UNITED STATESSECURITIES AND EXCHANGE
COMMISSIONWashington, D.C.  20549

FORM 10-K

|                                           
|-------------------------------------------
|[X]                                        
|For the Fiscal Year Ended December 31, 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 of
      incorporation)26220 Enterprise Court, Lake Forest, CA
      (Address of principal executive offices) | 33-0488566(I.R.S. Employer
      Identification Number)92630-8405(Zip Code)

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

Securities registered
pursuant to Section 12(b) of the Act:

|                                                               |                                                                   
|-------------------------------------------------------------- | ------------------------------------------------------------------
|Common Stock, $0.001 par value per share
(Title of each class) | New York Stock Exhange
(Name of each exchange on which registered)

Securities registered
pursuant to Section 12(g) of the Act:  None

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

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

As of June 30, 2003 the aggregate market value
of the shares of common stock held by non-affiliates of the Registrant, computed based on
the closing sale price of $24.88 per share as reported by the New York Stock Exchange, was
approximately $1,356,361,066. As of March 5, 2004, there were outstanding 50,582,271 shares of the Registrants common stock, par
value $0.001, which is the only class of common stock of the Registrant (not including
7,156,757 shares held in treasury).

Documents Incorporated by Reference

The information called for by Part III is
incorporated by reference to the Definitive Proxy Statement for the 2004 Annual
Meeting of Stockholders of the Registrant which will be filed with the Securities
and Exchange Commission not later than 120 days after December 31, 2003

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APRIA HEALTHCARE GROUP INC.

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|PART I                   |   |                                                                                                                                                                                                               | 
|Item 1                   |  | Business                                                                                                                                                                                                      | 
|                         |   | Strategy                                                                                                                                                                                                      | 
|                         |   | Service Lines                                                                                                                                                                                                 | 
|                         |   | Organization and
Operations                                                                                                                                                                                   | 
|                         |   | Marketing                                                                                                                                                                                                     | 
|                         |   | Sales                                                                                                                                                                                                         | 
|                         |   | Competition                                                                                                                                                                                                   | 
|                         |   | Government Regulation                                                                                                                                                                                         | 
|                         |   | Employees                                                                                                                                                                                                     | 
|                         |   | Website Access to Reports                                                                                                                                                                                     | 
|                         |   | Executive Officers                                                                                                                                                                                            | 
|                         |   | Risk Factors                                                                                                                                                                                                  | 
|Item 2                   |  | Properties                                                                                                                                                                                                    | 
|Item 3                   |  | Legal Proceedings                                                                                                                                                                                             | 
|Item 4                   |  | Submission of Matters to a Vote
of Secutity Holders                                                                                                                                                           | 
|PART II                  |   |                                                                                                                                                                                                               | 
|Item 5                   |  | Market for the Registrants Common Equity
and Related Stockholders Matters                                                                                                                                    | 
|Item 6                   |  | Selected Financial Data                                                                                                                                                                                       | 
|Item 7                   |  | Managements Discussion and Analysis of Financial
Condition and Results of Operations                                                                                                                         | 
|Item 7A                  |  | Quantitative and Qualitative Disclosures about Market
Risk                                                                                                                                                    | 
|Item 8                   |  | Financial Statements and Supplementary Data                                                                                                                                                                   | 
|Item 9                   |  | Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure                                                                                                                          | 
|Item 9A                  |  | Controls and Procedures                                                                                                                                                                                       | 
|PART III *               |   |                                                                                                                                                                                                               | 
|Item 10                  |  | Directors and Executive Officers
of the Registrant                                                                                                                                                            | 
|Item 11                  |  | Executive Compensation                                                                                                                                                                                        | 
|Item 12                  |  | Security Ownership of Certain Beneficial
Owners and Management     and Related Stockholder Matters                                                                                                            | 
|Item 13                  |  | Certain Relationships and Related Transactions                                                                                                                                                                | 
|Item 14                  |  | Principal Accountant Fees and
Services                                                                                                                                                                        | 
|                         |   | * All items under Part III are incorporated
by reference from Part I and the companys definitive Proxy Statement to be filed with
the Commission within 120 days after the end of the companys fiscal year. | 
|PART IV                  |   |                                                                                                                                                                                                               | 
|Item 15                  |  | Exhibits, Financial Statement Schedule and
Reports on Form 8-K                                                                                                                                                | 
|                         |   | Independent Auditors
Report                                                                                                                                                                                  | 
|                         |   | Consolidated Financial
Statements                                                                                                                                                                             | 
|                         |   | Consolidated Financial
Statement Schedule                                                                                                                                                                     | 
|SIGNATURESCERTIFICATIONS |   |                                                                                                                                                                                                               | 

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PART I

ITEM 1.      BUSINESS

Apria Healthcare Group
Inc. provides a broad range of home healthcare services through approximately 425 branch
locations that serve patients in all 50 states. Apria has three major service lines: home
respiratory therapy, home infusion therapy and home medical equipment. The following table
provides examples of the services and products in each:

|Service Line             |  | Examples of Services and Products                                                                                                                                                                                          
|------------------------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
|Home respiratory therapy |  | Provision of oxygen
systems, stationary and portable ventilators, obstructive sleep apnea equipment,
nebulizers, respiratory medications and related clinical/administrative support
 services                             
|Home infusion therapy    |  | Intravenous administration of
anti-infectives, pain management, chemotherapy, nutrients (also administered
through a feeding tube), immune globulin, other medications and related
clinical/administrative support services
|Home medical equipment   |  | Provision of patient safety items,
ambulatory aids and in-home equipment, such as wheelchairs and hospital beds                                                                                                            

Strategy

Apria is pursuing an
operating strategy to increase its market share and improve its profitability. In response
to the reimbursement reductions called for by the Medicare Prescription Drug, Improvement
and Modernization Act of 2003, Apria has dedicated additional resources to long-term
strategic planning. Apria management believes its strategic initiatives will enable the
company to continue to grow despite the effects of the recent legislation. Key elements of
this strategy are listed below. See Business  Government Regulation 
Medicare and Medicaid Reimbursement.

Maintain Focus on
Existing Service Offerings.Apria continues to focus on growth in its core
businesses of home respiratory therapy, home infusion therapy and home medical equipment.
Offering all three services gives Apria a competitive advantage with its managed care,
hospital and physician customers and enables it to maintain a diversified revenue base.
Through specific growth initiatives that enhance the companys clinical offering,
Apria continues its emphasis on growth in the home respiratory therapy line, which
historically has produced higher gross margins than the other service lines.

Supplement Internal
Growth with Selective Acquisitions.Apria continues to pursue strategically
complementary acquisition opportunities, with an emphasis on home respiratory therapy
businesses. Apria operates in a highly fragmented market, which provides an attractive
opportunity to drive growth through acquisitions. During 2003, Apria completed 27
acquisitions, comprised largely of respiratory therapy businesses, for an aggregate
consideration of approximately $98 million. The acquisitions expanded Aprias
presence in markets in the Southeast, West and Northeast, which position it to service a
larger percentage of contracted managed care customers members in the future.

Reduce Costs and
Increase Margins and Cash Flows.Aprias management continues to
develop and apply best practices and productivity improvement programs
throughout the company with the aim of achieving greater standardization and enhanced
productivity. Success with such programs has resulted in reduced costs and increased
margins and cash flow. Apria has implemented standardized clinical and delivery models,
billing and collection practices and common operating procedures in its field locations
and has centralized purchasing for inventory, patient service equipment and supplies.
Apria continues to focus resources on identifying opportunities for further productivity
improvements.

Evaluate
Opportunities to Expand Offerings in Home Healthcare.Apria believes that
with the aging of the U.S. population, the resulting increases in medical costs and
utilization of healthcare services will lead to an expansion of the number of services
provided in the home. Providing such services in the home should reduce healthcare costs
for the patient as well as enhance patient convenience. Technological advances are also
expected to contribute to additional expansion of the domestic home healthcare market.
During 2004, Apria will evaluate several new business opportunities. The initial focus
will be on identifying the unfulfilled healthcare needs of Aprias existing patient
population and evaluating the potential business opportunity associated with each.
Management expects that these opportunities, upon evaluation to determine their viability
and scalability, will result in the future expansion of services that Apria will offer in
the home.

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Service Lines

In each of its three
service lines, Apria provides patients with a variety of clinical and administrative
support services, as well as related products and supplies, most of which are prescribed
by a licensed physician as part of a care plan. These services include:

- providing in-home clinical respiratory care, infusion and respiratory pharmacy management and high-tech infusion
nursing;
- educating patients and their caregivers about illnesses and providing them with written instructions about home
safety, self-care and the proper use of their equipment;
- monitoring patients individualized treatment plans;
- reporting patient progress and status to the physician and/or managed care organization;
- providing in-home delivery and set-up of equipment and/or supplies;
- maintaining and repairing equipment; and
- processing claims to third-party payors, billing and collecting patient co-pays and deductibles.

The following table sets
forth a summary of net revenues by service line, expressed as percentages of total net
revenues:

|                             | Year Ended December 31,
|---------------------------- | -----------------------
|
|
|
|Home respiratory therapy     |                        
|Home infusion therapy        |                        
|Home medical equipment/other |                        
|                             |                        
|Total net revenues           |                        
|                             |                        

Home Respiratory Therapy.Apria provides home respiratory therapy services to patients with a variety of
conditions, including:

- chronic obstructive pulmonary diseases such as emphysema, chronic bronchitis and asthma;
- nervous system-related respiratory conditions such as Lou Gehrigs disease and quadriplegia;
- obstructive sleep apnea;
- congestive heart failure; and
- lung cancer.

Apria employs a nationwide clinical staff of respiratory
care professionals to provide direct patient care, monitoring and other support services
to its home respiratory therapy patients under physician-directed treatment plans and in
accordance with Aprias proprietary acuity program.

Apria derives
approximately 71% of its respiratory therapy revenues from the provision of oxygen
systems, home ventilators, nebulizers and home-delivered respiratory medications. The
company derives most of its remaining respiratory revenues from the provision of:

- infant apnea monitors;
- continuous positive airway pressure devices; and
- noninvasive positive pressure ventilation.

Home Infusion
Therapy.Home infusion therapy involves the administration of a drug or nutrient
directly into the body intravenously through injection or catheterization. Examples of
such therapies include:

- total parenteral (intravenous) nutrition;
- anti-infective and anti-fungal medications;
- chemotherapy; and
- pain management.

The home infusion therapy service line also includes
enteral nutrition, which is the administration of nutrients directly into the
gastrointestinal tract through a feeding tube.

Depending on the therapy,
a broad range of venous access devices and pump technologies may be used to facilitate
homecare and patient independence. Apria employs licensed pharmacists and registered
high-tech infusion nurses who specialize in the delivery of home infusion therapy. They
are available to respond to emergencies and questions regarding therapy 24 hours a day,
seven days a week and to provide initial and ongoing training and education to the patient
and caregiver. Other support services include patient service, supply replenishment, pump
management, preventive maintenance, assistance with insurance questions and outcome
reporting. Apria currently operates 31 pharmacy locations to serve its home infusion
patients.

Home Medical
Equipment/Other.Aprias primary emphasis in the home medical equipment
service line is on the provision of equipment to assist patients with ambulation, safety
and general care in and around the home. The company also offers rehabilitation products
in selective markets in the United States. Such products include customized seating and
wheeled mobility equipment. Aprias integrated service approach allows patients,
hospital and physician referral sources and managed care systems accessing either
respiratory or infusion therapy services to also access needed home medical equipment
through a single source.

As Aprias managed
care organization customer base has grown, management has recognized the need to expand
its ability to provide value-added services to these customers. Rather than provide
certain non-core services directly, Apria sometimes aligns itself with other segment
leaders, such as home health nursing organizations, providers of home-delivered routine
medical supplies or large drug/supply wholesalers, through formal relationships or
ancillary networks. Such networks must be credentialed and qualified by Aprias
clinical services department.

Organization and Operations

Organization.Aprias approximately 425 branch locations are organized
          into four geographic divisions, which are further divided into 16 geographic
          regions. Each of the regions is operated as a separate business unit and
          consists of a number of branches and a regional office. The regional office
          provides each of its branches with key support services such as billing,
          purchasing, equipment maintenance, repair and warehousing. The branch delivers
          home healthcare products and services to patients in their homes and other care
          sites through the companys delivery fleet, qualified delivery
          professionals and clinical employees.

Although Apria generally
operates its regions as separate business units, the companys sales and business
operations functions are vertically integrated. The operations function is further divided
into revenue management, clinical services, logistics, regulatory compliance and
acquisition integration. Through this structure, all functions that are performed at the
region level have direct reporting and accountability to corporate headquarters. Apria
believes that this structure provides control over and consistency among its regions and
branches. In accordance with Aprias strategy to identify opportunities for
efficiencies and productivity improvements, management is evaluating the feasibility of
centralizing certain functions that are currently performed at a region or branch level.

Corporate
Compliance.As a leader in the home healthcare industry, Apria has
implemented a compliance program to further the companys commitment to providing
quality home healthcare services and products while maintaining high standards of ethical
and legal conduct. Apria believes that operating its business with integrity and in full
compliance with applicable regulations is essential. Aprias Corporate Compliance
Program includes a written Code of Ethical Business Conduct that employees receive as part
of their initial orientation process. The program is designed to accomplish the goals
described above through employee education, a confidential disclosure program, written
policy guidelines, periodic reviews, frequent reinforcement, compliance audits, a formal
disciplinary component and other programs. Compliance oversight is provided by the
Corporate Compliance Committee of the companys Board of Directors which meets
quarterly in conjunction with Aprias internal Corporate Compliance Committee,
consisting of senior and mid-level management personnel from various functional
disciplines. See Business  Risk Factors  Federal Investigation.

Internal Audit.Apria has established an internal audit function with direct reporting to
the Audit Committee of the Board of Directors to provide an ongoing assessment of
Aprias system of internal controls and procedures for financial reporting. Internal
Audit is responsible for both operational and financial reviews of the companys
operations, monitoring compliance with policies and procedures, identification and
development of best practices within the organization and overseeing compliance with the
requirements of the Sarbanes-Oxley Act of 2002.

Operating
Systems and Controls.Aprias business is dependent, to a
substantial degree, upon the quality of its operating and field information systems for
proper contract administration, accurate order entry and pricing, billing and collections,
as well as inventory and patient service equipment management. These systems provide
reporting that enables management to monitor and evaluate contract profitability.
Aprias information services department works closely with all of the corporate
departments to ensure that Aprias systems are compliant with government regulations
and payor requirements and to support their business improvement initiatives with
technological solutions.

Apria has established
performance indicators which measure operating results against expected thresholds for the
purpose of allowing all levels of management to identify and modify areas requiring
improvement and to monitor progress. Operating models with strategic targets have been
developed to move Apria toward more effectively managing the sales, customer service,
accounts receivable, clinical and distribution areas of its business. Aprias
management team is compensated using performance-based incentives focused on criteria such
as revenue growth and improvement in operating income.

Payors. Apria derives substantially all its revenues from third-party
          payors, including private insurers, managed care organizations, Medicare and
          Medicaid. For 2003, approximately 28% of Aprias net revenues were derived
          from Medicare and 6% from Medicaid. Generally, each third-party payor has
          specific requirements which must be met before claim submission will result in
          payment. Apria has policies and procedures in place to manage the claims
          submission process, including verification procedures to facilitate complete and
          accurate documentation.

Receivables
Management. Apria operates in an environment with complex requirements
governing billing and reimbursement for its products and services. Initiatives focused
specifically on receivables management such as system enhancements, process refinements
and organizational changes have resulted in improvement and consistency in key accounts
receivable indicators.

Apria is expanding its use
of technology in areas such as electronic claims submission and electronic funds transfer
with managed care organizations to more efficiently process business transactions. This
can expedite claims processing and reduce the administrative cost associated with this
activity for both Apria and its customer/payors. Management is also focusing resources on
certain large third-party payors to develop internal expertise with the payors
unique reimbursement requirements, thereby reducing subsequent denials and shortening the
related collection periods.

Marketing

Through its field sales
force, Apria markets its services primarily to physicians, managed care organizations,
hospitals, medical groups, home health agencies and case managers. Apria has developed and
put into practice several marketing initiatives, including but not limited to:

Automated Call
Routing Through a Single Toll-Free Number.This initiative allows select
managed care organizations to reach any of Aprias locations and to access the full
range of Apria services through a single central telephone number: 1-800-APRIA-88.

Accreditation by the
Joint Commission on Accreditation of Healthcare Organizations or JCAHO.JCAHO is a nationally recognized organization that develops standards for
various healthcare industry segments and monitors compliance with those standards through
voluntary surveys of participating providers. As the home healthcare industry has grown,
the need for objective quality measurements has increased. Accreditation by JCAHO entails
a lengthy review process that is conducted every three years. Accreditation is widely
considered a prerequisite for entering into contracts with managed care organizations at
every level. Because accreditation is expensive and time consuming, not all providers
choose to undergo the process. Due to its leadership role in establishing quality
standards for home healthcare and its active and early participation in this process,
Apria management believes the company is generally viewed favorably by referring
healthcare professionals. All of Aprias branch locations, including acquired
locations, are accredited by or in the process of receiving accreditation from JCAHO.
Aprias most recent triennial survey cycle began in January 2003 with a successful
corporate survey outcome and is anticipated to be concluded by August 2004.

Essential Care
Model. Apria has developed the Essential Care Model, a proprietary model
that defines the services, supplies and products delivered in conjunction with prescribed
homecare equipment and therapies. The Essential Care Model is used to establish consistent
and clear expectations for referral sources, payors and patients.

Physician Relations.Aprias physician relations group places phone calls to physician
offices in an effort to educate them about homecare and to stimulate interest in Apria.
Physician relations representatives work closely with sales professionals throughout the
country to identify, develop and maintain quality relationships.

Patient Satisfaction
and Complaint Resolution Process.Apria has a centralized patient
satisfaction survey function that periodically conducts targeted member satisfaction
studies for key managed care organizations as specified by the various contractual
arrangements. The same centralized group manages a complaint resolution process through
which service improvements are identified and resolved at the field level. The company
believes that both centralized processes afford it visibility to centralized performance
improvement data and trends that enable it to amend policies and procedures as necessary
to meet the needs of patients and referral sources.

Apria Great
EscapesTM Travel Program. Aprias 425-branch network
facilitates travel for patients who require oxygen, home infusion or other products,
services and therapies. Apria coordinates equipment and service needs for thousands of
traveling patients annually, which enhances their mobility and quality of life.

Sales

Apria employs over 520
sales professionals whose primary responsibility is to target key referral sources to
generate new or renewal patient referrals or prescriptions (as applicable) for all of its
service lines. Key customers include but are not limited to physicians and their staffs,
hospital-based healthcare professionals and managed care organizations. Apria provides its
sales professionals with the necessary clinical and technical training to represent
Aprias major service offerings of home respiratory therapy, home infusion therapy
and home medical equipment. As larger segments of the marketplace become involved with
managed care, specific portions of the sales forces working knowledge of pricing,
contracting and negotiating, and specialty-care management programs are being enhanced as
well.

