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

Form 10-Q

|(Mark One)
|----------
|[X]       

For the quarterly period ended
 September 30, 2006

OR

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

Commission File Number:
1-14316

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

|                                                                                                                                                                 |                                                                       
|---------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------
|Delaware(State or other
      jurisdiction ofincorporation or organization)26220 Enterprise
      Court, Lake Forest, CA(Address of principal executive offices) | 33-0488566(I.R.S. Employer
      Identification Number)92630(Zip Code)

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

Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No

Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of
accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange
Act.
          
          
Large accelerated filer  [X]        
               
               
Accelerated filer  [   ]      
               
               
Non-accelerated filer  [   ]

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

As of November 7, 2006 there were outstanding
42,629,906 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 16,972,857 shares held in treasury).

---

APRIA HEALTHCARE GROUP INC.

FORM 10-Q

For the period ended September 30, 2006

|                                          |  |                                                                                                                                                                                                                                                       | 
|----------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|PART I.    
        FINANCIAL INFORMATION | 
|                                          |  |                                                                                                                                                                                                                                                       | 
|Item 1.                                   |  | Financial Statements (unaudited).
       Condensed Consolidated Balance Sheets
       Condensed Consolidated Income Statements
       Condensed Consolidated Statements of Cash Flows
       Notes to Condensed Consolidated Financial Statements | 
|                                          |  |                                                                                                                                                                                                                                                       | 
|Item 2.                                   |  | Managements Discussion and Analysis ofFinancial
Condition and Results of Operations.                                                                                                                                                                 | 
|                                          |  |                                                                                                                                                                                                                                                       | 
|Item 3.                                   |  | Quantitative and Qualitative Disclosures About Market Risk.                                                                                                                                                                                           | 
|                                          |  |                                                                                                                                                                                                                                                       | 
|Item 4.                                   |  | Controls and Procedures.                                                                                                                                                                                                                              | 
|                                          |  |                                                                                                                                                                                                                                                       | 
|                                          |  |                                                                                                                                                                                                                                                       | 
|PART II.   
         OTHER INFORMATION    | 
|                                          |  |                                                                                                                                                                                                                                                       | 
|Item 1.                                   |  | Legal Proceedings.                                                                                                                                                                                                                                    | 
|                                          |  |                                                                                                                                                                                                                                                       | 
|Item 1A.                                  |  | Risk Factors.                                                                                                                                                                                                                                         | 
|                                          |  |                                                                                                                                                                                                                                                       | 
|Item 2.                                   |  | Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities.                                                                                                                                                                     | 
|                                          |  |                                                                                                                                                                                                                                                       | 
|Item 3.                                   |  | Defaults Upon Senior Securities.                                                                                                                                                                                                                      | 
|                                          |  |                                                                                                                                                                                                                                                       | 
|Item 4.                                   |  | Submission of Matters to a Vote of Security Holders.                                                                                                                                                                                                  | 
|                                          |  |                                                                                                                                                                                                                                                       | 
|Item 5.                                   |  | Other Information.                                                                                                                                                                                                                                    | 
|                                          |  |                                                                                                                                                                                                                                                       | 
|Item 6.                                   |  | Exhibits.                                                                                                                                                                                                                                             | 
|                                          |  |                                                                                                                                                                                                                                                       | 
|SIGNATURES                                |  |                                                                                                                                                                                                                                                       | 
|                                          |  |                                                                                                                                                                                                                                                       | 
|EXHIBITS                                  |  |                                                                                                                                                                                                                                                       | 

---

Cautionary statement for purposes of the Safe
Harbor provisions of the Private Securities Litigation Reform Act of 1995:
Aprias business is subject to a number of risks which are partly or entirely beyond
the companys control. The company has described certain of those risks in its Annual
Report on Form 10-K/A for the fiscal year ended December 31, 2005, as filed with the
Securities and Exchange Commission on March 23, 2006. This report may be used for purposes
of the Private Securities Litigation Reform Act of 1995 as a readily available document
containing meaningful cautionary statements identifying important factors that could cause
actual results to differ materially from those projected in any forward-looking statements
the company may make from time to time. Key factors that may have an impact on Apria
include the following:

| |  | trends
 and developments affecting the collectibility of accounts receivable;                      
|- |  | ---------------------------------------------------------------------------------------------------
| |  | government legislative
 and budget developments that could continue to affect reimbursement levels;
| |  | potential reductions in reimbursement rates by government and third-party payors;                  
| |  | the effectiveness of Aprias operating systems and controls;                                       
| |  | healthcare reform and the effect of federal and state healthcare regulations; and                  
| |  | other factors described in Aprias filings with the Securities and Exchange Commission.            

In addition, the military and national security
activities in which the United States is currently engaged have and could continue to
have significant impacts on the economy and government spending priorities. Deficit
spending by the government as the result of adverse developments in the economy and the
continuing costs of military and national security activities will most likely
increase pressure to reduce government expenditures for other purposes, including
government-funded programs such as Medicare and Medicaid.

---

PART I  FINANCIAL INFORMATION

ITEM 1.     FINANCIAL STATEMENTS

APRIA HEALTHCARE GROUP INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)

|                                                                                | September 30, |  | December 31,
|------------------------------------------------------------------------------- | ------------- |  | ------------
|
|
|ASSETS                                                                          |               |  |             
|CURRENT ASSETS                                                                  |               |  |             
|Cash and cash equivalents                                                       |               |  | $           
|Accounts receivable, less allowance
for doubtful accounts of $34,330            |               | 
|and $41,527 at September 30, 2006 and
December 31, 2005, respectively           |               |  |             
|Inventories, net                                                                |               |  |             
|Deferred income taxes                                                           |               |  |             
|Prepaid expenses and other current assets                                       |               |  |             
|                                                                                |               |  |             
|TOTAL CURRENT ASSETS                                                            |               |  |             
|                                                                                |               | 
|PATIENT SERVICE EQUIPMENT, less accumulated depreciation of $442,895            |               | 
|and $446,728 at September 30, 2006 and December 31, 2005, respectively          |               |  |             
|PROPERTY, EQUIPMENT AND IMPROVEMENTS, net                                       |               |  |             
|DEFERRED INCOME TAXES                                                           |               |  |             
|GOODWILL                                                                        |               |  |             
|INTANGIBLE ASSETS, less accumulated amortization of $7,576 and                  |               | 
|$7,988 at September 30, 2006 and December 31, 2005, respectively                |               |  |             
|DEFERRED DEBT ISSUANCE COSTS, net                                               |               |  |             
|OTHER ASSETS                                                                    |               |  |             
|                                                                                |               |  |             
|                                                                                |               |  | $           
|                                                                                |               |  |             
|LIABILITIES AND STOCKHOLDERS EQUITY                                            |               | 
|CURRENT LIABILITIES                                                             |               | 
|Accounts payable                                                                |               |  | $           
|Accrued payroll and related taxes and benefits                                  |               |  |             
|Accrued insurance                                                               |               |  |             
|Income taxes payable                                                            |               |  |             
|Other accrued liabilities                                                       |               |  |             
|Current portion of long-term debt                                               |               |  |             
|                                                                                |               |  |             
|TOTAL CURRENT LIABILITIES                                                       |               |  |             
|                                                                                |               | 
|LONG-TERM DEBT, exclusive of current portion                                    |               |  |             
|DEFERRED INCOME TAXES                                                           |               |  |             
|OTHER NON-CURRENT LIABILITIES                                                   |               |  |             
|COMMITMENTS AND CONTINGENCIES (Note I)                                          |               | 
|                                                                                |               |  |             
|TOTAL LIABILITIES                                                               |               |  |             
|                                                                                |               |  |             
|                                                                                |               | 
|STOCKHOLDERS EQUITY                                                            |               | 
|Preferred stock, $.001 par value: 10,000,000 shares authorized;                 |               | 
|none issued                                                                     |               |  |             
|Common stock, $.001 par value: 150,000,000 shares authorized;                   |               | 
|59,430,629 and 59,215,749 shares issued at
September 30, 2006 and               |               | 
|December 31, 2005, respectively;
42,457,772 and 42,250,564 shares               |               | 
|outstanding at September 30, 2006 and December 31, 2005, respectively           |               |  |             
|Additional paid-in capital                                                      |               |  |             
|Treasury stock, at cost; 16,972,857 and 16,965,185 shares
at September 30, 2006 |               | 
|and December 31, 2005, respectively                                             |               |  |             
|Retained earnings                                                               |               |  |             
|Accumulated other comprehensive income                                          |               |  |             
|                                                                                |               |  |             
|TOTAL STOCKHOLDERS EQUITY                                                      |               |  |             
|                                                                                |               |  |             
|                                                                                |               |  | $           
|                                                                                |               |  |             

See notes to condensed
consolidated financial statements.

---

APRIA HEALTHCARE GROUP INC.

CONDENSED CONSOLIDATED INCOME STATEMENTS 
(unaudited)

|                                             | Three Months EndedSeptember 30, |  | Nine Months EndedSeptember 30,
|-------------------------------------------- | ------------------------------- |  | ------------------------------
|
|
|
|Net revenues                                 |                                 |  | $                             
|Costs and expenses:                          |                                 | 
|Cost of net revenues:                        |                                 | 
|Product and supply costs                     |                                 |  |                               
|Patient service equipment depreciation       |                                 |  |                               
|Respiratory therapy services                 |                                 |  |                               
|Nursing services                             |                                 |  |                               
|Other                                        |                                 |  |                               
|                                             |                                 |  |                               
|TOTAL COST OF NET REVENUES                   |                                 |  |                               
|                                            
|Provision for doubtful accounts              |                                 |  |                               
|Selling, distribution and administrative     |                                 |  |                               
|Qui tamsettlement and related costs (Note I) |                                 |  |                               
|Amortization of intangible assets            |                                 |  |                               
|                                             |                                 |  |                               
|TOTAL COSTS AND EXPENSES                     |                                 |  |                               
|                                             |                                 |  |                               
|OPERATING INCOME                             |                                 |  |                               
|Interest expense                             |                                 |  |                               
|Interest income                              |                                 |  |                               
|                                             |                                 |  |                               
|INCOME BEFORE TAXES                          |                                 |  |                               
|Income tax expense                           |                                 |  |                               
|                                             |                                 |  |                               
|NET INCOME                                   |                                 |  | $                             
|                                             |                                 |  |                               
|                                             |                                 |  |                               
|                                             |                                 |  |                               
|Basic net income per common share            |                                 |  | $                             
|                                             |                                 |  |                               
|Diluted net income per common share          |                                 |  | $                             
|                                             |                                 |  |                               

See notes to condensed consolidated
financial statements.

