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, 2001
                                       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)

        26220 ENTERPRISE COURT                       92630-8400
            LAKE FOREST, CA                          (Zip Code)
(Address of principal executive offices)

       Registrant's telephone number, including area code: (949) 639-2000

           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. [X]

As  of  March  20,  2002,  there  were  outstanding  53,768,638  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, 2002 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 $21.59 per share as reported by the New York
Stock Exchange, was approximately $1,131,685,426.

                    DOCUMENTS INCORPORATED BY REFERENCE: None


                                     PART I

ITEM 1. BUSINESS

     Apria Healthcare Group Inc. provides comprehensive home healthcare services
through  approximately  400 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          Intravenous administration of anti-infectives,
                                  pain management, chemotherapy, nutrients (also
                                  administered through a feeding tube) and other
                                  medications  and  related services

   Home medical equipment         Provision  of   patient  safety   items,   and
                                  ambulatory   and  room  equipment,   such   as
                                  hospital   beds  and wheelchairs


STRATEGY

     Apria is pursuing an  operating  strategy to increase  its market share and
improve its profitability. Key elements of its strategy are as follows:

     MAINTAIN  DISCIPLINED  FOCUS ON EXISTING  SERVICE  OFFERINGS  AND  INCREASE
EMPHASIS  ON HOME  RESPIRATORY  THERAPY.  Apria  intends  to  remain in its core
businesses of home respiratory  therapy,  home infusion therapy and home medical
equipment.  Offering a comprehensive range of services gives Apria a competitive
advantage  with its core  managed  care  customers  and enables it to maintain a
diversified revenue base.  However,  Apria plans on increasing the percentage of
net revenues  generated by home  respiratory  therapy,  which  historically  has
produced higher gross margins than the other service lines.

     SUPPLEMENT  INTERNAL GROWTH WITH SELECTIVE  ACQUISITIONS.  Apria intends to
continue to expand through internal growth in the home respiratory  service line
and through  acquisitions.  Apria operates in a highly fragmented market,  which
provides an attractive opportunity to drive growth through acquisitions.  During
2001, Apria completed a number of acquisitions  comprised largely of respiratory
therapy businesses for an aggregate consideration of $81.7 million.

     REDUCE COSTS AND ENHANCE  MARGINS AND CASH FLOWS.  Apria's  management team
will continue to implement "best practices" programs throughout the company with
the aim of achieving greater  standardization,  reduced costs,  enhanced margins
and cash flow.  Apria's  receivables  management  program has reduced days sales
outstanding  to 50 at December 31, 2001.  Additionally,  Apria has developed and
implemented  standardized  clinical and delivery models,  billing  practices and
common  operating   procedures  in  its  field  locations  and  has  centralized
purchasing  for  inventory,   patient  service  equipment  and  supplies.  Apria
continues  to  focus   resources  on  identifying   opportunities   for  further
productivity improvements.


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,  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.  Apria purchases or rents the products needed to complement
its services. 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's individualized treatment plans;
     - reporting to the physician and/or managed care organization;
     - maintaining equipment; and
     - processing claims to third-party payors.

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

                                                    YEAR ENDED DECEMBER 31,
                                               ---------------------------------
                                                2001         2000         1999
--------------------------------------------------------------------------------

     Home respiratory therapy..............      66%           65%          64%
     Home infusion therapy.................      19%           19%          19%
     Home medical equipment/other..........      15%           16%          17%
                                                ----          ----         ----
           Total net revenues..............     100%          100%         100%
                                                ====          ====         ====

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

     - chronic  obstructive   pulmonary  disease  such  as  emphysema,   chronic
       bronchitis and asthma;
     - nervous  system-related   respiratory  conditions;
     - congestive heart failure; and
     - 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.

     Apria derives  approximately  58% of its respiratory  therapy revenues from
the provision of oxygen systems,  home  ventilators  and  nebulizers,  which are
devices to aerosolize medication.  The company derives its remaining respiratory
revenues from the provision of:

     - apnea monitors used to monitor the vital signs of newborns;
     - continuous  positive  airway pressure  devices used to treat  obstructive
       sleep apnea;
     - noninvasive positive pressure ventilation;
     - respiratory medications in pre-mixed unit dose form; and
     - other respiratory therapy products.

     HOME INFUSION THERAPY. Home infusion therapy involves the administration of
a drug or nutrient  directly into the body  intravenously  through a needle or a
catheter. Examples include:

     - total parenteral  (intravenous) nutrition;
     - anti-infectives;
     - chemotherapy;
     - pain management; and
     - other intravenous and injectable medications.

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

     Depending on the therapy,  a broad range of venous access  devices and pump
technologies may be used to facilitate homecare and patient independence.  Apria
employs licensed  pharmacists and registered  high-tech infusion nurses who have
specialized skills in the delivery of home infusion therapy.  They are available
to  respond  to  emergencies  and  questions  regarding  therapy  and to provide
training and  education to the patient and  caregiver.  Other  support  services
include patient service,  assistance with insurance questions,  pump management,
preventive maintenance,  direct billing of Medicare,  Medicaid and other payors,
outcome reporting and claims  processing.  Apria currently  operates 31 pharmacy
locations to serve its home infusion patients.

     HOME MEDICAL EQUIPMENT/OTHER.  Apria's primary emphasis in the home medical
equipment  service  line  is on  the  provision  of  patient  safety  items  and
ambulatory  and  patient  room  equipment.  The  company is also  expanding  its
rehabilitation  product  offering  in  selective  markets in the United  States.
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,  Apria's
management has recognized the need to expand its ability to provide  value-added
services to these  customers.  Rather than directly  providing  certain non-core
services itself,  Apria aligns itself with other segment  leaders,  such as 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 400 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,  equipment
maintenance,  repair  and  warehousing.  The  branch  delivers  home  healthcare
products  and  services to patients in their homes and other care sites  through
the  company's  delivery  fleet,   clinical  employees  and  qualified  delivery
professionals.  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 between revenue management, clinical
services 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 over and
consistency  among its  regions  and  branches  and  enables  implementation  of
standardized  policies and procedures,  thereby 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,  frequent  reinforcement,  compliance  audits, a
formal disciplinary component and other programs. See "Business - Risk Factors -
Federal Investigations".

     OPERATING  SYSTEMS  AND  CONTROLS.  Apria's  business  is  dependent,  to a
substantial  degree,  upon the quality of its  operating  and field  information
systems for the maintenance of accurate contract terms, accurate order entry and
pricing,  billing and collections.  These systems provide reporting that enables
management to effectively monitor and evaluate contract  profitability.  Apria's
information  services  department  works  closely  with  all  of  the  corporate
departments  to ensure  that  Apria's  systems  are  compliant  with  government
regulations  and payor  requirements  and to support their business  improvement
initiatives  with  technological  solutions.  The following are some of the more
significant projects currently underway:

     - Over  the  last 18  months,  Apria  has  been  developing  the  necessary
       functionality to support the infusion therapy business on the platform on
       which the respiratory/home  medical equipment application  operates.  The
       current infusion therapy application is based on an operating system that
       has limited support. The new system is currently in the quality assurance
       phase and  management  expects  to begin the  testing  phase in the third
       quarter of 2002. Upon completion of the testing,  the nationwide  rollout
       will commence and is expected to continue into late 2003.

     - Apria expects to complete the  implementation  and  integration of supply
       chain  management  software  by the  second  quarter  of  2002.  Apria is
       currently  planning  the  second  phase  of this  project,  which  is the
       implementation  of  the  software's  distribution  requirements  planning
       module and the customer  routing module to gain further  efficiencies  in
       the delivery of products to patients.

     - Over the last few years Apria has been centralizing and consolidating the
       respiratory/home  medical  equipment  billing  system data from the field
       locations to the corporate office.  This process thus far has reduced the
       number of IBM AS400 data servers in the field locations from 175 to fewer
       than 40. To mitigate  the risks  associated  with such a  centralization,
       Apria has  implemented a "hot site" that mirrors the corporate  data site
       at a remote  location which would serve as a backup in case of a disaster
       or other equipment failure.

     - The Health Insurance Portability and Accountability Act of 1996 ("HIPAA")
       contains  standardization  provisions  that  apply to health  information
       created  or  maintained  by  healthcare  providers  who engage in certain
       electronic  transactions.  Functions common to healthcare businesses such
       as billing, reimbursement and insurance eligibility verification that are
       performed  electronically  are  subject  to the  rules.  The  transaction
       standardization  rules require,  among other things,  the use of specific
       file formats and transaction codes for electronic  transmissions  between
       healthcare  business  affiliates.  Apria's  management  has been focusing
       resources on the  standardization  rules for the last year and expects to
       begin testing with the durable medical equipment regional carriers during
       the second  quarter of 2002.  See  "Business -  Government  Regulation  -
       HIPAA".

     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 - 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 identify and modify areas  requiring  improvement  and to monitor
progress.  Operating  models with strategic  targets have been developed to move
Apria  toward  more  effectively   managing  the  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 2001,  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.
Initiatives  focused  specifically  on  receivables  management  such as  system
enhancements,  process  refinements and organizational  changes have resulted in
improvement and consistency in key accounts  receivable  indicators.  Days sales
outstanding at December 31, 2001 and 2000 were 50 and 51, respectively.

     Apria  is  utilizing  its   information   systems   expertise  to  increase
utilization of technology  such as electronic  claims  submission and electronic
funds  transfer  with  managed  care  organizations.  This can  expedite  claims
processing and reduce the administrative  cost associated with this activity for
both Apria and its  customer/payors.  Management is also  focusing  resources on
certain large third-party  payors to develop internal expertise with the payors'
unique  reimbursement  requirements,  thereby  reducing  subsequent  denials and
shortening the related collection periods.


MARKETING

     Through its field sales  force,  Apria  markets its  services  primarily to
managed care organizations,  physicians,  hospitals, medical groups, home health
agencies  and  case  managers.  Following  are  examples  of  Apria's  marketing
initiatives:

     AUTOMATED CALL ROUTING THROUGH A SINGLE  TOLL-FREE  NUMBER.  This marketing
initiative  allows  select  managed care  organizations  to reach any of Apria's
locations  and to  access  the full  range of Apria  services  through  a single
central telephone number: 1-800-APRIA-88.

     ACCREDITATION  BY THE  JOINT  COMMISSION  ON  ACCREDITATION  OF  HEALTHCARE
ORGANIZATIONS. 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  that 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,  including acquired  locations,
are  accredited  by or in the  process of  receiving  accreditation  from JCAHO.
Apria's most recent triennial survey cycle concluded in the fall of 2001.

     ESSENTIAL CARE MODEL ("ECM").  Apria has devloped a proprietary  model that
defines the  services,  supplies and  products  delivered  in  conjunction  with
prescribed  homecare  equipment  and  therapies.  The ECM is  used to  establish
consistent and clear expectations for referral sources, payors and patients.

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

     PATIENT  SATISFACTION.  Apria has a centralized patient satisfaction survey
function that periodically conducts targeted member satisfaction studies for key
managed care organizations as specified by the various contractual arrangements.
The program  also meets  JCAHO's  requirements  for  outcome  data to be used in
performance improvement initiatives.

     APRIA  GREAT  ESCAPES TM   TRAVEL  PROGRAM.   Apria's   400-branch  network
facilitates  travel for patients who require  oxygen or other  therapies.  Apria
coordinates  equipment  and service  needs for  thousands of patients  annually,
which enhances their mobility and quality of life.


SALES

     Apria  employs   approximately  461  sales   professionals   whose  primary
responsibility  is to target key  customers  for all of its service  lines.  Key
customers   include   but  are  not   limited   to   hospital-based   healthcare
professionals, physicians and their staffs and managed care organizations. Apria
provides its sales  professionals  with the  necessary  clinical  and  technical
training to  represent  Apria's  major  service  offerings  of home  respiratory
therapy, home infusion therapy and home medical equipment. As larger segments of
the  marketplace  become  involved with managed care,  specific  portions of the
sales force's working  knowledge of pricing,  contracting and  negotiating,  and
specialty-care management programs are being enhanced as well.

     An integral  component  of Apria's  overall  sales  strategy is to increase
volume through managed care organizations and traditional 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 2001. Among its more significant managed care agreements, Apria
has contracts with Aetna,  Gentiva's  CareCentrix group, Kaiser Health Plans and
United  HealthCare  Group.  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; and
     - 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; and
     - accreditation by JCAHO.

     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 2001,  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, Apria's
Medicare  reimbursement  levels.  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 provided reinstatement in 2001 of the full annual cost of living adjustment
for durable medical equipment and provides minimal increases in 2002 for durable
medical  equipment and oxygen.  The Balanced  Budget Act of 1997 had frozen such
adjustments for each of the years 1998 through 2002.

     During  2000,  the  Secretary  of the U.S.  Department  of Health and Human
Services ("HHS") 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 that homecare pharmacies incur to prepare, deliver or
administer the drugs to patients.  Billing,  collection and other overhead costs
also would have been excluded. Under current government reimbursement schedules,
these  costs  are  not  clearly  defined  but  are  implicitly  covered  in  the
reimbursement  for the drug cost. The  healthcare  industry has taken issue with
the HHS's approach for several reasons,  primarily  because it fails to consider
the  accompanying  costs of  delivering  and  administering  these types of drug
therapies  to  patients  in  their  homes.   Further,  if  providers  choose  to
discontinue  providing  these  drugs due to  inadequate  reimbursement,  patient
access 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.   The  study  was  completed  but  the  authors
acknowledged  that 1) the limited scope and deadline  associated  with the study
did not allow for a thorough analysis of the homecare pharmacy aspect of covered
services,  2) legitimate  service  components and related costs do exist, and 3)
different methods of determining drug delivery and  administration  payments may
be necessary for different types of drugs.  Currently,  the timing and impact of
such pricing methodology revisions are not known.

     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.  In several states,  these changes have
reduced the level of  reimbursement  received by Apria to an unacceptable  level
without a  corresponding  offset or increase to compensate for the service costs
incurred.  In those  states,  Apria has elected to stop  accepting  new Medicaid
patient  referrals for the affected drugs.  The company is continuing to provide
services  to  patients  already  on  service,  and for those who  receive  other
Medicaid-covered respiratory, home medical equipment or infusion therapies.

     The Balanced  Budget Act of 1997 granted  authority to the Secretary of HHS
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 to
examine the use of the authority  granted under this procedure  (completed  July
2000),  and (2)  promulgation  by the Centers for  Medicare & Medicaid  Services
(formerly  the  Health  Care   Financing   Administration),   of  a  final  rule
implementing the inherent reasonableness  authority. This regulation has not yet
been issued.

     Further,  the  Balanced  Budget Act of 1997  mandated  that the Centers for
Medicare & Medicaid  Services conduct  competitive  bidding  demonstrations  for
Medicare  Part B items and services.  The  competitive  bidding  demonstrations,
currently  in  progress,  could  provide  the  Centers  for  Medicare & Medicaid
Services 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.  The
administration is seeking authority to implement nationwide  competitive bidding
for all Part B products and services (except physician's services). Congress has
rejected  similar  proposals in the past. It is not clear whether  Congress will
adopt this latest proposal.

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

     HIPAA. The Health Insurance Portability and Accountability Act mandates the
adoption of standards for the exchange of electronic  health  information  in an
effort to encourage  overall  administrative  simplification  and to enhance the
effectiveness  and efficiency of the healthcare  industry.  Ensuring privacy and
security of patient  information -  "accountability" - is one of the key factors
driving the  legislation.  The other major  factor -  "portability"  - refers to
Congress'  intention  to ensure  that  individuals  can take their  medical  and
insurance records with them when they change employers.

     In August 2000, HHS issued final regulations  establishing  electronic data
transmission  standards that  healthcare  providers must use when  submitting or
receiving  certain  healthcare  data  electronically.   All  affected  entities,
including  Apria,  are required to comply with these  regulations by October 16,
2002 unless the entity files a readiness plan by October 16, 2002, in which case
it will have until October 16, 2003 to comply.

     In December  2000, HHS issued final  regulations  concerning the privacy of
healthcare  information.  These  regulations  regulate the use and disclosure of
individuals' healthcare  information,  whether communicated  electronically,  on
paper or orally. All affected entities,  including Apria, are required to comply
with these  regulations by April 14, 2003. The regulations also provide patients
with significant new rights related to  understanding  and controlling how their
health  information  is used or disclosed.  In March 2002,  HHS issued  proposed
amendments to the final  regulations  which, if ultimately  adopted,  would make
Apria's compliance with certain of the requirements less burdensome.

     In  addition,  in the  Spring  of 2002,  HHS is  expected  to  issue  final
regulations  concerning  the security of  healthcare  information  maintained or
transmitted electronically.  Security regulations proposed by HHS in August 1998
would require  healthcare  providers to implement  organizational  and technical
practices  to  protect  the  security  of such  information.  Once the  security
regulations  are  finalized,  the company will have  approximately  two years to
comply with such regulations.

     Although the  enforcement  provisions of HIPAA have not yet been finalized,
sanctions are expected to include  criminal  penalties and civil  sanctions.  At
this time, the company anticipates that it will be fully able to comply with the
HIPAA regulations that have been issued by their respective mandatory compliance
dates.  Based on the  existing  and  proposed  HIPAA  regulations,  the  company
believes  that the cost of its  compliance  with  HIPAA will not have a material
adverse effect on its business, financial condition or results of operations.

     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  and home health  services.  In addition,
"financial  relationship"  is  broadly  defined  to  include  any  ownership  or
investment  interest or compensation  arrangement  pursuant to which a physician
receives  remuneration  from the provider at issue.  Violations  of Stark II may
result in loss of Medicare  and  Medicaid  reimbursement,  civil  penalties  and
exclusion from participation in the Medicare and Medicaid  programs.  In January
2001,  the  Centers  for  Medicare & Medicaid  Services  issued the first of two
phases of final  regulations to clarify the meaning and application of Stark II.
Officials of the Centers for Medicare & Medicaid  Services have stated that they
expect Phase II to be issued by August,  2002,  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 the bulk of Phase I of the final
regulations  was January 4, 2002.  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 entitled to receive up to 30% of the recovered amount from
the litigation proceeds if the litigation is successful. Recently, the number of
qui tam suits brought against healthcare  providers has increased  dramatically.
In addition, 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 it would  engage in  conduct or enter  into  contracts  in
violation of the fraud and abuse laws.  Contracts of the types  subject to these
laws are reviewed and approved by 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
administrative  or  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
governmental  bodies will continue to review and assess  alternative  healthcare
delivery  systems and payment  methodologies  and public  debate of these issues
will  continue  in the  future.  Due to  uncertainties  regarding  the  ultimate
features of reform  initiatives  and their enactment and  implementation,  Apria
cannot predict which,  if any, of such reform  proposals will be adopted or when
they may be adopted or that any such  reforms  will not have a material  adverse
effect on Apria's business and results of operations.

