Edgar Filing: APRIA HEALTHCARE GROUP INC

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2000

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

Commission File No. 1-14316

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

DELAWARE 33-0488566
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification)

3560 HYLAND AVENUE 92626
COSTA MESA, CA (Zip Code)
(Address of principal executive offices)

Registrant's telephone number, including area code: (714) 427-2000

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

COMMON STOCK, $0.001 PAR VALUE PER SHARE
(Title of class)

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. [ ]

As of March 15, 2001, there were outstanding 53,516,556 shares of the
Registrant's common stock, par value $0.001, which is the only class of common
stock of the Registrant. As of February 28, 2001 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 $24.61 per share as reported by the New York
Stock Exchange, was approximately $1,036,026,267.

Documents Incorporated by Reference: None

PART I

ITEM 1. BUSINESS

General

Apria Healthcare Group Inc. provides comprehensive home healthcare services
through approximately 360 branch locations which 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, home ventilators,
sleep apnea equipment, nebulizers and respiratory
medications and related services

Home infusion therapy Administration of total parenteral or enteral
nutrition, anti-infectives, pain management,
chemotherapy and other medications and related
services

Home medical equipment Provision of patient room equipment, principally
hospital beds, wheelchairs, ambulatory and safety
aids

Apria was formed through the merger in 1995 of Homedco Group, Inc. into
Abbey Healthcare Group Incorporated. Abbey was incorporated in 1991 in the State
of Delaware.

BUSINESS STRATEGY

Apria adopted and began implementing the following strategic plan in
mid-1998. The strategy is aimed at maximizing profitability through five key
elements:

REMAIN IN CORE BUSINESSES, WITH INCREASED EMPHASIS ON HOME RESPIRATORY
THERAPY. Apria intends to remain in its core businesses of home respiratory
therapy, home infusion therapy and home medical equipment. However, Apria
expects to continue to increase the percentage of net revenues generated by
respiratory therapy with a corresponding reduction in the percentage of net
revenues generated by infusion therapy and home medical equipment. Net revenues
for home respiratory therapy, as percentages of total net revenues, were 65%,
64% and 59% for 2000, 1999 and 1998, respectively. Apria's home respiratory
therapy service line historically has produced higher gross margins than its
home infusion therapy and home medical equipment service lines.

EXPAND THROUGH INTERNAL GROWTH AND ACQUISITIONS. Apria intends to continue
to expand through internal growth and acquisitions in its target markets. In
2000 and 1999, Apria completed a number of acquisitions with aggregate
consideration of $27.3 million and $56.3 million, respectively. Apria plans to
continue to pursue acquisitions in 2001 subject to the availability of
attractive opportunities and limitations contained in Apria's credit agreement.
Apria also intends to continue to focus its internal growth primarily in the
home respiratory therapy service line.

IMPROVE APRIA'S CAPITAL STRUCTURE. Since November 1998, Apria has reduced
the amount owed on its credit agreement by $198 million. In addition to
scheduled amortization, Apria has reduced the outstanding amount in connection
with various amendments to the credit agreement and through other voluntary
prepayments.

Under the credit agreement, Apria is permitted to repurchase up to $50
million of its common stock (of which $1 million had been expended through
December 31, 2000) and may complete acquisitions with an aggregate purchase
price of up to $200 million (of which $52.5 million had been expended through
December 31, 2000).

A September 2000 amendment to the credit agreement extended the maturity
date to September 2002 and reduced the interest rate by 0.75%. Apria's $200
million 9 1/2% senior subordinated notes mature November 2002. Apria may need to
refinance all or a portion of its indebtedness on or before the respective
maturity dates. Apria will continue to pursue the optimal capital structure to
meet its business needs and to implement its strategy.

REDUCE COSTS IN CORPORATE AND FIELD OPERATIONS. Apria seeks to leverage
costs both at its corporate headquarters and in its field operations. In late
1998, Apria closed or consolidated a number of smaller branches, billing centers
and field support facilities and reduced labor costs at its corporate and field
locations. In late 1999, Apria completed the centralization, at the region
level, of its purchasing, patient service equipment repair and maintenance,
warehouse and oxygen transfill functions. Cost savings from this regional
centralization are being realized through improved efficiency and tighter
control over costs. Apria continues to focus resources on identifying and
implementing more cost-effective and efficient methods of delivering products
and services.

WITHDRAW FROM UNPROFITABLE COMPONENTS OF THE BUSINESS. During late 1998 and
early 1999 Apria exited the infusion therapy business in Texas, California,
Louisiana, West Virginia, western Pennsylvania and downstate New York. Apria
then reorganized its remaining infusion operations in 1999, realizing
improvement in profitability due to better contract structure and therapy mix.
Apria continues to evaluate the profitability of all its contracts, service
lines and locations.

Achieving Apria's objectives is subject to competitive and other factors
outside of Apria's control. See "Business - Risk Factors".

SERVICE LINES

Apria derives substantially all of its revenue from the home healthcare
segment of the healthcare market in three principal service lines: home
respiratory therapy, including home-delivered respiratory medications, home
infusion therapy and home medical equipment. In all three lines, Apria provides
patients with a variety of clinical services, related products and supplies,
most of which are prescribed by a physician as part of a care plan. These
services include:

- providing respiratory care, pharmacy services and high-tech infusion
nursing
- educating patients and their caregivers about illnesses and instructing
them on self-care and the proper use of products in the home
- monitoring patient compliance with individualized treatment plans
- reporting to the physician and/or managed care organization
- maintaining equipment
- processing claims to third-party payors

Apria provides numerous services directly to its patients, and purchases or
rents the products needed to complement the service.

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

Year Ended December 31,
-------------------------
2000 1999 1998
---- ---- ----

Respiratory therapy..................... 65% 64% 59%
Infusion therapy........................ 19% 19% 23%
Home medical equipment/other............ 16% 17% 18%
---- ---- ----
Total net revenues................. 100% 100% 100%
==== ==== ====

RESPIRATORY THERAPY. Apria provides home respiratory therapy services to
patients with a variety of conditions, including:

- chronic obstructive pulmonary disease ("COPD") such as emphysema,
chronic bronchitis and asthma
- nervous system-related respiratory conditions
- congestive heart failure
- lung cancer

Apria employs a clinical staff of respiratory care professionals to provide
support to its home respiratory therapy patients, according to
physician-directed treatment plans and a proprietary acuity program.

Approximately 61% of Apria's respiratory therapy revenues are derived from
the provision of oxygen systems, home ventilators and nebulizers, which are
devices to aerosolize medication. The remaining respiratory revenues are
generated from the provision of:

- apnea monitors used to monitor the vital signs of newborns
- continuous positive airway pressure devices used to control adult sleep
apnea
- noninvasive positive pressure ventilation
- other respiratory therapy products, including medications

Apria has developed a home respiratory medication service, which is
fulfilled through the Apria Pharmacy Network. Through the network, Apria offers
its patients in all 50 states physician-prescribed medications to accompany the
nebulizer through which they are administered. This comprehensive program offers
patients and payors a broad base of services from one source, including the home
delivery of medications in premixed unit dose form, pharmacy services, patient
education and claims processing.

INFUSION THERAPY. Home infusion therapy involves the administration of, and
24-hour access to:

- parenteral and enteral nutrition
- anti-infectives
- chemotherapy
- other intravenous and injectable medications

Depending on the therapy, a broad range of venous access devices and pump
technology may be used to facilitate homecare and patient independence. Apria
employs licensed pharmacists and registered high-tech infusion nurses who have
specialized skills in the delivery of home infusion therapy. Apria currently
operates 28 pharmacy locations to serve its home infusion patients.

In 1998, Apria performed a comprehensive review of its infusion therapy
business. By early 1999, Apria had substantially completed the process of
exiting the infusion service line in certain geographic areas where it was not
meeting acceptable profitability thresholds. Subsequently, Apria launched
standardization and other profitability improvement initiatives that resulted in
better inventory utilization, growth in higher margin business and increased
profitability.

HOME MEDICAL EQUIPMENT/OTHER. Apria's primary emphasis in the home medical
equipment service line is on the provision of patient room equipment,
principally hospital beds and wheelchairs. Apria's integrated service approach
allows patients 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 directly provide certain non-core services itself,
Apria aligns itself with other segment leaders, such as medical supply
distributors and home health nursing organizations, 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 360 branch locations are organized into
four geographic divisions, which are further divided into 15 geographic regions.
Each region 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, and equipment
maintenance, repair and warehousing. Each branch delivers home healthcare
products and services to patients in their homes and other care sites through
the branch's delivery fleet and qualified personnel. This structure is designed
to create operating efficiencies associated with centralized services while
promoting responsiveness to local market needs.

To manage its large regional network, Apria's organization is
vertically-integrated in the functional areas of sales and operations. The
operations function is then further divided along the functional lines of
revenue management and logistics. Through this structure, all functional areas
performed by the regional network have direct reporting and accountability to
corporate headquarters. Apria believes that this structure provides control and
consistency among its regions and branches and helps to develop standard
policies and procedures while eliminating many of the problems inherent with a
decentralized network.

CORPORATE COMPLIANCE. As a leader in the home healthcare industry, Apria
has made a 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 honesty and integrity is essential. Apria's
Corporate Compliance Program is designed to accomplish these goals through
employee education, a confidential disclosure program, written policy
guidelines, periodic reviews, compliance audits and other programs. See
"Business - Risk Factors - Federal Investigations".

OPERATING SYSTEMS AND CONTROLS. The company's business is dependent, to a
substantial degree, upon the quality of its operating and field information
systems for the establishment of accurate and profitable contract terms,
accurate order entry and pricing, billing and collections, and effective
monitoring and supervision. 1n 1998, following a period of difficulties
encountered in the conversion to a common system of the previously separate
operations of Abbey and Homedco, management performed an extensive evaluation of
its existing systems. A significant conclusion of that evaluation was that the
platform on which the respiratory/home medical equipment system operates is
adequate but the infusion billing system operates on an obsolete platform which
is no longer supported by the computer industry. To address this particular
risk, Apria commenced a project to add the functionality necessary to support
the infusion product line on the platform on which the respiratory/home medical
equipment system operates. With the analysis and design phases completed, the
project is currently in the development phase. Management expects to progress to
the quality assurance/testing phase in the second quarter of 2001. The 1998
systems evaluation also led to changes to the order entry, billing and accounts
receivable modules of the systems that were largely completed in 1999. Another
project currently underway is the installation of supply chain management
software to replace the inventory and purchasing modules of the current systems.
The software has been successfully installed in one of Apria's larger regions
and the rollout to the remainder of the company is in process. Management
believes that the implementation of these changes will substantially improve its
systems. Nonetheless, such implementations could have a disruptive effect on
related transaction processing. See "Business - Organization and Operations -
Receivables Management" and "Business - Risk Factors - Operating Systems and
Controls".

Apria has established performance indicators which measure operating
results against expected thresholds for the purpose of allowing all levels of
management to monitor, identify and adjust areas requiring improvement.
Operating models with strategic targets have been developed to move Apria toward
more effectively managing labor expenses and the customer service, accounts
receivable, clinical and distribution areas of its business. Apria's management
team is compensated using performance-based incentives focused on quality
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 2000, approximately 23% of Apria's net revenues were derived from
Medicare and 7% from Medicaid. Generally, each third-party payor has specific
claims requirements. 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.
Apria experienced serious difficulties in a number of areas relating to billing
and collection of accounts receivable subsequent to the merger of Abbey and
Homedco. The related facility consolidations, system conversions and high
employee turnover had a disruptive effect on the processes of order taking,
product identification, billing and collections. This ultimately led to a high
level of accounts receivable write-offs. See "Business - Risk Factors - Federal
Investigations".

Management addressed the issues through a number of initiatives such as
system enhancements, process refinements and organizational changes. By 1999,
the effects of the merger-related problems had largely subsided as evidenced by
the improvement in key accounts receivable indicators throughout 1999 and 2000.
Days sales outstanding have been 56 days or fewer for each of the last nine
quarters, compared to a range of 87 to 111 days during 1996 and 1997. At
December 31, 2000, Apria's days sales outstanding were 51 days.

MARKETING

Through its field sales force, Apria markets its services primarily to
managed care organizations, physicians, hospitals, medical groups and home
health agencies and case managers. The following sample marketing initiatives
address the requirements of the company's referral sources:

AUTOMATED CALL ROUTING THROUGH A SINGLE TOLL-FREE NUMBER. This 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. The Joint Commission on Accreditation of Healthcare Organizations
("JCAHO") is a nationally recognized organization which 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 which is
conducted every three years. Accreditation is increasingly being 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 is viewed favorably by referring healthcare
professionals. All of Apria's branch locations are accredited by or in the
process of receiving accreditation from JCAHO. Apria's triennial survey cycle
began in late 1999 and is anticipated to be concluded in the fall of 2001.

CLINICAL MANAGEMENT SERVICES. As more alternate site healthcare is managed
and directed by various managed care organizations, new methods and systems are
sought to simultaneously control costs and improve outcomes. Apria has developed
a series of programs designed to proactively manage patients in conjunction with
a managed care partner and the patient's physician in an alternate site setting.
These services may include:

- patient and/or environmental assessments
- screening/diagnostics
- patient education
- clinical monitoring
- pharmacological management
- utilization and outcome reporting

PHYSICIAN RELATIONS. Apria's physician relations group places phone calls
to physician offices in an effort to increase and enhance awareness of Apria's
services 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. Apria has a centralized patient satisfaction survey
function. Prior to centralization, Apria relied on its distributed branch
network to mail surveys to and receive responses from its discharged patients.
Centralization of the function ensures the validity of the sampling methodology
and has served to increase the survey response rate from approximately 4% to a
more statistically-meaningful 33%. The program also meets JCAHO's new
requirements for outcome data. Targeted member satisfaction studies for key
managed care organizations are also conducted periodically.

APRIA GREAT ESCAPES(TM) TRAVEL PROGRAM. Apria's 360-branch network
facilitates travel for patients who require oxygen or other therapies. The
company coordinates equipment and service needs for thousands of patients
annually, which enhances their mobility and quality of life.

SALES

Apria employs approximately 434 sales professionals whose primary
responsibility is to target key customers for all service lines. Key customers
include but are not limited to hospital-based healthcare professionals,
physicians and their staffs, and managed care organizations. Sales professionals
are afforded 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 referral channels. As
the markets that Apria serves continue to evolve, 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 driven largely
by these 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 2000. Among its more significant managed care agreements, the
company has contracts with Aetna/U.S. Healthcare/Prudential National, Gentiva
Network Management, Kaiser Health Plans and United Healthcare. 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".

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
- access and responsiveness
- price of services
- overall ease of doing business
- quality of care and service
- range of home healthcare services

The competitive factors most important in the larger, national markets are the
foregoing factors and:

- wide geographic coverage
- ability to develop and maintain contractual relationships with managed
care organizations
- access to capital

It is increasingly important to be able to integrate a broad range of home
healthcare services to provide customers access through a single source. 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 and home infusion therapy as reflected by
the JCAHO accreditation of its branches.

Other types of healthcare providers, including hospitals, home health
agencies and health maintenance organizations have entered, and may continue to
enter, Apria's various service lines. Depending on their individual situations,
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. See
"Business - Risk Factors - Federal Investigations".

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 such as persons over 65 and the disabled. 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 2000, approximately 23% of Apria's net
revenue was derived from Medicare and 7% from Medicaid.

Medicare Legislation. In December 2000, federal legislators enacted the
Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act of 2000.
Among other items, this legislation provides the home healthcare industry with
some relief from the effects of the Balanced Budget Act of 1997, which contained
a number of provisions that are affecting, or could potentially affect, Medicare
reimbursement levels to Apria. The Medicare Balanced Budget Refinement Act of
1999 also mitigated some of the effects of the Balanced Budget Act of 1997.

The Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act of
2000 provides reinstatement in 2001 of the full annual cost of living adjustment
(based on the Consumer Price Index) for certain durable medical equipment. The
Balanced Budget Act of 1997 had frozen this adjustment for each of the years
1998 through 2002.

During 2000, the Secretary of the U.S. Department of Health and Human
Services wrote to the durable medical equipment regional carriers and
recommended, but did not mandate, that Medicare claims processors base their
payments for covered outpatient drugs and biologicals on pricing schedules other
than the Average Wholesale Price listing, which historically has been the
industry's basis for drug reimbursement. The suggested alternative pricing
methodology was offered in an effort to reduce reimbursement levels for certain
drugs to more closely approximate a provider's acquisition cost, but it would
not have covered the costs of preparing, delivering or administering the drugs
to the patients. Under current reimbursement schedules, these costs are
implicitly covered in the reimbursement for the drug cost. The healthcare
industry has taken issue with the U.S. Department of Health and Human Services'
approach for several reasons, primarily because it fails to consider the
accompanying costs of delivering and administering these types of drug
therapies. Further, if providers choose to discontinue providing these drugs due
to inadequate reimbursement, patient access may be jeopardized. The Medicare,
Medicaid and SCHIP Benefits Improvement and Protection Act of 2000 delayed the
adoption of proposed drug price changes and directed the General Accounting
Office to conduct a thorough study, by September 2001, to examine the adequacy
of current payments and to recommend revised payment methodologies. In addition,
some states have adopted or are contemplating adopting some form of the proposed
alternate pricing methodology for certain drugs and biologicals under the
Medicaid program. These changes may reduce the level of reimbursement received
by Apria and may ultimately cause Apria to stop participating in the Medicaid
program in one or more states.