---

APRIA HEALTHCARE GROUP INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

|                                                                                   | Nine Months EndedSeptember 30,
|---------------------------------------------------------------------------------- | ------------------------------
|
|
|
|OPERATING ACTIVITIES                                                               |                               
|Net income                                                                         |                               
|Items included in net income not requiring cash:                                   |                               
|Provision for doubtful accounts                                                    |                               
|Depreciation and amortization                                                      |                               
|Amortization of deferred debt issuance costs                                       |                               
|Deferred income taxes                                                              |                               
|Share-based compensation                                                           |                               
|Loss on disposition of assets and other                                            |                               
|Changes in operating assets and liabilities, exclusive
of effects of acquisitions: |                               
|Accounts receivable                                                                |                               
|Inventories, net                                                                   |                               
|Prepaid expenses and other assets                                                  |                               
|Accounts payable, exclusive of book cash
overdraft                                 |                               
|Accrued payroll and related taxes and benefits                                     |                               
|Income taxes payable                                                               |                               
|Accrued expenses                                                                   |                               
|                                                                                   |                               
|NET CASH PROVIDED
 BY OPERATING ACTIVITIES                                         |                               
|                                                                                   |                               
|INVESTING ACTIVITIES                                                               |                               
|Purchases of patient service equipment and property,                               |                               
|equipment and improvements, exclusive of effects of acquisitions                   |                               
|Proceeds from disposition of assets                                                |                               
|Cash paid for acquisitions, including payments of deferred consideration           |                               
|                                                                                   |                               
|NET CASH USED IN INVESTING ACTIVITIES                                              |                               
|                                                                                   |                               
|FINANCING ACTIVITIES                                                               |                               
|Proceeds from revolving credit facilities                                          |                               
|Payments on revolving credit facilities                                            |                               
|Payments on other long-term debt                                                   |                               
|Change in book cash overdraft included in accounts payable                         |                               
|Capitalized debt issuance costs                                                    |                               
|Issuances of common stock                                                          |                               
|                                                                                   |                               
|NET CASH
(USED IN) PROVIDED BY FINANCING ACTIVITIES                                |                               
|                                                                                   |                               
|NET DECREASE IN CASH AND CASH EQUIVALENTS                                          |                               
|Cash and cash equivalents at beginning of period                                   |                               
|                                                                                   |                               
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                                         |                               
|                                                                                   |                               

See notes to condensed
consolidated financial statements.

---

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS

NOTE A  CERTAIN SIGNIFICANT ACCOUNTING POLICIES

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

All adjustments, consisting of normal recurring accruals
necessary for a fair presentation of the results of operations for the interim periods
presented, have been reflected herein. The unaudited results of operations for interim
periods are not necessarily indicative of the results to be expected for the entire year.
For further information, refer to the consolidated financial statements and footnotes
thereto included in the companys Annual Report on Form 10-K/A for the fiscal year
ended December 31, 2005.

Reclassifications: Certain amounts from prior
periods have been reclassified to conform to the current period presentation. Purchases of
patient service equipment and property, equipment and improvements presented on the
condensed consolidated statement of cash flows for the nine months ended September 30,
2005, have been revised to exclude purchases that were unpaid at the end of that period.
Also, certain respiratory therapy and infusion therapy nursing expenses, which were
previously presented in the selling, distribution and administrative expense line, are now
included as separate line items on the condensed consolidated income statement within cost
of net revenues. The respiratory therapy and infusion therapy nursing expenses that have
been reclassified to cost of net revenues are comprised primarily of employee salary and
benefit costs and fees paid to contracted workers who are deployed to service a patient.
Aprias respiratory therapy and infusion therapy nursing personnel are also engaged
in a number of administrative and marketing tasks, and accordingly, the costs related to
those activities remain classified within selling, distribution and administrative
expenses. See Clinical Expenses.

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

Revenue Recognition and Concentration of Credit
Risk: Revenues are recognized on the date services and related products are provided
to patients and are recorded at amounts expected to be received under reimbursement
arrangements with third-party payors, including private insurers, prepaid health plans,
Medicare and Medicaid. For the nine-month period ended September 30, 2006,
approximately 37% of the companys revenues were reimbursed
under arrangements with Medicare and Medicaid, and no other third-party payor group represented
more than 9% of the companys revenues. The majority of the companys revenues
are derived from fees charged for patient care under fee-for-service arrangements.
Revenues derived from capitation arrangements represent less than 11% of total net
revenues for the year-to-date period ended September 30, 2006.

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

Management performs periodic analyses to evaluate
accounts receivable balances to ensure that recorded amounts reflect estimated net
realizable value. Specifically, management considers historical realization data, accounts
receivable aging trends, other operating trends and 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.
Management also performs focused reviews of certain large and/or slow-paying payors. Due
to continuing changes in the healthcare industry and with third-party reimbursement, it is
possible that 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.

---

Revenues from Capitation Arrangements:
 Revenues derived from capitation arrangements with managed care organizations totaled
$40,780,000 and $120,547,000 for the three- and nine-month periods ended September 30,
2006, respectively.  For the three- and nine-month periods in 2005, such
revenues were $36,651,000 and $109,457,000.

Clinical Expenses: Respiratory therapy and
infusion therapy nursing expenses included in selling, distribution and administrative
expenses totaled $4,979,000 and $14,638,000 for the three and nine-month periods ended
September 30, 2006, respectively. For the corresponding periods in 2005, such respiratory
therapy and infusion therapy nursing expenses were $5,804,000 and $17,269,000,
respectively.

Distribution Expenses: Distribution expenses,
totaling $43,924,000 and $131,004,000 for the three and nine-month periods ended September
30, 2006, respectively, are included in selling, distribution and administrative expenses.
For the corresponding periods in 2005, distribution expenses were $42,980,000 and
$127,889,000, respectively.

Recent Accounting Pronouncements: In November
2004, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 151, Inventory Costs,
which amends and clarifies previous guidance on the accounting for abnormal amounts of
idle facility expense, freight, handling costs and spoilage. Abnormal amounts of these
costs should be recognized as current period charges rather than as a portion of inventory
cost. Additionally, SFAS No. 151 requires that the allocation of fixed production overhead
be based on the normal capacity of the production facilities, which refers to a range of
production levels within which ordinary variations are expected. Aprias adoption of
SFAS No. 151 on January 1, 2006 did not have a material effect on the companys
consolidated financial statements.

In December 2004, the FASB issued SFAS No. 123R,
Share-Based Payment. This statement replaces SFAS No. 123, Accounting
for Stock-Based Compensation, and supersedes Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees.
SFAS No. 123R requires a company to measure the cost of employee services received in
exchange for an award of equity instruments based on the grant date fair value of the
award. The cost will be recognized over the period during which the employee is required
to provide service in exchange for the award (usually the vesting period). Apria adopted
the statement January 1, 2006 and has employed the modified prospective method of
transition. See Note F  Share-Based Compensation.

In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections, which replaces APB Opinion
No. 20, Accounting Changes, and FASB Statement No. 3, Reporting
Accounting Changes in Interim Financial Statements. SFAS No. 154 changes the
accounting for, and the reporting of, a change in accounting principle. The statement also
defines and requires retrospective application of a change in accounting principle to
prior periods financial statements unless impracticable. If retrospective
application is impracticable, the new accounting principle must be applied to the asset
and liability balances as of the beginning of the earliest period practicable and a
corresponding adjustment to the opening balance of retained earnings for the same period,
rather than being reported in the income statement. Additionally, SFAS No. 154 addresses a
change in accounting for estimates effected by a change in accounting principle and
redefines restatement as a revision to reflect the correction of an error. Aprias
adoption of SFAS No. 154 on January 1, 2006 did not have a material effect on the
companys consolidated financial statements.

In February 2006, the FASB issued SFAS No. 155,
Accounting for Certain Hybrid Financial Instruments. The statement amends SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities and SFAS
No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. The statement is effective for all financial
instruments acquired or issued after the beginning of an entitys first fiscal year
beginning after September 15, 2006. Accordingly, the company plans to adopt SFAS No. 155
on January 1, 2007. Management is currently evaluating the statement to determine what, if
any, impact it will have on the companys consolidated financial statements.

In March 2006, the FASB issued SFAS No. 156,
Accounting for Servicing of Financial Assets, which amends SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities. The statement is effective as of the beginning of an entitys
first fiscal year beginning after September 15, 2006. Accordingly, the company plans to
adopt SFAS No. 156 on January 1, 2007. Management is currently evaluating the statement to
determine what, if any, impact it will have on the companys consolidated financial
statements.

In June 2006, the Financial Accounting Standards Board
issued FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty
in Income Taxes, an interpretation of FASB Statement No. 109". FIN 48 clarifies the
accounting for uncertainty in income taxes by prescribing a recognition threshold and
measurement attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim periods,
disclosure, and transition. FIN 48 is effective for fiscal years beginning after December
15, 2006. The company plans to adopt FIN 48 in the first quarter of calendar year 2007.
The company is currently evaluating the impact of adoption on its consolidated financial
statements.

---

In September 2006, The FASB issued 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 it will have on the companys consolidated financial statements.

In September 2006, the Securities and Exchange
Commission issued Staff Accounting Bulletin No. 108 (SAB No. 108),
Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements, which provides guidance on quantifying financial statement misstatements.
SAB No. 108 is effective for annual financial statements covering the first fiscal year ending
after November 15, 2006. Management plans to adopt SAB No. 108 in the fourth quarter of 2006 and
is currently evaluating the bulletin to determine
the method of adoption that will be utilized and what, if any, impact it will have on the companys consolidated financial statements.

NOTE B  BUSINESS COMBINATIONS

Apria periodically makes acquisitions of complementary
businesses in specific geographic markets. The results of operations of the acquired
companies are included in the accompanying condensed consolidated income statements from
the dates of acquisition. During the nine-month periods ended September 30, 2006 and 2005,
cash paid for acquisitions was $7,794,000 and $101,907,000, which included deferred
payments of $5,239,000 and $2,794,000, respectively. At September 30, 2006 and December
31, 2005, deferred consideration payable totaled $395,000 and $5,682,000, respectively,
and is included in the condensed consolidated balance sheets in other accrued liabilities.

During the nine-month period ended September 30, 2006,
Apria closed three acquisitions, including two for customer bases that were previously
being serviced by Apria on a subcontract basis. Pending receipt of additional valuation
information, amounts preliminarily allocated to goodwill, other intangible assets, and
patient service and other property, plant and equipment were $326,000, $1,090,000, and
$2,159,000 respectively. Revenues and net income from these acquisitions are not material
to the companys consolidated financial statements.

NOTE C  GOODWILL AND INTANGIBLE ASSETS

Apria accounts for intangible assets and goodwill under
the initial recognition provisions of SFAS No. 141, Business Combinations, and
the financial accounting and reporting provisions of SFAS No. 142, Goodwill and
Other Intangible Assets. Goodwill and other intangible assets with indefinite lives
are not amortized but are tested for impairment annually, or more frequently if
circumstances indicate that impairment might exist. If the carrying value of goodwill or
an intangible asset exceeds its fair value, an impairment loss is recognized.

The net decrease in goodwill for the nine months ended
September 30, 2006 is comprised of a write-off of goodwill in the sale of a
previously-acquired business back to the original seller; adjustments to preliminary
acquisition valuations that resulted in goodwill decreases; and goodwill recorded in
conjunction with 2006 acquisitions. Substantially all of the goodwill recorded during the
periods presented is expected to be deductible for tax purposes.

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

|(dollars in thousands)   |  |  | September 30, 2006 |     | December 31, 2005
|------------------------ |  |  | ------------------ | --- | -----------------
|
|
|
|Covenants not to compete |  |  |                    | 5.0 |                  
|Trade names              |  |  |                    | -   |                  
|Customer lists           |  |  |                    | 1.0 |                  
|                         |  |  |                    |     |                  
|                         |  |  |                    | 3.4 |                  
|                         |  |  |                    |     |                  

---

Estimated amortization expense for the current year and
each of the next five years ending December 31 is presented below:

|Year Ending December 31, | (dollars in thousands)
|------------------------ | ----------------------
|
|2006                     |                       
|2007                     |                       
|2008                     |                       
|2009                     |                       
|2010                     |                       

NOTE D  LONG-TERM DEBT

Revolving Credit Facility: Aprias credit
agreement with Bank of America and a syndicate of lenders was amended and restated
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
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%.

At September 30, 2006, borrowings under the revolving
credit facility were $295,000,000; outstanding letters of credit totaled $3,855,000;
credit available under the revolving facility was $201,145,000; and Apria was in
compliance with all covenants required by the credit agreement.