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


EMPLOYEES

     As of February 15,  2002,  Apria had 9,696  employees,  of which 8,600 were
full-time and 1,096 were  part-time.  The company's  employees are not currently
represented  by  a  labor  union  or  other  labor   organization,   except  for
approximately 17 employees in the State of New York.

     In February 2002, Apria's full-time  equivalents in the functional areas of
sales, operations and administration totaled 461, 7,762 and 1,036, respectively.
Full-time equivalents are computed by dividing the actual number of hours worked
in a given  period by the  typical  number of hours for that  period  based on a
40-hour week.



EXECUTIVE OFFICERS

     Set forth below are the names, ages, titles with Apria and past and present
positions of the persons serving as Apria's  executive  officers as of March 20,
2002:

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

Lawrence M. Higby, 56........ Chief  Executive Officer, President  and Director.
                              Mr. Higby  was appointed Chief  Executive  Officer
                              and Director  in February  2002.  He joined  Apria
                              in November 1997  as President and Chief Operating
                              Officer.  Prior  to  joining  Apria,   Mr.   Higby
                              served as President  and Chief  Operating  Officer
                              of Unocal's 76  Products  Company  and  Group Vice
                              President of Unocal Corporation from 1994 to 1997.

Michael R. Dobbs, 52 ........ 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.

James E. Baker, 50 .......... Chief  Financial  Officer.  Mr. Baker was promoted
                              to Chief Financial Officer  in  October  2001.  He
                              served  as  Vice President, Controller of  Homedco
                              and,   subsequently,   Apria,  since  August 1991.

Michael J. Keenan, 44 ....... Executive Vice President, Business Operations. Mr.
                              Keenan was promoted to Executive  Vice  President,
                              Business Operations  in April 2001. He  served  as
                              Division  Vice   President   of Operations for the
                              Pacific Division from December 1997 to April 2001.
                              Prior to that,  Mr. Keenan served as Regional Vice
                              President  of  the Northwest Region.

George J. Suda, 43 .......... Executive Vice  President,  Information  Services.
                              Mr. Suda was promoted to Executive Vice President,
                              Information Services in March 2000. Prior  to this
                              he served  as Senior  Vice President,  Information
                              Services  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.

Anthony S. Domenico, 44...... Executive  Vice  President,  Sales.  Mr.  Domenico
                              joined Apria as Executive Vice President, Sales in
                              August 2001.  From  1998  to  2001,  Mr.  Domenico
                              served as Chief Operating  Officer and Senior Vice
                              President  of  Sales  and  Operations  of  Perigon
                              Medical  Distribution,  Inc.  From  June  1995  to
                              January 1998, Mr. Domenico served as Regional Vice
                              President of Apria's Southern California Region.




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.  Readers of this report can identify these  statements by the use of
words like "may", "will", "could", "should", "project", "believe", "anticipate",
"expect", "plan", "estimate", "forecast",  "potential", "intend", "continue" and
variations of these words or comparable words. Such  forward-looking  statements
include,  but are not limited to,  statements as to anticipated  future results,
developments and occurrences set forth or implied herein.

     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  ITS
CONTROLS AND PROCESSES OVER BILLING AND COLLECTING OR THE  DETERIORATION  OF THE
FINANCIAL CONDITION OF ITS PAYORS COULD REDUCE ITS CASH COLLECTIONS AND INCREASE
ITS ACCOUNTS RECEIVABLE WRITE-OFFS.

     The  collection of accounts  receivable is one of Apria's most  significant
challenges  and requires  constant  focus and  involvement  by  management,  and
ongoing  enhancements  to  information  systems  and  billing  center  operating
procedures.   Further,   some  of  Apria's  payors  may   experience   financial
difficulties,  or may otherwise not pay accounts  receivable when due, resulting
in increased write-offs.  Apria can provide no assurance that it will be able to
maintain its current  levels of  collectibility  and days sales  outstanding  in
future  periods.  If Apria is unable to properly  bill and collect its  accounts
receivable,  its results and financial condition will be adversely affected. See
"Business  --  Organization  and  Operations  --  Receivables   Management"  and
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations".

OPERATING SYSTEMS AND CONTROLS -- APRIA'S  IMPLEMENTATION OF SIGNIFICANT  SYSTEM
MODIFICATIONS COULD HAVE A DISRUPTIVE EFFECT ON RELATED  TRANSACTION  PROCESSING
AND COULD  ULTIMATELY  DISRUPT THE COLLECTION OF REVENUES AND INCREASE  ACCOUNTS
RECEIVABLE AND INVENTORY WRITE-OFFS.

     Over  the  last  18  months,   Apria  has  been  developing  the  necessary
functionality  to support the  infusion  business  on the  platform on which the
respiratory/home  medical equipment application  operates.  The current infusion
therapy  billing  application  is based on an operating  system that has limited
support.  The new system is  currently  in the  quality  assurance  phase and is
expected to be moved to the  testing  phase in the third  quarter of 2002.  Upon
completion of the testing,  the nationwide rollout will commence and is expected
to continue into late 2003.

     Another  project  Apria  has  been  working  on is the  implementation  and
integration of supply chain management  software.  Completion is expected in the
second  quarter of 2002.  Apria is  currently  planning the second phase of this
project,  which is the implementation of the distribution  requirements planning
module  and  the  customer  routing  module  of the  software  to  gain  further
efficiencies  in the delivery of products to  patients.  The  implementation  of
these  system  changes  could have a  disruptive  effect on related  transaction
processing.  See "Business -- Organization  and Operations -- Operating  Systems
and Controls".

FEDERAL INVESTIGATIONS -- THE OUTCOME OF THE FEDERAL GOVERNMENT'S INVESTIGATIONS
OF APRIA'S  MEDICARE AND OTHER BILLING  PRACTICES COULD RESULT IN THE IMPOSITION
OF MATERIAL  LIABILITIES OR PENALTIES AND COULD RESULT IN APRIA'S EXCLUSION FROM
PARTICIPATION IN FEDERAL HEALTHCARE PROGRAMS.

     The U.S. Attorney's office in Los Angeles is conducting an investigation of
Apria's billing  documentation.  The U.S.  Attorney's  office has informed Apria
that this  investigation is the result of qui tam litigation,  a private lawsuit
filed by one or more  individuals on behalf of the  government,  but has not yet
informed  Apria whether it will  intervene in the qui tam actions;  however,  it
could reach a decision  with respect to  intervention  at any time.  If the U.S.
Attorney  were to intervene in the qui tam cases,  or if qui tam actions were to
proceed without such intervention, the amount of the claim could range from $4.8
billion to over $9 billion. Although Apria believes that the assertions in those
actions  are  unwarranted,  and is  prepared to  vigorously  defend  against any
attempt  to impose  material  liabilities  or  penalties,  Apria can  provide no
assurance as to the outcome of these proceedings. See "Legal Proceedings".

GOVERNMENT  REGULATION;  HEALTHCARE  REFORM -- APRIA  COULD BE SUBJECT TO SEVERE
FINES,  FACILITY  SHUTDOWNS AND POSSIBLE EXCLUSION FROM PARTICIPATION IN FEDERAL
HEALTHCARE  PROGRAMS  IF IT FAILS  TO  COMPLY  WITH  THE  LAWS  AND  REGULATIONS
APPLICABLE TO ITS BUSINESS OR IF THOSE LAWS AND REGULATIONS CHANGE.

     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 is subject to strict licensing and safety  requirements.  If Apria
is deemed to have violated these laws and regulations, Apria could be subject 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".

MEDICARE  REIMBURSEMENT RATES -- CONTINUED REDUCTIONS IN MEDICARE  REIMBURSEMENT
RATES COULD RESULT IN REDUCED REVENUES, EARNINGS AND CASH FLOWS.

     The  Balanced  Budget  Act  of  1997  significantly  reduced  the  Medicare
reimbursement  rates for home oxygen therapy and included other  provisions that
have impacted or may impact reimbursement rates in the future, such as potential
reimbursement   reductions  under  an  inherent  reasonableness   procedure  and
competitive  bidding.  Also  currently at issue is the potential  adoption of an
alternative  pricing  methodology for certain drugs and  biologicals.  Apria can
provide  no  assurance  to  prospective  investors  that  further  reimbursement
reductions will not be made. Since Medicare  accounted for  approximately 23% of
Apria's  net  revenues  for the  fiscal  year 2001,  any  further  reduction  in
reimbursement rates could result in lower revenues, earnings and cash flows. See
"Business -- Government Regulation -- Medicare and Medicaid Reimbursement".

     In addition,  the terrorist  attacks of September 11, 2001 and the military
and security  activities  which  followed,  their  impacts on the United  States
economy and government spending priorities,  and the effects of any further such
developments  pose  risks  and  uncertainties  to  all  U.S.-based   businesses,
including Apria.  Among other things,  deficit spending by the government as the
result of adverse  developments  in the  economy  and costs of the  government's
response to the  terrorist  attacks  could lead to increased  pressure to reduce
government  expenditures  for other  purposes,  including  governmentally-funded
programs such as Medicare.

PRICING PRESSURES -- CONTINUED  PRESSURE TO REDUCE HEALTHCARE COSTS COULD REDUCE
APRIA'S  MARGINS AND LIMIT  APRIA'S  ABILITY TO MAINTAIN OR INCREASE  ITS MARKET
SHARE.

     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.  Large  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,
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 RESULT IN A SLOWDOWN IN CASH COLLECTIONS AND ULTIMATELY
LEAD TO INCREASES IN APRIA'S ACCOUNTS RECEIVABLE WRITE-OFFS.

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


ITEM 2. PROPERTIES

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

     Apria has  approximately  400 branch  facilities that are organized into 15
regions.  The region  facilities  usually  house a branch and  various  regional
support  functions  such as  warehousing,  repair,  billing and pharmacy.  These
facilities are typically  located in light  industrial areas and generally range
from 20,000 to 85,000 square feet. The typical branch facility, other than those
that share a building with a region, is a combination warehouse and office, with
approximately  50% of the square footage  consisting of warehouse  space.  These
branch facilities,  also located in light industrial areas, can range from 1,000
square feet for a satellite  location up to 50,000  square  feet.  Apria  leases
substantially all of its facilities with lease terms of ten or fewer years.


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. The
consolidated  amended  class action  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 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 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.

     Following  a series  of  settlement  discussions,  the  parties  reached  a
tentative settlement of both the consolidated federal and state class actions in
early 2002. Under the terms of the settlement,  Apria has contributed $1 million
to a settlement  pool,  with the balance of the total  settlement  amount of $42
million coming from Apria's insurance carriers. Apria has also agreed to provide
various  indemnities to certain  current and former Apria officers and directors
who would be entitled to receive such indemnification  under applicable law. The
Orange County  Superior  Court has required that final  settlement  documents be
presented to the Court on April 16, 2002.  Apria cannot  provide any  assurances
that all of the  agreements  necessary  to finalize the  settlement,  and obtain
final Court approval for such a settlement,  will be obtained.  However,  in the
opinion of Apria's management,  the ultimate  disposition of these class actions
will not have a material  adverse  effect on Apria's  results of  operations  or
financial condition.

     Apria and its former Chief Executive Officer are also defendants in a class
action lawsuit,  J.E.B. Capital Partners,  LP v. Apria Healthcare Group Inc. and
Philip L. Carter,  filed on August 27, 2001 in the U.S.  District  Court for the
Central  District of California,  Southern  Division (Case No.  SACV01-813 GLT).
Among other things,  the operative  complaint  alleges that the defendants  made
false and/or  misleading public statements by not announcing until July 16, 2001
the amount of potential  damages asserted by the U.S.  Attorney's  office in Los
Angeles and counsel for the plaintiffs in the qui tam actions referred to below.
Apria believes that it has meritorious defenses to the plaintiff's claims and it
intends to vigorously defend itself. In the opinion of Apria's  management,  the
ultimate  disposition  of this class  action  will not have a  material  adverse
effect on Apria's results of operations or financial condition.

     As  previously  reported,  since  mid-1998  Apria has been the  subject  of
investigations  conducted  by  several  U.S.  Attorneys'  offices  and the  U.S.
Department  of Health  and Human  Services.  These  investigations  concern  the
documentation supporting Apria's billing for services provided to patients whose
healthcare  costs are paid by  Medicare  and other  federal  programs.  Apria is
cooperating with the government in connection with these  investigations  and is
responding to various document requests and subpoenas.  A criminal investigation
conducted by the U.S.  Attorney's  office in  Sacramento  was closed in mid-1999
with no charges being filed. Potential claims resulting from an investigation by
the U.S. Attorney's office in San Diego were settled in mid-2001 in exchange for
a payment by Apria of $95,000.

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

     On July 12, 2001, government representatives and counsel for the plaintiffs
in the qui tam  actions  asserted  that,  by a process of  extrapolation  from a
sample of 300 patient files to all of Apria's billings to the federal government
during the  three-and-one-half  year sample period, Apria could be liable to the
government  under the False Claims Act for more than $9 billion,  consisting  of
extrapolated  overpayment liability,  plus treble damages and penalties of up to
$10,000 for each allegedly false claim derived from the extrapolation.

     Apria has acknowledged that there may be errors and omissions in supporting
documentation  affecting a portion of its  billings.  However,  it considers the
assertions  and amounts  described in the preceding  paragraph to be unsupported
both legally and factually  and believes that most of the alleged  documentation
errors and  omissions  should not give rise to any  liability,  for  overpayment
refunds or otherwise.  Accordingly,  Apria believes that the claims asserted are
unwarranted  and  that  it is  in a  position  to  assert  numerous  meritorious
defenses. Nevertheless, Apria cannot provide any assurances as to the outcome of
these proceedings. Management cannot estimate the possible loss or range of loss
that may result  from these  proceedings  and  therefore  has not  recorded  any
related accruals.

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

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


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

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



                                     PART II

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

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

                                                HIGH            LOW
                                             ----------     -----------
Year ended December 31, 2001
----------------------------
  First Quarter                               $30.000         $20.400
  Second Quarter                               29.490          23.800
  Third Quarter                                29.850          21.000
  Fourth Quarter                               25.750          19.500


Year ended December 31, 2000
----------------------------
  First Quarter                               $22.000         $12.625
  Second Quarter                               16.375          10.500
  Third Quarter                                16.250          11.250
  Fourth Quarter                               30.625          14.000

     As of March 6,  2002,  there  were 646  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.



ITEM 6. SELECTED FINANCIAL DATA

     The following table presents Apria's  selected  financial data for the five
years ended  December 31, 2001.  The data set forth below have been derived from
Apria's audited Consolidated Financial Statements and are qualified by reference
to,  and  should  be  read  in  conjunction  with,  the  Consolidated  Financial
Statements and related notes thereto and  "Management's  Discussion and Analysis
of Financial Condition and Results of Operations" included in this report.


                                                                        YEAR ENDED DECEMBER 31,
                                                   ----------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)              2001           2000        1999(1)     1998(2,3)    1997(2,4)
-------------------------------------------------------------------------------------------------------------------

STATEMENTS OF OPERATIONS DATA:
                                                                                         
Net revenues....................................   $1,131,915   $1,014,201   $  940,024   $  933,793    $1,180,694
Income (loss) before extraordinary charge.......       73,445       57,006      204,135     (207,938)     (272,608)
Net income (loss)...............................       71,917       57,006      204,135     (207,938)     (272,608)

Basic income (loss) per common share:
  Income (loss) before extraordinary charge.....       $ 1.36       $ 1.09       $ 3.93       $(4.02)       $(5.30)
  Extraordinary charge on debt refinancing,
    net of taxes................................         0.03            -            -            -             -
                                                       ------       ------       ------       ------        ------
          Net income (loss).....................       $ 1.33       $ 1.09       $ 3.93       $(4.02)       $(5.30)
                                                       ======       ======       ======       ======        ======

Diluted income (loss) per common share:
  Income (loss) before extraordinary charge.....       $ 1.32       $ 1.06       $ 3.81       $(4.02)       $(5.30)
  Extraordinary charge on debt refinancing,
    net of taxes................................         0.03            -            -            -             -
                                                       ------       ------       ------       ------        ------
          Net income (loss) ....................       $ 1.29       $ 1.06       $ 3.81       $(4.02)       $(5.30)
                                                       ======       ======       ======       ======        ======

BALANCE SHEET DATA:
Total assets....................................   $  695,782   $  620,332    $  637,361  $  504,208    $  762,992
Long-term obligations, including
   current maturities...........................      293,689      343,478       423,094     496,196       554,727
Stockholders' equity (deficit)..................      242,798      146,242        75,469    (131,657)       74,467

(1)  Net income for 1999 reflects an income tax benefit of $131 million that was
     attributable  to the  release of  the company's  valuation allowance in the
     fourth quarter of 1999.

(2)  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 a charge of $61.4  million in 1997 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)  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.

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
approximately 400 branch locations.

     STRATEGY.  Apria is pursuing an operating strategy to increase market share
and improve profitability. Key elements of the strategy are as follows:

     - Remain in its core businesses of home respiratory therapy,  home infusion
       therapy and home medical  equipment.  Offering a  comprehensive  range of
       services  gives Apria a competitive  advantage with its core managed care
       customers and enables it to maintain a diversified revenue base. However,
       Apria plans on increasing  the  percentage  of net revenues  generated by
       home respiratory  therapy,  which  historically has produced higher gross
       margins than its home infusion therapy and home medical equipment service
       lines.

     - Continue  to  expand  through  internal  growth  in the home  respiratory
       service  line  and  through  acquisitions.  Apria  operates  in a  highly
       fragmented  market,  which  provides an attractive  opportunity  to drive
       growth through acquisitions.

     - Standardize  procedures,  reduce costs, enhance margins and optimize cash
       flow by implementing  "best practices"  programs  throughout the company.
       Apria's receivables management program has reduced days sales outstanding
       to 50 at  December  31,  2001.  Additionally,  Apria  has  developed  and
       implemented  standardized clinical and delivery models, billing practices
       and  common   operating   procedures  in  its  field  locations  and  has
       centralized  purchasing  for  inventory,  patient  service  equipment and
       supplies. Apria continues to focus resources on identifying opportunities
       for further productivity improvements.

     CRITICAL ACCOUNTING  POLICIES.  Apria's management considers the accounting
policies  that  govern  revenue  recognition  and the  determination  of the net
realizable  value of accounts  receivable to be the most critical in relation to
the  company's  consolidated   financial  statements.   These  policies  require
management's most complex and subjective  judgments.  Other accounting  policies
requiring significant judgment are those related to goodwill and income taxes.