An integral component of
Aprias overall sales strategy is to increase volume through managed care
organizations and traditional physician referral channels. Specific growth initiatives
designed to increase customer awareness of Aprias clinical and operational programs
have been launched with the goal of garnering a greater share of the traditional market.
The ultimate decision makers for healthcare services vary greatly, from closed model
managed care organizations to preferred provider networks which are controlled by more
traditional means. Aprias selling structure and strategies are designed to adapt to
changing market factors and will continue to adjust as further changes in the industry
occur. Managed care organizations continue to represent a significant portion of
Aprias business in several of its primary metropolitan markets. No single account,
however, represented more than 10% of Aprias total net revenues for 2003. Among its
more significant managed care agreements during 2003 were Aetna, Kaiser Health Plans and
United HealthCare Group. Apria chose not to renew its contract with Gentivas
CareCentrix group upon its expiration in December 2003. Apria also offers discount
agreements and various fee-for-service arrangements to hospitals or hospital systems whose
patients have home healthcare needs. See Business  Risk Factors  Pricing
Pressures and Managements Discussion and Analysis of Financial Condition
and Results of Operations.

Competition

The segment of the
healthcare market in which Apria operates is highly competitive. In each of its service
lines there are a limited number of national providers and numerous regional and local
providers. The competitive factors most important in the regional and local markets are:

- reputation with referral sources, including local physicians and hospital-based professionals;
- accessibility and responsiveness;
- price of services;
- overall ease of doing business;
- quality of patient care and associated services; and
- range of home healthcare services.

In addition to the foregoing, the competitive factors
most important in the larger, national markets are:

- ability to service a wide geographic area;
- ability to develop and maintain contractual relationships with managed care organizations;
- access to capital;
- information systems capabilities; and
- accreditation by the JCAHO or a similar accrediting body.

Apria believes that it competes
effectively in each of its service lines with respect to all of the above factors and that
it has an established record as a quality provider of home respiratory therapy, home
medical equipment and home infusion therapy as reflected by JCAHO accreditation of
Aprias branches.

Other types of healthcare
providers, including industrial gas manufacturers, individual hospitals and hospital
systems, home health agencies and health maintenance organizations have entered, and may
continue to enter, the market to compete with Aprias various service lines. Depending
on their business strategies and financial position, it is possible that Aprias
competitors may have, or may obtain, significantly greater financial and marketing
resources than Apria. See Business  Risk Factors  Pricing
Pressures.

Government Regulation

Apria is subject to
extensive government regulation, including numerous laws directed at preventing fraud and
abuse and laws regulating reimbursement under various governmental programs, as more fully
described below. Apria maintains several programs designed to minimize the likelihood that
it would engage in conduct or enter into contracts in violation of the fraud and abuse
laws. Contracts of the types subject to these laws are reviewed and approved by
corporate contract services and/or legal department personnel. Apria also maintains
various educational programs designed to keep its managers updated and informed on
developments with respect to the fraud and abuse laws and to reinforce to all employees
the policy of strict compliance in this area. While Apria believes its discount
agreements, billing contracts and various fee-for-service arrangements with other
healthcare providers comply with applicable laws and regulations, Apria cannot provide any
assurance that further administrative or judicial interpretations of existing laws or
legislative enactment of new laws will not have a material adverse effect on Aprias
business.

Medicare and
Medicaid Reimbursement.As part of the Social Security Amendments of 1965,
Congress enacted the Medicare program which provides for hospital, physician and other
statutorily-defined health benefits for qualified individuals. The Medicaid program, also
established by Congress in 1965, is a joint federal and state program that provides
certain statutorily-defined health benefits to financially needy individuals who are
blind, disabled, aged or members of families with dependent children. In addition,
Medicaid generally covers financially needy children, refugees and pregnant women. A
substantial portion of Aprias revenue is attributable to payments received from
third-party payors, including the Medicare and Medicaid programs. In 2003, approximately
28% of Aprias net revenue was derived from Medicare and 6% from Medicaid.

Medicare. In
December 2003, the President signed into law the Medicare Prescription Drug,
          Improvement and Modernization Act of 2003. The Act includes a number of
          provisions that will affect Medicare Part B reimbursement policies for items
and
services provided by Apria, the most significant of which are:

| |  | The legislation provides for a freeze on annual payment increases for durable medical
equipment from 2004 through 2008. Further, beginning in 2005, reimbursement for five
durable medical equipment categories will be reduced based on the median price paid for
such items on behalf of beneficiaries of federal employee health plans.      
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                 
| |  | Reimbursement for inhalation drugs has been reduced from the previous reimbursement rate
of 95% of the average wholesale price to 80% of the average wholesale price, effective
January 1, 2004. Beginning in January 2005, reimbursement for these drugs will shift to
average sales price, as defined by the Act, plus 6%.                    
| |   |                                                                                                                                                                                                                                                                                                                                                 
| |  | The Act requires the establishment of a competitive acquisition program for as yet
unspecified durable medical equipment items and services that is to be transitioned into
(i) ten of the largest metropolitan statistical areas in 2007; (ii) 80 of the largest
metropolitan statistical areas in 2009; and (iii) additional areas after 2009.

Until regulations
implementing the provisions of the legislation are issued, Apria cannot be certain of the
exact impact of the reimbursement reductions. However, based on its current interpretation
of the Act, Aprias management estimates that the revision to inhalation drug
reimbursement will result in revenue reductions from 2003 levels of approximately $14 million and $56
million in 2004 and 2005, respectively. The estimated impact to revenues in 2005 from the
durable medical equipment reimbursement reduction is $30 million. The impact of the
competitive acquisition program cannot be estimated at this time. If the inhalation drug
reductions are implemented as currently interpreted and estimated for 2005, the untenable
nature of the new reimbursement model would cause Apria to begin transitioning out of this
product line late in the fourth quarter of 2004. The company has developed a contingency
plan that includes a proper notice period for existing Medicare patients and physician
referral sources.

The Balanced Budget Act of
1997 contained several provisions that 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. The Medicare
Prescription Drug, Improvement and Modernization Act of 2003 addressed some of the issues
pending from the earlier legislation. However, still pending from the 1997 legislation is
streamlined authority granted to the Secretary of the U.S. Department of Health and Human
Services, or 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 & Medicaid Services, or 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, a prospective payment system, or a competitive acquisition program. As of
this date, neither CMS nor the durable medical equipment regional carriers have used the
expedited authority.

Medicaid. 
          Some states have already adopted, or are contemplating adopting, alternative
          pricing methodologies 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.
          Apria 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 if the reimbursement levels for those services remain
          adequate.

Claims
Audits. Durable medical equipment regional carriers are private
organizations that contract to serve as the federal governments agents for the
processing of claims for items and services provided under Part B of the Medicare program.
These carriers and Medicaid agencies also periodically conduct pre-payment and
post-payment reviews and other audits of claims submitted. Medicare and Medicaid agents
are under increasing pressure to scrutinize healthcare claims more closely. In addition,
the home healthcare industry is generally characterized by long collection cycles for
accounts receivable due to complex and time-consuming requirements for obtaining
reimbursement from private and governmental third-party payors. Such long collection
cycles or reviews and/or similar audits or investigations of Aprias claims and
related documentation could result in denials of claims for payment submitted by Apria.
Further, the government could demand significant refunds or recoupments of amounts paid by
the government for claims which, upon subsequent investigation, are determined by the
government to be inadequately supported by the required documentation. See Business
 Risk Factors  Federal Investigation and Business  Risk
Factors  Medicare Reimbursement Rates.

---

HIPAA. 
The Health Insurance Portability and Accountability Act of 1996 is comprised of
a number of components. Pursuant to
the administrative simplification section of HIPAA, HHS has issued multiple sets
of regulations, each with its own compliance date. Regulations under
HIPAA that may have a material effect on Apria govern the following:

| |  | privacy of individually  identifiable  health  information - compliance date: April 14, 2003 - Apria was
materially compliant by this date;                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                               
| |  | standard electronic  transaction and code sets - compliance date: October 16, 2003 - Apria was materially
compliant by this date;                                                                                                                             
| |   |                                                                                                                                                                                                                                                               
| |  | electronic  security of individually  identifiable  health  information - compliance  date:  April 21, 2005
- Apria  expects to be materially compliant with these regulations by the compliance date;                                                        
| |   |                                                                                                                                                                                                                                                               
| |  | standards for a unique national health identifier for healthcare providers for use in
connection with standard transactions  compliance date: May 23, 2007  Apria
expects to be able to materially comply with these regulations by the compliance date; and
| |   |                                                                                                                                                                                                                                                               
| |  | the first installment of an interim enforcement rule, when issued in full, will address
both substantive and procedural requirements for the imposition of civil monetary
penalties.                                                                          

The privacy regulations
provide patients with information and control regarding the companys request for,
and receipt, use and disclosure of patients protected health information. The
privacy regulations require the development and implementation of detailed policies,
procedures, contracts and forms for this purpose. The privacy regulations also require
entities subject to the HIPAA regulations to contractually obligate certain of their
contractors, who may receive protected health information during the course of rendering
services on behalf of that entity, to abide by certain privacy requirements. Aprias
privacy policies and practices must also comply with any state law privacy protections
that are more stringent than the privacy afforded by these federal privacy regulations.
Aprias management has developed and implemented the required policies, procedures
and forms necessary to comply materially with such privacy regulations and applicable
laws.

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

In mid-October 2003, the
panel posted the revised HCPCS list for 2004 on its web site. The panel approved very few
new codes. The absence of new codes for certain higher-cost respiratory products and
services could have an impact on gross profit margins, since the panel only allows one
code per certain equipment category, regardless of the actual equipment provided to the
patients per a physicians prescription and/or patient preference. The absence of
standardized codes for products or services provided by Apria also may preclude the
company from submitting electronic billings to certain payors. Such an outcome would
require submitting paper claims, which could ultimately result in delays and difficulties
in collecting these claims.

The final electronic
security regulations, published in the Federal Register on February 20, 2003, have a
compliance date of April 21, 2005. In general, the security regulations require covered
entities to implement reasonable technical, physical and administrative security measures
to safeguard protected health information that is maintained, used and disclosed in
electronic form. Apria has begun to evaluate its systems, procedures and policies related
to the security of protected health information and expects to modify them as necessary to
comply in all material respects with the security regulations by the applicable compliance
date.

The final rule
establishing the standard for a unique health identifier for healthcare providers for use
in the healthcare system and the adoption of the National Provider Identifier
(NPI), along with implementation specifications for obtaining and using this
standard, were published in the Federal Register on January 23, 2004 and have a compliance
date of May 23, 2007. In general, this rule requires that covered healthcare providers
apply for an NPI. The NPI will be a 10-position numeric identifier that will be assigned
by a national provider system and will help identify the type of provider and provide
other relevant identifying information during the transmission of claims and other
standard transactions. Covered healthcare providers will be required to use their NPIs in
connection with HIPAA standard transactions as of the applicable compliance date, will be
required to disclose their NPIs to other entities that need the NPIs to process standard
transactions, and must communicate to the national provider system any changes to data
elements that affect the NPIs. Parties that perform transactions on behalf of a covered
entity must also agree to use the healthcare providers NPI when conducting such
transactions. Apria anticipates that it will begin evaluating the policies and procedures
necessary to obtain one or more NPI(s) within the required time frame and expects to
implement and/or modify its systems as necessary to comply materially with the regulations
associated with the obtaining and use of NPIs by the applicable compliance date.

The HIPAA statute includes
financial and criminal penalties for violations of the above referenced regulations. At
this time, Apria expects to maintain its compliance with the regulations already in
effect, anticipates that it will be able to materially comply with the electronic security
and the NPI standard by their respective mandatory compliance dates and believes that the
cost of its compliance efforts will not have a material adverse effect on Aprias
business, financial condition or results of operations.

Anti-Kickback
Statute.As a provider of services under the Medicare and Medicaid
programs, Apria is subject to the Medicare and Medicaid fraud and abuse laws, commonly
known as the anti-kickback statute. At the federal level, the anti-kickback
statute prohibits any bribe, kickback or rebate in return for the referral of patients,
products or services covered by federal healthcare programs. Federal healthcare programs
have been defined to include plans and programs that provide health benefits funded by the
United States Government, including Medicare, Medicaid and TRICARE (formerly known as the
Civilian Health and Medical Program of the Uniformed Services), among others. Violations
of the anti-kickback statute may result in civil and criminal penalties and exclusion from
participation in the federal healthcare programs. In addition, a number of states in which
Apria operates have laws that prohibit certain direct or indirect payments (similar to the
anti-kickback statute) or fee-splitting arrangements between healthcare providers, if such
arrangements are designed to induce or encourage the referral of patients to a particular
provider. Possible sanctions for violation of these restrictions include exclusion from
state-funded healthcare programs, loss of licensure and civil and criminal penalties. Such
statutes vary from state to state, are often vague and have seldom been interpreted by the
courts or regulatory agencies.

Physician
Self-Referrals.Certain provisions of the Omnibus Budget Reconciliation Act
of 1993, commonly known as Stark II, prohibit Apria, subject to certain exceptions, from
submitting claims to the Medicare and Medicaid programs for designated health services if
Apria has a financial relationship with the physician making the referral for such
services or with a member of such physicians immediate family. The term
designated health services includes several services commonly performed or
supplied by Apria, including durable medical equipment and home health services. In
addition, financial relationship is broadly defined to include any ownership
or investment interest or compensation arrangement pursuant to which a physician receives
remuneration from the provider at issue. Violations of Stark II may result in loss of
Medicare and Medicaid reimbursement, civil penalties and exclusion from participation in
the Medicare and Medicaid programs. In January 2001, CMS issued the first of two phases of
final regulations to clarify the meaning and application of Stark II. Phase I addresses
the primary substantive aspects of the prohibition and several key exceptions.
Significantly, the final regulations define previously undefined key terms, clarify prior
definitions, and create several new exceptions for certain indirect compensation
arrangements, fair market value transactions, arrangements involving non-monetary
compensation up to $300, and risk-sharing arrangements, among others. The regulations also
create a new knowledge exception that permits providers to bill for items provided in
connection with an otherwise prohibited referral, if the provider does not know, and does
not act in reckless disregard or deliberate ignorance of, the identity of the referring
physician. The effective date for the bulk of Phase I of the final regulations was January
4, 2002. The publication of Phase II Rules is currently scheduled for no later than March
16, 2004. In addition, a number of the states in which Apria operates have similar
prohibitions on physician self-referrals. Finally, recent enforcement activity and
resulting case law developments have increased the legal risks of physician compensation
arrangements that do not satisfy the terms of an exception to Stark II, especially in the
area of joint venture arrangements with physicians.

False Claims.The False Claims Act imposes civil and criminal liability on individuals or
entities that submit false or fraudulent claims for payment to the government. Violations
of the False Claims Act may result in treble damages, civil monetary penalties and
exclusion from the Medicare and Medicaid programs.

The False Claims Act also
allows a private individual to bring a qui tam suit on behalf of the government
against a healthcare provider for violations of the False Claims Act. A qui tam
suit may be brought by, with only a few exceptions, any private citizen who has material
information of a false claim that has not yet been previously disclosed. Even if
disclosed, the original source of the information leading to the public disclosure may
still pursue such a suit. Although a corporate insider is often the plaintiff in such
actions, an increasing number of outsiders are pursuing such suits.

In a qui tamsuit,
the private plaintiff is responsible for initiating a lawsuit that may eventually lead to
the government recovering money of which it was defrauded. After the private plaintiff has
initiated the lawsuit, the government must decide whether to intervene in the lawsuit and
become the primary prosecutor. In the event the government declines to join the lawsuit,
the private plaintiff may choose to pursue the case alone, in which case the private
plaintiffs counsel will have primary control over the prosecution (although the
government must be kept apprised of the progress of the lawsuit and will still receive at
least 70% of any recovered amounts). In return for bringing the suit on the
governments behalf, the statute provides that the private plaintiff is entitled to
receive up to 30% of the recovered amount from the litigation proceeds if the litigation
is successful. Recently, the number of qui tam suits brought against healthcare
providers has increased dramatically. In addition, a number of states have enacted laws
modeled after the False
Claims Act that allow those states to recover money which was fraudulently obtained by a
healthcare provider from the state (e.g., Medicaid funds provided by the state). See
Business  Risk Factors  Federal Investigation and Legal
Proceedings.

Other Fraud and
Abuse Laws.HIPAA created, in part, two new federal crimes: Health
Care Fraud and False Statements Relating to Health Care Matters. The
Health Care Fraud statute prohibits executing a knowing and willful scheme or artifice to
defraud any healthcare benefit program. A violation of this statute is a felony and may
result in fines and/or imprisonment. The False Statements statute prohibits knowingly and
willfully falsifying, concealing or covering up a material fact by any trick, scheme or
device or making any materially false, fictitious or fraudulent statement in connection
with the delivery of or payment for healthcare benefits, items or services. A violation of
this statute is a felony and may result in fines and/or imprisonment.

In recent years, the
federal government has made a policy decision to significantly increase the financial
resources allocated to enforcing the healthcare fraud and abuse laws. In addition, private
insurers and various state enforcement agencies have increased their level of scrutiny of
healthcare claims in an effort to identify and prosecute fraudulent and abusive practices
in the healthcare area.

Healthcare Reform
Legislation.Economic, political and regulatory influences are subjecting
the healthcare industry in the United States to fundamental change. Various healthcare
reform proposals are formulated and proposed by the legislative and administrative
branches of the federal government on a regular basis. In addition, some of the states in
which Apria operates periodically consider various healthcare reform proposals. Apria
anticipates that federal and state governmental bodies will continue to review and assess
alternative healthcare delivery systems and payment methodologies and public debate of
these issues will continue in the future. Due to uncertainties regarding the ultimate
features of reform initiatives and their enactment and implementation, Apria cannot
predict which, if any, of such reform proposals will be adopted, or when they may be
adopted, or that any such reforms will not have a material adverse effect on Aprias
business and results of operations.

Healthcare is an area of
extensive and dynamic regulatory change. Changes in the law or new interpretations of
existing laws can have a dramatic effect on permissible activities, the relative costs
associated with doing business and the amount of reimbursement by government and other
third-party payors. Recommendations for changes may result from an ongoing study of
patient access by the General Accounting Office and from the potential findings of the
National Bipartisan Commission on the Future of Medicare. See Business  Risk
Factors  Government Regulation; Healthcare Reform.

Employees

As of February 29, 2004,
Apria had 10,582 employees, of which 9,329 were full-time and 1,253 were part-time. The
companys employees are not currently represented by a labor union or other labor
organization, except for approximately 18 employees in New York.

In February 2004,
Aprias full-time equivalents in the functional areas of sales, operations and
administration totaled 544, 8,321 and 1,142, respectively. Full-time equivalents are
computed by dividing the actual number of hours worked in a given period by the typical
number of hours for that period based on a 40-hour week.

Website Access to Reports

Aprias annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, all
amendments thereto and other filings are made available on the companys website as
soon as reasonably practicable after such reports are filed with or furnished to the
Securities and Exchange Commission. Also available on the website is Aprias Code of
Ethical Business Conduct. Aprias website can be found at www.apria.com.