Convertible Senior Notes: At September 30, 2006,
the fair value of the $250,000,000 in convertible senior notes was $239,063,000, as
determined by reference to quoted market prices.

Hedging Activities: Apria utilizes interest rate
swap agreements to moderate its exposure to interest rate fluctuations on its underlying
variable rate long-term debt. Apria does not use derivative financial instruments for
trading or other speculative purposes. At September 30, 2006, Apria had two interest rate
swap agreements in effect. One agreement, which will expire in December 2006, has a
notional amount of $25,000,000 with a fixed rate of 3.42%. The other 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 the companys
variable rate debt at 4.44%.

The swap agreements are being accounted for under SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. The
difference between the interest received and interest paid is reflected as an adjustment
to interest expense. Apria received a net settlement amount of $382,000 for the nine-month
period ended September 30, 2006 and paid a net settlement amount of $68,000 for the
nine-month period ended September 30, 2005. The aggregate fair value of the two remaining
swap agreements was an asset of $447,000 and $769,000 at September 30, 2006 and December
31, 2005, respectively, and is reflected in the accompanying condensed consolidated
balance sheets in other assets. Unrealized gains on the fair value of the swap agreements
are reflected in other comprehensive income or interest expense/income within the
condensed consolidated statements of income as applicable. Aprias exposure to credit
loss under the swap agreements is limited to the interest rate spread in the event of
counterparty non-performance.

NOTE E  STOCKHOLDERS EQUITY

For the nine months ended September 30, 2006, changes to
stockholders equity were comprised of the following amounts:

|(dollars in thousands)                              
|----------------------------------------------------
|
|Net income                                          
|Exercise of stock options                           
|Tax benefit related to the exercise of stock options
|Change in treasury stock                            
|Stock-based compensation                            
|Other comprehensive loss, net of taxes              
|                                                    
|                                                    
|                                                    

Net income and total comprehensive income differ by
unrealized gains or losses related to interest rate swap agreements, net of taxes. For the
three months ended September 30, 2006 and 2005, total comprehensive income was $19,257,000
and $19,739,000 respectively. For the nine months ended September 30, 2006 and 2005, total
comprehensive income was $53,740,000 and $47,767,000, respectively.

---

NOTE F  SHARE-BASED COMPENSATION

Effective January 1, 2006, Apria adopted the provisions
of SFAS No. 123R, Share-Based Payment, which establishes accounting for equity
instruments exchanged for employee services. Under the provisions of SFAS No. 123R,
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, the company accounted for share-based compensation to employees in accordance with
APB No. 25, Accounting for Stock Issued to Employees, and related
interpretations. The company also followed 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. The
company elected to employ the modified prospective transition method as provided by SFAS
No. 123R 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 three and nine month periods ended September 30,
2006, the company recorded share-based compensation expense of $2,135,000 and $4,016,000,
respectively. All such compensation is reflected in the accompanying condensed
consolidated income statement within the selling, distribution and administrative expense
line item. Share-based compensation expense recognized in the first nine months of 2006 is
based on awards ultimately expected to vest; therefore, it has been reduced for estimated
forfeitures. SFAS No. 123R 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, the company
accounted for forfeitures as they occurred.

For the three and nine months ended September 30, 2006,
Aprias adoption of SFAS No. 123R reduced the companys operating income and
income before taxes by $1,306,000 and $1,656,000, respectively and net income was reduced
by $919,000 and $1,238,000, respectively. Basic and diluted earnings per share were each
reduced by $0.02 for the three months ended September 30, 2006. For the nine months ended
September 30, 2006, basic and diluted earnings per share were each reduced by $0.03. The
adoption of SFAS No. 123R did not affect cash flow.

For the three and nine months ended September 30, 2006,
cash received from the exercise of options totaled $354,000 and $3,213,000, respectively
and income tax benefits related to stock-based compensation arrangements amounted to
$31,000 and $61,000, respectively.

The company estimates the fair value of stock options
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 companys expected
annual dividend yield. Aprias management believes that the valuation technique and
the approach utilized to develop the underlying assumptions are appropriate in calculating
the fair values of the companys stock options granted in the nine months ended
September 30, 2006. 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 during the nine months ended September 30,
2006 and 2005, are summarized in the table below.

|                               | Nine Months EndedSeptember 30,
|------------------------------ | ------------------------------
|
|
|
|Expected option term (1)       |                               
|Expected volatility (2)        |                               
|Risk-free interest rate (3)    |                               
|Expected annual dividend yield |                               

|   
|---
|(1)
|(2)
|(3)

---

2003 Performance Incentive Plan: In July 2003,
Aprias shareholders 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. 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, 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 in cash. The company
has historically issued new shares 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
shareholders as well as serving as an effective tool to attract, retain and motivate plan
participants.

Stock Options:Aprias incentive 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 Apria 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 nine months ended September 30, 2006:

|                                                    | Options | Weighted-AverageExercise Price | Weighted-AverageRemainingContractual Term
                                 (in Years) | AggregateIntrinsicValue
|--------------------------------------------------- | ------- | ------------------------------ | ------------------------------------------------------------------------------------- | -----------------------
|
|Outstanding at January 1, 2006                      |         | 4,076,705                      |                                                                                       | $                      
|Granted                                             |         | 721,000                        |                                                                                       |                        
|Exercised                                           |         | (135,918                       | )                                                                                     |                        
|Forfeited                                           |         | (512,170                       | )                                                                                     |                        
|                                                    |         |                                |                                                                                       |                        
|Outstanding at September 30, 2006                   |         | 4,149,617                      |                                                                                       | $                      
|                                                    |         |                                |                                                                                       |                        
|Vested or expected to vest as of September 30, 2006 |         | 4,071,145                      |                                                                                       | $                      
|                                                    |         |                                |                                                                                       |                        
|Exercisable at September 30, 2006                   |         | 3,604,617                      |                                                                                       | $                      
|                                                    |         |                                |                                                                                       |                        

The weighted-average fair value of stock options granted
during the nine months ended September 30, 2006 was $7.22. There were 49,000 stock options
granted in the corresponding period in 2005. The total intrinsic value of options
exercised was $245,000 and $10,118,000 for the nine months ended September 30, 2006 and
2005, respectively.

As of September 30, 2006, total unrecognized stock-based
compensation cost related to unvested stock options was $3,210,000, which is expected to
be expensed over a weighted-average period of 1.44 years.

Restricted Stock Purchase Rights:In 2003 and
2004, Apria granted restricted stock purchase rights to certain members of executive
management. The awards represented the right to purchase a certain number of shares of
Apria 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 Apria 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 nine months ended September 30, 2006:

|                                                    | RestrictedStockPurchaseRights | Weighted-AverageExercise Price | Weighted-AverageRemainingContractual Term
                                 (in Years) | AggregateIntrinsicValue
|--------------------------------------------------- | ----------------------------- | ------------------------------ | ------------------------------------------------------------------------------------- | -----------------------
|
|Outstanding at January 1, 2006                      |                               | 546,000                        |                                                                                       | $                      
|Granted                                             |                               | -                              |                                                                                       |                        
|Exercised                                           |                               | (40,500                        | )                                                                                     |                        
|Forfeited                                           |                               | (87,500                        | )                                                                                     |                        
|                                                    |                               |                                |                                                                                       |                        
|Outstanding at September 30, 2006                   |                               | 418,000                        |                                                                                       | $                      
|                                                    |                               |                                |                                                                                       |                        
|Vested or expected to vest as of September 30, 2006 |                               | 380,200                        |                                                                                       | $                      
|                                                    |                               |                                |                                                                                       |                        
|Exercisable at September 30, 2006                   |                               | 134,000                        |                                                                                       | $                      
|                                                    |                               |                                |                                                                                       |                        

The total intrinsic value of restricted stock purchase
rights exercised was $625,000 and $418,000 for the nine months ended September 30, 2006
and 2005, respectively. No such awards were granted during these two periods.

As of September 30, 2006, total unrecognized stock-based
compensation cost related to unvested restricted stock purchase rights was $3,772,000,
which is expected to be expensed over a weighted-average period of 3.35 years.

Restricted Stock Awards and Units: Aprias
incentive plan provides for the granting of restricted stock and restricted stock units to
its non-employee directors and employees (limited to executive management). 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 nine months ended September 30, 2006:

|                                                                  | SharesorShare Units |  | Weighted-AverageGrant-Date
             Fair Value
|----------------------------------------------------------------- | ------------------- |  | --------------------------------------------------
|
|Nonvested restricted stock awards and
units at January 1, 2006    |                     |  |                                                   
|Granted                                                           |                     |  |                                                   
|Vested and released                                               |                     |  |                                                   
|Forfeited                                                         |                     |  |                                                   
|                                                                  |                     |  |                                                   
|Nonvested restricted stock awards and units at September 30, 2006 |                     |  |                                                   
|                                                                  |                     |  |                                                   

The weighted-average fair value of restricted stock
awards and units granted during the nine months ended September 30, 2006 was $22.45. There
were 81,384 awards granted in the corresponding period in 2005. Restricted stock awards or
units released during the nine months ended September 30, 2006 and 2005, were 38,462 and
26,000 shares, respectively. The total intrinsic value of restricted stock awards or units
released was $768,000 and $832,000 for the nine months ended September 30, 2006 and 2005,
respectively.

As of September 30, 2006, total unrecognized stock-based
compensation cost related to unvested restricted stock awards and units was $9,220,000,
which is expected to be expensed over a weighted-average period of 3.11 years.

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 three and nine
months ended September 30, 2005 as if the company had applied the fair value recognition
provisions of SFAS No. 123 to share-based employee awards.

---

|                                                                                                                                         | Three Months EndedSeptember 30, |   | Nine Months EndedSeptember 30,
|---------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------- | - | ------------------------------
|
|
|
|Net income as reported                                                                                                                   |                                 | $ | 19,255                        
|Add:  stock-based compensation expense included
    in reported net income, net of related tax effects                                   |                                 |   | 247                           
|                                                                                                                                        
|Deduct: total stock-based
compensation expense    determined for all awards under fair
value-based    method, net of related tax effects |                                 |   | (1,627                        
|                                                                                                                                         |                                 |   |                               
|Pro forma net income                                                                                                                     |                                 | $ | 17,875                        
|                                                                                                                                         |                                 |   |                               
|                                                                                                                                        
|Basic net income per share:                                                                                                             
|As reported                                                                                                                              |                                 | $ | 0.39                          
|Pro forma                                                                                                                                |                                 | $ | 0.36                          
|                                                                                                                                        
|Diluted income per share:                                                                                                               
|As reported                                                                                                                              |                                 | $ | 0.38                          
|Pro forma                                                                                                                                |                                 | $ | 0.35                          

NOTE G  INCOME TAXES

Income taxes for the nine-month period ended September
30, 2006 have been provided at a lower effective rate than is expected to be applicable
for the entire year. The lower rate is due to a decrease in the valuation allowance during
the third quarter of 2006 resulting from state net operating loss carryforwards that
became realizable based on a change in state tax law. This decrease was partially offset
by an increase in Federal tax contingencies for a 2003 IRS audit expected to be completed
by the end of 2006. In addition, the lower rate is due to a decrease in state tax
contingencies resulting from a change in estimate during the second quarter of 2006 and a
decrease in Federal tax contingencies for a 2002 IRS audit completed during the first
quarter of 2006.

Income taxes for the nine-month period ended September
30, 2005 were provided at a higher effective rate than was applicable for that year. The
higher rate was due to an accrual recorded to reflect the settlement of two
previously-disclosed qui tamlawsuits, a portion of which was not deductible. This
higher rate was partially offset by a decrease in the valuation allowance and
corresponding reduction of the tax provision that was recorded in the first quarter of
2005. Such adjustment resulted from state net operating loss carryforwards that became
realizable based on a change in estimate of expected future earnings.