     Revenue  and  Accounts  Receivable.  Revenues  are  recognized  on the date
services  and related  products  are  provided to patients  and are  recorded at
amounts  estimated  to  be  received  under   reimbursement   arrangements  with
third-party payors,  including private insurers,  prepaid health plans, Medicare
and  Medicaid.  Due  to  the  nature  of  the  industry  and  the  reimbursement
environment in which Apria  operates,  certain  estimates are required to record
net revenues and accounts receivable at their net realizable values. Inherent in
these  estimates  is the risk that they will have to be  revised  or  updated as
additional information becomes available.  Specifically,  the complexity of many
third-party  billing  arrangements and the uncertainty of reimbursement  amounts
for certain  services from certain  payors may result in  adjustments to amounts
originally  recorded.  Such adjustments are typically identified and recorded at
the  point  of cash  application,  claim  denial  or  account  review.  Accounts
receivable are reduced by an allowance for doubtful  accounts which provides for
those  accounts  from which  payment is not  expected to be  received,  although
services were provided and revenue was earned.

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

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

     Goodwill. Goodwill arising from business combinations represents the excess
of the  purchase  price over the  estimated  fair value of the net assets of the
acquired  business.  Prior to a  transition  period  called for by  Statement of
Financial  Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets,"  goodwill  was being  amortized  over the period of  expected  benefit.
Management  reviewed for  impairment on an ongoing basis and whenever  events or
changes in circumstances indicated the possibility of impairment.  In accordance
with the  provisions  of SFAS No. 142,  goodwill is no longer  amortized  but is
tested  annually for  impairment or more  frequently if  circumstances  indicate
potential impairment. See "Recent Accounting Pronouncements".

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

     SEGMENT  REPORTING.  Apria's branch locations are organized into geographic
regions.  Each region  consists of a number of  branches  and a regional  office
which  provides  key support  services  such as billing,  purchasing,  equipment
maintenance, repair and warehousing. Management evaluates operating results on a
geographic basis, and therefore views each region as an operating  segment.  All
regions provide the same products and services,  including  respiratory therapy,
infusion  therapy  and  home  medical  equipment  and  supplies.  For  financial
reporting purposes, all the company's operating segments are aggregated into one
reportable  segment in accordance with the aggregation  criteria in paragraph 17
of SFAS No.  131,  "Disclosures  about  Segments  of an  Enterprise  and Related
Information".

     RECENT ACCOUNTING  PRONOUNCEMENTS.  During the first quarter of 2001, Apria
adopted  SFAS No.  133,  "Accounting  for  Derivative  Instruments  and  Hedging
Activities",  which was amended by SFAS No. 137 and SFAS No. 138.  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. Adoption of SFAS No. 133 did not have a
material effect on Apria's  consolidated  financial  statements.  See "Long Term
Debt - Hedging Activities".

     In July 2001, Apria adopted SFAS No. 141, "Business Combinations". SFAS No.
141 requires that all business  combinations  initiated  after June 30, 2001 are
accounted for under the purchase method and eliminates the  pooling-of-interests
method.  Adoption  of SFAS No.  141 did not have a  material  effect on  Apria's
consolidated financial statements.

     Effective  January 1, 2002,  Apria  adopted SFAS No. 142, in its  entirety.
SFAS No. 142 addresses the financial  accounting  and reporting for goodwill and
other  intangible   assets.  The  statement  provides  that  goodwill  or  other
intangible  assets with indefinite lives will no longer be amortized,  but shall
be tested for impairment annually, or more frequently if circumstances  indicate
potential  impairment.  The  impairment  test is comprised  of two steps:  (1) a
reporting unit's fair value is compared to its carrying value; if the fair value
is less than its carrying value,  goodwill  impairment is indicated;  and (2) if
impairment  is  indicated  in the first step,  it is measured by  comparing  the
implied  fair value of  goodwill to its  carrying  value at the  reporting  unit
level.  In the year of adoption,  SFAS No. 142 requires a transitional  goodwill
impairment  test; the first step must be completed within six months of adoption
and the second  step,  if  necessary,  must be completed by the end of the year.
Amounts used in the  transitional  test shall be measured as of the beginning of
the year. An impairment  loss  resulting from  application  of the  transitional
goodwill  impairment  test  shall be  recognized  as the  effect  of a change in
accounting principle.  Apria's transitional goodwill impairment test and overall
evaluation  of SFAS No. 142's  impact is currently in progress,  therefore it is
not  presently  known  whether  adoption  will  have a  material  effect  on the
consolidated  financial  statements.  Goodwill amortization expense for the year
ended  December 31, 2001 was $9.8  million.  See  "Amortization  of Goodwill and
Intangible Assets".

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


RESULTS OF OPERATIONS

     NET REVENUES.  Approximately  30% of Apria's 2001  revenues are  reimbursed
under  arrangements  with Medicare and Medicaid.  In 2001, no other  third-party
payor  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 9.5% of total net revenues for 2001.  Because of continuing  changes
in the  healthcare  industry  and  third-party  reimbursement,  there  can be no
assurance that Apria's  current  revenue  levels can be maintained,  which could
have an impact on operations and cash flows.

     Net  revenues  increased to $1,132  million in 2001 from $1,014  million in
2000 and $940  million  in 1999.  Growth  rates  were 11.6% and 7.9% in 2001 and
2000, respectively. The increases in both years are due to volume increases, new
contracts with regional and national  payors,  the acquisition of  complementary
businesses  and price  increases  in certain  managed care  agreements.

     Apria's acquisition strategy provides for the rapid integration of acquired
businesses into existing operating  locations.  This limits management's ability
to  separately  track the amount of revenue  generated by an acquired  business.
Estimating the revenue contribution from acquisitions therefore requires certain
assumptions.  Based on its analyses,  Apria management estimates from one-fourth
to one-third of the revenue  growth in 2001 was derived from  acquisitions.

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

                                                    YEAR ENDED DECEMBER 31,
                                            ------------------------------------
    (IN THOUSANDS)                              2001         2000        1999
    ----------------------------------------------------------------------------

    Home respiratory therapy..........      $  742,805   $  656,089    $598,901
    Home infusion therapy.............         216,436      194,508     179,148
    Home medical equipment/other......         172,674      163,604     161,975
                                            ----------   ----------    --------
          Total net revenues..........      $1,131,915   $1,014,201    $940,024
                                            ==========   ==========    ========

     Home  Respiratory   Therapy.   Respiratory  therapy  revenues  are  derived
primarily from the provision of oxygen systems,  home  ventilators,  sleep apnea
equipment,  nebulizers,   respiratory  medications  and  related  services.  The
respiratory  therapy  service line  increased in 2001 by 13.2% when  compared to
2000 and  increased by 9.5% in 2000 when compared to 1999.  Apria's  strategy to
target acquisitions of respiratory therapy businesses contributed to this growth
in 2001 and 2000.

     Home  Infusion  Therapy.  The infusion  therapy  service line  involves the
administration  of a drug or  nutrient  directly  into  the  body  intravenously
through  a  needle  or  catheter.   Examples  include:   parenteral   nutrition,
anti-infectives, pain management, chemotherapy and other medications and related
services.  The  infusion  line  also  includes  enteral  nutrition  which is the
administration of nutrients directly into the  gastrointestinal  tract through a
feeding tube.  Infusion therapy revenues increased 11.3% in 2001 versus 2000 and
8.6% in 2000  versus  1999.  The growth in both  years is largely  due to volume
increases. Much of the increase in 2001 was concentrated in the enteral nutrient
products  and  services  category.

     Home Medical  Equipment/Other.  Home medical  equipment/other  revenues are
derived from the provision of patient safety items,  ambulatory and patient room
equipment.  Home medical equipment/other revenues increased by 5.5% in 2001 from
its level in 2000 and 1.0% in 2000 from 1999. Increases in this service line are
usually  lower than the other  lines  because  the sales  focus is placed on the
higher-margin  respiratory  therapy  service line and on the infusion  line. The
increase in 2001  reflects the  restoration  of the full Medicare cost of living
adjustment for certain durable medical equipment  products and services that had
been frozen since 1998  pursuant to the  Balanced  Budget Act of 1997. A minimal
increase was applied to  reimbursement  amounts in the first six months of 2001.
In the second half of 2001  reimbursement  was  increased by  approximately  7%,
which  included a  transitional  allowance  that  effectively  compressed a full
year's Consumer Price Index update into six months.  The transitional  allowance
did not carry forward into the base upon which the minimal 2002  increases  were
computed.

     Medicare  and  Medicaid  Reimbursement.  The  Balanced  Budget  Act of 1997
contained a number of provisions that affected,  or could potentially  affect in
the  future,  Medicare  reimbursement  levels to Apria.  Although  the  Medicare
Balanced  Budget  Refinement  Act of 1999 and the  Medicare,  Medicaid and SCHIP
Benefits Improvement and Protection Act of 2000 mitigated or delayed some of the
effects of the original legislation,  the following significant issues are still
outstanding:

     - 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 to examine the use
       of the authority granted under this procedure  (completed July 2000), and
       (2)  promulgation  by  the  Centers  for  Medicare  &  Medicaid  Services
       (formerly  the  Health  Care  Financing  Administration)  of a final rule
       implementing the inherent reasonableness authority (not yet effected).

     - The  Balanced  Budget  Act of 1997 also  mandated  that the  Centers  for
       Medicare & Medicaid Services conduct competitive  bidding  demonstrations
       for  Medicare  Part  B  items  and  services.   The  competitive  bidding
       demonstrations,  currently  in  progress,  could  provide the Centers for
       Medicare & Medicaid  Services 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.

     Also at issue is a  recommendation  by the U.S.  Department  of Health  and
Human Services 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 that homecare pharmacies incur to prepare, deliver or administer the drugs
to patients.  Billing,  collection  and other overhead costs also would not have
been considered.  Under current government reimbursement schedules,  these costs
are not clearly defined but are implicitly  covered 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 to patients in their homes. 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.   The  study  was  completed  but  the  authors
acknowledged  that 1) the limited scope and deadline  associated  with the study
did not allow for a thorough analysis of the homecare pharmacy aspect of covered
services,  2) legitimate  service  components and related costs do exist, and 3)
different methods of determining drug delivery and  administration  payments may
be necessary for different types of drugs.  Currently,  the timing and impact of
such pricing methodology revisions are not known.

     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.  In several  states these changes have
reduced the level of  reimbursement  received by Apria to an unacceptable  level
without a  corresponding  offset or increase to compensate for the service costs
incurred.  In those  states,  Apria has elected to stop  accepting  new Medicaid
patient  referrals for the affected drugs.  The company is continuing to provide
services  to  patients  already  on  service,  and for those who  receive  other
Medicaid-covered products and services.

     Further,  the terrorist  attacks of September 11, 2001 and the military and
security  activities which followed,  their impacts on the United States economy
and  government  spending  priorities,  and  the  effects  of any  further  such
developments  pose  risks  and  uncertainties  to  all  U.S.-based   businesses,
including Apria.  Among other things,  deficit spending by the government as the
result of adverse  developments  in the  economy  and costs of the  government's
response to the  terrorist  attacks  could lead to increased  pressure to reduce
government  expenditures  for other  purposes,  including  governmentally-funded
programs such as Medicare.

     GROSS PROFIT.  Gross margins were 72.8% in 2001, 72.5% in 2000 and 71.5% in
1999.  The increase in 2001 reflects  continued  improvement  from  management's
strategy to increase the  proportion of  higher-margin  respiratory  revenues to
total  revenues.  Much  of  the  increase  in  2000  as  compared  to  1999  was
attributable to improved pricing negotiated for purchases of inventory,  patient
service equipment and related goods and the increase in the share of respiratory
revenues.  Further,  the  margins  in 2001  and 2000  reflect  the  benefits  of
standardization  initiatives and optimal  operating  models  implemented in 1999
that were intended to achieve cost savings and  operational  efficiencies in the
functional areas of purchasing, supply management and inventory management.

     PROVISION FOR DOUBTFUL  ACCOUNTS.  As described in the Critical  Accounting
Policies section above,  accounts  receivable  estimated to be uncollectible are
provided  for  through  the   application  of  specified   percentages  to  each
receivables aging category.  For 2001, 2000 and 1999, the provision for doubtful
accounts as a percentage of net revenues was 3.3%, 3.2% and 3.7%,  respectively.
The provision rate reflects  consistent cash collections and improvements in the
accounts  receivable  aging.  See "Critical  Accounting  Policies" and "Accounts
Receivable".

     SELLING,   DISTRIBUTION  AND  ADMINISTRATIVE.   Selling,  distribution  and
administrative  expenses are comprised of expenses incurred in direct support of
operations and those associated with administrative functions. Expenses incurred
by the operating  locations include salaries and other expenses in the following
functional  areas:  selling,  distribution,   clinical,  intake,  reimbursement,
warehousing and repair. Many of these operating costs are directly variable with
revenue growth  patterns.  Some are also very sensitive to  market-driven  price
fluctuations such as facility lease and fuel costs. The administrative  expenses
include overhead costs incurred by the operating locations and corporate support
functions.  These  expenses do not vary as closely with revenue growth as do the
operating costs. Selling, distribution and administrative expenses, expressed as
percentages of net revenues, were 55.8% in 2001 and 54.7% for 2000 and 1999. The
increase in 2001 is mainly due to merit and certain  bonus plan  increases.  The
bonus plans for 2001 were adopted in late 2000, when national unemployment rates
were relatively low. As a retention  strategy,  the bonus plans were extended to
all employee  groups and the payment  provisions  of these plans were  enriched,
thereby  resulting in the expense  increase.  The 2002 plans do not include such
provisions.

     AMORTIZATION  OF GOODWILL AND INTANGIBLE  ASSETS.  Amortization of goodwill
and intangible  assets was $12.3 million,  $10.2 million and $8 million in 2001,
2000 and 1999,  respectively.  The increases in both years were directly related
to the  acquisitions  that were  consummated  since  late  1999.  Pursuant  to a
transition  provision  of  SFAS  No.  142,  goodwill  associated  with  business
combinations completed after June 30, 2001 was not amortized, while amortization
on goodwill existing at that date continued through the end of 2001. See "Recent
Accounting Pronouncements" and "Business Combinations".

     INTEREST EXPENSE. Interest expense was $25.7 million in 2001, $40.1 million
in 2000 and  $42.5  million  in 1999.  The  significant  decrease  in 2001  when
compared  to 2000 is due to a number of factors.  Long-term  debt  decreased  by
$49.8 million during 2001. The July 2001 refinancing  replaced the 9 1/2% senior
subordinated  notes with debt at significantly more favorable interest rates and
also  resulted  in  lower  rates  on the  bank  loans.  In  connection  with the
refinancing,  deferred debt issuance costs on the 9 1/2% notes and old bank debt
were written off; the issuance  costs  incurred upon  refinancing  resulted in a
lower  monthly  amortization  expense.  And finally,  the dramatic  decreases in
market-driven  interest rates over the course of 2001 contributed to the overall
decrease  in Apria's  interest  expense.  The  decrease  in 2000 versus 1999 was
primarily  attributable  to the $79.6  million  reduction in  long-term  debt as
offset by higher  interest  rates  incurred  on the bank loans.  See  "Long-Term
Debt".

     INCOME  TAXES.  Income taxes for 2001 and 2000 were $44.1 million and $41.1
million,  respectively, and were provided at the effective tax rates expected to
be applicable for the respective  year. The income tax benefit for 1999 amounted
to $131.0  million,  which was  primarily  attributable  to the  release  of the
company's $158.9 million valuation allowance.

     At December 31, 2001, Apria had federal net operating loss carryforwards of
approximately $89 million, expiring in varying amounts in the years 2003 through
2018 and various  state  operating  loss  carryforwards  that began to expire in
1997.   Additionally,   the  company  has  an  alternative  minimum  tax  credit
carryforward of approximately  $9.8 million.  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 million per year.
Because of the annual  limitation,  approximately  $57  million  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.  Management  believes that its strategies will result in sufficient
taxable income during the  carryforward  period to utilize Apria's net operating
loss carryforwards that are not limited by Section 382.


LIQUIDITY AND CAPITAL RESOURCES

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

     CASH FLOW. Cash provided by operating activities in 2001 was $241.4 million
compared  to $188.0  million in 2000 and $147.7  million in 1999.  The cash flow
increase in 2001 was primarily attributable to the increase in net income before
items not requiring cash,  plus the timing of  disbursements  processed  through
accounts  payable.   Partially  offsetting  this  is  an  increase  in  accounts
receivable due to the continued  quarterly revenue  increases.  Increases in net
income  before  non-cash  items,  plus a  reduction  in the rate of  increase in
accounts  receivable,  resulted in cash flow improvements in 2000 as compared to
1999.

     Cash used in investing  activities  increased in 2001 when compared to 2000
due to  increases in business  acquisitions  and  increases  in patient  service
equipment  purchases to support the growth in the respiratory service line. Cash
used in 2000  decreased  from 1999 due to a  decrease  in  acquisition  activity
between the years and an increase in patient service equipment expenditures.

     Cash used in financing activities decreased between 2001 and 2000 primarily
due to the following two items:  (1) Apria made no scheduled  term loan payments
on the former  credit  agreement in 2001 prior to the  refinancing  due to large
prepayments  made in the latter  part of 2000,  and (2) an  increase in proceeds
from the exercise of stock options in 2001.

     CONTRACTUAL CASH OBLIGATIONS.  The following table summarizes  Apria's long
term cash payment obligations to which the company is contractually bound:



     (IN MILLIONS)                                  2002   2003    2004    2005   2006   2007+   TOTAL
     --------------------------------------------------------------------------------------------------

                                                                             
     Term loans..............................      $ 13   $ 26    $ 26    $ 29   $ 64     $125    $283
     Revolving loans.........................         -      -       -       -      8        -       8
     Capitalized lease obligations...........         2      1       -       -      -        -       3
     Operating leases........................        49     39      32      24     16       20     180
     Deferred acquisition payments...........         3      -       -       -      -        -       3
                                                   ----   ----    ----    ----   ----     ----    ----

        Total contractual cash obligations...      $ 67   $ 66    $ 58    $ 53   $ 88     $145    $477
                                                   ====   ====    ====    ====   ====     ====    ====



     ACCOUNTS  RECEIVABLE.  Accounts  receivable  before  allowance for doubtful
accounts increased by $8.9 million during 2001 which is directly attributable to
the revenue increase.  Days sales outstanding  (calculated as of each period end
by dividing accounts  receivable,  less allowance for doubtful accounts,  by the
90-day rolling average of net revenues) were 50 at December 31, 2001 compared to
51 at December 31, 2000 and 56 at December 31, 1999.  See  "Critical  Accounting
Policies".

