UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K/A

(Mark one)

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007

OR

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

For the transition period from                      to                      

Commission file number 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 Number)
26220 Enterprise Court, Lake Forest, CA		92630
(Address of Principal Executive Offices)		(Zip Code)

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

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

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

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

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 o No þ

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. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated filer þ		Accelerated filer o		Non-Accelerated filer o (Do not check if a smaller reporting company)		Smaller Reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No

As of June 30, 2008 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 $18.90 per share as reported by the New York Stock Exchange, was approximately $588,499,412.

As of September 9, 2008, there were outstanding 43,949,271 shares of the Registrant’s common stock, par value $.001 per share, which is the only class of common stock of the Registrant (not including 17,112,574 shares held in treasury).

 

 

Explanatory Note

Apria Healthcare Group Inc. (“Apria,” the “Company”, “we” or “our”) is filing this Amendment No. 1 (“Amendment No. 1”) to its Annual Report on Form 10-K for the fiscal year ended December 31, 2007 (the “Original Form 10-K”), which was filed with the Securities and Exchange Commission (the “SEC”) on February 29, 2008, to amend Part II, Item 9A: Controls and Procedures, to revise our conclusions regarding the effectiveness of the Company’s internal control over financial reporting and disclosure controls and procedures. In addition, the cover page and portions of Part IV, Item 15: Exhibits and Financial Statement Schedules, have been updated and amended.

Subsequent to the evaluation of the effectiveness of our internal control over financial reporting and disclosure controls and procedures made in connection with the Original Form 10-K, we reevaluated our internal control over financial reporting relating to the calculation of accounts receivable reserves and concluded that the Company did not effectively design and perform certain control activities to prevent or detect material misstatements that might exist in our reserve for uncollectible accounts receivable and, therefore, a material weakness existed in the Company’s internal control over financial reporting. Due to the identification of this material weakness our management, including our Chief Executive Officer and Chief Financial Officer, reevaluated the effectiveness of our disclosure controls and procedures as of December 31, 2007 and concluded that they were not effective as of that date. Notwithstanding the material weakness, based upon the work performed by the Company during August and September of 2008, we have concluded that there were no material adjustments required to the previously reported accounts receivable reserve amounts, and that our consolidated financial statements for the periods covered by and included in our Original Form 10-K are fairly stated in all material respects in accordance with accounting principles generally accepted in the United States of America.

In addition, as required under Rule 12b-15 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company’s principal executive officer and principal financial officer are providing new certifications in connection with this Amendment No. 1. For purposes of this Amendment No. 1 and in accordance with Rule 12b-15 under the Exchange Act, Item 9A of the Original Form 10-K has been amended and restated in its entirety. Except for the amendments described above, this Amendment No. 1 does not modify or update the disclosures in, or the exhibits to, the Original Form 10-K. Among other things, forward-looking statements made in the Original Form 10-K have not been revised to reflect events that occurred or facts that became known to us after the filing of the Original Form 10-K, and such forward looking statements should be read in their historical context.

PART II

Item 9A. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

In connection with the Original Form 10-K, with the participation of our Chief Executive Officer and Chief Financial Officer, our management had evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2007. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer had concluded that, as of the end of the period covered by the Original Form 10-K, our disclosure controls and procedures were effective.

Subsequent to the evaluation made in connection with our Original Form 10-K, we reevaluated our internal control over financial reporting relating to the calculation of accounts receivable reserves and concluded that the Company did not effectively design and perform control activities to prevent or detect material misstatements that might exist in our reserve for uncollectible accounts receivable and, therefore, a material weakness existed. Specifically, we did not perform an analysis with a sufficient level of detail to support management’s estimate of the reserve for uncollectible accounts receivable. Due to the identification of the material weakness in internal control over financial reporting, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, reevaluated the effectiveness of our disclosure controls and procedures and have concluded that they were not effective as of December 31, 2007.

Notwithstanding the material weakness, based upon the work performed by the Company during August and September of 2008, including a review of accounts receivable reserves as of December 31, 2007, we have concluded that there were no material adjustments required to the previously reported accounts receivable reserve amounts and that our consolidated financial statements for the periods covered by and included in our Original Form 10-K are fairly stated in all material respects in accordance with accounting principles generally accepted in the United States of America.

Future Remediation Plan for Material Weakness

During September 2008, we completed the design and implementation of control activities that we believe will prevent or detect material misstatements that might exist in our reserve for uncollectible accounts receivable. Specifically, we have developed a process to assess our historical cash receipts experience and consider other relevant factors to support management’s estimate for uncollectible accounts receivable. While management believes that these steps are appropriate to remediate the material weakness in our internal control over financial reporting, management cannot conclude that remediation is complete until such controls operate for a sufficient period of time and are tested further. Following testing of our operational effectiveness, we believe our remediation will be complete in the fourth quarter of 2008.

Changes in Internal Control Over Financial Reporting

During the fourth quarter of the period covered by the Original Form 10-K, there were changes to our internal control over financial reporting. These changes were made in connection with analyzing deferred revenues and deferred expenses during the fourth quarter of 2007, where management identified that certain corrections to the amounts reported for these items were necessary. As a result of this, management has improved internal control over financial reporting by hiring additional qualified resources into the financial accounting group.

Management’s Report On Internal Control Over Financial Reporting (As Revised)

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). The Company’s internal control over financial reporting system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance that material misstatements will be prevented or detected on a timely basis. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, the Company has conducted an evaluation of the effectiveness of its internal control over financial reporting as of December 31, 2007. In making this assessment, our management used the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. Based upon our evaluation, we identified a material weakness in our internal control over financial reporting, which is described below. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Because of the following material weakness, management has concluded that the Company’s internal control over financial reporting was not effective as of December 31, 2007.

Management’s estimate of the reserve for uncollectible accounts receivable. We did not effectively design and perform control activities to prevent or detect material misstatements that might exist in our reserve for uncollectible accounts receivable. Specifically, we did not perform an analysis with a sufficient level of detail to support management’s estimate of the reserve for uncollectible accounts receivable.

Our management has not yet conducted an assessment of the internal control over financial reporting of Coram. We completed the acquisition of Coram on December 3, 2007, and it was not possible, given the timing of the acquisition, to conduct an assessment of Coram’s internal control over financial reporting in the period between the completion of the acquisition and the date of our management’s assessment of our internal control over financial reporting. Accordingly, our conclusion in this Amendment No. 1 regarding the effectiveness of our internal control over financial reporting as of December 31, 2007 does not include the internal control over financial reporting of Coram. Included in our consolidated financial statements was 28 days of operations which amounted to approximately $42.0 million, or 2.6% of net revenues and $0.7 million of net income. Additionally, Coram’s total assets as of December 31, 2007 were approximately $444 million, or 28% of consolidated total assets. We intend to undertake an evaluation of Coram’s internal control over financial reporting during 2008.

The Company’s independent registered public accounting firm has audited the Company’s internal control over financial reporting as of December 31, 2007, as stated in the Report of Independent Registered Accounting Firm, appearing under Item 15, which expresses an adverse opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2007.

