geographic markets. The results
of operations of the acquired companies are included in the accompanying consolidated
income statements from the dates of acquisition. Covenants not to compete, typically
effected in these transactions, are being amortized over the life of the respective
agreements.

The aggregate
consideration for acquisitions that closed during the first nine months of 2003 was $88.6
million. Pending receipt of additional valuation information, the preliminary allocation
of this amount includes $74.0 million to goodwill, $4.2 million to other intangible assets
and $8.4 million to patient service equipment. Cash paid for acquisitions, which includes
amounts deferred from prior year acquisitions, totaled $88.8 million and $59.6 million in
the first nine months of 2003 and 2002, respectively.

The success of
Aprias acquisition strategy is directly dependent on Aprias ability to
maintain and/or generate sufficient liquidity to fund such acquisitions and on the
companys ability to integrate the acquired operations successfully.

HIPAA. 
          The Health Insurance Portability and Accountability Act of 1996
          (HIPAA) is comprised of a number of components, several of which are
          applicable to Apria. Pursuant to the administrative simplification section of
          HIPAA, HHS has issued three sets of regulations, each with its own compliance
          date, governing the following:

| |  | privacy of individually identifiable health information - compliance date: April 14, 2003 - Apria was
materially compliant by this date;                                                            
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | standard electronic transaction and code sets - compliance date: October 16, 2003 - Apria was materially
compliant by this date; and                                                                
| |  | electronic security of individually identifiable health information - compliance date: April 20, 2005 -
Apria expects to be able to materially comply with these regulations by the compliance date.

The standard electronic
transaction and code sets regulations will standardize how health claims and eligibility
information is collected, recorded and processed. The standard electronic transaction and
code sets regulations also mandate that standardized codes be used for electronic billing
purposes by all payors in the United States, including both government and private health
plans. Historically, certain billing codes used in the homecare industry have varied by
state Medicaid program and certain health plans. Under HIPAA, authority for approving,
modifying, adding or deleting codes lies solely with the Health Care Procedure Coding
System (HCPCS) panel, operating under the auspices of CMS. It is primarily the
responsibility of healthcare equipment and supply manufacturers and state Medicaid
programs to seek and obtain codes for their respective products. Under HIPAA, such codes
are to be used not only by Medicare payors, but by state Medicaid programs and private
managed care payors as well. The panel reviews such requests primarily on an annual basis,
with a deadline of April 1 each year. Apria supported industry representatives and
manufacturers to obtain the necessary HCPCS codes.

In mid-October 2003, the
panel posted the revised HCPCS list for 2004 on its web site. The panel approved very few
new codes. The probability that some payors will not be fully compliant by January 1,
2004, and the fact that CMS has directed its durable medical equipment regional carriers
to deploy contingency plans that allow them to continue accepting former codes for an
as-yet undetermined amount of time, make it likely that Apria will experience an increase
in claim rejections or denials in early 2004. Ultimately, this could impact the
companys net revenue line and the collectibility of its accounts receivable. In
addition, the absence of new codes for certain higher-cost respiratory products and
services could have an impact on gross profit margins, since the panel only allows one
code per certain equipment category, regardless of the actual equipment provided to the
patients per a physicians prescription and patient preference. The absence of
standardized codes for products or services provided by Apria also may preclude the
company from submitting electronic billings (or claims) to certain payors.
Such an outcome would require submitting paper claims, which could ultimately result in
delays and difficulties in collecting these claims.

Federal
Investigation.As previously reported, since mid-1998 Apria has been the
subject of an investigation conducted by the U.S. Attorneys office in Los Angeles
and the U.S. Department of Health and Human Services. The investigation concerns the
documentation supporting Aprias billing for services provided to patients whose
healthcare costs are paid by Medicare and other federal programs. Apria is cooperating
with the government and has responded to various document requests and subpoenas.

Apria has been informed
that the investigation is the result of civil qui tam litigation filed on behalf of
the government against Apria. The complaints in the litigation are under seal, however,
and the government has not informed Apria of either the identities of the plaintiffs, the
court or courts where the proceedings are pending, the date or dates instituted or the
factual bases alleged to underlie the proceedings. To date, the U.S. Attorneys
office has not informed Apria of any decision to intervene in the qui tam actions;
however, it could reach a decision with respect to intervention at any time.

Government representatives
and counsel for the plaintiffs in the qui tam actions asserted in July 2001 that,
by a process of extrapolation from a sample of 300 patient files to all of Aprias
billings to the federal government during the three-and-one-half year sample period, Apria
could be liable to the government under the False Claims Act for more than $9 billion,
consisting of extrapolated overpayment liability, treble damages and penalties of up to
$10,000 for each allegedly false claim derived from the extrapolation.