     Unbilled  Receivables.  Included  in  accounts  receivable  are  earned but
unbilled receivables of $26.9 million and $17.9 million at December 31, 2001 and
2000, respectively.  Delays, ranging from a day up to several weeks, between the
date of  service  and  billing  can occur due to  delays  in  obtaining  certain
required payor-specific documentation from internal and external sources. Earned
but unbilled  receivables  are aged from date of service and are  considered  in
Apria's analysis of historical  performance and collectibility.  The increase in
2001 from the end of 2000 is largely due to  acquisitions  effected during 2001.
The  time-consuming  processes of converting  patient files onto Apria's systems
and obtaining provider numbers from government payors routinely delay billing of
the newly acquired business.

     INVENTORIES AND PATIENT SERVICE EQUIPMENT. Inventories consist primarily of
pharmaceuticals and disposable articles used in conjunction with patient service
equipment.  Patient service  equipment  consists of respiratory and home medical
equipment that is provided to in-home patients for the course of their care plan
and subsequently returned to Apria for reuse.

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

     Continued  revenue growth is directly  dependent on Apria's ability to fund
its inventory and patient service equipment requirements.

     LONG-TERM  DEBT. On July 20, 2001,  Apria closed a new $400 million  senior
secured  credit  agreement  with a syndicate  of lenders led by Bank of America,
N.A. The credit facilities consist of a $100 million five-year  revolving credit
facility,  a $125 million  five-year term loan and a $175 million  six-year term
loan.  The $125  million  term loan is  repayable  in 20  consecutive  quarterly
installments of $5.5 million to $7 million each,  commencing  December 31, 2001.
The $175 million term loan is repayable in 20 consecutive quarterly installments
of $437,500 each,  commencing  December 31, 2001,  followed by three consecutive
quarterly  installments  of $41.6  million  each,  and a final  payment of $41.5
million due on July 20, 2007.

     On December 28, 2001, the company made scheduled quarterly payments of $5.5
million and $437,500 on the five-year and six-year term loans, respectively. The
company  further  reduced the  outstanding  debt on the  five-year  term loan by
making a voluntary prepayment of $11 million on December 28, 2001. The voluntary
prepayment was applied against future scheduled quarterly payments,  effectively
eliminating  any  pre-payment  requirements  on the  five-year  term loan  until
September 2002.

     The senior  secured  credit  agreement  permits  Apria to select one of two
variable  interest rates. One option is the base rate, which is expressed as the
higher of (a) the  Federal  Funds  rate plus 0.50% and (b) the Prime  Rate.  The
other  option is the  Eurodollar  rate,  which is based on the London  Interbank
Offered  Rate  ("LIBOR").  Interest  on  outstanding  balances  under the senior
secured  credit  agreement are  determined by adding a margin to the  Eurodollar
rate or base rate in effect at each interest  calculation  date.  The applicable
margins for the  revolving  credit  facility  and the $125 million term loan are
based on Apria's  leverage  ratio,  which is the ratio of its funded debt to its
last  four  quarters  of  earnings  before  interest,  taxes,  depreciation  and
amortization.  The  applicable  margin ranges from 1.50% to 2.25% for Eurodollar
loans and from 0.50% to 1.25% for base rate  loans.  For the $175  million  term
loan, the margins are fixed at 3.00% for Eurodollar  loans and at 2.00% for base
rate loans. The effective  interest rate at December 31, 2001 was 4.87% on total
borrowings of $290.9 million.  The senior credit agreement also requires payment
of commitment  fees ranging from 0.25% to 0.50% (also based on Apria's  leverage
ratio) on the unused portion of the revolving credit facility.

     Borrowings under the senior secured credit facilities are collateralized by
substantially all of the assets of Apria. The credit agreement contains numerous
restrictions,  including but not limited to, covenants requiring the maintenance
of certain  financial  ratios,  limitations  on additional  borrowings,  capital
expenditures,  mergers,  acquisitions and investments and,  restrictions on cash
dividends,  loans and other  distributions.  The agreement also permits Apria to
expend a maximum of $100 million per year on acquisitions. At December 31, 2001,
the company was in compliance  with all of the financial  covenants  required by
the credit agreement.

     The company's  previous credit agreement and the $200 million 9 1/2% senior
subordinated  notes,  both of which were scheduled to mature in late 2002,  were
repaid in full  concurrently  with the closing of the new senior  secured credit
agreement.  In connection with the early retirement of its debt, Apria wrote-off
the  unamortized   balance  of  deferred  financing  fees  attributable  to  the
subordinated  notes  and  the  previous  credit  agreement.  Accordingly,  Apria
recorded an  extraordinary  charge of $1.5  million,  net of tax, in the quarter
ended September 30, 2001.

     On December 31, 2001,  borrowings  under the revolving credit facility were
$7.8  million,  outstanding  letters of credit  totaled  $1  million  and credit
available under the revolving facility was $91.2 million.

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

     During the fourth  quarter of 2001,  Apria  entered into two interest  rate
swap  agreements  with a  total  notional  amount  of  $100  million  to fix its
LIBOR-based variable rate debt at 2.58% (before the applicable margin). The swap
agreements  became  effective  October 30, 2001 and terminate on March 31, 2003.
The swaps are  being  accounted  for as cash flow  hedges  under  SFAS No.  133.
Accordingly,  the difference  between the interest received and interest paid is
reflected  as an  adjustment  to interest  expense.  For the period  between the
effective date of the swap  agreements  and December 31, 2001,  Apria paid a net
settlement  amount of $39,000.  At December 31, 2001,  the swap  agreements  are
reflected in the accompanying  balance sheet in other assets at their fair value
of  $44,000.  Unrealized  gains on the fair  value  of the swap  agreements  are
reflected, net of taxes, in other comprehensive income.

     Apria does not anticipate losses due to counterparty  nonperformance as its
counterparty  to  the  swap  agreements  is  a  nationally-recognized  financial
institution with a strong credit rating.

     TREASURY STOCK. In mid-February  2002, Apria announced a plan to repurchase
up to $35 million of  outstanding  common stock during the first two quarters of
2002. Depending on market conditions and other considerations,  repurchases will
be made from time to time in open market  transactions.  From  February 15, 2002
through March 11, 2002 Apria  repurchased  999,800 shares for $21.7 million.  In
2000,  Apria  repurchased  86,000 shares of its common stock for  $958,000.  All
repurchased  common shares are being held in treasury.  Apria's credit agreement
limits  common  stock  repurchases  to $35  million in any fiscal  year and $100
million in the aggregate over the term of the agreement.

     BUSINESS  COMBINATIONS.  Pursuant to one of its primary growth  strategies,
Apria  periodically  acquires  complementary  businesses in specific  geographic
markets.  These  transactions  are accounted for as purchases and the results of
operations of the acquired companies are included in the accompanying statements
of operations from the dates of acquisition.  For business  combinations closing
on or before June 30, 2001,  goodwill  was being  amortized  over 20 years.  For
business combinations consummated between July 1, 2001 and December 31, 2001, no
goodwill amortization was recorded. Covenants not to compete are being amortized
over the life of the respective agreements.

     The aggregate  consideration  for acquisitions  that closed during 2001 was
$81.7 million.  Allocation of this amount includes $73.1 million to goodwill and
intangible  assets and $7.6 million to patient service  equipment.  During 2000,
the aggregate  consideration  for acquisitions was $27.3 million.  Cash paid for
acquisitions,  which  includes  amounts  deferred from prior year  acquisitions,
totaled $80.3 million and $26.2 million in 2001 and 2000, respectively.

     The  success of Apria's  acquisition  strategy  is  directly  dependent  on
Apria's ability to maintain and/or  generate  sufficient  liquidity to fund such
purchases.

     FEDERAL  INVESTIGATIONS.  As previously reported,  since mid-1998 Apria has
been the subject of investigations  conducted by several U.S. Attorneys' offices
and the U.S.  Department  of Health  and Human  Services.  These  investigations
concern the  documentation  supporting  Apria's billing for services provided to
patients whose healthcare costs are paid by Medicare and other federal programs.
Apria is cooperating with the government in connection with these investigations
and is  responding  to  various  document  requests  and  subpoenas.  A criminal
investigation  conducted by the U.S.  Attorney's office in Sacramento was closed
in mid-1999  with no charges being filed.  Potential  claims  resulting  from an
investigation  by the U.S.  Attorney's  office  in San  Diego  were  settled  in
mid-2001 in exchange for a payment by Apria of $95,000.

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

     On July 12, 2001, government representatives and counsel for the plaintiffs
in the qui tam  actions  asserted  that,  by a process of  extrapolation  from a
sample of 300 patient files to all of Apria's billings to the federal government
during the  three-and-one-half  year sample period, Apria could be liable to the
government  under the False Claims Act for more than $9 billion,  consisting  of
extrapolated  overpayment liability,  plus treble damages and penalties of up to
$10,000 for each allegedly false claim derived from the extrapolation.

     Apria has acknowledged that there may be errors and omissions in supporting
documentation  affecting a portion of its  billings.  However,  it considers the
assertions  and amounts  described in the preceding  paragraph to be unsupported
both legally and factually  and believes that most of the alleged  documentation
errors and  omissions  should not give rise to any  liability,  for  overpayment
refunds or otherwise.  Accordingly,  Apria believes that the claims asserted are
unwarranted  and  that  it is  in a  position  to  assert  numerous  meritorious
defenses. Nevertheless, Apria cannot provide any assurances as to the outcome of
these proceedings. Management cannot estimate the possible loss or range of loss
that may result  from these  proceedings  and  therefore  has not  recorded  any
related accruals.

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


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

     At December 31, 2001,  Apria's term loan  borrowings  totaled $283 million.
The bank  credit  agreement  governing  the term loans  provides  interest  rate
options based on the following indices: Federal Funds Rate, Prime Rate or LIBOR.
All such  interest  rate options are subject to the  application  of an interest
margin as specified in the bank credit  agreement.  At December 31, 2001, all of
Apria's  outstanding  term debt was tied to LIBOR.  During the fourth quarter of
2001, Apria entered into two interest rate swap agreements with a total notional
amount of $100 million to fix its LIBOR-based debt at 2.58% (before  application
of the  interest  margin).  The term of both  agreements  is October 30, 2001 to
March 31, 2003.

     Based on the term  debt  outstanding  and the swap  agreements  in place at
December 31, 2001, a 100 basis point  change in the  applicable  interest  rates
would  increase or  decrease  Apria's  annual  cash flow and pretax  earnings by
approximately $1.8 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" 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, 2002:


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

                                                                                                         
David H. Batchelder, 52               Principal and Managing  Member of  Relational  Investors LLC     1998       2002
                                      since  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.

David L. Goldsmith, 53                Managing   Director   of  RS   Investment   Management,   an    1987*      2002
                                      investment  management  firm. Prior to joining RS Investment
                                      Management  in 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.

Lawrence M. Higby, 56                 Chief  Executive  Officer  and a  Director  of  Apria  since    2002       2002
                                      February  12,  2002,  and  President  and  Chief   Operating
                                      Officer  of Apria  since  1997.  Mr.  Higby  also  served as
                                      Apria's  Chief  Executive  Officer on an interim  basis from
                                      January  through May of 1998.  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.  He also serves as a
                                      director of Ross Stores, Inc.

Richard H. Koppes, 55                 Of Counsel to Jones,  Day, Reavis & Pogue, a law firm, and a    1998       2002
                                      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 1996 to 1998.


Philip R. Lochner, Jr., 58            Senior  Vice  President  - Chief  Administrative  Officer of    1998       2002
                                      Time  Warner Inc.  from 1991 to 1998.  He is a member of the
                                      Advisory  Council of Republic  New York  Corporation  and of
                                      the Boards of Directors  of Clarcor,  Inc.,  GTech  Holdings
                                      Corp. and The American Stock Exchange.

--------------------------
*     Director of Homedco Group Inc., from the date shown until the June 1995 merger with Abbey Healthcare Group Inc.
which formed Apria. Director of Apria from the date of the merger until the present.




                                                      BUSINESS EXPERIENCE DURING LAST                DIRECTOR    TERM
NAME AND AGE                                           FIVE YEARS AND DIRECTORSHIPS                    SINCE    EXPIRES
------------------------------------- ------------------------------------------------------------- ---------- ----------
                                                                                                       
Beverly Benedict Thomas, 59           Principal of BBT Strategies,  a consulting firm specializing    1998       2002
                                      in  public  affairs  and  strategic  planning,  since  1997.
                                      Previously,  Ms.  Thomas was a principal  of UT  Strategies,
                                      Inc., a public affairs firm, from 1995 to 1997.

Ralph V. Whitworth, 46                Chairman of the Board of Directors of Apria since 1998.  Mr.    1998       2002
                                      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.   Mr.   Whitworth  is  also  a  director  of
                                      Tektronix, Inc., Mattel, Inc. and Waste Management, Inc.


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 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 2001 fiscal year.



ITEM 11. EXECUTIVE COMPENSATION

SUMMARY OF EXECUTIVE COMPENSATION

     The following  table sets forth all  compensation  for the 2001,  2000, and
1999 fiscal years paid to or earned by Apria's Chief  Executive  Officer and the
five other most highly  compensated  executive  officers  during the 2001 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.....................2001        691,916        680,000          --                --              3,313  (6)
  Chief Executive Officer (5)        2000        661,538        421,354        500,000           680,000           3,330  (6)
                                     1999        613,694        480,000         75,000             --              3,430  (6)

Lawrence M. Higby................... 2001        463,010        460,000          --                --              3,313  (6)
  Chief Executive Officer,           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 (7)

John C. Maney......................  2001        403,171           --            --                --          2,093,262  (9)
  Executive Vice President           2000        382,921        243,089        200,000           390,000           3,330  (6)
  and Chief Financial Officer (8)    1999        358,522        280,000         30,000             --              1,615  (6)

Michael R. Dobbs..................   2001        276,671        275,000         20,000             --              3,313  (6)
  Executive Vice President,          2000        251,492        162,059         75,000           250,020           3,330  (6)
  Logistics                          1999        210,332        168,000         30,000             --             23,151 (10)

George S. Suda.....................  2001        233,024        230,000         20,000             --              3,313  (6)
  Executive Vice President,          2000        218,186        136,130         75,000           210,061           3,330  (6)
  Information Services               1999        182,211        126,000         20,000             --              2,890  (6)



Michael J. Keenan..................  2001        205,725        163,795         20,000             --              3,313  (6)
  Executive Vice President,          2000        184,880           --           40,000           178,880         438,784 (11)
  Business Operations                1999        177,995           --           15,000             --             19,259 (12)


        (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 some years contain payment dates
             for pay periods which begin or end in other years, amounts reported
             as salary paid for a  particular  year may vary  slightly  from the
             actual  amounts of the 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.  The option  grants for 2001 were  approved by the
             company's  Board of  Director in October  2001,  but did not become
             effective and were not fixed as to price until January 2, 2002.

        (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 resigned from the company on February 12, 2002.

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

        (7)  Mr. Higby was appointed Chief  Executive  Officer upon Mr. Carter's
             resignation on February 12, 2002.

        (8)  Mr. Maney resigned from the company in October, 2001.

        (9)  Value realized from stock option exercises.

        (10) Relocation payment.

        (11) Includes annual  contribution  of $3,330  by Apria to the company's
             401(k)  Savings Plan in the name of the  individual and $435,454 in
             value realized from the exercise of stock options.

        (12) Includes annual  contribution  of $2,890  by Apria to the company's
             401(k)  Savings Plan in the name of the  individual  and $16,369 in
             value realized from the exercise of stock options.



SUMMARY OF OPTION GRANTS

     The following table provides  information with respect to grants of options
in 2001 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 2000,  which did not become  effective  until
January 2, 2001,  but do include  options  approved in 2001 which did not become
effective until January 2, 2002.


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

                                                                                          
Philip L. Carter                 --              --                --            --             --             --
Lawrence M. Higby                --              --                --            --             --             --
John C. Maney                    --              --                --            --             --             --
Michael R. Dobbs               20,000           1.55%             24.01       01/02/12       301,995        765,315
George J. Suda                 20,000           1.55%             24.01       01/02/12       301,995        765,315
Michael J. Keenan              20,000           1.55%             24.01       01/02/12       301,995        765,315



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 2001  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                  --            --            775,000/550,000               12,193,813/402,625
Lawrence M. Higby                 --            --            403,333/386,667                5,361,589/982,886
John C. Maney                  115,000       2,093,262        120,000/   --                  2,436,300/   --
Michael R. Dobbs                  --            --            110,000/95,000                 1,914,525/161,050
George J. Suda                    --            --             46,666/88,334                   793,278/107,372
Michael J. Keenan                 --            --             53,300/50,000                   897,442/80,525

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

(1)  These amounts or calculations do not include options approved in 2001 which
     did not become  effective  until January 2, 2002.

(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 2001 (December 31) was $24.99.




COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

     No member of the  Compensation  Committee was either an officer or employee
of the company since January 1, 2001.


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  2001,  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  2001,  the  non-employee  Chairman of the Board was granted an option to
purchase  25,000  shares  of  the  company's   common  stock,   and  each  other
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.

     LAWRENCE M. HIGBY. Pursuant to an Amended and Restated Employment Agreement
which became  effective  January 1, 2000,  and is scheduled  for  expiration  on
January  18,  2003,  Mr.  Higby has  served  and  continues  to serve as Apria's
President  and Chief  Operating  Officer.  Since  February 12, 2002, he has also
begun serving as Apria's Chief Executive  Officer.  The Agreement  provides that
Mr. Higby is to receive an annual salary of not less than  $400,000,  subject to
increases at the discretion of the company's  Board of Directors or Compensation
Committee.  During 2001, Mr.  Higby's  annual salary was $460,000;  the Board of
Directors expects to approve a salary increase to reflect his promotion to Chief
Executive  Officer  by the end of April  2002.  Mr.  Higby is also  entitled  to
participate in Apria's annual bonus, incentive, stock and other benefit programs
generally  available to executive  officers of the company.  The agreement  also
provides for (i)  reasonable  access to the company's  accountants  for personal
financial planning, (ii) an automobile allowance, (iii) reimbursement of certain
other expenses and (iv) an indemnification of 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.

     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  $275,000.  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.

     MICHAEL J.  KEENAN.  In June 1997,  Mr.  Keenan  entered  into an executive
severance  agreement with the company.  Pursuant to that  agreement,  Mr. Keenan
serves in a position and undertakes duties at Apria's discretion. As of December
31, 2001,  Mr.  Keenan  served as Apria's  Executive  Vice  President,  Business
Operations.  The  agreement  provides that Mr.  Keenan's  salary shall be at the
company's discretion.  Currently,  his annual salary is $205,000.  Mr. Keenan 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.  He is also  entitled to bonuses in  accordance  with the
bonus plans from time to time in effect for Apria's executives and reimbursement
of certain expenses at the company's  discretion.  If the company terminates his
employment  without cause,  or if he terminates his employment  with good reason
(including upon a change in control),  Mr. Keenan 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.  Such payments shall be payable in periodic
installments over one year.