The Balanced Budget Act of 1997 granted authority to the Secretary of
Health and Human Services to increase or reduce the reimbursement for home
medical equipment, including oxygen, by 15% each year under an inherent
reasonableness procedure. However, under the provisions of the Medicare Balanced
Budget Refinement Act of 1999, reimbursement reductions proposed under the
inherent reasonableness procedure have been delayed pending (1) a study by the
General Accounting Office (completed July 2000) to examine the use of the
authority granted under this procedure, and (2) promulgation by the Health Care
Financing Administration of a final rule implementing the inherent
reasonableness authority.

Further, the Balanced Budget Act of 1997 mandated that the Health Care
Financing Administration conduct competitive bidding demonstrations for Medicare
Part B items and services. The first demonstration commenced October 1999 in
Polk County, Florida. The second demonstration commenced January 2001 in the San
Antonio, Texas area and covers the counties of Bexar, Comal and Guadalupe. The
competitive bidding demonstrations could provide the Health Care Financing
Administration and Congress with a model for implementing competitive pricing in
all Medicare programs. If such a competitive bidding system were implemented, it
could result in lower reimbursement rates, exclude certain items and services
from coverage or impose limits on increases in reimbursement rates.

Claims Audits. Durable medical equipment regional carriers are private
organizations that contract to serve as the 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 Investigations" and
"Business - Risk Factors - Medicare Reimbursement Rates".

THE 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 (sometimes referred to 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, home health services and parenteral and
enteral nutrition. 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. On January 4, 2001, the Health Care Financing
Administration issued the first of two phases of final regulations to clarify
the meaning and application of Stark II. The Health Care Financing
Administration has not stated when Phase II will be issued, however, 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 Phase I of the final regulations has
been delayed for one year until January 4, 2002. In the interim, the current
statute and the regulations issued in 1995 for the predecessor law, Stark I,
will remain in effect. 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 tam suit, 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 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, at least five states - California, Illinois, Florida, Tennessee, and
Texas - 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 Investigations".

OTHER FRAUD AND ABUSE LAWS. The Health Insurance Portability and
Accountability Act of 1996 created in part, two new federal crimes: "Health Care
Fraud" and "False Statements Relating to Health Care Matters." The Health Care
Fraud statute prohibits knowingly and willfully executing a 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.

Recently, 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.

INTERNAL CONTROLS. Apria maintains several programs designed to minimize
the likelihood that Apria would engage in conduct or enter into contracts
violative of the fraud and abuse laws. Contracts of the types subject to these
laws are reviewed and approved by the corporate contract services and/or legal
departments. 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 remind all employees of Apria's 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
judicial interpretations of existing laws or legislative enactment of new laws
will not have a material adverse effect on Apria's business. See "Business -
Risk Factors - Federal Investigations".

HEALTHCARE REFORM LEGISLATION. Economic, political and regulatory
influences are subjecting the healthcare industry in the United States to
fundamental change. Healthcare reform proposals have been formulated by the
legislative and administrative branches of the federal government. In addition,
some of the states in which Apria operates periodically consider various
healthcare reform proposals. Apria anticipates that federal and state government
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 15, 2001, Apria had 9,172 employees, of which 7,988 were
full-time and 1,184 were part-time. The company's employees are not currently
represented by a labor union or other labor organization, except for
approximately 24 and 48 employees in the states of New York and New Mexico,
respectively.

In February 2001, Apria's full-time equivalents in the functional areas of
sales, operations and administration totaled 432, 7,334 and 914, respectively.
Full-time equivalents are computed by dividing the actual number of hours worked
in a given period by the "normal" number of hours for that period based on a
40-hour week.

EXECUTIVE OFFICERS OF THE REGISTRANT

Set forth below are the names, ages, titles with Apria and present and past positions of the persons serving as executive
officers of Apria as of March 20, 2001:

NAME AND AGE OFFICE AND EXPERIENCE
------------ ---------------------

Philip L. Carter, 52............ Chief Executive Officer and Director. Mr. Carter has been Chief Executive Officer and a
Director of Apria since May 1998. Prior to joining Apria, Mr. Carter was President and
Chief Executive Officer of Mac Frugal's Bargains o Close-Outs Inc., a chain of retail
discount stores, since 1995.

Lawrence M. Higby, 55........... President and Chief Operating Officer. Mr. Higby 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.

Michael R. Dobbs, 51 ........... Executive Vice President, Logistics. Mr. Dobbs was promoted to Executive Vice President,
Logistics in January 1999. He served as Senior Vice President, Logistics from June 1998
to January 1999. Prior to joining Apria, Mr. Dobbs served as Senior Vice President of
Distribution for Mac Frugal's Bargains o Close-Outs Inc. from 1991 to January 1998.

John C. Maney, 41 .............. Executive Vice President and Chief Financial Officer. Mr. Maney has been Executive Vice
President and Chief Financial Officer since joining Apria in November 1998. Prior to
joining Apria, Mr. Maney was employed by Arthur Andersen LLP since 1992 and was a partner
of such firm from 1995 to 1998.

Lawrence A. Mastrovich, 39 ..... Executive Vice President, Revenue Management. Mr. Mastrovich was promoted to Executive
Vice President, Revenue Management in October 1998. He served as Division Vice President,
Operations of the Northeast Division from December 1997 to October 1998. Prior to that
time he had served as a Regional Vice President for Apria and Homedco since 1994 and in
various other capacities from 1987 to 1994.

George J. Suda, 42 ............. Executive Vice President, Information Services. Mr. Suda was promoted to Executive Vice
President, Information Systems in March 2000. Prior to this he served as Senior Vice
President, Information Systems since July 1998, as Vice President, Information Services
Technology from June 1997 to July 1998 and as Director, Technology from January 1997 to
June 1997. From July 1994 to January 1997, Mr. Suda was a self-employed information
services consultant, providing services to Abbey and Apria.

Dennis E. Walsh, 51............. Executive Vice President, Sales. Mr. Walsh was promoted to Executive Vice President, Sales
in January 1998. Mr. Walsh served as Senior Vice President, Western Zone from March 1997 to
January 1998. From June 1995 to March 1997, he served as Senior Vice President, Sales and
Marketing. He served as Vice President, Sales of Homedco from November 1987 to June 1995.

RISK FACTORS

This report contains forward-looking statements, which are subject to
numerous factors (many of which are beyond the company's control) which could
cause actual results to differ materially from those in the forward-looking
statements. Such forward-looking statements include, but are not limited to,
statements as to anticipated future results, developments and occurrences set
forth or implied:

- under the caption Business - Business Strategy" and elsewhere in this
report as to measures being undertaken to improve profitability, and
plans for the future
- under the caption "Business - Organization and Operations - Operating
Systems and Controls"
- under the caption "Business - Organization and Operations - Receivables
Management"
- under the caption "Business - Government Regulation - Medicare and
Medicaid Reimbursement"
- under the caption "Business - Government Regulation - Internal Controls"
- under the caption "Legal Proceedings" and elsewhere in this report
concerning the outcome of pending legal proceedings
- under the caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations"
- under the caption "Quantitative and Qualitative Disclosures about Market
Risk"
- under the caption "Notes to Consolidated Financial Statements - Notes 1,
7 and 11"

Apria has identified below 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 OR IMPROVE
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 RESULTS OF OPERATIONS AND FINANCIAL CONDITION.

Apria had experienced high levels of accounts receivable write-offs
subsequent to the 1995 Abbey/Homedco merger caused by the disruptive effects of
system conversions and process changes. In 1999 and 2000, accounts receivable
write-offs decreased significantly from the levels experienced in 1996, 1997 and
1998. Additionally, days sales outstanding have been 56 days or fewer for each
of the last nine quarters, compared to a range of 87 to 111 days during 1996 and
1997. Despite these improvements, collection of accounts receivable remains one
of Apria's biggest challenges, requiring constant focus and involvement by
senior management and ongoing enhancements to information systems and billing
center operating procedures. Further, some of Apria's payors 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, results will be adversely affected. See "Business - Organization and
Operations - Receivables Management" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources".

MEDICARE REIMBURSEMENT RATES - CONTINUED REDUCTIONS IN MEDICARE REIMBURSEMENT
RATES COULD HAVE A MATERIAL ADVERSE EFFECT ON RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.

Pursuant to the provisions of the Balanced Budget Act of 1997, the Medicare
reimbursement rates for home oxygen therapy and respiratory drugs were reduced
by 25% and 5%, respectively, effective January 1, 1998. An additional
reimbursement reduction of 5% on home oxygen therapy was effective on January 1,
1999. Also included in the Balanced Budget Act of 1997 was a freeze on Consumer
Price Index-based reimbursement rate increases for 1998 through 2002 as well as
other provisions which may impact reimbursement rates in the future. The
Medicare Balanced Budget Refinement Act of 1999 and the Medicare, Medicaid and
SCHIP Benefits Improvement and Protection Act of 2000 provide some relief from
the Consumer Price Index-based reimbursement rate freeze and other provisions
contained in the Balanced Budget Act of 1997. However, there can be no assurance
that further reimbursement reductions will not be made. See "Business -
Government Regulation - Medicare and Medicaid Reimbursement."

FEDERAL INVESTIGATIONS - THE OUTCOME OF THE FEDERAL GOVERNMENT'S INVESTIGATIONS
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 received a number of subpoenas and document
requests from U.S. Attorneys' offices and from the U.S. Department of Health and
Human Services. The subpoenas and requests generally ask for documents, such as
patient files, billing records and other documents relating to billing
practices, related to the company's patients whose healthcare costs are paid by
Medicare and other federal programs. Apria is cooperating with the government in
connection with these investigations and is responding to the document requests
and subpoenas. In July 1999 the company received notification that the U.S.
Attorney's office in Sacramento closed its criminal investigation file relating
to eight subpoenas that had been issued by that office.

In February 2001 the company was informed by the U.S. Attorney's office in
Los Angeles that the billing investigation being conducted by that office is the
result of qui tam litigation filed on behalf of the government against the
company, and that the government is investigating certain allegations for the
purpose of determining whether it will intervene in that litigation. The
complaints in the litigation are under seal, however, and the government has not
informed the company of either the identity of the court or courts where the
proceedings are pending, the date or dates instituted, the identity of the
plaintiffs, the factual bases alleged to underlie the proceedings, or the relief
sought.

Apria has acknowledged that there may be errors and omissions in supporting
documentation affecting a portion of its billings. If a judge, jury or
administrative agency were to determine that such errors and omissions resulted
in the submission of false claims to federal healthcare programs or 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
exclusion of Apria from participation in federal healthcare programs. Apria
believes that the company would be in a position to assert numerous meritorious
defenses in the event that the qui tam litigation proceeds or any other claims
are asserted. However, no assurance can be provided as to the outcome of this
litigation or whether any other claims will be asserted or as to the outcome of
any other possible proceedings that may result from any such other claims.

OPERATING SYSTEMS AND CONTROLS - APRIA'S IMPLEMENTATION OF SIGNIFICANT SYSTEM
MODIFICATIONS COULD HAVE A DISRUPTIVE EFFECT ON RELATED TRANSACTION PROCESSING
AND COULD ULTIMATELY HAVE A SIGNIFICANT NEGATIVE IMPACT ON RESULTS OF OPERATIONS
AND FINANCIAL CONDITION.

In 1998, following a period of difficulties encountered in the conversion
to a common system of the previously separate operations of Abbey and Homedco,
management performed an extensive evaluation of its existing systems. A
significant conclusion of that evaluation was that the platform on which the
respiratory/home medical equipment system operates is adequate but the infusion
billing system operates on an obsolete platform which is no longer supported by
the computer industry. To address this particular risk, Apria commenced a
project to add the functionality necessary to support the infusion product line
on the platform on which the respiratory/home medical equipment system operates.
With the analysis and design phases completed, the project is currently in the
development phase. Another project currently underway is the installation of
supply chain management software to replace the inventory and purchasing modules
of the current systems. The software has been successfully installed in one of
Apria's larger regions and the rollout to the remainder of the company is in
process. There can be no assurance that the system modifications will resolve
the difficulties experienced in prior periods and the implementation of these
system changes could have a disruptive effect on related transaction processing.
See "Business - Organization and Operations - Operating Systems and Controls".

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.

Apria is subject to stringent laws and regulations at both the federal and
state levels, requiring compliance with burdensome and complex billing,
substantiation and record-keeping requirements. Financial relationships between
Apria and physicians and other referral sources are subject to strict and
ambiguous limitations. In addition, the provision of services, pharmaceuticals
and equipment are subject to strict licensing and safety requirements.
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. See "Business - Government Regulation".

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 buyer 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 2001. Certain competitors of Apria may have or
may obtain significantly greater financial and marketing resources than Apria.
In addition, relatively few barriers to entry exist in local home healthcare
markets. As a result, Apria could encounter increased competition in the future
that may increase pricing pressure and limit its ability to maintain or increase
its market share. See "Business - Sales" and "Business - Competition".

ACQUISITION STRATEGY - APRIA MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE ACQUIRED
BUSINESSES WHICH COULD HAVE AN ADVERSE EFFECT ON RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.

The process of integrating newly acquired businesses may be costly and
disruptive. Cash collections on the newly acquired business could be delayed
pending conversion of patient files onto Apria's billing systems and receipt of
provider numbers from government payors. If Apria is not successful in
integrating acquired businesses, results will be adversely affected. See
"Business - Business Strategy".

ITEM 2. PROPERTIES

Apria's headquarters are located in Costa Mesa, California and consist of
approximately 112,000 square feet of office space. The lease expires in 2001.
Apria has signed a lease to relocate its headquarters to Lake Forest, California
which will consist of approximately 100,000 square feet of office space. The new
lease expires in 2011.

Apria has approximately 360 branch facilities serving patients in all 50
states. These branch facilities are typically located in light industrial areas
and average approximately 10,500 square feet. The typical facility is a
combination warehouse and office, with approximately 50% of the square footage
consisting of warehouse space. Apria leases substantially all of its facilities
with lease terms of ten years or less.

ITEM 3. LEGAL PROCEEDINGS

Apria and certain of its present and former officers and/or directors are
defendants in a class action lawsuit, In Re Apria Healthcare Group Securities
Litigation, filed in the U.S. District Court for the Central District of
California, Southern Division (Case No. SACV98-217 GLT). This case is a
consolidation of three similar class actions filed in March and April, 1998.
Pursuant to a court order dated May 27, 1998, the plaintiffs in the original
three class actions filed a Consolidated Amended Class Action Complaint on
August 6, 1998. The amended complaint purports to establish a class of plaintiff
shareholders who purchased Apria's common stock between May 22, 1995 and January
20, 1998. No class has been certified at this time. The amended complaint
alleges, among other things, that the defendants made false and/or misleading
public statements regarding Apria and its financial condition in violation of
federal securities laws. The amended complaint seeks compensatory and punitive
damages as well as other relief.

Two similar class actions were filed during July, 1998 in the Superior
Court for the State of California for the County of Orange: Schall v. Apria
Healthcare Group Inc., et al. (Case No. 797060) and Thompson v. Apria Healthcare
Group Inc., et al. (Case No. 797580). These two actions were consolidated by a
court order dated October 22, 1998 (Master Case No. 797060). On June 14, 1999,
the plaintiffs filed a Consolidated Amended Class Action Complaint asserting
claims founded on state law and on Sections 11 and 12(2) of the 1933 Securities
Act.

Apria believes that it has meritorious defenses to the plaintiffs' claims,
and it intends to vigorously defend itself in both the federal and state cases.
In the opinion of Apria's management, the ultimate disposition of these class
actions will not have a material adverse effect on the company's results of
operations or financial condition.

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 the company'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, 2000
----------------------------
First Quarter $22.0000 $12.6250
Second Quarter 16.3750 10.5000
Third Quarter 16.2500 11.2500
Fourth Quarter 30.6250 14.0000

YEAR ENDED DECEMBER 31, 1999
----------------------------
First Quarter $12.0000 $ 7.1250
Second Quarter 22.0625 11.5000
Third Quarter 20.5000 12.5625
Fourth Quarter 18.0000 12.3125

As of March 15, 2001 there were 690 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. In addition,
Apria has a credit agreement which prohibits the payment of dividends.

