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

                                       OR

       [ ]      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.

     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.

     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.

     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.

                                      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.

     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.
Management  cannot  estimate the range of possible loss of this  litigation  and
therefore has not recorded any related accruals.

     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.