         GEORGE S. SUDA.  In March 2000,  Mr.  Suda  entered  into an  executive
severance  agreement  with the  company.  Pursuant to that  agreement,  Mr. Suda
serves as Apria's Executive Vice President,  Information Services and undertakes
duties at the  company's  discretion.  The  agreement  provides  that Mr. Suda's
salary shall be at the  company's  discretion.  Currently,  his annual salary is
$230,000.  Mr. Suda 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.  He is also entitled to receive (i) bonuses
in  accordance  with the bonus  plans  from time to time in effect  for  Apria's
executives  and  (ii)   reimbursement  of  certain  expenses  at  the  company's
discretion.  If  Apria  terminates  his  employment  without  cause,  or  if  he
terminates his employment with good reason (including upon a change in control),
Mr. Suda is  entitled to a 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.  Suda  on an
after-tax  basis in the event he incurs an excise tax under  Section 4999 of the
Internal Revenue Code.

     PHILIP L. CARTER.  Mr.  Carter served as Apria's  Chief  Executive  Officer
during 2001,  but resigned on February 12, 2002.  Pursuant to a Resignation  and
General Release  Agreement which became effective  February 12, 2002, Mr. Carter
received two payments during  February in the respective  amounts of $61,333 and
$2,606,354.  Mr. Carter will also receive  $1,303,177 payable in 52 equal weekly
installments  under the terms of a Nondisclosure  and  Noncompetition  Agreement
pursuant to which Mr.  Carter is entitled to receive  cash  payments in exchange
for the  performance  of certain  agreements  pertaining  to  nondisclosure  and
noncompetition  following his resignation.  Apria is also required to provide an
office and  secretarial  support at a cost of not more than  $50,000  during the
year following his resignation.  The relevant agreements also contain 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.

     JOHN C. MANEY.  John Maney had an executive  severance  agreement  with the
company.  However, Mr. Maney resigned from Apria voluntarily under circumstances
that did not entitle him to receive any benefits under the agreement.



                      REPORT OF THE COMPENSATION COMMITTEE

TO:  THE BOARD OF DIRECTORS

     As  members of the  Compensation  Committee,  it is our duty to  administer
Apria's overall compensation program for its senior and mid-level management. In
addition,  the Compensation Committee evaluates the performance and specifically
establishes the  compensation of the Chief Executive  Officer.  The Compensation
Committee is comprised entirely of independent Directors who are not officers or
employees of Apria.

COMPENSATION PHILOSOPHY AND PROGRAM FOR SENIOR MANAGEMENT

     During  2001, Apria's  compensation  program  for  executive  officers  was
designed to:

     - reward each member of senior management commensurately with the company's
       overall growth and financial performance;
     - attract and retain  individuals who are capable of leading the company in
       achieving  its  business  objectives  in  an  industry  characterized  by
       competitiveness, growth and change; and
     - encourage ownership of Apria's stock by executive officers.

     The company  believes a substantial  portion of the annual  compensation of
each  member of senior  management  should  relate to, and should be  contingent
upon,  the financial  success of the company.  As discussed  below,  the program
consists of, and is intended to strike a balance among, three elements:

     - Salaries.  Salaries for the Chief  Executive  Officer and  President  are
       based on the Committee's  evaluation of individual job performance and an
       assessment  of the  salaries  and  total  compensation  mix paid by other
       similar companies to executive officers holding equivalent positions. The
       salaries   for  all  other   executive   officers  are  approved  by  the
       Compensation  Committee  pursuant  to  recommendations  made by the Chief
       Executive Officer on the basis of similar criteria.

     - Executive  bonuses.  Executive  bonuses  are  based on an  evaluation  of
       company performance against qualitative and quantitative measures.

     - Long-term incentive  compensation.  Long-term incentive awards consisting
       of stock options are designed to insure that  incentive  compensation  is
       linked to the long-term  performance of Apria and its common stock.  Such
       awards provide an incentive that focuses on managing the company from the
       perspective of an owner.

     In recent years,  the Committee's  overall  compensation  strategy has been
adjusted so that more than one-half of the total cash  compensation  earnable by
executive  officers  consists  of bonuses  based  solely on the  achievement  of
certain  financial  objectives  by the company.  Stock  option  grants will also
continue  to  represent  a  significant  portion of  executive  compensation  if
managerial efforts result in continued stock price increases.

FACTORS AFFECTING THE EVALUATION OF EXECUTIVE PERFORMANCE FOR 2001

     During  2001,  the  company  continued  to  pursue  a  plan  for  achieving
profitable operating results through the following principal elements:

     - Maintaining   disciplined   focus  on  existing  service   offerings  and
       increasing emphasis on home respiratory therapy;
     - Supplementing internal growth with selective acquisitions;
     - Reducing costs and enhancing margins and cash flows; and
     - Improving the company's capital structure.

     As those  objectives have been and continue to be achieved,  management has
placed increased emphasis on sales and operations and has continued its emphasis
on  compliance  issues.  Members of senior  management  have been asked to adapt
their  activities  so as  to  achieve  the  benefits  sought  by  the  foregoing
strategies.  Accordingly,  members of senior  management were and continue to be
evaluated in light of their  contributions  toward achievement of the objectives
established by the Chief Executive  Officer and the Board.  Future  compensation
for senior  management  will continue to be based in large part on the company's
ability to  effectively  develop and implement  strategies  that enable Apria to
achieve those objectives and enhance stockholder value.

TOTAL COMPENSATION

     Total compensation  target levels for Apria executives are established with
consideration given to an analysis of competitive market compensation. The total
compensation  package  for each  executive  is broken  down into the three basic
components  indicated above and discussed in more detail below. This strategy is
intended  to  emphasize  the  "performance-based"  component  of  the  company's
executive  compensation,  and the Committee intends to continue this emphasis in
2002.

2001 TOTAL COMPENSATION FOR THE CHIEF EXECUTIVE OFFICER

     During 2001, Philip L. Carter served as Apria's Chief Executive Officer. He
resigned from Apria on February 12, 2002  pursuant to a Resignation  and General
Release  Agreement.   Although  a  significant  portion  of  Mr.  Carter's  2001
compensation consisted of a bonus plan based largely on company performance, the
Committee  did not rely entirely on  predetermined  formulas or a limited set of
criteria when it evaluated the  performance  of the  company's  Chief  Executive
Officer. The Committee considered:

     - management's overall accomplishments;
     - Mr. Carter's individual accomplishments;
     - the company's financial performance; and
     - other criteria discussed below.

     The Committee designed a compensation package for Mr. Carter which provided
a competitive  salary with the potential of significant  bonus plan compensation
in the event the company  performed  well under his  leadership.  For 2001,  Mr.
Carter's  annual  salary  was  $680,000  and his total  bonus  compensation  was
$680,000.  This bonus award was the maximum amount payable under the bonus plan.
Of the award,  80% was based on the company's  achievement of certain  financial
objectives  related  to  earnings  before  interest,   taxes,  depreciation  and
amortization  ("EBITDA"),  earnings  per  share  and net  revenue  with a lesser
element (20%) to be paid on recommendation  of the Compensation  Committee based
on the implementation of certain strategic initiatives.  All performance targets
and goals concerning the implementation of initiatives were met or exceeded. Mr.
Carter's  long-term  compensation  package  was  also  designed  to  couple  his
long-term interests with those of Apria's  stockholders.  The Committee believes
that the most  significant  portion  of the  package  consisted  of  options  to
purchase up to 750,000  shares of Apria's  common stock at an exercise  price of
$9.00 per share  granted to Mr.  Carter  when he was first  employed by Apria in
1998. The options from Mr.  Carter's  initial grant became entirely vested on an
accelerated  basis because certain target prices for the company's  common stock
were met. Mr.  Carter was granted  options for an  additional  (i) 75,000 shares
during 1999 at a per share  exercise  price of $16.9375 and (ii) 500,000  shares
during 2000 at a per share exercise price of $27.125.  He received no additional
option  grants for 2001.  As of February 12, 2002,  the date of his  resignation
from the company,  options for 50,000 of the $16.9375  shares and 125,000 of the
$27.125  shares had vested.  The  unvested  portions of the 1999 and 2000 option
grants were cancelled at the time of his resignation.

SALARIES FOR EXECUTIVE OFFICERS

     In  setting  salaries,  the first  element  of the  executive  compensation
program,  the Committee did not use a predetermined  formula.  Instead, the 2001
salaries of the Chief Executive  Officer,  the President and the other executive
officers were based on:

     - the Committee's evaluation of individual job performance;
     - an assessment of the company's performance; and
     - a  consideration  of  salaries  paid by similar  companies  to  executive
       officers holding equivalent positions.

     Philip  L.  Carter.  Mr.  Carter's  annual  salary  for 2001 was  $680,000,
compared to a salary of $650,000  during 2000. The Committee felt the salary was
justified  due to the fact that the  company's  profitability  had  continued to
improve.

     Other Executive  Officers.  The 2001 salaries of the five other most highly
compensated  executive  officers are shown in the "Salary" column of the Summary
Compensation  Table.

2001 EXECUTIVE OFFICER BONUSES

     Bonuses for all executive  officers  were awarded under the 2001  Executive
Officer  Incentive  Compensation  Plan, a plan adopted to provide each member of
senior management with significant bonus  compensation (up to the full amount of
each officer's 2001 salary) upon the achievement of certain  improved  financial
performance  levels for the 2001 fiscal year and the  implementation  of certain
key initiatives.

     The target levels of performance as well as the key initiatives established
for the company in the 2001 Executive Officer  Incentive  Compensation Plan were
achieved, and the resulting 2001 bonus payments to Mr. Carter and the other most
highly  compensated  executive officers of the company are listed in the "Bonus"
column of the Summary  Compensation Table.  Because publication of sensitive and
proprietary  quantifiable  targets and other  specific goals for the company and
its executive officers could place the company at a competitive disadvantage, it
has  not  been  the  company's  practice  to  disclose  the  specific  financial
performance  target  levels  set  forth  in its  incentive  compensation  plans.
However,  the actual  results for each of the  quantifiable  target  factors are
publicly available and reflect an increase in 2001 net revenues of approximately
12%  ($117,714,000)  over the 2000  level.  In  addition,  EBITDA  increased  by
approximately  7.5%  ($18,206,000) and earnings per share increased by more than
21% ($.23 per share)  over 2000  levels.  Company  management  also  concluded a
successful debt  restructuring  and reduced Apria's days sales outstanding to 50
during 2001.

LONG-TERM INCENTIVE COMPENSATION

     As noted above,  the company  provided  long-term  compensation  to certain
members of senior and mid-level  management under various stock incentive plans.
The stock  incentive  plans provide the company with the ability to periodically
reward key employees,  including  executive  officers,  with options to purchase
shares of the company's common stock.

     The  value  of  stock  options  is tied to the  future  performance  of the
company's  common stock and provides  value to the recipient only when the price
of the company's common stock increases above the option grant price.

STOCK OPTION AWARDS TO EXECUTIVE OFFICERS

     Mr.  Carter,  Mr. Higby and Mr. Maney  received no additional  stock option
grants as a part of their 2001  compensation.  Stock option grants for the other
three most  highly  compensated  executive  officers  are shown in the  "Options
Granted" column of the Summary Compensation Table.

TAX TREATMENT OF STOCK OPTIONS

     The Compensation  Committee has considered the anticipated tax treatment to
the company  regarding  the  compensation  and  benefits  paid to the  executive
officers  of the  company in light of the  enactment  of  Section  162(m) of the
United States Internal  Revenue Code. The basic  philosophy of the  Compensation
Committee is to strive to provide the  executive  officers of the company with a
compensation  package which will preserve the deductibility of such payments for
the  company  to  the  greatest  extent  possible.  However,  certain  types  of
compensation  payments and their deductibility  (e.g., the spread on exercise of
non-qualified  options) depend upon the timing of an executive officer's vesting
or exercise of  previously  granted  rights.  Moreover,  interpretations  of and
changes in the tax laws and other factors  beyond the  Compensation  Committee's
control  may  affect the  deductibility  of certain  compensation  payments.  In
addition,  in order to attract  qualified  management  personnel,  it has proven
necessary to grant certain long-term incentives that may not be deductible under
Section 162(m) of the Code.  The  Compensation  Committee will consider  various
alternatives  to  preserving  the  deductibility  of  compensation  payments and
benefits to the extent reasonably  practicable and to the extent consistent with
its other compensation objectives.

Date:  April 1, 2002


THE COMPENSATION COMMITTEE
OF THE BOARD OF DIRECTORS
David H. Batchelder (Chairman)
Ralph V. Whitworth
Beverly Benedict Thomas



                                PERFORMANCE GRAPH
--------------------------------------------------------------------------------

     The following graph shows the changes over the last five-year period in the
value of $100 invested in (i) the common stock of Apria,  (ii) the S&P 500 Stock
Index, and (iii) the Peer Group Index (1). The value of each investment is based
on share price appreciation, with reinvestment of all dividends. The investments
are assumed to have occurred at the beginning of the period presented.



                 COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
                       AMONG APRIA HEALTHCARE GROUP INC.,
                   THE S&P 500 INDEX AND THE PEER GROUP INDEX


[OBJECT OMITTED, graphically depicts the data presented in the table below]



                               12/96   12/97     12/98    12/99    12/00   12/01
---------------------------   -----   ------   ------   ------   ------   ------
Apria Healthcare Group Inc.    100     71.67    47.67    95.67   158.67   133.28
S & P 500                      100    133.36   171.47   207.56   188.66   166.24
Peer Group                     100    116.02   131.53   111.06   179.50   190.49

   (1) The Peer Group Index is based  on  the  cumulative  total  returns of the
       following  companies:  Coram Healthcare  Corporation,  Lincare  Holdings,
       Inc., Optioncare, Inc., and American Homepatient,  Inc. In years prior to
       1998, Rotech Medical  Corporation (no longer publicly owned) was included
       in the Peer Group Index.

     It should be noted  that  this  graph  represents  historical  stock  price
performance  and  is  not  necessarily  indicative  of any  future  stock  price
performance.

     The  foregoing  report  of  the  Compensation  Committee  of the  Board  of
Directors  regarding   compensation  and  the  performance  graph  that  appears
immediately  after such report shall not be deemed to be soliciting  material or
to be filed with the Securities and Exchange Commission under the Securities Act
of 1933, as amended,  or the Exchange Act, or  incorporated  by reference in any
document so filed.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following  table sets forth  information as of February 28, 2002,  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 four
other  most  highly  compensated  executive  officers  who were  serving in such
capacity as of December 31, 2001,  John C. Maney 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
-----------------------------------------------------------     ---------------------    ------------
                                                                                       
Janus Capital Corporation (1)                                         5,115,705              9.44%
Thomas H. Bailey (1)                                                  5,115,705              9.44
Janus Fund (1)                                                        5,115,705              9.44
Barclays Global Investors, LTD. (2)                                   2,777,011              6.13
David H. Batchelder (3)                                               1,301,282              2.40
Ralph V. Whitworth (3)                                                1,257,948              2.32
Philip L. Carter (4)                                                    900,000              1.66
Lawrence M. Higby (5)                                                   532,666               *
David L. Goldsmith (6)                                                  391,902               *
Michael R. Dobbs (7)                                                    156,180               *
George S. Suda (8)                                                       80,933               *
Michael J. Keenan (9)                                                    71,633               *
Richard H. Koppes (10)                                                   68,000               *
Philip R. Lochner, Jr. (11)                                              67,000               *
Beverly Benedict Thomas (12)                                             65,000               *
John C. Maney (13)                                                       53,000               *
All current directors and executive officers as a group               2,894,289              5.34
(12 persons) (14)
------------------
*     Less than 1%

(1)   According to an amended Schedule 13G dated February 8, 2002, Janus Capital
      Corporation  ("Janus Capital")  reported  beneficial  ownership as well as
      sole  dispositive  and voting  power with  respect  to  5,115,705  shares.
      3,571,250  of the shares are held by Janus  Fund,  an  investment  company
      registered under Section 8 of the Investment Company Act of 1940 for which
      Janus  Capital is the  investment  advisor.  Thomas H.  Bailey  ("Bailey")
      joined in the report  stating that, as President and Chairman of the Board
      of Janus Capital, he may be deemed to have the power to exercise or direct
      the exercise of Janus Capital's 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  Capital 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 to individual and institutional clients. The mailing address for Janus
      Capital,  Janus Fund and Bailey is 100 Filmore  Street,  Denver,  Colorado
      80206-4923.

 (2)  According  to a Schedule  13G,  dated  February  8,  2002,  filed with the
      Securities  and  Exchange  Commission,  Barclays  Global  Investors,  Ltd.
      ("BGLTD"), a bank as defined in Section 3(a)(6) of the Securities Exchange
      Act of 1934, has sole  dispositive  power as to 2,777,011  shares and sole
      voting  power as to  2,707,799  shares.  BGLTD  holds  4,230 of the shares
      directly and has sole dispositive and voting power as to those shares. The
      balance of the shares is held by two related banks:  Barclays  Global Fund
      Advisors  ("BGF"),  which  has sole  voting  and  dispositive  power as to
      343,304 shares, and Barclays Global Investors,  N.A.  ("BGNA"),  which has
      sole voting power as to 2,360,265 shares and sole dispositive  power as to
      2,429,477.  The  mailing  address  for  BGLTD,  BGF and BGNA is 45 Fremont
      Street, San Francisco, California 94105.

(3)   According to a Schedule 13D  Amendment,  dated August 9, 2001,  and Form 5
      filings  dated  January 28, 2002 and  February 1, 2002,  all of which have
      been  filed  with  the  Securities  and  Exchange  Commission,  Relational
      Investors LLC ("RILLC"),  its affiliated companies and Messrs.  Batchelder
      and Whitworth,  individually and as Managing  Members of RILLC,  have sole
      voting and dispositive power as to 1,322,948 shares, which amount includes
      161,666  shares  subject  to  options  that  are  currently   exercisable.
      1,161,282  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  96,666  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
      65,000  shares. The  mailing  address for  both  Mr.  Whitworth  and   Mr.
      Batchelder  is  11975  El  Camino  Real, Suite 300,  San Diego, California
      92130.

(4)   Includes 875,000 shares subject to options that are currently exercisable.
      The amounts reflected in  the table have  been adjusted to account for the
      sale during March 2002 of 50,000 shares acquired on option.

