UNITED STATESSECURITIES AND EXCHANGE
COMMISSIONWashington, D.C.  20549

FORM 10-K

|                                           
|-------------------------------------------
|[X]                                        
|For the Fiscal Year Ended December 31, 2004

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 of
      Incorporation)26220 Enterprise Court, Lake Forest, CA
      (Address of Principal Executive Offices) | 33-0488566(I.R.S. Employer
      Identification Number)92630-8405(Zip Code)

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

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

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

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

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

Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrants knowledge, in definitive proxy or information statements incorporated
by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  
 X

Indicate by check mark whether the Registrant
is an accelerated filer (as defined in Exchange Act Rule 12b-2. Yes X
No

As of June 30, 2004 the aggregate market value
of the shares of common stock held by non-affiliates of the Registrant, computed based on
the closing sale price of $28.70 per share as reported by the New York Stock Exchange, was
approximately $1,422,370,442. As of March 5, 2005, there were outstanding 48,973,126
shares of the Registrants common stock, par value $0.001, which is the only class
of common stock of the Registrant (not including 9,627,659 shares held in treasury).

Documents Incorporated by Reference:

The information called for by Part III is
incorporated by reference to the Definitive Proxy Statement for the 2005 Annual
Meeting of Stockholders of the Registrant which will be filed with the Securities
and Exchange Commission not later than 120 days after December 31, 2004.

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APRIA HEALTHCARE GROUP INC.

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|------------------------ | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|PART I                   |   |                                                                                                                                                                                                                                             | 
|Item 1                   |  | Business                                                                                                                                                                                                                                    | 
|                         |   | Strategy                                                                                                                                                                                                                                    | 
|                         |   | Service Lines                                                                                                                                                                                                                               | 
|                         |   | Organization and
Operations                                                                                                                                                                                                                 | 
|                         |   | Marketing                                                                                                                                                                                                                                   | 
|                         |   | Sales                                                                                                                                                                                                                                       | 
|                         |   | Competition                                                                                                                                                                                                                                 | 
|                         |   | Government Regulation                                                                                                                                                                                                                       | 
|                         |   | Employees                                                                                                                                                                                                                                   | 
|                         |   | Website Access to Reports                                                                                                                                                                                                                   | 
|                         |   | Executive Officers                                                                                                                                                                                                                          | 
|                         |   | Risk Factors                                                                                                                                                                                                                                | 
|Item 2                   |  | Properties                                                                                                                                                                                                                                  | 
|Item 3                   |  | Legal Proceedings                                                                                                                                                                                                                           | 
|Item 4                   |  | Submission of Matters to a Vote
of Secutity Holders                                                                                                                                                                                         | 
|PART II                  |   |                                                                                                                                                                                                                                             | 
|Item 5                   |  | Market for the Registrants Common Equity
and Related Stockholders Matters and      
Issuer Purchases of Equity Securities                                                                                                                  | 
|Item 6                   |  | Selected Financial Data                                                                                                                                                                                                                     | 
|Item 7                   |  | Managements Discussion and Analysis of Financial
Condition and Results of Operations                                                                                                                                                       | 
|Item 7A                  |  | Quantitative and Qualitative Disclosures about Market
Risk                                                                                                                                                                                  | 
|Item 8                   |  | Financial Statements and Supplementary Data                                                                                                                                                                                                 | 
|Item 9                   |  | Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure                                                                                                                                                        | 
|Item 9A                  |  | Controls and Procedures
      Managements Report on Internal Control over
Financial Reporting      Report of Independent Registered
Public Accounting Firm                                                                                 | 
|Item 9B                  |  | Other Information                                                                                                                                                                                                                           | 
|PART III *               |   |                                                                                                                                                                                                                                             | 
|Item 10                  |  | Directors and Executive Officers
of the Registrant                                                                                                                                                                                          | 
|Item 11                  |  | Executive Compensation                                                                                                                                                                                                                      | 
|Item 12                  |  | Security Ownership of Certain Beneficial
Owners and Management and Related      Stockholder Matters                                                                                                                                         | 
|Item 13                  |  | Certain Relationships and Related Transactions                                                                                                                                                                                              | 
|Item 14                  |  | Principal Accountant Fees and
Services                                                                                                                                                                                                      | 
|                         |   | * All
information required to be disclosed in Part III is incorporated
by reference from Part I and the companys definitive Proxy    Statement
to be filed with the Commission within 120 days after the end of the companys fiscal year. | 
|PART IV                  |   |                                                                                                                                                                                                                                             | 
|Item 15                  |  | Exhibits, Financial Statement Schedule and
Reports on Form 8-K                                                                                                                                                                              | 
|                         |   | Report
of Independent Registered Public Accounting Firm                                                                                                                                                                                     | 
|                         |   | Consolidated Financial
Statements                                                                                                                                                                                                           | 
|                         |   | Consolidated Financial
Statement Schedule                                                                                                                                                                                                   | 
|SIGNATURESCERTIFICATIONS |   |                                                                                                                                                                                                                                             | 

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Forward Looking Statements

This report contains
forward-looking statements that are not based on historical facts. All such
forward-looking statements are uncertain. Apria has based those forward-looking statements
on, among other things, projections and estimates regarding the economy in general, the
healthcare industry and other factors that impact Aprias results of operations.
These statements involve known and unknown risks, uncertainties and other factors that may
cause Aprias actual results, levels of activity, performance or achievements to be
materially different from any results, levels of activity, performance or achievements
expressed or implied by any forward-looking statements. In some cases, forward-looking
statements that involve risks and uncertainties contain terminology such as
may, will, should, could,
expects, intends, plans, anticipates,
believes, estimates, predicts, potential,
or continue or variations of these terms or other comparable terminology. See
Risk Factors at the end of Item 1  Business.

PART I

ITEM 1.      BUSINESS

Apria Healthcare Group
Inc. provides a broad range of home healthcare services through approximately 475 branch
locations that serve patients in all 50 states. Apria has three major service lines: home
respiratory therapy, home infusion therapy and home medical equipment. The following table
provides examples of the services and products in each:

|Service Line             |  | Examples of Services and Products                                                                                                                                                                                          
|------------------------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
|Home respiratory therapy |  | Provision of oxygen
systems, stationary and portable ventilators, obstructive sleep apnea equipment,
nebulizers, respiratory medications and related clinical/administrative support
 services                             
|Home infusion therapy    |  | Intravenous administration of
anti-infectives, pain management, chemotherapy, nutrients (also administered
through a feeding tube), immune globulin, other medications and related
clinical/administrative support services
|Home medical equipment   |  | Provision of patient safety items,
ambulatory aids and in-home equipment, such as wheelchairs and hospital beds                                                                                                            

Strategy

Key elements of
Aprias strategy are as follows:

Maintain Focus on
Existing Service Offerings.Aprias principal focus is on growth in
its core businesses of home respiratory therapy, home infusion therapy and home medical
equipment. Offering all three service lines gives Apria a competitive advantage with its
managed care, hospital and physician customers and enables it to maintain a diversified
revenue base. Through specific growth initiatives that enhance the companys clinical
offering, Apria continues its emphasis on growth in the home respiratory therapy line,
which historically has produced higher gross margins than the other service lines.

Supplement Internal
Growth with Selective Acquisitions.Apria continues to pursue strategically
complementary acquisition opportunities, with an emphasis on home respiratory therapy
businesses. Apria operates in a highly fragmented market, which provides an opportunity to
drive growth through acquisitions. During 2004, Apria completed 27 acquisitions, comprised
largely of respiratory therapy businesses, for an aggregate consideration of approximately
$148.7 million. The acquisitions expanded Aprias presence in markets in the
Southeast, West and Northeast, and position it to service a larger percentage of
managed care customers in the future.

Reduce Costs and
Increase Margins and Cash Flows.Aprias management continues to
develop and apply best practices and productivity improvement programs
throughout the company with the aim of achieving greater standardization and enhanced
productivity. Success with such programs has resulted in reduced costs and increased
margins and cash flow. Apria has implemented standardized clinical and delivery models,
billing and collection practices, purchasing processes and common operating procedures.
Apria continues to focus resources on identifying opportunities for further productivity
improvements.

Evaluate
Opportunities to Expand Offerings in Home Healthcare.Apria believes that
with the aging of the U.S. population, the resulting increases in medical costs and
utilization of healthcare services will lead to an expansion of the number of services
provided in the home. Providing such services in the home should reduce healthcare costs
for the patient as well as enhance patient convenience. Technological advances are also
expected to contribute to additional expansion of the domestic home healthcare market.
Apria will continue to explore new business opportunities with a focus on identifying
unfulfilled healthcare needs of Aprias existing patient population and evaluating
the business opportunity associated with each. Management expects that these
opportunities, upon determining their viability and scalability, will result
in the future expansion of services that Apria will offer in the home.

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Service Lines

In each of its three
service lines, Apria can provide patients with a variety of clinical and administrative
support services, as well as related products and supplies, most of which are prescribed
by a licensed physician as part of a care plan. These services include:

- providing in-home clinical respiratory care, infusion and respiratory pharmacy management and high-tech infusion
nursing;
- educating patients and their caregivers about illnesses and providing them with written instructions about home
safety, self-care and the proper use of their equipment;
- monitoring patients individualized treatment plans;
- reporting patient progress and status to the physician and/or managed care organization;
- providing in-home delivery and set-up of equipment and/or supplies;
- maintaining and repairing equipment; and
- processing claims to third-party payors, billing and collecting patient co-pays and deductibles.

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

|                             | Year Ended December 31,
|---------------------------- | -----------------------
|
|
|
|Home respiratory therapy     |                        
|Home infusion therapy        |                        
|Home medical equipment/other |                        
|                             |                        
|Total net revenues           |                        
|                             |                        

Home Respiratory Therapy.Apria provides home respiratory therapy services to patients with a variety of
conditions, including:

- chronic obstructive pulmonary diseases such as emphysema, chronic bronchitis and asthma;
- nervous system-related respiratory conditions such as Lou Gehrigs disease and quadriplegia;
- obstructive sleep apnea;
- congestive heart failure; and
- lung cancer.

Apria employs a nationwide clinical staff of respiratory
care professionals to provide direct patient care, monitoring and other support services
to its home respiratory therapy patients under physician-directed treatment plans and in
accordance with Aprias proprietary acuity program.

Apria derives
approximately 71% of its respiratory therapy revenues from the provision of oxygen
systems, home ventilators, nebulizers and home-delivered respiratory medications. The
company derives most of its remaining respiratory revenues from the provision of:

- infant apnea monitors;
- continuous positive airway pressure devices; and
- noninvasive positive pressure ventilation.

Home Infusion
Therapy.Home infusion therapy involves the administration of a drug or nutrient
directly into the body intravenously through injection or catheterization. Examples of
such therapies include:

- total parenteral (intravenous) nutrition;
- anti-infective and anti-fungal medications;
- chemotherapy; and
- pain management.

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

Depending on the therapy,
a broad range of venous access devices and pump technologies may be used to facilitate
homecare and patient independence. Apria employs licensed pharmacists and registered
high-tech infusion nurses who specialize in the delivery of home infusion therapy. They
are available to respond to emergencies and questions regarding therapy 24 hours a day,
seven days a week and to provide initial and ongoing training and education to the patient
and caregiver. Other support services include patient service, supply replenishment, pump
management, preventive maintenance, assistance with insurance questions and outcome
reporting. Apria currently operates 30 pharmacy locations nationwide to serve its home
infusion patients.

Home Medical
Equipment/Other.Aprias primary emphasis in the home medical equipment
service line is on the provision of equipment to assist patients with ambulation, safety
and general care in and around the home. The company also offers rehabilitation products
in selective markets in the United States. Such products include customized seating and
mobility equipment. Aprias integrated service approach allows patients, hospital and
physician referral sources and managed care systems accessing either respiratory or
infusion therapy services to also access needed home medical equipment through a single
source.

As Aprias managed
care customer base has grown, management has recognized the need to expand its ability to
provide value-added services to these customers. Rather than provide certain non-core
services directly, Apria sometimes aligns itself with other segment leaders, such as home
health nursing organizations, providers of home-delivered routine medical supplies or
large drug/supply wholesalers, through formal relationships or ancillary networks.

Organization and Operations

Organization.Aprias approximately 475 branch locations are organized
          into four geographic divisions, which are further divided into 14 geographic
          regions. Each of the regions is operated as a separate business unit and
          consists of a number of branches and a regional office. The regional office
          provides each of its branches with key support services such as billing,
          purchasing, equipment maintenance, repair and warehousing. The branch delivers
          home healthcare products and services to patients in their homes and other care
          sites through the companys delivery fleet, qualified delivery
          professionals and clinical employees.

Although Apria generally
operates its regions as separate business units, the companys sales and business
operations functions are vertically integrated. The operations function is further divided
into receivables management, clinical services, logistics, regulatory compliance and
acquisition integration. Through this structure, all functions that are performed at the
region level have direct reporting and accountability to corporate headquarters. Apria
believes that this structure provides control over and consistency among its regions and
branches. In accordance with Aprias strategy to identify opportunities for
efficiencies and productivity improvements, management is evaluating the feasibility of
centralizing certain functions that are currently performed at the region or branch level.

Corporate
Compliance.As a leader in the home healthcare industry, Apria has
implemented a compliance program to further the companys commitment to providing
quality home healthcare services and products while maintaining high standards of ethical
and legal conduct. Apria believes that operating its business with integrity and in full
compliance with applicable regulations is essential. Aprias Corporate Compliance
Program includes a written Code of Ethical Business Conduct that employees receive as part
of their initial orientation process. The program is designed to accomplish the goals
described above through employee education, a confidential disclosure program, written
policy guidelines, periodic reviews, frequent reinforcement, compliance audits, a formal
disciplinary component and other programs. Compliance oversight is provided by the
Corporate Compliance Committee of the companys Board of Directors which meets
quarterly in conjunction with Aprias internal Corporate Compliance Committee,
consisting of senior and mid-level management personnel from various functional
disciplines. See Business  Risk Factors  Federal Investigation.

Internal Audit.Apria has an internal audit function with direct reporting to the Audit
Committee of the Board of Directors to provide an ongoing assessment of Aprias
system of disclosure controls and procedures and internal control over financial
reporting. The internal audit department is responsible for both operational and financial
reviews of the companys operations, monitoring compliance with policies and
procedures, identification and development of best practices within the organization and
confirming compliance with the requirements of the Sarbanes-Oxley Act of 2002.

Operating
Systems and Controls.Aprias business is dependent, to a
substantial degree, upon the quality of its operating and field information systems for
proper contract administration, accurate order entry and pricing, billing and collections,
as well as inventory and patient service equipment management. These systems provide
reporting that enables management to monitor and evaluate contract profitability.
Aprias information services department works closely with all of the corporate
departments to ensure that Aprias systems are compliant with government regulations
and payor requirements and to support their business improvement initiatives with
technological solutions.