At September 30, 2006, the company had various
apportioned state net operating loss carryforwards which resulted in a deferred tax asset
of $8,827,000, net of Federal tax benefit.

---

NOTE H  PER SHARE AMOUNTS

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

|                                                    | Three Months EndedSeptember 30, |  |   | Nine Months EndedSeptember 30,
|--------------------------------------------------- | ------------------------------- |  | - | ------------------------------
|
|
|
|Numerator:                                          |                                 |  |   |                               
|Net income                                          |                                 |  | $ | 19,306                        
|Numerator for basic and diluted per share amounts  |                                 | 
|income available to common stockholders             |                                 |  | $ | 19,306                        
|                                                   
|Denominator:                                        |                                 | 
|Denominator for basic per share                     |                                 | 
|amounts  weighted average shares                   |                                 |  |   | 42,436                        
|                                                   
|Effect of dilutive securities:                      |                                 | 
|Employee stock options                             |                                 | 
|dilutive potential common shares                    |                                 |  |   | 351                           
|                                                    |                                 |  |   |                               
|Denominator for diluted per share amounts          |                                 | 
|adjusted weighted average shares                    |                                 |  |   | 42,787                        
|                                                    |                                 |  |   |                               
|                                                   
|Basic net income per common share                   |                                 |  | $ | 0.45                          
|                                                    |                                 |  |   |                               
|Diluted net income per common share                 |                                 |  | $ | 0.45                          
|                                                    |                                 |  |   |                               
|                                                   
|Employee stock options excluded from the            |                                 | 
|computation of diluted per share amounts:           |                                 | 
|                                                   
|Shares for which exercise price exceeds             |                                 | 
|average market price of common stock                |                                 |  |   | 3,649                         
|                                                   
|Average exercise price per share that exceeds       |                                 | 
|average market price of common stock                |                                 |  | $ | 26.18                         
|                                                    |                                 |  |   |                               

---

NOTE I  COMMITMENTS AND CONTINGENCIES

Apria is the defendant in a California class action
lawsuit containing blanket claims of liability under various California employee
protection statutes and regulations relating to payment of regular and overtime wages, the
timeliness of such payments, the maintenance and provision of access to required payroll
records, and the provision of meal and rest periods. Venegas vs. Apria Healthcare,
Inc.,et al., was filed on February 21, 2006 in the California Superior Court
for the County of San Francisco (Case No. CGC -- 06 -- 449669). No class has been
certified at this time, but on behalf of a purported class consisting of certain hourly
employees of the company in the State of California, the complaint seeks compensatory and
punitive damages in an unspecified amount as well as other relief. The company has filed
an answer to the complaint denying all material allegations and asserting a number of
affirmative defenses. Based on the companys preliminary investigation of the
allegations, management believes there are meritorious defenses to the claims and the
company intends to vigorously defend the lawsuit. No assurance can be given, however, that
the ultimate disposition of this case will not have a material adverse effect on the
companys financial condition or results of operations. Management cannot estimate
the possible loss or range of loss that may result from these proceedings and, therefore,
has not recorded any related accruals.

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

Qui Tam Settlement and Related Costs:As
previously reported, Apria was the subject of an investigation launched in mid-1998 by the
U.S. Attorneys office in Los Angeles and the U.S. Department of Health and Human
Services. The investigation concerned the documentation supporting Aprias billing
for services provided to patients whose healthcare costs were paid by Medicare and other
federal programs. The investigation related to two civil qui tam lawsuits against
Apria filed by individuals suing on behalf of the government. Apria and representatives of
the government and the individual plaintiffs reached a preliminary agreement in early
August 2005 to settle these lawsuits for the aggregate sum of $17,600,000, without any
admission of wrongdoing by Apria. The settlement was finalized in a definitive agreement
that was fully executed and became effective on September 30, 2005, and Apria paid the
settlement amount on that date. Apria also incurred $1,658,000 in legal fees and other
related costs. Aprias condensed consolidated financial statements for the nine
months ended September 30, 2005 reflect an initial accrual of $20,000,000 for the
settlement and related costs. During the fourth quarter of 2005, such accrual was adjusted
to $19,258,000, the aggregate of the actual amounts of the settlement and related costs.

---

ITEM 2.     MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS          
          OF OPERATIONS

Apria operates in the home
healthcare segment of the healthcare industry and provides services in the home
respiratory therapy, home infusion therapy and home medical equipment areas. In all three
lines, Apria provides patients with a variety of clinical and administrative support
services and related products and supplies, most of which are prescribed by a physician as
part of a care plan. Apria provides these services to patients in the home through
approximately 500 branch locations throughout the United States.

Aprias branch
locations are organized into 15 geographic regions. Each region consists of a number of
branches and a regional office that provides key administrative support services. All
regions provide respiratory therapy and home medical equipment and supplies, and most of
the regions provide infusion therapy. Many operational support and administrative services
are provided at a corporate level. Management continues to evaluate opportunities to gain
efficiencies and cost savings by consolidating additional regional functions. Management
has historically considered each region an operating segment. For financial reporting
purposes, all 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.

Strategy.Aprias mission is to be the first choice of patients and
          payors for homecare needs. Apria has positioned itself in the marketplace as the
          low cost, quality provider of a broad range of home healthcare services to
          managed care customers and to Medicare. The specific elements of the
          companys strategy to achieve its mission and optimize its market position
          are as follows:

| |  | Growth - Apria's  primary focus is to increase  organic  sales growth and to increase  market share in its core
service lines. The company will continue to invest in service line extensions.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Productivity  - Apria  strives to leverage its  nationwide  infrastructure  to reduce  costs by enhancing  best
practices and by investing in systems improvements.                           
| |  | Service - Apria differentiates itself from the competition by setting a high standard for customer service.                                                                                   
| |  | People - Apria  recruits,  develops  and advances  individuals  who are leaders in order to respond to changing
 market conditions and to maximize sales and earnings growth.                 

Critical Accounting
Policies.Aprias management considers the accounting policies that
govern revenue recognition and the determination of the net realizable value of accounts
receivable to be the most critical in relation to the companys consolidated
financial statements. These policies require managements most complex and subjective
judgments. Additionally, the accounting policies related to goodwill, long-lived assets
and income taxes require significant judgment. These policies are presented in detail in
the Managements Discussion and Analysis of Financial Condition and Results of
Operations section in Aprias Annual Report on Form 10-K/A for the fiscal year
ended December 31, 2005.

Results of Operations

Net
Revenues. Net revenues were $382.2 million in the third quarter of 2006,
compared to $367.6 million for the same quarter of 2005. For the nine-month period ended
September 30, 2006, net revenues were $1,126.3 million compared to $1,114.4 million for
the corresponding period in 2005. The increases for both the three and nine-month periods
are volume-based. Much of the increases were related to a new national contract and the
associated sales efforts to develop accounts outside of the contract network. Also,
incremental revenue from acquisitions effected in late 2005 and in 2006 is estimated at
approximately $1.7 million for the third quarter in 2006 and $18.5 million for the 2006
nine-month period. The net revenue increases were partially offset by pricing declines.
Lower dispensing fees for respiratory drugs went into effect January 1, 2006 and the
average sales prices, which are used as the basis for Medicare reimbursement of
respiratory drugs and are updated each quarter, have generally been lower in 2006 than in
2005. Further, the Medicare reimbursement reduction for oxygen and oxygen equipment that
became effective April 8, 2005 affected the comparison between the 2006 and 2005
year-to-date periods only. The combined effect of these Medicare reductions on
year-to-year comparisons was $1.8 million for the third quarter of 2006 and $13.0 million
for the first nine months of 2006. Additionally, reduced pricing for three of the
companys larger managed care contracts caused revenues to decline by approximately
$2.7 million and $8.7 million for the quarter and year-to-date periods in 2006,
respectively.

Apria expects to continue
to face pricing pressures from Medicare as well as from its managed care customers as
these payors seek to lower costs by obtaining more favorable pricing from providers such
as Apria. Managed care organizations are also evaluating alternative delivery models for
certain products and services, which include those provided by Apria. This potential
change may cause Apria to provide reduced levels of certain products and services in the
future, resulting in a corresponding reduction in revenue. See Medicare
Reimbursement.

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

|                             | Three Months Ended September 30, |  | Nine Months Ended September 30,
|---------------------------- | -------------------------------- |  | -------------------------------
|
|
|
|
|
|Respiratory therapy          |                                  |  | $                              
|Infusion therapy             |                                  |  |                                
|Home medical equipment/other |                                  |  |                                
|                             |                                  |  |                                
|Total net revenues           |                                  |  | $                              
|                             |                                  |  |                                

Respiratory
Therapy. Respiratory therapy revenues are derived primarily from the provision of
oxygen systems, home ventilators, sleep apnea equipment, nebulizers, respiratory
medications and related services. Revenues from the respiratory therapy service line
increased by 3.3% in the third quarter of 2006 and by 0.6% year-to-date when compared to
the corresponding periods of 2005. The Medicare reductions noted above adversely affected
revenues for the respiratory therapy line. Excluding these reductions, revenues from the
respiratory line would have increased by 4.1% and 2.3% for the third quarter and first
nine months of 2006, respectively. Such increases were largely attributable to the new
national contract and related growth and to acquisitions as noted above.

Growth between the
year-to-date periods in 2005 and 2006 in the largest respiratory categories is as follows:
Excluding the effects of the Medicare reductions, revenues from oxygen and oxygen systems
were relatively flat and revenues from respiratory medications increased 3.1% in 2006.
Revenues from the continuous positive and bi-level airway pressure devices and related
supplies, which currently comprise approximately 28% of total respiratory revenues, grew
by 13.9%. Much of this growth is being derived through a program the company has
instituted to provide via mail the necessary supplies to patients already utilizing the
airway pressure devices.

Infusion
Therapy.The infusion therapy service line involves the administration of drugs or
nutrients directly into the body intravenously through a needle or catheter. Infusion
therapy services also include administering enteral nutrients directly into the
gastrointestinal tract through a feeding tube. Infusion therapy revenues increased by 6.2%
and 5.6% in the three and nine months ended September 30, 2006 when compared to the same
periods last year. The growth was generated by the enteral nutrition offering, which
represents just under half of the infusion therapy line. Enteral nutrition increased by
17.5% and 12.7% for the three and nine months ended September 30, 2006, respectively, due
mainly to organizational changes and the management focus that has been placed on this
sub-category.

Home Medical
Equipment/Other. Home medical equipment/other revenues are derived from the
provision of equipment to assist patients with ambulation, safety and general care in and
around the home. Home medical equipment/other revenues increased by 4.3% and decreased by
2.0% for the three and nine months ended September 30, 2006, respectively, when compared
to the corresponding periods in 2005. The home medical equipment line was impacted by
decreases in hospital utilization rates for many of the companys managed care
contractors that began in the second half of 2005. Managed care pricing compression has
also had a negative effect on this line.

---

Medicare
Reimbursement. There are a number of legislative and regulatory activities
by the Centers for Medicare and Medicaid Services, or CMS, that affect or may affect
Medicare reimbursement policies for items and services provided by Apria. Certain material
provisions are outlined below in chronological order.

The Balanced Budget Act of
1997 granted streamlined authority to the U.S. Department of Health and Human Services, or
HHS, to increase or reduce the reimbursement for home medical equipment, including oxygen,
by up to 15% each year under an inherent reasonableness authority. CMS issued
a rule that established a process by which such adjustments may be made. The rule applies
to all Medicare Part B services except those paid under a physician fee schedule, a
prospective payment system, or a competitive bidding program.