(5)   Includes 521,666 shares subject to options that are currently exercisable.

(6)   Includes  300,236  held  in a shared  trust with Mr. Goldsmith's  wife and
      91,666  shares  subject to options that are currently exercisable.

(7)   Includes 145,000 shares subject to options that are currently exercisable.

(8)   Includes 78,333 shares subject to options that are currently exercisable.

(9)   Includes 71,633 shares subject to options that are currently exercisable.

(10)  Includes 65,000 shares subject to options that are currently exercisable.

(11)  Includes 65,000 shares subject to options that are currently exercisable.

(12)  Includes 64,000 shares subject to options that are currently exercisable.

(13)  Includes 45,000 shares subject to options that are currently exercisable.

(14)  Includes shares owned by certain trusts.  Also includes  1,273,097  shares
      subject to options that are currently exercisable.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED 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, 2001 and 2000.............     F-2
  Consolidated Statements of Income - Years ended
    December 31, 2001, 2000 and 1999...................................     F-3
  Consolidated Statements of Stockholders' Equity - Years
    ended December 31, 2001, 2000 and 1999.............................     F-4
  Consolidated Statements of Cash Flows - Years ended
    December 31, 2001, 2000 and 1999...................................     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, 2001 and
2000, and the related consolidated  statements of income,  stockholders' equity,
and cash flows for each of the three  years in the  period  ended  December  31,
2001.  Our audits also included the financial  statement  schedule as of and for
each of the three years in the period ended  December 31, 2001,  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,  2001  and  2000,  and the  results  of their
operations  and their cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States of America.  Also, in our opinion,  such  financial  statement
schedule,  when  considered  in  relation  to the basic  consolidated  financial
statements taken as a whole,  presents  fairly,  in all material  respects,  the
information set forth therein.


/s/ DELOITTE & TOUCHE LLP
---------------------------------


Costa Mesa, California
April 1, 2002



                           APRIA HEALTHCARE GROUP INC.
                           CONSOLIDATED BALANCE SHEETS

                                                                                      DECEMBER 31,
                                                                                ----------------------
(in thousands)                                                                     2001         2000
------------------------------------------------------------------------------------------------------

                                     ASSETS
CURRENT ASSETS
                                                                                       
  Cash and cash equivalents .................................................   $   9,359    $  16,864
  Accounts receivable, less allowance for doubtful accounts of $32,073
    and $39,787 at December 31, 2001 and 2000, respectively .................     162,092      145,518
  Inventories, net ..........................................................      25,084       22,404
  Deferred income taxes .....................................................      33,017       33,067
  Prepaid expenses and other current assets .................................      10,271        8,617
                                                                                ---------    ---------
         TOTAL CURRENT ASSETS ...............................................     239,823      226,470

PATIENT SERVICE EQUIPMENT, less accumulated depreciation of
   $342,010 and $310,741 at December 31, 2001 and 2000, respectively ........     165,471      134,812
PROPERTY, EQUIPMENT AND IMPROVEMENTS, NET ...................................      47,312       40,630
DEFERRED INCOME TAXES .......................................................      37,838       75,076
GOODWILL, NET ...............................................................     193,458      131,841
INTANGIBLE ASSETS, NET ......................................................       4,863        6,087
OTHER ASSETS ................................................................       7,017        5,416
                                                                                ---------    ---------
                                                                                $ 695,782    $ 620,332
                                                                                =========    =========


                        LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
  Accounts payable ..........................................................   $  71,198    $  54,250
  Accrued payroll and related taxes and benefits ............................      33,907       28,449
  Accrued insurance .........................................................      10,376        9,980
  Income taxes payable ......................................................       9,060       13,378
  Other accrued liabilities .................................................      34,754       24,555
  Current portion of long-term debt .........................................      15,455        1,999
                                                                                ---------    ---------
         TOTAL CURRENT LIABILITIES ..........................................     174,750      132,611

LONG-TERM DEBT, net of current portion ......................................     278,234      341,479

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; 54,690,267 and 53,153,890 shares issued
    at December 31, 2001 and 2000, respectively; 54,604,167 and 53,067,790
    outstanding at December 31, 2001 and 2000, respectively .................          55           53
  Additional paid-in capital ................................................     368,231      343,621
  Treasury stock, at cost; 86,100 shares at
    December 31, 2001 and 2000, respectively ................................        (961)        (961)
  Accumulated deficit .......................................................    (124,554)    (196,471)
  Accumulated other comprehensive income ....................................          27            -
                                                                                ---------    ---------
                                                                                  242,798      146,242
                                                                                ---------    ---------
                                                                                $ 695,782    $ 620,332
                                                                                =========    =========


See notes to consolidated financial statements.



                           APRIA HEALTHCARE GROUP INC.
                         CONSOLIDATED INCOME STATEMENTS

                                                                         YEAR ENDED DECEMBER 31,
                                                                ----------------------------------------
(in thousands, except per share data)                               2001           2000          1999
--------------------------------------------------------------------------------------------------------
                                                                                    
Net revenues ................................................   $ 1,131,915    $ 1,014,201   $   940,024
Costs and expenses:
   Cost of net revenues:
      Product and supply costs ..............................       204,666        188,581       183,750
      Patient service equipment depreciation ................        89,985         77,819        73,138
      Nursing services ......................................         1,223          1,642         2,011
      Other .................................................        11,773         10,900         9,015
                                                                -----------    -----------   -----------
          TOTAL COST OF NET REVENUES ........................       307,647        278,942       267,914
   Provision for doubtful accounts ..........................        37,110         32,166        34,314
   Selling, distribution and administrative .................       631,582        554,691       514,041
   Amortization of goodwill and intangible assets ...........        12,349         10,205         8,048
                                                                -----------    -----------   -----------
          TOTAL COSTS AND EXPENSES ..........................       988,688        876,004       824,317
                                                                -----------    -----------   -----------
          OPERATING INCOME ..................................       143,227        138,197       115,707
Interest expense, net .......................................        25,685         40,056        42,526
                                                                -----------    -----------   -----------
          INCOME BEFORE TAXES AND EXTRAORDINARY CHARGE ......       117,542         98,141        73,181
Income tax expense (benefit) ................................        44,097         41,135      (130,954)
                                                                -----------    -----------   -----------
          INCOME BEFORE EXTRAORDINARY CHARGE ................        73,445         57,006       204,135
Extraordinary charge on debt refinancing,
   net of taxes of $914 .....................................         1,528              -             -
                                                                -----------    -----------   -----------
          NET INCOME ........................................   $    71,917    $    57,006   $   204,135
                                                                ===========    ===========   ===========


Basic income per common share:
   Income before extraordinary charge .......................   $      1.36    $      1.09   $      3.93
   Extraordinary charge on debt refinancing, net of taxes....          0.03             -             -
                                                                -----------    -----------   -----------
          Net income ........................................   $      1.33    $      1.09   $      3.93
                                                                ===========    ===========   ===========

Diluted income per common share:
   Income before extraordinary charge .......................   $      1.32    $      1.06   $      3.81
   Extraordinary charge on debt refinancing, net of taxes....          0.03              -             -
                                                                -----------    -----------   -----------
          Net income ........................................   $      1.29    $      1.06   $      3.81
                                                                ===========    ===========   ===========


See notes to consolidated financial statements.




                                                                   APRIA HEALTHCARE GROUP INC.
                                                         CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY



                                                                                                        ACCUMULATED
                                          COMMON STOCK      ADDITIONAL   TREASURY STOCK                   OTHER           TOTAL
                                       ------------------    PAID-IN     --------------   ACCUMULATED  COMPREHENSIVE   STOCKHOLDERS'
(in thousands)                         SHARES   PAR VALUE    CAPITAL     SHARES    COST     DEFICIT       INCOME          EQUITY
------------------------------------------------------------------------------------------------------------------------------------

                                                                                                
Balance at December 31, 1998 ......    51,785   $     52    $ 325,906         -   $(3)    $(457,612)      $   -        $(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          -   (3)     (253,477)          -           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        (86) (961)    (196,471)          -          146,242

Exercise of stock options .........     1,536          2       16,476                                                     16,478
Tax benefits related to
  stock options....................                             8,134                                                      8,134

Unrealized gain on interest rate
   swap agreements, net of taxes...                                                                          27               27
Net income ........................                                                          71,917                       71,917
                                                                                          ---------       -----        ---------
      Total comprehensive income...                                                          71,917          27           71,944
                                      -------   --------    ---------     ------  -----   ---------       -----        ---------
Balance at December 31, 2001 ......    54,690   $     55    $ 368,231        (86) $(961)  $(124,554)      $  27        $ 242,798
                                      =======   ========    =========     ======  =====   =========       =====        =========


See notes to consolidated financial statements.



                           APRIA HEALTHCARE GROUP INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                                      YEAR ENDED DECEMBER 31,
                                                                               -----------------------------------
(in thousands)                                                                    2001         2000         1999
------------------------------------------------------------------------------------------------------------------

OPERATING ACTIVITIES
                                                                                                
Net income .................................................................   $  71,917    $  57,006    $ 204,135
Items included in net income not requiring (providing) cash:
    Extraordinary charge on debt refinancing ...............................       2,442            -            -
    Provision for doubtful accounts ........................................      37,110       32,166       34,314
    Provision for inventory and patient service equipment shortages ........           -            -        3,968
    Depreciation ...........................................................     106,106       95,074       92,312
    Amortization of goodwill and intangible assets .........................      12,349       10,205        8,048
    Amortization of deferred debt issuance costs............................       1,880        2,618        4,471
    Deferred income taxes ..................................................      45,405       34,414     (138,334)
    Other, net .............................................................          97         (921)      (1,679)
Changes in operating assets and liabilities, exclusive of effects of
acquisitions:
    Accounts receivable ....................................................     (53,822)     (27,105)     (49,802)
    Inventories, net .......................................................      (2,516)      (3,898)      (3,668)
    Prepaids and other assets ..............................................      (1,718)       1,427       (3,905)
    Accounts payable, exclusive of outstanding checks ......................      11,979         (156)       4,446
    Accrued payroll and related taxes and benefits .........................       5,459        1,971          898
    Income taxes payable ...................................................      (4,319)       4,158        4,701
    Accrued expenses .......................................................       9,060      (18,976)     (12,188)
                                                                               ---------    ---------    ---------
         NET CASH PROVIDED BY OPERATING ACTIVITIES .........................     241,429      187,983      147,717

INVESTING ACTIVITIES
    Purchases of patient service equipment and property,
      equipment and improvements, exclusive of effects of acquisitions......    (133,162)     (96,414)     (75,119)
    Proceeds from disposition of assets ....................................         303          637        1,038
    Cash paid for acquisitions, including
      payments of deferred consideration....................................     (80,273)     (26,220)     (53,427)
                                                                               ---------    ---------    ---------
         NET CASH USED IN INVESTING ACTIVITIES .............................    (213,132)    (121,997)    (127,508)

FINANCING ACTIVITIES
    Proceeds from revolving credit facilities ..............................      94,900            -            -
    Payments on revolving credit facilities ................................     (87,100)           -            -
    Proceeds from term loans ...............................................     300,000            -            -
    Payments on term loans .................................................    (156,938)     (79,062)     (68,938)
    Payment on redemption of senior subordinated notes .....................    (200,000)           -            -
    Payments on other long-term debt .......................................      (2,488)      (3,608)      (5,826)
    Outstanding checks included in accounts payable ........................       4,969        4,259         (872)
    Capitalized debt issuance costs, net ...................................      (5,623)        (982)      (2,226)
    Repurchases of common stock ............................................           -         (958)           -
    Issuances of common stock ..............................................      16,478       10,736        2,671
                                                                               ---------    ---------    ---------
         NET CASH USED IN FINANCING ACTIVITIES .............................     (35,802)     (69,615)     (75,191)
                                                                               ---------    ---------    ---------

NET DECREASE IN CASH AND CASH EQUIVALENTS ..................................      (7,505)      (3,629)     (54,982)
Cash and cash equivalents at beginning of year .............................      16,864       20,493       75,475
                                                                               ---------    ---------    ---------
         CASH AND CASH EQUIVALENTS AT END OF YEAR ..........................   $   9,359    $  16,864    $  20,493
                                                                               =========    =========    =========

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

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


See notes to consolidated financial statements.



                           APRIA HEALTHCARE GROUP INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

     Company  Background  and  Segment  Reporting:  Apria  operates  in the home
healthcare segment of the healthcare  industry,  providing a variety of clinical
services  and related  products  and  supplies as  prescribed  by a physician or
authorized  by a case manager as part of a care plan.  All products and services
offered  by  the  company  are  provided   through  the  company's   network  of
approximately  400 branch  facilities,  which are located  throughout the United
States and are organized into 15 geographic  regions.  Each region consists of a
number of branches and a regional  office,  which provides key support  services
such as billing,  purchasing,  equipment  maintenance,  repair and  warehousing.
Management evaluates operating results on a geographic basis and therefore views
each region as an operating  segment.  All regions provide the same products and
services,  including  respiratory  therapy,  infusion  therapy and home  medical
equipment and supplies.  For financial reporting purposes,  all of the company's
operating segments are aggregated into one reportable segment in accordance with
the  aggregation  criteria in paragraph 17 of Statement of Financial  Accounting
Standards  ("SFAS") No. 131,  "Disclosures  about  Segments of an Enterprise and
Related Information".

     Respiratory therapy,  infusion therapy and home medical equipment represent
approximately 66%, 19% and 15% of total 2001 revenues,  respectively.  The gross
margins  for  these  services  and  related  products  were  79%,  59% and  63%,
respectively.

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

     Revenue   Recognition  and  Concentration  of  Credit  Risk:  Revenues  are
recognized  on the date  services and related  products are provided to patients
and are  recorded  at  amounts  estimated  to be  received  under  reimbursement
arrangements with third-party payors, including private insurers, prepaid health
plans,  Medicare and Medicaid.  Approximately 30% of the company's 2001 revenues
are reimbursed under arrangements with Medicare and Medicaid.  In 2001, 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 2001, 2000 and
1999.

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

     Management  performs periodic analyses to evaluate 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.

     Cash and Cash  Equivalents:  Apria  maintains  cash with various  financial
institutions.  These financial  institutions  are located  throughout the United
States and the company's  cash  management  practices  limit exposure to any one
institution.  Outstanding checks,  which are reported as a component of accounts
payable,  were  $23,457,000  and  $18,488,000  at  December  31,  2001 and 2000,
respectively.  Management considers all highly liquid instruments purchased with
a maturity of less than three months to be cash equivalents.

     Accounts  Receivable:  Included  in  accounts  receivable  are  earned  but
unbilled  receivables  of $26,925,000  and  $17,863,000 at December 31, 2001 and
2000, 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 ten years.

     Property, Equipment and Improvements:  Property, equipment and improvements
are  stated at cost.  Included  in  property  and  equipment  are  assets  under
capitalized leases which consist solely of information systems.  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  fifteen  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.  Management does not believe any impairment of its
capitalized software existed at December 31, 2001.

     Goodwill: Goodwill arising from business combinations represents the excess
of the  purchase  price over the  estimated  fair value of the net assets of the
acquired  business.  Prior to a  transition  period  called for by SFAS No. 142,
"Goodwill  and Other  Intangible  Assets",  goodwill  attributable  to  business
combinations  completed on or before June 30, 2001, was being amortized over the
period of expected benefit. The amortization period for substantially all of the
company's  goodwill  was 20 years.  Management  reviewed  for  impairment  on an
ongoing  basis and whenever  events or changes in  circumstances  indicated  the
possibility  of impairment.  In accordance  with the provisions of SFAS No. 142,
goodwill arising from business combinations  initiated after June 30, 2001, will
no longer be  amortized  but shall be tested  annually  for  impairment  or more
frequently if circumstances indicate potential impairment. Upon Apria's adoption
of SFAS No.  142 in its  entirety  on  January  1,  2002,  the  amortization  of
goodwill,  including goodwill recorded in past transactions,  ceased completely.
See "Recent Accounting Pronouncements".

     Intangible and Other Long-lived Assets: Intangible assets consist primarily
of covenants not to compete  resulting  from business  combinations.  The values
assigned to such intangible  assets are amortized on a straight-line  basis over
their contractual terms, which range from two to ten years.

     Management  reviews for  impairment  of  intangible  assets and  long-lived
assets on an ongoing  basis and  whenever  events or  changes  in  circumstances
indicate that the carrying amount of an asset may not be recoverable. Management
does not believe any  impairment of its intangible  assets or long-lived  assets
existed at December 31, 2001. See "Recent Accounting Pronouncements".

     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  $3,044,000,  $2,212,000 and
$2,528,000 for 2001, 2000 and 1999,  respectively,  are expensed as incurred and
included in "Selling, distribution and administrative expenses".

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

     Derivative  Instruments and Hedging Activities:  Effective January 1, 2001,
the company  adopted SFAS No. 133,  "Accounting  for Derivative  Instruments and
Hedging  Activities",  as amended by SFAS No. 137 and SFAS No. 138. SFAS No. 133
establishes  accounting and reporting  standards for hedging  activities and for
derivative  instruments,  including certain derivative  instruments  embedded in
other contracts. Apria's adoption of SFAS No. 133 did not have a material effect
on the company's consolidated financial statements.

     Comprehensive  Income: For the year ended December 31, 2001, the difference
between net income and comprehensive  income is $27,000,  net of taxes, which is
attributable to unrealized gains on two interest rate swap  agreements.  For the
years  ended  December  31,  2000 and 1999,  there were no  differences  between
comprehensive income and net income.

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

     Recent Accounting Pronouncements: In July 2001, Apria adopted SFAS No. 141,
"Business Combinations". SFAS No. 141 eliminates the pooling-of-interests method
of  accounting  for  business   combinations  and  requires  that  all  business
combinations  initiated  after June 30, 2001 be accounted for under the purchase
method. Adoption of SFAS No. 141 did not have a material effect on the company's
consolidated financial statements.

     Effective January 1, 2002, Apria adopted SFAS No. 142,  "Goodwill and Other
Intangible  Assets"  in its  entirety.  SFAS No.  142  addresses  the  financial
accounting and reporting for goodwill and other intangible assets. The statement
provides that goodwill or other intangible  assets with indefinite lives will no
longer be  amortized,  but  shall be tested  for  impairment  annually,  or more
frequently if circumstances  indicate potential impairment.  The impairment test
is comprised of two steps:  (1) a reporting unit's fair value is compared to its
carrying  value;  if the fair value is less than its  carrying  value,  goodwill
impairment is  indicated;  and (2) if impairment is indicated in the first step,
it is measured by  comparing  the implied fair value of goodwill to its carrying
value at the  reporting  unit  level.  In the  year of  adoption,  SFAS No.  142
requires  a  transitional  goodwill  impairment  test;  the  first  step must be
completed within six months of adoption and the second step, if necessary,  must
be completed by the end of the year. Amounts used in the transitional test shall
be measured as of the beginning of the year. An impairment  loss  resulting from
application of the transitional  goodwill impairment test shall be recognized as
the effect of a change in accounting  principle.  Apria's transitional  goodwill
impairment test and overall  evaluation of SFAS No. 142's impact is currently in
progress,  therefore it is not  presently  known  whether  adoption  will have a
material effect on the consolidated financial statements.  Goodwill amortization
expense for the year ended December 31, 2001 was $9,809,000.