Apria has established
performance indicators which measure operating results against expected thresholds for the
purpose of allowing all levels of management to identify and modify areas requiring
improvement and to monitor progress. Operating models with strategic targets have been
developed to move Apria toward more effectively managing the sales, customer service,
accounts receivable, clinical and distribution areas of its business. Aprias
management team is compensated using performance-based incentives focused on criteria such
as revenue growth and improvement in operating income.

Payors.Apria derives substantially all its revenues from third-party
          payors, including private insurers, managed care organizations, Medicare and
          Medicaid. For 2004, approximately 31% of Aprias net revenues were derived
          from Medicare and 7% from Medicaid. Generally, each third-party payor has
          specific requirements which must be met before claim submission will result in
          payment. Apria has policies and procedures in place to manage the claims
          submission process, including verification procedures to facilitate complete and
          accurate documentation.

Receivables
Management. Apria operates in an environment with complex requirements
governing billing and reimbursement for its products and services. Initiatives focused
specifically on receivables management such as system enhancements, process refinements
and organizational changes have resulted in improvement and consistency in key accounts
receivable indicators.

Apria is expanding its use
of technology in areas such as electronic claims submission and electronic funds transfer
with managed care organizations to more efficiently process business transactions. This
can expedite claims processing and reduce the administrative cost associated with this
activity for both Apria and its customers/payors. Apria now submits approximately 75% of
its claims electronically. Management is also focusing resources on certain large
third-party payors to develop internal expertise with the payors unique
reimbursement requirements, helping to reduce subsequent denials and shorten the related
collection periods. Aprias policy is to collect co-payments from the patient or
applicable secondary payor. In the absence of a secondary payor, Apria generally requires
the co-payment at the time the patient is initially established with the product/service.
Subsequent months rental fees are billed to the patient. Management is also seeking
to streamline the related processes to maximize the co-payment collection rate.

Marketing

Through its field sales
force, Apria markets its services primarily to physicians, managed care organizations,
hospitals, medical groups, home health agencies and case managers. Apria has developed and
put into practice several marketing initiatives, including but not limited to:

Automated Call
Routing Through a Single Toll-Free Number.This initiative allows select
managed care organizations to reach any of Aprias locations and to access the full
range of Apria services through a single central telephone number: 1-800-APRIA-88.

Accreditation by the
Joint Commission on Accreditation of Healthcare Organizations or JCAHO.JCAHO is a nationally recognized organization that develops standards for
various healthcare industry segments and monitors compliance with those standards through
voluntary surveys of participating providers. As the home healthcare industry has grown,
the need for objective quality measurements has increased. Accreditation by JCAHO entails
a lengthy voluntary review process that is conducted every three years. Accreditation is
widely considered a prerequisite for entering into contracts with managed care
organizations at every level. Because accreditation is expensive and time consuming, not
all providers choose to undergo the process. All of Aprias branch locations are
accredited by or in the process of receiving accreditation from JCAHO.

Essential Care
Model. Apria has developed the Essential Care Model, a proprietary model
that defines the services, supplies and products delivered in conjunction with prescribed
homecare equipment and therapies. The Essential Care Model is used to establish consistent
and clear expectations for referral sources, payors and patients.

Physician Relations.Aprias physician relations group places phone calls to physician
offices in an effort to educate them about homecare and to stimulate interest in and
awareness of Apria and its products and services. Physician relations representatives work
closely with sales professionals throughout the country to identify, develop and maintain
quality relationships.

Patient Satisfaction
and Complaint Resolution Process.Apria has a centralized patient
satisfaction survey function that periodically conducts targeted member satisfaction
studies for key managed care organizations as specified by the various contractual
arrangements. The same centralized group manages a complaint resolution process through
which service improvements are identified and implemented at the field level. The company
believes that both centralized processes afford it visibility to centralized performance
improvement data and trends that enable it to amend policies and procedures as necessary
to meet the needs of patients and referral sources.

Apria Great
Escapes® Travel Program. Aprias 475-branch network
facilitates travel for patients who require oxygen, home infusion or other products,
services and therapies. Apria coordinates equipment and service needs for thousands of
traveling patients annually, which enhances their mobility and quality of life.

Sales

Apria employs over 560
sales professionals whose primary responsibility is to target key referral sources to
generate new or renewal patient referrals or prescriptions (as applicable) for all of its
service lines. Key customers include but are not limited to, physicians and their staffs,
hospital-based healthcare professionals and managed care organizations. Apria provides its
sales professionals with the necessary clinical and technical training to represent
Aprias major service offerings of home respiratory therapy, home infusion therapy
and home medical equipment. As larger segments of the marketplace become involved with
managed care, specific portions of the sales forces working knowledge of pricing,
contracting and negotiating and specialty-care management programs are being enhanced as
well.

An integral component of
Aprias overall sales strategy is to increase volume through managed care
organizations and traditional physician referral channels. Specific growth initiatives
designed to increase customer awareness of Aprias clinical and operational programs
have been launched with the goal of garnering a greater share of the traditional market.
The ultimate decision makers for healthcare services vary greatly, from closed model
managed care organizations to preferred provider networks, which are controlled by more
traditional means. Aprias selling structure and strategies are designed to adapt to
changing market factors and will continue to adjust as further changes in the industry
occur. Managed care organizations continue to represent a significant portion of
Aprias business in several of its primary metropolitan markets. No single account,
however, represented more than 8% of Aprias total net revenues for 2004. Among its
more significant managed care agreements during 2004 were Aetna US Healthcare, Kaiser
Health Plans and United HealthCare Group. Apria chose not to renew its contract with
Gentivas CareCentrix group upon its expiration in December 2004 due to contract
pricing differences. Apria also offers discount agreements and various fee-for-service
arrangements to hospitals or hospital systems whose patients have home healthcare needs.
See Business  Risk Factors  Pricing Pressures and
Managements Discussion and Analysis of Financial Condition and Results of
Operations.

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Competition

The segment of the
healthcare market in which Apria operates is highly competitive. In each of its service
lines there are a limited number of national providers and numerous regional and local
providers. The competitive factors most important in the regional and local markets are:

- reputation with referral sources, including local physicians and hospital-based professionals;
- accessibility and responsiveness;
- price of services;
- overall ease of doing business;
- quality of patient care and associated services; and
- range of home healthcare services and products.

In addition to the foregoing, the most important
competitive factors in the larger, national markets are:

- ability to service a wide geographic area;
- ability to develop and maintain contractual relationships with managed care organizations;
- access to capital;
- information systems capabilities; and
- accreditation by the JCAHO or a similar accrediting body.

Apria believes that it
competes effectively in each of its service lines with respect to all of the above factors
and that it has an established record as a quality provider of home respiratory therapy,
home medical equipment and home infusion therapy, as reflected by JCAHO accreditation of
Aprias branches.

The segment of the
healthcare market in which Apria operates is highly competitive. In each of its service
lines there are a number of national providers and numerous regional and local providers.
Among the national providers with which Apria directly competes are, American HomePatient,
Coram Healthcare, Critical Care Systems, Lincare Holdings, Option Care and Rotech
Healthcare. Other types of healthcare providers, including industrial gas manufacturers,
individual hospitals and hospital systems, home health agencies and health maintenance
organizations have entered, and may continue to enter, the market to compete with
Aprias various service lines. Depending on their business strategies and financial
position, it is possible that Aprias competitors may have, or may obtain,
significantly greater financial and marketing resources than Apria. See Business
 Risk Factors  Pricing Pressures.

Government Regulation

Apria is subject to
extensive government regulation, including numerous laws directed at preventing fraud and
abuse and laws regulating reimbursement under various government programs, as more fully
described below. Apria maintains several programs designed to minimize the likelihood that
it would engage in conduct or enter into contracts in violation of the fraud and abuse
laws. Contracts subject to these laws are reviewed and approved by corporate contract
services and/or legal department personnel. Apria also maintains various educational
and audit programs designed to keep its managers updated and informed on developments with respect
to the fraud and abuse laws and to reinforce to all employees the companys policy of
strict compliance in this area. While Apria believes its discount agreements, billing
contracts and various fee-for-service arrangements with other healthcare providers comply
with applicable laws and regulations, Apria cannot provide any assurance that current or
future administrative or judicial interpretations of existing laws or legislative
enactment of new laws will not have a material adverse effect on Aprias business.

Medicare and
Medicaid Reimbursement.In 2004, approximately 38% of Aprias revenues
are being reimbursed under arrangements with Medicare and Medicaid. No other third-party
payor represents 8% or more of the companys revenues. The majority of the
companys revenues are derived from fees charged for patient care under
fee-for-service arrangements. Revenues derived from capitation arrangements represent less
than 10% of total net revenues for all periods presented.

Medicare Reimbursement. In
December 2003, the Medicare Prescription Drug,
          Improvement and Modernization Act of 2003, which is herein referred to as the
Medicare Modernization Act, became law. The Medicare Modernization Act includes a number of
          provisions that will affect Medicare Part B reimbursement policies for items
          and services provided by Apria, the most significant of which are:

| |  | 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 went into effect January 1, 2005.  The reimbursement reduction for oxygen, however, is delayed
until the Office of the Inspector General provides the Centers for Medicare and Medicaid
Services, or CMS, with the additional data required to
establish pricing.  Providers are currently being reimbursed for oxygen based on 2004 fee schedules, with
an indication from CMS that no retroactive adjustment will be made once the new pricing is in
effect.  Further, a freeze on annual payment increases for
durable medical equipment has been instituted from 2004 through 2008.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | Reimbursement reduction 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, as defined by the Medicare Modernization Act, plus 6%, plus a separate
despensing fee per patient episode.  The dispensing fees for 2005 have been established at $57.00
for a 30-day supply of medications and $80.00 for a 90-day supply.                                                                                                                                                                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | Establishment of a competitive bidding program  Such a program would require
that suppliers wishing to provide certain items to beneficiaries submit bids to Medicare.
The program, for as yet
unspecified durable medical equipment items and services, is to be transitioned into
(i) 10 of the largest metropolitan statistical areas in 2007; (ii) 80 of the largest
metropolitan statistical areas in 2009; and (iii) additional areas after 2009.  The
legislation contains special provisions for rural areas.                                                                                                                                                                                                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | Reimbursement for home infusion therapy under Medicare Part D  Currently, a limited
number of infusion therapies, supplies and equipment is covered by Medicare Part B.  The
Medicare Modernization Act provides expanded coverage for home infusion drugs.  The industry
is currently working with CMS to further define the coverage and payment policies that
will govern the administration of this benefit, which takes effect in 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | 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 a stated effort to attract more
Medicare beneficiaries to managed care models.  The company maintains contracts to
provide respiratory, 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 starting in mid-2006.                                                                                                                                                                                                                                                                                                                    

Aprias management
estimates that the revision to inhalation drug reimbursement in 2004 resulted in a revenue
reduction from 2003 levels of approximately $15 million. Once the 2005 oxygen fee
schedules are released, management will provide an estimate of the aggregate impact of all
reimbursement reductions that will be in effect for 2005. The impact of the competitive
bidding program scheduled to commence in 2007 cannot be estimated at this time.

The Balanced Budget Act of
1997 contained several provisions that lowered Aprias Medicare reimbursement levels.
Subsequent legislationthe Medicare Balanced Budget Refinement Act of 1999 and the
Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act of
2000mitigated some of the effects of the original legislation. The Medicare
Modernization Act also addressed some of the issues pending from the earlier legislation.
However, still pending from the 1997 Legislation is the streamlined authority granted to
the Secretary of 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. In December 2002, CMS issued an interim
final rule that establishes 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. As of this date, neither
CMS nor the durable medical equipment regional carriers have used the expedited authority.

Medicaid
Reimbursement. Since 2001, some states have adopted alternative pricing
methodologies for certain drugs and biologicals under the Medicaid program. In at least 22
states, these changes have reduced the level of reimbursement received by industry
participants without a corresponding offset or increase to compensate for the service
costs incurred. In several of those states, Apria has elected to stop accepting new
Medicaid patient referrals for the affected drugs. Apria is continuing to provide services
to patients already on service, and for those who receive other Medicaid-covered
respiratory, home medical equipment or infusion therapies, if the reimbursement levels for
those services remain adequate. Further, some states are considering other reductions in
Medicaid reimbursement as they work through their respective states budget process.
Apria management cannot predict the outcome of such budget negotiations and whether other
states will consider reductions as well.

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

HIPAA. 
The Health Insurance Portability and Accountability Act of 1996, or HIPAA, is comprised of
a number of components. Pursuant to
the administrative simplification section of HIPAA, HHS has issued multiple
regulations, each with its own compliance date. Regulations under
HIPAA that may have a material effect on Apria govern the following:

| |  | privacy of individually  identifiable  health  information - compliance date: April 14, 2003 - Apria was
materially compliant by this date;                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                          
| |  | standard electronic  transaction and code sets - compliance date: October 16, 2003 - Apria was materially
compliant by this date;                                                                                                                        
| |   |                                                                                                                                                                                                                                                          
| |  | electronic  security of individually  identifiable  health  information - compliance  date:  April 21, 2005
- Apria  expects to be materially compliant with these regulations by the compliance date;                                                   
| |   |                                                                                                                                                                                                                                                          
| |  | standards for a unique national health identifier for healthcare providers for use in
connection with standard transactions  compliance date: May 23, 2007  Apria
expects to be materially compliant with these regulations by the compliance date; and
| |   |                                                                                                                                                                                                                                                          
| |  | the first installment of an interim enforcement rule, when issued in full, will address
both substantive and procedural requirements for the imposition of civil monetary
penalties.                                                                     

Apria faces potential
criminal or civil sanctions if it does not comply with existing or new laws and
regulations related to patient health information, use of standard transaction and code
sets and use of standard identifiers. New health information standards, whether
implemented pursuant to HIPAA or otherwise, could have a significant effect on the manner
in which Apria handles healthcare related data and communicates with payors.

Anti-Kickback
Statute.As a provider of services under the Medicare and Medicaid
programs, Apria is subject to the Medicare and Medicaid fraud and abuse laws, commonly
known as the anti-kickback statute. At the federal level, the anti-kickback
statute prohibits any bribe, kickback or rebate in return for the referral of patients,
products or services covered by federal healthcare programs. Federal healthcare programs
have been defined to include plans and programs that provide health benefits funded by the
United States Government, including Medicare, Medicaid and TRICARE (formerly known as the
Civilian Health and Medical Program of the Uniformed Services), among others. Violations
of the anti-kickback statute may result in civil and criminal penalties and exclusion from
participation in federal healthcare programs.

In addition, a number of
states in which Apria operates have laws that prohibit certain direct or indirect payments
(similar to the anti-kickback statute) or fee-splitting arrangements between healthcare
providers, if such arrangements are designed to induce or encourage the referral of
patients to a particular provider. Possible sanctions for violations of these restrictions
include exclusion from state-funded healthcare programs, loss of licensure and civil and
criminal penalties. Such statutes vary from state to state, are often vague and have
seldom been interpreted by courts or regulatory agencies.