Apria has acknowledged
that there may be errors and omissions in supporting documentation affecting a portion of
its billings. However, it considers the assertions and amounts described in the preceding
paragraph to be unsupported both legally and factually and believes that most of the
alleged documentation errors and omissions should not give rise to any liability, for
overpayment refunds or otherwise. Accordingly, Apria believes that the claims asserted are
unwarranted and that it is in a position to assert numerous meritorious defenses.

Apria has been exchanging
information and having discussions with government representatives in an attempt to
explore whether it will be possible to resolve this matter on a basis that would be
considered fair and reasonable by all parties. Apria cannot provide any assurances as to
the outcome of these discussions, however, or as to the outcome of the qui tam
litigation in the absence of a settlement. Management cannot estimate the possible loss or
range of loss that may result from these proceedings and therefore has not recorded any
related accruals.

If a judge, jury or
administrative agency were to determine that false claims were submitted to federal
healthcare programs or that there were significant overpayments by the government, Apria
could face civil and administrative claims for refunds, sanctions and penalties for
amounts that would be highly material to its business, results of operations and financial
condition, including the exclusion of Apria from participation in federal healthcare
programs.

Off-Balance Sheet Arrangements

Apria is not a party to
off-balance sheet arrangements as defined by the Securities and Exchange
Commission. However, from time to time the company enters into certain types of contracts
that contingently require the company to indemnify parties against third party claims. The
contracts primarily relate to: (i) certain asset purchase agreements, under which the
company may provide customary indemnification to the seller of the business being
acquired; (ii) certain real estate leases, under which the company may be required to
indemnify property owners for environmental and other liabilities, and other claims
arising from the companys use of the applicable premises; and (iii) certain
agreements with the companys officers, directors and employees, under which the
company may be required to indemnify such persons for liabilities arising out of their
employment relationship.

The terms of such
obligations vary by contract and in most instances a specific or maximum dollar amount is
not explicitly stated therein. Generally, amounts under these contracts cannot be
reasonably estimated until a specific claim is asserted. Consequently, no liabilities have
been recorded for these obligations on the companys balance sheets for any of the
periods presented.

---

ITEM 3.    
 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Apria is exposed to
interest rate fluctuations on its underlying variable rate long-term debt. Apria utilizes
interest rate swap agreements to moderate such exposure. Apria does not use derivative
financial instruments for trading or other speculative purposes.

At September 30, 2003,
Aprias term loan borrowings totaled $250.5 million. The bank credit agreement
governing the term loans provides interest rate options based on the following indices:
Federal Funds Rate, Prime Rate or the London Interbank Offered Rate (LIBOR).
All such interest rate options are subject to the application of an interest margin as
specified in the bank credit agreement. At September 30, 2003, all of Aprias
outstanding term debt was tied to LIBOR.

Until their March 31, 2003
expiration, Apria had two interest rate swap agreements with a total notional amount of
$100 million to pay a fixed rate of 2.58% (before application of interest margin). In
December 2002, Apria entered into four additional interest rate swap agreements with a
total notional amount of $100 million to pay fixed rates ranging from 2.43% to 3.42%
(before application of interest margin). The terms of the new swap agreements range from
two to four years.

Based on the term debt
outstanding and the swap agreements in place at September 30, 2003 (excluding those
recently expired), a 100 basis point change in the applicable interest rates would
increase or decrease Aprias annual cash flow and pretax earnings by approximately
$1.5 million. See Managements Discussion and Analysis of Financial Condition
and Results of Operations  Long-term Debt  Hedging Activities.

ITEM 4.     CONTROLS AND PROCEDURES

As of the end of the
period covered by this report, the company carried out an evaluation, under the
supervision and with the participation of the companys management, including the
companys Chief Executive Officer and Chief Financial Officer, of the effectiveness
of the design and operation of the companys disclosure controls and procedures.
Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the companys disclosure controls and procedures are effective in
timely alerting them to material information relating to the company that is required to
be included in the companys periodic Securities and Exchange Commission filings.

During the period covered
by this report, there have been no changes to the companys internal control over
financial reporting that have materially affected, or are reasonably likely to materially
affect, the companys internal control over financial reporting.

---

PART II  OTHER INFORMATION

ITEM 1.     LEGAL PROCEEDINGS

As previously reported,
since mid-1998 Apria has been the subject of an investigation conducted by the U.S.
Attorneys office in Los Angeles and the U.S. Department of Health and Human
Services. The investigation concerns the documentation supporting Aprias billing for
services provided to patients whose healthcare costs are paid by Medicare and other
federal programs. Apria is cooperating with the government and has responded to various
document requests and subpoenas.