     Effective  January  1, 2002,  Apria was  required  to adopt  SFAS No.  144,
"Accounting for the Impairment or Disposal of Long-Lived  Assets".  SFAS No. 144
requires that one accounting model be used for long-lived  assets to be disposed
of by  sale.  Discontinued  operations  will  be  measured  similarly  to  other
long-lived  assets  classified  as held  for sale at the  lower of its  carrying
amount or fair value less cost to sell.  Future  operating losses will no longer
be recognized  before they occur. SFAS No. 144 also broadens the presentation of
discontinued  operations to include a component of an entity when operations and
cash flows can be clearly  distinguished,  and establishes criteria to determine
when a long-lived  asset is held for sale.  The adoption of this  statement will
not have a material effect on Apria's financial statements.

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


NOTE 2 -- PROPERTY, EQUIPMENT AND IMPROVEMENTS

     Property, equipment and improvements consist of the following:

                                                            DECEMBER 31,
                                                   -----------------------------
     (IN THOUSANDS)                                   2001              2000
     ---------------------------------------------------------------------------

     Leasehold improvements.................       $  17,809         $  20,912
     Equipment and furnishings..............          43,565            46,136
     Information systems....................          73,597            57,408
                                                   ---------         ---------
                                                     134,971           124,456
     Less accumulated depreciation..........         (87,659)          (83,826)
                                                   ---------         ---------
                                                   $  47,312         $  40,630
                                                   =========         =========

NOTE 3 -- BUSINESS COMBINATIONS

     During  2001,  2000 and 1999,  Apria  acquired  a number  of  complementary
businesses in specific geographic markets.  Included are five companies acquired
after June 30, 2001. All of these companies  primarily provided home respiratory
therapy services.  For all periods presented,  these all-cash  transactions were
accounted for as purchases  and,  accordingly,  the results of operations of the
acquired  businesses are included in the consolidated income statements from the
dates  of  acquisition.  The  purchase  prices  were  allocated  to the  various
underlying  tangible  and  intangible  assets  and  liabilities  on the basis of
estimated fair value.

     The following  table  summarizes the  allocation of the purchase  prices of
acquisitions  made by the company,  which include  payments  deferred from prior
years.  In 2001,  such  payments  totaled  $2,408,000.  At  December  31,  2001,
outstanding  deferred   consideration  totaled  $1,385,000  and  $2,200,000  for
business  combinations  intitiated on or before June 30, 2001 and after June 30,
2001, respectively.


                                                      2001                   YEAR ENDED
                                             -----------------------        DECEMBER 31,
                                              After      On or prior   -----------------------
     (IN THOUSANDS)                          June 30,    to June 30,       2000        1999
     ---------------------------------------------------------------   -----------------------

                                                                        
     Fair value of assets acquired.........  $  44,523   $  37,286      $  26,778   $  56,313
     Liabilities (assumed) paid, net.......     (1,932)        396           (558)     (2,886)
                                             ---------   ---------      ---------   ---------
        Cash paid..........................  $  42,591   $  37,682      $  26,220   $  53,427
                                             =========   =========      =========   =========


     The allocation of the aggregate  consideration  for  acquisitions  effected
during  2001,  2000  and  1999  includes   goodwill  and  intangible  assets  of
$73,112,000, $22,492,000 and $49,324,000, respectively.

     The following  supplemental  unaudited pro forma  information  presents the
combined  operating  results of Apria and the  businesses  that were acquired by
Apria during 2001, as if the  acquisitions  had occurred at the beginning of the
periods  presented.  The  pro  forma  information  is  based  on the  historical
financial statements of Apria and those of the acquired businesses.  Amounts are
not  necessarily  indicative  of the results that may have been obtained had the
combinations  been in effect on the dates  indicated  or that may be achieved in
the future.

                                                        YEAR ENDED DECEMBER 31,
                                                      --------------------------
     (IN THOUSANDS)                                      2001           2000
     ---------------------------------------------------------------------------

     Net revenues..................................   $1,164,658     $1,083,178
     Income before extraordinary charge............   $   73,197     $   53,191
     Net income....................................   $   71,669     $   53,191

     Diluted income per common share:
       Income before extraordinary charge..........      $  1.34        $  0.97
       Extraordinary charge on debt
         refinancing, net of taxes.................         0.03              -
                                                         -------        -------
         Net income................................      $  1.31        $  0.97
                                                         =======        =======

NOTE 4 - GOODWILL AND INTANGIBLE ASSETS

                                                              DECEMBER 31,
                                                       -------------------------
     (IN THOUSANDS)                                       2001           2000
     ---------------------------------------------------------------------------

     Goodwill from business combinations
       completed on or before June 30, 2001.........   $ 203,077      $ 170,522
     Less accumulated amortization..................     (48,490)       (38,681)
                                                       ---------      ---------
                                                         154,587        131,841
     Goodwill from business combinations
       initiated after June 30, 2001................      38,871              -
                                                       ---------      ---------
                                                       $ 193,458      $ 131,841
                                                       =========      =========

     Intangible assets, comprised of
       covenants not to compete.....................   $  16,180      $  16,455
     Less accumulated amortization..................     (11,317)       (10,368)
                                                       ---------      ---------
                                                       $   4,863      $   6,087
                                                       =========      =========

     Covenants not to compete relating to business combinations  completed after
June 30, 2001 have a  weighted-average  life of five years.  All of the goodwill
recorded in conjunction with business combinations initiated after June 30, 2001
is expected to be deductible for tax purposes.


NOTE 5 -- CREDIT FACILITY AND LONG-TERM DEBT

     Long-term debt consists of the following:

                                                              DECEMBER 31,
                                                        ------------------------
     (IN THOUSANDS)                                       2001           2000
     ---------------------------------------------------------------------------

     Term loans payable.............................    $283,062       $140,000
     Notes payable relating to revolving
       credit facilities............................       7,800              -
     9 1/2% senior subordinated notes...............           -        200,000
     Capital lease obligations (see Note 9).........       2,827          3,478
                                                        --------       --------
                                                         293,689        343,478
     Less: Current maturities.......................     (15,455)        (1,999)
                                                        --------       --------
                                                        $278,234       $341,479
                                                        ========       ========

     Credit Agreement:  On July 20, 2001, Apria closed a new $400,000,000 senior
secured  credit  agreement  with a syndicate  of lenders led by Bank of America,
N.A. The credit facilities consist of a $100,000,000  five-year revolving credit
facility,  a $125,000,000  five-year term loan and a $175,000,000  six-year term
loan.  The  $125,000,000  term loan is  repayable  in 20  consecutive  quarterly
installments of $5,500,000 to $7,000,000 each, commencing December 31, 2001. The
$175,000,000 term loan is repayable in 20 consecutive quarterly  installments of
$437,500  each,  commencing  December  31, 2001,  followed by three  consecutive
quarterly  installments of $41,562,500  each, and a final payment of $41,562,500
due on July 20, 2007.

     On December 28,  2001,  the company made  scheduled  quarterly  payments of
$5,500,000 and $437,500 on the five-year and six-year term loans,  respectively.
The company further  reduced the outstanding  debt on the five-year term loan by
making a voluntary prepayment of $11,000,000 on December 28, 2001. The voluntary
prepayment was applied against future scheduled quarterly payments,  effectively
eliminating  any  prepayment  requirements  on the  five-year  term  loan  until
September 2002.

     The senior  secured  credit  agreement  permits  Apria to select one of two
variable  interest rates. One option is the base rate, which is expressed as the
higher of (a) the  Federal  Funds  rate plus 0.50% and (b) the Prime  Rate.  The
other  option is the  Eurodollar  rate,  which is based on the London  Interbank
Offered  Rate  ("LIBOR").  Interest  on  outstanding  balances  under the senior
secured  credit  agreement are  determined by adding a margin to the  Eurodollar
rate or base rate in effect at each interest  calculation  date.  The applicable
margins for the revolving  credit  facility and the  $125,000,000  term loan are
based on Apria's  leverage  ratio,  which is the ratio of its funded debt to its
last four  quarters  of  earnings  before  interest,  taxes,  depreciation,  and
amortization.  The  applicable  margin ranges from 1.50% to 2.25% for Eurodollar
loans and from 0.50% to 1.25% for base rate  loans.  For the  $175,000,000  term
loan, the margins are fixed at 3.00% for Eurodollar  loans and at 2.00% for base
rate loans. The effective  interest rate at December 31, 2001 was 4.87% on total
borrowings of $290,862,500. The senior credit agreement also requires payment of
commitment  fees  ranging  from 0.25% to 0.50% (also  based on Apria's  leverage
ratio) on the unused portion of the revolving credit facility.

     Borrowings under the senior secured credit facilities are collateralized by
substantially all of the assets of Apria. The credit agreement contains numerous
restrictions,  including but not limited to, covenants requiring the maintenance
of certain  financial  ratios,  limitations  on additional  borrowings,  capital
expenditures,  mergers,  acquisitions and investments and,  restrictions on cash
dividends,  loans and other  distributions.  The agreement also permits Apria to
expend a maximum of $100,000,000 per year on acquisitions. At December 31, 2001,
the company was in compliance  with all of the financial  covenants  required by
the credit agreement.

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

     The company's  previous credit agreement and the $200,000,000 9 1/2% senior
subordinated  notes,  both of which were scheduled to mature in late 2002,  were
repaid in full  concurrently  with the closing of the new senior  secured credit
agreement.  In connection with the early retirement of its debt, Apria wrote-off
the  unamortized   balance  of  deferred  financing  fees  attributable  to  the
subordinated  notes  and  the  previous  credit  agreement.  Accordingly,  Apria
recorded an extraordinary charge of $1,528,000, net of tax, in the quarter ended
September 30, 2001.

     On December 31, 2001,  borrowings  under the revolving credit facility were
$7,800,000,   outstanding  letters  of  credit  totaled  $1,000,000  and  credit
available under the revolving facility was $91,200,000.

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


     (IN THOUSANDS)                            DECEMBER 31, 2001
     -----------------------------------------------------------
     2002................................          $ 13,250
     2003................................            25,750
     2004................................            26,500
     2005................................            29,000
     2006................................            71,675
     2007................................           124,687
                                                   --------
                                                   $290,862

     Total  interest  paid in  2001,  2000  and 1999  amounted  to  $27,298,000,
$37,119,000 and $37,923,000, respectively.

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

     During the fourth  quarter of 2001,  Apria  entered into two interest  rate
swap  agreements  with a  total  notional  amount  of  $100,000,000  to fix  its
LIBOR-based variable rate debt at 2.58% (before the applicable margin). The swap
agreements  became  effective  October 30, 2001 and terminate on March 31, 2003.
The swaps are  being  accounted  for as cash flow  hedges  under  SFAS No.  133.
Accordingly,  the difference  between the interest received and interest paid is
reflected  as an  adjustment  to interest  expense.  For the period  between the
effective date of the swap  agreements  and December 31, 2001,  Apria paid a net
settlement  amount of $39,000.  At December 31, 2001,  the swap  agreements  are
reflected in the accompanying  balance sheet in other assets at their fair value
of  $44,000.  Unrealized  gains on the fair  value  of the swap  agreements  are
reflected, net of taxes, in other comprehensive income.


NOTE 6 -- STOCKHOLDERS' EQUITY

     Treasury Stock: In mid-February  2002, Apria announced a plan to repurchase
up to $35,000,000  of outstanding  common stock during the first two quarters of
2002. Depending on market conditions and other considerations,  repurchases will
be made from time to time in open market  transactions.  From  February 15, 2002
through March 11, 2002 Apria  repurchased  999,800  shares for  $21,670,000.  In
2000,  Apria  repurchased  86,000 shares of its common stock for  $958,000.  All
repurchased common shares are being held in treasury.

     Stock Compensation Plans: Apria has various stock-based compensation plans,
which are  described  below.  Management  applies the  provisions  of Accounting
Principles  Board Opinion 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,  Apria's net
income and per share  amounts  would have been adjusted to the pro forma amounts
indicated below.

     (IN THOUSANDS, EXCEPT PER SHARE DATA)         2001       2000       1999
     ---------------------------------------------------------------------------

     Net income:
       As reported......................        $ 71,917   $ 57,006   $ 204,135
       Pro forma........................        $ 61,761   $ 47,812   $ 196,971

     Basic net income per share:
       As reported......................         $  1.33    $  1.09     $  3.93
       Pro forma........................         $  1.14    $  0.91     $  3.79

     Diluted net income per share:
       As reported......................         $  1.29    $  1.06     $  3.81
       Pro forma........................         $  1.11    $  0.89     $  3.71


     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 2001, 2000
and 1999:  risk-free  interest rates ranging from 3.83% to 5.03%, 5.99% to 6.72%
and 6.81% to 6.89%,  respectively;  dividend yield of 0% for all years; expected
lives of 4.25 years for 2001,  4.89 years for 2000 and 5.08 years for 1999;  and
volatility of 62% for 2001, 65% for 2000 and 64% for 1999.

     Fixed Stock  Options:  Apria has  various  fixed  stock  option  plans that
provide  for the  granting  of  incentive  or  non-statutory  options to its key
employees and  non-employee  members of the Board of  Directors.  In the case of
incentive stock options, the exercise price may not be less than the fair market
value of the company's stock on the date of the grant,  and may not be less than
110% of the fair market  value of the  company's  stock on the date of the grant
for any individual  possessing 10% or more of the voting power of all classes of
stock of the company.  The dates at which the options become  exercisable  range
from the date of grant to five  years  after  the date of grant and  expire  not
later than 10 years after the date of grant. The weighted-average fair values of
fixed stock options  granted during 2001,  2000 and 1999 were $14.06,  $9.85 and
$10.79, respectively.


     A summary of the status of Apria's  fixed stock  options as of December 31,
2001,  2000 and 1999, and the activity during the years ending on those dates is
presented below:


                                                    2001                          2000                          1999
                                           --------------------------    ------------------------    --------------------------
                                                          WEIGHTED-                   WEIGHTED-                     WEIGHTED-
                                                           AVERAGE                     AVERAGE                       AVERAGE
                                             SHARES    EXERCISE PRICE      SHARES  EXERCISE PRICE       SHARES   EXERCISE PRICE
-------------------------------------------------------------------------------------------------------------------------------

                                                                                                   
Outstanding at beginning of year..........  3,268,096      $15.87         2,619,083      $15.73       2,300,969      $14.73
Granted:
  Exercise price equal to fair value......  2,246,000      $26.65         1,136,000      $16.47         563,332      $18.06
  Exercise price greater than fair value..          -      $    -                 -      $    -          50,000      $18.45
Exercised.................................   (548,185)     $15.45          (322,432)     $15.87        (189,241)     $10.24
Forfeited.................................   (618,892)     $23.99          (164,555)     $17.69        (105,977)     $17.59
                                            ---------                     ---------                   ---------
Outstanding at end of year................  4,347,019      $20.41         3,268,096      $15.87       2,619,083      $15.73
                                            =========                     =========                   =========
Exercisable at end of year................  1,913,525      $16.02         1,868,339      $15.23       1,792,519      $15.14
                                            =========                     =========                   =========


     The  following  table  summarizes  information  about fixed  stock  options
outstanding at December 31, 2001:


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

                                                                                                     
      $ 6.69 - $12.19                         625,979          6.23            $ 9.32               565,979         $ 9.02
      $12.25 - $16.63                         386,828          6.87            $14.64               322,826         $14.57
      $16.94 - $16.94                         658,631          7.94            $16.94               195,988         $16.94
      $17.05 - $20.00                         480,541          6.17            $18.04               382,692         $17.99
      $20.50 - $26.45                         686,840          6.53            $23.96               431,840         $23.73
      $27.13 - $29.00                       1,508,200          8.95            $27.14                14,200         $28.08
                                            ---------                                             ---------
      $ 6.69 - $29.00                       4,347,019          7.53            $20.41             1,913,525         $16.02
                                            =========                                             =========





     Performance-Based   Stock   Options:   Included   in  Apria's   stock-based
compensation  plans are provisions for the granting of  performance-based  stock
options. No such options have been granted since 1999. All options awarded under
the  performance-based  plans  have  vested and expire 10 years from the date of
grant.  The  weighted-average  fair  value of  performance-based  stock  options
granted during 1999 was $7.38.

     A summary  of the  status of  Apria's  performance-based  stock  options at
December 31, 2001,  2000 and 1999,  and the activity  during the years ending on
those dates is presented below:


                                                     2001                          2000                          1999
                                           --------------------------    ------------------------    --------------------------
                                                          WEIGHTED-                   WEIGHTED-                     WEIGHTED-
                                                           AVERAGE                     AVERAGE                       AVERAGE
                                             SHARES    EXERCISE PRICE      SHARES  EXERCISE PRICE       SHARES   EXERCISE PRICE
-------------------------------------------------------------------------------------------------------------------------------

                                                                                                   
Outstanding at beginning of year..........  2,384,402     $  7.99         3,208,392     $  7.77       3,410,862      $ 7.55
Granted:
  Exercise price equal to fair value......          -     $     -                 -     $     -         124,500      $13.54
  Exercise price greater than fair value..          -     $     -                 -     $     -          20,000      $ 6.50
Exercised.................................   (988,192)    $  8.09          (776,484)    $  7.20         (80,470)     $11.00
Forfeited.................................          -     $     -           (47,506)    $  6.50        (266,500)     $ 6.50
                                            ---------                     ---------                   ---------
Outstanding at end of year................  1,396,210     $  7.91         2,384,402     $  7.99       3,208,392      $ 7.77
                                            =========                     =========                   =========
Exercisable at end of year................  1,396,210     $  7.91         1,747,365     $  8.36         871,142      $ 9.70
                                            =========                     =========                   =========


     The following table summarizes  information about  performance-based  stock
options outstanding at December 31, 2001:


                                                        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                        685,126          6.61            $ 6.18               685,126         $ 6.18
      $ 6.75 - $ 9.00                        610,000          6.41            $ 8.75               610,000         $ 8.75
      $10.75 - $18.56                        101,084          5.03            $14.53               101,084         $14.53
                                           ---------                                             ---------
      $ 4.69 - $18.56                      1,396,210          6.41            $ 7.91             1,396,210         $ 7.91
                                           =========                                             =========


     Approximately  9,328,000  shares of common  stock are  reserved  for future
issuance upon exercise of stock options under all of Apria's active plans.