September 11, 2008

/s/ LAWRENCE M. HIGBY   Lawrence M. Higby
Chief Executive Officer
/s/ CHRIS A. KARKENNY   Chris A. Karkenny Executive Vice President and Chief Financial Officer

PART IV

Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)			1.			The financial statements described in the “Index to Consolidated Financial Statements and Financial Statement Schedule” are included in this Amendment No. 1 starting at page F-1.
			2.			The financial statement schedule is included 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 by reference herein:
						See Exhibit Index.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE

		Page
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm			F-1
Consolidated Balance Sheets — December 31, 2007 and 2006 (As Restated)			F-3
Consolidated Statements of Income — Years ended December 31, 2007, 2006 (As Restated) and 2005 (As Restated)			F-4
Consolidated Statements of Stockholders’ Equity — Years ended December 31, 2007, 2006 (As Restated) and 2005 (As Restated)			F-5
Consolidated Statements of Cash Flows — Years ended December 31, 2007, 2006 (As Restated) and 2005 (As Restated)			F-6
Notes to Consolidated Financial Statements			F-7
FINANCIAL STATEMENT SCHEDULE
Schedule II — Valuation and Qualifying Accounts			S-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Apria Healthcare Group Inc.
Lake Forest, California

We have audited the accompanying consolidated balance sheets of Apria Healthcare Group Inc. and subsidiaries (the “Company”) as of December 31, 2007 and 2006, and the consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2007. Our audits also included the financial statement schedules listed in the Index at Item 15. We also have audited the Company’s internal control over financial reporting as of and for the year ended December 31, 2007, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. As described in Management’s Report on Internal Control Over Financial Reporting, management excluded from its assessment the internal control over financial reporting at Coram, Inc., which was acquired on December 3, 2007 and whose financial statements constitute 28% of total assets, 2.6% of net revenues, and 0.8% of net income of the consolidated financial statement amounts as of December 31, 2007. Accordingly, our audit did not include the internal control over financial reporting at Coram, Inc. The Company’s management is responsible for these financial statements and financial statement schedules, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting based on our audits. Our responsibility is to express an opinion on these financial statements and financial statement schedules and an opinion on the Company’s internal control over financial reporting based on our audits.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment:

Management’s estimate of the reserve for uncollectible accounts receivable.

The Company did not effectively design and perform certain control activities to prevent or detect material misstatements that might exist in its reserve for uncollectible accounts receivable.

This material weakness was considered in assessing the nature, timing, and extent of audit tests applied in our audit of the financial statements and financial statement schedules of the Company and this material weakness does not affect our opinion on such financial statements and financial statement schedules.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Apria Healthcare Group Inc. and subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. Also, in our opinion, because of the effect of the material weakness identified above on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

As discussed in Note 8 to the consolidated financial statements, the Company changed its method of accounting for Share-Based Payment and prospectively adjusted the 2006 consolidated financial statements for the change. Also, as discussed in Note 3 to the consolidated financial statements, on January 1, 2007, the Company adopted the provisions of Financial Accounting Standards Board No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109.

DELOITTE & TOUCHE LLP
Costa Mesa, CA
February 29, 2008
(September 11, 2008 as to the material weakness described above)

APRIA HEALTHCARE GROUP INC.

		December 31,
(in thousands, except share data)		2007				2006
						(As Restated —
						See Note 2)
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	28,451			$	14,657
Accounts receivable, less allowance for doubtful accounts of $47,823 and $27,324 at December 31, 2007 and 2006, respectively			284,141				211,097
Inventories, net			52,079				40,681
Deferred income taxes			66,198				42,480
Deferred expenses			3,102				3,020
Prepaid expenses and other current assets			23,364				19,142
TOTAL CURRENT ASSETS			457,335				331,077
PATIENT SERVICE EQUIPMENT, less accumulated depreciation of $453,324 and $445,608 at December 31, 2007 and 2006, respectively			200,180				212,068
PROPERTY, EQUIPMENT AND IMPROVEMENTS, NET			102,827				52,975
GOODWILL			715,235				539,187
INTANGIBLE ASSETS, NET			107,757				6,551
DEFERRED DEBT ISSUANCE COSTS, NET			2,834				4,612
OTHER ASSETS			11,634				8,166
		$	1,597,802			$	1,154,636
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable		$	120,360			$	66,969
Accrued payroll and related taxes and benefits			66,625				46,532
Income taxes payable			3,076				10,793
Other accrued liabilities			73,835				44,804
Deferred revenue			29,704				29,158
Current portion of long-term debt			254,252				2,145
TOTAL CURRENT LIABILITIES			547,852				200,401
LONG-TERM DEBT, net of current portion			433,031				485,000
DEFERRED INCOME TAXES			62,290				60,815
INCOME TAXES PAYABLE AND OTHER NON-CURRENT LIABILITIES			42,604				8,727
TOTAL LIABILITIES			1,085,777				754,943
COMMITMENTS AND CONTINGENCIES (Notes 11 and 13)
STOCKHOLDERS’ EQUITY
Preferred stock, $.001 par value:
10,000,000 shares authorized; none issued			—				—
Common stock, $.001 par value:
150,000,000 shares authorized; 60,844,901 and 59,762,307 shares issued at December 31, 2007 and 2006, respectively; 43,794,492 and 42,789,450 outstanding at December 31, 2007 and 2006, respectively			61				60
Additional paid-in capital			514,848				482,123
Treasury stock, at cost; 17,050,409 and 16,972,857 shares at December 31, 2007 and 2006, respectively			(431,651	)			(429,573	)
Retained earnings			428,538				346,732
Accumulated other comprehensive income			229				351
TOTAL STOCKHOLDERS’ EQUITY			512,025				399,693
		$	1,597,802			$	1,154,636

See notes to consolidated financial statements.

APRIA HEALTHCARE GROUP INC.

		Year Ended December 31,
(in thousands, except per share data)		2007				2006				2005
						(As Restated				(As Restated
						— See Note 2)				— See Note 2)
Net revenues:
Fee for service arrangements		$	1,465,303			$	1,355,202			$	1,329,346
Capitation			166,498				161,489				146,324
TOTAL NET REVENUES			1,631,801				1,516,691				1,475,670
Costs and expenses:
Cost of net revenues:
Product and supply costs			386,496				345,693				309,338
Patient service equipment depreciation			110,775				113,177				111,759
Home respiratory therapy services			38,886				38,501				34,669
Nursing services			11,353				8,825				9,078
Other			17,482				15,384				14,369
TOTAL COST OF NET REVENUES			564,992				521,580				479,213
Provision for doubtful accounts			43,138				38,723				46,948
Selling, distribution and administrative			862,062				804,285				792,031
Qui tam settlement and related costs (Note 13)			—				—				19,258
Amortization of intangible assets			3,079				5,080				6,941
TOTAL COSTS AND EXPENSES			1,473,271				1,369,668				1,344,391
OPERATING INCOME			158,530				147,023				131,279
Interest expense			22,447				31,205				22,972
Interest income and other			(1,954	)			(1,742	)			(853	)
INCOME BEFORE TAXES			138,037				117,560				109,160
Income tax expense			51,998				43,297				40,677
NET INCOME		$	86,039			$	74,263			$	68,483
Basic net income per common share		$	1.98			$	1.75			$	1.42
Diluted net income per common share		$	1.95			$	1.73			$	1.40

See notes to consolidated financial statements.

APRIA HEALTHCARE GROUP INC.

																										Accumulated
										Additional																Other				Total
		Common Stock								Paid-In				Treasury Stock								Retained				Comprehensive				Stockholders’
(in thousands)		Shares				Par Value				Capital				Shares				Cost				Earnings				(Loss)Income				Equity
																						(As Restated								(As Restated
																						— See Note 2)								— See Note 2)
Balance at January 1, 2005, as previously reported			58,236			$	58			$	439,544				9,628			$	(254,432	)		$	221,041			$	(26	)		$	406,185
Restatement adjustments																							(17,055	)							(17,055	)
Balance at January 1, 2005, as restated			58,236				58				439,544				9,628				(254,432	)			203,986				(26	)			389,130
Exercise of stock options			937				1				21,179																				21,180
Tax benefits related to stock options											4,117																				4,117
Compensatory stock options and awards			43								3,259																				3,259
Repurchases of common stock															7,337				(175,000	)											(175,000	)
Unrealized gain on interest rate swap agreements, net of taxes																											482				482
Net income																							68,483								66,483
Total comprehensive income																							68,483				482				68,965
Balance at December 31, 2005, as restated			59,216				59				468,099				16,965				(429,432	)			272,469				456				311,651
Exercise of stock options			508				1				8,244																				8,245
Tax benefits related to stock options											403																				403
Tax shortfalls on share-based compensation											(386	)																			(386	)
Compensatory stock options and awards			38								5,763																				5,763
Restricted stock retained in treasury upon vesting															8				(141	)											(141	)
Unrealized loss on interest rate swap agreements, net of taxes																											(105	)			(105	)
Net income																							74,263								74,263
Total comprehensive income																							74,263				(105	)			74,158
Balance at December 31, 2006, as restated			59,762				60				482,123				16,973				(429,573	)			346,732				351				399,693
Cumulative effect adjustment pursuant to adoption of FIN 48																							(4,233	)							(4,233	)
Exercise of stock options			887				1				17,617																				17,618
Tax benefits related to stock options											4,057																				4,057
Tax shortfalls on share-based compensation											(99	)																			(99	)
Compensatory stock options and awards			196								11,150																				11,150
Restricted stock retained in treasury upon vesting															77				(2,078	)											(2,078	)
Unrealized loss on interest rate swap agreements, net of taxes																											(122	)			(122	)
Net income																							86,039								86,039
Total comprehensive income																							86,039				(122	)			85,917
Balance at December 31, 2007			60,845			$	61			$	514,848				17,050			$	(431,651	)		$	428,538			$	229			$	512,025

See notes to consolidated financial statements.