Physician
Self-Referrals.Certain provisions of the Omnibus Budget Reconciliation Act
of 1993, commonly known as Stark II, prohibit health service providers such as Apria,
subject to certain exceptions, from submitting claims to the Medicare and Medicaid
programs for designated health services if Apria has a financial relationship with the
physician making the referral for such services or with a member of such physicians
immediate family. The term designated health services includes several
services commonly performed or supplied by Apria, including durable medical equipment and
home health services. In addition, financial relationship is broadly defined
to include any ownership or investment interest or compensation arrangement pursuant to
which a physician receives remuneration from the provider at issue. Violations of Stark II
may result in loss of Medicare and Medicaid reimbursement, civil penalties and exclusion
from participation in the Medicare and Medicaid programs. In addition, a number of the states in
which Apria operates have similar prohibitions on physician self-referrals. Finally,
recent enforcement activity and resulting case law developments have increased the legal
risks of physician compensation arrangements that do not satisfy the terms of an exception
to Stark II, especially in the area of joint venture arrangements with physicians.

False Claims.The False Claims Act imposes civil and criminal liability on individuals or
entities that submit false or fraudulent claims for payment to the government. Violations
of the False Claims Act may result in treble damages, civil monetary penalties and
exclusion from the Medicare and Medicaid programs.

The False Claims Act also
allows a private individual to bring a qui tam suit on behalf of the government
against a healthcare provider for violations of the False Claims Act. A qui tam
suit may be brought by, with only a few exceptions, any private citizen who has material
information of a false claim that has not yet been previously disclosed. Even if
disclosed, the original source of the information leading to the public disclosure may
still pursue such a suit. Although a corporate insider is often the plaintiff in such
actions, an increasing number of outsiders are pursuing such suits.

In a qui tamsuit,
the private plaintiff is responsible for initiating a lawsuit that may eventually lead to
the government recovering money of which it was defrauded. After the private plaintiff has
initiated the lawsuit, the government must decide whether to intervene in the lawsuit and
become the primary prosecutor. In the event the government declines to join the lawsuit,
the private plaintiff may choose to pursue the case alone, in which case the private
plaintiffs counsel will have primary control over the prosecution (although the
government must be kept apprised of the progress of the lawsuit and will still receive at
least 70% of any recovered amounts). In return for bringing the suit on the
governments behalf, the statute provides that the private plaintiff is entitled to
receive up to 30% of the recovered amount from the litigation proceeds if the litigation
is successful. Recently, the number of qui tam suits brought against healthcare
providers has increased dramatically. In addition, a number of states have enacted laws
modeled after the False Claims Act that allow those states to recover money which was
fraudulently obtained by a healthcare provider from the state (e.g., Medicaid funds
provided by the state). See Business  Risk Factors  Federal
Investigation and Legal Proceedings.

Other Fraud and
Abuse Laws.HIPAA created, in part, two new federal crimes: Health
Care Fraud and False Statements Relating to Health Care Matters. The
Health Care Fraud statute prohibits executing a knowing and willful scheme or artifice to
defraud any healthcare benefit program. A violation of this statute is a felony and may
result in fines and/or imprisonment. The False Statements statute prohibits knowingly and
willfully falsifying, concealing or covering up a material fact by any trick, scheme or
device or making any materially false, fictitious or fraudulent statement in connection
with the delivery of or payment for healthcare benefits, items or services. A violation of
this statute is a felony and may result in fines and/or imprisonment.

In recent years, the
federal government has made a policy decision to significantly increase the financial
resources allocated to enforcing the healthcare fraud and abuse laws. In addition, private
insurers and various state enforcement agencies have increased their level of scrutiny of
healthcare claims in an effort to identify and prosecute fraudulent and abusive practices
in the healthcare area.

Healthcare Reform
Legislation.Economic, political and regulatory influences are causing
fundamental changes in the healthcare industry in the United States. Various healthcare
reform proposals are formulated and proposed by the legislative and administrative
branches of the federal government on a regular basis. In addition, some of the states in
which Apria operates periodically consider various healthcare reform proposals. Apria
anticipates that federal and state governments will continue to review and assess
alternative healthcare delivery systems and payment methodologies and public debate of
these issues will continue in the future. Due to uncertainties regarding the ultimate
features of reform initiatives and their enactment and implementation, Apria cannot
predict which, if any, of such reform proposals will be adopted, or when they may be
adopted, or that any such reforms will not have a material adverse effect on Aprias
business and results of operations.

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

Employees

As of January 31, 2005,
Apria had 11,178 employees, of which 9,652 were full-time and 1,526 were part-time. The
companys employees are not currently represented by a labor union or other labor
organization, except for 3 employees in New York.

Website Access to Reports

Aprias Annual
Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, all
amendments thereto and other filings are made available on the companys website as
soon as reasonably practicable after such reports are filed with or furnished to the
Securities and Exchange Commission. Aprias Code of Ethical Business Conduct is also
available on the companys website. In the event Apria makes any amendment to, or
grants any waiver from, a provision of the Code of Ethical Business Conduct that applies to
the principal executive officer, principal financial officer or principal accounting
officer that requires disclosure under applicable Securities and Exchange Commission
rules, Apria will disclose such amendment or waiver and the reasons therefor on its
website. Aprias website can be found at www.apria.com.

---

Executive Officers of the Registrant

Set forth below are the names, ages, titles
with Apria and past and present positions of the persons serving as Aprias executive officers
as of March 15, 2005.

|Name and Age               |  | Office and Experience                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
|Lawrence M. Higby, 59      |  | Chief Executive Officer and Director.
Mr. Higby was appointed Chief Executive Officer and Director in February 2002.  Mr. Higby also served as
Aprias Chief Executive Officer on an interim basis from January through May 1998.  He joined Apria in
November 1997 as President and Chief Operating Officer.  Prior to joining Apria, Mr. Higby served as President and Chief Operating
Officer of Unocals 76 Products Company and Group Vice President of Unocal Corporation from 1994 to 1997.
From 1986 to 1994, Mr. Higby held various positions with the Times Mirror Company, including Executive Vice
President, Marketing of the Los Angeles Times and Chairman of the Orange County Edition.
In 1986, Mr. Higby served as President and Chief Operating Officer of Americas Pharmacy, Inc., a division
of Caremark, Inc.              
|Lawrence A. Mastrovich, 43 |  | President and Chief Operating Officer.
 Mr. Mastrovich joined Apria
as Chief Operating Officer in April 2002. From August 2001 to April 2002,
Mr. Mastrovich served as President and Chief Operating Officer of TechRx, a
pharmacy technology company. From April 2001 to August 2001, Mr. Mastrovich
served as Aprias Executive Vice President, Sales. From October 1998 to April
2001, Mr. Mastrovich served as Aprias Executive Vice President, Revenue Management. From
December 1997 to October 1998, Mr. Mastrovich served as Division Vice President, Operations for
Aprias Northeast Division.  Prior to that time, Mr. Mastrovich had served as a Regional Vice
President for Apria and its predecessor, Homedco, since 1994 and in various other capacities from 1987 to 1994.                                                       
|Amin I. Khalifa, 51        |  | Executive Vice President and
Chief Financial Officer. Mr. Khalifa joined Apria as Executive Vice
President and Chief Financial Officer in October 2003. From June 1999 to
September 2003, Mr. Khalifa served as Vice President and Chief Financial Officer
of Beckman Coulter, Inc., a manufacturer of diagnostic laboratory equipment and
instruments. From October 1996 to June 1999, Mr. Khalifa served as the Chief Financial
Officer of the Agricultural Sector of Monsanto Company, a life sciences company.  From
1994 to October 1996, Mr. Khalifa served as Senior Vice President, Chief Financial Officer for
Aetna Health Plans and as Senior Vice President, Strategy and Investor Relations for Aetna, Inc.
 From 1979 to 1994, Mr. Khalifa held a succession of senior financial management and
operating positions at PepsiCo, Inc.
|Anthony S. Domenico, 47    |  | Executive Vice President, Sales.
Mr. Domenico joined Apria as Executive Vice President, Sales in August 2001. From
January 1998 to August 2001, Mr. Domenico served as Chief Operating Officer and Senior Vice
President of Sales and Operations of Perigon Medical Distribution, Inc., a wholesale medical
supply and equipment distributor. From June 1995 to
January 1998, Mr. Domenico served as Regional Vice President of Aprias Southern California
Region.  From 1984 to June 1995, Mr. Domenico held various positions, including Corporate
Assistant Controller, with Aprias predecessor, Homedco.                                                                                                                                                                                                                                    

---

Risk Factors

Apria has identified the
following important factors that could cause actual results to differ materially from
those projected in any forward-looking statements the company may make from time to time.

Collectibility of Accounts
ReceivableAprias failure to maintain its controls and processes over
billing and collecting or the deterioration of the financial condition of its
payors could have a significant negative impact on its results of operations and
financial condition.

The collection of accounts
receivable is one of Aprias most significant challenges and requires constant focus
and involvement by management and ongoing enhancements to information systems and billing
center operating procedures. Further, some of Aprias payors and/or patients may
experience financial difficulties, or may otherwise not pay accounts receivable when due,
resulting in increased write-offs. There can be no assurance that Apria will be able to
maintain its controls and processes over billing or its current levels of collectibility
and days sales outstanding in future periods. If Apria is unable to properly bill and
collect its accounts receivable, its results will be adversely affected.

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.
          In December 2003, the Medicare Modernization Act became law. The Medicare
          Modernization Act includes a number of provisions that negatively affect
          Medicare Part B reimbursement policies for items and services provided by Apria,
          the most significant of which are:

| |  | 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
went into effect January 1, 2005. The reimbursement reduction for oxygen, however, is delayed until
the Office of the Inspector General provides CMS with the additional data required to
establish pricing. Providers are currently being reimbursed for oxygen based on 2004 fee schedules,
with an indication from CMS that no retroactive adjustment will be made once the new
pricing is in effect. Further, a freeze on annual payment increases for durable medical
equipment has been instituted from 2004 through 2008.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | Reimbursement reduction 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, as
defined by the Act, plus 6%, plus a separate dispensing fee per patient episode. The
dispensing fees for 2005 have been established at $57.00 for a 30-day supply of
medications and $80.00 for a 90-day supply.                                                                                                                                                                                                                                                       
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | Establishment of a competitive bidding program  Such a program would require that
suppliers wishing to provide certain items to beneficiaries submit bids to Medicare. The
program, for as yet unspecified durable medical equipment items and services, is to be
transitioned into (i) 10 of the largest metropolitan statistical areas in 2007; (ii) 80 of
the largest metropolitan statistical areas in 2009; and (iii) additional areas after 2009.
The legislation contains special provisions for rural areas.                                                                                                                                                                                                                                                                                                       

Aprias management
estimates that the revision to inhalation drug reimbursement in 2004 resulted in a revenue
reduction from 2003 levels of approximately $15 million. Once the 2005 oxygen fee
schedules are released, management will provide an estimate of the aggregate impact of all
reimbursement reductions that will be in effect for 2005. The impact of the competitive
bidding program scheduled to commence in 2007 cannot be estimated at this time.

Medicaid.
          Since 2001, some states have adopted alternative pricing methodologies for
          certain drugs and biologicals under the Medicaid program. In at least 22 states,
          these changes have reduced the level of reimbursement received by industry
          participants without a corresponding offset or increase to compensate for the
          service costs incurred. In several of those states, Apria has elected to stop
          accepting new Medicaid patient referrals for the affected drugs. Apria is
          continuing to provide services to patients already on service, and for those who
          receive other Medicaid-covered respiratory, home medical equipment or infusion
          therapies, if the reimbursement levels for those therapies remain adequate.
          Further, some states are considering other reductions in Medicaid reimbursement
          as they work through their respective states budget process. Apria
          management cannot predict the outcome of such budget negotiations and whether
          other states will consider reductions as well.

---

Medicare and Medicaid
payments accounted for approximately 31% and 7% of Aprias 2004 net revenues,
respectively. Apria cannot be certain of the ultimate impact of the latest Medicare
legislation or provide assurance to its investors that additional reimbursement reductions
will not be made.

Federal InvestigationThe outcome of the federal
governments investigation of Aprias Medicare and other government
billing practices could have a material negative impact on Aprias operations
and financial condition.

As previously reported,
since mid-1998 Apria has been the subject of an investigation conducted by the U.S.
Attorneys office in Los Angeles and the U.S. Department of Health and Human
Services. The investigation concerns the documentation supporting Aprias billing for
services provided to patients whose healthcare costs are paid by Medicare and other
federal programs. Apria is cooperating with the government and has responded to various
document requests and subpoenas.

The investigation relates
to two civil qui tam lawsuits against Apria filed under seal on behalf of the
government. In 2004 the government for the first time provided Apria with redacted copies
of the complaints in these lawsuits. On the copies provided to Apria, the names of the
plaintiffs, the courts and the dates instituted were blacked out. In general, both
complaints allege that for an unspecified period of time commencing in 1995 Apria
knowingly engaged in various schemes to defraud the government by submitting false claims
for payment and by manipulating and falsifying documentation in support of such claims.
The complaints do not quantify the alleged damages sought and do not identify any of the
particular individuals, patient accounts or Apria facilities alleged to be involved in any
improper billing. To date, the U.S. Attorneys office has not informed Apria of any
decision to intervene in the qui tam actions; however, it could reach a decision
with respect to intervention at any time.

Apria has acknowledged
that there may be errors and omissions in supporting documentation affecting a portion of
its billings. However, it believes that most of the alleged documentation errors and
omissions should not give rise to any liability. Accordingly, Apria believes that most of
the assertions made by the government and the qui tam plaintiffs are legally and
factually incorrect and that Apria is in a position to assert numerous meritorious
defenses.

During the past several
years, Apria and representatives of the government have been analyzing and discussing the
documentation underlying Aprias billings to the federal government for services
provided by Apria from mid-1995 through 1998 to a sample of 300 patients selected by the
government. Government representatives and counsel for the plaintiffs asserted in 2001
that, by a process of extrapolation from the patient files in the sample to all of
Aprias government billings during the sample period, Apria could have a very
significant liability to the government under the False Claims Act. Differences between
Apria and the government have been reduced on a number of issues as a result of the
analysis and discussions referred to above. Consequently, while Aprias potential
liability could still be very material, Apria believes that the amount the government is
now seeking is significantly less than asserted in 2001.

Apria and government
representatives are continuing to explore whether it will be possible to resolve this
matter on a basis that would be considered fair and reasonable by all parties.
Notwithstanding the progress made to date in reducing the differences between Apria and
the government, there remain significant disagreements as to the number and the legal
implications of billing documentation deficiencies in the 300-patient sample. Accordingly,
Apria cannot provide any assurances as to the outcome of its discussions with the
government, or as to the outcome of the qui tam litigation in the absence of a
settlement. Management cannot estimate the possible loss or range of loss that may result
from these proceedings and, therefore, has not recorded any related accruals.

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

Operating Systems and ControlsAprias
failure to successfully implement computer and other system modifications designed
to maximize productivity could ultimately have a significant negative impact on its
results of operations and financial condition.