In September 2003, the HHS
Office of Inspector General, or OIG, issued a proposed rule intended to clarify certain
terms and the application of program authority to exclude claims containing excessive
charges. Under the rule, a provider could be excluded if its charges to Medicare or
Medicaid were substantially in excess of the providers usual charges, unless there
was good cause. The proposed clarification defined substantially in excess as
charges that are 120% or more of the providers usual charges. The company, along
with many other providers and members of the public, submitted formal comments to the OIG
regarding the proposed rule in the fall of 2003. Based upon statements of federal
legislators issued in early 2006, it is the companys understanding that the OIG is
currently working on a final rule. Because the company is unaware of what changes the OIG
may make to the proposed rule before it is finalized, Apria cannot at this time quantify
any negative impact that this rule, if and when issued, may have on the company.

In December 2003, the
Medicare Prescription Drug, Improvement and Modernization Act of 2003, also referred to as
the Medicare Modernization Act, or MMA, became law. The provisions contained therein that
are significant to Apria are as follows:

| |  | A freeze on annual payment  increases for durable  medical  equipment  The freeze  commenced in 2004
and will continue through 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
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| |  | Reimbursement  reductions  for  five  durable  medical  equipment  categories,   including  oxygen 
 Reimbursement  for most of these  categories  is based on the  median  price  paid for such  items on
 behalf of  beneficiaries  of federal  employee health benefit plans, or FEHBP.  The new fee schedules
 for most  products  went into  effect  January 1, 2005.  The  revised  pricing  for oxygen and oxygen
 equipment was implemented on April 8, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | Reimbursement  reductions for  inhalation  drugs   The previous  reimbursement  rate of 95% of the average
wholesale  price was  reduced  to 80% of the  average  wholesale  price,  effective  January 1, 2004.
Beginning in January 2005,  reimbursement  for these drugs was further reduced through a shift to the
manufacturer-reported  average  sales price  (subject to  adjustment  each  quarter)  plus 6%, plus a
separate  dispensing fee per patient  episode.  The dispensing  fees for 2006 are $57.00 for a 30-day
supply for a new patient and $33.00 for each 30-day supply  thereafter.  The 90-day dispensing fee is
$66.00. CMS has indicated there will be no change to the dispensing fees in 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | Establishment  of a  competitive  bidding  program for Medicare Part B   Such a program would require
that suppliers  wishing to provide certain items to beneficiaries  submit bids to Medicare.  Although
the specific durable medical  equipment items and services  subject to this rule remain  unspecified,
the program is to be phased in as follows: (i) 10 of the largest  metropolitan  statistical areas, or
MSAs,  in 2007;  (ii) 80 of the largest  MSAs in 2009;  and (iii)  additional  areas after 2009.  The
legislation contains special provisions exempting rural areas.

On April 24, 2006,  CMS issued a proposed  rule for the  competitive  bidding  program  under  Medicare  Part B,
related to durable medical equipment,  prosthetics and supplies,  or DMEPOS,  and related matters.  The document
outlined CMS' general intent and proposed  procedures and  requirements  regarding  competitive  acquisition for
DMEPOS beginning some time in 2007. However,  it did not specify:  (i) which DMEPOS products will be included in
the 10 initial  competitive  acquisition program areas; (ii) which MSAs will be included in the initial phase of
competitive  bidding,  although it does explicitly exclude New York City, Chicago and Los Angeles from the first
phase;  (iii) target cost savings;  (iv) specific quality  standards;  or (v) specific  provider  guidelines for
preparing,  completing  and  implementing  the bids in each area.  The  proposed  rule also  introduced  certain
concepts not  previously  addressed.  CMS accepted  comments on all aspects of the proposed  rule as of June 30,
2006, and Apria submitted extensive comments.

After reviewing comments  submitted on the proposed rule for the competitive  bidding program on August 1, 2006,
CMS issued a final rule, the August 1 Final Rule,  limited to only selective aspects of the competitive  bidding
program.  CMS informed the provider  community that it would issue  additional  final rules and guidance related
to  competitive  bidding later in 2006.  The August 1 Final Rule  finalized  CMS' plan to work with  Competitive
Bidding Implementation  Contractors, or CBICs, to administer the competitive bidding program in conjunction with
CMS and the DME Medicare  Administrator  Contractors,  or DME MACs.  It also  clarified  CMS' plan to administer
certain aspects of accrediting  providers in order to qualify to participate in competitive  bidding. CMS issued
final quality  standards  for  competitive  bidding  participants  on August 14, 2006. On October 13, 2006,  CMS
announced  that it awarded  Palmetto GBA the  contract to serve as a CBIC for the program.  Given that the final
rule on  competitive  bidding is not expected to be released  until later this year and the limited  information
available  regarding  CMS' final plan for the  competitive  bidding  program,  such as the list of products  and
services and the MSAs to be included,  Apria cannot estimate at this time the impact of the competitive  bidding
program on the company's operations or financial condition.
| |  | Incentives for expansion of Medicare Part C   The Medicare  Modernization Act includes financial incentives for
managed care plans to expand their  provision of Medicare  Advantage  plans in 2006 in an effort to attract more
Medicare  beneficiaries to managed care models. The company maintains contracts to provide respiratory  therapy,
infusion and medical  equipment and related services to a significant  number of managed care plans  nationwide,
and believes that the Medicare Advantage expansion represents a growth opportunity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | Reimbursement  for home infusion  therapy  under  Medicare  Part D    Currently,  a limited  number of infusion
therapies,  supplies  and  equipment  are covered by Medicare  Part B. The Medicare  Modernization  Act provides
expanded  coverage for the drugs only, but excludes  coverage for the supplies and clinical  services  needed to
safely and  effectively  provide  home  infusion  therapy  services  to  patients  in the home.  The company has
contracted  with a limited number of Medicare Part D prescription  drug plans in order to provide  continuity of
care for  certain  patients.  Due to  nationwide  Part D  implementation  issues  experienced  by home  infusion
providers  in the first half of 2006,  the industry is  continuing  to work with CMS and Congress to rectify the
coverage  and payment  limitations  that are causing  implementation  challenges  for  providers,  patients  and
referral  sources.  In addition,  a bill was  introduced  in Congress this summer to  consolidate  home infusion
therapy  coverage under Part B. The bill would provide for benefit coverage in a more  comprehensive  manner and
one that is  analogous  to how the  therapy is covered by the  managed  care  sector.  Although  the bill had 40
sponsors as of the end of October, the likelihood of the bill's passage is unknown at this time.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

The Deficit Reduction Act
of 2005, or DRA, was signed by the President in February 2006. However, a number of
lawsuits were subsequently filed to prevent its implementation because the House and
Senate approved different versions of the bill due to a clerical error. Three of these
cases have been dismissed at the district court level, two cases are being pursued on
appeal and one other is still pending in district court. Should the legislation survive as
written, it contains the following provisions that will impact reimbursement to Apria:

---

| |  | In 2007, durable medical equipment currently  categorized in the capped rental category by CMS, such as hospital
beds,  wheelchairs,  nebulizers,  patient  lifts  and  continuous  positive  airway  pressure  devices,  will be
considered  purchased  outright at the end of the maximum  rental  period and the ownership of such devices will
transfer  directly to the patients.  The maximum rental period,  which had been 15 months with an option for the
patients to purchase the  equipment in the tenth month,  will be reduced to 13 months.  The new 13-month  rental
period policy took effect on January 1, 2006,  and therefore the first month in which the new policy will impact
the company's  revenue is February 2007. The service and  maintenance  fee that had been paid to suppliers twice
yearly after the rental  period ended was  eliminated  for patients  commencing  service on or after  January 1,
2006. In addition,  according to a final rule issued in advance copy on November 1, 2006,  supplier  replacement
of equipment during the rental period is limited,  and suppliers must replace  beneficiary-owned  equipment that
does not last the useful  lifetime  of the  equipment,  which CMS has  generally  defined  as being five  years.
Management  estimates that the reduction in rental revenues and the loss of the service and maintenance  fees in
2007 will be  approximately  $4 million and $0.5  million,  respectively.  However,  this estimate is subject to
assumptions and uncertainties and the actual negative impact on revenue and fees may be greater or less.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|- |  | 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-------------------------
| |  | Reimbursement  for oxygen  equipment  will also  convert  from an ongoing  rental  method to a  rent-to-purchase
              method. The DRA mandates that oxygen equipment  reimbursement will be limited to 36 months, after which time the
              ownership of the equipment will transfer to the patient, who will assume primary  responsibility for identifying
              when repairs or preventive  maintenance are needed.  Such repairs and preventive  maintenance have  historically
              been provided by home oxygen  providers  and included in the bundled  monthly  rental  payment from Medicare for
              oxygen  therapy.  The new DRA payment  amounts  will go into effect  January 1, 2007,  but the  36-month  rental
              period will be retroactively  applied to January 1, 2006 for all  beneficiaries  requiring oxygen as of December
              31,  2005.  Accordingly,  the first month in which the transfer of ownership  for oxygen  equipment  and the new
              repair and maintenance policy will impact the company is January 2009.

              On November 1, 2006,  CMS issued an advance  copy of the final rule  relating to the  implementation  of the DRA
              provisions for durable  medical  equipment and oxygen  therapy.  The final rule  establishes new payment classes
              for oxygen equipment,  including transfilling and portable equipment,  new monthly rental payment rates, and new
              payment  rates for the delivery of oxygen  contents for  patient-owned  equipment  after title to the  equipment
              transfers.  According to this final rule,  beginning in 2008, Medicare will review the utilization  patterns and
              fee schedule  rates and consider  whether an  adjustment  to the payment rates is needed in order to satisfy the
              statutory mandate of budget neutrality.

              This final rule  permits  payment  to  suppliers  for  certain  general  maintenance  and  servicing  of certain
              patient-owned  oxygen  equipment  every six months,  beginning  after the first six months the patient  owns the
              equipment.  The final rule limits  payment for general  maintenance  and servicing  visits to thirty  minutes of
              labor  based on rates the  Medicare  contractors  establish.  CMS  declined  to offer  general  maintenance  and
              servicing  payments for  beneficiary-owned  liquid and gas equipment  with the exception of a single payment for
              pick-up and storage or disposal of such equipment  that a beneficiary no longer needs.  Once title to the oxygen
              equipment  transfers,  CMS will also pay for certain other reasonable and necessary but non-routine repairs, but
              not for patient support  services.  Apria may or may not continue to provide repair and  maintenance  service on
              patient-owned equipment and is in the process of evaluating the impact of these changes.

              The final rule also limits  supplier  replacement of oxygen  equipment  during the rental  period,  and requires
              suppliers to replace beneficiary-owned  equipment that does not last the useful lifetime of the equipment, which
              CMS has generally defined as being five years.

              The  President's  current  healthcare  proposals  seek to further  reduce the maximum  rental  period for oxygen
              equipment from the now-mandated 36 months to 13 months.  There are other initiatives to reduce the rental period
              further,  but it is uncertain  whether any of these  initiatives  will  ultimately be approved by Congress.  For
              example,  in September  2006, the HHS Office of Inspector  General  published a report  entitled  "Medicare Home
              Oxygen:  Equipment  Cost and  Servicing."  The  report was the result of an audit  survey  conducted  by the OIG
              beginning in the Fall of 2005.  The  survey's  stated  objective  was to study the average  acquisition  cost of
              oxygen  concentrators.  The final report included a recommendation  that Congress consider further reductions to
              oxygen payment  levels,  including the  possibility  of limiting the maximum rental period for oxygen  equipment
              from the  DRA-mandated  36 months to 13 months.  The industry has analyzed the report and shared  concerns about
              the narrow  scope of the report and its findings  with the OIG,  CMS,  Members of Congress and other  government
              agencies.  There are also  legislative  provisions  that have been  introduced in Congress that would repeal the
              current  oxygen  reimbursement  cap and  equipment  ownership  mandate  included in the DRA, but it is uncertain
              whether and when any of the OIG's  recommendations  or the repeal  legislation  ultimately  would be adopted and
              passed by Congress.