Apria has been informed
that the investigation is the result of civil qui tam litigation filed on behalf of
the government against Apria. The complaints in the litigation are under seal, however,
and the government has not informed Apria of either the identities of the plaintiffs, the
court or courts where the proceedings are pending, the date or dates instituted or the
factual bases alleged to underlie the proceedings. To date, the U.S. Attorneys
office has not informed Apria of any decision to intervene in the qui tam actions;
however, it could reach a decision with respect to intervention at any time.

Government representatives
and counsel for the plaintiffs in the qui tam actions asserted in July 2001 that,
by a process of extrapolation from a sample of 300 patient files to all of Aprias
billings to the federal government during the three-and-one-half year sample period, Apria
could be liable to the government under the False Claims Act for more than $9 billion,
consisting of extrapolated overpayment liability, treble damages and penalties of up to
$10,000 for each allegedly false claim derived from the extrapolation.

Apria has acknowledged
that there may be errors and omissions in supporting documentation affecting a portion of
its billings. However, it considers the assertions and amounts described in the preceding
paragraph to be unsupported both legally and factually and believes that most of the
alleged documentation errors and omissions should not give rise to any liability, for
overpayment refunds or otherwise. Accordingly, Apria believes that the claims asserted are
unwarranted and that it is in a position to assert numerous meritorious defenses.

Apria has been exchanging
information and having discussions with government representatives in an attempt to
explore whether it will be possible to resolve this matter on a basis that would be
considered fair and reasonable by all parties. Apria cannot provide any assurances as to
the outcome of these discussions, however, or as to the outcome of the qui tam
litigation in the absence of a settlement. Management cannot estimate the possible loss or
range of loss that may result from these proceedings and therefore has not recorded any
related accruals.

If a judge, jury or
administrative agency were to determine that false claims were submitted to federal
healthcare programs or that there were significant overpayments by the government, Apria
could face civil and administrative claims for refunds, sanctions and penalties for
amounts that would be highly material to its business, results of operations and financial
condition, including the exclusion of Apria from participation in federal healthcare
programs.

Apria is also engaged in
the defense of certain claims and lawsuits arising out of the ordinary course and conduct
of its business, the outcomes of which are not determinable at this time. Apria has
insurance policies covering such potential losses where such coverage is cost effective.
In the opinion of management, any liability that might be incurred by Apria upon the
resolution of these claims and lawsuits will not, in the aggregate, have a material
adverse effect on Aprias results of operations or financial condition.

ITEM 2.     CHANGES IN SECURITIES
AND USE OF PROCEEDS

On August 20, 2003, Apria issued 3.375% Convertible Senior
Notes in the aggregate principal amount of $250 million under an indenture between Apria and
U.S. Bank National Association. The notes were issued in a
private placement at an issue price of $1,000 per note (100% of the principal amount at
maturity). The notes will mature on September 1, 2033, unless earlier converted, redeemed
or repurchased by Apria. Apria may redeem some or all of the notes at any time after
September 8, 2010 at a redemption price equal to 100% of the principal amount of the notes
to be redeemed plus accrued and unpaid interest and contingent interest,
if any, to the redemption date. The holders of the notes may require Apria to
repurchase some or all of the notes at a repurchase price equal to 100% of the principal
amount of the notes plus accrued and unpaid interest, including contingent interest,
up to but excluding the applicable repurchase date initially on
September 1, 2008, and subsequently on September 1 of 2010, 2013, 2018,
2023 and 2028, or at any time prior to their maturity following a fundamental
change as defined in the indenture. Any notes that Apria is required to repurchase on
September 1, 2008 will be paid for in cash. For all remaining repurchase dates, Apria may
pay the repurchase price in cash or by delivering shares of its common stock or a
combination of cash and shares of its common stock.

The notes bear interest at the rate of 3.375% per year.
Interest on the notes is payable on September 1 and March 1 of each year, beginning on
March 1, 2004. The notes are convertible during certain periods by holders into shares of
Apria common stock initially at a conversion rate of 28.6852 shares of common stock per
$1,000 principal amount of notes, subject to adjustment in certain events, under certain
 circumstances as outlined in the indenture.

Apria received approximately $244.4 million in proceeds
upon issuance of the notes. Concurrent with the issuance and with a portion of the
proceeds, Apria repurchased approximately 3.8 million shares of its common stock for $100 million.
Issuance costs deducted from the proceeds plus those paid separately in cash
totaled 5.8 million. The remaining proceeds may be used for additional share
repurchases, acquisitions or general corporate purposes.