Aprias management
has identified a number of areas throughout its operations where it intends to modify the
current processes or systems in order to attain a higher level of productivity. The
ultimate cost savings expected from the successful design and implementation of such
initiatives will be necessary to help offset the impact of Medicare reimbursement
reductions and continued downward pressure on pricing. Aprias failure to
successfully implement its planned system modifications and other productivity
improvements could have a significant impact on its operations and financial condition.
Further, the implementation of these system changes could have a disruptive effect on
related transaction processing and operations.

Government Regulation; Healthcare
ReformNon-compliance with laws and regulations applicable to Aprias
business and future changes in those laws and regulations could have a material
adverse effect on Apria.

Stringent laws and
regulations at both the federal and state levels, requiring compliance with burdensome and
complex billing, substantiation and record-keeping requirements apply to Apria. Financial
relationships between Apria and physicians and other referral sources are subject to
strict limitations. In addition, strict licensing and safety requirements apply to the
provision of services, pharmaceuticals and equipment. Violations of these laws and
regulations could subject Apria to severe fines, facility shutdowns and possible exclusion
from participation in federal healthcare programs such as Medicare and Medicaid.
Government officials and the public will continue to debate healthcare reform. Changes in
healthcare law, new interpretations of existing laws, or changes in payment methodology
may have a dramatic effect on Aprias business and results of operations.

Pricing PressuresApria believes that continued
pressure to reduce healthcare costs could have a material adverse effect on the
company.

The current market
continues to exert pressure on healthcare companies to reduce healthcare costs, resulting
in reduced margins for home healthcare providers such as Apria. Larger group purchasing
organizations and supplier groups exert additional pricing pressure on home healthcare
providers. These include managed care organizations, which control an increasing portion
of the healthcare economy. Apria has a number of contractual arrangements with managed
care organizations and other parties, although no individual arrangement accounted for
more than 10% of Aprias net revenues in 2004.

The segment of the
healthcare market in which Apria operates is highly competitive. In each of its service
lines, there are a number of national providers and numerous regional and local providers.
Other types of healthcare providers, including industrial gas manufacturers, individual
hospitals and hospital systems, home health agencies and health maintenance organizations
have entered, and may continue to enter the market to compete with Aprias various
service lines. Some of these competitors have, or may obtain, significantly greater
financial and marketing resources than Apria that may increase pricing pressure and limit
Aprias ability to maintain or increase its market share.

Acquisition StrategyApria may not be able to
successfully integrate acquired businesses, which could have an adverse effect on
its results of operations and financial condition.

Aprias strategic
plan includes growth through the acquisition of other companies. Such growth involves a
number of risks, including:

- difficulties in integration;
- diversion of managements attention from day-to-day operations;
- loss of key personnel;
- the failure to realize anticipated benefits such as cost savings and revenue enhancements;
- the assumption of liabilities of an acquired business, including unforeseen liabilities; and
- difficulties related to assimilating the products, services, personnel and systems of an acquired business.

During 2004, Apria
completed 27 acquisitions for an aggregate consideration of approximately $148.7 million
and during 2003, Apria acquired 27 businesses for an aggregate consideration of
approximately $98.0 million.

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

ITEM 2.      
PROPERTIES

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

Apria has approximately
475 branch facilities that are organized into 14 regions. The region facilities usually
house a branch and various regional support functions such as warehousing, repair, billing
and infusion pharmacy. These facilities are typically located in light industrial areas
and generally range from 20,000 to 85,000 square feet. The typical branch facility, other
than those that share a building with a region, is a combination warehouse and office,
with approximately 50% of the square footage consisting of warehouse space. These branch
facilities, also located in light industrial areas, can range from 1,000 to 50,000 square
feet. Apria leases substantially all of its facilities with lease terms of ten years or
less.

ITEM 3.      
LEGAL PROCEEDINGS

As previously reported,
since mid-1998 Apria has been the subject of an investigation conducted by the U.S.
Attorneys office in Los Angeles and the U.S. Department of Health and Human
Services. The investigation concerns the documentation supporting Aprias billing for
services provided to patients whose healthcare costs are paid by Medicare and other
federal programs. Apria is cooperating with the government and has responded to various
document requests and subpoenas.

The investigation relates
to two civil qui tam lawsuits against Apria filed under seal on behalf of the
government. In 2004 the government for the first time provided Apria with redacted copies
of the complaints in these lawsuits. On the copies provided to Apria, the names of the
plaintiffs, the courts and the dates instituted were blacked out. In general, both
complaints allege that for an unspecified period of time commencing in 1995 Apria
knowingly engaged in various schemes to defraud the government by submitting false claims
for payment and by manipulating and falsifying documentation in support of such claims.
The complaints do not quantify the alleged damages sought and do not identify any of the
particular individuals, patient accounts or Apria facilities alleged to be involved in any
improper billing. To date, the U.S. Attorneys office has not informed Apria of any
decision to intervene in the qui tam actions; however, it could reach a decision
with respect to intervention at any time.

Apria has acknowledged
that there may be errors and omissions in supporting documentation affecting a portion of
its billings. However, it believes that most of the alleged documentation errors and
omissions should not give rise to any liability. Accordingly, Apria believes that most of
the assertions made by the government and the qui tam plaintiffs are legally and
factually incorrect and that Apria is in a position to assert numerous meritorious
defenses.

During the past several
years, Apria and representatives of the government have been analyzing and discussing the
documentation underlying Aprias billings to the federal government for services
provided by Apria from mid-1995 through 1998 to a sample of 300 patients selected by the
government. Government representatives and counsel for the plaintiffs asserted in 2001
that, by a process of extrapolation from the patient files in the sample to all of
Aprias government billings during the sample period, Apria could have a very
significant liability to the government under the False Claims Act. Differences between
Apria and the government have been reduced on a number of issues as a result of the
analysis and discussions referred to above. Consequently, while Aprias potential
liability could still be very material, Apria believes that the amount the government is
now seeking is significantly less than asserted in 2001.

Apria and government
representatives are continuing to explore whether it will be possible to resolve this
matter on a basis that would be considered fair and reasonable by all parties.
Notwithstanding the progress made to date in reducing the differences between Apria and
the government, there remain significant disagreements as to the number and the legal
implications of billing documentation deficiencies in the 300-patient sample. Accordingly,
Apria cannot provide any assurances as to the outcome of its discussions with the
government, or as to the outcome of the qui tam litigation in the absence of a
settlement. Management cannot estimate the possible loss or range of loss that may result
from these proceedings and, therefore, has not recorded any related accruals.

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

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

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

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

PART II

ITEM 5.      MARKET FOR THE REGISTRANTS
 COMMON EQUITY AND RELATED STOCKHOLDER     
              MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES

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

|                             |  | High   | Low   
|---------------------------- |  | ------ | ------
|Year ended December 31, 2004 |  |        |       
|First quarter                |  | $32.00 | $28.00
|Second quarter               |  | 30.74  | 27.44 
|Third quarter                |  | 32.00  | 26.25 
|Fourth quarter               |  | 34.95  | 26.97 
|Year ended December 31, 2003 |  |        |       
|First quarter                |  | $24.23 | $20.50
|Second quarter               |  | 25.10  | 22.45 
|Third quarter                |  | 29.00  | 24.42 
|Fourth quarter               |  | 31.69  | 25.00 

As of March 5, 2005, there
were 345 holders of record of Apria common stock. Apria has not paid any dividends since
its inception and does not intend to pay any dividends on its common stock in the
foreseeable future.

---

Equity Compensation Plans

The following table sets
forth information as of December 31, 2004 for Aprias equity compensation plans:

|Plan Category                                            |  | Number of Securitiesto be Issued Upon
Exercise ofOutstanding Options | Weighted AverageExercise Price of
Outstanding Options | Number ofSecurities RemainingAvailable for
Future Issuance
|-------------------------------------------------------- |  | -------------------------------------------------------------------- | ----------------------------------------------------- | ----------------------------------------------------------
|
|Equity compensation plans   approved by stockholders     |  |                                                                      | 5,091,407                                             |                                                           
|                                                         |  |                                                                      |                                                       |                                                           
|Equity compensation plans not   approved by stockholders |  |                                                                      | 608,738                                               |                                                           
|                                                         |  |                                                                      |                                                       |                                                           
|Totals                                                   |  |                                                                      | 5,700,145                                             |                                                           
|                                                         |  |                                                                      |                                                       |                                                           

Aprias 1998
Nonqualified Stock Incentive Plan is the only equity compensation plan that has not been
approved by stockholders. The plan was approved by the Board of Directors on December 15,
1998 and became effective as of that date. Upon stockholder approval of the 2003
Performance Incentive Plan, the ability to grant additional awards under the 1998 Plan was
terminated.

---

ITEM 6.      SELECTED FINANCIAL DATA

The following table
presents Aprias selected financial data for the five years ended December 31, 2004.
The data set forth below have been derived from Aprias audited Consolidated
Financial Statements and are qualified by reference to, and should be read in conjunction
with, the Consolidated Financial Statements and related notes thereto and
Managements Discussion and Analysis of Financial Condition and Results of
Operations included in this report.

|                                    | Year Ended December 31,
|----------------------------------- | -----------------------
|                                    |                        
|
|                                   
|Statements of Income Data:          |                        
|Net revenues                        |                        
|Net income                          |                        
|Basic net income per common share   |                        
|Diluted net income per common share |                        
|Balance Sheet Data:                 |                        
|Total assets                        |                        
|Long-term obligations, including    |                        
|current maturities                  |                        
|Stockholders equity                |                        

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Net income for 2004 reflects the
write-off of deferred debt issuance costs of $2.7 million associated with the
November 2004 refinancing.                                                                                                                                                                                                                                                                                                            
|(2) | The balance sheet data at December 31,
2003 reflects the issuance of convertible senior notes in the aggregate principal
amount of $250.0 million and the concurrent repurchase of common stock with $100.0 million
of the proceeds.  Net income per share for 2003 reflects the effect of the share
repurchase.                                                                                                                                     
|(3) | Net income for 2002 reflects the
impact of the favorable outcome of an income tax dispute that was settled in the fourth
quarter of 2002. The components of this impact include: income tax benefit
of $11.1 million, interest income of $4.0 million and related professional
fee expense of $1.7 million. Effective January 1, 2002, Apria adopted Statement
of Financial Accounting Standards No. 142 and accordingly ceased to amortize
goodwill.

Apria did not pay any cash dividends on its common stock
during any of the periods set forth in the table above.

---

ITEM 7.      
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
             
      OF OPERATIONS

Apria operates in the home
healthcare segment of the healthcare industry and provides services in the home
respiratory therapy, home infusion therapy and home medical equipment areas. In all three
lines, Apria provides patients with a variety of clinical 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 throughout the
United States through approximately 475 branch locations.

Strategy.
          Key elements of Aprias strategy are as follows:

| |  | Place principal focus on growth in its core businesses of home respiratory therapy, home
infusion therapy and home medical equipment. Offering all three service lines gives Apria
a competitive advantage with its managed care, hospital and physician customers, enabling
it to maintain a diversified revenue base. Through specific growth initiatives that
enhance the companys clinical offering, Apria continues its emphasis on growth in
the home respiratory therapy line, which historically has produced higher gross margins
than its home infusion therapy and home medical equipment service lines.                                                                                                                                                                                                                                                                                                                       
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | Supplement internal growth with strategic acquisitions. Apria operates in a highly
fragmented market, which provides an opportunity to drive growth through acquisition of
complementary businesses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | Develop and apply best practices and productivity improvement programs
throughout the company with the aim of achieving greater standardization and enhanced
productivity. Success with such programs results in reduced costs and increased margins
and cash flows. Apria has developed and implemented standardized clinical and delivery
models, billing and collection practices, purchasing processes and common operating
procedures. Apria continues to focus resources on identifying opportunities for further
productivity improvements.                                                                                                                                                                                                                                                                                                                                                                                       
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | Evaluate opportunities to expand offerings in home healthcare.Apria believes that
with the aging of the U.S. population, the resulting increases in medical costs and
utilization of healthcare services will lead to an expansion of the number of services
provided in the home. Providing such services in the home should reduce patient costs as
well as enhance patient convenience. Technological advances are also expected to
contribute to additional expansion of the domestic home healthcare market. Apria will
continue to evaluate new business opportunities. The focus is on identifying the
unfulfilled healthcare needs of Aprias existing patient population and evaluating
the potential business opportunity associated with each. Management expects that these
opportunities, upon determining their viability and scalability, will result in the future
expansion of services that Apria will offer in the home.

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 the most complex and subjective judgments of
management. Additionally, the accounting policies related to goodwill, long-lived assets
and income taxes require significant judgment.

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

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

Goodwill and
Long-lived Assets.Goodwill arising from business combinations represents the
excess of the purchase price over the estimated fair value of the net assets of the
acquired business. Pursuant to Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other Intangible Assets, goodwill is
tested annually for impairment or more frequently if circumstances indicate potential
impairment. Also, management tests for impairment of its intangible assets and long-lived
assets on an ongoing basis and whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Aprias goodwill impairment
test is conducted at a reporting unit level and compares each reporting
units fair value to its carrying value. The company has determined that its
geographic regions are reporting units under SFAS No. 142. The measurement of fair
value for each region is based on an evaluation of future discounted cash flows and is
further tested using a multiple of earnings approach. In projecting its reporting
units cash flows, management considers industry growth rates and trends, known and
potential reimbursement reductions, cost structure changes and local circumstances
specific to a region. Based on its tests and reviews, no impairment of its goodwill,
intangible assets or other long-lived assets existed at December 31, 2004. However, future
events or changes in current circumstances could affect the recoverability of the carrying
value of goodwill and long-lived assets. Should an asset be deemed impaired, an impairment
loss would be recognized, to the extent the carrying value of the asset exceeded its
estimated fair market value.

Income
Taxes. Apria provides for income taxes in accordance with provisions specified in
SFAS No. 109, Accounting for Income Taxes. Accordingly, deferred income tax
assets and liabilities are computed for differences between the financial statement and
tax bases of assets and liabilities. These differences will result in taxable or
deductible amounts in the future, based on tax laws and rates applicable to the periods in
which the differences are expected to affect taxable income. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income during the
periods in which temporary differences become deductible. In making an assessment
regarding the probability of realizing a benefit from these deductible differences,
management considers the companys current and past performance, the market
environment in which the company operates, tax planning strategies and the length of
carryforward periods. Valuation allowances are established when necessary to reduce
deferred tax assets to amounts that are more likely than not to be realized. Further, the
company provides for income tax issues not yet resolved with federal, state and local tax
authorities.

Segment
Reporting. Aprias branch locations are organized into geographic
regions. Each region consists of a number of branches and a regional office that provides
key support services such as billing, purchasing, equipment maintenance, repair and
warehousing. Management evaluates operating results on a geographic basis and, therefore,
views each region as an operating segment. All regions provide the same products and
services, including respiratory therapy, infusion therapy and home medical equipment and
supplies. Additional support services are provided at a corporate level and management
continues to evaluate opportunities to gain efficiencies and cost savings by consolidating
regional functions. For financial reporting purposes, all the companys operating
segments are aggregated into one reportable segment in accordance with the aggregation
criteria of SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information.