ITEM 6. SELECTED FINANCIAL DATA

The following table presents selected financial data of Apria for the five
years ended December 31, 2000. The data set forth below have been derived from
the audited Consolidated Financial Statements of Apria 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,
---------------------------------------------------------------
2000 1999(1) 1998(2,3) 1997(2,4) 1996(2,5)
---- ------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENTS OF OPERATIONS DATA:

Net revenues ...................................... $1,014,201 $ 940,024 $ 933,793 $1,180,694 $1,181,143
Net income (loss) ................................. 57,006 204,135 (207,938) (272,608) 33,300

Per share amounts:
Basic income (loss) per common share .......... $ 1.09 $ 3.93 $ (4.02) $ (5.30) $ 0.66
Diluted income (loss) per common share ........ $ 1.06 $ 3.81 $ (4.02) $ (5.30) $ 0.64

BALANCE SHEET DATA:

Total assets ...................................... $ 616,603 $ 631,996 $ 496,598 $ 757,170 $1,149,110
Long-term obligations, including current maturities 339,749 417,729 488,586 548,905 634,864
Stockholders' equity (deficit) .................... 146,242 75,469 (131,657) 74,467 342,935

(1) As described in Item 7 and in Note 7 to the Consolidated Financial
Statements, net income for 1999 reflects an income tax benefit of $131
million that was primarily attributable to the release of the company's
valuation allowance in the fourth quarter of 1999.

(2) As described in Item 7, Apria recorded a charge of $22.7 million in 1998 to
increase the allowance for doubtful accounts for changes in collection
policies and in conjunction with certain portions of the business from
which the company exited. Apria recorded charges of $61.4 million and $9
million in 1997 and 1996, respectively, to increase the allowance for
doubtful accounts. These charges were due primarily to the residual effects
of the 1995 and 1996 facility consolidations and system conversions
effected in conjunction with the 1995 Abbey/Homedco merger.

(3) As described in Item 7 and in Notes 3 and 4 to the Consolidated Financial
Statements, the operations data for 1998 include impairment charges of
$76.2 million to write down the carrying values of intangible assets and
$22.2 million to write-off information systems hardware,
internally-developed software and assets associated with the exit of
portions of the business.

(4) The operations data for 1997 include significant adjustments and charges to
write down the carrying values of intangible assets and information systems
hardware and internally-developed software of $133.5 million and $26.8
million, respectively, to increase the valuation allowance on deferred tax
assets by $30 million, and to provide for estimated shortages related to
patient service assets inventory of $33.1 million.

(5) The per share amounts prior to 1997 have been restated as required to
comply with Statement of Financial Accounting Standards No. 128, Earnings
per Share.

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 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 its
approximately 360 branch locations. Management measures operating results on a
geographic basis and, therefore, views each branch as an operating segment. All
the branches provide the same services, except that infusion services are not
offered in all the geographic markets in which the company operates. For
financial reporting purposes, all the company's operating segments are
aggregated into one reportable segment.

BACKGROUND. The following strategic initiatives, adopted in July 1998, were
designed to improve the company's performance. The key elements of the strategy
were to: (1) remain in the core businesses, with an increased emphasis on
respiratory therapy, (2) withdraw from unprofitable components of the business,
(3) institute a comprehensive cost reduction and capital conservation program,
(4) pursue expansion through internal growth and acquisitions, and (5) improve
the capital structure of the company. Significant actions taken by management in
1998 included the sale of the California component of the infusion therapy
service line ("the infusion sale"), the exit of the infusion therapy service
line in Texas, Louisiana, West Virginia, western Pennsylvania and downstate New
York and the consolidation or closure of certain small branch locations
throughout the United States. Other significant actions taken in 1998 included
the termination of plans to proceed with the capital-intensive implementation of
an enterprise resource planning system, a significant reduction of corporate and
regional labor and general administrative costs and the development of a
comprehensive plan to capture cost savings in the areas of purchasing,
distribution and inventory management. Amendments to Apria's credit agreement
effected in 1999 and 2000 resulted in, among other items, the ability to
complete up to $200 million in acquisitions and repurchase up to $50 million of
Apria's common stock. Further, Apria has made significant prepayments against
its bank loans to reduce long-term debt.

RESULTS OF OPERATIONS

NET REVENUES. Net revenues increased to $1 billion in 2000 from $940
million in 1999. The increase in net revenues is due to volume increases, new
contracts with regional and national payors, the acquisition of complementary
businesses and price increases in certain managed care agreements. The increase
in revenues in 1999 when compared to 1998 was due largely to the same sources.
The 1999 increase was partially offset by revenues lost in the third quarter
1998 exit from the infusion therapy service line in selected areas, the 5%
reduction in Medicare reimbursement rates in 1999 for home oxygen therapy, and
the exit from contractual arrangements that were not meeting minimum
profitability standards.

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

YEAR ENDED DECEMBER 31,
-------------------------------
2000 1999 1998
---- ---- ----
(IN MILLIONS)

Respiratory therapy................. $ 656 $ 599 $ 553
Infusion therapy.................... 194 179 211
Home medical equipment/other........ 164 162 170
------- ------- -------
Total net revenues............ $ 1,014 $ 940 $ 934
======= ======= =======

Respiratory Therapy. The respiratory therapy service line increased in 2000
by 9.5% when compared to 1999 and increased 8.3% in 1999 when compared to 1998.
These increases were largely due to a sales focus on the higher-margin
respiratory service line and the impact of acquisitions consummated in 2000 and
1999. See "Liquidity and Capital Resources - Business Combinations and
Dispositions".

Effective January 1, 1998, the Medicare reimbursement rates for home oxygen
therapy and respiratory drugs were reduced by 25% and 5%, respectively. This
reduction, which was pursuant to the provisions of the Balanced Budget Act of
1997, was followed by an additional 5% reduction in reimbursement rates for home
oxygen therapy in 1999. The estimated decrease in 1999 and 1998 revenues and
operating income resulting from these reimbursement reductions was approximately
$10 million and $57 million, respectively. The Balanced Budget Act of 1997 also
froze Consumer Price Index-based increases for Medicare-reimbursed respiratory
therapy services beginning in 1998.

Infusion Therapy. Infusion therapy revenues increased 8.4% in 2000 as
compared to 1999, largely due to volume increases. The decrease in infusion
therapy revenues in 1999 as compared to 1998 was directly attributable to the
exit of the infusion service line in selected areas that represented
approximately $40 million in annual revenues. The infusion line in 1999 was also
impacted by the termination of low-margin contracts. These decreases were offset
somewhat by growth in the remaining geographic areas in which Apria engages in
the infusion business.

Home Medical Equipment/Other. Home medical equipment/other revenues
increased by 1.2% in 2000 from 1999 levels. This service line increased only
nominally because the sales focus was placed on the higher-margin respiratory
therapy service line.

Home medical equipment/other revenues decreased by 4.7% in 1999 when
compared to 1998. The decrease was primarily attributable to the sales focus on
the higher-margin respiratory therapy service line, the termination of
low-profit contracts and to, a lesser extent, decreases in the medical supply
and nursing lines that Apria began exiting in late 1997.

The Consumer Price Index-based Medicare reimbursement rates for home
medical equipment/other were also frozen by the Balanced Budget Act of 1997
beginning in 1998.

Use of Estimates in Recording Net Revenues. Substantially all of Apria's
revenues are reimbursed by third party payors, including Medicare, Medicaid and
managed care organizations. Due to the nature of the industry and the
reimbursement environment in which Apria operates, certain estimates are
required in recording net revenues. Inherent in these estimates is the risk that
they will have to be revised or updated as additional information becomes
available.

Medicare Reimbursement Update. Some relief to the freeze on Consumer Price
Index-based reimbursement increases, that was enacted by the Balanced Budget Act
of 1997, was provided through the Medicare Balanced Budget Refinement Act of
1999 with limited reimbursement increases in 2001 and 2002. The Medicare,
Medicaid and SCHIP Benefits Improvement and Protection Act of 2000 provides
reinstatement of the full Consumer Price Index-based reimbursement increase in
2001 for certain durable medical equipment.

During 2000, the Secretary of the U.S. Department of Health and Human
Services wrote to the durable medical equipment regional carriers and
recommended, but did not mandate, that Medicare claims processors base their
payments for covered outpatient drugs and biologicals on pricing schedules other
than the Average Wholesale Price listing, which historically has been the
industry's basis for drug reimbursement. The suggested alternative pricing
methodology was offered in an effort to reduce reimbursement levels for certain
drugs to more closely approximate a provider's acquisition cost, but it would
not have covered the costs of preparing, delivering or administering the drugs
to the patients. Under current reimbursement schedules, these costs are
implicitly covered in the reimbursement for the drug cost. The healthcare
industry has taken issue with the U.S. Department of Health and Human Services'
approach for several reasons, primarily because it fails to consider the
accompanying costs of delivering and administering these types of drug
therapies. Further, if providers choose to discontinue providing these drugs due
to inadequate reimbursement, patient access may be jeopardized. The Medicare,
Medicaid and SCHIP Benefits Improvement and Protection Act of 2000 also delayed
the adoption of proposed drug price changes and directed the General Accounting
Office to conduct a thorough study, by September 2001, to examine the adequacy
of current payments and to recommend revised payment methodologies.

GROSS PROFIT. Gross margins were 72.5% in 2000, 71.5% in 1999 and 64.6% in
1998. Much of the increase in 2000 and in 1999 was attributable to improved
pricing negotiated for purchases of inventory, patient service equipment and
related goods. Also contributing to the gross profit improvement in both years
were increases in the share of higher-margin respiratory revenues to total net
revenues. Further, during 1999, management implemented standardization
initiatives and optimal operating models intended to achieve cost savings and
operational efficiencies in the functional areas of purchasing and supply
management and inventory management. The gross margin in 2000 reflected a full
year's benefit of the related cost savings. Also, the exit from low-profit
service lines and contracts that commenced in late 1997 and continued throughout
1998 contributed to the gross margin improvement in 2000 and 1999.

Gross margins in 1998 were impacted by the following charges recorded at
September 30, 1998: $5.4 million to settle certain procurement contracts, $3.5
million to provide for oxygen cylinder losses, $2.8 million to provide for
losses and obsolescence in inventory and patient service equipment and $3.5
million related to the exit of the infusion service line in selected markets.

PROVISION FOR DOUBTFUL ACCOUNTS. The provision for doubtful accounts as a
percentage of net revenues was 3.2%, 3.7% and 8.1% in 2000, 1999 and 1998,
respectively. The decrease in 2000 when compared to 1999 was primarily due to
continued improvement in the aging of accounts receivable and increased cash
collections. The decrease in the 1999 provision rate versus the 1998 rate was
largely attributable to an improvement in the aging of accounts receivable which
management believes was due to process and system improvements implemented in
the preceding years. See "Liquidity and Capital Resources - Accounts
Receivable".

The 1998 provision for doubtful accounts included: $12.1 million to
increase the allowance for doubtful accounts due to a change in management's
collection policy, $1.5 million for specific uncollectible accounts and $9.1
million to increase the allowance for doubtful accounts on accounts receivable
associated with the infusion sale and other business closures.

SELLING, DISTRIBUTION AND ADMINISTRATIVE. Selling, distribution and
administrative expenses, expressed as percentages of net revenues, were 54.7%
for 2000 and 1999, down from 61.6% in 1998. This improvement over 1998 was
largely attributable to the realization of savings from various cost reduction
measures that were effected during 1998, such as labor force reductions and
facility consolidations. Further, standardization initiatives implemented in
1999 in the functional areas of vehicle fleet and delivery management also
improved the selling, distribution and administrative line.

Also contributing to the relatively high level of expenses in 1998 were the
following charges recorded in the third quarter of 1998: $3.8 million loss on
the infusion sale, $1.8 million to record certain costs associated with business
closures, $3.9 million in severance, stay bonuses and other employee costs, and
$2 million in lease liability on vacant facilities due to facility consolidation
activities.

AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets was
$10.2 million, $8 million and $12.5 million in 2000, 1999 and 1998,
respectively. The increase in 2000 as compared to 1999 was due to intangible
assets recorded in conjunction with acquisitions that closed in 2000 and during
1999. The decrease in amortization in 1999 versus 1998 was due to the write-off
of impaired goodwill of $76.2 million in the third quarter of 1998. This
decrease was partially offset by additional amortization expense that was
incurred due to the 1999 acquisitions. See "Liquidity and Capital Resources -
Business Combinations and Dispositions".

IMPAIRMENT OF INTANGIBLE ASSETS. In 1998, the deterioration in the infusion
therapy industry and Apria's decision to withdraw from the infusion service line
in certain geographic markets served as indicators of potential intangible asset
impairment. Other indicators of potential impairment identified by management
included the company's depressed common stock price, failure to meet its already
lowered financial expectations, the threat of continued Medicare reimbursement
reductions, government investigations against the company, slower than expected
progress in improving its revenue management process, and collection
difficulties resulting from reported financial problems within major managed
care organizations with which the company does business. Therefore, management
conducted an evaluation of the carrying value of the company's recorded
intangible assets and considered current and anticipated industry conditions,
recent changes in its business strategies, and current and anticipated operating
results. The evaluation resulted in an impairment charge of $76.2 million which
was recorded in the third quarter of 1998. The charge included a write-off of
$4.8 million in intangible assets associated with the exit of the infusion
service line in certain areas.

For purposes of assessing impairment, assets were grouped at the branch
level, which is the lowest level for which there are identifiable cash flows
that are largely independent. A branch location was deemed to be impaired if the
company's estimate of undiscounted cash flows was less than the carrying amount
of the long-lived assets and goodwill at the branch. In estimating future cash
flows, management used its best estimates of anticipated operating results over
the remaining useful life of the assets. For those branches identified as
impaired, the amount of impairment was measured by comparing the carrying amount
of the long-lived assets and goodwill to the estimated fair value for each
branch. Fair value was estimated using a valuation technique based on the
present value of the expected future cash flows.

IMPAIRMENT OF LONG-LIVED ASSETS AND INTERNALLY-DEVELOPED SOFTWARE. One of
the actions taken in 1998 was the termination of a project to implement an
enterprise resource planning system. As a result, Apria wrote off related
software and other capitalized costs of $7.5 million in the third quarter of
1998. As part of the decision to terminate the enterprise resource planning
project, management evaluated its existing systems to determine their long-term
viability in the context of Apria's overall strategic direction. It was
determined that Apria was at some risk in continuing to run the infusion billing
system on a platform which is no longer supported by the computer industry. To
mitigate the risk, Apria began the process to convert the infusion system to the
platform on which the respiratory/home medical equipment system operates. Also,
Apria effected a number of enhancements to the systems that rendered certain
previously-developed modules obsolete. Further, pharmacy and branch
consolidations and closures rendered a variety of computer equipment obsolete.
Due to its age and technological obsolescence, it was deemed to have no future
value. As a result of these actions, Apria recorded an impairment charge of
$11.9 million at September 30, 1998. Apria also recognized additional asset
impairments during 1998 of $1.4 million in conjunction with the exited service
lines and $1.4 million related to other facility closures and consolidations.

INTEREST EXPENSE. Interest expense was $40.1 million in 2000, $42.5 million
in 1999 and $46.9 million in 1998. The decreases in 2000 and 1999 were primarily
attributable to the continued reduction in long-term debt as partially offset by
higher interest rates incurred on the bank loans. The higher interest rates in
2000 as compared to 1999 were market-driven, while the higher rates in 1999,
when compared to 1998, were due to an increase in the margin applied by the bank
to market interest rates pursuant to the November 1998 amendment and restatement
of the credit agreement. Also, interest income decreased in 2000 and 1999 from
the level in 1998 because Apria's cash balances decreased to $16.9 million at
December 31, 2000 from $75.5 million at December 31, 1998. This reduction in the
cash balance was due primarily to $157.4 million in aggregate payments made on
long-term debt in 2000 and 1999. See "Liquidity and Capital Resources -
Long-Term Debt".

INCOME TAXES. Income tax expense for 2000 was $41.1 million and represents
41.9% of income before taxes. At December 31, 2000 Apria had federal net
operating loss carryforwards ("NOLs") of approximately $173 million, expiring in
varying amounts in the years 2003 through 2013 and various state NOLs which
began expiring in 1997. Additionally, the company has an alternative minimum tax
credit carryforward of approximately $8 million. Management believes that its
strategies will result in sufficient taxable income during the carryforward
period to utilize substantially all of the NOLs.

The income tax benefit for 1999 amounted to $131 million, which was
primarily attributable to the release of the company's $158.9 million valuation
allowance. Income tax expense for 1998 amounted to $3 million, which was
primarily state taxes payable on a basis other than, or in addition to, taxable
income. The remaining amount of income tax expense included estimated settlement
amounts for in-progress state tax audits. Certain of these tax expense items
resulted in increases to deferred tax assets for which no benefit was recorded
in 1998 due to offsetting increases to the valuation allowance.

LIQUIDITY AND CAPITAL RESOURCES

CASH FLOW. Cash provided by operating activities in 2000 was $192.2 million
compared to $146.8 million in 1999 and $172.4 million in 1998. The primary
reasons for the improvement in operating cash flow in 2000, as compared to 1999,
were the increase in income before taxes (see discussion above regarding
non-cash tax benefit in 1999), plus a smaller increase in accounts receivable in
2000 (exclusive of the provision for doubtful accounts). Income before taxes
increased in 1999 when compared to 1998, however, operating cash flow decreased
due to working capital requirements.