Other outstanding issues
that will or could have an impact on Medicare reimbursement levels to Apria are summarized
as follows:

| |  | In late December  2005,  CMS issued the 2006 Health Care Procedure  Coding  System,  or HCPCS,  fee schedule for
              Medicare Part B medications  and the new two-tiered  dispensing fee for inhalation  therapies.  The fee schedule
              took  effect on  January  1,  2006,  and  included  two HCPCS  codes for  commercially  manufactured  budesonide
              (Pulmicort®)(1) and DuoNeb®(2). The fee  schedule  also  included a revised  definition  for the HCPCS codes for
              commercially  manufactured budesonide and budesonide compounded from a powder, and separated these products into
              two unique  codes.  Management  currently  estimates  that the impact of this change is an annual  gross  profit
              reduction  in 2006  of  approximately  $3  million.  However,  this  estimate  is  subject  to  assumptions  and
              uncertainties and the actual negative impact on gross profit may be greater or less.

              In October  2006,  CMS issued the 2007 HCPCS list for Medicare  Part B  medications.  The 2007 list includes new
              codes for certain  compounded  medications,  but does not include the proposed Medicare  allowable rates for the
              new codes.  Apria  anticipates  that the list of rates will  likely be  published  by January 1, 2007.  However,
              management does not expect such coding or reimbursement  changes to have a material impact on the company due to
              the  extremely  low  volume of  custom,  patient-specific,  physician-prescribed  compounding  performed  by its
              inhalation pharmacies.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|- |  | 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------------------------------------------------
| |  | In January  2006,  CMS published a final  regulation  that would shift  payment for certain  respiratory  assist
              devices from the current  "frequent and  substantial"  payment category to the "capped rental"  category.  Under
              "frequent  and  substantial"  payment,  Medicare  payment  continues  for the  duration of time the  beneficiary
              requires  the device,  while  "capped  rental"  payment  continues  for 13 months (a  reduction  from 15 months,
              mandated by the recently  enacted DRA.) The change in the payment  category became  effective April 1, 2006. The
              policy  applies to those  respiratory  assist  devices (also known as BiPAP STs) that have a backup rate feature
              that delivers pressure  whenever the user's  spontaneous  breathing  efforts are insufficient.  The first claims
              received  for  each  Medicare  beneficiary  with  a date  of  service  on or  after  April  1,  2006,  including
              beneficiaries  with  existing  rental  equipment,  are counted as the first  rental  month in the capped  rental
              period.  Thus,  the first month in which the new  categorization  will impact the company's  revenue will be May
              2007.  The  company's  estimate for this change in payment  categories  is a reduction in annual  revenues of $3
              million.  However,  this estimate is subject to assumptions and  uncertainties and the actual negative impact on
              revenue may be greater or less.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | In  January  2006,  CMS  announced  the  designation  of four  specialty  contractors,  DME MACs,  which will be
              responsible for handling the  administration of all Medicare claims from suppliers of durable medical equipment.
              Three of the four new DME MACs are currently  processing claims;  National Heritage Insurance Company (NHIC) for
              Region A,  AdminaStar  Federal for Region B (effective  July 1, 2006) and Noridian  Administrative Services for Region D
              (effective  October 1, 2006).  The Region C contract is  currently  under appeal and the  transition  plans have
              been delayed for that Region until further  notice.  It is difficult at this time to predict  precisely how this
              change in claims  administration  will affect DME suppliers,  nor can the company predict or estimate the
              potential impact of this change on collections of its accounts receivable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | On March 24, 2006, the three Program  Safeguard  Contractors,  or PSCs,  overseeing  durable  medical  equipment
              issued a proposed Local Coverage  Determination,  or LCD, for nebulizer  medications covered by Medicare Part B.
              In their respective  geographic  regions,  the PSC medical  directors are responsible for  implementing  medical
              policies that conform to Medicare rules,  regulations,  coverage  guidelines and payment  policies for Part B as
              mandated  by law or other  regulations.  The LCD for  nebulizer  medications  proposes to change the payment and
              coverage  policies for certain  inhalation  therapies that are provided in conjunction  with the durable medical
              equipment nebulizer.  Specifically,  four provisions were proposed:  (i) payment for levalbuterol  (commercially
              manufactured as brand-name Xopenex®)(3) will be based on the  allowance  for  generic  albuterol  sulfate;  (ii)
              payment for commercially-manufactured,  brand-name DuoNeb® will be based on the allowance for separate unit dose
              vials of albuterol sulfate and ipratropium  bromide;  (iii) coverage for a variety of other nebulizer drugs will
              be  eliminated  because  the PSCs  assert  that  there is  inadequate  support  in the  medical  literature  for
              administration  using a DME  nebulizer;  and (iv) maximum  monthly  utilization  limits for  budesonide  will be
              defined.  The PSCs  issued a deadline of May 8, 2006 by which  formal  comments  from the public and  interested
              parties were required to be submitted.  In addition,  the three PSCs scheduled  public  hearings on the subject,
              all of which were completed by May 17, 2006. Nothing further has been published since that time.

              Apria participated - along with numerous other industry  representatives,  manufacturers,  providers,  physician
              and patient  advocacy groups - in the public hearings and has also submitted formal written comments to the PSCs
              and CMS. The company  believes  that the MMA is clear in its intent to prescribe  the Part B average sales price
              reimbursement  formula for single-source  drugs which applies to both DuoNeb® and Xopenex®.  The company further
              believes  that the PSCs do not have the legal  authority  to  circumvent  the average  sales  price  methodology
              through the issuance of an LCD that invokes their  authority to use the "Least Costly  Alternative" as the basis
              for reducing the reimbursement  for these drugs.  Apria is continuing to work with industry  representatives  to
              further  demonstrate  to CMS and the PSCs  that  such a  decision  would  have a  negative  impact  on access to
              prescription  medications used in the front-line treatment of chronic obstructive pulmonary disease. The company
              has determined that if the four  provisions of the LCD are implemented as proposed in the March 24 document,  it
              will generally not provide DuoNeb® and Xopenex® to existing or future patients covered by Medicare,  as the cost
              would far exceed the  reimbursement  rate. The company would undertake an effort to inform existing patients and
              physicians of the option to use the generic drugs that the PSCs have deemed to be therapeutically  equivalent to
              these  brand-name  drugs.  Such an effort would be intended to mitigate but likely would not  eliminate the full
              effect of the change in  reimbursement;  the  company's  current  estimated  annual  gross  profit  reduction of
              providing the  replacement  medications  in lieu of the brand name drugs is $13 million in 2007.  However,  this
              estimate is subject to  assumptions  and  uncertainties  and the actual  negative  impact on gross profit may be
              greater or less.

               The  manufacturer of Xopenex® previously had announced that it is attempting to negotiate a solution to
               this issue directly with CMS that would reduce the reimbursement  rate while maintaining  patient access
               to the drug within the Medicare Part B program.  Apria does not have the  particulars of such a proposal
               but  believes  that such a solution  could also have an adverse  affect on its  revenues  and results of
               operations.  After  reopening the comment  period for  reimbursement  of Medicare Part B drugs under the
               average sales price  methodology in the proposed  physician fee schedule released on August 8, 2006, CMS
               issued an advance  copy of the final  physician  fee schedule  rule on November 1, 2006.  It is possible
               that this final rule may adversely impact  reimbursement  for nebulizer  medication  covered by Medicare
               Part B.
| |  | On September 20, 2006, CMS announced that it has revised the LCD for power  mobility  devices  resulting
               in reductions to the power mobility devices fee schedule.  The revised fee schedule  imposes  reductions
               for certain power mobility  devices of up to 50%. The changes are scheduled to take effect  November 15,
               2006.  Management's  estimate of the annualized  reduction in Apria's revenues  resulting from these fee
               schedule changes is $5 million.  However,  this estimate is subject to assumptions and uncertainties and
               the actual  negative  impact on revenue may be greater or less. The industry is continuing work with CMS
               to  obtain  clarification  and  modification  of the LCD.  The  industry  also  believes  that  Medicare
               beneficiary  access  to power  mobility  will be  restricted  by this LCD and  therefore  has  requested
               revisions to the fee schedule.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

Apria
cannot estimate the combined possible impact of all legislative, regulatory and
contemplated reimbursement changes that could have a material adverse effect on
Aprias results of operations, cash flow and capital resources.

---

|1 |  | Pulmicort ® is a registered
trademark of AstraZeneca AB Corporation
|- |  | -------------------------------------------------------------------
|2 |  | DuoNeb® is a registered
trademark of Dey L.P.                      
|3 |  | Xopenex ® is a registered
trademark of Seprecor, Inc.              

---

Medicaid
Reimbursement. In 2001, some states began adopting alternative pricing
methodologies for certain drugs and biologicals under the Medicaid program. In at least 22
states, the changes reduced the level of reimbursement received by Apria without a
corresponding offset or increase to compensate for the service costs incurred. In several
of those states, Apria elected to stop accepting new Medicaid patient referrals for the
affected drugs and biologicals. Further, in 2005, some states implemented other payment
policy changes or changed coverage criteria altogether for medical equipment, enteral and
infusion therapy. Currently, other states are considering reductions in Medicaid
reimbursement as they work through their respective budget processes. Apria cannot predict
the outcome of such budget negotiations or whether other states will consider reductions
as well.

Gross Margin.The gross margin was 65.7% in the third quarter of 2006 and 67.7% in the
same period last year. For the nine months ended September 30, 2006 and 2005, the margins
were 65.6% and 67.9%, respectively. The principal causes of the declines are the Medicare
reimbursement reductions and managed care pricing reductions discussed above, as well as
shifts in product mix to lower margin items.

Provision for
Doubtful Accounts.The provision for doubtful accounts is based on
managements estimate of the net realizable value of accounts receivable after
considering actual write-offs of specific receivables. Accounts receivable which are not
expected to be collected are estimated and provided for by applying specific percentages
to each receivables aging category, which is determined by the number of days the
receivable is outstanding. The provision for doubtful accounts, expressed as a percentage
of net revenues, was 2.4% and 3.3% for the third quarter of 2006 and 2005, respectively.
On a year-to-date basis, the provision was 2.6% and 3.5% for the first nine months of 2006
and 2005, respectively. The improvement between the periods reflects improvements in cash
collections and notably the success of a credit card program designed to collect patient
receivables upon delivery and automatically on the rental due date thereafter. Also, the
absence of acquisitions in recent months has allowed the revenue management teams to focus
on basics and best practices, as discussed below under Liquidity and Capital
Resources  Accounts Receivable.

Selling,
Distribution and Administrative.Selling, distribution and administrative
expenses are comprised of expenses incurred in direct support of operations and those
associated with administrative functions. Expenses incurred by the operating locations
include salaries and other expenses in the following functional areas: selling,
distribution, intake, reimbursement, warehousing and repair. Many of these operating costs
are directly variable with revenue growth patterns. Some are also very sensitive to
market-driven price fluctuations such as facility leases and fuel costs. The
administrative expenses include overhead costs incurred by the operating locations and
corporate support functions. These expenses do not fluctuate with revenue growth as
closely as operating costs.