---

Executive Officers

Set forth below are the names, ages, titles
with Apria and past and present positions of the persons serving as Aprias executive officers
as of March 5, 2004.

|Name and Age               |  | Office and Experience                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
|Lawrence M. Higby, 58      |  | President, Chief Executive Officer and Director.
Mr. Higby was appointed Chief Executive Officer and Director in February 2002.  Mr. Higby also served as
Aprias Chief Executive Officer on an interim basis from January through May 1998.  He joined Apria in
November 1997 as President and Chief Operating Officer.  Prior to joining Apria, Mr. Higby served as President and Chief Operating
Officer of Unocals 76 Products Company and Group Vice President of Unocal Corporation from 1994 to 1997.
From 1986 to 1994, Mr. Higby held various positions with the Times Mirror Company, including Executive Vice
President, Marketing of the Los Angeles Times and Chairman of the Orange County Edition.
In 1986, Mr. Higby served as President and Chief Operating Officer of Americas Pharmacy, Inc., a division
of Caremark, Inc.   
|Lawrence A. Mastrovich, 42 |  | Chief Operating Officer. Mr. Mastrovich joined Apria
as Chief Operating Officer in April 2002. From August 2001 to April 2002,
Mr. Mastrovich served as President and Chief Operating Officer of TechRx, a
pharmacy technology company. From April 2001 to August 2001, Mr. Mastrovich
served as Aprias Executive Vice President, Sales. From October 1998 to April
2001, Mr. Mastrovich served as Aprias Executive Vice President, Revenue Management. From
December 1997 to October 1998, Mr. Mastrovich served as Division Vice President, Operations for
Aprias Northeast Division.  Prior to that time, Mr. Mastrovich had served as a Regional Vice
President for Apria and its predecessor, Homedco, since 1994 and in various other capacities from 1987 to 1994.                                                                      
|Amin I. Khalifa, 50        |  | Executive Vice President and
Chief Financial Officer. Mr. Khalifa joined Apria as Executive Vice
President and Chief Financial Officer in October 2003. From June 1999 to
September 2003, Mr. Khalifa served as Vice President and Chief Financial Officer
of Beckman Coulter, Inc., a manufacturer of diagnostic laboratory equipment and
instruments. From October 1996 to June 1999, Mr. Khalifa served as the Chief Financial
Officer of the Agricultural Sector of Monsanto Company, a life sciences company.  From
1994 to October 1996, Mr. Khalifa served as Senior Vice President, Chief Financial Officer for
Aetna Health Plans and as Senior Vice President, Strategy and Investor Relations for Aetna, Inc.
 From 1979 to 1994, Mr. Khalifa held a succession of senior financial management and
operating positions at PepsiCo, Inc.
|Anthony S. Domenico, 46    |  | Executive Vice President, Sales.
Mr. Domenico joined Apria as Executive Vice President, Sales in August 2001. From
January 1998 to August 2001, Mr. Domenico served as Chief Operating Officer and Senior Vice
President of Sales and Operations of Perigon Medical Distribution, Inc., a wholesale medical
supply and equipment distributor. From June 1995 to
January 1998, Mr. Domenico served as Regional Vice President of Aprias Southern California
Region.  From 1984 to June 1995, Mr. Domenico held various positions, including Corporate
Assistant Controller, with Aprias predecessor, Homedco.                                                                                                                                                                                                                                    

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Risk Factors

This report contains
statements that are not based on historical facts. All such forward-looking statements are
uncertain. Apria has based those forward-looking statements on, among other things,
projections and estimates regarding the economy in general, the healthcare industry and
other factors that impact Aprias results of operations. These statements involve
known and unknown risks, uncertainties and other factors that may cause Aprias
actual results, levels of activity, performance or achievements to be materially different
from any results, levels of activity, performance or achievements expressed or implied by
any forward-looking statements. In some cases, forward-looking statements that involve
risks and uncertainties contain terminology such as may, will,
should, could, expects, intends,
plans, anticipates, believes, estimates,
predicts, potential, or continue or variations of
these terms or other comparable terminology.

Apria has identified the
following 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.

Collectibility of Accounts
ReceivableAprias failure to maintain its controls and processes over
billing and collecting or the deterioration of the financial condition of its
payors could have a significant negative impact on its results of operations and
financial condition.

The collection of accounts
receivable is one of Aprias most significant challenges and requires constant focus
and involvement by management and ongoing enhancements to information systems and billing
center operating procedures. Further, some of Aprias payors and/or patients may
experience financial difficulties, or may otherwise not pay accounts receivable when due,
resulting in increased write-offs. There can be no assurance that Apria will be able to
maintain its current levels of collectibility and days sales outstanding in future
periods. If Apria is unable to properly bill and collect its accounts receivable, its
results will be adversely affected.

Medicare/Medicaid Reimbursement RatesContinued
reductions in Medicare and Medicaid reimbursement rates could have a material
adverse effect on Aprias results of operations and financial condition.

Medicare. 
In December 2003, the President signed into law the Medicare Prescription Drug,
Improvement and Modernization Act of 2003. The Act includes a number of
provisions that will affect Medicare Part B reimbursement policies for items and
services provided by Apria, the most significant of which are:

| |  | The
legislation provides for a freeze on annual payment increases for durable medical
equipment from 2004 through 2008. Further, beginning in 2005, reimbursement for five
durable medical equipment categories will be reduced based on the median price paid for
such items on behalf of beneficiaries of federal employee health plans.      
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                 
| |  | Reimbursement for inhalation drugs has been reduced from the previous reimbursement rate
of 95% of the average wholesale price to 80% of the average wholesale price, effective
January 1, 2004. Beginning in January 2005, reimbursement for these drugs will shift to
average sales price, as defined by the Act, plus 6%.                    
| |   |                                                                                                                                                                                                                                                                                                                                                 
| |  | The Act requires the establishment of a competitive acquisition program for as yet
unspecified durable medical equipment items and services that is to be transitioned into
(i) ten of the largest metropolitan statistical areas in 2007; (ii) 80 of the largest
metropolitan statistical areas in 2009; and (iii) additional areas after 2009.

Until regulations
implementing the provisions of the legislation are issued, Apria cannot be certain of the
exact impact of the reimbursement reductions. However, based on its current interpretation
of the Act, Aprias management estimates that the revision to inhalation drug
reimbursement will result in revenue reductions from 2003 levels of approximately $14 million and $56
million in 2004 and 2005, respectively. The estimated impact to revenues in 2005 from the
durable medical equipment reimbursement reduction is $30 million. The impact of the
competitive acquisition program cannot be estimated at this time. If the inhalation drug
reductions are implemented as currently interpreted and estimated for 2005, the untenable
nature of the new reimbursement model would cause Apria to begin transitioning out of this
product line late in the fourth quarter of 2004. The company has developed a contingency
plan that includes a proper notice period for existing Medicare patients and physician
referral sources.

The Balanced Budget Act of
1997 contained several provisions that 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. The Medicare
Prescription Drug, Improvement and Modernization Act of 2003 addressed some of the issues
pending from the earlier legislation. However, still pending from the 1997 legislation is
streamlined authority granted to the Secretary of 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, 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, a prospective payment system, or a competitive
acquisition program. To date, neither CMS nor the durable medical equipment
regional carriers have used the expedited authority.

Medicaid. 
Some states have already adopted, or are contemplating adopting, alternative
pricing methodologies 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.
Apria 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, if the reimbursement levels for those therapies remain
adequate.

Medicare and Medicaid
payments accounted for approximately 28% and 6% of Aprias 2003 net revenues,
respectively. The reimbursement reductions described above will result in lower revenues,
earnings and cash flows. Apria cannot be certain of the ultimate impact of the latest
Medicare legislation or provide assurance to its investors that additional reimbursement
reductions will not be made.

Federal InvestigationThe outcome of the federal
governments investigation of Aprias Medicare and other billing
practices could have a material negative impact on Aprias operations and
financial condition.

Since mid-1998 Apria has
been the subject of an investigation conducted by the U.S. Attorneys office in Los
Angeles and HHS. 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 has been informed
that the investigation is the result of civil qui tam litigation filed on behalf of
the government against Apria. To date, the U.S. Attorneys office has not informed
Apria of any decision to intervene in the qui tamactions; 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
above to be unsupported both legally and factually.

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. At this time 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 can provide no assurance as to the outcome of these proceedings. See
Legal Proceedings.

Operating Systems and ControlsAprias
failure to successfully implement computer and other system modifications designed
to maximize productivity could ultimately have a significant negative impact on its
results of operations and financial condition.

Aprias management
has identified a number of areas throughout its operations where it intends to modify the
current processes or systems in order to attain a higher level of productivity. The
ultimate cost savings expected from the successful design and implementation of such
initiatives will be necessary to help offset the impact of Medicare reimbursement
reductions and continued downward pressure on pricing. Aprias failure to
successfully implement its planned system modifications and other productivity
improvements could have a significant impact on its operations and financial condition.
Further, the implementation of these system changes could have a disruptive effect on
related transaction processing and operations.

Government Regulation; Healthcare
ReformNon-compliance with laws and regulations applicable to Aprias
business and future changes in those laws and regulations could have a material
adverse effect on Apria.

Stringent laws and
regulations at both the federal and state levels, requiring compliance with burdensome and
complex billing, substantiation and record-keeping requirements apply to Apria. Financial
relationships between Apria and physicians and other referral sources are subject to
strict limitations. In addition, strict licensing and safety requirements apply to the
provision of services, pharmaceuticals and equipment. Violations of these laws and
regulations could subject Apria to severe fines, facility shutdowns and possible exclusion
from participation in federal healthcare programs such as Medicare and Medicaid.
Government officials and the public will continue to debate healthcare reform. Changes in
healthcare law, new interpretations of existing laws, or changes in payment methodology
may have a dramatic effect on Aprias business and results of operations.

HIPAA  Compliance with regulations under HIPAA relating to
the transmission and privacy of health information and compliance with new
regulations under HIPAA relating to security and the implementation of the national
provider identifier requirements could impose significant costs on Aprias
operations.

Numerous federal and state
laws and regulations, including HIPAA, govern the collection, dissemination, use and
confidentiality of patient-identifiable health information. HIPAA requires Apria to comply
with standards for the use and disclosure of health information within the company and
with third parties, such as payors, business associates and customers. These include
standards for common healthcare electronic transactions and code sets, such as claims
information, plan eligibility, payment information and the use of electronic signatures,
and privacy and electronic security of individually identifiable health information. Each
set of HIPAA regulations has a specified compliance date and requires certain healthcare
providers, including Apria, in addition to health plans and clearinghouses, to develop and
maintain policies and procedures with respect to protected health information that is used
or disclosed. The HIPAA security rules require that by the compliance date, Apria complete
a security risk assessment of its operations, including its electronic systems that
maintain electronic protected health information and implement policies and procedures
with respect to the security of such electronic information.

The standard electronic
transaction and code sets regulations standardize how health claims and eligibility
information is collected, recorded and processed. The standard electronic transaction and
code sets regulations also mandate that standardized codes be used for electronic billing
purposes by all payors in the United States, including both government and private health
plans. Historically, certain billing codes used in the homecare industry have varied by
state Medicaid program and certain health plans. Under HIPAA, authority for approving,
modifying, adding or deleting codes lies solely with the HCPCS panel, operating under the
auspices of CMS, and such codes are to be used not only by Medicare payors, but by state
Medicaid programs and private managed care payors as well. The panel reviews requests for
new codes primarily on an annual basis, with a new code application deadline of April 1
each year.

In mid-October 2003, the
panel posted the revised HCPCS list for 2004 on its web site. The panel approved very few
new codes. The absence of new codes for certain higher-cost respiratory products and
services could have an impact on gross profit margins, since the panel only allows one
code per certain equipment category, regardless of the actual equipment provided to the
patients per a physicians prescription and/or patient preference. The absence of
standardized codes for products or services provided by Apria also may preclude the
company from submitting electronic billings to certain payors. Such an outcome would
require submitting paper claims, which could ultimately result in delays and difficulties
in collecting these claims.

Apria faces potential
criminal or civil sanctions if it does not comply with existing or new laws and
regulations related to patient health information, use of standard transaction and code
sets and use of standard identifiers. New health information standards, whether
implemented pursuant to HIPAA or otherwise, could have a significant effect on the manner
in which Apria handles healthcare related data and communicates with payors. See
Business  Government Regulation  HIPAA.

Revocation of Hospital Medicare Supplier Numbers  CMS
action may have an adverse impact on Aprias results of operations and financial
condition.

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

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

Apria and its hospital
customers are in discussions with CMS regarding the hospitals retaining their
Medicare supplier numbers, the hospitals entering into alternative arrangements with
Apria that would satisfy CMS interpretation of the regulations, and CMS
allowance of adequate time to transition to these alternative arrangements. Under most of
the alternative arrangements being considered, Aprias future revenues from the
affected markets would likely decrease.

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

Pricing PressuresApria believes that continued
pressure to reduce healthcare costs could have a material adverse effect on the
company.

The current market
continues to exert pressure on healthcare companies to reduce healthcare costs, resulting
in reduced margins for home healthcare providers such as Apria. Larger group purchasing
organizations and supplier groups exert additional pricing pressure on home healthcare
providers. These include managed care organizations, which control an increasing portion
of the healthcare economy. Apria has a number of contractual arrangements with managed
care organizations and other parties, although no individual arrangement accounted for
more than 10% of Aprias net revenues in 2003.

The segment of the
healthcare market in which Apria operates is highly competitive. In each of its service
lines there are a number of national providers and numerous regional and local providers.
Among the national providers with which Apria directly competes are, American HomePatient,
Coram Healthcare, Critical Care Solutions, Lincare Holdings, Option Care and Rotech
Healthcare. Other types of healthcare providers, including industrial gas manufacturers,
individual hospitals and hospital systems, home health agencies and health maintenance
organizations have entered, and may continue to enter the market to compete with
Aprias various service lines. Some of these competitors have, or may obtain,
significantly greater financial and marketing resources than Apria that may increase
pricing pressure and limit Aprias ability to maintain or increase its market share.

Acquisition StrategyApria may not be able to
successfully integrate acquired businesses, which could have an adverse effect on
its results of operations and financial condition.

Aprias strategic
plan includes growth through the acquisition of other companies. Such growth involves a
number of risks, including:

- difficulties in integration;
- diversion of managements attention from day-to-day operations;
- the failure to realize anticipated benefits such as cost savings and revenue enhancements;
- the assumption of liabilities of an acquired business, including unforeseen liabilities; and
- difficulties related to assimilating the products, services, personnel and systems of an acquired business.

During 2003, Apria
completed 27 acquisitions for an aggregate consideration of approximately $98.0 million
and during 2002, Apria acquired 17 businesses for an aggregate consideration of
approximately $78.3 million.

In connection with past
acquisitions, Apria has found that the labor-intensive patient qualification process and
conversion of patient files onto Aprias billing systems can shift focus away from
Aprias routine processes. These activities and the time required to obtain provider
numbers from government payors often delay billing of the newly acquired business, which
may delay cash collections. Moreover, excessive delays may make certain items
uncollectible. The successful integration of an acquired business is also dependent on the
size of the acquired business, condition of the patient files, complexity of system
conversions and local managements execution of the integration plan. If Apria is not
successful in integrating acquired businesses, its results will be adversely affected.

ITEM 2.      PROPERTIES

Aprias headquarters
are located in Lake Forest, California and consist of approximately 100,000 square feet of
office space. The lease expires in 2011.

Apria has approximately
425 branch facilities that are organized into 16 regions. The region facilities usually
house a branch and various regional support functions such as warehousing, repair, billing
and infusion pharmacy. These facilities are typically located in light industrial areas
and generally range from 20,000 to 85,000 square feet. The typical branch facility, other
than those that share a building with a region, is a combination warehouse and office,
with approximately 50% of the square footage consisting of warehouse space. These branch
facilities, also located in light industrial areas, can range from 1,000 to 50,000 square
feet. Apria leases substantially all of its facilities with lease terms of ten years or
less.

ITEM 3.      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 HHS. The investigation concerns the documentation
supporting Aprias billing for
services provided to patients whose healthcare costs are paid by Medicare and other
federal programs. Apria is cooperating with the government and has responded to various
document requests and subpoenas.

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

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

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

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

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

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

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

No matters were submitted
to a vote of Aprias stockholders during the fourth quarter of the fiscal year
covered by this report.

PART II

ITEM 5.      MARKET FOR THE REGISTRANTS
 COMMON EQUITY AND RELATED STOCKHOLDER     
              MATTERS

Aprias common stock
is traded on the New York Stock Exchange under the symbol AHG. The table below sets forth,
for the calendar periods indicated, the high and low sales prices per share of Apria
common stock:

|                             |  | High   | Low   
|---------------------------- |  | ------ | ------
|Year ended December 31, 2003 |  |        |       
|First quarter                |  | $24.23 | $20.50
|Second quarter               |  | 25.10  | 22.45 
|Third quarter                |  | 29.00  | 24.42 
|Fourth quarter               |  | 31.69  | 25.00 
|Year ended December 31, 2002 |  |        |       
|First quarter                |  | $24.95 | $20.79
|Second quarter               |  | 28.50  | 20.25 
|Third quarter                |  | 25.30  | 18.90 
|Fourth quarter               |  | 25.68  | 20.75 

As of March 5, 2004, there
were 362 holders of record of Apria common stock. Apria has not paid any dividends since
its inception and does not intend to pay any dividends on its common stock in the
foreseeable future.

---

Equity Compensation Plans

The following table sets
forth information as of December 31, 2003 for Aprias equity compensation plans:

|Plan Category                                            |  | Number of Securitiesto be Issued Upon
Exercise ofOutstanding Options | Weighted AverageExercise Price of
Outstanding Options | Number ofSecurities RemainingAvailable for
Future Issuance
|-------------------------------------------------------- |  | -------------------------------------------------------------------- | ----------------------------------------------------- | ----------------------------------------------------------
|
|Equity compensation plans   approved by stockholders     |  |                                                                      | 4,138,256                                             |                                                           
|                                                         |  |                                                                      |                                                       |                                                           
|Equity compensation plans not   approved by stockholders |  |                                                                      | 891,670                                               |                                                           
|                                                         |  |                                                                      |                                                       |                                                           
|Totals                                                   |  |                                                                      | 5,029,926                                             |                                                           
|                                                         |  |                                                                      |                                                       |                                                           

Aprias 1998
Nonqualified Stock Incentive Plan is the only equity compensation plan that has not been
approved by stockholders. The plan was approved by the Board of Directors on December 15,
1998 and became effective as of that date.  On July 17, 2003,
upon stockholder approval of the 2003 Performance Incentive Plan, the ability to grant
additional awards under the 1998 Plan was terminated.

ITEM 6.      SELECTED FINANCIAL DATA

The following table
presents Aprias selected financial data for the five years ended December 31, 2003.
The data set forth below have been derived from Aprias audited Consolidated
Financial Statements and are qualified by reference to, and should be read in conjunction
with, the Consolidated Financial Statements and related notes thereto and
Managements Discussion and Analysis of Financial Condition and Results of
Operations included in this report.

|                                    | Year Ended December 31,
|----------------------------------- | -----------------------
|                                    |                        
|
|                                   
|Statements of Income Data:          |                        
|Net revenues                        |                        
|Net income                          |                        
|Basic net income per common share   |                        
|Diluted net income per common share |                        
|Balance Sheet Data:                 |                        
|Total assets                        |                        
|Long-term obligations, including    |                        
|current maturities                  |                        
|Stockholders equity                |                        

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The balance sheet data at December 31,
2003 reflects the issuance of convertible senior notes in the aggregate principal
amount of $250 million and the concurrent purchase of common stock with $100 million
of the proceeds.  Net income per share for 2003 reflects the effect of the share
repurchase.                                                                                                                                         
|(2) | Net income for 2002 reflects the
impact of the favorable outcome of an income tax dispute that was settled in the fourth
quarter of 2002. The components of this impact include: income tax benefit
of $11.1 million, interest income of $4 million and related professional
fee expense of $1.7 million. Effective January 1, 2002, Apria adopted Statement
of Financial Accounting Standards No. 142 and accordingly ceased to amortize
goodwill.
|(3) | Net income for 1999 reflects an income
tax benefit of $131 million that was attributable to the release of the companys
deferred tax asset valuation allowance in the fourth quarter of 1999.                                                                                                                                                                                                                                                     

Apria did not pay any cash dividends on its common stock
during any of the periods set forth in the table above.