Change in Accounting
Principle. Effective January 1, 2002, Apria adopted SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. This statement
superseded SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, and amended other guidance related to the
accounting and reporting of long-lived assets. SFAS No. 144 requires that one
accounting model be used for long-lived assets to be disposed of by sale. Discontinued
operations are to be measured similarly to other long-lived assets classified as held for
sale at the lower of its carrying amount or fair value less cost to sell. Future operating
losses will no longer be recognized before they occur. SFAS No. 144 also broadened
the presentation of discontinued operations to include a component of an entity when
operations and cash flows can be clearly distinguished, and established criteria to
determine when a long-lived asset is held for sale. Adoption of this statement did not
have a material effect on Aprias consolidated financial statements.

Recent Accounting
Pronouncements. In December 2002, SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure  an amendment of FASB
Statement No. 123, was issued. This statement amends SFAS No. 123, Accounting
for Stock-Based Compensation, to provide alternative methods of transition and
guidance for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. SFAS No. 148 also amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The company has complied with the expanded
financial statement disclosure requirements in its consolidated financial statements. See
SFAS No. 123R.

In October 2002, the
FASBs Emerging Issues Task Force (EITF) issued EITF 02-17, which
addresses issues raised in the interpretation of SFAS No. 141, Business
Combinations and SFAS No. 142, Goodwill and Other Intangible Assets and
the identification and valuation of intangible assets. EITF 02-17 provides guidance on
determining when, as a result of a business combination, a customer-related intangible
asset exists that should be separately valued from goodwill. EITF 02-17 is effective for
business combinations consummated and goodwill impairment tests performed after October
25, 2002. Adoption of this interpretation did not have a material effect on the
companys consolidated financial statements.

In November 2002, the FASB
issued FASB Interpretation (FIN) No. 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others, an interpretation of SFAS Nos. 5, 57 and 107 and rescission of FIN No. 34,
Disclosure of Indirect Guarantees of Indebtedness of Others. FIN No. 45
elaborates on the disclosure requirements for the interim and annual financial statements
of the guarantor. It also requires that a guarantor recognize a liability at the inception
of the guarantee for the fair value of the obligation undertaken. Apria was required to
adopt the recognition provisions of FIN No. 45 beginning January 1, 2003, while the
disclosure provisions became effective at December 31, 2002. Adoption of this
interpretation did not have a material effect on the companys consolidated financial
statements.

FIN No. 46,
Consolidation of Variable Interest Entities, an interpretation of Accounting
Research Bulletin No. 51, was originally issued in January 2003 and subsequently revised
in December 2003. FIN No. 46, as revised, requires a variable interest entity to be
consolidated by a company if that company is subject to a majority of the risk of loss
from the variable interest entitys activities or is entitled to receive a majority
of the entitys residual returns or both. FIN No. 46 also requires certain
disclosures about variable interest entities in which a company has a significant
interest, regardless of whether consolidation is required. Application of FIN No. 46 is
required for potential variable interest entities commonly referred to as special purpose
entities for periods ending after December 15, 2003. Application of the provisions is
required for all other variable interest entities by the end of the first reporting period
that ends after March 15, 2004. The company currently is not a beneficiary of any variable
interest entities, therefore the adoption of this interpretation did not have a material
effect on the companys consolidated financial statements.

In April 2003, the FASB
issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and
Hedging Activities. SFAS No. 149 amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities under SFAS No. 133,Accounting
for Derivative Instruments and Hedging Activities. The statement is generally
effective for contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. Adoption of this statement did not have a
material effect on the companys consolidated financial statements.

---

In November 2004, the FASB
issued 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. The statement is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. Apria does not expect the
adoption of SFAS No. 151 to 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 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). Adoption of SFAS No. 123R is required as of the
beginning of the first interim or annual reporting period that begins after June 15, 2005.
Accordingly, Apria will adopt the statement at the beginning of its third quarter in
fiscal 2005, on July 1, 2005. Management is currently evaluating the statement and its
transition provisions. The impact of adoption on the results of operations cannot be
estimated at this time as it is dependent on the level of future share-based awards.
However, had SFAS No. 123R been adopted in prior periods, the effect would have
approximated the SFAS No. 123 proforma disclosures presented in the Notes to
Consolidated Financial Statements.

In December 2004, the FASB
issued SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment of APB No.
29, Accounting for Nonmonetary Transactions. This statement eliminates the
exception from fair value measurement for nonmonetary exchanges of similar productive
assets and replaces it with an exception for exchanges that do not have commercial
substance. If the future cash flows of the entity are not expected to change significantly
as a result of the transaction, then the exchange shall be measured based on the recorded
amount of the nonmonetary assets relinquished, rather than on the fair values of the
exchanged assets. The statement is effective for nonmonetary asset exchanges beginning
after June 15, 2005. Apria does not expect the adoption of SFAS No. 153 to have a material
effect on the companys consolidated financial statements.

Results of Operations

Net
Revenues. Net revenues were $1,451 million in 2004, up from $1,381 million
in 2003 and $1,252 million in 2002. Growth rates were 5.1% and 10.3% in 2004 and 2003,
respectively. The revenue growth, net of reductions explained below, resulted from volume
increases and the acquisition of complementary businesses. Aprias acquisition
strategy generally results in the rapid integration of acquired businesses into existing
operating locations. This rapid integration limits Aprias ability to separately
track the amount of revenue generated by an acquired business. Estimating the net revenue
contribution from acquisitions therefore requires certain assumptions. Based on these
assumptions and its analysis, Apria estimates that approximately $82.3 million of the net
revenue growth in 2004 was derived from acquisitions.

Revenue growth in 2004 was
negatively affected by the Medicare reimbursement reduction for respiratory medications
that went into effect January 1, 2004. Also, revenues declined as Apria transitioned out
of the Gentiva CareCentrix Inc. contract which management chose not to renew for 2004 due
to contract pricing differences. The effect in 2004 of the Medicare reduction was $15.2
million and the reduction to revenues resulting from the Gentiva transition was $47.4
million. Further, Apria is experiencing increased pricing pressure from its managed care
customers as these organizations 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.

---

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

|                             | Year Ended December 31,
|---------------------------- | -----------------------
|
|
|
|Home respiratory therapy     |                        
|Home 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 in 2004 by 6.5% when compared to 2003 and increased by 12.0% in 2003 when
compared to 2002. This growth was primarily driven by volume increases and acquisitions of
respiratory therapy businesses. The Medicare reimbursement reduction for respiratory
medications caused a decline of 1.6% in the revenue growth rates for 2004. The growth in
this service line was also reduced by the non-renewal of the Gentiva contract; the related
decline represented 4.2% of prior year respiratory revenues.

Infusion
Therapy.The infusion therapy service line involves the administration of a drug
or nutrient directly into the body intravenously through a needle or catheter. Infusion
therapy services also include administering enteral nutrients directly into the
gastrointestinal tract through a feeding tube. Infusion therapy revenues increased 2.0% in
2004 versus 2003 and 5.5% in 2003 versus 2002. Growth in enteral nutrition, one of the
strongest contributors in the infusion line was impacted by the Gentiva contract exit. The
decline in Gentiva infusion revenues in 2004, virtually all of which had been derived from
enteral nutrition, represented 1.1% of prior year infusion revenues.

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 2.5% in 2004 from 2003
and by 8.7% in 2003 from 2002. Rehabilitation revenue growth in 2004 has been considerably
lower than in 2003, largely as a result of action taken by the Centers for Medicare &
Medicaid Services, or CMS, that required previously qualified orders for power mobility
devices to be re-screened against stricter qualification standards. This process resulted
in the delay and cancellation of many orders in the first half of 2004, particularly in
the first quarter. In the past, the rehabilitation product business was a strong
contributor to the growth in the home medical equipment/other line. Further, the decline
in Gentiva revenues in home medical equipment/other represented 3.0% of prior year home
medical equipment/other revenues. Diabetic supplies, historically a very small percentage
of the home medical equipment line, grew significantly in 2004. This growth is directly
attributable to an acquisition early in the year of a company that entered the diabetic
supply market just prior to being acquired.

Medicare and
Medicaid Reimbursement. In 2004, approximately 38% of Aprias revenues
were reimbursed under arrangements with Medicare and Medicaid. No other third-party payor
represents 8% or more of the companys revenues. The majority of the companys
revenues are derived from fees charged for patient care under fee-for-service
arrangements. Revenues derived from capitation arrangements represent less than 10% of
total net revenues for all periods presented.

Medicare
Reimbursement. In December 2003, the Medicare Prescription Drug,
Improvement and Modernization Act of 2003, which is herein referred to as the Medicare
Modernization Act, became law. The Medicare Modernization Act includes a number of
provisions that affect Medicare Part B reimbursement policies for items and services
provided by Apria, the most significant of which are:

| |  | 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 went into effect January 1, 2005. The reimbursement reduction for oxygen, however,
is delayed until the Office of the Inspector General provides the Centers for Medicare and
Medicaid Services, or CMS, with the additional data required to establish pricing.
Providers are currently being reimbursed for oxygen based on 2004 fee schedules, with an indication
from CMS that no retroactive adjustment will be made once the new pricing is in effect.
Further, a freeze on annual payment increases for durable medical equipment has been
instituted from 2004 through 2008.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Reimbursement
reduction 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, as defined by
the Medicare Modernization Act, plus 6%, plus a separate dispensing fee per patient
episode. The dispensing fees for 2005 have been established at $57.00 for a 30-day supply
of medications and $80.00 for a 90-day supply.                                                                                                                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Establishment of a competitive bidding program  Such a program would require that
suppliers wishing to provide certain items to beneficiaries submit bids to Medicare. The
program, for as yet unspecified durable medical equipment items and services, is to be
transitioned into (i) 10 of the largest metropolitan statistical areas in 2007; (ii) 80 of
the largest metropolitan statistical areas in 2009; and (iii) additional areas after 2009.
The legislation contains special provisions for rural areas.                                                                                                                                                                                                                                                                                                                                                           
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Reimbursement for home infusion therapy under Medicare Part D -- Currently, a limited
number of infusion therapies, supplies and equipment is covered by Medicare Part B. The
Medicare Modernization Act provides expanded coverage for home infusion drugs. The
industry is currently working with CMS to further define the coverage and payment policies
that will govern the administration of this benefit, which takes effect in 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | 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 a stated effort to attract more Medicare beneficiaries to
managed care models. The company maintains contracts to provide respiratory, 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 starting in mid-2006.                                                                                                                                                                                                                                                                                                               

Aprias management
estimates that the revision to inhalation drug reimbursement in 2004 resulted in a revenue
reduction from 2003 levels of approximately $15 million. Once the 2005 oxygen fee
schedules are released, management will provide an estimate of the aggregate impact of all
reimbursement reductions that will be in effect for 2005. The impact of the competitive
bidding program scheduled to commence in 2007 cannot be estimated at this time.

The Balanced Budget Act of
1997 contained several provisions that lowered Aprias Medicare reimbursement levels.
Subsequent legislationthe Medicare Balanced Budget Refinement Act of 1999 and the
Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act of
2000mitigated some of the effects of the original legislation. The Medicare
Modernization Act also addressed some of the issues pending from the earlier legislation.
However, still pending from the 1997 Legislation is the streamlined authority granted to
the Secretary of 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. In December 2002, CMS issued an interim
final rule that establishes 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. As of this date, neither
CMS nor the durable medical equipment regional carriers have used the expedited authority.

Medicaid
Reimbursement. Since 2001, some states have adopted alternative pricing
methodologies for certain drugs and biologicals under the Medicaid program. In at least 22
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 has elected to stop accepting new Medicaid patient referrals for
the affected drugs. Apria is continuing to provide services to patients already on
service, and for those who receive other Medicaid-covered respiratory, home medical
equipment or infusion therapies, if the reimbursement levels for those services remain
adequate. Further, some states are considering other reductions in Medicaid reimbursement
as they work through their respective states budget process. Apria management cannot
predict the outcome of such budget negotiations and whether other states will consider
reductions as well.

Gross
Profit. Gross margins were 71.9% in 2004, 72.7% in 2003 and 72.8% in 2002.
The margin declined by 0.3% due to the Medicare reimbursement reductions for respiratory
medications and was further impacted by the non-renewal of the Gentiva contract. Also, as
noted above, Aprias revenue line has been adversely affected by pricing pressures
from its managed care partners. However, Apria has been successful in negotiating
favorable product pricing with the companys suppliers, thereby minimizing the impact
of the revenue pricing pressures on the gross margin.

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 estimated to be
uncollectible are provided for by applying specific percentages to each receivables aging
category, which is determined by the number of days the receivable is outstanding. For
2004, 2003 and 2002, the provision for doubtful accounts as a percentage of net revenues
was 3.3%, 3.7% and 3.6%, respectively. The improvement in 2004 when compared to 2003 is
partially due to strong cash collections in late 2004 and a focused effort to increase
cash applications. Also impacting the provision was a lower allowance requirement
indicated by the companys analysis of subsequent realization data.

Selling,
Distribution and Administrative. Selling, distribution and administrative
expenses are comprised of expenses incurred in direct support of operations and those
associated with administrative functions. Expenses incurred by the operating locations
include salaries and other expenses in the following functional areas: selling,
distribution, clinical, intake, reimbursement, warehousing and repair. Many of these
operating costs are directly variable with revenue growth patterns. Some are also very
sensitive to market-driven price fluctuations such as facility lease and fuel costs. The
administrative expenses include overhead costs incurred by the operating locations and
corporate support functions. These expenses do not vary as closely with revenue growth as
do the operating costs. Selling, distribution and administrative expenses, expressed as
percentages of net revenues, were 54.3% in 2004, 54.2% in 2003 and 54.7% in 2002. The
effect of the Medicare reimbursement reduction on this percentage in 2004 was an increase
of 0.6%. Expenses in 2004 reflect savings resulting from managements focus on
productivity and controls placed on labor expenses beginning late in the third quarter of
2003. Management is currently implementing additional productivity initiatives aimed at
further reducing costs to mitigate the effects of the 2005 Medicare reimbursement
reductions. The decrease in 2003 when compared to 2002 is largely due to one-time costs
charged in 2002 that included executive termination costs and professional fees associated
with the favorable outcome and settlement of an income tax dispute. See Income Tax
Expense.

Amortization of
Goodwill and Intangible Assets.Amortization of intangible assets was $6.7
million in 2004, $3.7 million in 2003 and $2.7 million in 2002. The increase in
amortization of intangible assets in 2004 is largely due to increased acquisition activity
and the valuation of certain customer relationships acquired in the business combinations.
The increase in 2003, when compared to 2002, is also due to a higher level of acquisition
activity.