Cash used in investing activities increased in 2000 and 1999 over the 1998
level due to increases in business acquisitions and increases in patient service
equipment purchases to support the growth in the respiratory service line.

ACCOUNTS RECEIVABLE. Accounts receivable before allowance for doubtful
accounts decreased by $9.1 million during 2000. Despite an increase in net
revenues in 2000, accounts receivable decreased as a result of an increase in
cash collections and a decrease in collection periods. Days sales outstanding
(calculated as of each period end by dividing accounts receivable, less
allowance for doubtful accounts, by the 90-day rolling average of net revenues)
were 51 days at December 31, 2000 compared to 56 days at December 31, 1999.

Evaluation of Net Realizable Value. Management performs various analyses to
evaluate the net realizable value of accounts receivable. Specifically, the
process involves an extensive, balanced evaluation of historical realization
data, accounts receivable aging trends and operating statistics. Also considered
are relevant business conditions such as Medicare carrier conditions, the extent
of contracted business and business combinations. Further, focused reviews of
certain large and/or problematic payors are performed. Management periodically
refines the evaluation process to consider any changes in related policies and
procedures. Because of 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 Apria's results of
operations.

Unbilled Receivables. Included in accounts receivable are earned but
unbilled receivables of $17.9 million and $23 million at December 31, 2000 and
1999, 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.

LONG-TERM DEBT. Apria's credit agreement with a syndicate of banks was
amended and restated in November 1998, upon execution of which a $50 million
permanent repayment of the loan was required. The remaining indebtedness under
the credit agreement was restructured into a $288 million term loan and a $30
million revolving credit facility with a maturity date of August 9, 2001. Four
amendments to the amended and restated credit agreement were executed during
1999 and two additional amendments were executed in 2000. The most significant
revisions to the terms of the credit agreement effected during 2000 were
pursuant to the sixth amendment that was executed in September 2000. This latest
amendment increased the revolving credit facility to $50 million, extended the
final maturity date to September 30, 2002, increased the aggregate amount of
permitted acquisitions and reduced interest rates and commitment fees.

In conjunction with the September 2000 amendment, Apria made a $20.1
million payment, of which $5 million was scheduled to be paid on September 30.
Further, during the fourth quarter of 2000, Apria made additional prepayments
totaling $49 million. These latest prepayments were applied against future
scheduled quarterly payments, effectively eliminating any repayment requirements
until March 2002.

The amended and restated credit agreement, as further amended by the six
amendments, permits Apria to elect one of two variable rate interest options at
the time an advance is made. The first option is a rate expressed as 1.75% plus
the higher of the Federal Funds Rate plus 0.50% per annum or the Bank of America
"reference" rate. The second option is a rate based on the London Interbank
Offered Rate ("LIBOR") plus an additional increment of 2.75% per annum. The
agreement requires payment of commitment fees of 0.375% on the unused portion of
the revolving credit facility.

The amended and restated credit agreement, as further amended by the six
amendments, allows Apria to make acquisitions with an aggregate purchase price
of up to $200 million from October 22, 1999 through the final maturity date of
the agreement. At December 31, 2000, Apria had $147.5 million remaining on its
acquisition allotment. Also, the agreement, as amended, provides Apria with the
ability to repurchase up to $50 million of its common stock through the final
maturity date, subject to annual limitations. At December 31, 2000, Apria had
expended $1 million of its common stock repurchase authority.

Borrowings under the credit agreement are secured by substantially all of
Apria's assets and the agreement also imposes numerous restrictions, including,
but not limited to, covenants requiring the maintenance of certain financial
ratios, limitations on additional borrowings, capital expenditures, mergers,
acquisitions and investments, and restrictions on cash dividends, loans and
other distributions. At December 31, 2000, the company was in compliance with
the financial covenants contained in the credit agreement.

At December 31, 2000, borrowings under the credit agreement totaled $140
million and outstanding letters of credit totaled $1 million.

BUSINESS COMBINATIONS AND DISPOSITIONS. Apria periodically makes
acquisitions of complementary businesses in specific geographic markets. The
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 date of acquisition. Goodwill recorded in conjunction with such
acquisitions is being amortized over 20 years and covenants not to compete are
being amortized over the life of the respective agreements.

The aggregate consideration of the acquisitions that closed during 2000 was
$27.3 million (cash paid for acquisitions and related contingent consideration
totaled $26.2 million in 2000). Allocation of the total consideration includes
$21.1 million to intangible assets, $3.2 million to patient service equipment
and $1.7 million to accounts receivable. During 1999, the aggregate
consideration for acquisitions was $56.3 million (cash paid for acquisitions and
related contingent consideration totaled $53.4 million in 1999).

During 1998, management performed an extensive profitability study to
identify service lines and/or geographic markets as potential candidates for
exit. Most significant of the decisions arising from the study was the decision
to withdraw from the infusion service line in California, Texas, Louisiana, West
Virginia, western Pennsylvania and downstate New York. Shortly after Apria
announced its plans to exit the infusion line in these geographic markets, a
buyer emerged for the California locations. Crescent Healthcare, Inc. purchased
substantially all the assets and business, excluding accounts receivable, of the
California infusion locations. Apria recorded a $3.8 million loss on the sale in
the third quarter of 1998. The transition out of the service line in
substantially all of the selected areas took place in the fourth quarter of
1998. The operations of these infusion locations had revenues of $41.5 million
and gross profits of $14.9 million in 1998.

OTHER. During 2000, Apria repurchased 86,000 shares of its common stock for
$958,000 to hold in treasury.

At December 31, 2000, Apria had $16.9 million in cash and cash equivalents.
Apria's management believes that cash provided by operations and amounts
available under its existing credit facilities together with cash invested in
its money market account will be sufficient to finance its current operations
for at least the next year.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Apria currently utilizes no derivative financial instruments that may
expose the company to significant market risk. However, Apria is subject to
interest rate changes on its variable rate term loan under the company's bank
credit agreement that may affect the fair value of that debt and cash flow and
earnings. Based on the term debt outstanding at December 31, 2000 and the
current market perception, a 100 basis point increase in the applicable interest
rates would decrease Apria's annual cash flow and pretax earnings by
approximately $1.4 million. Conversely, a 100 basis point decrease in the
applicable interest rates would increase annual cash flow and pretax earnings by
$1.4 million.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Independent Auditors' Report, Consolidated Financial Statements and
Consolidated Financial Statement Schedule 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 AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

EXECUTIVE OFFICERS

Information regarding Apria's executive officers is set forth under the
caption "Executive Officers of the Registrant" in Item 1 hereof.

DIRECTORS

Set forth below are the names, ages and past and present positions of the
persons serving as Apria's Directors as of March 1, 2001:

BUSINESS EXPERIENCE DURING LAST DIRECTOR TERM
NAME AND AGE FIVE YEARS AND DIRECTORSHIPS SINCE EXPIRES
------------ ---------------------------- ----- -------

David H. Batchelder, 51 Principal and Managing Member of Relational Investors, LLC 1998 2001
since March 1996. Since 1998 he has served as the
Chairman and Chief Executive Officer of Batchelder &
Partners, Inc., a financial advisory and investment
banking firm based in San Diego, California, which is a
registered broker-dealer under Section 15(b) of the
Securities Exchange Act of 1934 and a member of the
National Association of Securities Dealers, Inc. Mr.
Batchelder also serves as a director of Washington Group
International, Inc., and Nuevo Energy Company.

Philip L. Carter, 52 Chief Executive Officer and a Director of Apria since May 1998 2001
1998. Prior to joining Apria, Mr. Carter was President
and Chief Executive Officer of Mac Frugal's Bargains o
Close-Outs Inc., a chain of retail discount stores, since
1995.

David L. Goldsmith, 52 Managing Director of RS Investment Management, an 1987* 2001
investment management firm. Prior to joining RS Investment
Management in February 1999, he served as Managing
Director of Robertson, Stephens Investment Management, an
investment management firm owned by Bank of America
National Trust and Savings Association. He was affiliated
with Robertson, Stephens & Company LLC and its
predecessors from 1981 through 1999. Mr. Goldsmith is
also a director of Balanced Care Corporation.

Richard H. Koppes, 54 Of Counsel to Jones, Day, Reavis & Pogue, a law firm, and 1998 2001
a Consulting Professor of Law and Co-Director of Education
Programs at Stanford University School of Law. He served
as a principal of American Partners Capital Group, a
venture capital and consulting firm, from August 1996 to
December 1998. From May 1986 through July 1996, Mr.
Koppes held several positions with the California Public
Employees' Retirement System, including General Counsel,
Interim Chief Executive Officer and Deputy Executive
Officer. Mr. Koppes is also a director of Mercy
Healthcare, a non-profit hospital system.

Philip R. Lochner, Jr., 57 Senior Vice President - Administration of Time Warner Inc. 1998 2001
from July 1991 to July 1998. From March 1990 to June
1991, Mr. Lochner was a Commissioner of the Securities and
Exchange Commission. He is a member of the Advisory
Council of Republic New York Corporation and of the Boards
of Directors of Clarcor, Inc., and GTech Holdings Corp.
He is also a Trustee of The Canterbury School.

Beverly Benedict Thomas, 58 Principal of BBT Strategies, a consulting firm 1998 2001
specializing in public affairs and strategic planning.
Previously, Ms. Thomas was a principal of UT Strategies,
Inc., a public affairs firm, from 1995 to 1997 and
Assistant Treasurer of the State of California from 1991
to 1995. In addition to serving as a director of Catellus
Real Estate Development Corporation, a diversified real
estate operating company, Ms. Thomas also serves as a
Commissioner of the Los Angeles City Employees' Retirement
System. From 1993 to 1995, Ms. Thomas served on the
Boards of the California Public Employees' Retirement
System and the California State Teachers Retirement System.

Ralph V. Whitworth, 45 Chairman of the Board of Directors of Apria since April 1998 2001
28, 1998. Mr. Whitworth is also a principal and Managing
Member of Relational Investors, LLC, a private investment
company. He is also a partner in Batchelder & Partners,
Inc., a financial advisory and investment-banking firm
based in San Diego, California which is registered as a
broker-dealer under Section 15(b) of the Securities
Exchange Act of 1934 and a member of the National
Association of Securities Dealers, Inc. From 1988 until
1996, Mr. Whitworth was president of Whitworth and
Associates, a corporate advisory firm. Mr. Whitworth is
also a director of Sirius Satellite Radio, Inc.,
Tektronix, Inc., Mattel, Inc. and Waste Management, Inc.

------------------------
* Director of Homedco, from the date shown until the date of the merger with Abbey. Director of Apria from the date
of the merger until the present.

COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT BY CERTAIN COMPANY AFFILIATES

Section 16(a) of the Exchange Act requires Apria's Directors and executive
officers, and persons who own more than 10% of a registered class of Apria's
equity securities, to file reports of ownership and changes in ownership with
the Securities and Exchange Commission and The New York Stock Exchange, Inc.
Directors, executive officers and greater than 10% stockholders are required by
the Securities and Exchange Commission to furnish the company with copies of the
reports they file.

Based solely on its review of the copies of such reports and written
representations from certain reporting persons that certain reports were not
required to be filed by such persons, the company believes that, except as
provided below, all of its Directors, executive officers and greater than 10%
beneficial owners complied with all filing requirements applicable to them with
respect to transactions during the 2000 fiscal year. The one exception to
complete compliance with such filing requirements is that a Form 4 filing for
Lawrence A. Mastrovich reflecting the sale of 4,400 shares of the company's
common stock upon the exercise of an employee stock option on January 31, 2000
was not filed until February 17, 2000.

ITEM 11. EXECUTIVE COMPENSATION

SUMMARY OF EXECUTIVE COMPENSATION

The following table sets forth all compensation for the 2000, 1999, and
1998 fiscal years paid to or earned by Apria's Chief Executive Officer, and the
five other most highly compensated executive officers during the 2000 fiscal
year.

SUMMARY COMPENSATION TABLE
---------------------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION LONG-TERM COMPENSATION (1)
---------------------- -------------------------
OPTIONS LTIP ALL OTHER
SALARY(2) BONUS GRANTED(3) PAYOUTS(4) COMPENSATION
NAME YEAR ($) ($) (#) ($) ($)
----------------------------------- ---- --------- --------- ---------- ---------- ------------

Philip L. Carter.................. 2000 661,538 421,354 500,000 680,000 3,330(6)
Chief Executive Officer (5) 1999 613,694 480,000 75,000 -- 3,430(6)
1998 330,499 300,000 750,000 -- --

Lawrence M. Higby................. 2000 443,553 285,224 300,000 440,000 3,330(6)
President and Chief 1999 418,386 329,600 40,000 -- 3,295(6)
Operating Officer 1998 424,113 20,000 300,000 -- --

John C. Maney..................... 2000 382,921 243,089 200,000 390,000 3,330(6)
Executive Vice President 1999 358,522 280,000 30,000 -- 1,615(6)
and Chief Financial Officer (7) 1998 37,347 100,000 225,000 -- --

Michael R. Dobbs.................. 2000 251,492 162,059 75,000 250,000 3,330(6)
Executive Vice President, 1999 210,332 168,000 30,000 -- 23,151(9)
Logistics (8) 1998 93,600 90,000 100,000 -- 2,500(10)

Dennis E. Walsh................... 2000 247,155 155,577 75,000 240,000 3,330(6)
Executive Vice President, 1999 234,702 182,160 30,000 -- 2,890(6)
Sales 1998 237,971 18,750 100,000 -- 3,940(6)

Robert S. Holcombe................ 2000 304,774 194,471 40,000 300,000 3,330(6)
Senior Vice President, 1999 292,439 228,800 20,000 -- 3,160(6)
General Counsel and 1998 292,869 19,500 40,000 -- 3,940(6)
Secretary

(1) Apria has not issued stock appreciation rights or restricted stock
awards.

(2) These amounts include an automobile allowance which is paid as salary.
Salary is paid on the basis of bi-weekly pay periods, with payment for
each period being made during the week following its termination. Due
to the fact that 1998 contained a payment date for a pay period which
ended in 1997, amounts reported as salary paid for 1998 vary slightly
from the actual amounts of the 1998 salaries of the executive officers
listed above.

(3) The option grants for 1999 were approved by the company's Board of
Directors in October 1999 but did not become effective and were not
fixed as to price until January 3, 2000. The option grants for 2000
were approved by the company's Board of Directors in October 2000 but
did not become effective and were not fixed as to price until January
2, 2001.

(4) Payments under a two-year incentive plan adopted by the Board of
Directors in December 1998. Includes payments made in 2001 but
allocable to the 1999-2000 period covered by the plan.

(5) Mr. Carter was first employed by the company in May 1998.

(6) Annual contribution by Apria to the company's 401(k) Savings Plan in
the name of the individual.

(7) Mr. Maney was first employed by the company in November 1998.

(8) Mr. Dobbs was first employed by the company in June 1998.

(9) $2,423 contribution by Apria to the company's 401(k) Savings Plan in
the name of the individual and $20,728 in relocation expense payments.

(10) Relocation payment.

SUMMARY OF OPTION GRANTS

The following table provides information with respect to grants of options
in 2000 to Apria's Chief Executive Officer and the five other most highly
compensated executive officers of the company. These amounts or calculations do
not include options approved in 1999, which did not become effective until
January 3, 2000, but do include options approved in 2000 which did not become
effective until January 2, 2001.

OPTION GRANTS TABLE
-------------------------------------------------------------------------------------------------------------
POTENTIAL REALIZABLE
NUMBER OF VALUE AT ACCRUAL RATE
SECURITIES % OF TOTAL EXPIRATION OF STOCK APPRECIATION
UNDERLYING OPTIONS GRANTED DATE OF FOR OPTION TERM ($)
OPTIONS TO EMPLOYEES IN EXERCISE OPTIONS --------------------------
NAME GRANTED FISCAL YEAR PRICE ($) GRANTED 5% 10%
--------------------- ---------- ----------------- ---------- ---------- ----------- -------------

Philip L. Carter 500,000 25.19% 27.125 01/02/11 8,529,383 21,615,132
Lawrence M. Higby 300,000 15.12% 27.125 01/02/11 5,117,630 12,969,079
John C. Maney 200,000 10.08% 27.125 01/02/11 3,411,753 8,646,053
Michael R. Dobbs 75,000 3.78% 27.125 01/02/11 1,279,407 3,242,270
Dennis E. Walsh 75,000 3.78% 27.125 01/02/11 1,279,407 3,242,270
Robert S. Holcombe 40,000 2.01% 27.125 01/02/11 682,351 1,729,210

SUMMARY OF OPTIONS EXERCISED

The following table provides information with respect to the exercise of
stock options by Apria's Chief Executive Officer and the five other most highly
compensated executive officers of the company during the 2000 fiscal year,
together with the fiscal year-end value of unexercised options.

AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUE
------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
OPTIONS AT THE-MONEY OPTIONS AT
SHARES FISCAL YEAR-END(1) FISCAL YEAR-END(1)(2)
ACQUIRED ON VALUE -------------------------- ---------------------------
EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
----------- --------- -------------------------- ---------------------------
NAME (#) ($) (#) / (#) ($) / ($)
--------------------- ----------- --------- -------------------------- ---------------------------

Philip L. Carter -- -- 750,000 / 75,000 15,562,500 / 960,937
Lawrence M. Higby -- -- 269,998 / 220,002 4,882,872 / 3,794,003
John C. Maney -- -- 225,000 / 30,000 5,639,062 / 384,375
Michael R. Dobbs -- -- 86,666 / 43,334 1,999,984 / 694,391
Dennis E. Walsh -- -- 117,866 / 64,134 2,033,585 / 1,169,290
Robert S. Holcombe -- -- 54,666 / 40,334 966,485 / 652,891

---------------------

(1) These amounts or calculations do not include options approved in 2000 which
did not become effective until January 2, 2001.

(2) Market value of the securities underlying the options at year-end, minus the
exercise or base price of "in-the-money" options. The market value of a
share of Apria's common stock at the close of trading on the last trading
day of 2000 (December 29) was $29.75.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

No member of the Compensation Committee since January 1, 2000, was either
an officer or employee of the company.

DIRECTORS' FEES

All Directors of Apria are reimbursed for their out-of-pocket expenses
incurred in connection with attending Board and related Committee meetings.
During 2000, all non-employee Directors received: (i) $1,000 per Board or
Committee meeting attended in person ($2,000 per Committee meeting for the
Director who is the Committee's chairperson) and (ii) $500 per Board or
Committee meeting attended via telephone. In addition, for services rendered
during 2000, the non-employee Chairman of the Board was granted an option to
purchase 25,000 shares of the company's common stock, and each non-employee
Director was granted an option to purchase 15,000 shares. The options are
granted at a purchase or exercise price equal to the fair market value on the
date of grant.

EMPLOYMENT AND SEVERANCE AGREEMENTS

Apria has employment agreements, nondisclosure/noncompetition agreements
and/or severance agreements with the following executive officers and other
persons listed in the Summary Compensation Table.

PHILIP L. CARTER. Pursuant to an Employment Agreement which became
effective January 1, 2000, Mr. Carter serves as Apria's Chief Executive Officer.
The Agreement has a two-year term, although it is extended one day for each day
during its term. The Agreement may be terminated at any time by the company or
Mr. Carter. The Agreement provides that Mr. Carter is to receive an annual
salary of not less than $650,000 (his current annual salary is $680,000),
subject to increases at the discretion of the company's Board of Directors or
Compensation Committee, and is entitled to participate in Apria's annual bonus,
incentive, stock and other benefit programs generally available to executive
officers of the company. Mr. Carter is also entitled to receive (i) reasonable
access to the company's accountants for personal financial planning, (ii) an
automobile allowance, and (iii) reimbursement of certain other expenses. If the
company terminates Mr. Carter's employment without cause, or if he terminates
his employment with good reason (including upon a change in control), Mr. Carter
shall receive a lump sum severance payout equal to his annual salary and car
allowance that would have been payable through the remaining two-year term of
the agreement, plus two times the sum of (i) the average of his two most recent
annual bonuses and (ii) the average annual cost for company employees of
obtaining certain post-employment medical insurance. The company shall be
required to provide an office and secretarial support at a cost of not more than
$50,000 during the year following such a termination. In addition, the vested
portion of the 750,000 share stock option grant issued to Mr. Carter in 1998
will remain exercisable for a period of three years following such a
termination. The Agreement also contains provisions designed to indemnify Mr.
Carter on an after-tax basis in the event he incurs an excise tax under Section
4999 of the Internal Revenue Code.

The company also has entered into a Nondisclosure and Noncompetition
Agreement with Mr. Carter pursuant to which, if the company terminates Mr.
Carter's employment without cause, or if he terminates his employment with good
reason (including upon a change in control), Mr. Carter shall be entitled to
receive cash payments in exchange for the performance of certain agreements
pertaining to nondisclosure and noncompetition following the termination.
Payments under the Nondisclosure and Noncompetition Agreement are required to be
made in 52 equal weekly installments following the termination, and shall equal,
in the aggregate, the sum of Mr. Carter's base salary, the average of his two
most recent annual bonuses, his annual car allowance and an additional amount
equal to the average annual cost for company employees of obtaining certain
post-employment medical insurance.

LAWRENCE M. HIGBY. Pursuant to an Amended and Restated Employment Agreement
which became effective January 1, 2000, Mr. Higby serves as Apria's President
and Chief Operating Officer. The Agreement is scheduled to expire January 18,
2002, although it is automatically extended for an additional year unless either
the company or Mr. Higby declines to accept such extension. The Agreement
provides that Mr. Higby is to receive an annual salary of not less than $400,000
(his current annual salary is $440,000), subject to increases at the discretion
of the company's Board of Directors or Compensation Committee, and is entitled
to participate in Apria's annual bonus, incentive, stock and other benefit
programs generally available to executive officers of the company. Mr. Higby is
also entitled to receive (i) reasonable access to the company's accountants for
personal financial planning, (ii) an automobile allowance and (iii)
reimbursement of certain other expenses. The Agreement also contains provisions
designed to indemnify Mr. Higby on an after-tax basis in the event he incurs an
excise tax under Section 4999 of the Internal Revenue Code.

The company also has entered into a Nondisclosure and Noncompetition
Agreement with Mr. Higby pursuant to which, if the company terminates Mr.
Higby's employment without cause, or if he terminates his employment with good
reason (including upon a change in control), Mr. Higby shall be entitled to
receive cash payments in exchange for the performance of certain agreements
pertaining to nondisclosure and noncompetition following the termination.
Payments under the Nondisclosure and Noncompetition Agreement are required to be
made in 52 equal weekly installments following the termination, and shall equal,
in the aggregate, three times the sum of (i) his annual salary, (ii) the average
of his two most recent annual bonuses, (iii) his annual car allowance, and (iv)
an additional amount equal to the average annual cost for company employees of
obtaining certain post-employment medical insurance. The company shall be
required to provide an office and secretarial support at a cost not to exceed
$50,000 during the year following such a termination. In addition, the vested
portion of the 150,000 share stock option grant issued to Mr. Higby in January
1998 will remain exercisable for a period of three years following such
termination.

JOHN C. MANEY. Pursuant to an Employment Agreement which became effective
on January 1, 2000, Mr. Maney serves as Apria's Executive Vice President and
Chief Financial Officer. The Agreement has a two-year term, although it is
extended one day for each day during its term. The Agreement may be terminated
at any time by the company or Mr. Maney. The Agreement provides for an annual
salary of not less than $350,000 (his current annual salary is $390,000),
subject to increases at the discretion of the company, except that the increases
for 2000, 2001 and 2002 shall not be less than 5% for each year. Mr. Maney is
entitled to participate in Apria's annual bonus, incentive, stock and other
benefit programs generally available to the Chief Executive Officer of the
company. Mr. Maney is also entitled to (i) reasonable access to the company's
accountants for personal financial planning, (ii) an automobile allowance, and
(iii) reimbursement of certain other expenses. If the company terminates Mr.
Maney's employment without cause, or if he terminates his employment with good
reason (including upon a change in control), Mr. Maney shall receive a lump sum
severance payout equal to his annual salary and car allowance that would have
been payable through the remaining two-year term of the agreement, plus two
times the sum of (i) the average of his two most recent annual bonuses and (ii)
the average annual cost for company employees of obtaining certain
post-employment medical insurance. In addition, the vested portion of the
225,000 share stock option grant issued to Mr. Maney in 1998 will remain
exercisable for a period of three years following such a termination. The
Agreement also contains provisions designed to indemnify Mr. Maney on an
after-tax basis in the event he incurs an excise tax under Section 4999 of the
Internal Revenue Code.

MICHAEL R. DOBBS. Pursuant to an Amended and Restated Executive Severance
Agreement dated February 26, 1999, Mr. Dobbs serves as the company's Executive
Vice President, Logistics and undertakes duties at Apria's discretion. The
Agreement provides that Mr. Dobbs' salary shall be at the company's discretion.
Currently, Mr. Dobbs' annual salary is $250,000. Mr. Dobbs is entitled to
participate in Apria's annual bonus, incentive, stock and other benefit programs
generally available to executive officers of the company. Mr. Dobbs is also
entitled to receive reimbursement of certain other expenses at the company's
discretion. If the company terminates Mr. Dobbs' employment without cause, or if
he terminates his employment with good reason (including upon a change in
control), Mr. Dobbs is entitled to a lump sum payment equal to two times the sum
of (i) his annual salary, (ii) the average of his two most recent annual
bonuses, (iii) his annual car allowance, and (iv) an additional amount equal to
the average annual cost for company employees of obtaining certain
post-employment medical insurance. The Agreement also contains provisions
designed to indemnify Mr. Dobbs on an after-tax basis in the event he incurs an
excise tax under Section 4999 of the Internal Revenue Code.

ROBERT S. HOLCOMBE AND DENNIS E. WALSH. In June 1997, Messrs. Holcombe and
Walsh (each referred to as "Executive" below) entered into executive severance
agreements with the company. Pursuant to each agreement, each Executive serves
in a position and undertakes duties at Apria's discretion. As of December 31,
2000, Mr. Holcombe served as Senior Vice President, General Counsel and
Secretary of the company and Mr. Walsh served as Executive Vice President,
Sales. Each agreement provides that the Executive's salary shall be at the
company's discretion. Currently, Mr. Holcombe's annual salary is $300,000 and
Mr. Walsh's annual salary is $240,000. Each Executive is entitled to participate
in Apria's stock option plans and all other benefit programs generally available
to executive officers of the company at the company's discretion. Each Executive
is also entitled to receive (i) such bonuses as the Compensation Committee may,
from time to time, in its sole discretion award, and (ii) reimbursement of
certain other expenses at the company's discretion. If the company terminates an
Executive's employment without cause, each Executive is entitled to a payment
equal to the sum of (i) his annual salary, (ii) the average of his two most
recent annual bonuses, (iii) his annual car allowance, and (iv) an additional
amount equal to the average annual cost for company employees of obtaining
certain post-employment medical insurance. However, if such termination occurs
during the two-year period following a change of control of the company, Messrs.
Holcombe and Walsh shall each be entitled to a payment equal to twice such sum.
Such payments shall be payable in periodic installments over one or two years.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information as of February 28, 2001, with
respect to the beneficial ownership of Apria's common stock by each person who
is known by the company to beneficially own more than 5% of Apria's common
stock, each Director of the company, Apria's Chief Executive Officer, the five
other most highly compensated executive officers who were serving in such
capacity as of December 31, 2000, and all Directors and executive officers as a
group. Except as otherwise indicated, beneficial ownership includes both voting
and investment power with respect to the shares shown.

SECURITY OWNERSHIP TABLE
---------------------------------------------------------------------------------------------------

AMOUNT AND NATURE OF PERCENT OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS
------------------------ -------------------- ----------

Relational Investors, LLC (1) 10,936,282 20.42%
David H. Batchelder (1) 11,061,282 20.65
Ralph V. Whitworth (1) 11,007,948 20.55
Joel L. Reed (1) 10,936,282 20.42
George L. Argyros (2) 2,770,434 5.17
Janus Capital Corporation (3) 2,729,200 5.09
Thomas H. Bailey (3) 2,729,200 5.09
Philip L. Carter (4) 800,000 1.49
David L. Goldsmith (5) 376,902 *
Lawrence M. Higby (6) 374,333 *
John C. Maney (7) 243,000 *
Dennis E. Walsh (8) 151,200 *
Michael R. Dobbs (9) 121,180 *
Robert S. Holcombe (10) 87,366 *
Richard H. Koppes (11) 52,000 *
Philip R. Lochner, Jr. (12) 52,000 *
Beverly Benedict Thomas (13) 50,000 *
All current directors and executive officers as a group 13,621,650 25.43
(14 persons) (14) ---------- -----
------------------
* Less than 1%

(1) According to a Schedule 13D Amendment, dated April 19, 1999, and Form 4
filings dated May 14 and December 16, 1999 and September 7, 2000, all of
which have been filed with the Securities and Exchange Commission,
Relational Investors, LLC ("RILLC"), its affiliated companies and Messrs.
Batchelder, Whitworth and Reed, individually and as Managing Members of
RILLC, have sole voting and dispositive power as to 11,132,948 shares,
which amount includes 121,666 shares subject to options that are currently
exercisable. 10,936,282 of the shares are held by RILLC or by limited
partnerships (Relational Coast Partners, L.P., Relational Investors, L.P.,
Relational Fund Partners, L.P., or Relational Partners, L.P.) of which
RILLC is the sole general partner. Mr. Whitworth, who is the non-employee
Chairman of the company's Board of Directors, holds currently exercisable
options to acquire 71,666 shares, and Mr. Batchelder, who also serves as a
non-employee member of the company's Board of Directors, holds 75,000
shares in a personal account and currently exercisable options to acquire
50,000 shares. Mr. Reed's holdings are all through RILLC. The mailing
address of Relational Investors, LLC and each of Messrs. Whitworth,
Batchelder and Reed is 11975 El Camino Real, Suite 300, San Diego,
California 92130.

(2) According to a Schedule 13D Amendment, dated June 25, 1998, filed with the
Securities and Exchange Commission, Mr. Argyros has sole investment and
dispositive power as to all 2,770,434 shares. This number includes 6,666
shares subject to options that are currently exercisable. This number
includes 2,430,670 shares owned by HBI Financial, Inc., of which Mr.
Argyros is the sole shareholder. This number also includes (1) 280,912
shares held in trust by two private charitable foundations of which Mr.
Argyros is a vice president and director with respect to which he disclaims
beneficial ownership, (2) 500 shares held in a charitable trust of which
Mr. Argyros is a trustee but not a beneficiary with respect to which he
disclaims beneficial ownership, (3) 31,050 shares held in a trust for the
benefit of Mr. Argyros' children, for which Mr. Argyros disclaims
beneficial ownership and (4) 20,636 shares held by Mr. Argyros
individually. The amount listed does not include 3,450 shares held in a
trust of which Mr. Argyros is not a trustee for the benefit of certain of
Mr. Argyros' adult children who do not share his household for which he
disclaims beneficial ownership and 2,400 shares held in a trust of which
Mr. Argyros is not a trustee for the benefit of Mr. Argyros' mother-in-law
for which he disclaims beneficial ownership. The mailing address for Mr.
Argyros is c/o Arnel Development Company, 949 South Coast Drive, Suite 600,
Costa Mesa, California 92626.

(3) According to a Schedule 13G dated February 15, 2001, Janus Capital
Corporation ("Janus") reported beneficial ownership as well as sole
dispositive and voting power with respect to 2,729,200 shares. Thomas H.
Bailey ("Bailey") joined in the report stating that, as a 12.2%
shareholder, President and Chairman of the Board of Janus, he may be deemed
to have the power to exercise or direct the exercise of Janus' dispositive
and voting powers, even though he disclaims beneficial ownership and the
right to receive dividends from, or the proceeds of any sale, of the stock.
Janus is a registered investment advisor which furnishes investment advice
to several investment companies registered under Section 8 of the
Investment Company Act of 1940 and individual and institutional clients.
The mailing address for Janus is 100 Filmore Street, Denver, Colorado
80206-4923.

(4) Includes 775,000 shares subject to options that are currently exercisable.

(5) Includes 300,236 held in a shared trust with Mr. Goldsmith's wife and
76,666 shares subject to options that are currently exercisable.

(6) Includes 363,333 shares subject to options that are currently exercisable.

(7) Includes 235,000 shares subject to options that are currently exercisable.

(8) Includes 151,200 shares subject to options that are currently exercisable.

(9) Includes 110,000 shares subject to options that are currently exercisable.

(10) Includes 74,666 shares subject to options that are currently exercisable.
Also includes 200 shares held by Mr. Holcombe's wife.

(11) Includes 50,000 shares subject to options that are currently exercisable.

(12) Includes 50,000 shares subject to options that are currently exercisable.

(13) Includes 49,000 shares subject to options that are currently exercisable.

(14) Includes shares owned by certain trusts. Also includes 2,229,397 shares
subject to options that are currently exercisable.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

CERTAIN TRANSACTIONS

None.

PART IV

ITEM 14. 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:

No reports on Form 8-K were filed during the fourth quarter
of the fiscal year covered by this report.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE

Page
----
CONSOLIDATED FINANCIAL STATEMENTS

Independent Auditors' Report..................................... F-1
Consolidated Balance Sheets - December 31, 2000 and 1999......... F-2
Consolidated Statements of Operations - Years ended
December 31, 2000, 1999 and 1998............................... F-3
Consolidated Statements of Stockholders' Equity - Years
ended December 31, 2000, 1999 and 1998......................... F-4
Consolidated Statements of Cash Flows - Years ended
December 31, 2000, 1999 and 1998............................... F-5
Notes to Consolidated Financial Statements....................... F-6

CONSOLIDATED FINANCIAL STATEMENT SCHEDULE

Schedule II - Valuation and Qualifying Accounts.................. S-1

INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholders of
Apria Healthcare Group Inc.