Selling, distribution and
administrative expenses, expressed as percentages of net revenues, were 53.0% in the third
quarter of 2006 and 54.8% in the third quarter of 2005. For the nine months ended
September 30, 2006, selling distribution and administrative expenses were 53.2% compared
to 53.5% for the same period last year. The Medicare and managed care pricing changes
noted above resulted in lower revenues, however, there was no corresponding reduction in
the companys actual cost of providing the related products and services. These
revenue pricing factors had the effect of increasing the expense percentages by 0.6% and
1.0% for the three- and nine-month periods ended September 30, 2006, respectively.
Therefore, absent the revenue pricing effects, the comparison between the reported periods
reflects expense leveraging achieved through the successful implementation of a number of
cost saving initiatives. Such initiatives include those in the revenue management area
whereby productivity and efficiencies have been enhanced by consolidating and centralizing
certain functions. Billing and collection activities for several of the companys
larger payors have been centralized as have certain other related functions. Also, in the
logistics area, the routing of deliveries has been automated which has resulted in
decreased miles per delivery stop and increased stops per driver. The company has been
successful in converting these productivity improvements to cost savings.

Share-based compensation
is reflected within the selling, distribution and administrative expense line item.
Effective January 1, 2006, Apria adopted the provisions of SFAS No. 123R,
Share-Based Payment. Prior to 2006, the company accounted for share-based
compensation in accordance with APB No. 25, Accounting for Stock Issued to
Employees, and related interpretations. The company elected to employ the modified
prospective transition method as provided by SFAS No. 123R 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 nine-month periods
ended September 30, 2006 and 2005, share-based compensation expense was $4.0 million and
$2.6 million, respectively. The adoption of SFAS No. 123R had a minimal effect on the
comparison between quarters primarily due to the November 2005 acceleration of the vesting
of outstanding employee stock options with per share prices above $26.00, so that each
such option became fully vested. That action eliminated the future compensation expense of
the unvested portion of such options. The share-based compensation expense in both periods
is comprised largely of expense associated with restricted stock awards and units for
which expense recognition was previously required under the principles of APB No. 25.

Qui tam Settlement
and Related Costs.In early August 2005, Apria reached a preliminary
agreement to settle two qui tam lawsuits for the aggregate sum of $17.6 million.
The settlement was finalized in a definitive agreement that was fully executed and became
effective on September 30, 2005, and Apria paid the settlement amount on that date. An
initial accrual of $20 million to provide for the settlement amount plus an estimate for
legal fees and other related costs is reflected in the condensed consolidated income
statement for the nine-month period ended September 30, 2005. Actual legal fees and
related costs ultimately totaled $1.7 million. During the fourth quarter of 2005, the
initial accrual was adjusted to the actual expenses incurred.

Amortization of
Intangible Assets.For the quarter and nine months ended September 30,
2006, amortization expense was $1.1 million and $4.0 million, respectively. This compares
to $2.0 million and $5.2 million for the same periods last year. See Liquidity and
Capital Resources  Business Combinations.

Interest Expense and
Income.Interest expense was $8.0 million for the third quarter of 2006 as
compared to $5.6 million for the comparable period in 2005. For the year-to-date periods
in 2006 and 2005, interest expense was $24.8 million and $15.4 million, respectively. The
increases in interest expense in 2006 is primarily attributable to the increase in
long-term debt incurred to repurchase $175 million of Aprias common stock late in
2005. The increase in base interest rates also contributed to the increases. Interest
income was $93,000 and $366,000 for the three months ended September 30, 2006 and 2005,
respectively. For the year-to-date periods in 2006 and 2005, interest income was $1.6
million and $525,000, respectively. See Liquidity and Capital Resources 
Long-term Debt and Treasury Stock.

Income Tax
Expense. Income taxes for the nine-month period ended September 30, 2006
have been provided at a lower effective rate than is expected to be applicable for the
entire year. The lower rate is due to a decrease in the valuation allowance during the
third quarter of 2006 resulting from state net operating loss carryforwards that became
realizable based on a change in state tax law. This decrease was partially offset by an
increase in Federal tax contingencies for a 2003 IRS audit expected to be completed by the
end of 2006. In addition, the lower rate is due to a decrease in state tax contingencies
resulting from a change in estimate during the second quarter of 2006 and a decrease in
Federal tax contingencies for a 2002 IRS audit completed during the first quarter of 2006.

Income taxes for the
nine-month period ended September 30, 2005 were provided at a higher effective rate than
was applicable for that year. The higher rate was due to an accrual recorded to reflect
the settlement of two previously-disclosed qui tamlawsuits, a portion of which was
not deductible. This higher rate was partially offset by a decrease in the valuation
allowance and corresponding reduction of the tax provision that was recorded in the first
quarter of 2005. Such adjustment resulted from state net operating loss carryforwards that
became realizable based on a change in estimate of expected future earnings.

At September 30, 2006, the
company had various apportioned state net operating loss carryforwards which resulted in a
deferred tax asset of $8.8 million, net of Federal tax benefit.

Inflation.Apria is impacted by rising costs for certain inflation-sensitive
          operating expenses such as vehicle fuel, labor and employee benefits and
          facility and equipment leases.

Liquidity and Capital Resources

Aprias principal
source of liquidity is its operating cash flow, which is supplemented by a $500 million
revolving credit facility. In recent years, Apria has generated operating cash flows in
excess of its operating needs, which has afforded it the ability to pursue acquisitions
and fund patient service equipment purchases to support revenue growth. Aprias
management believes that its operating cash flow will continue to be sufficient to fund
its operations and growth strategies. In September 2008, the holders of the $250 million
convertible senior notes will have an opportunity to require Apria to repurchase some or
all of the notes. Accordingly, Apria management has begun to explore financing
alternatives.

Further, Apria has
initiated a project to implement a new enterprise-wide information system. The overall
objective of the project is to deliver the necessary technology and automation across the
organization to enable improvements in service, productivity and access to information.
The overall implementation roadmap and project plan are nearing completion, and
development on certain modules has commenced. The total cost of the project will be
determined once the project planning has been completed.

Cash Flow.Cash provided by operating activities was $189.9 million in the first nine
months of 2006 compared to $128.1 million in the corresponding period in 2005. The
increase in operating cash flow between the two periods is due primarily to strong cash
collections of receivables and reduced income tax payments due to a favorable IRS tax
ruling.

Cash used in investing
activities decreased to $97.8 million for the first nine months of 2006 compared to $193.3
million during the same period last year. A significant reduction in the level of
acquisitions executed during the first nine months of 2006 is the primary driver of this
decrease. Cash paid for acquisitions, including payments of deferred consideration,
decreased from $101.9 million for the nine months ended September 30, 2005 to $7.8 million
for the corresponding period in 2006.

Cash used in financing
activities was $101.4 million during the first nine months of 2006 compared to cash
provided by financing activities of $38.2 million for the first nine months of 2005. The
primary drivers of this change are noted above, the most significant of which are the
improvement in operating cash flow and the absence of acquisitions. As a result, during
the nine months ended September 30, 2006, the company reduced the amount owed on its
revolving line of credit by $95 million.

---

Contractual Cash
Obligations.The following table summarizes Aprias long-term cash
payment obligations to which the company is contractually bound. The years presented below
represent 12-month rolling periods ending September 30.

|(dollars in millions)                                                                                                                                                                                                                                                                                                                                                                                                                          | 2007 | 2008 | 2009 | 2010 | 2011 | There-after | Totals
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---- | ---- | ---- | ---- | ---- | ----------- | ------
|
|Revolving loan                                                                                                                                                                                                                                                                                                                                                                                                                                 |      |      | $    | -    |      | $           | -     
|Convertible senior notes (3.375%) (1)                                                                                                                                                                                                                                                                                                                                                                                                          |      |      |      | -    |      |             | -     
|Capital lease obligations and other debt                                                                                                                                                                                                                                                                                                                                                                                                       |      |      |      | 7    |      |             | 1     
|Operating leases                                                                                                                                                                                                                                                                                                                                                                                                                               |      |      |      | 51   |      |             | 43    
|                                                                                                                                                                                                                                                                                                                                                                                                                                               |      |      |      |      |      |             |       
|Total contractual cash obligations                                                                                                                                                                                                                                                                                                                                                                                                             |      |      | $    | 58   |      | $           | 44    
|                                                                                                                                                                                                                                                                                                                                                                                                                                               |      |      |      |      |      |             |       
|                                                                                                                                                                                                                                                                                                                                                                                                                                               |      |      |      |      |      |             |       
|(1) The holders of the convertible senior notes
will first have the option to require Apria to repurchase all or a portion
of their notes in September 2008. Interest on these notes is paid bi-annually in March
and September. Unless the notes are earlier converted, redeemed or repurchased, such
interest payments will total $8.4 million annually in years 2007 through 2011 and $8.4 million
annually until the notes mature in 2033.

Accounts Receivable.Accounts receivable before allowance for doubtful accounts decreased to
$256.7 million at September 30, 2006, from $268.0 million at December 31, 2005. Days sales
outstanding (calculated as of each period-end by dividing accounts receivable, less
allowance for doubtful accounts, by the 90-day rolling average of net revenues) were 52
days at September 30, 2006 compared to 57 at December 31, 2005. The decrease in days sales
outstanding is a result of strong cash collections and the relative absence of
acquisitions in recent months, as discussed below under Unbilled Receivables.

Accounts aged in excess of
180 days of total receivables for certain payor categories, and in total, are as follows:

|                   | September 30, |  | December 31,
|------------------ | ------------- |  | ------------
|
|
|Total              |               |  |             
|                   |              
|Medicare           |               |  |             
|Medicaid           |               |  |             
|Self pay           |               |  |             
|Managed care/other |               |  |             

Unbilled
Receivables.Included in accounts receivable are earned but unbilled receivables
of $32.4 million and $41.6 million at September 30, 2006 and December 31, 2005,
respectively. Delays, ranging from a day up to several weeks, between the date of service
and billing can occur due to delays in obtaining certain required payor-specific
documentation from internal and external sources. Earned but unbilled receivables are aged
from date of service and are considered in Aprias analysis of historical performance
and collectibility. The higher unbilled amount at December 31, 2005 is largely due to
acquisitions effected throughout 2005. The time-consuming processes of converting patient
files onto Aprias systems and obtaining provider numbers from governmental payors
routinely delay billing of the newly acquired business.

Inventories and
Patient Service Equipment.Inventories consist primarily of pharmaceuticals
and disposable products used in conjunction with patient service equipment. Patient
service equipment consists of respiratory and home medical equipment that is provided to
in-home patients for the course of their care plan, normally on a rental basis, and
subsequently returned to Apria for redistribution after cleaning and maintenance is
performed.

The branch locations serve
as the primary point from which inventories and patient service equipment are delivered to
patients. Certain products and services, such as infusion therapy and respiratory
medications, bypass the branches and are provided directly to patients from pharmacies or
other central locations. The branches are supplied with inventory and equipment from
central warehouses that service specific areas of the country. Such warehouses are also
responsible for repairs and scheduled maintenance of patient service equipment, which adds
to the frequent movement of equipment between locations. Further, the majority of
Aprias patient service equipment is located in patients homes. While
utilization varies widely between equipment types, on the average, approximately 83% of
equipment is on rent at any given time. Inherent in this asset flow is the fact that
losses will occur. Depending on the product type, the company performs physical
inventories on an annual or quarterly basis. Inventory and patient service equipment
balances in the financial records are adjusted to reflect the results of these physical
inventories. Inventory and patient service equipment losses for the nine months ended
September 30, 2006 and 2005, were $3.0 million and $1.4 million, respectively.