APRIA HEALTHCARE GROUP INC.

		Year Ended December 31,
(in thousands)		2007				2006				2005
						(As Restated				(As Restated
						— See Note 2)				— See Note 2)
OPERATING ACTIVITIES
Net income		$	86,039			$	74,263			$	68,483
Items included in net income not requiring cash:
Provision for doubtful accounts			43,138				38,723				46,948
Depreciation			131,645				133,563				133,677
Amortization of intangible assets			3,079				5,080				6,941
Amortization of deferred debt issuance costs			1,778				1,755				1,729
Deferred income taxes			4,605				24,712				(4,962	)
Share-based compensation			11,150				5,763				3,259
Excess tax benefits from shared-based compensation			(4,057	)			(403	)			—
Gain on disposition of assets and other			(536	)			(81	)			—
Changes in operating assets and liabilities, exclusive of effects of acquisitions:
Accounts receivable			(33,724	)			(23,342	)			(54,198	)
Inventories, net			2,589				2,025				(561	)
Prepaid expenses and other assets			(48	)			7,094				3,452
Accounts payable, exclusive of book cash overdraft			7,043				7,717				2,907
Accrued payroll and related taxes and benefits			477				(4,775	)			3,547
Income taxes payable			20,380				2,145				(6,427	)
Deferred revenue, net of deferred expenses			289				1,238				(1,790	)
Accrued expenses			20,159				5,437				3,294
NET CASH PROVIDED BY OPERATING ACTIVITIES			294,006				280,914				206,299
INVESTING ACTIVITIES
Purchases of patient service equipment and property, equipment and improvements, exclusive of effects of acquisitions			(128,759	)			(125,628	)			(118,867	)
Proceeds from disposition of assets			102				778				767
Cash paid for acquisitions			(354,578	)			(8,082	)			(105,471	)
NET CASH USED IN INVESTING ACTIVITIES			(483,235	)			(132,932	)			(223,571	)
FINANCING ACTIVITIES
Proceeds from revolving credit facilities			359,000				29,800				216,250
Payments on revolving credit facilities			(170,000	)			(184,800	)			(51,000	)
Payments on other long-term debt			(3,264	)			(7,030	)			(7,854	)
Change in book cash overdraft included in accounts payable			(4,291	)			(2,128	)			(2,384	)
Capitalized debt issuance costs			—				(1,119	)			(15	)
Repurchases of common stock			—				—				(175,000	)
Excess tax benefits from shared-based compensation			4,057				403				—
Issuances of common stock			17,521				8,245				21,180
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES			203,023				(156,629	)			1,177
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			13,794				(8,647	)			(16,095	)
Cash and cash equivalents at beginning of year			14,657				23,304				39,399
CASH AND CASH EQUIVALENTS AT END OF YEAR		$	28,451			$	14,657			$	23,304

SUPPLEMENTAL DISCLOSURES — See Note 7 — Long-term Debt and Note 9 — Income Taxes for cash paid for interest and income taxes, respectively.

NON-CASH TRANSACTIONS — See Statements of Stockholders’ Equity, Note 5 — Business Combinations and Note 11— Leases for tax benefit from stock option exercises, non-cash treasury stock transactions, liabilities assumed in acquisitions and purchase of property and equipment under capital leases, respectively.

Purchases of patient service equipment and property, equipment and improvements exclude purchases that remain unpaid at the end of the respective year. Such amounts are then included in the following year’s purchases. Unpaid purchases were $10,994, $8,152 and $10,754 at December 31, 2007, 2006 and 2005, respectively.

See notes to consolidated financial statements.

APRIA HEALTHCARE GROUP INC.

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 in consolidation. The 2006 and prior years financial statements have been restated. See Note 2 to these Consolidated Financial Statements.

Company Background: Apria operates in the home healthcare segment of the healthcare industry, providing a variety of clinical services and related products and supplies as prescribed by a physician or authorized by a case manager as part of a care plan. Essentially all products and services offered by the Company are provided through the Company’s network of approximately 550 branch facilities, which are located throughout the United States. Our home respiratory therapy and home medical equipment service lines are currently organized into three geographic divisions. The recently acquired Coram home infusion business is organized in a single division. The Company’s chief operating decision maker evaluates operating results on a divisional basis and, therefore, each division is designated an operating segment. All divisions provide the same products and services, including home respiratory therapy, home infusion therapy and home medical equipment and supplies, except for the recently acquired Coram business which provides home infusion therapy services only. For financial reporting purposes, all of the Company’s operating segments are aggregated into one reportable segment in accordance with the aggregation criteria of Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosures about Segments of an Enterprise and Related Information.”

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 under fee for service arrangements through equipment we rent to patients, sales of equipment, supplies, pharmaceuticals and other items we sell to patients and lastly, through capitation payments received from third party payors for services and equipment we provide to the patients of these payors. Revenue generated from equipment that we rent to patients is recognized over the rental period, typically one month, and commences on delivery of the equipment to the patients. Revenue related to sales of equipment, supplies and pharmaceuticals is recognized on the date of delivery to the patients. Revenues derived from capitation arrangements were approximately 10%, 11% and 11% of total net revenues for 2007, 2006 and 2005, respectively. Capitation revenue is earned as a result of entering into a contract with a third party to provide its members certain services without regard to the actual services provided, therefore revenue is recognized in the period that the beneficiaries are entitled to health care services. All revenues are recorded at amounts estimated to be received under reimbursement arrangements with third-party payors, including private insurers, prepaid health plans, Medicare and Medicaid. For the years 2007, 2006 and 2005, revenues reimbursed under arrangements with Medicare and Medicaid were approximately 35%, 36% and 39%, respectively, as a percentage of total revenues. In all three years presented, no other third-party payor group represented more than 9% of the Company’s revenues. In fee for service arrangement revenue, rental and sale revenues comprise approximately $730,492,000 or 49.9% and $734,811,000 or 50.1%; $701,224,000 or 51.7% and $653,978,000 or 48.3%; and $704,607,000 or 53.0% and $624,739,000 or 47.0% in 2007, 2006 and 2005, respectively.

Emerging Issues Task Force (“EITF”) Topic 00-21, Revenue Arrangements with Multiple Deliverables, addresses the accounting for revenues in which multiple products and/or services are delivered at different times under one arrangement with a customer, and provides guidance in determining whether multiple deliverables should be considered as separate units of accounting. In our business, we have multiple products that are delivered to patients. These arrangements involve equipment that is rented and related supplies that may be sold that cannot be returned. In our revenue recognition policy regarding arrangements with multiple deliverables, revenue is recognized when each deliverable is provided to the patient. For example, revenues from equipment rental supplies sales are recognized upon of delivery of the products, as the supplies sold are considered a separate unit of accounting.

Deferred Revenue and Deferred Expense: Rental of equipment to patients is accounted for under SFAS No. 13, “Accounting for Leases.” Under SFAS No. 13, a lessor is required to recognize rental income over the lease term. Rental of patient equipment is billed on a monthly basis beginning on the date the equipment is delivered. Since deliveries can occur on any day during a month, the amount of billings that apply to the next month are deferred.

