UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the period ended
June 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 54,711,191 shares of common stock, $.001 par
value, outstanding at August 7, 2003.

---

APRIA HEALTHCARE GROUP INC.

FORM 10-Q

For the period ended June 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)

|                                                                         | June 30, |  | December 31,
|------------------------------------------------------------------------ | -------- |  | ------------
|
|
|ASSETS                                                                   |          |  |             
|CURRENT ASSETS                                                           |          |  |             
|Cash and cash equivalents                                                |          |  | $           
|Accounts receivable, less allowance for doubtful accounts of $37,283     |          | 
|and $32,206 at June 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 $386,030     |          | 
|and $368,420 at June 30, 2003 and December 31, 2002, respectively        |          |  |             
|PROPERTY, EQUIPMENT AND IMPROVEMENTS, NET                                |          |  |             
|DEFERRED INCOME TAXES                                                    |          |  |             
|GOODWILL                                                                 |          |  |             
|INTANGIBLE ASSETS, 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;            |          | 
|56,897,506 and 56,580,677 shares issued at June 30, 2003 and             |          | 
|December 31, 2002, respectively; 54,913,850 and 54,897,521               |          | 
|outstanding at June 30, 2003 and December 31, 2002, respectively         |          |  |             
|Additional paid-in capital                                               |          |  |             
|Treasury stock, at cost; 1,983,656 and 1,683,156 shares at June 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 EndedJune 30, |  | Six Months EndedJune 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)

|                                                                                   | Six Months EndedJune 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                                                             |                         
|Payments on other long-term debt                                                   |                         
|Change in outstanding checks included in accounts payable                          |                         
|Capitalized debt issuance costs                                                    |                         
|Repurchases of common stock                                                        |                         
|Issuances of common stock                                                          |                         
|                                                                                   |                         
|NET CASH USED IN FINANCING ACTIVITIES                                              |                         
|                                                                                   |                         
|NET (DECREASE) 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. Approximately 34% of the companys revenues are
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:Effective
January 1, 2003, Apria adopted Statement of Financial Accounting Standards
(SFAS) No. 145, Rescission of FASB Statements No. 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. Adoption of this statement did not have a
material effect on the companys consolidated financial statements.

Effective January 1, 2003, Apria adopted SFAS No. 146,
Accounting for Costs Associated With Exit or Disposal Activities. 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 this statement did not have a material effect on the
company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 Financial Accounting Standards
Board (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
annual and interim 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. Apria adopted the recognition and measurement provisions of FIN
No. 45 beginning January 1, 2003, while the disclosure provisions became effective at
December 31, 2002. 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 six-month period ended June 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. Apria
adopted the consolidation provisions of FIN No. 46 beginning January 1, 2003, while
certain disclosure requirements became effective for all financial statements issued after
January 31, 2003, regardless of when the variable interest entities were established. 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 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. No stock-based
employee compensation expense is recognized in net income for any of the periods
presented. 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 EndedJune 30, |  |   | Six Months EndedJune 30,
|----------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- |  | - | ------------------------
|
|
|
|Net income as reported                                                                                                                    |                            |  | $ | 29,412                  
|Deduct:  total stock-based
compensation expense    determined for all awards under fair
value-based    method, net of related tax effects |                            |  |   | 2,051                   
|                                                                                                                                          |                            |  |   |                         
|Pro forma net income                                                                                                                      |                            |  | $ | 27,361                  
|                                                                                                                                          |                            |  |   |                         
|                                                                                                                                          |                            | 
|Basic net income per share:                                                                                                               |                            | 
|As reported                                                                                                                               |                            |  | $ | 0.54                    
|Pro forma                                                                                                                                 |                            |  | $ | 0.50                    
|                                                                                                                                          |                            | 
|Diluted income per share:                                                                                                                 |                            | 
|As reported                                                                                                                               |                            |  | $ | 0.53                    
|Pro forma                                                                                                                                 |                            |  | $ | 0.49                    

---

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 six-month periods ended June 30, 2003 and 2002: risk-free interest rates
ranging from 1.91% to 2.81% and 3.89% to 4.71%, respectively; dividend yield of 0% for all
periods; expected lives ranging from 4.03 to 4.49 and 4.13 years, respectively; and
volatility of 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 six-month period ended June 30, 2003, cash paid for
acquisitions was $42,522,000, which included deferred payments of $3,890,000 that were
related to prior year acquisitions. At June 30, 2003, outstanding deferred consideration
totaled $8,180,000 and is included on the balance sheet in other accrued liabilities.