---

ITEM 7.      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 and administrative support
services and related products and supplies, most of which are prescribed by a physician as
part of a care plan. Apria provides these services to patients in the home throughout the
United States through approximately 425 branch locations.

Strategy. Apria is pursuing an operating strategy to increase market share
          and improve profitability. In response to the reimbursement reductions called
          for by the Medicare Prescription Drug, Improvement and Modernization Act of
          2003, Apria has dedicated additional resources to long-term strategic planning.
          Apria management believes its strategic initiatives will enable the company to
          continue to grow despite the effects of the recent legislation. Key elements of
          the strategy are as follows:

| |  | Focus on growth in its core businesses of home respiratory therapy, home infusion therapy
and home medical equipment. By offering a broad range of services, Apria achieves a
competitive advantage with its managed care, hospital and physician customers, enabling it
to maintain a diversified revenue base. Through specific growth initiatives that enhance
the companys clinical offering, Apria continues its emphasis on growth in the home
respiratory therapy line, which historically has produced higher gross margins than its
home infusion therapy and home medical equipment service lines.                                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | Supplement internal growth with strategic acquisitions. Apria operates in a highly
fragmented market, which provides an attractive opportunity to drive growth through
acquisition of complementary businesses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | Develop and apply best practices and productivity improvement programs
throughout the company with the aim of achieving greater standardization and enhanced
productivity. Success with such programs results in reduced costs and increased margins
and cash flows. Apria has developed and implemented standardized clinical and delivery
models, billing and collection practices and common operating procedures in its field
locations and has centralized purchasing for inventory, patient service equipment and
supplies. Apria continues to focus resources on identifying opportunities for further
productivity improvements.                                                                                                                                                                                                                                                                                                                                   
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | Evaluate opportunities to expand offerings in home healthcare.Apria believes that
with the aging of the U.S. population, the resulting increases in medical costs and
utilization of healthcare services will lead to an expansion of the number of services
provided in the home. Providing such services in the home should reduce patient costs as
well as enhance patient convenience. Technological advances are also expected to
contribute to additional expansion of the domestic home healthcare market. During 2004,
Apria will evaluate several new business opportunities. The initial focus will be on
identifying the unfulfilled healthcare needs of Aprias existing patient population
and evaluating the potential business opportunity associated with each. Management expects
that these opportunities, upon evaluation to determine their viability and
scalability, will result in the future expansion of services that Apria will offer in the
home.

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. Additionally, the accounting policies related to goodwill and long-lived assets
require significant judgment.

Revenue and Accounts
Receivable.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. 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. 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.

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 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 their respective reserve levels are appropriate.

Because of the
reimbursement environment in which Apria operates and the level of subjectivity that is
required in recording revenues and accounts receivable, it is possible that
managements estimates could change in the near term, which could have an impact on
the consolidated financial statements.

Goodwill and
Long-lived Assets.Goodwill arising from business combinations represents the
excess of the purchase price over the estimated fair value of the net assets of the
acquired business. Pursuant to Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other Intangible Assets, goodwill is
tested annually for impairment or more frequently if circumstances indicate potential
impairment. Also, management reviews for impairment of its intangible assets and
long-lived assets on an ongoing basis and whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Aprias
goodwill impairment test is conducted at a reporting unit level and compares
each reporting units fair value to its carrying value. The company has determined
that its geographic regions are reporting units under SFAS No. 142. The measurement
of fair value for each region is based on an evaluation of future discounted cash flows
and is further tested using a multiple of earnings approach. In projecting its reporting
units cash flows, management considers industry growth rates and trends, known and
potential reimbursement reductions, cost structure changes and local circumstances
specific to a region. Based on its tests and reviews, management does not believe any
impairment of its goodwill, intangible assets or other long-lived assets existed at
December 31, 2003. However, future events or changes in current circumstances could affect
the recoverability of the carrying value of goodwill and long-lived assets. Should an
asset be deemed impaired, an impairment loss would be recognized, to the extent the
carrying value of the asset exceeded its estimated fair market value. Such an impairment
charge could have an adverse impact on Aprias consolidated financial statements.

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, 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. Additional support services are provided at a corporate level and management
continues to evaluate opportunities to gain efficiencies and cost savings by consolidating
regional functions. For financial reporting purposes, all the companys operating
segments are aggregated into one reportable segment in accordance with the aggregation
criteria of SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information.

Change in Accounting
Principles. Effective January 1, 2002, Apria adopted SFAS
No. 142, which addresses the financial accounting and reporting for goodwill and
other intangible assets. The statement provides that goodwill or other intangible assets
with indefinite lives are no longer amortized, but shall be tested for impairment
annually, or more frequently if circumstances indicate the possibility of impairment. See
Amortization of Goodwill and Intangible Assets.

Effective January 1,
2002, Apria adopted SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. This statement superseded SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and
amended other guidance related to the accounting and reporting of long-lived assets. SFAS
No. 144 requires that one accounting model be used for long-lived assets to be
disposed of by sale. Discontinued operations are to be measured similarly to other
long-lived assets classified as held for sale at the lower of its carrying amount or fair
value less cost to sell. Future operating losses will no longer be recognized before they
occur. SFAS No. 144 also broadened the presentation of discontinued operations to
include a component of an entity when operations and cash flows can be clearly
distinguished, and established criteria to determine when a long-lived asset is held for
sale. Adoption of this statement did not have a material effect on Aprias
consolidated financial statements.

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 in 2003. Adoption of this
statement did not have a material effect on the companys consolidated financial
statements, but resulted in the reclassification to interest expense of the extraordinary
charge on debt refinancing of $2,442,000 in 2001.

Recent Accounting
Pronouncements. 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 was required for exit and disposal activities
initiated after December 31, 2002. Apria had no such transactions during 2003.

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 October 2002, the
FASBs Emerging Issues Task Force (EITF) issued EITF 02-17, which
addresses issues raised in the interpretation of SFAS No. 141, Business
Combinations and SFAS No. 142, Goodwill and Other Intangible Assets and
the identification and valuation of intangible assets. EITF 02-17 provides guidance on
determining when, as a result of a business combination, a customer-related intangible
asset exists that should be separately valued from goodwill. EITF 02-17 is effective for
business combinations consummated and goodwill impairment tests performed after October
25, 2002. Adoption of this interpretation did not have a material effect on the
companys 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 of 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. Apria was required to
adopt the recognition 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 the companys consolidated financial
statements.

FIN No. 46,
Consolidation of Variable Interest Entities, an interpretation of Accounting
Research Bulletin No. 51, was originally issued in January 2003 and subsequently revised
in December 2003. FIN No. 46, as revised, requires a variable interest entity to be
consolidated by a company if that company is subject to a majority of the risk of loss
from the variable interest entitys activities or is entitled to receive a majority
of the entitys residual returns or both. 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. Application of FIN No. 46 is
required for potential variable interest entities commonly referred to as special purpose
entities for periods ending after December 15, 2003. Application of the provisions will be
required for all other variable interest entities by the end of the first reporting period
that ends after March 15, 2004. The company currently has no variable interest entities,
therefore the adoption of this interpretation will not 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. Adoption of this statement did not have a
material effect on the companys consolidated financial statements.

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. However, in November
2003, the FASB issued Staff Position No. 150-3, which defers the effective date for
certain provisions of the statement. Once required in its entirety, SFAS No. 150 is not
expected to have a material effect on the companys consolidated financial
statements.

Results of Operations

Net
Revenues. Net revenues increased to $1,381 million in 2003 from $1,252
million in 2002 and $1,132 million in 2001. Growth rates were 10.3% and 10.6% in 2003 and
2002, respectively. The growth in both years is due to volume increases, including new
contracts with regional and national payors, and the acquisition of complementary
businesses. Recently, Apria has been experiencing increasing pricing pressure from its
managed care partners as these organizations seek to lower their costs by negotiating more
favorable pricing and by evaluating alternative healthcare delivery models. Such pricing
pressures resulted in Aprias decision not to renew its network contract with Gentiva
CareCentrix for 2004. In accordance with the transition agreement, Apria will continue to
service existing patients until such service is no longer medically necessary and will
continue to accept new patients through the end of March 2004.

Apria management estimates
that approximately one-half of the revenue growth in 2003 was derived from acquisitions.
Aprias acquisition strategy provides for the rapid integration of acquired
businesses into existing operating locations. This limits managements ability to
separately track the amount of revenue generated by an acquired business. Therefore,
estimating the revenue contribution from acquisitions requires certain assumptions.

---

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

|                             | Year Ended December 31,
|---------------------------- | -----------------------
|
|
|
|Home respiratory therapy     |                        
|Home infusion therapy        |                        
|Home medical equipment/other |                        
|                             |                        
|Total net revenues           |                        
|                             |                        

Home Respiratory
Therapy.Respiratory therapy revenues are derived primarily from the provision of
oxygen systems, home ventilators, obstructive sleep apnea equipment, nebulizers,
respiratory medications and related services. The respiratory therapy service line
increased in 2003 by 12.0% when compared to 2002 and increased by 11.9% in 2002 when
compared to 2001. The growth in this service line for both 2003 and 2002 was primarily
focused in the respiratory medication, positive air pressure and oxygen concentrator
product categories, driven primarily by volume increases and acquisitions. It is
Aprias acquisition strategy to target businesses with a high concentration of
respiratory revenues.

Home 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: total parenteral nutrition, anti-infectives, pain management, chemotherapy and
other medications and related services. The infusion line also includes enteral nutrition,
which is the administration of nutrients directly into the gastrointestinal tract through
a feeding tube. Infusion therapy revenues increased 5.5% in 2003 versus 2002 and 5.9% in
2002 versus 2001. The growth in both years is mainly due to volume increases. Essentially
all of the 2003 increase resulted from higher volumes in the enteral nutrition and
antibiotic therapy lines.

Home Medical
Equipment/Other.Home medical equipment/other revenues are derived from the
provision of equipment to assist patients with ambulation, safety and general care in and
around the home. Home medical equipment/other revenues increased by 8.7% in 2003 from 2002
and by 11.2% in 2002 from 2001. Although the companys acquisition strategy is to
target respiratory therapy businesses, such businesses typically have a home medical
equipment component, which contributed to the growth in this line. A substantial portion
of the internal revenue growth in this line was derived from rehabilitation products.

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

In 2003, approximately 34%
of Aprias revenues were 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.  In December 2003, the President signed into law the Medicare
Prescription Drug, Improvement and Modernization Act of 2003. The Act includes a number of
provisions that will affect Medicare Part B reimbursement policies for items and services
provided by Apria, the most significant of which are:

| |  | The legislation provides for a freeze on annual payment increases for durable medical
equipment from 2004 through 2008. Further, beginning in 2005,
reimbursement for five durable medical equipment categories will be reduced based on the
median price paid for such items on behalf of beneficiaries of federal employee health
plans.      
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                 
| |  | Reimbursement for inhalation drugs has been reduced from the previous reimbursement rate
of 95% of the average wholesale price to 80% of the average wholesale price, effective
January 1, 2004. Beginning in January 2005, reimbursement for these drugs will shift to
average sales price, as defined by the Act, plus 6%.                    
| |   |                                                                                                                                                                                                                                                                                                                                                 
| |  | The Act requires the establishment of a competitive acquisition program for as yet
unspecified durable medical equipment items and services that is to be transitioned into
(i) ten of the largest metropolitan statistical areas in 2007; (ii) 80 of the largest
metropolitan statistical areas in 2009; and (iii) additional areas after 2009.

Until regulations
implementing the provisions of the legislation are issued, Apria cannot be certain of the
exact impact of the reimbursement reductions. However, based on its current interpretation
of the Act, Aprias management estimates that the revision to inhalation drug
reimbursement will result in revenue reductions from 2003 levels of approximately $14 million and $56
million in 2004 and 2005, respectively. The estimated impact to revenues in 2005 from the
durable medical equipment reimbursement reduction is $30 million. The impact of the
competitive acquisition program cannot be estimated at this time. If the inhalation drug
reductions are implemented as currently interpreted and estimated for 2005, the untenable
nature of the new reimbursement model would cause Apria to begin transitioning out of this
product line late in the fourth quarter of 2004. The company has developed a contingency
plan that includes a proper notice period for existing Medicare patients and physician
referral sources.

The Balanced Budget Act of
1997 contained several provisions that 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. The Medicare
Prescription Drug, Improvement and Modernization Act of 2003 addressed some of the issues
pending from the earlier legislation. However, still pending from the 1997 legislation is
streamlined authority granted to the Secretary of the U.S. Department of Health and Human
Services, or 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, Centers for Medicare & Medicaid Services, or 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, a prospective
payment system, or a competitive acquisition program. As of this date, neither CMS nor the
durable medical equipment regional carriers have used the expedited authority.

Some states have already
adopted, or are contemplating adopting, alternative pricing methodologies 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.
Apria 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,
if the reimbursement levels for those services remain adequate.

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

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

Apria and certain of the
hospitals are in discussions with CMS regarding the hospitals retaining their
Medicare supplier numbers, the hospitals entering into alternative arrangements with
Apria that would satisfy CMS interpretation of the regulations, and CMS
allowance of adequate time to transition to these alternative arrangements. Under most of
the alternative arrangements being considered, Aprias future revenues from the
affected markets would likely decrease.

Gross
Profit. Gross margins were 72.7% in 2003 and 72.8% in 2002 and 2001. As
discussed above, Aprias revenue line has been adversely affected by pricing
pressures from its managed care partners. The impact in 2003 was minimal, but will likely
increase in 2004 and in future years. Apria has been successful in negotiating favorable
product pricing with the companys suppliers, thereby minimizing the impact of the
revenue pricing pressures on the gross margin. One exception from a product pricing perspective
is an increase
in the cost of respiratory medications in 2003. Another factor contributing to the
stability of the margin has been a slight increase in the proportion of the higher-margin
respiratory business among the three major service lines.

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. Accounts receivable estimated to be
uncollectible are provided for by applying specific percentages to each receivables aging
category, which is determined by the number of days the receivable is outstanding. For
2003, 2002 and 2001, the provision for doubtful accounts as a percentage of net revenues
was 3.7%, 3.6% and 3.3%, respectively. The slight increase in 2003 when compared to 2002
is attributed to a nominal deterioration of the aging. Accounts aged in excess of 180 days
were 18.6% of total accounts receivable at December 31, 2003, versus 18.0% at the end of
2002. One reason for the increase in the older receivables and ultimately, the provision,
was the increased acquisition activity in 2003. The time-consuming processes of converting
the acquired patient files onto Aprias systems delay billing of the newly acquired
business. During this time, a provision for doubtful accounts is recorded on the earned
but unbilled receivables as they pass through the aging categories. When the billings are
finally submitted and, subsequently, cash is received, the provision requirement
decreases. Because the majority of the acquired business in 2003 was effected in the last
half of the year, there was not sufficient time for completion of this cycle on a number
of the acquisitions. Acquisitions completed in 2002 were even more heavily weighted toward
the last half of the year, accounting for the increase in the provision between 2001 and
2002. See Critical Accounting Policies and 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 growth patterns. Some are also very
sensitive to market-driven price fluctuations such as facility lease and fuel costs. The
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 54.2% in 2003, 54.7% in 2002 and 55.8% in 2001. The
decrease in the expense percentage in 2003 when compared to 2002 is largely due to a
fourth quarter effort to decrease the labor line through improved labor productivity. The
decrease in 2002 versus 2001 reflects the benefit of the implementation of various
standardization and productivity initiatives. Also, expenses were comparatively higher in
2001 due to special bonus plan payment provisions which were met, thereby resulting in the
expense increase. The 2003 and 2002 bonus plans did not include such provisions. Sales,
distribution and administrative expenses in 2002 included $3.8 million in costs related to
the departure of the former chief executive officer and $1.7 million in professional fees
associated with the favorable outcome and settlement of an income tax dispute. See
Income Tax Expense.

Amortization of
Goodwill and Intangible Assets.Amortization of intangible assets was $3.7
million in 2003, $2.7 million in 2002 and $2.5 million in 2001. Amortization of goodwill
was $9.8 million in 2001. Upon adoption of SFAS No. 142 on January 1, 2002, goodwill
amortization ceased. The effect of adding this amount back as though the non-amortization
provisions of SFAS No. 142 were adopted at the beginning of 2001 would have resulted in
net income and diluted income per share increases of $6.1 million and $0.11 in 2001. The
increase in amortization of intangible assets in 2003 was due to the application of EITF
No. 02-17 issued by the FASB in late 2002. Application resulted in the valuation of
certain customer relationships acquired in the business combinations.

Interest Expense and
Income. Interest expense was $15.8 million in 2003, $15.0 million in 2002
and $30.1 million in 2001. Interest income was $786,000, $4.2 million and $1.9 million in
2003, 2002 and 2001, respectively. Interest expense increased due to the issuance of $250
million of convertible senior notes in August 2003, bearing interest at 3.375%. The
additional interest was offset by lower interest on the bank loans due to a $19.3 million
reduction in the principal balance and the full years effect of the lower applicable
interest margin on the $175 million term loan resulting from a June 2002 amendment to the
credit agreement. The difference in interest income between 2003 and 2002 is mainly due to
the $4 million interest refund received in 2002 in conjunction with the favorable outcome
of an income tax dispute.

The decrease in interest
expense in 2002 when compared to 2001 can be attributed to a number of factors. The
dramatic decreases in market-driven interest rates that took place over the course of 2001
are fully reflected in 2002. In July 2001, both the then current bank loans and the $200
million 91⁄2% senior subordinated notes were refinanced entirely through bank loans
at significantly more favorable terms. Interest expense in 2002 reflects a full
years benefit of this refinancing. The refinancing also resulted in the write-off of
debt issuance costs related to the notes and old bank debt that, in turn, lowered the
related amortization expense. The lower applicable margin negotiated in the June 2002
credit agreement amendment reduced interest expense in the second half of the year. And
finally, long-term debt was reduced by $24.3 million during 2002, which further reduced
interest expense. See Income Tax Expense and Long-term Debt.

Income Tax Expense.Income taxes were $70.6 million, $52.4 million and $43.2 million for 2003,
2002 and 2001, respectively, and were provided at the effective tax rates expected to be
applicable for each year. The income tax provision for 2002 was reduced by a benefit of
$11.1 million that resulted from the favorable outcome of an income tax dispute which was
settled in the fourth quarter of 2002.

As a result of settling
the tax dispute, Apria utilized approximately $34.2 million of its previously limited $57
million net operating loss carryforward during 2002. Such net operating loss carryforward
was generated prior to 1992 and utilization had been limited to $5 million per year in
accordance with Internal Revenue Code Section 382. Prior to 2002, the $57 million net
operating loss carryforward was not recognized for financial statement reporting purposes
as management believed it unlikely that they would be used before expiration. The
remaining net operating loss carryforward of approximately $22.8 million was excluded from
the related deferred tax assets and has expired unused.

At December 31, 2003,
Apria has federal net operating loss carryforwards of approximately $5 million. Apria
expects to utilize these net operating loss carryforwards in 2004. The company utilized
its remaining alternative minimum tax credit carryforward of $6.1 million in 2003.
Additionally, the company has various state net operating loss carryforwards.