The accounting for the deferral of expenses by lessors is addressed by SFAS No. 91 “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases.” Only the direct costs associated with the initial rental period are deferred in accordance with SFAS No. 91.

Cash and Cash Equivalents: Cash is maintained 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. Book cash overdrafts, which are reported as a component of accounts payable, were $14,228,000 and $18,519,000 at December 31, 2007 and 2006, 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 $48,262,000 and $30,036,000 at December 31, 2007 and 2006, 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 the analysis of historical performance and collectibility.

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

Management performs periodic analyses to evaluate accounts receivable balances to ensure that recorded amounts reflect estimated net realizable value. Specifically, management considers historical realization data, accounts receivable aging trends, other operating trends, the extent of contracted business and business combinations. Also considered are relevant business conditions such as governmental and managed care payor claims processing procedures and system changes. Additionally, focused reviews of certain large and/or problematic payors are performed. Due to continuing changes in the healthcare industry and third-party reimbursement, it is possible that management’s estimates could change in the near term, which could have an impact on operations and cash flows.

Accounts receivable are reduced by an allowance for doubtful accounts which provides for those accounts from which payment is not expected to be received, although services were provided and revenue was earned. Upon determination that an account is uncollectible, it is written-off and charged to the allowance.

Inventories: Inventories are stated at the lower of cost (first-in, first-out method) or market and consist primarily of pharmaceuticals and items used in conjunction with patient service equipment. Inventories are reduced by a reserve for slow moving or obsolete inventory.

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

Property, Equipment and Improvements: Property, equipment and improvements are stated at cost. Included in property and equipment are assets under capitalized leases which consist of information systems hardware and software. Depreciation is provided using the straight-line method over the estimated useful lives of the assets. Estimated useful lives for each of the categories presented in Note 4 are as follows: leasehold improvements — the shorter of the remaining lease term or seven years; equipment and furnishings — three to fifteen years; and information systems — three to six 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 that the assets are expected to provide benefit and are accounted for under Statement of Position No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. Capitalized costs include direct costs of materials and services incurred in developing or obtaining internal-use software and payroll and benefit costs for employees directly involved in the development of internal-use software.

Long-Lived Assets: The recoverability of long-lived assets, including property and equipment and certain identifiable intangible assets, is evaluated in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 requires a review for impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Factors considered important which could trigger an impairment review include but are not limited to:

	•		significant underperformance relative to historical or projected future operating results;
	•		significant changes in the manner of use of the assets or the strategy for our overall business;
	•		significant decrease in the market value of the assets; and
	•		significant negative industry or economic trends.

When it is determined that the carrying amount of long-lived assets may not be recoverable based upon the existence of one or more of the above indicators, management assesses the assets for impairment based on the estimated future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the carrying amount of an asset exceeds its estimated future undiscounted cash flows, an impairment loss is recorded for the excess of the asset’s carrying amount over its fair value. Fair value is generally determined based on the estimated future discounted cash flows over the remaining useful life of the asset using a discount rate determined by management to be commensurate with the risk inherent in its business model. The assumptions supporting the cash flows, including the discount rates, are determined using management’s best estimates as of the date of the impairment review. If these estimates or their related assumptions change in the future, impairment charges may be required for these assets, and future results of operations could be adversely affected.

Goodwill: Goodwill arising from business combinations represents the excess of the purchase price over the estimated fair value of the net assets of the businesses acquired. In accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill is tested annually for impairment or more frequently if circumstances indicate the possibility of impairment. The Company has selected December 31 to perform its annual impairment test. Management does not believe any impairment of its goodwill existed at December 31, 2007. The goodwill amounts for the December 3, 2007 acquisition of Coram are based upon preliminary estimates that are subject to change in 2008 upon completion of the final valuation analysis. Final determination of these estimates could result in an adjustment to the purchase price allocation with an offsetting adjustment to goodwill.

Intangible Assets: Intangible assets consist of covenants not to compete, trade names, patient referral sources and customer lists, all of which arose from business combinations. The values assigned to the covenants not to compete are amortized on a straight-line basis over their contractual terms. Customer list and patient referral sources are amortized over their period of expected benefit. Management tests for impairment in accordance with SFAS No. 142. The intangible assets resulting from the December 3, 2007 acquisition of Coram are based upon preliminary estimates that are subject to change in 2008 upon completion of final valuation analysis.

Deferred Debt Issuance Costs: Capitalized debt issuance costs include those associated with the Company’s revolving credit facility and the convertible senior notes. Such costs are classified as non-current assets. Costs relating to the revolving credit facility are being amortized through the maturity date of June, 2011. Costs relating to the convertible senior notes are amortized from the issuance date through September 2008. See Note 7 — “Long-term Debt.”

Fair Value of Financial Instruments: The carrying value of Apria’s bank debt approximates fair value because the underlying instruments are variable notes that reprice frequently. The fair value of the convertible senior notes, as determined by reference to quoted market prices, is $249,455,000 and $242,398,000 at December 31, 2007 and 2006, respectively. The carrying amounts of cash and cash equivalents, accounts receivable, trade payables and accrued expenses approximate fair value due to their short maturity.

Product and Supply Costs: Product and supply costs presented within cost of net revenues are comprised primarily of cost of supplies and equipment provided to patients, infusion drug costs and enteral product costs.

Home Respiratory Therapy Expenses: Home respiratory therapy expenses presented within cost of net revenues are comprised primarily of employee salary and benefit costs or contract fees paid to respiratory therapists and other related professionals who are deployed to service a patient. Home respiratory therapy personnel are also engaged in a number of administrative and marketing tasks, and accordingly, these costs are classified within selling, distribution and administrative expenses and amounted to $19,766,000 in 2007 and $15,694,000 in 2006.

Distribution Expenses: Distribution expenses are included in selling, distribution and administrative expenses and totaled $175,947,000, $174,273,000 and $171,724,000 in 2007, 2006, and 2005, respectively. Such expense represents the cost incurred to coordinate and deliver products and services to the patients. Included in distribution expenses are leasing, maintenance, licensing and fuel costs for the vehicle fleet; salaries and other costs related to drivers and dispatch personnel; and amounts paid to courier and other outside shipping vendors. Such expenses fall within the definition of “shipping and handling” costs as discussed in Emerging Issues Task Force (“EITF”) No. 00-10 “Accounting for Shipping and Handling Fees and Costs,” which permits their income statement classification within selling and administrative expenses.

Self-Insurance: Coverage for certain employee medical claims and benefits, as well as workers’ compensation, vehicle liability, professional and general liability are self-insured. Accruals for medical claims at December 31, 2007 and 2006 were $8,484,000 and $10,061,000, respectively. Amounts accrued for costs of the other liability coverages totaled $15,456,000 and $10,977,000 at December 31, 2007 and 2006, respectively. All such amounts are classified in other accrued liabilities.

Advertising: Advertising costs are initially established as a prepaid expense and amortized over the period of expected benefit. Such expenses are included in selling, distribution and administrative expenses and amounted to $3,831,000, $5,849,000 and $6,844,000 for 2007, 2006 and 2005, respectively.

Income Taxes: Income taxes are provided for in accordance with the provisions of SFAS No. 109, “Accounting for Income Taxes.” Accordingly, deferred income tax assets and liabilities are computed for differences between the carrying amounts of assets and liabilities for financial statement and tax purposes. Deferred income tax assets are required to be reduced by a valuation allowance when it is determined that it is more likely than not that all or a portion of a deferred tax asset will not be realized. In determining the necessity and amount of a valuation allowance, management considers current and past performance, the operating market environment, tax planning strategies and the length of tax benefit carryforward periods.

As of January 1, 2007, Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), an interpretation of SFAS No. 109 was adopted. Prior to January 1, 2007, tax contingencies were accounted for under the principles of SFAS No. 5, “Accounting for Contingencies”. See Note 3 — Recent Accounting Pronouncements to the Consolidated Financial Statements for further discussion regarding adoption of FIN 48.