During the six months ended June 30, 2003, Apria
acquired 12 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 $35,743,000, $836,000 and
$7,020,000, 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 six-month period ended June 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.

|                                    | Six Months EndedJune 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 six months ended June 30, 2003, the net change
in the carrying amount of goodwill of $35,325,000 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)   |  |  | June 30, 2003 |     | December 31, 2002
|------------------------ |  |  | ------------- | --- | -----------------
|
|
|
|Covenants not to compete |  |  |               | 4.9 |                  
|Tradename                |  |  |               | 2.0 |                  
|                         |  |  |               |     |                  
|                         |  |  |               | 4.2 |                  
|                         |  |  |               |     |                  

---

Amortization expense amounts to $1,411,000 for the six
months ended June 30, 2003. Estimated amortization expense for each of the next six 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

At June 30, 2003, there were no borrowings under the
revolving credit facility, outstanding letters of credit totaled $5,055,000, credit
available under the revolving facility was $94,945,000, and Apria was in compliance with
all of the financial covenants required by the credit agreement.

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 margin). 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 the 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 six-month periods ended June 30, 2003 and 2002, Apria paid
net settlement amounts of $1,042,000 and $289,000, respectively. At June 30, 2003, the
aggregate fair value of the swap agreements was a deficit of $2,778,000 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 six months ended June 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
|Other comprehensive loss, net of taxes              
|Repurchased common shares held in treasury          
|                                                    
|                                                    
|                                                    

For the six-month periods ended June 30, 2003 and 2002,
net income and comprehensive income differed by unrealized losses related to interest rate
swap agreements in the amounts of $479,000 and $277,000, respectively.

Pursuant to its credit agreement, Apria can repurchase
up to $35,000,000 worth of its outstanding common stock during this calendar year. In
March 2003, Apria announced that its Board of Directors had authorized the commencement of
the repurchase program for fiscal year 2003. The company repurchased 300,500 shares for
$7,046,000 during the six months ended June 30, 2003.

---

NOTE F  INCOME TAXES

Income taxes for the six-month periods ended June 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 December 31, 2002, Apria had federal net
operating loss carryforwards of $15,348,000, of which $10,000,000 are limited to
$5,000,000 of usage per year under Internal Revenue Code Section 382 and are expected to
be fully utilized during 2003 and 2004. The remaining $5,348,000 is an unrestricted net
loss carryforward and is expected to be utilized during 2003. The company has an
alternative minimum tax credit carryforward of $9,614,000 which is expected to be utilized
during 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 EndedJune 30, |  |   | Six Months EndedJune 30,
|--------------------------------------------------- | -------------------------- |  | - | ------------------------
|
|
|
|Numerator:                                          |                            |  |   |                         
|Net income                                          |                            |  | $ | 29,412                  
|Numerator for basic and diluted per share amounts - |                            | 
|income available to common stockholders             |                            |  | $ | 29,412                  
|                                                   
|Denominator:                                        |                            | 
|Denominator for basic per share                     |                            | 
|amounts - weighted average shares                   |                            |  |   | 54,942                  
|                                                   
|Effect of dilutive securities:                      |                            | 
|Employee stock options -                            |                            | 
|dilutive potential common shares                    |                            |  |   | 511                     
|                                                    |                            |  |   |                         
|Denominator for diluted per share amounts -         |                            | 
|adjusted weighted average shares                    |                            |  |   | 55,453                  
|                                                    |                            |  |   |                         
|                                                   
|Basic net income per common share                   |                            |  | $ | 0.54                    
|                                                    |                            |  |   |                         
|Diluted net income per common share                 |                            |  | $ | 0.53                    
|                                                    |                            |  |   |                         
|                                                   
|Employee stock options excluded from the            |                            | 
|computation of diluted per share amounts:           |                            | 
|                                                   
|Shares for which exercise price exceeds             |                            | 
|average market price of common stock                |                            |  |   | 2,060                   
|                                                   
|Average exercise price per share that exceeds       |                            | 
|average market price of common stock                |                            |  | $ | 25.37                   
|                                                    |                            |  |   |                         

---

---

Cautionary statement for purposes of the Safe
Harbor provisions of the Private Securities Litigation Reform Act of1995:
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. Those risks include:

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

In addition, the terrorist attacks of September 11, 2001
and the military and security activities which followed, have and could continue to have
significant impacts on the United States 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 costs of the governments response to the terrorist
attacks and efforts in Iraq, Liberia, North Korea and elsewhere 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 415 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.