Liquidity and Capital Resources

Aprias principal
source of liquidity is its operating cash flow, which is supplemented by a $100 million
revolving credit facility. Aprias ability to generate operating cash flows in excess
of its operating needs has afforded it the ability, among other things, to pursue its
acquisition strategy and fund patient service equipment purchases to support revenue
growth, while continuing to reduce long-term debt. Aprias 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 in 2003 was $263.9 million
compared to $262.0 million in 2002 and $241.4 million in 2001. Operating cash flow was
relatively flat between 2003 and 2002 despite the fact that 2003 reflects income tax
payments totaling $50.4 million as compared to income tax refunds of $3.2 million in 2002.
The company will continue to make significant income tax payments as Apria has utilized
the majority of its remaining net operating loss carryforwards. The primary offset to the
increase in tax payments is the increase in net income before items not requiring cash, as
adjusted to factor out the favorable settlement in 2002 of the tax dispute. Also contributing to
the operating cash flow increase in 2003 was a lower rate of accounts receivable growth in
2003 relative to the revenue growth, as compared to 2002.

The operating cash flow
increase in 2002 versus 2001 was primarily attributable to the increase in net income
before items not requiring cash. Also contributing to the increase was the income tax
refund related to the tax settlement. The cash flow increase was offset by an increase in
accounts receivable and the timing of disbursements processed through accounts payable.
Also offsetting the net income increase in 2002 was a decrease in accrued expenses. See Income Tax
Expense.

Cash used in investing
activities was $242.6 million, $195.4 million and $213.1 million in 2003, 2002 and 2001,
respectively. The increase in 2003 is primarily due to increased acquisition activity. The
increase in acquisitions also contributed to the increase in patient service equipment
expenditures. Often, the patient service equipment acquired in business combinations does
not meet Aprias standards or is not adequate to support the companys delivery
models, resulting in incremental equipment purchases. Cash used in investing activities
decreased in 2002 when compared to 2001 due to lower levels of acquisition activity and
patient service equipment expenditures.

In 2003, cash provided by
financing activities was $112.9 million, compared to cash used in financing activities of
$49.7 million and $35.8 million for 2002 and 2001, respectively. Cash provided in 2003 by
financing activities is primarily due to the net proceeds received upon issuance of $250
million of 3.375% convertible senior notes. The company repurchased a total of $118.5 million
of its common stock in 2003, $100 million of which was purchased with the
convertible note proceeds. The main reason for the increase in cash used in financing
activities between 2002 and 2001 is a common stock repurchase in the aggregate amount of
$35 million in 2002. See Long-term Debt and Treasury Stock.

Contractual Cash
Obligations.The following table summarizes Aprias long-term cash
payment obligations to which the company is contractually bound:

|                                   | For the Year Ending December
31, |  |  
|---------------------------------- | -------------------------------- |  | -
|
|
|
|Term loans                         |                                  |  | $
|Convertible senior notes           |                                  |  |  
|Capital lease obligations          |                                  |  |  
|Other long-term debt               |                                  |  |  
|Operating leases                   |                                  |  |  
|Deferred acquisition payments      |                                  |  |  
|                                   |                                  |  |  
|Total contractual cash obligations |                                  |  | $
|                                   |                                  |  |  

Accounts
Receivable. Accounts receivable before allowance for doubtful accounts
increased by $17.4 million during 2003, which is primarily attributable to the revenue
increase. 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 50 days at December 31, 2003 compared to 51 at December 31, 2002. Accounts
aged in excess of 180 days were 18.6% of total receivables at December 31, 2003 and 18.0%
at the end of 2002. See Critical Accounting Policies.

Unbilled
Receivables.Included in accounts receivable are earned but unbilled receivables
of $31.7 million and $29.2 million at December 31, 2003 and 2002, respectively. Delays,
ranging from a day up to several weeks, between the date of service and billing can occur
due to delays in obtaining certain required payor-specific documentation from internal and
external sources. Earned but unbilled receivables are aged from date of service and are
considered in Aprias analysis of historical performance and collectibility. The
increase in 2003 from the end of 2002 is largely due to acquisitions effected during 2003.
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.

Inventories and
Patient Service Equipment.Inventories consist primarily of pharmaceuticals
and disposable products 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, normally on a rental basis, and
subsequently returned to Apria for redistribution after cleaning and preventive
maintenance is performed.

The branch locations serve
as the primary point from which inventories and patient service equipment are delivered to
the patient. The branches are supplied with inventory and equipment from the regional
warehouses, where the purchasing responsibility lies. The regions are also responsible for
repairs and scheduled maintenance of patient service equipment, which adds to the frequent
movement of equipment between the region and branch locations. Further, at any given time,
approximately 80% of Aprias patient service equipment is located in patients
homes. Inherent in this asset flow is the fact that losses will occur. Management has
successfully instituted a number of controls over the companys inventories and
patient service equipment to minimize such losses. However, there can be no assurance that
Apria will be able to maintain its current level of control over inventories and patient
service equipment. Continued revenue growth is directly dependent on Aprias ability
to fund its inventory and patient service equipment requirements.

Deferred Income Taxes.The decrease
in deferred tax assets (combined current and non-current) from December 31,
2002 to December 31, 2003 is primarily due to the utilization of the net operating loss
carryforwards. See "Income Tax Expense.

Long-term
Debt. Apria has a $400 million senior secured credit agreement with a
syndicate of lenders led by Bank of America, N.A. The credit agreement consists of a $125
million term loan, a $175 million term loan and a $100 million revolving credit facility.
In June 2002, the credit agreement was amended to extend the maturity date, reduce the
applicable interest rate margins and modify the repayment schedule for the $175 million
term loan. In August 2003, the credit agreement was further amended to permit the issuance
of the $250 million convertible senior notes and the concurrent repurchase of $100 million
of Aprias outstanding common stock with a portion of the proceeds.

The remaining payment
schedule on the $125 million term loan requires 10 consecutive quarterly payments ranging
from $6 million to $7 million with the final payment of $7 million due on July 20, 2006.
The remaining payment schedule on the $175 million term loan requires 15 consecutive
quarterly payments of $437,500 followed by three consecutive quarterly payments of $41.1
million with the final payment of $41.1 million due on July 20, 2008. The final maturity
date for the revolving credit facility is July 20, 2006.

The senior secured credit
agreement permits Apria to select one of two variable interest rates. One option is the
base rate, which is expressed as the higher of (a) the Federal Funds rate plus 0.50% or
(b) the Prime Rate. The other option is the Eurodollar rate, which is based on the London
Interbank Offered Rate (LIBOR). Interest on outstanding balances under the
senior secured credit agreement is determined by adding a margin to the Eurodollar rate or
base rate in effect at each interest calculation date. The applicable margins for the
revolving credit facility and the $125 million term loan are based on Aprias
leverage ratio, which is the ratio of its funded debt to its last four quarters of
earnings before interest, taxes, depreciation and amortization. The applicable margin
ranges from 1.50% to 2.25% for Eurodollar loans and from 0.50% to 1.25% for base rate
loans. For the $175 million term loan, the margins are fixed at 2.00% for Eurodollar loans
and at 1.00% for base rate loans. The effective interest rate at December 31, 2003, after
consideration of the effect of the swap agreements described below, was 3.57%. The senior
credit agreement also requires payment of commitment fees ranging from 0.25% to 0.50%
(also based on Aprias leverage ratio) on the unused portion of the revolving credit
facility. See Hedging Activities.

Borrowings under the
senior secured credit facilities are collateralized by substantially all of the assets of
Apria. The credit agreement contains numerous restrictions, including but not limited to,
covenants requiring the maintenance of certain financial ratios, limitations on additional
borrowings, capital expenditures, mergers, certain investments, loans and other
distributions. The August 2003 amendment eliminated limitations related to repurchases of
the companys common stock, dividends and acquisitions so long as the companys
leverage ratio, as defined by the credit agreement, is under 2.0 to 1.0, and imparts
limitations as the leverage ratio increases. At December 31, 2003, Aprias leverage
ratio was 1.5 to 1.0. At December 31, 2003, the company was in compliance with all of the
financial covenants required by the credit agreement.

On December 31, 2003
outstanding borrowings on the two term loans were $244.1 million and there were no
borrowings under the revolving credit facility. Outstanding letters of credit totaled $3.9
million and credit available under the revolving facility was $96.1 million.

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

The notes bear interest at
the rate of 3.375% per year. Interest on the notes is payable on September 1 and March 1 of
each year, beginning on March 1, 2004. Also, during certain periods commencing on
September 8, 2010, Apria will pay contingent interest on the interest payment date for the
applicable interest period if the average trading price of the notes during the five
trading days ending on the third day immediately preceding the first day of the applicable
interest period equals or exceeds 120% of the principal amount of the notes. The
contingent interest payable per note will equal 0.25% per year of the average trading
price of such note during the applicable five trading-day reference period. Further, the
notes are convertible during certain periods into shares of Apria common stock, initially
at a conversion rate of 28.6852 shares of common stock per $1,000 principal amount of
notes, subject to adjustment in certain events, under certain circumstances as outlined in
the indenture.

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

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

At December 31, 2003,
Apria had four interest rate swap agreements in effect to fix its LIBOR-based 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 in March 2003. All rates are stated before application of the interest
margins described above.

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. For 2003,
Apria paid a net settlement amount of $1.9 million. Unrealized gains and losses on the
fair value of the swap agreements are reflected, net of taxes, in other comprehensive
loss. At December 31, 2003, the aggregate fair value of the swap agreements was a
liability of $1.5 million. Apria does not anticipate losses due to counterparty
nonperformance as its counterparties to the various swap agreements are nationally
recognized financial institutions with strong credit ratings.

Treasury Stock.During 2003, Apria repurchased 4.5 million shares of its common stock for
$118.5 million in open market transactions. As indicated above, 3.8 million of these
shares were purchased in conjunction with the issuance of the convertible senior notes. In
2002,Apria repurchased 1.6 million shares for $35 million. All repurchased common
shares are being held in treasury.

In January 2004, Apria
repurchased approximately 1.7 million shares of its common stock for $50 million through
an accelerated share repurchase program.

Business
Combinations.Pursuant to one of its primary growth strategies, Apria
periodically acquires complementary businesses in specific geographic markets. Because of
the potential for a higher gross margin, Apria targets respiratory therapy businesses.
These transactions are accounted for as purchases and the results of operations of the
acquired companies are included in the accompanying statements of operations from the
dates of acquisition. In accordance with SFAS No. 142, goodwill is no longer being
amortized. Covenants not to compete are being amortized over the life of the respective
agreements. Tradenames and customer lists are being amortized over the period of their
expected benefit.

The aggregate
consideration for acquisitions that closed during 2003 was $98 million. Allocation of this
amount includes $81.7 million to goodwill and $4.9 million to other intangible assets. The
aggregate consideration for acquisitions that closed during 2002 and 2001 was $78.3
million and $81.7 million, respectively. Cash paid for acquisitions, which includes
amounts deferred from prior year acquisitions, totaled $99.4 million, $74 million and
$80.3 million in 2003, 2002 and 2001, 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 purchases.

HIPAA. 
          The Health Insurance Portability and Accountability Act of 1996 is comprised of
          a number of components. Pursuant to the administrative simplification section of
          HIPAA, HHS has issued multiple sets of regulations, each
          with its own compliance date. Regulations under HIPAA that may have a
          material effect on Apria govern the following:

| |  | privacy of individually  identifiable  health  information - compliance date: April 14, 2003 -
Apria was materially  compliant by this date;                                                                                                                  
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                               
| |  | standard electronic  transaction and code sets - compliance date: October 16, 2003 - Apria
was materially compliant  by this date;                                                                                                                            
| |   |                                                                                                                                                                                                                                                               
| |  | electronic  security of individually  identifiable  health  information - compliance  date:
April 21, 2005 - Apria expects to be materially compliant with these regulations by the compliance date;                                                          
| |   |                                                                                                                                                                                                                                                               
| |  | standards for a unique national health identifier for healthcare providers for use in
connection with standard transactions  compliance date: May 23, 2007  Apria
expects to be able to materially comply with these regulations by the compliance date; and
| |   |                                                                                                                                                                                                                                                               
| |  | the first installment of an interim enforcement rule, when issued in full, will address
both substantive and procedural requirements for the imposition of civil monetary
penalties.                                                                          

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

In mid-October 2003, the
panel posted the revised HCPCS list for 2004 on its web site. The panel approved very few
new codes. The absence of new codes for certain higher-cost respiratory products and
services could have an impact on gross profit margins, since the panel only allows one
code per certain equipment category, regardless of the actual equipment provided to the
patients per a physicians prescription and/or patient preference. The absence of
standardized codes for products or services provided by Apria also may preclude the
company from submitting electronic billings to certain payors. Such an outcome would
require submitting paper claims, which could ultimately result in delays and difficulties
in collecting these claims.

Apria faces potential
criminal or civil sanctions if it does not comply with existing or new laws and
regulations related to patient health information, use of standard transaction and code
sets and use of standard identifiers. New health information standards, whether
implemented pursuant to HIPAA or otherwise, could have a significant effect on the manner
in which Apria handles healthcare related data and communicates with payors.

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 HHS. 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 7A. 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 December 31, 2003,
Aprias term loan borrowings totaled $244.1 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. All such interest
rate options are subject to the application of an interest margin as specified in the bank
credit agreement. At December 31, 2003, all of Aprias outstanding term debt was tied
to LIBOR.

At
December 31, 2003, Apria had four 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 these swap agreements range from
two to four years. Also, 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) that
expired March 31, 2003.

Based on the term debt
outstanding and the swap agreements in place at December 31, 2003, a 100 basis point change
in the applicable interest rates would
increase or decrease Aprias annual cash flow and pretax earnings by approximately
$1.4 million. See Managements Discussion and Analysis of Financial Condition
and Results of Operations  Long-term Debt  Hedging Activities.

ITEM 8.      FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA

The Independent
Auditors Report and Consolidated Financial Statements listed in the Index to
Consolidated Financial Statements and Financial Statement Schedule are filed as part
of this report.

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

None.

ITEM 9A.     CONTROLS AND PROCEDURES

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

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

---

PART III

ITEM 10.      DIRECTORS AND OFFICERS OF THE REGISTRANT

Information with respect
to this item is incorporated by reference from the companys definitive Proxy
Statement to be filed with the Commission within 120 days after the end of the
companys fiscal year. Information regarding executive officers of the company is set
forth under the caption Executive Officers in Item 1 hereof.

ITEM 11.      EXECUTIVE COMPENSATION

Information with respect
to this item is incorporated by reference from the companys definitive Proxy
Statement to be filed with the Commission within 120 days after the end of the
companys fiscal year.

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

Information with respect
to this item is incorporated by reference from the companys definitive Proxy
Statement to be filed with the Commission within 120 days after the end of the
companys fiscal year. Information regarding securities authorized for issuance under
equity compensation plans is set forth in Item 5.

ITEM 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information with respect
to this item is incorporated by reference from the companys definitive Proxy
Statement to be filed with the Commission within 120 days after the end of the
companys fiscal year.

ITEM 14.      PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information with respect
to this item is incorporated by reference from the companys definitive Proxy
Statement to be filed with the Commission within 120 days after the end of the
companys fiscal year.

PART IV

ITEM 15.      EXHIBITS, FINANCIAL
STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K

| |     |                      |  |                                                                                                                                                                                                                                                                                                                                                                                                                           
| | --- | -------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | 1.                   |  | The documents described in
the "Index to Consolidated Financial Statements and Financial Statement Schedule"
are included in this report starting at page F-1.                                                                                                                                                                                                                                                            
| |     | 2.                   |  | The financial statement schedule
described in the "Index to Consolidated Financial Statements and Financial
Statement Schedule" is included in this report starting on page S-1.

All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable, and therefore have been
omitted.
| |     | 3.                   |  | Exhibits included or incorporated herein:
See exhibit index.                                                                                                                                                                                                                                                                                                                                                              
| | (b) | Reports on Form 8-K:
| |     |                      |  | Apria filed a Current Report on Form 8-K on October 22,
2003 to report under Items 7 and 12 the issuance of a press release announcing its
financial results for the quarter ended September 30, 2003.                                                                                                                                                                                                                    

---

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE

|                                                                                                                             | Page
|---------------------------------------------------------------------------------------------------------------------------- | ----
|CONSOLIDATED FINANCIAL STATEMENTS                                                                                            |     
|Independent Auditors Report                                                                                                 | F-1 
|Consolidated Balance Sheets - December 31,
2003 and 2002                                                                     | F-2 
|Consolidated Statements of Income - Years
ended December 31, 2003, 2002 and 2001                                             | F-3 
|Consolidated Statements of Stockholders
Equity and Comprehensive      Income - Years
ended December 31, 2003, 2002 and 2001 | F-4 
|Consolidated Statements of Cash Flows -
Years ended December 31, 2003, 2002 and 2001                                         | F-5 
|Notes to Consolidated Financial
Statements                                                                                   | F-6 
|FINANCIAL STATEMENT SCHEDULE                                                                                                 |     
|Schedule II - Valuation and Qualifying
Accounts                                                                              | S-1 

---

INDEPENDENT AUDITORS REPORT

Board of Directors and
Stockholders ofApria Healthcare Group Inc.:

We have audited the accompanying consolidated balance
sheets of Apria Healthcare Group Inc. and subsidiaries (the Company) as of
December 31, 2003 and 2002, and the related consolidated statements of income,
stockholders equity and comprehensive income, and cash flows for each of the three
years in the period ended December 31, 2003. Our audits also included the financial
statement schedule for each of the three years in the period ended December 31, 2003,
included in the Index at Item 15(a)(2). These consolidated financial statements and this
financial statement schedule are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial statements and
this financial statement schedule based on our audits.

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

In our opinion, such consolidated financial statements
present fairly, in all material respects, the financial position of Apria Healthcare Group
Inc. and subsidiaries as of December 31, 2003 and 2002, and the results of their
operations and their cash flows for each of the three years in the period ended December
31, 2003 in conformity with accounting principles generally accepted in the United States
of America. Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.

As discussed in Note 1 to the consolidated financial
statements, the company changed its method of accounting for goodwill and other intangible
assets during 2002 as a result of adoption of Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets.

/s/ DELOITTE & TOUCHE
LLP

Costa Mesa, CaliforniaFebruary
16, 2004

---

APRIA HEALTHCARE GROUP INC.

CONSOLIDATED BALANCE SHEETS

|                                                                     | December 31,
|-------------------------------------------------------------------- | ------------
|
|
|
|ASSETS                                                               |             
|CURRENT ASSETS                                                       |             
|Cash and cash equivalents                                            |             
|Accounts receivable, less allowance
for doubtful accounts of $38,531 |             
|and $32,206 at December 31, 2003 and
2002, respectively              |             
|Inventories, net                                                     |             
|Deferred income taxes                                                |             
|Prepaid expenses and other current assets                            |             
|                                                                     |             
|TOTAL CURRENT ASSETS                                                 |             
|                                                                     |             
|PATIENT SERVICE EQUIPMENT, less accumulated depreciation of $392,297 |             
|and $368,420 at December 31, 2003 and 2002, respectively             |             
|PROPERTY, EQUIPMENT AND IMPROVEMENTS, NET                            |             
|DEFERRED INCOME TAXES                                                |             
|GOODWILL                                                             |             
|INTANGIBLE ASSETS, NET                                               |             
|DEFERRED DEBT ISSUANCE COSTS, NET                                    |             
|OTHER ASSETS                                                         |             
|                                                                     |             
|                                                                     |             
|                                                                     |             
|LIABILITIES AND STOCKHOLDERS EQUITY                                 |             
|CURRENT LIABILITIES                                                  |             
|Accounts payable                                                     |             
|Accrued payroll and related taxes and benefits                       |             
|Accrued insurance                                                    |             
|Income taxes payable                                                 |             
|Other accrued liabilities                                            |             
|Current portion of long-term debt                                    |             
|                                                                     |             
|TOTAL CURRENT LIABILITIES                                            |             
|                                                                     |             
|LONG-TERM DEBT, net of current portion                               |             
|DEFERRED INCOME TAXES                                                |             
|COMMITMENTS AND CONTINGENCIES (Notes 9 & 11)                         |             
|STOCKHOLDERS EQUITY                                                 |             
|Preferred stock, $.001 par value: 10,000,000 shares authorized;      |             
|none issued                                                          |             
|Common stock, $.001 par value: 150,000,000 shares authorized;        |             
|57,317,094 and 56,580,677 shares issued at December 31,
 2003 and    |             
|2002, respectively; 51,107,538 and 54,897,521 outstanding            |             
|at December 31, 2003 and 2002, respectively                          |             
|Additional paid-in capital                                           |             
|Treasury stock, at cost; 6,209,556 and 1,683,156 shares at           |             
|December 31, 2003 and 2002, respectively                             |             
|Retained earnings (accumulated deficit)                              |             
|Accumulated other comprehensive loss                                 |             
|                                                                     |             
|                                                                     |             
|                                                                     |             
|                                                                     |             
|                                                                     |             

See notes to consolidated
financial statements.