Derivative Instruments and Hedging Activities: From time to time derivative financial instruments are used to limit exposure to interest rate fluctuations on the Company’s variable rate long-term debt. The interest rate swap agreements are being accounted for in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” Unrealized gains and losses on the fair value of the swap agreements are reflected, net of taxes, in operating income, as the transactions no longer qualify for hedge accounting treatment. Exposure to credit loss under the swap agreement is limited to the interest rate spread in the event of counterparty nonperformance. The Company does not anticipate losses due to counterparty nonperformance as our counterparties to the swap agreement are nationally recognized financial institutions with strong credit ratings.

Share-Based Compensation: Prior to 2006, stock-based compensation plans were accounted for under the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. For 2005, net income reflects compensation expense for restricted stock awards and restricted stock purchase rights valued in accordance with APB Opinion No. 25.

The provisions of SFAS No. 123(R), “Share-Based Payment” were adopted on January 1, 2006. The modified prospective transition method was elected and, accordingly, financial statement amounts for prior periods presented have not been restated to reflect the fair value method of expensing share-based compensation. The short-cut method was elected, as provided by SFAS No. 123(R), for determining the historical pool of tax benefits. See Note 8 — Share-Based Compensation and Stockholders’ Equity.

Comprehensive Income: For the years ended December 31, 2007, 2006, and 2005, the difference between net income and comprehensive income is $122,000, $(105,000) and $482,000, respectively, net of taxes, which is attributable to unrealized (losses) and gains on various interest rate swap agreements.

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

NOTE 2 — RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS

Historically, the Company accounted for deferred revenues and deferred expenses related to equipment it rents to patients under a “reimbursement contract” method. These deferred amounts were included in its consolidated financial statements for the year ended December 31, 2006, on which the Company’s independent registered public accountants, Deloitte & Touche LLP, issued an unqualified opinion. In the course of a review in the fourth quarter of 2007, of the Company’s accounting for deferred revenue and deferred expenses it was identified that the Company had incorrectly deferred revenue related to all of the Company’s capitated contracts (albeit, in the fee for service arrangements line item) and that the Company incorrectly deferred certain indirect and overhead expenses. The Company concluded that the rental of such equipment should be accounted for under SFAS No. 13, “Accounting for Leases.” Under SFAS No. 13 lessors are required to recognize rental income over the lease term. The Company bills for the rental of patient equipment on a monthly basis beginning on the date the equipment is delivered. Since deliveries can occur on any day during a month revenue must be deferred for the amount of billings that apply to the next month.

The accounting for the deferral of expenses by lessors is addressed by SFAS No. 91 “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases.” Under SFAS No. 91 only the direct costs associated with leases are to be deferred. The Company has re-evaluated the amount of costs to be deferred and now will be deferring only the direct costs associated with the initial rental period under SFAS No. 91 and have adjusted our financial statements accordingly.

On December 31, 2007, the Company’s management and the Audit Committee of the Board of Directors concluded to restate its previously issued financial statements because of reporting errors solely relating to its accounting for deferred revenue and deferred expenses related to equipment it rents to patients. Accordingly, the Company restated its consolidated balance sheet as of December 31, 2006, and its consolidated statements of income, cash flows and stockholders’ equity for the years ended December 31, 2006 and 2005. The impact of the restatement decreased net income for 2006 by $0.7 million, or 0.9%, and increased net income for 2005 by $1.5 million or 2.4%. The cumulative effect of the errors decreased stockholders’ equity as of December 31, 2006 by $10.7 million or 3.0% of retained earnings and 2.6% of total stockholders’ equity. The cumulative effect of the errors decreased stockholders’ equity as of January 1, 2005 by $17.1 million or 7.7% of retained earnings and 4.2% of total stockholders’ equity.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

In 2006, the Company made adjustments to its financial statements related to deferral of certain revenue and expenses pursuant to Staff Accounting Bulletin (“SAB”) No. 108 issued by the Securities and Exchange Commission. In the SAB 108 adjustment, the Company included all costs, including indirect and overhead costs which should have not been deferred. Prior to the SAB 108 adjustment in 2006, the Company did not record any deferred revenues or expenses. As a result of the restatement, the SAB 108 adjustment has been eliminated.

The following tables show the impact of the restatement.

CONSOLIDATED BALANCE SHEET ITEMS

		December 31, 2006
		(As Previously								(As
(in thousands)		Reported)				(Adjustments)				Restated)
Deferred income taxes		$	36,648			$	5,832			$	42,480
Deferred expenses			22,712				(19,692	)			3,020
Total current assets			344,937				(13,860	)			331,077
Total assets			1,168,496				(13,860	)			1,154,636
Deferred revenue			32,280				(3,122	)			29,158
Total current liabilities			203,523				(3,122	)			200,401
Total liabilities			758,065				(3,122	)			754,943
Retained earnings			357,470				(10,738	)			346,732
Total stockholders’ equity		$	410,431			$	(10,738	)		$	399,693

CONSOLIDATED STATEMENT OF INCOME ITEMS

		Year Ended December 31, 2006
		(As Previously								(As
(in thousands, except per share data)		Reported)				(Adjustments)				Restated)
Fee for service arrangements		$	1,355,818			$	(616	)		$	1,355,202
Total net revenues			1,517,307				(616	)			1,516,691
Product and supply costs			345,552				141				345,693
Total cost of net revenues			521,439				141				521,580
Selling, distribution and administrative			804,365				(80	)			804,285
Total costs and expenses			1,369,607				61				1,369,668
Operating income			147,700				(677	)			147,023
Income before taxes			118,237				(677	)			117,560
Income tax expense			43,257				40				43,297
Net income			74,980				(717	)			74,263
Basic net income per common share			1.77								1.75
Diluted net income per common share		$	1.75							$	1.73

CONSOLIDATED STATEMENT OF INCOME ITEMS

		Year Ended December 31, 2005
		(As Previously								(As
(in thousands, except per share data)		Reported)				(Adjustments)				Restated)
Fee for service arrangements		$	1,327,777			$	1,569			$	1,329,346
Total net revenues			1,474,101				1,569				1,475,670
Product and supply costs			309,413				(75	)			309,338
Total cost of net revenues			479,288				(75	)			479,213
Selling, distribution and administrative			792,177				(146	)			792,031
Total costs and expenses			1,344,612				(221	)			1,344,391
Operating income			129,489				1,790				131,279
Income before taxes			107,370				1,790				109,160
Income tax expense			40,429				248				40,677
Net income			66,941				1,542				68,483
Basic net income per common share			1.39								1.42
Diluted net income per common share		$	1.37							$	1.40

CONSOLIDATED STATEMENT OF CASH FLOWS ITEMS

		Year Ended December 31, 2006
		(As Previously								(As
(in thousands)		Reported)				(Adjustments)				Restated)
Net income		$	74,980			$	(717	)		$	74,263
Deferred income taxes			24,673				39				24,712
Deferred revenue, net of deferred expenses		$	560			$	678			$	1,238

CONSOLIDATED STATEMENT OF CASH FLOWS ITEMS

		Year Ended December 31, 2005
		(As Previously								(As
(in thousands)		Reported)				(Adjustments)				Restated)
Net income		$	66,941			$	1,542			$	68,483
Deferred income taxes			(5,210	)			248				(4,962	)
Deferred revenue, net of deferred expenses		$	—			$	(1,790	)		$	(1,790	)

NOTE 3 — RECENT ACCOUNTING PRONOUNCEMENTS

In June 2006, the FASB issued FIN 48. This interpretation creates a comprehensive model to address accounting for uncertainty in tax positions. FIN 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized for financial statement purposes. FIN 48 also provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

FIN 48 was adopted as of January 1, 2007 and the Company increased its liability for unrecognized tax benefits by recording a cumulative effect adjustment of $4,233,000. This cumulative effect adjustment was recorded as a reduction to the retained earnings balance at January 1, 2007. Potential accrued interest and penalties relevant to unrecognized tax benefits are recognized within income tax expense.