Interest Expense and
Income and Write-off of Deferred Debt Issuance Costs. Interest expense was
$20.7 million in 2004, $15.8 million in 2003 and $15.0 million in 2002. Interest income
was $678,000, $786,000 and $4.2 million in 2004, 2003 and 2002, respectively. Interest
expense was higher in 2004 due to the impact of a full year of interest on the $250
million convertible senior notes versus five months recorded in 2003. The interest
increases were partially offset by interest reductions resulting from a decrease in
borrowings under the credit agreement due to scheduled principal amortization payments and
by the expiration in March 2003 of two interest rate swap agreements that had fixed
interest at higher rates on a portion of Aprias debt. Interest expense increased in
2003 from 2002 due to the issuance of the convertible senior notes in August 2003. The
additional interest was offset by lower interest on the bank loans due to a reduction in
the principal balance and the full years effect of the lower applicable interest
margin on the $175 million term loan resulting from a June 2002 amendment to the credit
agreement.

Interest income in 2002
reflects a $4.0 million interest refund received in conjunction with the favorable outcome
of an income tax dispute. Further, in 2004, the company wrote-off $2.7 million in
unamortized debt issuance costs in conjunction with the November 2004 refinancing of the
companys bank loans. See Long-term Debt.

Income Tax Expense.Income taxes were $64.3 million, $70.6 million and $52.4 million for 2004,
2003 and 2002, respectively, and were provided at the effective tax rates expected to be
applicable for each year. The income tax provision for 2002 was reduced by a benefit of
$11.1 million that resulted from the favorable outcome of an income tax dispute which was
settled in the fourth quarter of 2002.

As a result of settling
the tax dispute, Apria utilized approximately $34.2 million of its previously limited
$57.0 million net operating loss carryforward during 2002. Such net operating loss
carryforward was generated prior to 1992 and utilization had been limited to $5.0 million
per year in accordance with Internal Revenue Code Section 382. Prior to 2002, the $57.0
million net operating loss carryforward was not recognized for financial statement
reporting purposes as management believed it was unlikely that they would be used before
expiration. The remaining net operating loss carryforward of approximately $22.8 million
was excluded from the related deferred tax assets and has expired unused.

Apria utilized $5.0
million of federal net operating loss carryforwards in 2004. The remaining federal net
operating loss carryforwards of $12.1 million expired unused on December 31, 2004. The
company utilized its remaining alternative minimum tax credit carryforward of $6.1 million
in 2003. Additionally, the company has various apportioned state net operating loss
carryforwards of $12.3 million, net of federal tax benefit, as of December 31, 2004.

The company believes it
has adequately provided for income tax issues not yet resolved with federal, state and
local tax authorities. At December 31, 2004, $19.2 million, net of tax benefit, was
accrued for such federal, state and local tax matters. Although not probable, the most
adverse resolution of these federal, state and local issues could result in additional
charges to earnings in future periods in addition to the $19.2 million currently provided.
Based upon a consideration of all relevant facts and circumstances, the company does not
believe the ultimate resolution of tax issues for all open tax periods will have a
materially adverse effect upon its results of operations or financial condition.

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

Cash
Flow. Cash provided by operating activities in 2004 was $276.0 million
compared to $263.9 million in 2003 and $262.0 million in 2002. The increase in 2004, when
compared to 2003, is largely due to an increase in net income before items not requiring
cash and the timing of disbursements processed against accounts payable and other
accruals. These items were partially offset by a larger increase in accounts receivable in
2004 than in 2003, which resulted from acquisition activity. Operating cash flow was
relatively flat between 2003 and 2002 despite the fact that 2003 reflects income tax
payments totaling $50.4 million as compared to income tax refunds of $3.2 million in 2002.

Cash used in investing
activities was $285.8 million, $242.6 million and $195.4 million in 2004, 2003 and 2002,
respectively. The increase in 2004 is primarily due to increased acquisition activity.
Cash used in investing activities increased in 2003 when compared to 2002 due to higher
levels of acquisition activity and patient service equipment expenditures.

In 2004, cash used by
financing activities was $111.4 million compared to cash provided by financing activities
of $112.9 million in 2003, and cash used in financing activities of $49.7 million in 2002.
Cash used in 2004 primarily relates to the $100 million repurchase of the companys
common stock and the scheduled principal payments made against the term loans prior to the
November 2004 refinancing. Cash provided in 2003 reflects the net proceeds received upon
issuance of $250 million of 3.375% convertible senior notes. Also, the company repurchased a
total of $118.5 million of its common stock in 2003, $100 million of which was purchased
with the convertible note proceeds.

Contractual Cash
Obligations.The following table summarizes Aprias long-term cash
payment obligations to which the company is contractually bound:

|                                   | For the Year Ending December
31, |  |  
|---------------------------------- | -------------------------------- |  | -
|
|
|
|Revolving loan                     |                                  |  | $
|Convertible senior notes           |                                  |  |  
|Capital lease obligations          |                                  |  |  
|Other long-term debt               |                                  |  |  
|Operating leases                   |                                  |  |  
|Deferred acquisition payments      |                                  |  |  
|                                   |                                  |  |  
|Total contractual cash obligations |                                  |  | $
|                                   |                                  |  |  

Accounts
Receivable. Accounts receivable before allowance for doubtful accounts
increased by $29.5 million during 2004, which is primarily attributable to the revenue
increase, particularly from acquisitions. 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 December 31, 2004 compared to 50
at December 31, 2003. The increase in days sales outstanding from the end of 2003 to the
end of 2004 is primarily due to the acquisition activity in 2004. 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.
Consequently, the related cash receipts are delayed, causing a temporary increase in
accounts receivable and days sales outstanding.

Accounts  aged in excess
of 180 days were 21.3% of total  receivables  at December  31, 2004 and 18.6% at the end
of 2003. At December 31, 2004,  accounts aged in excess of 180 days for certain  summary
payor  categories were as follows:  Medicare 19%; Medicaid 25%; self-pay 33% and managed
care/other 21%.

Unbilled Receivables.Included in
accounts receivable are earned but unbilled receivables of $36.3 million and $33.9 million
at December 31, 2004 and 2003, 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, 2004 is largely due to acquisitions effected during 2004, for the reasons
noted above.

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 the patient. The
branches are supplied with inventory and equipment from the regional warehouses, which
coordinate purchasing with the corporate office. The regions are also responsible for
repairs and scheduled maintenance of patient service equipment, which adds to the frequent
movement of equipment between the region and branch locations. Further, the majority of
Aprias patient service equipment is located in patients homes. While the
utilization varies widely between equipment types, on the average, approximately 80% of
the equipment is on rent at any given time. Inherent in this asset flow is the fact that
losses will occur. Management has successfully instituted a number of controls over the
companys inventories and patient service equipment to minimize such losses.
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 2004, 2003 and 2002, were $2.0 million, $2.4 million, and
$1.2 million, respectively. There can be no assurance that Apria will be able to maintain
its current level of control over inventories and patient service equipment. Continued
revenue growth is directly dependent on Aprias ability to fund its inventory and
patient service equipment requirements.

Long-term Debt.
Aprias credit agreement with Bank of America and a syndicate of lenders was amended
and restated effective November 23, 2004. The amendment increased the limit of the
companys senior secured credit agreement to $500 million from $400 million. Prior to
the amendment, the credit facilities consisted of a $100 million revolving credit
facility, a $125 million five-year term loan and a $175 million seven-year term loan.
These loans were eliminated in favor of a $500 million revolving credit facility, from
which proceeds were used to pay off the remaining balances on the previous loans. The
maturity date of the new revolver is November 23, 2009.

The senior secured credit
agreement permits Apria to select one of two variable interest rates. One option is the
base rate, which is expressed as the higher of (a) the Federal Funds rate plus 0.50% or
(b) the Bank of America prime rate. The other option is the Eurodollar rate, which is
based on the London Interbank Offered Rate. Interest on outstanding balances under the
senior secured credit agreement is determined by adding a margin to the Eurodollar rate or
base rate in effect at each interest calculation date. The applicable margin for the
revolving credit facility is based on Aprias debt rating as determined by S&P or
Moodys with respect to the credit facility. The applicable margin ranges from 0.75%
to 1.50% for Eurodollar loans and from zero to 0.50% for base rate loans. The effective
interest rate at December 31, 2004, after consideration of the effect of the swap
agreements described below, was 3.51%. The senior credit agreement also requires payment
of commitment fees ranging from 0.15% to 0.375% (also based on Aprias debt rating)
on the unused portion of the revolving credit facility. See Hedging
Activities.

Borrowings under the
senior secured credit facility are collateralized by substantially all of the assets of
Apria. At December 31, 2004, the company was in compliance with all of the financial
covenants required by the credit agreement.

On  December  31,  2004
 outstanding  borrowings  on the  revolving  credit  facility  were  $224.8  million.
Outstanding  letters of credit  totaled  $3.8 million and credit  available  under the
 revolving  facility was $271.4 million.

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

The notes bear interest at
the rate of 3.375% per year. Interest on the notes is payable on September 1 and March 1 of
each year, beginning on March 1, 2004. Also, during certain periods commencing on
September 8, 2010, Apria will pay contingent interest on the interest payment date for the
applicable interest period if the average trading price of the notes during the five
trading days ending on the third day immediately preceding the first day of the applicable
interest period equals or exceeds 120% of the principal amount of the notes. The
contingent interest payable per note will equal 0.25% per year of the average trading
price of such note during the applicable five trading-day reference period. Further, the
notes are convertible during certain periods into shares of Apria common stock, initially
at a conversion rate of 28.6852 shares of common stock per $1,000 principal amount of
notes, subject to adjustment in certain events, under certain circumstances as outlined in
the indenture.

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 December 31, 2004, Apria had two interest
rate swap agreements in effect to fix its LIBOR-based variable rate debt. The terms of
such agreements are as follows: a three-year agreement with a notional amount of $25
million and a fixed rate of 3.04%, expiring December 2005; and a four-year agreement with
a notional amount of $25 million and a fixed rate of 3.42%, expiring December 2006. Apria
also had two swap agreements with an aggregate notional amount of $50 million and a fixed
rate of 2.43% that expired December 2004.

The swap agreements are being accounted for as
cash flow hedges under SFAS No. 133, Accounting for Derivative and Hedging
Activities. Accordingly, the difference between the interest received and interest
paid is reflected as an adjustment to interest expense. For 2004, Apria paid a net
settlement amount of $1.4 million. Unrealized gains and losses on the fair value of the
swap agreements are reflected, net of taxes, in other comprehensive loss. At December 31,
2004, the aggregate fair value of the swap agreements was a liability of $42,000. While no
assurances can be made, Apria does not anticipate losses due to counterparty
nonperformance as its counterparties to the various swap agreements are nationally
recognized financial institutions with strong credit ratings.

Treasury Stock.On January 16, 2004, Apria prepaid $50 million to repurchase 1.7 million
shares of its common stock at a strike price of $28.89 through an accelerated share
repurchase program. The related contract, which had a scheduled settlement date of June
16, 2004, provided for cash or net share settlement at Aprias election. The
repurchase of the shares required by the contract was completed on April 28, 2004 and the
share price differential was settled in cash on June 7, 2004, for a total cost of $53
million. During the third quarter of 2004, the company purchased an additional 1.7 million
shares for $47 million, thereby completing the share repurchase authorized by the Board of
Directors.

During 2003, Apria
repurchased 4.5 million shares of its common stock for $118.5 million in open market
transactions, of which 3.8 million shares were purchased in conjunction with the issuance
of the convertible senior notes. In 2002,Apria repurchased 1.6 million shares for
$35 million. All repurchased common shares are being held in treasury.

Business
Combinations.Pursuant to one of its primary growth strategies, Apria
periodically acquires complementary businesses in specific geographic markets. Because of
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 statements of operations from the
dates of acquisition. In accordance with SFAS No. 142, goodwill is no longer being
amortized. 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 the 27 acquisitions that closed during 2004 was $148.7 million.
Allocation of this amount includes $125.1 million to goodwill and $9.3 million to other
intangible assets. The aggregate consideration for acquisitions that closed during 2003
and 2002 was $98.0 million and $78.3 million, respectively. Cash paid for acquisitions,
which includes amounts deferred from prior year acquisitions, totaled $144.2 million,
$99.4 million and $74.0 million in 2004, 2003 and 2002, respectively. Apria closed 27
acquisitions in 2003 and 17 in 2002.

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

Federal
Investigation.As previously reported, since mid-1998 Apria has been the
subject of an investigation conducted by the U.S. Attorneys office in Los Angeles
and the U.S. Department of Health and Human Services. The investigation concerns the
documentation supporting Aprias billing for services provided to patients whose
healthcare costs are paid by Medicare and other federal programs. Apria is cooperating
with the government and has responded to various document requests and subpoenas.

The investigation relates
to two civil qui tam lawsuits against Apria filed under seal on behalf of the
government. In 2004 the government for the first time provided Apria with redacted copies
of the complaints in these lawsuits. On the copies provided to Apria, the names of the
plaintiffs, the courts and the dates instituted were blacked out. In general, both
complaints allege that for an unspecified period of time commencing in 1995 Apria
knowingly engaged in various schemes to defraud the government by submitting false claims
for payment and by manipulating and falsifying documentation in support of such claims.
The complaints do not quantify the alleged damages sought and do not identify any of the
particular individuals, patient accounts or Apria facilities alleged to be involved in any
improper billing. To date, the U.S. Attorneys office has not informed Apria of any
decision to intervene in the qui tam actions; however, it could reach a decision
with respect to intervention at any time.

Apria has acknowledged
that there may be errors and omissions in supporting documentation affecting a portion of
its billings. However, it believes that most of the alleged documentation errors and
omissions should not give rise to any liability. Accordingly, Apria believes that most of
the assertions made by the government and the qui tam plaintiffs are legally and
factually incorrect and that Apria is in a position to assert numerous meritorious
defenses.

During the past several
years, Apria and representatives of the government have been analyzing and discussing the
documentation underlying Aprias billings to the federal government for services
provided by Apria from mid-1995 through 1998 to a sample of 300 patients selected by the
government. Government representatives and counsel for the plaintiffs asserted in 2001
that, by a process of extrapolation from the patient files in the sample to all of
Aprias government billings during the sample period, Apria could have a very
significant liability to the government under the False Claims Act. Differences between
Apria and the government have been reduced on a number of issues as a result of the
analysis and discussions referred to above. Consequently, while Aprias potential
liability could still be very material, Apria believes that the amount the government is
now seeking is significantly less than asserted in 2001.

Apria and government
representatives are continuing to explore whether it will be possible to resolve this
matter on a basis that would be considered fair and reasonable by all parties.
Notwithstanding the progress made to date in reducing the differences between Apria and
the government, there remain significant disagreements as to the number and the legal
implications of billing documentation deficiencies in the 300-patient sample. Accordingly,
Apria cannot provide any assurances as to the outcome of its discussions with the
government, or as to the outcome of the qui tam litigation in the absence of a
settlement. Management cannot estimate the possible loss or range of loss that may result
from these proceedings and, therefore, has not recorded any related accruals.