NOTE 7 -- INCOME TAXES

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

                                                           DECEMBER 31,
                                                    ----------------------------
     (IN THOUSANDS)                                    2001           2000
     ---------------------------------------------------------------------------

     Deferred tax liabilities:
       Tax over book depreciation..............     $ (4,122)       $ (4,834)
       Other, net..............................       (1,182)           (878)
                                                    --------        --------
          Total deferred tax liabilities.......       (5,304)         (5,712)

     Deferred tax assets:
       Allowance for doubtful accounts.........       12,028          14,636
       Accruals................................        9,309           9,251
       Asset valuation reserves................        2,181           2,766
       Net operating loss carryforward,
         limited by Section 382................       35,623          70,115
       AMT credit carryovers...................        9,766           8,052
       Intangible assets.......................        4,823           8,126
       Other, net..............................        2,429             909
                                                    --------        --------
          Total deferred tax assets............       76,159         113,855
                                                    --------        --------
          Net deferred tax assets..............     $ 70,855        $108,143
                                                    ========        ========

     At December 31, 2001, the company's net current deferred tax assets and net
long-term deferred tax assets are $33,017,000 and $37,838,000, respectively. The
difference in the  company's  deferred tax assets from 2000 to 2001 is primarily
attributable to utilization of current year net operating loss carryforwards.

     At December 31, 2001, Apria had federal net operating loss carryforwards of
approximately $89,000,000, expiring in varying amounts in the years 2003 through
2018,  and various state  operating loss  carryforwards  that began to expire in
1997.   Additionally,   the  company  has  an  alternative  minimum  tax  credit
carryforward of approximately  $9,800,000. 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.

     Income tax expense (benefit) consists of the following:

                                                YEAR ENDED DECEMBER 31,
                                       -----------------------------------------
     (IN THOUSANDS)                       2001           2000           1999
     ---------------------------------------------------------------------------

     Current:
       Federal..................       $  2,150        $  1,622       $  1,470
       State....................          1,200           5,099          6,145
                                       --------        --------       --------
                                          3,350           6,721          7,615
     Deferred:
       Federal..................         39,049          30,116       (123,495)
       State....................          1,698           4,298        (15,074)
                                       --------        --------       --------
                                         40,747          34,414       (138,569)
                                       --------        --------       --------
                                       $ 44,097        $ 41,135       $(130,954)
                                       ========        ========       =========

     During 2001,  the exercise of stock options  granted under Apria's  various
stock option plans gave rise to $21,689,000 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 2001 and  2000  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.

     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,
                                                          -------------------------------------
     (IN THOUSANDS)                                          2001          2000          1999
     -----------------------------------------------------------------------------------------------------------

                                                                             
     Income tax expense at statutory rate...............   $ 41,140      $ 34,349     $  25,613
     Non-deductible amortization of goodwill............      1,693         1,590         1,628
     State and foreign taxes, net of federal
       benefit and state loss carryforwards.............      2,959         3,942         4,073
     Decrease in valuation allowance for
       deferred items currently recognized..............          -             -      (158,992)
     Other..............................................     (1,695)        1,254        (3,276)
                                                           --------      --------      --------
                                                           $ 44,097      $ 41,135     $(130,954)
                                                           ========      ========     =========


     Net  income  taxes paid in 2001,  2000 and 1999,  amounted  to  $2,096,000,
$2,575,000 and $2,679,000, respectively.


NOTE 8 -- PER SHARE AMOUNTS

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


                                                                                   YEAR ENDED DECEMBER 31,
                                                                            -------------------------------------
     (IN THOUSANDS)                                                            2001         2000          1999
     ------------------------------------------------------------------------------------------------------------
                                                                                             
     Numerator:
        Net income.....................................................     $ 71,917     $ 57,006     $ 204,135
        Numerator for basic and diluted per share
          amounts - net income available to common stockholders........     $ 71,917     $ 57,006     $ 204,135

     Denominator:
        Denominator for basic per share
           amounts - weighted-average shares...........................       53,971       52,375        51,940

        Effect of dilutive securities:
           Employee stock options......................................        1,807        1,647         1,590
                                                                            --------     --------     ---------
           Total dilutive potential common shares......................        1,807        1,647         1,590
                                                                            --------     --------     ---------
        Denominator for diluted per share amounts - adjusted
            weighted-average shares....................................       55,778       54,022        53,530
                                                                            ========     ========     =========

     Basic net income per common share.................................       $ 1.33       $ 1.09        $ 3.93
                                                                              ======       ======        ======
     Diluted net income per common share...............................       $ 1.29       $ 1.06        $ 3.81
                                                                              ======       ======        ======

     Employee stock  options  excluded from the
       computation  of diluted per share amounts:

          Shares for which exercise price exceeds
             average market price of common stock......................        1,853          249         1,789
                                                                              ======     ========        ======
     Average exercise price per share that exceeds
        average market price of common stock...........................       $26.86       $25.52        $19.11
                                                                              ======       ======        ======


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 are generally  ten or fewer 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  2001,  2000 and  1999  amounted  to  $60,618,000,  $56,243,000  and
$55,465,000, respectively.

     In  addition,  during 2001 and 2000,  Apria  acquired  information  systems
totaling   $1,837,000  and   $3,054,000,   respectively,   under  capital  lease
arrangements with lease terms ranging from 24 to 30 months. No such arrangements
were effected in 1999.  Amortization of the leased information  systems amounted
to $811,000, $87,000 and $2,023,000 in 2001, 2000 and 1999, respectively.

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

                                                             DECEMBER 31,
                                                       -------------------------
     (IN THOUSANDS)                                      2001           2000
     ---------------------------------------------------------------------------

     Information systems...........................    $ 4,458        $ 3,054
     Less accumulated depreciation.................       (811)           (87)
                                                       -------        -------
                                                       $ 3,647        $ 2,967
                                                       =======        =======

     Future  minimum  payments,  by year and in the  aggregate,  required  under
capital lease  obligations and  noncancellable  operating  leases consist of the
following at December 31, 2001:

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

     2002............................................    $ 2,324       $ 48,564
     2003............................................        642         39,383
     2004............................................          -         31,941
     2005............................................          -         23,612
     2006............................................          -         16,512
     Thereafter......................................          -         19,894
                                                         -------       --------
                                                           2,966       $179,906
                                                                       ========
     Less interest included in minimum
       lease payments................................       (139)
                                                         -------
     Present value of minimum lease payments.........      2,827
     Less current portion............................     (2,205)
                                                         -------
                                                         $   622
                                                         =======

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 $4,240,000,  $3,792,000 and $3,405,000 in 2001, 2000 and
1999, 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 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 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.  Management is unable to estimate the range of possible loss
for all other claims and lawsuits.

     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. The
consolidated  amended  class action  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 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 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.

     Following  a series  of  settlement  discussions,  the  parties  reached  a
tentative settlement of both the consolidated federal and state class actions in
early 2002. Under the terms of the settlement,  Apria has contributed $1 million
to a settlement  pool,  with the balance of the total  settlement  amount of $42
million coming from Apria's insurance carriers. Apria has also agreed to provide
various  indemnities to certain  current and former Apria officers and directors
who would be entitled to receive such indemnification  under applicable law. The
Orange County  Superior  Court has required that final  settlement  documents be
presented to the Court on April 16, 2002.  Apria cannot  provide any  assurances
that all of the  agreements  necessary  to finalize the  settlement,  and obtain
final Court approval for such a settlement,  will be obtained.  However,  in the
opinion of Apria's management,  the ultimate  disposition of these class actions
will not have a material  adverse  effect on Apria's  results of  operations  or
financial condition.

     Apria and its former Chief Executive Officer are also defendants in a class
action lawsuit,  J.E.B. Capital Partners,  LP v. Apria Healthcare Group Inc. and
Philip L. Carter,  filed on August 27, 2001 in the U.S.  District  Court for the
Central  District of California,  Southern  Division (Case No.  SACV01-813 GLT).
Among other things,  the operative  complaint  alleges that the defendants  made
false and/or  misleading public statements by not announcing until July 16, 2001
the amount of potential  damages asserted by the U.S.  Attorney's  office in Los
Angeles and counsel for the plaintiffs in the qui tam actions referred to below.
Apria believes that it has meritorious defenses to the plaintiff's claims and it
intends to vigorously defend itself. In the opinion of Apria's  management,  the
ultimate  disposition  of this class  action  will not have a  material  adverse
effect on Apria's results of operations or financial condition.

     As  previously  reported,  since  mid-1998  Apria has been the  subject  of
investigations  conducted  by  several  U.S.  Attorneys'  offices  and the  U.S.
Department  of Health  and Human  Services.  These  investigations  concern  the
documentation supporting Apria's billing for services provided to patients whose
healthcare  costs are paid by  Medicare  and other  federal  programs.  Apria is
cooperating with the government in connection with these  investigations  and is
responding to various document requests and subpoenas.  A criminal investigation
conducted by the U.S.  Attorney's  office in  Sacramento  was closed in mid-1999
with no charges being filed. Potential claims resulting from an investigation by
the U.S. Attorney's office in San Diego were settled in mid-2001 in exchange for
a payment by Apria of $95,000.

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

     On July 12, 2001, government representatives and counsel for the plaintiffs
in the qui tam  actions  asserted  that,  by a process of  extrapolation  from a
sample of 300 patient files to all of Apria's billings to the federal government
during the  three-and-one-half  year sample period, Apria could be liable to the
government under the False Claims Act for more than  $9,000,000,000,  consisting
of extrapolated  overpayment liability,  plus treble damages and penalties of up
to $10,000 for each allegedly false claim derived from the extrapolation.

     Apria has acknowledged that there may be errors and omissions in supporting
documentation  affecting a portion of its  billings.  However,  it considers the
assertions  and amounts  described in the preceding  paragraph to be unsupported
both legally and factually  and believes that most of the alleged  documentation
errors and  omissions  should not give rise to any  liability,  for  overpayment
refunds or otherwise.  Accordingly,  Apria believes that the claims asserted are
unwarranted  and  that  it is  in a  position  to  assert  numerous  meritorious
defenses. Nevertheless, Apria cannot provide any assurances as to the outcome of
these proceedings. Management cannot estimate the possible loss or range of loss
that may result  from these  proceedings  and  therefore  has not  recorded  any
related accruals.

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

     Certain  Concentrations:  Approximately 66% of Apria's revenues are derived
from respiratory therapy services,  a significant portion of which is reimbursed
under  the  federal   Medicare   program.   The  Balanced  Budget  Act  of  1997
significantly reduced the Medicare  reimbursement rates for home oxygen services
and  respiratory  drugs and included other  provisions that have impacted or may
impact reimbursement rates in the future.  Although the Medicare Balanced Budget
Refinement Act of 1999 and the Medicare, Medicaid and SCHIP Benefits Improvement
and  Protection  Act of 2000  mitigated  or delayed  some of the  effects of the
original legislation,  there are still significant issues outstanding that could
adversely impact future revenues and operating results.

     Apria  currently  purchases   approximately  40%  of  its  patient  service
equipment and supplies from three 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.


NOTE 12 -- SERVICE/PRODUCT LINE DATA

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


                                                            YEAR ENDED DECEMBER 31,
                                                   -----------------------------------------
     (IN THOUSANDS)                                    2001          2000           1999
     ---------------------------------------------------------------------------------------
                                                                        
     Net revenues:
     Respiratory therapy......................     $  742,805     $  656,089     $   598,901
     Infusion therapy.........................        216,436        194,508         179,148
     Home medical equipment/other.............        172,674        163,604         161,975
                                                   ----------     ----------     -----------
               Total net revenues.............     $1,131,915     $1,014,201     $   940,024
                                                   ==========     ==========     ===========

     Gross profit:
     Respiratory therapy......................     $  588,868     $  521,867     $   472,306
     Infusion therapy.........................        126,778        115,352         106,162
     Home medical equipment/other.............        108,622         98,040          93,642
                                                   ----------     ----------     -----------
               Total gross profit.............     $  824,268     $  735,259     $   672,110
                                                   ==========     ==========     ===========




NOTE 13 -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)



                                                                                QUARTER
                                                        -------------------------------------------------------
     (IN THOUSANDS, EXCEPT PER SHARE DATA)                FIRST          SECOND         THIRD         FOURTH
     ----------------------------------------------------------------------------------------------------------
                                                                                          
     2001
     Net revenues...................................    $271,354        $283,480       $284,025       $293,056
     Gross profit...................................    $195,076        $207,905       $207,548       $213,739
     Operating income...............................    $ 35,696        $ 35,613       $ 35,681       $ 36,237
     Income before extraordinary charge.............    $ 17,076        $ 17,247       $ 19,133       $ 19,989
     Net income.....................................    $ 17,076        $ 17,247       $ 17,605       $ 19,989

     Basic income per common share:
       Income before extraordinary charge...........      $ 0.32         $ 0.32          $ 0.35         $ 0.37
       Extraordinary charge on debt refinancing,
         net of taxes...............................      $    -         $    -          $ 0.03         $    -
                                                          ------         ------          ------         ------
             Net income.............................      $ 0.32         $ 0.32          $ 0.32         $ 0.37

     Diluted income per common share:
       Income before extraordinary charge...........      $ 0.31         $ 0.31          $ 0.34         $ 0.36
       Extraordinary charge on debt refinancing,
         net of taxes...............................      $    -         $    -          $ 0.03         $    -
                                                          ------         ------          ------         ------
             Net income.............................      $ 0.31         $ 0.31          $ 0.31         $ 0.36

     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       $ 15,348

     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


     Third Quarter - 2001:  Net income for the third quarter of 2001 includes an
extraordinary charge of $1,528,000, net of tax, attributable to the write-off of
the  unamortized  balance  of  deferred  financing  fees  related  to the  early
retirement  of  Apria's 9 1/2%  senior  subordinated  notes  and the  previously
existing credit agreement.  Both were scheduled to mature in late 2002, but were
repaid in  full concurrently with the closing of the new senior credit agreement
in July 2001.




                                   o o o o o o




                                                  APRIA HEALTHCARE GROUP INC.

                                        SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS




                                                                          ADDITIONS
                                                                   ------------------------
                                                     BALANCE AT    CHARGED TO    CHARGED TO                  BALANCE AT
                                                      BEGINNING     COSTS AND       OTHER                      END OF
(IN THOUSANDS)                                        OF PERIOD     EXPENSES      ACCOUNTS    DEDUCTIONS       PERIOD
------------------------------------------------------------------------------------------------------------------------
                                                                                               
Year ended December 31, 2001
----------------------------
Deducted from asset accounts:
   Allowance for doubtful accounts .............       $39,787       $37,110       $     -      $44,824       $32,073
   Reserve for inventory and patient
      service equipment shortages ..............         7,790             -             -        1,974         5,816
                                                       -------       -------       -------      -------       -------
                  Totals .......................       $47,577       $37,110       $     -      $46,798       $37,889
                                                       =======       =======       =======      =======       =======


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
                                                       =======       =======       =======      =======      =======






                                   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:  April 1, 2002

                                       APRIA HEALTHCARE GROUP INC.

                                   By: /s/ LAWRENCE M. HIGBY
                                       --------------------------------------
                                       Chief Executive Officer and President

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

       SIGNATURE                   TITLE                              DATE
       ---------                   -----                              ----

/s/ LAWRENCE M. HIGBY                                              April 1, 2002
-----------------------
Lawrence M. Higby           Director, Chief Executive Officer
                            and President
                            (Principal Executive Officer)


/s/ JAMES E. BAKER
-----------------------
James E. Baker              Chief Financial Officer                April 1, 2002
                            (Principal Financial and
                            Accounting Officer)


/s/ RALPH V. WHITWORTH
-----------------------
Ralph V. Whitworth          Director, Chairman of the Board        April 1, 2002


/s/ DAVID H. BATCHELDER
-----------------------
David H. Batchelder         Director                               April 1, 2002


/s/ DAVID L. GOLDSMITH
-----------------------
David L. Goldsmith          Director                               April 1, 2002


/s/ RICHARD H. KOPPES
-----------------------
Richard H. Koppes           Director                               April 1, 2002


/s/ PHILIP R. LOCHNER
-----------------------
Philip R. Lochner           Director                               April 1, 2002


/s/ BEVERLY B. THOMAS
-----------------------
Beverly B. Thomas           Director                               April 1, 2002




                                  EXHIBIT INDEX


EXHIBIT NO.                                            DESCRIPTION                                                       REFERENCE
-----------                                            -----------                                                       ---------
                                                                                                                      
   3.1       Restated Certificate of Incorporation of Registrant.                                                           (b)

   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".

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

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

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

   4.1       Specimen Stock Certificate of the Registrant.

   4.2       Certificate of Designation of the Registrant.                                                                  (b)

   10.1      Schedule of Registration Procedures and Related Matters.                                                       (a)

   10.2      Executive Severance Agreement effective June 28, 1997 between Registrant and Michael J. Keenan.

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

   10.4      Amended and Restated  Employment  Agreement  effective January 1, 2000,  between Registrant and Lawrence M.
             Higby.                                                                                                         (f)

   10.5      Executive Severance Agreement effective March 28, 2000 between Registrant and George J. Suda.

   10.6      Building Lease,  dated December 6, 2000 and commencing on December 1, 2001,  between MSGW California I, LLC
             and Apria  Healthcare,  Inc. for two buildings  within the  MSGW/Pacific  Commercentre  Business Park, Lake
             Forest, California.                                                                                            (g)

   10.7      Amendment No. 1 to the 1998 Nonqualified Stock Incentive Plan, dated January 31, 2001.                         (f)

   10.8      Credit  Agreement dated July 20, 2001, among  Registrant and certain of its  subsidiaries,  Bank of America
             National Association and other financial institutions party to the Credit Agreement.                           (g)

   10.9      Underwriting Agreement dated August 9, 2001, between Registrant and Relational Investors, LLC.                 (g)

   10.10     Resignation and General Release Agreement  effective  February 12, 2002,  between  Registrant and Philip L.
             Carter.

   21.1      List of Subsidiaries.

   23.1      Consent of Deloitte & Touche LLP, Independent Auditors.






                               REFERENCES - DOCUMENTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
           
   (a)        Incorporated by reference to Registration  Statement on Form S-4  (Registration  No.  33-69094),  as filed on
              September 17, 1993.

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

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

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

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

   (f)        Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 2000.

   (g)        Incorporated  by reference to Quarterly  Report on Form 10-Q dated  September  30, 2001, as filed on November
              14, 2001.



                               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.