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 six-month
period ended June 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 $343.3 million in the second quarter of 2003,
compared to $310.4 million for the corresponding period in 2002, representing an increase
of 10.6%. For the six-month period ended June 30, 2003, net revenues were $678.4 million,
up 10.9% from $611.8 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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 third to one half of the revenue growth
between the quarters presented was derived from acquisitions.

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

|                             | Three Months Ended June 30, |  | Six Months Ended June 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 12.6%
in the second quarter of 2003 and 11.5% year-to-date, as compared to the corresponding
periods in 2002. This growth was primarily driven by volume increases as well as
Aprias focus on acquiring 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 also includes administering enteral
nutrients directly into the gastrointestinal tract through a feeding tube. When compared
to 2002, infusion therapy revenues increased by 5.9% and 7.6% in the second quarter and
first six 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 7.7% in the second quarter of 2003 versus the same
period in 2002. For the six-month period ended June 30, 2003, the home medical
equipment/other line increased by 12.4% 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.

Approximately
34% of Aprias revenues are 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 some pending issues that
may further impact Medicare 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 home medical equipment, including oxygen, by up to 15% each year under
an inherent reasonableness authority. In December 2002, the Centers for Medicare and
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.

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 demonstration
projects have been completed. The demonstrations could provide CMS and Congress with a
model for implementing competitive pricing in all Medicare programs. Initial reports from
government agencies allege cost savings that vary by product line, but the reports do not
include costs incurred by the government to administer the program. If such a competitive
bidding system were implemented, it could result in lower reimbursement rates, exclude
certain items and services from coverage or impose limits on increases in reimbursement
rates.

In
June 2003, the U.S. House of Representatives and the U.S. Senate passed alternative bills
that if enacted would include provisions that would affect Medicare Part B reimbursement
policies for items and services provided by Apria. The two chambers are working to
reconcile the differences between these bills, but 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 (H.R. 1) 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. The competitive bidding process for home infusion drug therapies or
inhalation drug therapies must take into account the standards, professional services and
related functions necessary to provide safe and effective care. In contrast, the Medicare
bill passed by the Senate on June 27, 2003 (S. 1) would not impose a
competitive acquisition system on durable medical equipment. Rather, S. 1 would place a
7-year freeze on annual payment increases for durable medical equipment.

The
House and Senate Medicare bills of June 2003 (H.R. 1 and S. 1) would 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 (currently set at
95 percent of the average wholesale price) under Medicare Part B to the lesser of 85
percent of the average wholesale price or the widely available market price. Any such
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 or to partially offset such reductions
for home inhalation drug therapy.

The
Administrator of CMS has indicated that if Congress does not enact prescription drug
pricing changes this year, CMS will implement drug reimbursement changes under its
regulatory authority. Some observers believe that a CMS regulation on this issue might be
patterned after the drug reimbursement provisions within either the Senate or House bill.