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

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
employment relationship.

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 7A.      
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 December 31, 2004,
Aprias revolving credit facility borrowings totaled $224.8 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. All such interest rate options are subject to the application of an interest
margin as specified in the bank credit agreement. At December 31, 2004, all of
Aprias outstanding revolving debt was tied to LIBOR.

At December 31, 2004,
Apria had a three-year interest rate swap agreement with a notional amount of $25.0
million and a fixed rate of 3.04% and a four-year interest rate swap agreement with a
notional amount of $25.0 million and a fixed rate of 3.42%. Both rates are before the
application of the interest margin.

Based on the term debt
outstanding and the swap agreements in place at December 31, 2004, a 100 basis point
change in the applicable interest rates would increase or decrease Aprias annual
cash flow and pretax earnings by approximately $1.7 million. See Managements
Discussion and Analysis of Financial Condition and Results of Operations  Long-term
Debt  Hedging Activities.

ITEM 8.      
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Report of the Independent
Registered Public Accounting Firm and the Consolidated Financial Statements listed in the
Index to Consolidated Financial Statements and Financial Statement Schedule
are filed as part of this report.

ITEM 9.      
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND            
           
FINANCIAL DISCLOSURE

None.

ITEM 9A.      
CONTROLS AND PROCEDURES

As of the end of the
period covered by this report, the company carried out an evaluation, under the
supervision and with the participation of the companys management, including the
companys principal executive officer and principal financial officer, of the
effectiveness of the design and operation of the companys disclosure controls and
procedures. Based upon that evaluation, the principal executive officer and principal
financial officer concluded that the companys disclosure controls and procedures are
effective in timely alerting them to material information relating to the company that is
required to be included in the companys periodic Securities and Exchange Commission
filings.

During the period covered
by this report, there have been no significant changes to the companys internal
control over financial reporting or in other factors that have materially affected, or are
reasonably likely to materially affect, the companys internal control over financial
reporting.

---

MANAGEMENTS REPORT ON INTERNAL CONTROL OVER
FINANCIAL REPORTING

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

Under the supervision and
with the participation of management, including the principal executive and financial
officers, the company has conducted an evaluation of the effectiveness of its internal
control over financial reporting based on the framework in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this evaluation, management has concluded that its internal
control over financial reporting was effective as of December 31, 2004.

Managements
assessment of the effectiveness of internal control over financial reporting as of
December 31, 2004 has been audited by Deloitte & Touche LLP, an independent registered
public accounting firm, as stated in its report on managements
assessment of Aprias internal control over financial reporting, which
is included herein.

March 16, 2005

---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We
have audited managements assessment, included in the accompanying Managements
Report on Internal Control Over Financial Reporting, that Apria Healthcare Group Inc. and
subsidiaries (the Company) maintained effective internal control over
financial reporting as of December 31, 2004, based on criteria established in Internal
ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations
of the Treadway Commission. The Companys management is responsible for
maintaining effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting.  Our responsibility
is to express an opinion on managements assessment and an opinion on the
effectiveness of the Companys internal control over financial reporting based on our
audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States).  Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects.  Our audit included
obtaining an understanding of internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design and operating
effectiveness of internal control, and performing such other procedures as we considered
necessary in the circumstances.  We believe that our audit provides a reasonable
basis for our opinion.

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

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

In our
opinion, managements assessment that the Company maintained effective internal
control over financial reporting as of December 31, 2004, is fairly stated, in all
material respects, based on the criteria established in Internal
ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations
of the Treadway Commission.  Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of December 31,
2004, based on the criteria established in Internal ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.

We
have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements and financial
statement schedule as of and for the year ended December 31, 2004 of the Company and our
report dated March 16, 2005 expressed an unqualified opinion on those financial statements
and the financial statement schedule.

/s/ DELOITTE & TOUCHE
LLP

Costa Mesa, California
March 16, 2005

---

ITEM 9B.      OTHER INFORMATION

None.

PART III

ITEM 10.      DIRECTORS AND OFFICERS OF THE REGISTRANT

Information with respect
to this item is incorporated by reference from the companys definitive Proxy
Statement to be filed with the Commission within 120 days after the end of the
companys fiscal year. Information regarding executive officers of the company is set
forth under the caption Executive Officers in Item 1 hereof.

ITEM 11.      EXECUTIVE COMPENSATION

Information with respect
to this item is incorporated by reference from the companys definitive Proxy
Statement to be filed with the Commission within 120 days after the end of the
companys fiscal year.

ITEM 12.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND           
           
RELATED STOCKHOLDER MATTERS

Information with respect
to this item is incorporated by reference from the companys definitive Proxy
Statement to be filed with the Commission within 120 days after the end of the
companys fiscal year. Information regarding securities authorized for issuance under
equity compensation plans is set forth in Item 5.

ITEM 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information with respect
to this item is incorporated by reference from the companys definitive Proxy
Statement to be filed with the Commission within 120 days after the end of the
companys fiscal year.

ITEM 14.      PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information with respect
to this item is incorporated by reference from the companys definitive Proxy
Statement to be filed with the Commission within 120 days after the end of the
companys fiscal year.

PART IV

ITEM 15.      EXHIBITS, FINANCIAL
STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K

| |     |    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | --- | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | 1. |  | The financial statements described in
the Index to Consolidated Financial Statements and Financial Statement Schedule
are included in this Annual Report on Form 10-K starting at page F-1.                                                                                                                                                                                                                                                 
| |     | 2. |  | The financial statement schedule
described in the Index to Consolidated Financial Statements and Financial
Statement Schedule is included in this Annual Report on Form 10-K starting on
page S-1.

All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable, and therefore have been
omitted.
| |     | 3. |  | Exhibits included or incorporated by reference herein:
See exhibit index.                                                                                                                                                                                                                                                                                                                                                                     

---

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE

|                                                                                                                              | 
|----------------------------------------------------------------------------------------------------------------------------- | 
|CONSOLIDATED FINANCIAL STATEMENTS                                                                                             | 
|Report of Independent Registered
Public Accounting Firm                                                                       | 
|Consolidated Balance Sheets - December 31,
2004 and 2003                                                                      | 
|Consolidated Statements of Income - Years
ended December 31, 2004, 2003 and 2002                                              | 
|Consolidated Statements of Stockholders
Equity and Comprehensive Income -       Years
ended December 31, 2004, 2003 and 2002 | 
|Consolidated Statements of Cash Flows -
Years ended December 31, 2004, 2003 and 2002                                          | 
|Notes to Consolidated Financial
Statements                                                                                    | 
|FINANCIAL STATEMENT SCHEDULE                                                                                                  | 
|Schedule II - Valuation and Qualifying
Accounts                                                                               | 

---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We
have audited the accompanying consolidated balance sheets of Apria Healthcare Group Inc.
and subsidiaries (the Company) as of December 31, 2004 and 2003, and the
related consolidated statements of income, stockholders equity and comprehensive
income, and cash flows for each of the three years in the period ended December 31,
2004.  Our audits also included the financial statement schedule for each of the
three years in the period ended December 31, 2004, included in the index at Item 15(a)(2).
These consolidated financial statements and the financial statement schedule are the
responsibility of the Companys management.  Our responsibility is to express an
opinion on these consolidated financial statements and financial statement schedule based
on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States).  Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free
of material misstatement.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.  An audit also
includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.  We
believe that our audits provide a reasonable basis for our opinion.

In our
opinion, such consolidated financial statements present fairly, in all material respects,
the financial position of Apria Healthcare Group Inc. and subsidiaries as of December 31,
2004 and 2003, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2004, in conformity with accounting
principles generally accepted in the United States of America. Also, in our opinion, such
financial statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.

We
have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Companys internal control
over financial reporting as of December 31, 2004, based on the criteria established in
Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated March 16, 2005 expressed an
unqualified opinion on managements assessment of the effectiveness of the
Companys internal control over financial reporting and an unqualified opinion on the
effectiveness of the Companys internal control over financial reporting.

/s/ DELOITTE & TOUCHE
LLP

Costa Mesa, California
March 16, 2005

---

APRIA HEALTHCARE GROUP INC.

CONSOLIDATED BALANCE SHEETS

|                                                                     | December 31,
|-------------------------------------------------------------------- | ------------
|
|
|
|ASSETS                                                               |             
|CURRENT ASSETS                                                       |             
|Cash and cash equivalents                                            |             
|Accounts receivable, less allowance
for doubtful accounts of $45,064 |             
|and $38,531 at December 31, 2004 and
2003, respectively              |             
|Inventories, net                                                     |             
|Deferred income taxes                                                |             
|Prepaid expenses and other current assets                            |             
|                                                                     |             
|TOTAL CURRENT ASSETS                                                 |             
|                                                                     |             
|PATIENT SERVICE EQUIPMENT, less accumulated depreciation of          |             
|$420,714 and $392,297 at December 31, 2004 and 2003, respectively    |             
|PROPERTY, EQUIPMENT AND IMPROVEMENTS, NET                            |             
|DEFERRED INCOME TAXES                                                |             
|GOODWILL                                                             |             
|INTANGIBLE ASSETS, NET                                               |             
|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, net of current portion                               |             
|DEFERRED INCOME TAXES                                                |             
|OTHER NON-CURRENT LIABILITIES                                        |             
|COMMITMENTS AND CONTINGENCIES (Notes 9 & 11)                         |             
|STOCKHOLDERS EQUITY                                                 |             
|Preferred stock, $.001 par value: 10,000,000 shares authorized;      |             
|none issued                                                          |             
|Common stock, $.001 par value: 150,000,000 shares authorized;        |             
|58,236,364 and 57,317,094 shares issued at December 31,
2004 and     |             
|2003, respectively; 48,608,705
and 51,107,538 outstanding            |             
|at December 31, 2004 and 2003, respectively                          |             
|Additional paid-in capital                                           |             
|Treasury stock, at cost; 9,627,659 and 6,209,556 shares at           |             
|December 31, 2004 and 2003, respectively                             |             
|Retained earnings                                                    |             
|Accumulated other comprehensive loss                                 |             
|                                                                     |             
|                                                                     |             
|                                                                     |             
|                                                                     |             
|                                                                     |             

See notes to consolidated
financial statements.

---

APRIA HEALTHCARE GROUP INC.

CONSOLIDATED STATEMENTS OF INCOME

|                                          | Year Ended December 31,
|----------------------------------------- | -----------------------
|
|
|
|Net revenues                              |                        
|Costs and expenses:                       |                        
|Cost of net revenues:                     |                        
|Product and supply costs                  |                        
|Patient
service equipment depreciation    |                        
|Nursing
services                          |                        
|Other                                     |                        
|                                          |                        
|TOTAL COST OF NET REVENUES                |                        
|Provision for doubtful accounts           |                        
|Selling, distribution and
administrative  |                        
|Amortization of intangible assets         |                        
|                                          |                        
|TOTAL COSTS AND EXPENSES                  |                        
|                                          |                        
|OPERATING INCOME                          |                        
|Interest expense                          |                        
|Interest income                           |                        
|Write-off of deferred debt issuance costs |                        
|                                          |                        
|INCOME BEFORE TAXES                       |                        
|Income tax expense                        |                        
|                                          |                        
|NET INCOME                                |                        
|                                          |                        
|Basic net income per common share         |                        
|                                          |                        
|Diluted net income per common share       |                        
|                                          |                        

See notes to consolidated financial
statements.

---

APRIA HEALTHCARE GROUP INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY AND COMPREHENSIVE INCOME

|                                                                  | Retained | Accumulated | 
|----------------------------------------------------------------- | -------- | ----------- | 
|
|
|
|
|Balance at December 31, 2001                                      |          | 54,690      | 
|Exercise of stock options                                         |          | 1,891       | 
|Tax benefits related to stock options                             |          |             | 
|Repurchases of common stock                                       |          |             | 
|Unrealized loss on interest rate
   swap agreements, net of taxes |          |             | 
|Net income                                                        |          |             | 
|                                                                  |          |             | 
|Total
comprehensive income (loss)                                 |          |             | 
|                                                                  |          |             | 
|Balance at December 31, 2002                                      |          | 56,581      | 
|Exercise of stock options                                         |          | 736         | 
|Tax benefits related to stock options                             |          |             | 
|Compensatory stock options   
and awards                          |          |             | 
|Repurchases of common stock                                       |          |             | 
|Unrealized gain on interest rate
   swap agreements, net of taxes |          |             | 
|Net income                                                        |          |             | 
|                                                                  |          |             | 
|Total
comprehensive income                                        |          |             | 
|                                                                  |          |             | 
|Balance at December 31, 2003                                      |          | 57,317      | 
|                                                                  |          |             | 
|Exercise of stock options                                         |          | 893         | 
|Tax benefits related to stock options                             |          |             | 
|Compensatory stock options   
and awards                          |          | 26          | 
|Repurchases of common stock                                       |          |             | 
|Unrealized gain on interest rate
   swap agreements, net of taxes |          |             | 
|Net income                                                        |          |             | 
|                                                                  |          |             | 
|Total
comprehensive income                                        |          |             | 
|                                                                  |          |             | 
|Balance at December 31, 2004                                      |          | 58,236      | 
|                                                                  |          |             | 

See notes to consolidated financial
statements.

---

APRIA HEALTHCARE GROUP INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                                                           | Year Ended December 31,
|-------------------------------------------------------------------------------------------------------------------------- | -----------------------
|
|
|
|OPERATING ACTIVITIES                                                                                                       |                        
|Net income                                                                                                                 |                        
|Items included in net income not requiring
(providing) cash:                                                               |                        
|Provision for doubtful
accounts                                                                                            |                        
|Depreciation                                                                                                               |                        
|Amortization of intangible assets                                                                                          |                        
|Amortization of deferred debt
issuance costs                                                                               |                        
|Deferred income taxes                                                                                                      |                        
|Expense on compensatory stock
options and awards                                                                           |                        
|(Gain) loss on disposition
of assets                                                                                       |                        
|Changes in operating assets and liabilities,
exclusive of effects of acquisitions:                                         |                        
|Accounts receivable                                                                                                        |                        
|Inventories, net                                                                                                           |                        
|Prepaid expenses and
other assets                                                                                          |                        
|Accounts payable, exclusive
of outstanding checks                                                                          |                        
|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 term loans                                                                                                     |                        
|Proceeds from issuance of
convertible senior notes                                                                         |                        
|Payments on other long-term
debt                                                                                           |                        
|Outstanding checks included
in accounts payable                                                                            |                        
|Capitalized debt issuance
costs                                                                                            |                        
|Repurchases of common
stock                                                                                                |                        
|Issuances of common
stock                                                                                                  |                        
|                                                                                                                           |                        
|NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES                                                                        |                        
|                                                                                                                           |                        
|NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS                                                                       |                        
|Cash and cash equivalents at beginning of year                                                                             |                        
|                                                                                                                           |                        
|CASH AND CASH EQUIVALENTS AT END OF YEAR                                                                                   |                        
|                                                                                                                           |                        

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

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

See notes to consolidated
financial statements.