FASB Staff Position FIN 48-1 (“FSP 48-1”), “Definition of Settlement in FASB Interpretation No. 48” was issued by the FASB in May 2007. FSP 48-1 amended FIN 48 to provide guidance on how an enterprise should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. FSP 48-1 required application upon the initial adoption of FIN 48. The adoption of FSP 48-1 did not have a material effect on the consolidated financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Management is currently evaluating the statement to determine what, if any, impact the statement will have on the consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, or SFAS No. 159. SFAS No. 159 expands opportunities to use fair value measurement in financial reporting and permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. Management is currently in the process of evaluating the potential impact of adopting SFAS No. 159 on the consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations. SFAS No. 141(R) replaces SFAS No. 141, Business Combinations. SFAS No. 141(R) retains the fundamental requirements in SFAS No. 141 that the acquisition method of accounting be used for all business combinations and for an acquirer to be identified for each business combination. SFAS No. 141(R) amends the recognition provisions for assets and liabilities acquired in a business combination, including those arising from contractual and noncontractual contingencies. SFAS No. 141(R) also amends the recognition criteria for contingent consideration. In addition, under SFAS No. 141(R), changes in an acquired entity’s deferred tax assets and uncertain tax positions after the measurement period will impact income tax expense. SFAS No. 141(R) is effective for fiscal years beginning on or after December 15, 2008. Early adoption is not permitted. Management is currently evaluating the potential impact of adopting SFAS No. 141(R) on the consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements—An Amendment of ARB No. 51. SFAS No. 160 establishes new accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. Management does not currently expect the adoption of SFAS No. 160 to have a material impact on the consolidated financial statements.

FASB Staff Position No. FAS 157-2 (“FSP 157-2”), Effective Date of FASB Statement No. 157 was issued in February 2008. FSP 157-2 delays the effective date of SFAS No. 157, for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value at least once a year, to fiscal years beginning after November 15, 2008, and for interim periods within those fiscal years.

NOTE 4 — PROPERTY, EQUIPMENT AND IMPROVEMENTS

Property, equipment and improvements consist of the following:

		December 31,
(in thousands)		2007				2006
Leasehold improvements		$	41,826			$	36,770
Equipment and furnishings			84,581				56,696
Information systems — hardware			96,155				88,396
Information systems — software			80,756				51,753
			303,318				233,615
Less accumulated depreciation			(200,491	)			(180,640	)
		$	102,827			$	52,975

Depreciation expense for property, equipment and improvements was $20,869,000, $20,387,000 and $21,918,000 for 2007, 2006 and 2005, respectively.

NOTE 5 — BUSINESS COMBINATIONS

On December 3, 2007, the acquisition of Coram, Inc. (“Coram”) was completed. Coram, which was privately-held, is a national provider of home infusion and specialty pharmaceutical services. The Coram acquisition strategically provided the Company an opportunity to diversify the existing product and payor mix. Additionally it positioned the Company in the growing clinical and specialty pharmaceutical and infusion market. During 2006, three complementary businesses were acquired within specific geographic markets, comprised primarily of home respiratory therapy businesses. Similarly, 21 companies were acquired during 2005. 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 all acquisitions. Payments for prior years’ acquisitions totaled $83,000, $4,523,000 and $8,576,000 for the years 2007, 2006 and 2005, respectively. At December 31, 2007, 2006 and 2005, unpaid consideration totaled $25,000, $108,000 and $5,682,000, respectively, and is included in the consolidated balance sheets in other accrued liabilities.

Cash paid for acquisitions:

		Year Ended December 31,
(in thousands)		2007				2006				2005
Fair value of patient service equipment acquired		$	7,014			$	1,923			$	7,453
Fair value of property and equipment acquired			24,916				4				985
Fair value of other assets acquired			132,070	(1)			641				1,577
Intangible assets			104,284				1,100				7,613
Goodwill			176,048				(1,112	)			85,362
Total assets acquired			444,332				2,556				102,990
Liabilities assumed and accrued, net of payments from prior years’ acquisitions			(89,754	)(2)			5,526				2,481
Net assets acquired		$	354,578			$	8,082			$	105,471

The amounts shown above for 2007 relate to the Coram acquisition and are based upon preliminary estimates that are subject to change in 2008 upon completion of the final valuation analysis.

The following supplemental unaudited pro forma information presents the combined operating results of Apria and the businesses that were acquired during 2007, 2006 and 2005, as if the acquisitions had occurred at the beginning of each 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 attained had the combinations been in effect at the beginning of the periods presented or that may be achieved in the future.

		Year Ended December 31,
(in thousands, except per share data)		2007				2006				2005
Net revenues		$	2,103,791			$	1,997,106			$	1,552,571
Net income			86,275				61,558				72,407
Basic net income per common share		$	1.98			$	1.45			$	1.50
Diluted net income per common share		$	1.95			$	1.43			$	1.48

NOTE 6 — GOODWILL AND INTANGIBLE ASSETS

Business combinations are accounted for in accordance with SFAS No. 141, “Business Combinations,” which requires that the purchase method of accounting be applied to all business combinations and addresses the criteria for initial recognition of intangible assets and goodwill. In accordance with SFAS No. 142, goodwill and other intangible assets with indefinite lives are not amortized but are tested for impairment annually, or more frequently if circumstances indicate the possibility of impairment. If the carrying value of goodwill or an intangible asset exceeds its fair value, an impairment loss shall be recognized.

Goodwill impairment testing is conducted at a “reporting unit” level and compares each reporting unit’s fair value to its carrying value as of December 31 annually. The Company has determined that its geographic divisions are reporting units under SFAS No. 142. The measurement of fair value for each division is based on an evaluation of future discounted cash flows and is further tested using a multiple of earnings approach. For all years presented, testing indicated that no impairment existed and, accordingly, no loss has been recognized.

For the year ended December 31, 2007, the net increase in the carrying amount of goodwill of $176,048,000 is the result of the acquisition of Coram on December 3, 2007. Most of the goodwill recorded in conjunction with business combinations for the periods presented is expected to be deductible for tax purposes. Goodwill and intangible assets from our Coram acquisition are based upon preliminary estimates that are subject to change in 2008 upon completion of the final valuation analysis.

Intangible assets consist of the following:

		December 31, 2007																December 31, 2006
		Average				Gross												Gross
		Life in				Carrying				Accumulated				Net Book				Carrying				Accumulated				Net Book
(dollars in thousands)		Years				Amount				Amortization				Value				Amount				Amortization				Value
Intangible assets subject to amortization:
Covenants not to compete			5.0			$	11,380			$	(7,744	)		$	3,636			$	13,506			$	(7,313	)		$	6,193
Patient referral sources			20.0				34,300				(143	)			34,157				—				—				—
Customer lists			1.0				—				—				—				1,283				(925	)			358
Favorable leases			3.1				584				(20	)			564
Total			7.3				46,264				(7,907	)			38,357				14,789				(8,238	)			6,551
Intangible assets not subject to amortization:
Trade names			—				69,400				—				69,400				—				—				—
Total			7.3			$	115,664			$	(7,907	)		$	107,757			$	14,789			$	(8,238	)		$	6,551

Amortization expense amounted to $3,079,000, $5,080,000 and $6,941,000 for the years 2007, 2006 and 2005, respectively. Estimated amortization expense for each of the fiscal years ending December 31, is presented below:

Year Ending December 31,		(in thousands)
2008		$	7,194
2009			4,425
2010			2,611
2011			2,129
2012			1,992

NOTE 7 — LONG-TERM DEBT

Long-term debt consists of the following:

		December 31,
(in thousands)		2007				2006
Notes payable relating to revolving credit facilities		$	424,000			$	235,000
Convertible senior notes			250,000				250,000
Capital lease obligations (see Note 11)			7,031				—
Other			6,252				2,145
			687,283				487,145
Less: current maturities			(254,252	)			(2,145	)
		$	433,031			$	485,000

Revolving Credit Facility: The senior secured credit agreement with Bank of America and a syndicate of lenders was amended effective June 23, 2006. The amendment extended the maturity date from November 23, 2009 to June 23, 2011 and lowered the applicable interest rate margins and commitment fees.