---

APRIA HEALTHCARE GROUP INC.

CONSOLIDATED STATEMENTS OF INCOME

|                                         | Year Ended December 31,
|---------------------------------------- | -----------------------
|
|
|
|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        |                        
|Amortization of goodwill                 |                        
|                                         |                        
|TOTAL COSTS AND EXPENSES                 |                        
|                                         |                        
|OPERATING INCOME                         |                        
|Interest expense                         |                        
|Interest income                          |                        
|                                         |                        
|INCOME BEFORE TAXES                      |                        
|Income tax expense                       |                        
|                                         |                        
|NET INCOME                               |                        
|                                         |                        
|Basic net income per common share        |                        
|                                         |                        
|Diluted net income per common share      |                        
|                                         |                        

See notes to consolidated financial
statements.

---

APRIA HEALTHCARE GROUP INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY AND COMPREHENSIVE INCOME

|                                                                  | Retained | Accumulated | 
|----------------------------------------------------------------- | -------- | ----------- | 
|
|
|
|
|Balance at December 31, 2000                                      |          | 53,154      | 
|Exercise of stock options                                         |          | 1,536       | 
|Tax benefits related to stock options                             |          |             | 
|Unrealized gain on interest rate
   swap agreements, net of taxes |          |             | 
|Net income                                                        |          |             | 
|                                                                  |          |             | 
|Total
comprehensive income                                        |          |             | 
|                                                                  |          |             | 
|Balance at December 31, 2001                                      |          | 54,690      | 
|Exercise of stock options                                         |          | 1,891       | 
|Tax benefits related to stock options                             |          |             | 
|Repurchases of common stock                                       |          |             | 
|Unrealized loss on interest rate
   swap agreements, net of taxes |          |             | 
|Net income                                                        |          |             | 
|                                                                  |          |             | 
|Total
comprehensive income                                        |          |             | 
|                                                                  |          |             | 
|Balance at December 31, 2002                                      |          | 56,581      | 
|Exercise of stock options                                         |          | 736         | 
|Tax benefits related to stock options                             |          |             | 
|Compensatory stock options   
and awards                          |          |             | 
|Repurchases of common stock                                       |          |             | 
|Unrealized gain on interest rate
   swap agreements, net of taxes |          |             | 
|Net income                                                        |          |             | 
|                                                                  |          |             | 
|Total
comprehensive income                                        |          |             | 
|                                                                  |          |             | 
|Balance at December 31, 2003                                      |          | 57,317      | 
|                                                                  |          |             | 

See notes to consolidated financial
statements.

---

APRIA HEALTHCARE GROUP INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                                                           | Year Ended December 31,
|-------------------------------------------------------------------------------------------------------------------------- | -----------------------
|
|
|
|OPERATING ACTIVITIES                                                                                                       |                        
|Net income                                                                                                                 |                        
|Items included in net income not requiring
(providing) cash:                                                               |                        
|Provision for doubtful
accounts                                                                                            |                        
|Depreciation                                                                                                               |                        
|Amortization of goodwill and
intangible assets                                                                             |                        
|Amortization of deferred debt
issuance costs                                                                               |                        
|Write-off of deferred debt issuance costs                                                                                  |                        
|Deferred income taxes                                                                                                      |                        
|Expense on compensatory stock
options and awards                                                                           |                        
|Gain (loss) on disposition
of assets                                                                                       |                        
|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                                                                                    |                        
|Proceeds from term
loans                                                                                                   |                        
|Payments on term loans                                                                                                     |                        
|Proceeds from issuance of
convertible senior notes                                                                         |                        
|Payment on redemption
of senior subordinated notes                                                                         |                        
|Payments on other long-term
debt                                                                                           |                        
|Outstanding checks included
in accounts payable                                                                            |                        
|Capitalized debt issuance
costs                                                                                            |                        
|Repurchases of common
stock                                                                                                |                        
|Issuances of common
stock                                                                                                  |                        
|                                                                                                                           |                        
|NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                                                                        |                        
|                                                                                                                           |                        
|NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS                                                                       |                        
|Cash and cash equivalents at beginning of year                                                                             |                        
|                                                                                                                           |                        
|CASH AND CASH EQUIVALENTS AT END OF YEAR                                                                                   |                        
|                                                                                                                           |                        

SUPPLEMENTAL DISCLOSURES  See Notes 5 and 7 for
cash paid for interest and income taxes, respectively. 

NON-CASH TRANSACTIONS  See Statements of Stockholders Equity and
Comprehensive Income, Note 3 and Note 9 for tax benefit from stock option
exercises, liabilities assumed in acquisitions and purchase of property and
equipment under capital leases, respectively.

See notes to consolidated
financial statements.

---

APRIA HEALTHCARE GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation:The accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America. These
statements include the accounts of Apria Healthcare Group Inc. (Apria or
the company) and its subsidiaries. Intercompany transactions and accounts have
been eliminated.

Company Background and
Segment Reporting: Apria operates in the home healthcare segment of the healthcare
industry, providing a variety of clinical services and related products and supplies as
prescribed by a physician or authorized by a case manager as part of a care plan. Essentially all
products and services offered by the company are provided through the companys
network of approximately 425 branch facilities, which are located throughout the United
States and are organized into 16 geographic regions. Each region consists of a number of
branches and a regional office, which provides key support services such as billing,
purchasing, equipment maintenance, repair and warehousing. The companys chief
operating decision maker 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. Additional support services are provided at a corporate level and management
continues to evaluate opportunities to gain efficiencies and cost savings by consolidating
 regional functions. For financial reporting purposes, all of 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.

Respiratory therapy,
infusion therapy and home medical equipment represent approximately 67%, 18% and 15% of
total 2003 revenues, respectively. The gross margins in 2003 for these services and
related products were 79%, 59% and 62%, respectively.

Use of Accounting
Estimates: The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and 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: 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. Approximately 34% of the companys
revenues for 2003, 2002 and 2001 were reimbursed under arrangements with Medicare and
Medicaid. In all three years presented, no other third-party payor group represented 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 represented less than 10% of total net revenues for 2003, 2002 and
2001.

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. Also, focused reviews of certain large and/or problematic payors are
performed. Due to continuing changes in the healthcare industry and third-party
reimbursement, it is possible that managements estimates could 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.

Cash and Cash
Equivalents: Apria maintains cash with various financial institutions. These financial
institutions are located throughout the United States and the companys cash
management practices limit exposure to any one institution. Outstanding checks, which are
reported as a component of accounts payable, were $21,612,000 and $20,980,000 at December
31, 2003 and 2002, respectively. Management considers all highly liquid instruments
purchased with a maturity of less than three months to be cash equivalents.

Accounts
Receivable: Included in accounts receivable are earned but unbilled receivables of
$31,688,000 and $29,207,000 at December 31, 2003 and 2002, respectively. Delays ranging
from a day up to several weeks between the date of service and billing can occur due to
delays in obtaining certain required payor-specific documentation from internal and
external sources. Earned but unbilled receivables are aged from date of service and are
considered in Aprias analysis of historical performance and collectibility.

Inventories:
Inventories are stated at the lower of cost (first-in, first-out method) or market and
consist primarily of disposables used in conjunction with patient service equipment, and
pharmaceuticals.

Patient Service
Equipment: Patient service equipment is stated at cost and consists of medical
equipment provided to in-home patients. Depreciation is provided using the straight-line
method over the estimated useful lives of the equipment, which range from one to ten
years.

Property, Equipment and
Improvements: Property, equipment and improvements are stated at cost. Included in
property and equipment are assets under capitalized leases which consist of information
systems and software. Depreciation is provided using the straight-line method over the
estimated useful lives of the assets. Estimated useful lives for each of the categories
presented in Note 2 are as follows: leasehold improvements  the shorter of the
remaining lease term or seven years; equipment and furnishings  three to fifteen
years; and information systems  three to four years.

Capitalized
Software: Included in property, equipment and improvements are costs related to
internally developed and purchased software that are capitalized and amortized over
periods not exceeding four years. Capitalized costs include direct costs of materials and
services incurred in developing or obtaining internal-use software and payroll and
payroll-related costs for employees directly involved in the development of internal-use
software.

The carrying value of
capitalized software is reviewed if the facts and circumstances suggest that it may be
impaired. Indicators of impairment may include a subsequent change in the extent or manner
in which the software is used or expected to be used, a significant change to the software
is made or expected to be made or the cost to develop or modify internal-use software
exceeds that expected amount. Management does not believe any impairment of its
capitalized software existed at December 31, 2003.

Goodwill: Goodwill
arising from business combinations represents the excess of the purchase price over the
estimated fair value of the net assets of the businesses acquired. Prior to 2002 and
before the adoption of SFAS No. 142, Goodwill and Other Intangible Assets,
goodwill attributable to business combinations completed on or before June 30, 2001, was
being amortized over the period of expected benefit. The amortization period for
substantially all of the companys goodwill was 20 years. Previously, management
reviewed for impairment on an ongoing basis and whenever events or changes in
circumstances indicated the possibility of impairment. In accordance with the provisions
of SFAS No. 142,  goodwill is no longer amortized but tested annually for impairment or more frequently if
circumstances indicate impairment.  Aprias impairment tests in 2002 and 2003
have indicated that no impairment exists.

Intangible Assets:
Intangible assets consist of covenants not to compete, tradenames and customer lists, all
of which resulted from business combinations. The values assigned to the covenants are
amortized on a straight-line basis over their contractual terms, which range from two to
five years. The customer list and tradename valuations are amortized over their period of
expected benefit of 7.5 months and two years, respectively.

Management reviews for
impairment of intangible assets and long-lived assets on an ongoing basis and whenever
events or changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Management does not believe any impairment of its intangible assets or
long-lived assets existed at December 31, 2003.

Fair Value of Financial
Instruments:The carrying value of Aprias bank debt approximates fair value
because the underlying instruments are variable notes that reprice frequently. The fair
value of the convertible senior notes, as determined by reference to quoted market prices,
is $284,483,000. The carrying amounts of cash and cash equivalents, accounts receivable,
trade payables and accrued expenses approximate fair value because of their short
maturity.

Advertising:
Advertising costs amounting to $3,155,000, $2,804,000 and $3,044,000 for 2003, 2002 and
2001, respectively, are expensed as incurred and included in selling, distribution and
administrative expenses.

Income Taxes: Apria
provides for income taxes in accordance with provisions specified in SFAS No. 109,
Accounting for Income Taxes. Accordingly, deferred income tax assets and
liabilities are computed for differences between the financial statement and tax bases of
assets and liabilities. These differences will result in taxable or deductible amounts in
the future, based on tax laws and rates applicable to the periods in which the differences
are expected to affect taxable income. Valuation allowances are established when necessary
to reduce deferred tax assets to amounts which are more likely than not to be realized.

Derivative Instruments
and Hedging Activities: From time to time Apria uses derivative financial instruments
to limit exposure to interest rate fluctuations on the companys variable rate
long-term debt. The company accounts for derivative instruments pursuant to the provisions
of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities.
The companys derivatives are recorded on the balance sheet at their fair value and,
for derivatives accounted for as cash flow hedges, any unrealized gains or losses on their
fair value are included, net of tax, in other comprehensive income.

Stock-based
Compensation:The company accounts for its stock-based compensation plans under the
recognition and measurement principles of Accounting Principles Board Opinion
(APB) No. 25,Accounting for Stock Issued to Employees, and
related interpretations. Apria has adopted the disclosure provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, as amended by SFAS No. 148,
Accounting for Stock-Based Compensation  Transition and Disclosure  an
amendment of FASB Statement No. 123. For the year ended December 31, 2003, net
income reflects compensation expense for restricted stock awards and restricted stock
purchase rights valued in accordance with APB No. 25. Had compensation expense for all of 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. See Note 6 
Stockholders Equity.

|                                                                                                                                               | Year Ended December 31,
|---------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------
|
|
|
|Net income as reported                                                                                                                         |                        
|Add: stock-based compensation
expense included in      
reported net income, net of related tax effects                                        |                        
|Deduct: total stock-based
compensation expense      
determined for all awards under fair value-based     
 method, net of related tax effects |                        
|                                                                                                                                               |                        
|Pro forma net income                                                                                                                           |                        
|                                                                                                                                               |                        
|Basic net income per share:                                                                                                                    |                        
|As reported                                                                                                                                    |                        
|Pro forma                                                                                                                                      |                        
|Diluted net income per share:                                                                                                                  |                        
|As reported                                                                                                                                    |                        
|Pro forma                                                                                                                                      |                        

Comprehensive Income:For the years ended December 31, 2003 and 2002, the difference between net income and
comprehensive income/(loss) is $314,000 and ($1,271,000), respectively, net of taxes,
which is attributable to unrealized gains/(losses) on various interest rate swap
agreements.

Per Share Amounts:
Basic net income per share is computed by dividing net income available to common
stockholders by the weighted-average number of common shares outstanding. Diluted net
income per share includes the effect of the potential shares outstanding, including
dilutive stock options and other awards, using the treasury stock method.

Change in Accounting
Principles: Effective January 1, 2002, Apria adopted SFAS No. 142, which
addresses the financial accounting and reporting for goodwill and other intangible assets.
The statement provides that goodwill or other intangible assets with indefinite lives are
no longer amortized but shall be tested for impairment annually, or more frequently if
circumstances indicate the possibility of impairment. The effect of adoption of SFAS
No. 142 on the consolidated financial statements is shown in Note 4 
Goodwill and Intangible Assets.

Effective January 1,
2002, Apria adopted SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. This statement superseded SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and
amended other guidance related to the accounting and reporting of long-lived assets. SFAS
No. 144 requires that one accounting model be used for long-lived assets to be
disposed of by sale. Discontinued operations are to be measured similarly to other
long-lived assets classified as held for sale at the lower of its carrying amount or fair
value less cost to sell. Future operating losses will no longer be recognized before they
occur. SFAS No. 144 also broadened the presentation of discontinued operations to
include a component of an entity when operations and cash flows can be clearly
distinguished, and established criteria to determine when a long-lived asset is held for
sale. Adoption of this statement did not have a material effect on Aprias
consolidated financial statements.

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 in 2003. Adoption of this
statement did not have a material effect on the companys consolidated financial
statements, but resulted in the reclassification to interest expense of the extraordinary
charge on debt refinancing of $2,442,000 in 2001.

Other Recent Accounting
Pronouncements: 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 that 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 was required for exit and disposal activities after
December 31, 2002. Apria had no such transactions during 2003.

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 October 2002, the
FASBs Emerging Issues Task Force (EITF) issued EITF 02-17, which
addresses issues raised in the interpretation of SFAS No. 141, Business
Combinations and SFAS No. 142, Goodwill and Other Intangible Assets and
the identification and valuation of intangible assets. EITF 02-17 provides guidance on
determining when, as a result of a business combination, a customer-related intangible
asset exists that should be separately valued from goodwill. EITF 02-17 is effective for
business combinations consummated and goodwill impairment tests performed after October
25, 2002. Adoption of this interpretation did not have a material effect on the
companys 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 of 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.

FIN No. 46,
Consolidation of Variable Interest Entities, an interpretation of Accounting
Research Bulletin No. 51, was originally issued in January 2003 and subsequently revised
in December 2003. FIN No. 46, as revised, requires a variable interest entity to be
consolidated by a company if that company is subject to a majority of the risk of loss
from the variable interest entitys activities or is entitled to receive a majority
of the entitys residual returns or both. 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. Application of FIN No. 46 is
required for potential variable interest entities commonly referred to as special purpose
entities for periods ending after December 15, 2003. Application of the provisions will be
required for all other variable interest entities by the end of the first reporting period
that ends after March 15, 2004. The company currently has no variable interest entities,
therefore the adoption of this interpretation will not 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 did not have a material
effect on the companys consolidated financial statements.

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. However, in November
2003, the FASB issued Staff Position No. 150-3 which defers the effective dates for
certain provisions of the statement. Once required in its entirety, SFAS No. 150 is not
expected to have a material effect on the companys consolidated financial
statements.

Reclassifications:
Certain amounts for prior periods have been reclassified to conform to the current year
presentation.

---

NOTE 2 -- PROPERTY, EQUIPMENT AND IMPROVEMENTS

Property, equipment and
improvements consist of the following:

|                              | December 31,
|----------------------------- | ------------
|
|
|
|Leasehold improvements        |             
|Equipment and furnishings     |             
|Information systems           |             
|                              |             
|                              |             
|Less accumulated depreciation |             
|                              |             
|                              |             
|                              |             

NOTE 3 -- BUSINESS COMBINATIONS

During 2003, 2002 and
2001, Apria acquired a number of complementary businesses in specific geographic markets.
During 2003, Apria acquired 27 companies comprised largely of home respiratory therapy
businesses. For all periods presented, these all-cash transactions were accounted for as
purchases and, accordingly, the results of operations of the acquired businesses are
included in the consolidated income statements from the dates of acquisition. The purchase
prices were allocated to the various underlying tangible and intangible assets and
liabilities on the basis of estimated fair value.

The following table
summarizes the allocation of the purchase prices of acquisitions made by the company,
which include payments deferred from prior years. In 2003, such payments totaled
$6,324,000. At December 31, 2003, outstanding deferred consideration totaled $4,464,000
and is included on the balance sheet in other accrued liabilities.

Cash paid for
acquisitions:

|                                                                              | Year Ended December 31,
|----------------------------------------------------------------------------- | -----------------------
|
|
|
|Fair value of tangible assets
acquired                                        |                        
|Intangible assets                                                             |                        
|Goodwill                                                                      |                        
|                                                                              |                        
|Total assets acquired                                                         |                        
|Liabilities assumed and accrued, net of
   payments deferred from prior years |                        
|                                                                              |                        
|Net assets acquired                                                           |                        
|                                                                              |                        

The following supplemental
unaudited pro forma information presents the combined operating results of Apria and the
businesses that were acquired by Apria during 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.

---

|                                    | Year Ended December 31,
|----------------------------------- | -----------------------
|
|
|
|Net revenues                        |                        
|Net income                          |                        
|                                    |                        
|Basic net income per common share   |                        
|                                    |                        
|Diluted net income per common share |                        
|                                    |                        

NOTE 4 -- GOODWILL AND INTANGIBLE ASSETS

In July 2001, Apria
adopted SFAS No. 141, Business Combinations, which requires that the
purchase method of accounting be applied to all business combinations completed after
June 30, 2001 and which also addresses the criteria for initial recognition of
intangible assets and goodwill. Effective January 1, 2002, the company adopted SFAS
No. 142, Goodwill and Other Intangible Assets, in its entirety. The
statement provides that goodwill and other intangible assets with indefinite lives are no
longer amortized, but shall be tested for impairment annually, or more frequently if
circumstances indicate the possibility of impairment. If the carrying value of goodwill or
an intangible asset exceeds its fair value, an impairment loss shall be recognized.