During
2000, the Secretary of HHS wrote to the durable medical equipment regional carriers and
recommended, but did not mandate, that Medicare and Medicaid claims processors base their
payments for covered outpatient drugs and biologicals on pricing schedules other than the
normally calculated Average Wholesale Prices, which historically has been the
industrys basis for drug reimbursement. The suggested alternative pricing
methodology was offered in an effort to reduce reimbursement levels for certain drugs to
more closely approximate a providers acquisition cost, but it would not have covered
the costs that homecare pharmacies incur to prepare, deliver or administer the drugs to
patients. Clinical services, billing, collection and other overhead costs also would not
have been considered. Under current government reimbursement schedules, these costs are
not clearly defined but are implicitly covered within the reimbursement for the drug. The
healthcare industry has taken issue with HHSs approach for several reasons,
primarily because it fails to consider the accompanying costs of delivering and
administering these types of drug therapies to patients in their homes. Further, if
providers choose to discontinue providing these drugs due to inadequate reimbursement,
patient access to homecare may be jeopardized. The Medicare, Medicaid and SCHIP Benefits
Improvement and Protection Act of 2000 provided for a moratorium on decreasing the payment
rates in effect as of January 1, 2001, for drugs and biologicals under the current
Medicare payment methodology. This legislation also required the General Accounting Office
to conduct a thorough study, by September 2001, of the adequacy of current payments. The
General Accounting Office was also directed to recommend revised payment methodologies and
report to Congress and the Secretary of HHS. The study was completed but the authors
acknowledged that 1) the limited scope and deadline associated with the study did not
allow for a thorough analysis of the homecare pharmacy aspects of covered services, 2)
legitimate service components and related costs do exist, and 3) different methods of
determining drug delivery and administration payments may be necessary for different types
of drugs. Currently, the moratorium has expired, but the timing and impact of any
potential pricing methodology revisions are not known. There is interest in Congress in
legislation that would replace Average Wholesale Price as the basis for Medicare drug
reimbursement, but to date there has been no agreement within Congress as to what the
alternative should be.

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.

Gross
Profit.Gross margins were 73.2% and 72.8% for the second quarter of 2003
and 2002, respectively. For the six-month periods ended June 30, 2003 and 2002, the
margins were 72.9% and 72.8%, respectively. While the margin between the six-month periods
remained consistent, the improvement between the quarters presented is due, in part, to an
increase in the share of higher-margin respiratory therapy revenues to total net revenues.
Additionally, the infusion therapy margin has improved since last year due to an increase
in higher-margin therapies. The respiratory medications margin deteriorated somewhat due
to an increased demand for more expensive brand name inhalation medications.

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 3.8% of net
revenues for both the second quarter and six-month period ended June 30, 2003. This is
consistent with the corresponding periods in 2002, in which the rate was 3.7% in the
second quarter and 3.8% for the six-month period.  See Accounts Receivable.

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 54.6% in the second quarter of 2003, up from 54.1% in
the second quarter of 2002. For the first six months of 2003, selling, distribution and
administrative expenses were 54.3%, compared to 54.6% for the same period in 2002. The
six-month period ended June 30, 2002 included $2.8 million in contract termination costs
related to the departure of the former Chief Executive Officer, which, if excluded, would
result in selling, distribution and administrative expenses at 54.1% of net revenues. The
primary reason for the increase in the expense to revenue percentage in the 2003 periods
is the effect of annual merit salary increases.

Amortization
of Intangible Assets.Amortization of intangible assets for the second
quarter of 2003 was $715,000 compared to $665,000 in the second quarter of 2002. For the
year-to-date periods in 2003 and 2002, amortization was $1.4 million and $1.3 million,
respectively. See Business Combinations.

Interest
Expense.Interest expense was $2.9 million for the second quarter of 2003,
down from $4.0 million in the second quarter of 2002. During the first six months of 2003,
interest expense was $6.3 million, compared to $8.1 million for the corresponding period
in the prior year. Two primary factors contributed to the decrease. Long-term debt
decreased by $26.8 million from the end of the second quarter of 2002 to the end of the
second quarter of 2003 and the applicable interest rate margin for the $175 million term
loan was reduced as a result of the June 2002 credit agreement amendment.

Income
Taxes. Income taxes for the three and six-month periods ended June 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
December 31, 2002, Apria had federal net operating loss carryforwards of $15 million,
of which $10 million are limited to $5 million of usage per year under Internal Revenue
Code Section 382 and are expected to be fully utilized during 2003 and 2004. The remaining
$5 million is an unrestricted net loss carryforward and is expected to be utilized during
2003. The company has an alternative minimum tax credit carryforward of $9.6 million,
which is expected to be utilized during 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 $135.6 million in the first
six months of 2003 compared with $107.7 million in the corresponding period in 2002. The
improvement is mainly due to the increase between periods in net income (before items not
requiring cash) and the timing of payments against accounts payable and income tax
accruals.