The credit agreement is structured as a $500 million revolving credit facility and permits Apria to select one of two variable interest rates. One option is the base rate, which is expressed as the higher of (a) the Federal Funds rate plus 0.50% or (b) the Bank of America 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 credit agreement is determined by adding a margin to the Eurodollar rate or base rate in effect at each interest calculation date. The applicable margin for the revolving credit facility is based on Apria’s debt rating as determined by either Standard and Poor’s Ratings Services or Moody’s Investor Services with respect to the credit facility.

The new applicable margins range from 0.625% to 1.25% for Eurodollar loans and from zero to 0.25% for base rate loans. The range for commitment fees on the unused portion of the revolving credit facility is now 0.10% to 0.20%. The effective interest rate at December 31, 2007, after consideration of the effect of the swap agreements, was 6.09%. Without the effect of the swap agreements, such rate would have been 6.14%.

At December 31, 2007, borrowings under the revolving credit facility were $424,000,000, outstanding letters of credit totaled $12,136,000 and credit available under the revolving facility was $63,864,000. The Company must maintain compliance with certain financial covenants measured on a quarterly basis, including a consolidated interest coverage ratio and a leverage ratio. At December 31, 2007, the Company was in compliance with all of the financial covenants required by the credit agreement. Borrowings under the credit facility are secured by a pledge of the common stock of certain of the Company’s subsidiaries.

Convertible Senior Notes: In August 2003, convertible senior notes in the aggregate principal amount of $250,000,000 were issued under an indenture with U.S. Bank National Association. The notes were issued in a private placement at an issue price of $1,000 per note (100% of the principal amount at maturity) and were subsequently registered with the Securities and Exchange Commission. The notes will mature on September 1, 2033, unless earlier converted, redeemed or repurchased. Some or all of the notes may be redeemed at any time after September 8, 2010, at a redemption price equal to 100% of the principal amount of the notes to be redeemed plus accrued and unpaid interest and contingent interest, if any, to the redemption date. The holders of the notes may require the repurchase of some or all of the notes at a repurchase price equal to 100% of the principal amount of the notes plus accrued and unpaid interest, including contingent interest, up to but excluding the applicable repurchase date, initially on September 1, 2008, and subsequently on September 1 of 2010, 2013, 2018, 2023 and 2028, or at any time prior to their maturity following a fundamental change, as defined in the indenture. Any notes required to be repurchased will be paid for in cash, pursuant to the terms of a December 2004 amendment to the indenture which eliminated the option of paying part of the repurchase price in common stock. Since the holders of the notes may require us to redeem some or all of the notes on September 1, 2008, the principal amount of $250 million has been reclassified to the current portion of long-term debt on the consolidated balance sheet as of December 31, 2007.

The notes bear interest at the rate of 3 3/8% per annum, which is payable on September 1 and March 1 of each year, beginning on March 1, 2004. Also, during certain periods commencing on September 8, 2010, contingent interest will be payable on the interest payment date for the applicable interest period if the average trading price of the notes during the five trading days ending on the third day immediately preceding the first day of the applicable interest period equals or exceeds 120% of the principal amount of the notes. The contingent interest payable per note will equal 0.25% per year of the average trading price of such note during the applicable five trading-day reference period. During certain periods, the notes are convertible, at the holders’ option, into shares of Apria common stock, initially at a conversion rate of 28.6852 shares of common stock per $1,000 principal amount of notes, subject to adjustment and under certain circumstances as outlined in the indenture.

The notes are unsecured and unsubordinated obligations and are senior in right of payment to any subordinated debt. The notes rank junior to the Company’s senior secured credit facility to the extent of the assets securing such indebtedness.

Maturities of long-term debt are as follows:

Year Ending December 31,		(in thousands)
2008		$	254,252
2009			3,436
2010			2,612
2011			426,304
2012			679
Thereafter			—
		$	687,283

Total interest paid on debt in 2007, 2006 and 2005 amounted to $18,062,000, $29,891,000 and $18,783,000, respectively.

Hedging Activities: Interest rate risk exists on the variable rate long-term debt. Interest rate risk is managed by evaluating and monitoring 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 that may be utilized to moderate 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. Derivatives are not used for trading or other speculative purposes.

During 2007, the Company had one interest rate swap agreement in effect to fix its LIBOR-based variable rate debt. The agreement, a forward-starting contract with a three-year term, became effective in January 2006, and has a notional amount of $25,000,000 that fixes an equivalent amount of its variable rate debt at 4.44%. In 2006, the Company had two interest rate swap agreements. Each agreement had a notional amount of $25,000,000, with one agreement expiring in December 2006 and the other agreement expiring in January 2009. In 2005, the Company had two interest rate swap agreements. Each agreement had a notional amount of $25,000,000, with one agreement expiring in December 2005 and the other agreement expiring in December 2006. For the years ended December 31, 2007, 2006 and 2005, the Company received net settlement amounts of $233,000, $540,000, and $11,000, respectively. At December 31, 2007, the aggregate fair value of the swap agreement was a liability of $105,000 and is reflected in the accompanying consolidated balance sheets in current liabilities. At December 31, 2006, the aggregate fair value of the swap agreements was an asset of $356,000, and is reflected in other assets.

The interest rate swap agreements are being accounted for in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” Unrealized gains and losses on the fair value of the swap agreements are reflected, net of taxes, in operating income, as the transactions no longer qualify for hedge accounting treatment. Exposure to credit loss under the swap agreement is limited to the interest rate spread in the event of counterparty nonperformance. The Company does not anticipate losses due to counterparty nonperformance as our counterparties to the swap agreement are nationally recognized financial institutions with strong credit ratings.

NOTE 8 — SHARE-BASED COMPENSATION AND STOCKHOLDERS’ EQUITY

Effective January 1, 2006, the provisions of SFAS No. 123(R) were adopted which establish accounting for equity instruments exchanged for employee services. Under the provisions of SFAS No. 123(R), share-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity grant). Prior to January 1, 2006, share-based compensation to employees was accounted for in accordance with APB Opinion No. 25 and related interpretations. The disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure” were followed. The modified prospective transition method was elected as provided by SFAS No. 123(R) and, accordingly, financial statement amounts for the prior periods presented have not been restated to reflect the fair value method of expensing share-based compensation.

For the year ended December 31, 2007, share-based compensation expense was $11,150,000, of which $1,751,000 was related to awards issued prior to the adoption of SFAS No. 123(R). All such compensation is reflected in the accompanying condensed consolidated income statement within the selling, distribution and administrative expense line item. The related awards were granted to administrative personnel or members of the Board of Directors and therefore no portion of the share-based compensation has been classified within cost of net revenues. Share-based compensation expense recognized in 2007 is based on awards ultimately expected to vest; therefore, it has been reduced for estimated forfeitures. SFAS No. 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. In the pro forma information presented for periods prior to 2006, forfeitures were accounted for as they occurred.

For the year ended December 31, 2007, cash received from the exercise of options totaled $17,521,000. Income tax benefits related to stock-based compensation arrangements amounted to $3,958,000.

Estimates of the fair value of stock options are determined using the Black-Scholes valuation model. Key input assumptions used to estimate the fair value of stock options include the exercise price of the award, the expected option term, the expected volatility of the Company’s stock over the option’s expected term, the risk-free interest rate over the option’s term, and the expected annual dividend yield. Management believes that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of stock options granted in 2007. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards.

The key input assumptions that were utilized in the valuation of the stock options granted are summarized in the table below.

		Year Ended December 31,
		2007				2006				2005
Expected option term in years (1)			4.6				4.8				4.1
Expected volatility (2)			29.9	%			27.3	%			32.0	%
Risk-free interest rate (3)			4.5	%			4.6	%			3.8	%
Expected annual dividend yield			0	%			0	%			0	%

2003 Performance Incentive Plan: In July 2003, stockholders approved the 2003 Performance Incentive Plan (“2003 Plan”), which permits the grant of stock options, stock appreciation rights (“SARs”), stock bonuses, restricted stock, performance stock, stock units, phantom stock, dividend equivalents, or similar rights to purchase or acquire shares, and cash awards. At the discretion of the Compensation Committee of the Board of Directors, any award may be paid or settled in cash. The 2003 Plan is currently the only plan from which stock-based awards may be granted.