Aprias goodwill
impairment test is conducted at a reporting unit level and compares each
reporting units fair value to its carrying value. The company has determined that
its geographic regions are reporting units under SFAS No. 142. The measurement of
fair value for each region is based on an evaluation of future discounted cash flows and
is further tested using a multiple of earnings approach. Aprias tests in 2002 and
2003 indicated that no impairment existed and, accordingly, no loss has been recognized.

The following table sets
forth the reconciliation of 2001 net income and earnings per share as adjusted for the
non-amortization provisions of SFAS No. 142:

|(in thousands, except per share data)    | Year Ended December 31, 2001
|---------------------------------------- | ----------------------------
|
|Reported net income                      |                             
|Add: goodwill amortization, net of taxes |                             
|                                         |                             
|Adjusted net income                      |                             
|                                         |                             
|Basic income per common share:           |                             
|Reported net income                      |                             
|Add: goodwill amortization, net of taxes |                             
|                                         |                             
|Adjusted net income                      |                             
|                                         |                             
|Diluted income per common share:         |                             
|Reported net income                      |                             
|Add: goodwill amortization, net of taxes |                             
|                                         |                             
|Adjusted net income                      |                             
|                                         |                             

For the year ended
December 31, 2003, the net change in the carrying amount of goodwill of $81,669,000 is the
result of business combinations. Goodwill amortization expense for the year ended December
31, 2001, was $9,809,000. All of the goodwill recorded in conjunction with business
combinations completed after June 30, 2001 is expected to be deductible for tax purposes.

---

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

|(in thousands)           |  |  | December 31, 2003 |     | December 31, 2002
|------------------------ |  |  | ----------------- | --- | -----------------
|
|
|
|Covenants not to compete |  |  |                   | 4.9 |                  
|Tradenames               |  |  |                   | 2.0 |                  
|Customer lists           |  |  |                   | 0.6 |                  
|                         |  |  |                   |     |                  
|                         |  |  |                   |     |                  
|                         |  |  |                   |     |                  

Amortization expense
amounts to $3,650,000 for the year ended December 31, 2003. Estimated amortization expense
for each of the fiscal years ending December 31, is presented below:

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

NOTE 5 -- LONG-TERM DEBT

Long-term debt consists of
the following:

|                                         | December 31,
|---------------------------------------- | ------------
|
|
|
|Convertible senior notes                 |             
|Term loans payable                       |             
|Capital lease obligations (see Note 9)   |             
|Other, interest at rates ranging to 2.8% |             
|                                         |             
|                                         |             
|Less: current maturities                 |             
|                                         |             
|                                         |             
|                                         |             

Credit Agreement:
Aprias credit agreement with Bank of America and a syndicate of lenders was amended
and restated effective August 13, 2003. The amendment permitted the issuance of
$250,000,000 of convertible senior notes and the concurrent repurchase of $100,000,000 of
Aprias outstanding common stock with a portion of the proceeds. The amendment also
eliminated limitations on repurchases of the companys common stock and expenditures
for acquisitions so long as the companys leverage ratio, as defined by the credit
agreement, is less than 2.0 to 1.0. As the leverage ratio increases, limitations are
imposed on acquisition expenditures and common stock repurchases.

At December 31, 2003,
there were no borrowings under the revolving credit facility, outstanding letters of
credit totaled $3,855,000 and credit available under the revolving facility was
$96,145,000.

The senior secured credit
agreement permits Apria to select one of two variable interest rates. One option is the
base rate, which is expressed as the higher of (a) the Federal Funds rate plus 0.50% or
(b) the Prime Rate. The other option is the Eurodollar rate, which is based on the London
Interbank Offered Rate. Interest on outstanding balances under the
senior secured credit agreement is determined by adding a margin to the Eurodollar rate or
base rate in effect at each interest calculation date. The applicable margins for the
revolving credit facility and the $125,000,000 term loan are based on Aprias
leverage ratio, which is the ratio of its funded debt to its last four quarters of
earnings before interest, taxes, depreciation and amortization. The applicable margin
ranges from 1.50% to 2.25% for Eurodollar loans and from 0.50% to 1.25% for base rate
loans. For the $175,000,000 term loan, the margins were amended in June 2002 and are
currently fixed at 2.00% for Eurodollar loans and 1.00% for base rate loans. The effective
interest rate at December 31, 2003, after consideration of the effect of the swap
agreements, was 3.57% on total borrowings of $244,063,000. The senior credit agreement
also requires payment of commitment fees ranging from 0.25% to 0.50% (also based on
Aprias leverage ratio) on the unused portion of the revolving credit facility.

Borrowings under the
senior secured credit facilities are collateralized by substantially all of the assets of
Apria. The credit agreement contains numerous restrictions, including but not limited to,
covenants requiring the maintenance of certain financial ratios, limitations on additional
borrowings, capital expenditures, mergers, certain investments, loans and other
distributions. The August 2003 amendment eliminated limitations related to repurchases of
the companys common stock, dividends and acquisitions so long as the companys
leverage ratio, as defined by the credit agreement, is under 2.0 to 1.0, and imparts
limitations as the leverage ratio increases. At December 31, 2003, Aprias leverage
ratio was 1.5 to 1.0. At December 31, 2003, the company was in compliance with all of the
financial covenants required by the credit agreement.

The carrying value of the
term loans and the revolving credit facility approximates fair value because the
underlying instruments are variable notes that reprice frequently.

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

The notes bear interest at
the rate of 3.375% per annum, which is payable on September 1 and March 1 of each year,
beginning on March 1, 2004. Also, during certain periods commencing on September 8, 2010,
Apria will pay contingent interest on the interest payment date for the applicable
interest period if the average trading price of the notes during the five trading days
ending on the third day immediately preceding the first day of the applicable interest
period equals or exceeds 120% of the principal amount of the notes. The contingent
interest payable per note will equal 0.25% per year of the average trading price of such
note during the applicable five trading-day reference period. During certain periods, the
notes are convertible into shares of Apria common stock, initially at a conversion rate of
28.6852 shares of common stock per $1,000 principal amount of notes, subject to adjustment
and under certain circumstances as outlined in the indenture.

Apria received
$244,375,000 in net proceeds upon issuance of the notes. Concurrent with the issuance and
with a portion of the proceeds, Apria repurchased 3,786,400 shares of its common stock for
$100,000,000. Issuance costs deducted from the proceeds plus those paid separately in cash
totaled $5,852,000.

The notes are unsecured
and unsubordinated obligations and are senior in right of payment to any subordinated debt
of the company. The notes rank junior to the companys senior secured credit facility
to the extent of the assets securing such indebtedness. The fair value of these notes, as
determined by reference to quoted market prices, is $284,483,000 at December 31, 2003.

Maturities of long-term
debt, exclusive of capital lease obligations, are as follows:

|Year Ending December 31, | (in thousands)
|------------------------ | --------------
|
|2004                     |               
|2005                     |               
|2006                     |               
|2007                     |               
|2008                     |               
|Thereafter               |               
|                         |               
|                         |               
|                         |               

Total interest paid in
2003, 2002 and 2001 amounted to $10,297,000, $13,691,000 and $28,642,000, respectively.

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 derivatives for trading or other speculative purposes.

At December 31, 2003,  Apria had four interest rate swap
agreements with a total notional amount of $100,000,000 that fix an equivalent amount of
its variable rate debt at rates ranging from 2.43% to 3.42% (before applicable interest margin specified in
the applicable credit agreement). The terms of these swap agreements range from two to four years.
 Apria also had two interest rate swap agreements with a total notional amount of
$100,000,000 and a fixed-rate of 2.58% (before applicable interest margin) that expired March 31, 2003.
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 years ended December 31, 2003 and 2002, Apria paid net settlement amounts of
$1,917,000 and $780,000, respectively. At December 31, 2003, the aggregate fair value of
the swap agreements was a deficit of $1,495,000 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.
Aprias exposure to credit loss under the swap agreements is limited to the interest
rate spread in the event of counterparty non-performance. 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.

---

NOTE 6 -- STOCKHOLDERS EQUITY

Treasury Stock:
During 2003, Apria repurchased 4,526,000 shares of its common stock for $118,471,000. Of
these amounts, 3,786,400 shares were repurchased for $100,000,000 in conjunction with the
issuance of the convertible senior notes. Apria also repurchased 1,597,000 shares for
$35,000,000 in 2002. All such repurchases were made in open market transactions throughout
the year. All repurchased shares are being held in treasury.

In January 2004, Apria
repurchased 1,731,000 shares of its common stock through an accelerated repurchase program
for $50,000,000.

Stock Compensation
Plans:Apria has various stock-based compensation plans, which are described below.
Management accounts for these plans under the recognition and measurement principles of
APB No. 25 and related interpretations. Compensation expense of $1,963,000 related to the
issuance of restricted stock purchase rights and restricted stock awards is included in
net income for the year ended December 31, 2003.

For purposes of the pro
forma disclosure presented in Note 1, 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 2003, 2002 and 2001: risk-free interest
rates of 2.84%, 4.35% and 4.80%, respectively; dividend yield of 0% for all years;
expected lives of 4.80 years in 2003, 4.13 years in 2002 and 4.25 years for 2001 and
volatility of 54% for 2003, 59% for 2002 and 62% for 2001. See Note 1  Summary
of Significant Accounting Policies  Stock-based Compensation.

Fixed Stock Options:Apria has various fixed stock option plans that provide for the granting of incentive
or non-statutory options to its key employees and non-employee members of the Board of
Directors. In the case of incentive stock options, the exercise price may not be less than
the fair market value of the companys stock on the date of the grant, and may not be
less than 110% of the fair market value of the companys stock on the date of the
grant for any individual possessing 10% or more of the voting power of all classes of
stock of the company. The dates at which the options become exercisable range from the
date of grant to five years after the date of grant and expire not later than ten years
after the date of grant. The weighted-average fair values of fixed stock options granted
during 2003, 2002 and 2001 were $10.68, $11.79 and $14.06, respectively.

A summary of the activity of
Aprias fixed stock options for 2003, 2002 and 2001 is presented below:

|                                   | 2003 |           | 2002 |   | 2001 
|---------------------------------- | ---- | --------- | ---- | - | -----
|
|
|
|Outstanding at beginning of year   |      | 4,357,976 |      | $ | 21.69
|Granted:                           |      |           |      |   |      
|Exercise price equal to fair value |      | 1,181,125 |      | $ | 22.49
|Exercised                          |      | (654,731  | )    | $ | 17.88
|Forfeited                          |      | (458,416  | )    | $ | 24.68
|                                   |      |           |      |   |      
|Outstanding at end of year         |      | 4,425,954 |      | $ | 22.16
|                                   |      |           |      |   |      
|Exercisable at end of year         |      | 2,308,611 |      | $ | 20.90
|                                   |      |           |      |   |      

---

The following table
summarizes information about fixed stock options outstanding at December 31, 2003:

|                 |  | Options Outstanding |           | Options Exercisable
|---------------- |  | ------------------- | --------- | -------------------
|
|
|
|$  6.69 - $12.19 |  |                     | 201,590   |                    
|$12.75 - $16.63  |  |                     | 251,310   |                    
|$16.94 - $16.94  |  |                     | 202,168   |                    
|$17.05 - $19.63  |  |                     | 317,254   |                    
|$20.50 - $24.01  |  |                     | 2,090,007 |                    
|$24.18 - $26.50  |  |                     | 589,500   |                    
|$27.13 - $29.00  |  |                     | 774,125   |                    
|                 |  |                     |           |                    
|$  6.69 - $29.00 |  |                     | 4,425,954 |                    
|                 |  |                     |           |                    

Performance-Based Stock
Options:Included in Aprias stock-based compensation plans are provisions for
the granting of performance-based stock options. In 2003, Apria granted options in the form
of restricted stock
purchase rights to key members of senior management. These options become exercisable over
periods of six and seven years and expire not later than ten years from the date of grant.
Accelerated vesting will ensue upon the occurrence of certain events or the achievement of
certain cumulative financial targets based on a two and three year measurement periods. The
weighted-average fair value of performance-based stock options granted during 2003 was
$21.06.

A summary of the activity of
Aprias performance-based stock options, including those granted in the form of
restricted stock purchase rights, for 2003, 2002 and 2001 is presented below:

|                                    | 2003 |         | 2002 |   | 2001
|----------------------------------- | ---- | ------- | ---- | - | ----
|
|
|
|Outstanding at beginning of year    |      | 209,658 |      | $ | 7.34
|Granted:                            |      |         |      |   |     
|Exercise price less than fair value |      | 476,000 |      | $ | 6.49
|Exercised                           |      | (81,686 | )    | $ | 7.78
|Forfeited                           |      | -       |      | $ | -   
|                                    |      |         |      |   |     
|Outstanding at end of year          |      | 603,972 |      | $ | 6.61
|                                    |      |         |      |   |     
|Exercisable at end of year          |      | 127,972 |      | $ | 7.05
|                                    |      |         |      |   |     

---

The following table summarizes information about
performance-based stock options, including those granted in the form of restricted stock
purchase rights, outstanding at December 31, 2003:

|                  |  | Options Outstanding |         | Options Exercisable
|----------------- |  | ------------------- | ------- | -------------------
|
|
|
|$  6.46 - $  6.46 |  |                     | 455,000 |                    
|$  6.50 - $  6.50 |  |                     | 120,638 |                    
|$  7.05 - $18.56  |  |                     | 28,334  |                    
|                  |  |                     |         |                    
|$  6.46 - $18.56  |  |                     | 603,972 |                    
|                  |  |                     |         |                    

Apria also granted restricted
stock awards, representing 26,000 shares, to its
non-employee directors during 2003. These awards will vest in April 2004. Approximately 10,897,000
shares of common stock are reserved for future issuance upon the exercise of stock options
and awards under all of Aprias active plans.

---

NOTE
7 -- INCOME TAXES

Significant components of
Aprias deferred tax assets and liabilities are as follows:

|                                                 | December 31,
|------------------------------------------------ | ------------
|
|
|
|Deferred tax assets:                             |             
|Allowance for doubtful
accounts                  |             
|Accruals                                         |             
|Asset valuation
reserves                         |             
|Net operating loss
carryforward, limited by §382 |             
|AMT credit carryovers                            |             
|Intangible assets                                |             
|Other, net                                       |             
|                                                 |             
|Total deferred tax assets                        |             
|                                                 |             
|Deferred tax liabilities:                        |             
|Tax over book depreciation                       |             
|Tax over book goodwill
amortization              |             
|                                                 |             
|Total deferred tax liabilities                   |             
|                                                 |             
|Net deferred tax assets                          |             
|                                                 |             

As a result of settling an
income tax dispute related to prior year tax examinations, Apria utilized approximately
$34,200,000 of its previously limited $57,000,000 net operating loss carryforward during
2002. Such net operating loss carryforward was generated prior to 1992 and utilization had
been limited to $5,000,000 per year in accordance with Internal Revenue Code Section 382.
Prior to 2002, the $57,000,000 net operating loss carryforward was not recognized for
financial statement reporting purposes as management believed it likely that they would
expire unused. The remaining net operating loss carryforward of approximately $22,800,000
was excluded from the related deferred tax assets and has expired unused.

At December 31, 2003, Apria had
federal net operating
loss carryforwards of $5,017,000. Apria expects to utilize these net operating loss
carryforwards in 2004. The company had an alternative minimum tax credit carryforward of
$6,149,000, which was utilized in 2003. Additionally, the company has various state net
operating loss carryforwards.

Income tax expense
(benefit) consists of the following:

|          | Year Ended December 31,
|--------- | -----------------------
|
|
|
|Current:  |                        
|Federal   |                        
|State     |                        
|          |                        
|          |                        
|          |                        
|Deferred: |                        
|Federal   |                        
|State     |                        
|          |                        
|          |                        
|          |                        
|          |                        
|          |                        

During 2003, the exercise
of stock options granted under Aprias various stock option plans gave rise to
$6,204,000 in compensation that is includable as taxable income to the employee and
deductible by the company for federal and state tax purposes but is not recognized as
expense for financial reporting purposes. Such tax benefits are included in additional
paid-in capital.

Differences between
Aprias income tax expense and an amount calculated utilizing the federal statutory
rate are as follows:

|                                                                                | Year Ended December 31,
|------------------------------------------------------------------------------- | -----------------------
|
|
|
|Income tax expense at statutory
rate                                            |                        
|Non-deductible expenses                                                         |                        
|State and foreign taxes, net of federal
   benefit and state loss carryforwards |                        
|Settlement of income tax dispute                                                |                        
|Other                                                                           |                        
|                                                                                |                        
|                                                                                |                        
|                                                                                |                        

Net income taxes paid
(received) in 2003, 2002 and 2001 amounted to $50,359,000, $(3,165,000) and $2,096,000,
respectively.

NOTE 8 -- PER SHARE AMOUNTS

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

|                                                                                                   | Year Ended December 31,
|-------------------------------------------------------------------------------------------------- | -----------------------
|
|
|
|Numerator:                                                                                         |                        
|Net income                                                                                         |                        
|Numerator for basic and diluted per
share amounts  net income    available to
common stockholders |                        
|Denominator:                                                                                       |                        
|Denominator for basic per share
    amounts  weighted-average shares                              |                        
|Effect of dilutive securities:                                                                     |                        
|Employee stock options and awards                                                                  |                        
|                                                                                                   |                        
|Total dilutive
potential common shares                                                             |                        
|                                                                                                   |                        
|Denominator for diluted per share
amounts  adjusted    weighted-average shares                    |                        
|                                                                                                   |                        
|Basic net income per common share                                                                  |                        
|                                                                                                   |                        
|Diluted net income per common share                                                                |                        
|                                                                                                   |                        
|Employee stock options excluded from
the computation  of diluted per share amounts:                |                        
|Shares for which exercise
price exceeds      average price of
common stock                         |                        
|                                                                                                   |                        
|Average exercise price per share that
exceeds  average market price of common stock                |                        
|                                                                                                   |                        

NOTE 9 -- LEASES

Apria leases substantially
all of its facilities. In addition, delivery vehicles and office equipment are leased
under operating leases. Lease terms are generally ten years or less with renewal options
for additional periods. Many leases provide that the company pay taxes, maintenance,
insurance and other expenses. Rentals are generally increased annually by the Consumer
Price Index, subject to certain maximum amounts defined within individual agreements.

Apria occasionally
subleases unused facility space when a lease buyout is not a viable option. Sublease
income, in amounts not considered material, is recognized monthly and is offset against
facility lease expense. Net rent expense in 2003, 2002 and 2001 amounted to $68,141,000,
$62,383,000 and $60,618,000, respectively.

In addition, during 2003,
2002 and 2001, Apria acquired information systems and software totaling $366,000,
$5,937,000 and $1,837,000, under capital lease arrangements with lease terms ranging from
12 to 36 months. Amortization of the leased information systems and software amounted to
$1,953,000, $1,367,000 and $811,000 in 2003, 2002 and 2001, respectively.