Long-term Debt.Revolving Credit Facility. Aprias credit agreement with
Bank of America and a syndicate of lenders was amended and restated 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 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%.

At September 30, 2006,
borrowings under Aprias revolving credit facility were $295.0 million; down from
$390.0 million at December 31, 2005. The company reduced its long term debt with cash
generated from operations. At September 30, 2006, outstanding letters of credit totaled
$3.9 million and credit available under the revolving facility was $201.1 million. The
company continues to be in compliance with all covenants required by the credit agreement.
The effective interest rate at September 30, 2006, after consideration of the effect of
the swap agreements described below, was 6.11%. See Hedging Activities below.

Convertible Senior
Notes.At September 30, 2006, the fair value of the $250 million in convertible
senior notes was $239.0 million, as determined by reference to quoted market prices.

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

At September 30, 2006,
Apria had two interest rate swap agreements in effect to fix its variable rate debt. One
such agreement has a notional amount of $25 million, a fixed rate of 3.42% and expires in
December 2006. The other agreement, which became effective in January 2006 has a
three-year term and a notional amount of $25 million, with a fixed rate of 4.44%.

---

The swap agreements are
being accounted for under SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. The difference between the interest received and interest paid
is reflected as an adjustment to interest expense. Apria received a net settlement amount
of $382,000 for the nine-month period ended September 30, 2006 and paid a net settlement
amount of $68,000 for the nine-month period ended September 30, 2005. The aggregate fair
value of the two remaining swap agreements was an asset of $447,000 and $769,000 at
September 30, 2006 and December 31, 2005, respectively, and is reflected in the
accompanying condensed consolidated balance sheets in other assets. Unrealized gains on
the fair value of the swap agreements are reflected in other comprehensive income or
interest expense/income within the condensed consolidated statements of income as
applicable. Aprias exposure to credit loss under the swap agreements is limited to
the interest rate spread in the event of counterparty non-performance.

Treasury Stock.In November 2005, Apria purchased 7.3 million shares of its common stock
for $175 million through an accelerated share repurchase program. Under the agreement,
Aprias counterparty borrowed shares that were sold to Apria at an initial price of
$23.83. The agreement contained a provision that subjected Apria to a purchase price
adjustment based on the volume weighted average price of the companys common stock
over the period during which the counterparty purchased the shares. Such provision
resulted in an additional $242,000 owed to the counterparty that Apria elected to settle
in cash in February 2006. This amount was recorded as a liability at December 31, 2005,
with a corresponding charge to interest expense reflecting the change in the fair value of
the settlement contract.

Apria has decided not to
complete its previously-announced $75 million share repurchase during 2006 in order to
focus on reducing its long-term debt.

Business
Combinations.Apria periodically acquires complementary businesses in
specific geographic markets. Given the potential for a higher gross margin, Apria targets
respiratory therapy businesses. These transactions are accounted for as purchases and the
results of operations of the acquired companies are included in the accompanying condensed
consolidated income statements from the dates of acquisition. Covenants not to compete are
being amortized over the life of the respective agreements. Tradenames and customer lists
are being amortized over the period of their expected benefit.

The aggregate
consideration for acquisitions that closed during the first nine months of 2006 was $3.6
million. Pending receipt of additional valuation information, the preliminarily allocation
of this amount includes $326,000 to goodwill, $1.1 million to other intangible assets,
and $2.2 million to patient service and other property, plant and equipment. Cash paid for
acquisitions, which includes amounts deferred from prior periods, totaled $7.8 million and
$101.9 million in the first nine months of 2006 and 2005, respectively.

Off-Balance Sheet Arrangements

Apria is not a party to
off-balance sheet arrangements as defined by the Securities and Exchange Commission.
However, from time to time the company enters into certain types of contracts that
contingently require the company to indemnify parties against third-party claims. The
contracts primarily relate to: (i) certain asset purchase agreements, under which the
company may provide customary indemnification to the seller of the business being
acquired; (ii) certain real estate leases, under which the company may be required to
indemnify property owners for environmental and other liabilities, and other claims
arising from the companys use of the applicable premises; and (iii) certain
agreements with the companys officers, directors and employees, under which the
company may be required to indemnify such persons for liabilities arising out of their
relationship with the company.

The terms of such
obligations vary by contract and in most instances a specific or maximum dollar amount is
not explicitly stated therein. Generally, amounts under these contracts cannot be
reasonably estimated until a specific claim is asserted. Consequently, no liabilities have
been recorded for these obligations on the companys balance sheets for any of the
periods presented.

---

ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK

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

At September 30, 2006,
Aprias revolving credit facility borrowings totaled $295.0 million. The bank credit
agreement governing the revolver provides interest rate options based on the following
indices: Federal Funds Rate, the Bank of America prime rate or the London Interbank
Offered Rate, or LIBOR. All such interest rate options are subject to the application of
an interest margin as specified in the bank credit agreement. At September 30, 2006, all
of Aprias outstanding revolving debt was tied to LIBOR.

During the third quarter
of 2006, Apria had two interest rate swap agreements in effect to fix its LIBOR-based
variable rate debt. One of the agreements, which will expire in December 2006, has a
notional amount of $25 million and a fixed rate of 3.42%. The other agreement became
effective in January 2006 for a three-year term, and has a notional amount of $25 million
that fixes an equivalent amount of the companys variable rate debt at 4.44%.

Based on the revolving
debt outstanding and the swap agreements in place at September 30, 2006, a 100 basis point
change in the applicable interest rates would increase or decrease Aprias annual
cash flow and pretax earnings by approximately $2.45 million. See Managements
Discussion and Analysis of Financial Condition and Results of Operations  Long-term
Debt  Hedging Activities.

ITEM 4.     CONTROLS AND PROCEDURES

As required by Rule
13a-15(b) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, the
companys management, including the companys principal executive officer and
acting principal financial officer, carried out an evaluation of the effectiveness of the
companys disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act. Based upon this evaluation, the
companys principal executive officer and acting principal financial officer each concluded
that the companys disclosure controls and procedures were effective as of the end of
the period covered by this report.

During the quarter ended
September 30, 2006, there were no changes to the companys internal control over
financial reporting (as such term is defined in Rules 13a-15(d) and 15d-15(d) under the
Exchange Act) that have materially affected, or are reasonably likely to materially
affect, the companys internal control over financial reporting.

PART II  OTHER INFORMATION

ITEM 1.     LEGAL PROCEEDINGS

Apria is the defendant in
a California class action lawsuit containing blanket claims of liability under various
California employee protection statutes and regulations relating to payment of regular and
overtime wages, the timeliness of such payments, the maintenance and provision of access
to required payroll records, and the provision of meal and rest periods. Venegas vs.
Apria Healthcare, Inc.,et al., was filed on February 21, 2006 in the
California Superior Court for the County of San Francisco (Case No. CGC -- 06 -- 449669).
No class has been certified at this time, but on behalf of a purported class consisting of
certain hourly employees of the company in the State of California, the complaint seeks
compensatory and punitive damages in an unspecified amount as well as other relief. The
company has filed an answer to the complaint denying all material allegations and
asserting a number of affirmative defenses. Based on the companys preliminary
investigation of the allegations, management believes there are meritorious defenses to
the claims and the company intends to vigorously defend the lawsuit. No assurance can be
given, however, that the ultimate disposition of this case will not have a material
adverse effect on the companys financial condition or results of operations.

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

ITEM 1A.     RISK FACTORS

The risk factors presented
in Aprias Annual Report on Form 10­K/A, as filed with the Securities and
Exchange Commission on March 23, 2006, are incorporated herein by reference with the
exception of the risk factor titled Medicare/Medicaid Reimbursement Rates
which is restated below in its entirety.

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

Medicare
Reimbursement Reductions. There are a number of provisions contained within recent
legislation and proposed regulations that adversely affect or may adversely affect
reimbursement for items and services provided by Apria. For example, in December 2003, the
Medicare Prescription Drug, Improvement and Modernization Act of 2003, also referred to as
the Medicare Modernization Act, or MMA, became law. The MMA and related rules issued by
the Centers for Medicare and Medicaid Services, or CMS, implemented reimbursement
reductions for a number of products and services provided by Apria and established a
proposed competitive bidding program for Medicare Part B, under which suppliers such as
Apria wishing to provide certain items to beneficiaries would be required to submit bids
to Medicare. The final rule on competitive bidding is not expected to be released until
later this year and there is limited information available regarding CMS final plan
for the competitive bidding program, such as the list of products and services and the
metropolitan areas to be included. The first phase of the competitive bidding program is
expected to begin in 2007. Accordingly, Apria cannot estimate the impact of the
competitive bidding program at this time.

The
Deficit Reduction Act of 2005, or DRA, was signed into law in February 2006. Once fully
implemented, the DRA and related rules issued by CMS would result in reduced reimbursement
rates for certain durable medical equipment, including home oxygen equipment and services
provided by Apria, a reduced period for rental revenue, and potential increased costs
associated with replacement of certain patient-owned equipment.

In
addition to these laws, certain other proposed legislative and regulatory activities may
affect reimbursement policies for other items and services provided by Apria. These
recently enacted reductions and pending proposed reductions in Medicare reimbursement
rates could have a material adverse effect on Aprias net revenues, net income, cash
flow and capital resources. See Managements Discussion and Analysis of
Financial Condition and Results of Operations  Results of Operations  Net
Revenues  Medicare Reimbursement.

Medicaid Reimbursement Reductions.In
2001, some states began adopting alternative pricing methodologies for certain drugs and
biologicals under the Medicaid program. In a number of states, these changes have reduced
the level of reimbursement received by Apria without a corresponding offset or increase to
compensate for the service costs incurred. In several of those states, Apria elected to
stop accepting new Medicaid patient referrals for the affected drugs and biologicals.
Further, some states are considering other reductions in Medicaid reimbursement as they
work through their respective states budget process.

Medicare
and Medicaid payments accounted for approximately 30% and 7%, respectively, of
Aprias net revenues for the nine months ended September 30, 2006. The Medicare
reimbursement reductions discussed in Managements Discussion and Analysis of
Financial Condition and Results of Operations reduced 2004 net revenues by approximately
$15 million, 2005 net revenues by $27 million and net revenues for the nine months ended
September 30, 2006 by approximately $13 million.

Apria
cannot estimate the ultimate impact of all legislated and contemplated Medicare and
Medicaid reimbursement changes or provide assurance to investors that additional
reimbursement reductions will not be made or will not have an adverse effect on the
companys operations and financial condition.

---

ITEM 2.     CHANGES IN SECURITIES, USE OF
PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES

None.

ITEM 3.     DEFAULTS UPON SENIOR
 SECURITIES

None.

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

None.

ITEM 5.     OTHER INFORMATION

None.

ITEM 6.     EXHIBITS

| |                   |  |                                                                                                      
| | ----------------- |  | -----------------------------------------------------------------------------------------------------
| | Exhibits:         |  |                                                                                                      
| | ExhibitNumber31.1 |  | ReferenceCertification of Chief Executive
Officer pursuant to Securities Exchange Act Rule 13a-14(a).
| | 31.2              |  | Certification of Chief Financial Officer pursuant
to Securities Exchange Act Rule 13a-14(a).         
| | 32.1              |  | Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350.                         
| | 32.2              |  | Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350.                         

---

SIGNATURES

Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

|                 |                                                                                          
|---------------- | -----------------------------------------------------------------------------------------
|                 | APRIA HEALTHCARE GROUP INC.
Registrant                                                   
|November 9, 2006 | /s/ LAWRENCE M. HIGBY
Lawrence M. HigbyChief Executive Officer                           
|                 | /s/ ALICIA PRICE
Alicia PriceVice President and Controller
(Principal Accounting Officer)