The maximum number of shares that may be issued as awards under the 2003 Plan equals the sum of (1) 6,500,000 shares, plus (2) the number of shares subject to stock options granted under previous plans, which expire or are cancelled or terminated without being exercised, after the effective date of the 2003 Plan.

The 2003 Plan also contains the following limits:

	•		grants of incentive stock options up to 2,000,000 shares,
	•		grants of options and SARs during any calendar year to any individual up to 500,000 shares,
	•		shares subject to all awards granted to an individual during any calendar year up to 1,000,000 shares,
	•		awards granted to non-employee directors up to 700,000 shares,

	•		awards granted, other than for stock options and SARs, up to 2,275,000 shares,
	•		performance-based awards, other than stock options and SARs, granted to an individual up to 500,000 shares in a calendar year, and
	•		performance-based awards, payable in cash at the discretion of the Compensation Committee, granted to an individual up to $10,000,000 in a calendar year.

The per share exercise price of an option or SAR (collectively referred to as “options”) generally may not be less than the per share fair market value on the date of grant. The maximum term of an option is ten years from the date of grant. Performance-based awards may also be issued from the 2003 Plan. The vesting or payment of such awards will depend on the Company’s performance to established measurement criteria. The performance measurement period may range from three months to ten years. Performance-based awards may be paid in stock or, at the discretion of the Compensation Committee, in cash. Historically, new shares are issued when options or stock-based awards are exercised.

The Company believes that share-based awards better align the interests of its senior management and other key employees with those of its stockholders as well as serving as an effective tool to attract, retain and motivate plan participants.

Stock Options: The 2003 Plan provides for the granting of stock options to employees and non-employee directors. Such grants to employees may include non-qualified and incentive stock options. The exercise price of an option is established at the fair market value of a share of common stock on the date of grant. Vesting of stock options is time-based and is generally over a three-year period.

The following table summarizes the activity for stock options for the years ended December 31, 2005, 2006 and 2007:

										Weighted-
										Remaining
						Weighted-				Contractual				Aggregate
						Average				Term				Intrinsic
		Options				Exercise Price				(in Years)				Value
Outstanding at January 1, 2005			5,114,145			$	24.84				7.37			$	41,774,469
Granted			49,000				32.45
Exercised			(920,385	)			22.49
Forfeited			(166,055	)			29.20
Outstanding at December 31, 2005			4,076,705			$	25.28				6.60			$	7,881,252
Granted			1,056,000				23.23
Exercised			(349,596	)			20.64
Forfeited			(726,795	)			29.48
Outstanding at December 31, 2006			4,056,314			$	24.59				6.38			$	13,750,742
Granted			759,830				30.84
Exercised			(863,693	)			20.23
Forfeited			(219,068	)			29.26
Outstanding at December 31, 2007			3,733,383			$	26.60				6.28			$	1,690,040
Vested or expected to vest as of December 31, 2007			3,503,580			$	26.56				6.12			$	1,680,053
Exercisable at December 31, 2007			2,581,277			$	26.21				5.17			$	1,638,973

The weighted-average fair value of stock options granted during the years ended December 31, 2007, 2006 and 2005 were $10.20, $7.39 and $10.11, respectively. There were 1,056,000 stock options granted in the corresponding period in 2006. The total intrinsic value of options exercised was $9,642,000, $1,272,000 and $10,239,000 for the years ended December 31, 2007, 2006 and 2005, respectively.

As of December 31, 2007, total unrecognized stock-based compensation cost related to unvested stock options was $6,907,000, which is expected to be expensed over a weighted-average period of 1.89 years.

Restricted Stock Purchase Rights: In 2003 and 2004, restricted stock purchase rights were granted under the 2003 Plan to certain members of executive management. The awards represented the right to purchase a certain number of shares of common stock at a future date at a specified exercise price. The exercise price was established at 25% of the fair market value of a share of common stock on the date of grant. Such awards generally require that certain performance conditions and service conditions be met before the awards will vest.

The following table summarizes the activity for restricted stock purchase rights for the years ended December 31, 2005, 2006 and 2007:

										Weighted
		Restricted								Remaining
		Stock				Weighted-				Contractual				Aggregate
		Purchase				Average				Term				Intrinsic
		Rights				Exercise Price				(in Years)				Value
Outstanding at January 1, 2005			586,000			$	6.70				8.71			$	15,385,350
Granted			—				—
Exercised			(16,000	)			6.46
Forfeited			(24,000	)			6.46
Outstanding at December 31, 2005			546,000			$	6.71				7.72			$	9,499,110
Granted			—				—
Exercised			(158,500	)			6.49
Forfeited			(87,500	)			6.85
Outstanding at December 31, 2006			300,000			$	6.79				6.76			$	5,957,820
Granted			—				—
Exercised			(23,000	)			6.46
Forfeited			—				—
Outstanding at December 31, 2007			277,000			$	6.82				5.77			$	4,086,290
Vested or expected to vest as of December 31, 2007			211,718			$	6.79				5.76			$	3,128,576
Exercisable at December 31, 2007			8,000			$	6.46				5.61			$	120,880

The total intrinsic value of restricted stock purchase rights exercised was $534,000 and $2,592,000 for the years ended December 31, 2007 and 2006, respectively. No such awards were granted during these two periods.

As of December 31, 2007, total unrecognized stock-based compensation cost related to unvested restricted stock purchase rights was $2,044,000, which is expected to be expensed over a weighted-average period of 2.32 years.

Restricted Stock Awards and Units: The 2003 Plan provides for the granting of restricted stock and restricted stock units to its non-employee directors and employees. Such awards generally require that certain performance conditions and service conditions be met before the awards will vest.

The following table summarizes the activity for restricted stock awards and units for the years ended December 31, 2005, 2006 and 2007:

		Shares				Weighted-Average
		or				Grant-Date
		Share Units				Fair Value
Nonvested restricted stock awards and units at January 1, 2005			226,000			$	32.80
Granted			81,384				34.98
Vested and released			(26,000	)			28.21
Forfeited			—				—
Nonvested restricted stock awards and units at December 31, 2005			281,384				33.86
Granted			339,000				22.71
Vested and released			(38,462	)			33.95
Forfeited			(95,000	)			28.35
Nonvested restricted stock awards and units at December 31, 2006			486,922				27.16
Granted			405,310				29.82
Vested and released			(186,901	)			24.09
Forfeited			(64,460	)			27.32
Nonvested restricted stock awards and units at December 31, 2007			640,871			$	29.73

The total intrinsic value of restricted stock awards or units released was $5,081,000 and $768,000 for the years ended December 31, 2007 and 2006, respectively.

As of December 31, 2007, total unrecognized stock-based compensation cost related to unvested restricted stock awards and units was $11,871,000, which is expected to be expensed over a weighted-average period of 2.43 years.

The following activity occurred under the 2003 Plan:

		Year Ended December 31
		2007				2006				2005
Total fair value of stock awards vested		$	5,081,411			$	768,204			$	832,520

Prior Period Pro Forma Presentation: Apria had previously adopted the provisions of SFAS No. 123 through disclosure only. The following table illustrates the effects on net income and earnings per share for the year ended December 31, 2005 as if the fair value recognition provisions of SFAS No. 123 had been applied to share-based employee awards.

		Year Ended
(in thousand, except per share data)		December 31, 2005
Net income as reported		$	68,483
Add: stock-based compensation expense included in reported net income, net of related tax effects			2,032
Deduct: total stock-based compensation expense determined for all awards under fair value-based method, net of related tax effects			(13,070	)
Pro forma net income		$	57,445
Basic net income per share:
As reported		$	1.42
Pro forma		$	1.19
Diluted net income per share:
As reported		$	1.40
Pro forma		$	1.17