The following amounts for
assets under capital lease obligations are included in property, equipment and
improvements:

|                              | December 31,
|----------------------------- | ------------
|
|
|
|Information systems           |             
|Software                      |             
|Less accumulated depreciation |             
|                              |             
|                              |             
|                              |             

Future minimum payments,
by year and in the aggregate, required under capital lease obligations and noncancelable
operating leases consist of the following at December 31, 2003:

|(in thousands)                                   | CapitalLeases |  | OperatingLeases
|------------------------------------------------ | ------------- |  | ---------------
|
|2004                                             |               |  | $              
|2005                                             |               |  |                
|2006                                             |               |  |                
|2007                                             |               |  |                
|2008                                             |               |  |                
|Thereafter                                       |               |  |                
|                                                 |               |  |                
|                                                 |               |  |                
|                                                 |               |  |                
|Less interest included in minimum lease payments |               |  |                
|                                                 |               |  |                
|Present value of minimum lease payments          |               |  |                
|Less current portion                             |               |  |                
|                                                 |               |  |                
|                                                 |               |  | $              
|                                                 |               |  |                

NOTE 10 -- EMPLOYEE BENEFIT PLANS

Apria has a 401(k) defined
contribution plan, whereby eligible employees may contribute up to 35% of their annual
base earnings. The company matches 50% of the first 8% of employee contributions. Total
expenses related to the defined contribution plan were $4,456,000, $4,569,000 and
$4,227,000 in 2003, 2002 and 2001, respectively.

NOTE 11 -- COMMITMENTS AND CONTINGENCIES

Regulatory Environment:The healthcare industry is subject to extensive government regulation, including
numerous laws directed at preventing fraud and abuse and laws regulating reimbursement
under various governmental programs. Many of these laws are subject to governmental
review, interpretation and reform, all of which complicate compliance. If Apria is deemed
to have violated these laws and regulations, Apria could be subject to significant fines
or penalties, facility shutdowns and possible exclusion from participation in federal
healthcare programs such as Medicare and Medicaid.

Litigation: 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.

Certain
Concentrations: Approximately 28% of Aprias 2003 revenues are derived from
Medicare. In December 2003, the President signed into law the Medicare Prescription Drug,
Improvement and Modernization Act of 2003. The Act includes a number of provisions that
will affect Medicare Part B reimbursement policies for items and services provided by
Apria, the most significant of which are:

| |  | The legislation provides for a freeze on annual payment increases for durable medical
equipment from 2004 through 2008. Further, beginning in 2005, reimbursement for five
durable medical equipment categories will be reduced based on the median price paid for
such items on behalf of beneficiaries of federal employee health plans.      
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                 
| |  | Reimbursement for inhalation drugs has been reduced from the previous reimbursement rate
of 95% of the average wholesale price to 80% of the average wholesale price, effective
January 1, 2004. Beginning in January 2005, reimbursement for these drugs will shift to
average sales price, as defined by the Act, plus 6%.                    
| |   |                                                                                                                                                                                                                                                                                                                                                 
| |  | The Act requires the establishment of a competitive acquisition program for as yet
unspecified durable medical equipment items and services that is to be transitioned into
(i) ten of the largest metropolitan statistical areas in 2007; (ii) 80 of the largest
metropolitan statistical areas in 2009; and (iii) additional areas after 2009.

Also, still pending from
the Balanced Budget Act of 1997 is streamlined authority granted to the Secretary of HHS
to increase or reduce the reimbursement for
home medical equipment, including oxygen, by up to 15% each year under an inherent
reasonableness authority. This authority applies to all Medicare Part B services except
those paid under a physician fee schedule, a prospective payment system, or a competitive
acquisition program.

Apria currently purchases
approximately 50% of its patient service equipment and supplies from four vendors.
Although there are a limited number of suppliers, management believes that other vendors
could provide similar products on comparable terms. However, a change in suppliers could
cause delays in service delivery and possible losses in revenue, which could adversely
affect operating results.

Guarantees and
Indemnities: From time to time Apria enters into certain types of contracts that
contingently require the company to indemnify parties against third party claims. These
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 or 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.

NOTE 12 -- SERVICE/PRODUCT LINE DATA

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

|                             | Year Ended December 31,
|---------------------------- | -----------------------
|
|
|
|Net revenues:                |                        
|Respiratory therapy          |                        
|Infusion therapy             |                        
|Home medical equipment/other |                        
|                             |                        
|Total net revenues           |                        
|                             |                        
|Gross profit:                |                        
|Respiratory therapy          |                        
|Infusion therapy             |                        
|Home medical equipment/other |                        
|                             |                        
|Total gross profit           |                        
|                             |                        

NOTE 13 -- SELECTED QUARTERLY FINANCIAL DATA (unaudited)

|                                |  | Quarter
|------------------------------- |  | -------
|
|
|
|2003                            |  |        
|Net revenues                    |  | $      
|Gross profit                    |  |        
|Operating income                |  |        
|Net income                      |  |        
|                                |  |        
|Basic income per common share   |  | $      
|Diluted income per common share |  | $      
|2002                            |  |        
|Net revenues                    |  | $      
|Gross profit                    |  |        
|Operating income                |  |        
|Net income                      |  |        
|                                |  |        
|Basic income per common share   |  | $      
|Diluted income per common share |  | $      

Fourth Quarter 
2002: Net income for the fourth quarter of 2002 reflects the impact of the favorable
outcome of an income tax dispute that was settled during the period. The components of
this are as follows: income tax benefit of $11,073,000, interest income of $4,045,000 and
related professional fee expense of $1,710,000.

        
        

---

APRIA HEALTHCARE GROUP INC.

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

|                                                                   | Additions | 
|------------------------------------------------------------------ | --------- | 
|
|
|                                                                  
|Year ended December 31, 2003                                       |           | 
|Deducted from asset accounts:                                      |           | 
|Allowance for doubtful accounts                                    |           | 
|Reserve for inventory and patient
     service equipment shortages |           | 
|                                                                   |           | 
|Totals                                                             |           | 
|                                                                   |           | 
|Year ended December 31, 2002                                       |           | 
|Deducted from asset accounts:                                      |           | 
|Allowance for doubtful accounts                                    |           | 
|Reserve for inventory and patient
     service equipment shortages |           | 
|                                                                   |           | 
|Totals                                                             |           | 
|                                                                   |           | 
|Year ended December 31, 2001                                       |           | 
|Deducted from asset accounts:                                      |           | 
|Allowance for doubtful accounts                                    |           | 
|Reserve for inventory and patient
     service equipment shortages |           | 
|                                                                   |           | 
|Totals                                                             |           | 
|                                                                   |           | 

---

SIGNATURES

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

Dated:  March 15, 2004

| | APRIA HEALTHCARE GROUP INC./s/ LAWRENCE M. HIGBY
Lawrence M. HigbyPresident and Chief Executive Officer
| | -------------------------------------------------------------------------------------------------------

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

|Signature                                        |  | Title                                                                                                              |  | Date          
|------------------------------------------------ |  | ------------------------------------------------------------------------------------------------------------------ |  | --------------
|
|/s/ LAWRENCE M. HIGBYLawrence M. Higby           |  | President, Chief Executive
Officer and Director(Principal Executive Officer)                                       |  | March 15, 2004
|/s/ AMIN I. KHALIFAAmin I. Khalifa               |  | Executive Vice President and
Chief Financial Officer(Principal Financial Officer and Principal Accounting Officer) |  | March 15, 2004
|/s/ RALPH V. WHITWORTHRalph V. Whitworth         |  | Director and Chairman of the Board                                                                                 |  | March 15, 2004
|/s/ VICENTE ANIDO, JR.Vicente Anido, Jr.         |  | Director                                                                                                           |  | March 15, 2004
|/s/ I.T. CORLEYI.T. Corley                       |  | Director                                                                                                           |  | March 15, 2004
|/s/ DAVID L. GOLDSMITHDavid L. Goldsmith         |  | Director                                                                                                           |  | March 15, 2004
|/s/ RICHARD H. KOPPESRichard H. Koppes           |  | Director                                                                                                           |  | March 15, 2004
|/s/ PHILIP R. LOCHNER, JR.Philip R. Lochner, Jr. |  | Director                                                                                                           |  | March 15, 2004
|/s/ JERI L. LOSEJeri L. Lose                     |  | Director                                                                                                           |  | March 15, 2004
|/s/ BEVERLY B. THOMASBeverly B. Thomas           |  | Director                                                                                                           |  | March 15, 2004

---

|Exhibit No. |  | EXHIBIT INDEXDescription                                                                                                                                                                                                                                         |  | Reference
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------
|
|3.1         |  | Restated Certificate of
Incorporation of Registrant.                                                                                                                                                                                                             |  | (c)      
|            |  |                                                                                                                                                                                                                                                                  |  |          
|3.2         |  | Certificate of Ownership
and Merger merging Apria Healthcare Group Inc. into Abbey and amending Abbeys
Restated Certificate of Incorporation to change Abbeys name to "Apria
Healthcare Group Inc."                                                            |  | (j)      
|            |  |                                                                                                                                                                                                                                                                  |  |          
|3.3         |  | Certificate of Amendment
of Certificate of Incorporation of Apria Healthcare Group Inc.                                                                                                                                                                          |  | (g)      
|            |  |                                                                                                                                                                                                                                                                  |  |          
|3.4         |  | Amended and Restated Bylaws
of Registrant, as amended on November 20, 2002.                                                                                                                                                                                      |  | (n)      
|            |  |                                                                                                                                                                                                                                                                  |  |          
|4.1         |  | Specimen Stock Certificate
of the Registrant.                                                                                                                                                                                                                    |  | (j)      
|            |  |                                                                                                                                                                                                                                                                  |  |          
|4.2         |  | Certificate of Designation of
the Registrant                                                                                                                                                                                                                     |  | (c)      
|            |  |                                                                                                                                                                                                                                                                  |  |          
|4.3         |  | Indenture dated August 20,
2003, between Apria Healthcare Group Inc. and U.S. Bank National Association,
as trustee, describing the Registrants issuance of 3.375% Convertible Senior
Notes due 2033.                                                           |  | (q)      
|            |  |                                                                                                                                                                                                                                                                  |  |          
|10.1        |  | 1991 Stock Option Plan                                                                                                                                                                                                                                           |  | (a)      
|            |  |                                                                                                                                                                                                                                                                  |  |          
|10.2        |  | Schedule of Registration
Procedures and Related Matters                                                                                                                                                                                                          |  | (b)      
|            |  |                                                                                                                                                                                                                                                                  |  |          
|10.3        |  | 401(k) Savings Plan, restated
effective October 1, 1993, amended December 28, 1994.                                                                                                                                                                              |  | (e)      
|            |  |                                                                                                                                                                                                                                                                  |  |          
|10.4        |  | Amendment Number Two to the
401(k) Savings Plan, dated June 27, 1995.                                                                                                                                                                                            |  | (n)      
|            |  |                                                                                                                                                                                                                                                                  |  |          
|10.5        |  | Apria/Homedco Stock Incentive
Plan, dated June 28, 1995.                                                                                                                                                                                                         |  | (d)      
|            |  |                                                                                                                                                                                                                                                                  |  |          
|10.6        |  | Amended and Restated 1992
Stock Incentive Plan.                                                                                                                                                                                                                  |  | (e)      
|            |  |                                                                                                                                                                                                                                                                  |  |          
|10.7        |  | Amendment Number Three to
the 401(k) Savings Plan, effective January 1, 1996.                                                                                                                                                                                    |  | (n)      
|            |  |                                                                                                                                                                                                                                                                  |  |          
|10.8        |  | Amendment 1996-1 to the
1991 Stock Option Plan, dated October 28, 1996.                                                                                                                                                                                          |  | (f)      
|            |  |                                                                                                                                                                                                                                                                  |  |          
|10.9        |  | Amendment 1996-1 to the
Amended and Restated 1992 Stock Incentive Plan, dated October 28, 1996.                                                                                                                                                                  |  | (f)      
|            |  |                                                                                                                                                                                                                                                                  |  |          
|10.10       |  | Amended and Restated 1997 Stock
Incentive Plan, dated February 27, 1997, as amended through June 30, 1998.                                                                                                                                                       |  | (f)      
|            |  |                                                                                                                                                                                                                                                                  |  |          
|10.11       |  | 1998 Nonqualified Stock
Incentive Plan, dated December 15, 1998                                                                                                                                                                                                  |  | (f)      
|            |  |                                                                                                                                                                                                                                                                  |  |          
|10.12       |  | Amendment No. 1 to the 1998
Nonqualified Stock Incentive Plan, dated January 31, 2001.                                                                                                                                                                           |  | (h)      
|            |  |                                                                                                                                                                                                                                                                  |  |          
|10.13       |  | Credit Agreement dated July
20, 2001, among Registrant and certain of its subsidiaries, Bank of America
National Association and other financial institutions party to the Credit
Agreement.                                                                     |  | (i)      
|            |  |                                                                                                                                                                                                                                                                  |  |          
|10.14       |  | Resignation and General Release
Agreement effective February 12, 2002, between Registrant and Philip L. Carter.                                                                                                                                                  |  | (j)      
|            |  |                                                                                                                                                                                                                                                                  |  |          
|10.15       |  | Amended and Restated Employment
Agreement effective February 12, 2002, between Registrant and Lawrence M. Higby.                                                                                                                                                 |  | (m)      
|            |  |                                                                                                                                                                                                                                                                  |  |          
|10.16       |  | Employment
Agreement effective April 4, 2002, between Registrant and Lawrence A. Mastrovich.                                                                                                                                                                     |  | (k)      
|            |  |                                                                                                                                                                                                                                                                  |  |          
|10.17       |  | Executive Severance Agreement
effective May 8, 2002, between Registrant and Anthony S. Domenico.                                                                                                                                                                 |  | (l)      
|            |  |                                                                                                                                                                                                                                                                  |  |          
|10.18       |  | Third Amended and Restated
Credit Agreement dated June 7, 2002, among Registrant and certain of its subsudiaries,
Bank of America National Association and other financial institutions party to the
Credit Agreement.                                           |  | (l)      
|            |  |                                                                                                                                                                                                                                                                  |  |          
|10.19       |  | International Swaps and
Derivatives Association, Inc. Master Agreement dated December 3, 2002, between
Registrant and Credit Lyonnais New York Branch.                                                                                                           |  | (n)      
|            |  |                                                                                                                                                                                                                                                                  |  |          
|10.20       |  | Schedule to the Master
Agreement dated December 3, 2002, between Registrant and Credit Lyonnais New
York Branch.                                                                                                                                                 |  | (n)      
|            |  |                                                                                                                                                                                                                                                                  |  |          
|10.21       |  | International Swaps and
Derivatives Association, Inc. Master Agreement dated December 3, 2002, between
Registrant and Bank of Nova Scotia.                                                                                                                       |  | (n)      
|            |  |                                                                                                                                                                                                                                                                  |  |          
|10.22       |  | Schedule to the Master
Agreement dated December 3, 2002, between Registrant and Bank of Nova Scotia.                                                                                                                                                             |  | (n)      
|            |  |                                                                                                                                                                                                                                                                  |  |          
|10.23       |  | Amendment to Executive
Severance Agreement dated March 18, 2003, between Registrant and Anthony S.
Domenico.                                                                                                                                                     |  | (n)      
|            |  |                                                                                                                                                                                                                                                                  |  |          
|10.24       |  | Form of Stock Ownership
Requirements Agreement, dated February 18, 2003, between Registrant and its
executive officers, and Exhibit A thereto, Stock Ownership Requirements for
Senior Executive Officers.                                                       |  | (o)      
|            |  |                                                                                                                                                                                                                                                                  |  |          
|10.25       |  | Apria Healthcare Group Inc.
2003 Performance Incentive Plan, dated July 17, 2003.                                                                                                                                                                                |  | (p)      
|            |  |                                                                                                                                                                                                                                                                  |  |          
|10.26       |  | First Amendment to Third
Amended and Restated Credit Agreement, dated August 13, 2003, between Apria
Healthcare Group Inc. and certain of its subsidiaries, Bank of America National
Association and other financial institutions party to the Credit Agreement. |  | (q)      
|            |  |                                                                                                                                                                                                                                                                  |  |          
|14.1        |  | Apria Healthcare Group Inc.
Code of Ethical Business Conduct.                                                                                                                                                                                                    |  |          
|            |  |                                                                                                                                                                                                                                                                  |  |          
|21.1        |  | List of Subsidiaries.                                                                                                                                                                                                                                            |  |          
|            |  |                                                                                                                                                                                                                                                                  |  |          
|23.1        |  | Consent of Deloitte & Touche
LLP, Independent Auditors.                                                                                                                                                                                                          |  |          
|            |  |                                                                                                                                                                                                                                                                  |  |          
|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 the Chief
Executive Officer pursuant to 18 U.S.C. Section 1350.                                                                                                                                                                                 |  |          
|            |  |                                                                                                                                                                                                                                                                  |  |          
|32.2        |  | Certification of the Chief
Financial Officer pursuant to 18 U.S.C. Section 1350.                                                                                                                                                                                 |  |          

---

|    |  | References  Documents filed with the
Securities and Exchange Commission                                                                    
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Incorporated by
reference to Registration Statement on Form S-1 (Registration No. 33-44690), as
filed on December 23, 1991.                 
|    |  |                                                                                                                                             
|(b) |  | Incorporated by
reference to Registration Statement on Form S-4 (Registration No. 33-69094), as
filed on September 17, 1993.                
|    |  |                                                                                                                                             
|(c) |  | Incorporated by
reference to Registration Statement on Form S-4 (Registration No. 33-90658), and
its appendices, as filed on March 27, 1995.
|    |  |                                                                                                                                             
|(d) |  | Incorporated by
reference to Registration Statement on Form S-8 (Registration No. 33-94026), as
filed on June 28, 1995.                     
|    |  |                                                                                                                                             
|(e) |  | Incorporated by
reference to Registration Statement on Form S-8 (Registration No. 33-80581), as
filed on December 19, 1995.                 
|    |  |                                                                                                                                             
|(f) |  | Incorporated by
reference to Annual Report on Form 10-K for the year ended December 31, 1998.                                               
|    |  |                                                                                                                                             
|(g) |  | Incorporated by
reference to Quarterly Report on Form 10-Q dated June 30, 1999, as
filed on August 12, 1999.                                
|    |  |                                                                                                                                             
|(h) |  | Incorporated by
reference to Annual Report on Form 10-K for the year ended December 31, 2000.                                               
|    |  |                                                                                                                                             
|(i) |  | Incorporated by
reference to Quarterly Report on Form 10-Q dated September 30, 2001, as
filed on November 14, 2001.                         
|    |  |                                                                                                                                             
|(j) |  | Incorporated by
reference to Annual Report on Form 10-K for the year ended December 31, 2001.                                               
|    |  |                                                                                                                                             
|(k) |  | Incorporated by
reference to Quarterly Report on Form 10-Q dated March 31, 2002, as
filed on May 15, 2002.                                  
|    |  |                                                                                                                                             
|(l) |  | Incorporated by
reference to Quarterly Report on Form 10-Q dated June 30, 2002, as
filed on August 14, 2002.                                
|    |  |                                                                                                                                             
|(m) |  | Incorporated by
reference to Quarterly Report on Form 10-Q dated September 30, 2002, as
filed on November 14, 2002.                         
|    |  |                                                                                                                                             
|(n) |  | Incorporated by
reference to Annual Report on Form 10-K for the year ended December 31, 2002.                                               
|    |  |                                                                                                                                             
|(o) |  | Incorporated by
reference to Quarterly Report on Form 10-Q dated March 31, 2003, as
filed on May 15, 2003.                                  
|    |  |                                                                                                                                             
|(p) |  | Incorporated by
reference to Quarterly Report on Form 10-Q dated June 30, 2003, as
filed on August 12, 2003.                                
|    |  |                                                                                                                                             
|(q) |  | Incorporated by
reference to Quarterly Report on Form 10-Q dated September 30, 2003, as
filed on November 14, 2003.