We have audited the accompanying consolidated balance sheets of Apria
Healthcare Group Inc. and subsidiaries (the company) as of December 31, 2000 and
1999, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years ended December 31, 2000. Our
audits also included the financial statement schedule as of and for each of the
three years ended December 31, 2000, included in the Index at Item 14(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, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years ended December 31,
2000 in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, such consolidated 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.

/s/ DELOITTE & TOUCHE LLP

Costa Mesa, California
February 14, 2001

F-1

APRIA HEALTHCARE GROUP INC.

CONSOLIDATED BALANCE SHEETS

DECEMBER 31,
-----------------------
2000 1999
---- ----
(IN THOUSANDS)
ASSETS
CURRENT ASSETS

Cash and cash equivalents .............................................. $ 16,864 $ 20,493
Accounts receivable, less allowance for doubtful accounts of $39,787
and $44,652 at December 31, 2000 and 1999, respectively .............. 145,518 149,767
Inventories, net ....................................................... 22,404 18,505
Deferred income taxes .................................................. 33,067 42,595
Prepaid expenses and other current assets .............................. 8,617 10,610
--------- ---------
TOTAL CURRENT ASSETS ............................................ 226,470 241,970
PATIENT SERVICE EQUIPMENT, less accumulated depreciation of
$310,741 and $277,915 at December 31, 2000 and 1999, respectively ..... 134,812 126,486
PROPERTY, EQUIPMENT AND IMPROVEMENTS, NET ................................ 40,630 41,503
DEFERRED INCOME TAXES .................................................... 75,076 95,974
INTANGIBLE ASSETS, NET ................................................... 137,928 125,641
OTHER ASSETS ............................................................. 1,687 422
--------- ---------
$ 616,603 $ 631,996
========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Accounts payable ....................................................... $ 54,250 $ 50,147
Accrued payroll and related taxes and benefits ......................... 28,449 26,478
Accrued insurance ...................................................... 9,980 10,866
Income taxes payable ................................................... 13,378 9,220
Other accrued liabilities .............................................. 24,555 42,087
Current portion of long-term debt ...................................... 1,999 23,528
--------- ---------
TOTAL CURRENT LIABILITIES ....................................... 132,611 162,326
LONG-TERM DEBT, net of current portion ................................... 337,750 394,201
COMMITMENTS AND CONTINGENCIES (Notes 9 and 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; 53,153,890 and 52,054,974 shares
issued at December 31, 2000 and 1999, respectively; 53,067,790 and
52,054,874 outstanding at December 31, 2000 and 1999, respectively.... 53 52
Additional paid-in capital ............................................. 343,621 328,897
Accumulated deficit .................................................... (196,471) (253,477)
Treasury stock, at cost; 86,100 and 100 shares at
December 31, 2000 and 1999, respectively ............................ (961) (3)
--------- ---------
146,242 75,469
--------- ---------
$ 616,603 $ 631,996
========= =========

See notes to consolidated financial statements.

F-2

APRIA HEALTHCARE GROUP INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

YEAR ENDED DECEMBER 31,
----------------------------------------
2000 1999 1998
---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Net revenues ............................................... $ 1,014,201 $ 940,024 $ 933,793
Costs and expenses:
Cost of net revenues:
Product and supply costs ............................. 188,581 183,750 240,798
Patient service equipment depreciation ............... 77,819 73,138 76,974
Nursing services ..................................... 1,642 2,011 2,330
Other ................................................ 10,900 9,015 10,593
----------- ----------- -----------
278,942 267,914 330,695
Provision for doubtful accounts ......................... 32,166 34,314 75,319
Selling, distribution and administrative ................ 554,691 514,041 574,895
Amortization of intangible assets ....................... 10,205 8,048 12,496
Impairment of intangible assets ......................... - - 76,223
Impairment of long-lived assets and
internally-developed software ......................... - - 22,187
----------- ----------- -----------
876,004 824,317 1,091,815
----------- ----------- -----------
OPERATING INCOME (LOSS) ................................ 138,197 115,707 (158,022)
Interest expense ........................................... 40,056 42,526 46,916
----------- ----------- -----------
INCOME (LOSS) BEFORE TAXES ............................. 98,141 73,181 (204,938)
Income tax expense (benefit) ............................... 41,135 (130,954) 3,000
----------- ----------- -----------
NET INCOME (LOSS) ...................................... $ 57,006 $ 204,135 $ (207,938)
=========== =========== ===========

Basic income (loss) per common share ....................... $ 1.09 $ 3.93 $ (4.02)
=========== =========== ===========
Diluted income (loss) per common share ..................... $ 1.06 $ 3.81 $ (4.02)
=========== =========== ===========

See notes to consolidated financial statements.

F-3

APRIA HEALTHCARE GROUP INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

COMMON STOCK ADDITIONAL TREASURY STOCK TOTAL
------------ PAID-IN ACCUMULATED -------------- STOCKHOLDERS'
SHARES PAR VALUE CAPITAL DEFICIT SHARES COST EQUITY
------ --------- ------- ------- ------ ---- -------
(IN THOUSANDS)

Balance at December 31, 1997............ 51,568 $ 51 $324,093 $(249,674) - $ (3) $ 74,467
Exercise of stock options............... 217 1 1,685 1,686
Other................................... 128 128
Net loss................................ (207,938) (207,938)
------- ------ -------- --------- ----- ----- --------
Balance at December 31, 1998............ 51,785 52 325,906 (457,612) - (3) (131,657)

Exercise of stock options............... 270 2,671 2,671
Tax benefits related to stock options... 235 235
Other................................... 85 85
Net income.............................. 204,135 204,135
------- ------ -------- --------- ----- ----- --------
Balance at December 31, 1999............ 52,055 52 328,897 (253,477) - (3) 75,469

Exercise of stock options............... 1,099 1 10,735 10,736
Tax benefits related to stock options... 3,989 3,989
Repurchases of common stock............. (86) (958) (958)
Net income.............................. 57,006 57,006
------- ------ -------- --------- ----- ----- --------
Balance at December 31, 2000............ 53,154 $ 53 $343,621 $(196,471) (86) $(961) $146,242
====== ====== ======== ========= ===== ===== ========

See notes to consolidated financial statements.

F-4

APRIA HEALTHCARE GROUP INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEAR ENDED DECEMBER 31,
------------------------------------
2000 1999 1998
---- ---- ----
(IN THOUSANDS)
OPERATING ACTIVITIES

Net income (loss) .............................................................. $ 57,006 $ 204,135 $(207,938)
Items included in net income (loss) not requiring (providing) cash:
Provision for doubtful accounts .............................................. 32,166 34,314 75,319
Provision for inventory and patient service equipment shortages/obsolescence.. - 3,968 23,305
Depreciation ................................................................. 95,074 92,312 104,031
Amortization of intangible assets ............................................ 10,205 8,048 12,496
Amortization of deferred debt costs .......................................... 2,618 4,471 1,747
Impairment of intangible assets .............................................. - - 76,223
Impairment of long-lived assets and internally-developed software ............ - - 22,187
Deferred income taxes ........................................................ 30,426 (138,569) -
Other, net ................................................................... 3,067 (1,444) 3,113
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable .......................................................... (27,105) (49,802) 50,035
Inventories .................................................................. (3,898) (3,668) (612)
Prepaids and other assets .................................................... 1,427 (3,905) 7,787
Accounts payable ............................................................. 4,103 3,574 5,276
Accrued payroll and related taxes and benefits ............................... 1,971 898 (15,692)
Accrued expenses ............................................................. (14,818) (7,487) 15,128
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES ............................... 192,242 146,845 172,405

INVESTING ACTIVITIES
Purchases of patient service equipment and property,
equipment and improvements, net of effects of acquisitions ................. (96,414) (75,119) (53,068)
Proceeds from disposition of assets .......................................... 637 1,038 3,170
Acquisitions and payments of contingent consideration ........................ (26,220) (53,427) (2,727)
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES ................................... (121,997) (127,508) (52,625)

FINANCING ACTIVITIES
Payments on term loan ........................................................ (79,062) (68,938) -
Payments under revolving credit facility ..................................... - - (50,000)
Payments on other long-term debt ............................................. (3,608) (5,826) (8,773)
Capitalized debt costs, net .................................................. (982) (2,226) (3,535)
Repurchases of common stock .................................................. (958) - -
Issuances of common stock .................................................... 10,736 2,671 1,686
--------- --------- ---------
NET CASH USED IN FINANCING ACTIVITIES ................................... (73,874) (74,319) (60,622)
--------- --------- ---------

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ........................... (3,629) (54,982) 59,158
Cash and cash equivalents at beginning of year ................................. 20,493 75,475 16,317
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR ................................ $ 16,864 $ 20,493 $ 75,475
========= ========= =========

See notes to consolidated financial statements.

F-5

APRIA HEALTHCARE GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Company Background and Segment Reporting: Apria operates in the home
healthcare segment of the healthcare industry and provides services including
home respiratory therapy, home infusion therapy, home medical equipment and
other services to patients in the home throughout the United States through its
approximately 360 branch locations. Respiratory therapy, infusion therapy and
home medical equipment/other represented approximately 65%, 19% and 16% of total
2000 revenues, respectively. The gross margins in 2000 for respiratory therapy,
infusion therapy and home medical equipment/other were 80%, 59% and 60%,
respectively.

Management measures operating results on a geographic basis and, therefore,
views each branch as an operating segment. All the branches provide the same
services, except that infusion services are not offered in all the geographic
markets in which the company operates. For financial reporting purposes, all the
company's operating segments are aggregated into one reportable segment.

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 30% of the company's 2000 revenues
are reimbursed under arrangements with Medicare and Medicaid. In 2000, 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 2000.

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 analyses to evaluate the net realizable value of
accounts receivable. 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. Because of 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.

The company adopted Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue
Recognition in Financial Statements", in the fourth quarter of 2000. SAB 101
provides guidance on the proper timing of revenue recognition in accordance with
generally accepted accounting principles. The adoption of SAB 101 did not have a
material effect on the company's consolidated results of operations or financial
position.

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 in excess of bank balances, which are reported
as a component of accounts payable, were $18,488,000 and $14,229,000 at December
31, 2000 and 1999, respectively. Management considers all highly liquid
instruments purchased with a maturity of less than three months to be cash
equivalents.

F-6

Accounts Receivable: Included in accounts receivable are earned but
unbilled receivables of $17,935,000 and $22,987,000 at December 31, 2000 and
1999, 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 consists of medical
equipment provided to in-home patients and is stated at cost. Depreciation is
provided using the straight-line method over the estimated useful lives of the
equipment, which range from one to 10 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 solely of computer equipment. 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 3
are as follows: leasehold improvements -- the shorter of the remaining lease
term or seven years; equipment and furnishings -- three to 15 years; 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. If events and circumstances indicate that the
software is impaired, management applies its policy for measuring and recording
impairment of its intangible and other long-lived assets, as described below.

Intangible and Other Long-lived Assets: Intangible assets consist of
covenants not to compete and goodwill arising from business combinations. The
values assigned to intangible assets are amortized on a straight-line basis.
Covenants are amortized over contractual terms, which range from two to 10
years. Goodwill, representing the excess of the purchase price over the
estimated fair value of the net assets of the acquired business, is amortized
over the period of expected benefit. The amortization period for substantially
all of the company's goodwill is 20 years.

Management reviews for impairment of long-lived assets and intangible
assets to be held and used in the company's operations on an ongoing basis and
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. For purposes of assessing impairment, assets
are grouped at the branch level which is the lowest level for which there are
identifiable cash flows that are largely independent of the cash flows of other
groups of assets. Goodwill is generally separately identified by acquisition and
branch location. However, for multi-location acquisitions, goodwill is allocated
to branches on the basis of annual revenues as of the acquisition date.
Management deems the long-lived and/or intangible assets of a branch to be
impaired if estimated expected undiscounted future cash flows are less than the
carrying amount of the assets. Estimates of expected future cash flows are based
on management's best estimates of anticipated operating results over the
remaining useful life of the assets. For those branches identified as containing
impaired assets, the company measures the impairment as the amount by which the
carrying amount of the asset exceeds the fair value of the asset. In estimating
the fair value of the asset, management utilizes a valuation technique based on
the present value of expected future cash flows. Management does not believe any
impairment of its long-lived assets or intangible assets existed at December 31,
2000.

Fair Value of Financial Instruments: The fair value of long-term debt and
letters of credit is determined by reference to borrowing rates currently
available to Apria for loans with similar terms and average maturities. The
carrying amounts of cash and cash equivalents, accounts receivables, trade
payables and accrued expenses approximate fair value because of their short
maturity.

Advertising: Advertising costs amounting to $2,212,000, $2,528,000 and
$3,295,000 for 2000, 1999 and 1998, respectively, are expensed as incurred and
included in "Selling, distribution and administrative expenses."

F-7

Income Taxes: Apria provides for income taxes in accordance with provisions
specified in Statement of Financial Accounting Standards 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.

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

Stock-Based Compensation: Apria grants options to employees for a fixed
number of shares with an exercise price equal to the fair value of the shares at
the date of grant. The company accounts for stock option grants in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"). Apria has adopted the disclosure provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-based
Compensation" ("SFAS No. 123").

In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
provides clarification for issues that have arisen in applying APB Opinion No.
25, "Accounting for Stock Issued to Employees," including: the definition of an
employee for purposes of applying APB Opinion No. 25; the criteria for
determining whether a plan qualifies as a noncompensatory plan; the accounting
consequences of various modifications to the terms of previously fixed stock
options or awards; and the accounting for an exchange of stock compensation
awards in a business combination. FIN 44 became effective July 1, 2000, but
certain conclusions in FIN 44 cover specific events that occur after either
December 15, 1998 or January 12, 2000. Apria adopted FIN 44 during the third
quarter of 2000. The adoption of FIN 44 did not have a material effect on
Apria's consolidated results of operations or financial position.

Comprehensive Income: For the years ended December 31, 2000, 1999 and 1998,
there were no differences between comprehensive income (loss) and net income
(loss).

Recent Accounting Pronouncements: Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"), was issued in June 1998 and subsequently amended
in June 1999 by Statement of Financial Accounting Standards No. 137, "Accounting
for Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of SFAS No. 133". SFAS No. 133 was further amended in June 2000 by
Statement of Financial Accounting Standards No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities". SFAS No. 133, as
amended, establishes accounting and reporting standards for hedging activities
and for derivative instruments, including certain derivative instruments
embedded in other contracts. It requires that an entity recognize all
derivatives as either assets or liabilities in the statements of financial
position and measure those instruments at fair value. Changes in the fair value
of derivatives must be recorded each period. SFAS No. 133 also requires formal
documentation, designation at the time the hedge transaction is initiated and
assessment of the effectiveness of the transactions that receive hedge
accounting. Apria's adoption of SFAS No. 133, which was required beginning
January 1, 2001, will not 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.

F-8

NOTE 2 -- BUSINESS COMBINATIONS AND DISPOSITIONS

During 2000, 1999 and 1998, Apria acquired a number of complementary
businesses in specific geographic markets which were purchased for cash. The
transactions were accounted for as purchases and, accordingly, the results of
operations of the acquired businesses are included in the consolidated
statements of operations 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, including payments of contingent consideration
that totaled $1,626,000 in 2000. At December 31, 2000, outstanding contingent
consideration totaled $2,919,000.

YEAR ENDED DECEMBER 31,
-----------------------------
2000 1999 1998
---- ---- ----
(IN THOUSANDS)

Fair value of assets acquired.......... $ 26,778 $ 56,313 $ 2,610
Liabilities paid (assumed), net........ (558) (2,886) 117
-------- -------- -------
Cash paid........................ $ 26,220 $ 53,427 $ 2,727
======== ======== =======

The fair value of assets acquired during 2000, 1999 and 1998 includes
intangible assets of $22,492,000, $49,324,000 and $1,653,000, respectively.

During the third quarter of 1998, Apria sold its infusion business in
California to Crescent Healthcare, Inc. and exited the infusion business in
Texas, Louisiana, West Virginia, western Pennsylvania and downstate New York.
Charges of $7,263,000 related to the wind-down of exited infusion operations and
a $3,798,000 loss on sale of the California business were recorded. The
operations of these infusion locations had revenues of $41,480,000 in 1998.