Cash
used in investing activities increased to $123.2 million for the first six months of 2003
compared to $72.7 million during the same period last year. The increase is primarily due
to increased acquisition activity in 2003. Purchases of patient service equipment also
increased between the periods. 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
used in financing activities was $14.3 million during the first six months of 2003
compared to $27.3 million during the first six months of 2002. The primary reason for the
difference is the higher level of repurchases of the companys stock in the first
half of 2002 than in the first half of 2003.

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 June 30.

|(dollars in millions)              | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Years 6+ | Totals
|---------------------------------- | ------ | ------ | ------ | ------ | ------ | -------- | ------
|
|Term loans                         |        |        | $      | 26     |        | $        | 28    
|Other long-term debt               |        |        |        | 3      |        |          | 2     
|Operating leases                   |        |        |        | 56     |        |          | 49    
|Deferred acquisition payments      |        |        |        | 8      |        |          | -     
|                                   |        |        |        |        |        |          |       
|Total contractual cash obligations |        |        | $      | 93     |        | $        | 79    
|                                   |        |        |        |        |        |          |       

Accounts
Receivable.Accounts receivable before allowance for doubtful accounts
increased to $233.9 million at June 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 52 at June 30, 2003
and 51 at December 31, 2002 and June 30, 2002. Accounts aged in excess of 180 days were
17.7% at June 30, 2003, 18.0% at December 31, 2002 and 17.7% at June 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 $29.6 million and $29.2 million at June 30, 2003 and December 31, 2002, respectively.
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.On June 30, 2003, total borrowings under the credit agreement were
$256.9 million, outstanding letters of credit totaled $5.1 million and credit available
under the revolving facility was $94.9 million. The company continues to be in compliance
with all of the financial covenants required by the credit agreement.

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 six-month periods of 2003 and 2002, Apria paid net settlement
amounts of $1.0 million and $289,000, respectively. Unrealized gains and losses on the
fair value of the swap agreements are reflected, net of taxes, in other comprehensive
income. At June 30, 2003, the aggregate fair value of the swap agreements was a deficit of
$2.8 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.Aprias credit agreement limits common stock repurchases to $35
million in any fiscal year and $100 million in the aggregate. During the first half of
2003, Apria repurchased 300,500 shares of its outstanding common stock for $7.0 million.
All repurchased common shares are being held in treasury.

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 half of 2003 was
$44.6 million. Pending receipt of additional valuation information, the preliminary
allocation of this amount includes $35.7 million to goodwill, $836,000 to other intangible
assets and $7.0 million to patient service equipment. Cash paid for acquisitions, which
includes amounts deferred from prior year acquisitions, totaled $42.5 million and $15.7
million in the first six 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.

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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 - status
 discussed below;  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. Aprias
management is currently working to ensure that the systems, procedures, policies and the
methods by which the company communicates with health plans and others, as applicable,
will be materially compliant with these regulations by the deadline.

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. It is currently unknown whether every existing local code used by
certain Medicaid and private health plans for products provided in the homecare setting
will have a corresponding HCPCS code by the October 16, 2003 compliance date. The absence
of standardized codes for products or services provided by Apria 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. Apria is currently supporting industry
representatives and manufacturers to obtain the necessary HCPCS codes.

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
June 30, 2003, Aprias term loan borrowings totaled $256.9 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 June 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 June 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
$1.6 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.

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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.

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ITEM 2-5.     NOT APPLICABLE

ITEM 6.     EXHIBITS AND REPORTS ON FORM 8-K

|    |                                                                                                                                                                                                   |  |                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------
|(a) | Exhibits:                                                                                                                                                                                         |  |                                                                                             
|    | ExhibitNumber10.1                                                                                                                                                                                 |  | ReferenceApria Healthcare Group Inc.
 2003 Performance Incentive Plan, dated July 17, 2003. 
|    | 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 April 23, 2003 to report the issuance
 of a press release announcing its financial results for the quarter ended
March 31, 2003.

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SIGNATURES

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

|                |                                                                                                     
|--------------- | ----------------------------------------------------------------------------------------------------
|                | APRIA HEALTHCARE GROUP INC.
Registrant                                                              
|August 12, 2003 | /s/ JAMES E. BAKER
James E. BakerChief Financial Officer(Principal Financial and
Accounting Officer)