ITEM 3.    NOT APPLICABLE

ITEM 4.    SUBMISSION OF MATTER TO A VOTE OF SECURITY
HOLDERS

| |           |                                                                                                                                                                                                                                                                                                                                                          
| | --------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a)(b)(c) | Annual Meeting of Stockholders of the
company on July 17, 2003.Directors reelected at the Annual Meeting
for a term of one year:Vicente Anido, Jr.I.T. CorleyDavid L. Goldsmith
Lawrence H. HigbyRichard H. KoppesPhilip R. Lochner, Jr.
Jeri L. LoseBeverly Benedict ThomasRalph V. WhitworthMatters Voted Upon at Annual Meeting:
Election of Directors
| |           | As of July 17, 2003, the company's Board of Directors consisted of
 nine members who will serve for one year or until the election and qualification
of their successors. The results of the stockholder voting were as follows:                                                                                                                         

| |                                                                                                                                                               | FOR                                                                                         | WITHHOLD                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------
| | Vicente Anido, Jr.I.T. CorleyDavid L. Goldsmith
Lawrence M. HigbyRichard H. KoppesPhilip R. Lochner, Jr.Jeri L. LoseBeverly
Benedict ThomasRalph V. Whitworth | 47,735,25248,651,135
48,649,12749,187,26248,650,52247,198,51648,650,02247,735,36947,735,256 | 1,539,963   624,080   626,088
     87,953   624,6932,076,699   625,193
1,539,8461,539,959

| |  |                                                                                                                                                                                                     
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Approval of the 2003 Performance Incentive Plan                                                                                                                                                     
| |  | The Board of Directors adopted and approved the Apria
Healthcare Group Inc. 2003 Performance Incentive Plan, subject to stockholder approval. The results
of the stockholder voting were as follows:

| | ForAgainstAbstainBroker Non-votes | 29,741,61712,654,539     
 16,049  6,863,010 | 
| | --------------------------------- | -------------------------------------------- | 

ITEM 5.     NOT APPLICABLE

---

ITEM 6.     EXHIBITS AND REPORTS ON FORM 8-K

|    |                                                                                                                                                                                                                                                                                                                                                                                                                        |  |                                                                                                                                                                                                                                                                 
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Exhibits:                                                                                                                                                                                                                                                                                                                                                                                                              |  |                                                                                                                                                                                                                                                                 
|    | ExhibitNumber4.1                                                                                                                                                                                                                                                                                                                                                                                                       |  | ReferenceIndenture dated August 20, 2003,
between Apria Healthcare Group Inc. and U.S. Bank National Association, as trustee, describing
the registrant's issuance of 3.375% Convertible Senior Notes due 2033.                                                 
|    | 10.1                                                                                                                                                                                                                                                                                                                                                                                                                   |  | First Amendment to Third Amended and Restated Credit
Agreement, dated August 13, 2003, between Apria Healthcare Group Inc. and certain of its subsidiaries, Bank of America National
Association and other financial institutions party to the Credit Agreement.
|    | 31.1                                                                                                                                                                                                                                                                                                                                                                                                                   |  | Certification of Chief Executive Officer pursuant
to Securities Exchange Act Rule 13a-14(a).                                                                                                                                                                    
|    | 31.2                                                                                                                                                                                                                                                                                                                                                                                                                   |  | Certification of Chief Financial Officer pursuant
to Securities Exchange Act Rule 13a-14(a).                                                                                                                                                                    
|    | 32.1                                                                                                                                                                                                                                                                                                                                                                                                                   |  | Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350.                                                                                                                                                                                    
|    | 32.2                                                                                                                                                                                                                                                                                                                                                                                                                   |  | Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350.                                                                                                                                                                                    
|(b) | Reports on Form 8-K:
Apria filed a Current Report on Form 8-K on July 22, 2003 to report the issuance
 of a press release announcing its financial results for the quarter ended
June 30, 2003.
Apria filed a Current Report on Form 8-K on August 18, 2003 to report the issuance of two press
releases announcing its intent to privately place $200 million aggregate principal amount of
convertible senior notes.

---

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.

|                  |                                                                                                                                     
|----------------- | ------------------------------------------------------------------------------------------------------------------------------------
|                  | APRIA HEALTHCARE GROUP INC.
Registrant                                                                                              
|November 14, 2003 | /s/ AMIN I. KHALIFA
Amin I. KhalifaExecutive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)