NOTE 3 -- PROPERTY, EQUIPMENT AND IMPROVEMENTS

Property, equipment and improvements consist of the following:

DECEMBER 31,
-----------------------
2000 1999
---- ----
(IN THOUSANDS)

Leasehold improvements................ $ 20,912 $ 20,787
Equipment and furnishings............. 46,136 44,960
Information systems................... 57,408 43,391
-------- --------
124,456 109,138
Less accumulated depreciation......... (83,826) (67,635)
-------- --------
$ 40,630 $ 41,503
======== ========

In 1998, Apria discontinued the implementation of an enterprise resource
planning system. Accordingly, Apria wrote off related software and other
capitalized costs of $7,548,000 in the third quarter of 1998. As part of the
decision to terminate the enterprise resource planning project, management
evaluated its existing systems to determine their long-term viability in the
context of the company's overall strategic direction. It was determined that the
company was at some risk in continuing to run the infusion billing system on its
current platform, which is no longer supported by the computer industry. To
mitigate this risk, Apria is in the process of converting the infusion system to
the same operating platform used in the company's respiratory therapy/home
medical equipment business. The company also installed a number of enhancements
to the systems, rendering certain previously-developed modules obsolete.
Additionally, pharmacy and branch consolidations and closures resulted in a
variety of computer equipment that was no longer needed. Due to its age and
technological obsolescence, it was deemed to have no future value. As a result
of these actions, Apria recorded an impairment charge of $11,843,000 in the
third quarter of 1998.

F-9

NOTE 4 -- INTANGIBLE ASSETS

Intangible assets consist of the following:

DECEMBER 31,
-------------------------
2000 1999
---- ----
(IN THOUSANDS)

Covenants not to compete.............. $ 16,455 $ 16,034
Goodwill.............................. 170,522 149,352
--------- ---------
186,977 165,386
Less accumulated amortization......... (49,049) (39,745)
--------- ---------
$ 137,928 $ 125,641
========= =========

1998 Impairment of Intangible Assets: The deterioration in the infusion
therapy industry and management's decision in 1998 to withdraw from the infusion
service line in certain geographic markets served as indicators of potential
intangible asset impairment. Other indicators of potential impairment identified
by management included, among other issues, the company's declining common stock
price, failure to meet its already lowered financial expectations, the threat of
continued Medicare reimbursement reductions, government investigations against
the company, slower than expected progress in improving its billing and
collection process, and collection difficulties resulting from reported
financial problems within major managed care organizations with which Apria does
business. In the third quarter of 1998, management conducted an evaluation of
the carrying value of the company's recorded intangible assets. Management
considered current and anticipated industry conditions, recent changes in its
business strategies, and current and anticipated operating results. The
evaluation resulted in an impairment charge of $76,223,000, which includes a
write-off of $4,771,000 in intangible assets associated with the exit of the
infusion service line in certain areas.

NOTE 5 -- CREDIT FACILITY AND LONG-TERM DEBT

Long-term debt consists of the following:

DECEMBER 31,
------------------------
2000 1999
---- ----
(IN THOUSANDS)

Term loan payable......................... $140,000 $219,062
9 1/2% senior subordinated notes.......... 200,000 200,000
Capital lease obligations (see Note 9).... 3,478 4,032
-------- --------
343,478 423,094
Less: Current maturities.................. (1,999) (23,528)
Unamortized deferred debt costs..... (3,729) (5,365)
-------- --------
$337,750 $394,201
======== ========

Credit Agreement: Apria's credit agreement with Bank of America and a
syndicate of banks was amended in March and September of 2000. The March
amendment increased the agreement's maximum capital expenditure limitation,
while the most recent amendment extended the maturity date of the agreement to
September 30, 2002. The September amendment also reduced the interest rate on
borrowings by .75%, increased the aggregate purchase price permitted for
acquisitions from $125,000,000 to $200,000,000 through the maturity date of the
agreement and increased the revolving line of credit from $30,000,000 to
$50,000,000. In conjunction with the September amendment, Apria also reduced the
outstanding term loan by $20,062,000.

The company further reduced the outstanding term loan by making voluntary
prepayments of $30,000,000 and $19,000,000 on October 20 and December 20, 2000,
respectively. The voluntary prepayments reduced the scheduled term loan payments
for the five quarterly periods ending December 31, 2000 through December 31,
2001, to zero. Remaining scheduled payments for the quarters ended March 31 and
June 30, 2002, amount to $6,000,000 and $10,000,000, respectively.

The amended agreement permits Apria to elect one of two variable rate
interest options at the time an advance is made. The first option is expressed
as 1.75% plus the higher of (a) the Bank of America "reference rate" and
(b) the Federal Funds Rate plus 0.50% per annum. The second option is a
rate based on the London Interbank Offered Rate plus 2.75% per annum. The

F-10

effective interest rate at December 31, 2000 was 9.44% for term loan borrowings
of $140,000,000. The amended credit agreement requires payment of commitment
fees of 0.375% on the unused portion of the revolving credit facility.

Borrowings under the credit facility are collateralized by substantially
all of the assets of Apria. The agreement contains numerous restrictions,
including but not limited to, covenants requiring the maintenance of certain
financial ratios, limitations on additional borrowings, capital expenditures,
mergers, acquisitions and investments and restrictions on cash dividends, loans
and other distributions. At December 31, 2000, the company was in compliance
with all of the financial covenants required by the credit agreement.

The carrying value of the term loan approximates fair market value because
the underlying instruments are variable notes that reprice frequently.

As of December 31, 2000, Apria had no derivative securities that require
fair value measurement under SFAS No. 133. The company is exposed to changes in
interest rates through its bank credit facility which offers the variable rate
interest options discussed above.

At December 31, 2000, the company's outstanding letters of credit amounted
to $1,000,000 and credit available under the revolving credit facility was
$49,000,000.

9 1/2% Senior Subordinated Notes: Apria's $200,000,000 9 1/2% senior
subordinated notes mature November 1, 2002 and are subordinated to all senior
debt of the company and are senior in right of payment to subordinated debt of
the company. The fair value of these notes, as determined by reference to quoted
market prices, is $195,200,000 and $196,080,000 at December 31, 2000 and 1999,
respectively.

Under the indenture governing Apria's senior subordinated notes, the
company's ability to incur additional indebtedness becomes restricted when the
company's fixed charge coverage ratio (as defined in the indenture) is less than
3.0 to 1.0. At December 31, 2000, the company's fixed charge coverage ratio
exceeds the minimum required by the indenture.

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

(IN THOUSANDS)

2001................................... $ -
2002................................... 340,000
--------
$340,000
========

Total interest paid in 2000, 1999 and 1998 amounted to $37,119,000,
$37,923,000 and $44,989,000, respectively.

NOTE 6 -- STOCKHOLDERS' EQUITY

Common Stock: Apria has granted registration rights to certain holders of
common stock under which the company is obligated to pay the expenses associated
with those registration rights.

On February 7, 2000, the Rights Agreement dated as of February 8, 1995,
between Apria and Norwest Bank Minnesota, National Association, as successor
Rights Agent, expired. As a result, all outstanding Rights issued under that
Agreement that were evidenced by shares of the company's common stock have
become void and may no longer be exercised under any circumstances.

F-11

Stock Compensation Plans: Apria has various stock-based compensation plans,
which are described below. Management applies the provisions of APB No. 25 and
related interpretations in accounting for its plans. No compensation expense has
been recognized upon granting of options under its fixed stock option plans or
its performance-based plans. Had compensation expense for the company's
stock-based compensation plans been recognized based on the fair value of awards
at the date of grant, consistent with the method of SFAS No. 123, Apria's net
income (loss) and per share amounts would have been adjusted to the pro forma
amounts indicated below.

2000 1999 1998
---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income (loss):
As reported......................... $57,006 $204,135 $(207,938)
Pro forma........................... $47,812 $196,971 $(212,518)

Basic net income (loss) per share:
As reported......................... $ 1.09 $ 3.93 $ (4.02)
Pro forma........................... $ 0.91 $ 3.79 $ (4.11)

Diluted net income (loss) per share:
As reported......................... $ 1.06 $ 3.81 $ (4.02)
Pro forma........................... $ 0.89 $ 3.71 $ (4.11)

For purposes of pro forma disclosure, the fair value of each option grant
is estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions used for grants in 2000, 1999
and 1998: risk-free interest rates ranging from 5.99% to 6.72%, 6.81% to 6.89%
and 5.72% to 4.16%, respectively; dividend yield of 0% for all years; expected
lives of 4.89 years for 2000, 5.08 years for 1999 and 5.36 years for 1998; and
volatility of 65% for 2000, 64% for 1999 and 63% for 1998.

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 options become exercisable at any time from the date
of grant to five years after the date of grant and expire not later than 10
years after the date of grant.

A summary of the status of Apria's fixed stock options as of December
31, 2000, 1999 and 1998, and the activity during the years ending on those dates
is presented below:

2000 1999 1998
------------------------- ------------------------ -------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ -------------- ------ -------------- ------ --------------

Outstanding at beginning of year.......... 2,619,083 $15.73 2,300,969 $14.73 2,803,952 $17.46
Granted:
Exercise price equal to fair value...... 1,136,000 $16.47 563,332 $18.06 774,994 $ 8.78
Exercise price greater than fair value.. - $ - 50,000 $18.45 75,000 $12.56
Exercised................................. (322,432) $15.87 (189,241) $10.24 (104,638) $ 4.33
Forfeited................................. (164,555) $17.69 (105,977) $17.59 (1,248,339) $17.90
--------- --------- ----------

Outstanding at end of year................ 3,268,096 $15.87 2,619,083 $15.73 2,300,969 $14.73
========= ========= ==========

Exercisable at end of year................ 1,868,339 $15.23 1,792,519 $15.14 1,701,287 $14.20
========= ========= ==========

The weighted-average fair values of fixed stock options granted during
2000, 1999 and 1998 were $9.85, $10.79 and $5.30, respectively.

F-12

The following table summarizes information about fixed stock options
outstanding at December 31, 2000:

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ---------------------------
WEIGHTED-
AVERAGE
REMAINING WEIGHTED- WEIGHTED-
NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE (IN YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
------------------------ ----------- --------------- -------------- ----------- --------------

$ 4.45 - $12.19 760,244 7.17 $ 8.79 670,244 $ 8.33
$12.25 - $16.63 474,420 7.37 $14.74 331,920 $14.59
$16.94 - $16.94 871,000 8.96 $16.94 10,800 $16.94
$17.05 - $20.00 660,312 7.27 $18.03 368,255 $17.95
$20.50 - $29.00 502,120 4.58 $23.00 487,120 $23.07
--------- ---------
$ 4.45 - $29.00 3,268,096 7.30 $15.87 1,868,339 $15.23
========= =========

Performance-Based Stock Options: Included in Apria's stock-based
compensation plans are provisions for the granting of performance-based stock
options. In 1999 and 1998, Apria granted such stock option awards to its key
employees and to key members of senior management. One third of these options
vested in January 2000, with the remainder scheduled to vest in July 2005.
Accelerated vesting was provided for upon the occurrence of certain events and
on designated dates on which the average fair market value of Apria's common
stock during any period of 90 consecutive calendar days subsequent to the grant
date was not less than a targeted per share price. As of January 2, 2001, all
such outstanding options had vested. These performance-based stock options
expire 10 years after the date of grant.

Also, the company has a Long-Term Senior Management Equity Plan which
provided for the granting of non-statutory stock option awards to key members of
senior management at fair market value on the date of the grant. The plan
provided for vesting at certain time intervals and accelerated vesting upon the
occurrence of certain events and the achievement of certain cumulative and
annual earnings per share targets. As of March 1999, all outstanding options had
vested. Since 1995, no options have been granted under this plan and no further
grants are authorized. Options awarded under this plan expire 10 years from the
date of grant.

A summary of the status of the Apria's performance-based stock options as
of December 31, 2000, 1999 and 1998, and the activity during the years ending on
those dates is presented below:

2000 1999 1998
-------------------------- ------------------------ -------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ -------------- ------ -------------- ------ --------------

Outstanding at beginning of year.......... 3,208,392 $ 7.77 3,410,862 $ 7.55 836,602 $11.24
Granted:
Exercise price equal to fair value...... - $ - 124,500 $13.54 2,767,000 $ 6.88
Exercise price greater than fair value.. - $ - 20,000 $ 6.50 136,500 $ 6.50
Exercised................................. (776,484) $ 7.20 (80,470) $11.00 (112,100) $11.00
Forfeited................................. (47,506) $ 6.50 (266,500) $ 6.50 (217,140) $10.85
--------- --------- ---------

Outstanding at end of year................ 2,384,402 $ 7.99 3,208,392 $ 7.77 3,410,862 $ 7.55
========= ========= =========
Exercisable at end of year................ 1,747,365 $ 8.36 871,142 $ 9.70 610,622 $10.53
========= ========= =========

The weighted-average fair values of performance based stock options granted
during 1999 and 1998 were $7.38 and $4.52, respectively.

F-13

The following table summarizes information about performance-based stock
options outstanding at December 31, 2000:

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- ---------------------------
WEIGHTED-
AVERAGE
REMAINING WEIGHTED- WEIGHTED-
NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE (IN YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
------------------------ ----------- --------------- -------------- ----------- --------------

$ 4.69 - $ 6.50 1,328,996 7.59 $ 6.33 733,461 $ 6.19
$ 6.75 - $ 9.00 610,000 7.41 $ 8.75 596,666 $ 8.75
$ 9.50 - $18.56 445,406 2.44 $11.88 417,238 $11.61
--------- ---------

$ 4.69 - $18.56 2,384,402 6.58 $ 7.99 1,747,365 $ 8.36
========= =========

Approximately 9,834,000 shares of common stock are reserved for future
issuance upon exercise of stock options under these plans.

NOTE 7 -- INCOME TAXES

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

DECEMBER 31,
-----------------------
2000 1999
---- ----
(IN THOUSANDS)
Deferred tax liabilities:
Tax over book depreciation ............... $ (4,834) $ (16,579)
Other, net ............................... (878) (559)
--------- ---------
Total deferred tax liabilities ..... (5,712) (17,138)

Deferred tax assets:
Allowance for doubtful accounts .......... 14,636 20,860
Accruals ................................. 9,251 12,827
Asset valuation reserves ................. 2,766 11,693
Net operating loss carryforward, limited
by Section 382 ......................... 70,115 89,104
AMT and research credit carryovers ....... 8,052 6,859
Intangible assets ........................ 8,126 14,021
Other, net ............................... 909 343
--------- ---------
Total deferred tax assets .......... 113,855 155,707
--------- ---------
Net deferred tax assets ............ $ 108,143 $ 138,569
========= =========

At December 31, 2000, the company's net current deferred tax assets and net
long-term deferred tax assets are $33,067,000 and $75,076,000 respectively. The
difference in the company's deferred tax assets from 1999 to 2000 is primarily
attributable to utilization of current year net operating loss carryforwards.

At December 31, 2000, Apria had federal net operating loss carryforwards of
approximately $173,000,000, expiring in varying amounts in the years 2003
through 2013 and various state operating loss carryforwards that began to expire
in 1997. Additionally, the company has an alternative minimum tax credit
carryforward of approximately $8,000,000. As a result of an ownership change in
1992 that met specified criteria of Section 382 of the Internal Revenue Code,
future use of a portion of the federal and state operating loss carryforwards
generated prior to 1992 are each limited to approximately $5,000,000 per year.
Because of the annual limitation, approximately $57,000,000 of each of Apria's
federal and state operating loss carryforwards may expire unused. The net
operating loss carryforward amount in the related deferred tax asset excludes
such amount.

F-14

Income tax expense (benefit) consists of the following:

YEAR ENDED DECEMBER 31,
-----------------------------------
2000 1999 1998
---- ---- ----
(IN THOUSANDS)
Current:
Federal....................... $ 1,622 $ 1,470 $ -
State......................... 5,099 6,145 2,000
Foreign....................... - - 1,000
--------- --------- ---------
6,721 7,615 3,000
Deferred:
Federal....................... 30,116 (123,495) -
State......................... 4,298 (15,074) -
--------- --------- ---------
34,414 (138,569) -
--------- --------- ---------
$ 41,135 $(130,954) $ 3,000
========= ========= =========

During 2000, the exercise of stock options granted under Apria's various
stock option plans gave rise to $10,844,000 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.

Current federal income tax expense for 2000 and 1999 represents the
company's expected federal alternative minimum tax liability. This amount is
also reflected as a deferred tax asset in the accompanying balance sheet.

Current state income tax expense for each period presented includes state
tax amounts accrued and paid on a basis other than income. The current liability
also includes estimated settlement amounts for state income tax examinations.
During 1999, the company settled its foreign tax liabilities associated with the
foreign tax audits.

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

YEAR ENDED DECEMBER 31,
------------------------------------
2000 1999 1998
---- ---- ----
(IN THOUSANDS)

Income tax expense (benefit) at statutory rate ............... $ 34,349 $ 25,613 $ (71,728)
Non-deductible merger costs and amortization
and impairment loss on goodwill ............................ 1,590 1,628 21,000
State and foreign taxes, net of federal
benefit and state loss carryforwards ....................... 3,942 4,073 422
Decrease in valuation allowance for
deferred items currently recognized ........................ - (158,992) -
Tax benefit of net operating loss not currently recognized.... - - 53,306
Other ........................................................ 1,254 (3,276) -
--------- --------- ---------
$ 41,135 $(130,954) $ 3,000
========= ========= =========

Net income taxes paid (refunded) in 2000, 1999 and 1998, amounted to
$2,575,000, $2,679,000 and $(3,103,000), respectively.

F-15

NOTE 8 -- PER SHARE AMOUNTS

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

YEAR ENDED DECEMBER 31,
----------------------------------
2000 1999 1998
---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Numerator:
Net income (loss) .................................................. $ 57,006 $ 204,135 $(207,938)
Numerator for basic per share amounts - income (loss)
attributable to common stockholders ............................. $ 57,006 $ 204,135 $(207,938)
Numerator for diluted per share amounts - income (loss)
attributable to common stockholders ............................. $ 57,006 $ 204,135 $(207,938)

Denominator:
Denominator for basic per share
amounts - weighted-average shares ............................... 52,375 51,940 51,732
Effect of dilutive securities:
Employee stock options .......................................... 1,647 1,590 -
--------- --------- ---------
Dilutive potential common shares ................................ 1,647 1,590 -
--------- --------- ---------
Denominator for diluted per share amounts - adjusted
weighted-average shares ........................................ 54,022 53,530 51,732
========= ========= =========

Basic income (loss) per share amounts ................................. $ 1.09 $ 3.93 $ (4.02)
========= ========= =========
Diluted income (loss) per share amounts ............................... $ 1.06 $ 3.81 $ (4.02)
========= ========= =========

Employee stock options excluded from the computation
of diluted per share amounts:
Exercise price exceeds average market
price of common stock ........................................ 249 1,789 5,433
Other ........................................................... - - 63
--------- --------- ---------
249 1,789 5,496
========= ========= =========
Average exercise price per share that exceeds
average market price of common stock ............................... $ 25.52 $ 19.11 $ 10.74
========= ========= =========

Because a net loss was incurred in 1998, the impact of options is
antidilutive and consequently there is no difference between basic and diluted
per share amounts. For additional disclosure regarding employee stock options,
see Note 6.

NOTE 9 -- LEASES

Apria operates principally in leased offices and warehouse facilities. In
addition, delivery vehicles and office equipment are leased under operating
leases. Lease terms range from one to ten years 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 2000, 1999 and 1998 amounted to $56,243,000, $55,465,000 and
$57,670,000, respectively.

In addition, during 2000, 1999 and 1998, Apria acquired information systems
totaling $3,054,000 and $263,000 in 2000 and 1998, respectively, under capital
lease arrangements with lease terms ranging from two to three years. No such
arrangements were effected in 1999. Amortization of the leased information
systems amounted to $87,000, $2,023,000 and $9,562,000 in 2000, 1999 and 1998,
respectively.

F-16

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

DECEMBER 31,
---------------------------
2000 1999
---- ----
(IN THOUSANDS)

Information systems............... $ 3,054 $ 7,561
Less accumulated depreciation..... (87) (4,922)
--------- ---------
$ 2,967 $ 2,639
========= =========

Future minimum payments, by year and in the aggregate, required under
noncancellable operating leases and capital lease obligations consist of the
following at December 31, 2000:

CAPITAL OPERATING
LEASES LEASES
------ ------
(IN THOUSANDS)

2001.............................................. $ 2,206 $ 54,210
2002.............................................. 1,521 41,330
2003.............................................. - 30,489
2004.............................................. - 22,582
2005.............................................. - 15,370
Thereafter........................................ - 14,464
-------- --------
3,727 $178,445
========
Less interest included in minimum lease payments.. (249)
--------
Present value of minimum lease payments........... 3,478
Less current portion.............................. (1,999)
--------
$ 1,479
========

NOTE 10 -- EMPLOYEE BENEFIT PLANS

Apria has a 401(k) defined contribution plan, whereby eligible employees
may contribute up to 16% of their annual basic earnings. The company matches 50%
of the first 8% of employee contributions. Total expenses related to the defined
contribution plan were $3,792,000, $3,405,000 and $3,539,000 in 2000, 1999 and
1998, respectively.

NOTE 11 -- COMMITMENTS AND CONTINGENCIES

Litigation: Apria is engaged in the defense of certain claims and lawsuits
arising out of the ordinary course and conduct of its business, the outcome 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 the company upon the
resolution of these claims and lawsuits will not, in the aggregate, have a
material adverse effect on Apria's consolidated results of operations and
financial position.

F-17

Two similar class actions were filed during July, 1998 in Superior Court of
California for the County of Orange: Schall v. Apria Healthcare Group Inc., et
al. (Case No. 797060) and Thompson v. Apria Healthcare Group Inc., et al. (Case
No. 797580). These two actions were consolidated by a court order dated October
22, 1998 (Master Case No. 797060). On June 14, 1999, the plaintiffs filed a
Consolidated Amended Class Action Complaint asserting claims founded on state
law and on Sections 11 and 12(2) of the 1933 Securities Act.

Apria believes that it has meritorious defenses to the plaintiffs' claims
and it intends to vigorously defend itself in both the federal and state cases.
In the opinion of Apria's management, the ultimate disposition of these class
actions will not have a material adverse effect on the company's financial
condition or results of operations.

Certain Concentrations: Approximately 65% of Apria's revenues are derived
from the provision of respiratory therapy services, a significant portion of
which is reimbursed under the federal Medicare program. Effective January 1,
1998, reimbursement for home oxygen services and respiratory drugs was reduced
by 25% and 5%, respectively. An additional 5% reduction for home oxygen services
was effective January 1, 1999. The impact of the reductions on revenues was
approximately $10,000,000 and $57,000,000 for 1999 and 1998, respectively. The
Balanced Budget Act of 1997 included a freeze on Consumer Price Index-based
reimbursement rate increases for 1998 through 2002 as well as other provisions
which may impact reimbursement rates in the future. The Medicare Balanced Budget
Refinement Act of 1999 and the Medicare, Medicaid and SCHIP Benefits Improvement
and Protection Act of 2000 provide some relief from the Consumer Price
Index-based reimbursement rate freeze and other provisions contained in the
Balanced Budget Act of 1997. However, there can be no assurance that further
reimbursement reductions will not be made which could adversely impact operating
results.

Apria currently purchases approximately 44% of its patient service
equipment and supplies from four suppliers. Although there are a limited number
of suppliers, management believes that other suppliers 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.

F-18

NOTE 12 -- SERVICE/PRODUCT LINE DATA

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

YEAR ENDED DECEMBER 31,
------------------------------------
2000 1999 1998
---- ---- ----
(IN THOUSANDS)

Respiratory .................... $ 656,089 $ 598,901 $ 552,725
Infusion therapy ............... 194,508 179,148 211,176
Home medical equipment/other.... 163,604 161,975 169,892
---------- ---------- ----------
Total net revenues $1,014,201 $ 940,024 $ 933,793
========== ========== ==========

NOTE 13 -- SELECTED QUARTERLY FINANCIAL DATA (unaudited)

QUARTER
-------
First Second Third Fourth
----- ------ ----- ------
(in thousands, except per share data)

2000
----
Net revenues ....................... $250,722 $252,570 $252,588 $258,321
Gross profit ....................... $179,221 $183,189 $185,178 $187,671
Operating income ................... $ 32,637 $ 34,567 $ 35,695 $ 35,298
Net income ......................... $ 12,781 $ 14,071 $ 14,806 $ 15,384

Basic income per common share ...... $ 0.24 $ 0.27 $ 0.28 $ 0.29
Diluted income per common share .... $ 0.24 $ 0.26 $ 0.28 $ 0.28

1999
----
Net revenues ....................... $228,294 $232,040 $237,367 $242,323
Gross profit ....................... $162,225 $165,291 $170,761 $173,833
Operating income ................... $ 27,274 $ 28,307 $ 29,385 $ 30,741
Net income ......................... $ 15,562 $ 17,804 $ 18,895 $151,874

Basic income per common share ...... $ 0.30 $ 0.34 $ 0.36 $ 2.92
Diluted income per common share .... $ 0.30 $ 0.33 $ 0.35 $ 2.83

Fourth Quarter - 1999: Net income for the fourth quarter of 1999 includes
an income tax benefit of $131,357,000 which was primarily attributable to the
release of the company's valuation allowance. Management evaluated the available
positive and negative evidence in determining the realizability of the net
deferred tax assets at December 31, 1999. Management concluded it was more
likely than not that the company would realize its net deferred tax assets. In
reaching this conclusion, significant weight was given to the company's
continued quarterly profitability since the fourth quarter of 1998. Additional
positive evidence consisted of the divestiture of unprofitable service lines,
the stabilization of reimbursement rates during that fiscal year, and
management's ability to develop and achieve internal financial forecasts.

o o o o o o

F-19

APRIA HEALTHCARE GROUP INC.

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)

ADDITIONS
----------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
--------- --------- ---------- ---------- ----------

Year ended December 31, 2000
----------------------------
Deducted from asset accounts:
Allowance for doubtful accounts............. $ 44,652 $ 32,166 $ - $ 37,031 $ 39,787
Reserve for inventory and patient
service equipment shortages.............. 10,359 - - 2,569 7,790
-------- -------- -------- -------- --------
Totals ...................... $ 55,011 $ 32,166 $ - $ 39,600 $ 47,577
======== ======== ======== ======== ========

Year ended December 31, 1999
----------------------------
Deducted from asset accounts:
Allowance for doubtful accounts............. $ 35,564 $ 34,314 $ - $ 25,226 $ 44,652
Reserve for inventory and patient
service equipment shortages.............. 15,797 3,968 - 9,406 10,359
-------- -------- -------- -------- --------
Totals ...................... $ 51,361 $ 38,282 $ - $ 34,632 $ 55,011
======== ======== ======== ======== ========

Year ended December 31, 1998
----------------------------
Deducted from asset accounts:
Allowance for doubtful accounts............. $ 58,413 $ 75,319 $ - $ 98,168 $ 35,564
Reserve for inventory and patient
service equipment shortages.............. 10,273 23,305 - 17,781 15,797
-------- -------- -------- -------- --------
Totals ...................... $ 68,686 $ 98,624 $ - $115,949 $ 51,361
======== ======== ======== ======== ========

S-1

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 22, 2001

APRIA HEALTHCARE GROUP INC.

By: /s/ PHILIP L. CARTER
-----------------------------------
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/ PHILIP L. CARTER
-----------------------
Philip L. Carter Chief Executive Officer March 22, 2001

/s/ JOHN C. MANEY
-----------------------
John C. Maney Executive Vice President and March 22, 2001
Chief Financial Officer
(Principal Financial and
Accounting Officer)

/s/ RALPH V. WHITWORTH
-----------------------
Ralph V. Whitworth Director, Chairman of the Board March 22, 2001

/s/ DAVID H. BATCHELDER
-----------------------
David H. Batchelder Director March 22, 2001

/s/ DAVID L. GOLDSMITH
-----------------------
David L. Goldsmith Director March 22, 2001

/s/ RICHARD H. KOPPES
-----------------------
Richard H. Koppes Director March 22, 2001

/s/ PHILIP R. LOCHNER
-----------------------
Philip R. Lochner Director March 22, 2001

/s/ BEVERLY B. THOMAS
-----------------------
Beverly B. Thomas Director March 22, 2001

EXHIBIT INDEX

EXHIBIT
NUMBER DESCRIPTION REFERENCE
------ ----------- ---------

3.1 Restated Certificate of Incorporation of Registrant. (d)

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." (f)

3.3 Amended and Restated Bylaws of Registrant, as amended on May 5, 1998. (i)

3.4 Certificate of Amendment of Certificate of Incorporation of Apria Healthcare Group Inc. (l)

3.5 Amended and Restated Bylaws of Registrant, as amended on October 29, 1999. (m)

4.1 Form of 9 1/2% Senior Subordinated Note due 2002. (b)

4.2 Indenture dated November 1, 1993, by and among Abbey, certain Subsidiary Guarantors defined therein and
U.S. Trust Company of California, N.A., as filed on Form SE. (n)

4.3 Specimen Stock Certificate of the Registrant. (h)

4.4 Certificate of Designation of the Registrant. (d)

10.1 1991 Stock Option Plan. (a)

10.2 Schedule of Registration Procedures and Related Matters. (c)

10.3 401(k) Savings Plan, restated effective October 1, 1993, amended December 28, 1994. (g)

10.4 Stock Incentive Plan, dated June 28, 1995. (e)

10.5 Amended and Restated 1992 Stock Incentive Plan. (g)

10.6 Amendment Number Two to the 401(k) Savings Plan, dated June 28, 1995. (h)

10.7 Amendment Number Three to the 401(k) Savings Plan, dated January 1, 1996. (h)

10.8 Amendment 1996-1 to the 1991 Stock Option Plan, dated October 28, 1996. (j)

10.9 Amendment 1996-1 to the Amended and Restated 1992 Stock Incentive Plan, dated October 28, 1996. (j)

10.10 Amended and Restated 1997 Stock Incentive Plan, dated February 27, 1997, as amended through June 30, 1998. (j)

10.11 1998 Non-qualified Stock Incentive Plan, dated December 15, 1998. (j)

10.12 Description of Two-Year Incentive Plan for Executive Officers, adopted by the Board of Directors in
December 1998. (p)

10.13 First Amendment to Amended and Restated Credit Agreement and Consent dated January 15, 1999, among
Registrant and certain of its subsidiaries, Bank of America National Trust and Savings Association and
other financial institutions party to the Credit Agreement. (j)

10.14 Second Amendment to Amended and Restated Credit Agreement dated February 23, 1999, among Registrant and
certain of its subsidiaries, Bank of America National Trust and Savings Association and other financial
institutions party to the Credit Agreement. (j)

EXHIBIT INDEX (continued)

EXHIBIT
NUMBER DESCRIPTION REFERENCE
------ ----------- ---------

10.15 Amended and Restated Executive Severance Agreement dated February 26, 1999, between Registrant and
Michael R. Dobbs, as revised in December 2000.

10.16 Third Amendment to Amended and Restated Credit Agreement dated April 22, 1999, among Registrant and
certain of its subsidiaries, Bank of America National Trust and Savings Association and other financial
institutions party to the Credit Agreement. (k)

10.17 Fourth Amendment to Amended and Restated Credit Agreement dated October 22, 1999, among Registrant and
certain of its subsidiaries, Bank of America, National Association and other financial institutions party
to the Credit Agreement. (m)

10.18 Employment Agreement effective January 1, 2000, between Registrant and Philip L. Carter.

10.19 Amended and Restated Employment Agreement effective January 1, 2000, between Registrant and Lawrence M.
Higby.

10.20 Employment Agreement effective January 1, 2000, between Registrant and John C. Maney.

10.21 Fifth Amendment to Amended and Restated Credit Agreement dated March 24, 2000, among Registrant and
certain of its subsidiaries, Bank of America, National Association and other financial institutions party
to the Credit Agreement. (o)

10.22 Sixth Amendment to Amended and Restated Credit Agreement dated September 22, 2000, among Registrant and
certain of its subsidiaries, Bank of America, National Association and other financial institutions party
to the Credit Agreement. (q)

10.23 Amendment No. 1 to the 1998 Nonqualified Stock Incentive Plan, dated January 31, 2001.

21.1 List of Subsidiaries.

23.1 Consent of Deloitte & Touche LLP, Independent Auditors.

EXHIBIT INDEX (continued)

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-1 (Registration No. 33-69078), as filed
on September 17, 1993.

(c) Incorporated by reference to Registration Statement on Form S-4 (Registration No. 33-69094), as filed
on September 17, 1993.

(d) Incorporated by reference to Registration Statement on Form S-4 (Registration No. 33-90658), and its
appendices, as filed on March 27, 1995.

(e) Incorporated by reference to Registration Statement on Form S-8 (Registration No. 33-94026), as filed
on June 28, 1995.

(f) Incorporated by reference to Quarterly Report on Form 10-Q dated June 30, 1995, as filed on August
14, 1995.

(g) Incorporated by reference to Registration Statement on Form S-8 (Registration No. 33-80581), as filed
on December 19, 1995.

(h) Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1995.

(i) Incorporated by reference to Quarterly Report on Form 10-Q dated June 30, 1998, as filed on August
14, 1998.

(j) Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1998.

(k) Incorporated by reference to Quarterly Report on Form 10-Q dated March 31, 1999, as filed on May 14,
1999.

(l) Incorporated by reference to Quarterly Report on Form 10-Q dated June 30, 1999, as filed on August
12, 1999.

(m) Incorporated by reference to Quarterly Report on Form 10-Q dated September 30, 1999, as filed on
November 12, 1999.

(n) Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1999.

(o) Incorporated by reference to Quarterly Report on Form 10-Q dated March 31, 2000, as filed on May 15,
2000.

(p) Incorporated by reference to Quarterly Report on Form 10-Q dated June 30, 2000, as filed on August
11, 2000.

(q) Incorporated by reference to Quarterly Report on Form 10-Q dated September 30, 2000, as filed on
November 14, 2000.

COPIES OF EXHIBITS

Copies of exhibits will be provided upon written request and payment of a fee of
$.25 per page plus postage. The written request should be directed to the
Financial Reporting Department (Attn: Ms. Donna Draper), at the address of the
company set forth on the first page of this Form 10-K.