---

APRIA HEALTHCARE GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Company Background and
Segment Reporting: Apria operates in the home healthcare segment of the healthcare
industry, providing a variety of clinical services and related products and supplies as
prescribed by a physician or authorized by a case manager as part of a care plan.
Essentially all products and services offered by the company are provided through the
companys network of approximately 475 branch facilities, which are located
throughout the United States and are currently organized into 14 geographic regions. Each
region consists of a number of branches and a regional office, which provides key support
services such as billing, purchasing, equipment maintenance, repair and warehousing. The
companys chief operating decision maker evaluates operating results on a geographic
basis and, therefore, views each region as an operating segment. All regions provide the
same products and services, including respiratory therapy, infusion therapy and home
medical equipment and supplies. Additional support services are provided at a corporate
level and management continues to evaluate opportunities to gain efficiencies and cost
savings by consolidating regional functions. For financial reporting purposes, all of the
companys operating segments are aggregated into one reportable segment in accordance
with the aggregation criteria of Statement of Financial Accounting Standards
(SFAS) No. 131, Disclosures about Segments of an Enterprise and Related
Information.

Respiratory therapy,
infusion therapy and home medical equipment represent approximately 68%, 17% and 15% of
total 2004 revenues, respectively. The gross margins in 2004 for these services and
related products were 80%, 57% and 62%, respectively.

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

Revenue Recognition and
Concentration of Credit Risk: Revenues are recognized on the date services and related
products are provided to patients and are recorded at amounts estimated to be received
under reimbursement arrangements with third-party payors, including private insurers,
prepaid health plans, Medicare and Medicaid. For the years 2004, 2003 and 2002, revenues
reimbursed under arrangements with Medicare and Medicaid were approximately 38%, 35% and
34%, respectively, as a percentage of total revenues. In all three years presented, no
other third-party payor group represented 10% or more of the companys revenues. The
majority of the companys revenues are derived from fees charged for patient care
under fee-for-service arrangements. Revenues derived from capitation arrangements
represented less than 10% of total net revenues for 2004, 2003 and 2002.

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

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

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

Cash and Cash
Equivalents: Apria maintains cash with various financial institutions. These financial
institutions are located throughout the United States and the companys cash
management practices limit exposure to any one institution. Outstanding checks, which are
reported as a component of accounts payable, were $23,031,000 and $21,612,000 at December
31, 2004 and 2003, respectively. Management considers all highly liquid instruments
purchased with a maturity of less than three months to be cash equivalents.

Accounts
Receivable: Included in accounts receivable are earned but unbilled receivables of
$36,265,000 and $33,948,000 at December 31, 2004 and 2003, respectively. Delays ranging
from a day up to several weeks between the date of service and billing can occur due to
delays in obtaining certain required payor-specific documentation from internal and
external sources. Earned but unbilled receivables are aged from date of service and are
considered in Aprias analysis of historical performance and collectibility.

Inventories:
Inventories are stated at the lower of cost (first-in, first-out method) or market and
consist primarily of pharmaceuticals and items used in conjunction with patient service
equipment.

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

Property, Equipment and
Improvements: Property, equipment and improvements are stated at cost. Included in
property and equipment are assets under capitalized leases which consist of information
systems and software. Depreciation is provided using the straight-line method over the
estimated useful lives of the assets. Estimated useful lives for each of the categories
presented in Note 2 are as follows: leasehold improvements  the shorter of the
remaining lease term or seven years; equipment and furnishings  three to fifteen
years; and information systems  three to five years.

Capitalized
Software: Included in property, equipment and improvements are costs related to
internally developed and purchased software that are capitalized and amortized over
periods not exceeding five years. Capitalized costs include direct costs of materials and
services incurred in developing or obtaining internal-use software and payroll and
payroll-related costs for employees directly involved in the development of internal-use
software.

The carrying value of
capitalized software is reviewed if the facts and circumstances suggest that it may be
impaired. Indicators of impairment may include a subsequent change in the extent or manner
in which the software is used or expected to be used, a significant change to the software
is made or expected to be made or the cost to develop or modify internal-use software
exceeds that expected amount. Management does not believe any impairment of its
capitalized software existed at December 31, 2004.

Goodwill: Goodwill
arising from business combinations represents the excess of the purchase price over the
estimated fair value of the net assets of the businesses acquired. In accordance with the
provisions of SFAS No. 142, goodwill is not amortized but tested annually for impairment
or more frequently if circumstances indicate the possibility of impairment.
Management does not believe any impairment of its goodwill existed at December 31, 2004.

Intangible Assets:
Intangible assets consist of covenants not to compete, tradenames and customer lists, all
of which resulted from business combinations. The values assigned to the covenants are
amortized on a straight-line basis over their contractual terms, which range from one to
five years. The customer list and tradename valuations are amortized over their period of
expected benefit, which averages 9.5 months and 20 months, respectively.

Management reviews for
impairment of intangible assets and long-lived assets on an ongoing basis and whenever
events or changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Management does not believe any impairment of its intangible assets or
long-lived assets existed at December 31, 2004.

Fair Value of Financial
Instruments:The carrying value of Aprias bank debt approximates fair value
because the underlying instruments are variable notes that reprice frequently. The fair
value of the convertible senior notes, as determined by reference to quoted market prices,
is $287,878,000. The carrying amounts of cash and cash equivalents, accounts receivable,
trade payables and accrued expenses approximate fair value because of their short
maturity.

---

Advertising:
Advertising costs amounting to $4,799,000, $3,155,000 and $2,804,000 for 2004, 2003 and
2002, respectively, are expensed as incurred and included in selling, distribution and
administrative expenses.

Distribution
Expenses: Distribution expenses are included in selling, distribution and
administrative expenses and totaled $156,272,000, $142,348,000 and $131,354,000 in 2004,
2003, and 2002, respectively.

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

Derivative Instruments
and Hedging Activities: From time to time Apria uses derivative financial instruments
to limit exposure to interest rate fluctuations on the companys variable rate
long-term debt. The company accounts for derivative instruments pursuant to the provisions
of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities.
The companys derivatives are recorded on the balance sheet at their fair value and,
for derivatives accounted for as cash flow hedges, any unrealized gains or losses on their
fair value are included, net of tax, in other comprehensive income.

Stock-based
Compensation:The company accounts for its stock-based compensation plans under the
recognition and measurement principles of Accounting Principles Board Opinion
(APB) No. 25,Accounting for Stock Issued to Employees,and related interpretations. Apria has adopted the disclosure provisions of SFAS No.
123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148,
Accounting for Stock-Based Compensation  Transition and Disclosure  an
amendment of FASB Statement No. 123. For the year ended December 31, 2004, net
income reflects compensation expense for restricted stock awards and restricted stock
purchase rights valued in accordance with APB No. 25. Had compensation expense for all of
the companys stock-based compensation awards been recognized based on the fair value
recognition provisions of SFAS No. 123, Aprias net income and per share amounts
would have been adjusted to the pro forma amounts indicated below. See Note 1 
Other Recent Accounting Pronouncements  SFAS No. 123R and Note 6 
Stockholders Equity.

|                                                                                                                                               | Year Ended December 31,
|---------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------
|
|
|
|Net income as reported                                                                                                                         |                        
|Add: stock-based compensation
expense included in      
reported net income, net of related tax effects                                        |                        
|Deduct: total stock-based
compensation expense      
determined for all awards under fair value-based     
 method, net of related tax effects |                        
|                                                                                                                                               |                        
|Pro forma net income                                                                                                                           |                        
|                                                                                                                                               |                        
|Basic net income per share:                                                                                                                    |                        
|As reported                                                                                                                                    |                        
|Pro forma                                                                                                                                      |                        
|Diluted net income per share:                                                                                                                  |                        
|As reported                                                                                                                                    |                        
|Pro forma                                                                                                                                      |                        

Comprehensive Income:For the years ended December 31, 2004 and 2003, the difference between net income and
comprehensive income is $904,000 and $314,000, respectively, net of taxes, which is
attributable to unrealized gains on various interest rate swap agreements, which are
accounted for as cash flow hedges.

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

Change in Accounting
Principle: Effective January 1, 2002, Apria adopted SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. This statement
superseded SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, and amended other guidance related to the
accounting and reporting of long-lived assets. SFAS No. 144 requires that one
accounting model be used for long-lived assets to be disposed of by sale. Discontinued
operations are to be measured similarly to other long-lived assets classified as held for
sale at the lower of its carrying amount or fair value less cost to sell. Future operating
losses will no longer be recognized before they occur. SFAS No. 144 also broadened
the presentation of discontinued operations to include a component of an entity when
operations and cash flows can be clearly distinguished, and established criteria to
determine when a long-lived asset is held for sale. Adoption of this statement did not
have a material effect on Aprias consolidated financial statements.

---

Other Recent Accounting
Pronouncements:In December 2002, SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure  an amendment of FASB Statement No.
123, was issued. This statement amends SFAS No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition and guidance
for a voluntary change to the fair value based method of accounting for stock-based
employee compensation. SFAS No. 148 also amends the disclosure requirements of SFAS No.
123 to require prominent disclosures in both interim and annual financial statements about
the method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The company has complied with the expanded financial
statement disclosure requirements in its consolidated financial statements.

In October 2002, the
FASBs Emerging Issues Task Force (EITF) issued EITF 02-17, which
addresses issues raised in the interpretation of SFAS No. 141, Business
Combinations and SFAS No. 142, Goodwill and Other Intangible Assets and
the identification and valuation of intangible assets. EITF 02-17 provides guidance on
determining when, as a result of a business combination, a customer-related intangible
asset exists that should be separately valued from goodwill. EITF 02-17 is effective for
business combinations consummated and goodwill impairment tests performed after October
25, 2002. Adoption of this interpretation did not have a material effect on the
companys consolidated financial statements.

In November 2002, the FASB
issued FASB Interpretation (FIN) No. 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others, an interpretation of SFAS Nos. 5, 57 and 107 and rescission of FIN No. 34,
Disclosure of Indirect Guarantees of Indebtedness of Others. FIN No. 45
elaborates on the disclosure requirements for the interim and annual financial statements
of the guarantor. It also requires that a guarantor recognize a liability at the inception
of the guarantee for the fair value of the obligation undertaken. The disclosure
provisions became effective at December 31, 2002 while the recognition provisions of FIN
No. 45 became effective January 1, 2003. Adoption of this interpretation did not have a
material effect on Aprias consolidated financial statements.

FIN No. 46,
Consolidation of Variable Interest Entities, an interpretation of Accounting
Research Bulletin No. 51, was originally issued in January 2003 and subsequently revised
in December 2003. FIN No. 46, as revised, requires a variable interest entity to be
consolidated by a company if that company is subject to a majority of the risk of loss
from the variable interest entitys activities or is entitled to receive a majority
of the entitys residual returns or both. FIN No. 46 also requires certain
disclosures about variable interest entities in which a company has a significant
interest, regardless of whether consolidation is required. Application of FIN No. 46 is
required for potential variable interest entities commonly referred to as special purpose
entities for periods ending after December 15, 2003. Application of the provisions will be
required for all other variable interest entities by the end of the first reporting period
that ends after March 15, 2004. The company currently is not the beneficiary of any
variable interest entities, therefore the adoption of this interpretation did not have a
material effect on the companys consolidated financial statements.

In April 2003, the FASB
issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and
Hedging Activities. SFAS No. 149 amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. The statement is generally effective
for contracts entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. The adoption of this statement did not have a material
effect on the companys consolidated financial statements.

In November 2004, the FASB
issued 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. The statement is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. Apria does not expect the
adoption of SFAS No. 151 to 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 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 fair value of the award on the date of grant. 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). Adoption of SFAS No. 123R is required as of the
beginning of the first interim or annual reporting period that begins after June 15, 2005.
Accordingly, Apria will adopt the statement July 1, 2005. Management is currently
evaluating the statement and its transition provisions. The impact of adoption on the
results of operations cannot be estimated at this time as it is dependent on the level of
future share-based awards. However, had SFAS No. 123R been adopted in prior periods, the
effect would have approximated the SFAS No. 123 proforma disclosures presented above.

In December 2004, the FASB
issued SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment of APB No.
29, Accounting for Nonmonetary Transactions. This statement eliminates the
exception from fair value measurement for nonmonetary exchanges of similar productive
assets and replaces it with an exception for exchanges that do not have commercial
substance. If the future cash flows of the entity are not expected to change significantly
as a result of the transaction, then the exchange shall be measured based on the recorded
amount of the nonmonetary assets relinquished, rather than on the fair values of the
exchanged assets. The statement is effective for nonmonetary asset exchanges beginning
after June 15, 2005. Apria does not expect the adoption of SFAS No. 153 to have a material
effect on the companys consolidated financial statements.

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

NOTE 2 -- PROPERTY, EQUIPMENT AND IMPROVEMENTS

Property, equipment and
improvements consist of the following:

|                               | December 31,
|------------------------------ | ------------
|
|
|
|Leasehold improvements         |             
|Equipment and furnishings      |             
|Information systems - hardware |             
|Information systems - software |             
|                               |             
|                               |             
|Less accumulated depreciation  |             
|                               |             
|                               |             
|                               |             

NOTE 3 -- BUSINESS COMBINATIONS

During 2004, Apria
acquired 27 complementary businesses within specific geographic markets, comprised
primarily of home respiratory therapy businesses. Similarly, during 2003 and 2002, the
company acquired 27 and 17 companies, respectively. For all periods presented, these
all-cash transactions were accounted for as purchases and, accordingly, the results of
operations of the acquired businesses are included in the consolidated income statements
from the dates of acquisition. The purchase prices were allocated to the various
underlying tangible and intangible assets and liabilities on the basis of estimated fair
value.

The following table
summarizes the allocation of the purchase prices of acquisitions made by the company,
which include payments deferred from prior years. In 2004, such payments totaled
$4,646,000. At December 31, 2004 and 2003, outstanding deferred consideration totaled
$8,575,000 and $4,464,000, respectively, and is included on the balance sheet in other
accrued liabilities.

---

Cash paid for
acquisitions:

|                                                                              | Year Ended December 31,
|----------------------------------------------------------------------------- | -----------------------
|
|
|
|Fair value of tangible assets
acquired                                        |                        
|Intangible assets                                                             |                        
|Goodwill                                                                      |                        
|                                                                              |                        
|Total assets acquired                                                         |                        
|Liabilities assumed and accrued, net of
   payments deferred from prior years |                        
|                                                                              |                        
|Net assets acquired                                                           |                        
|                                                                              |                        

The following supplemental
unaudited pro forma information presents the combined operating results of Apria and the
businesses that were acquired by Apria during 2004, as if the acquisitions had occurred at
the beginning of the periods presented. The pro forma information is based on the
historical financial statements of Apria and those of the acquired businesses. Amounts are
not necessarily indicative of the results that may have been obtained had the combinations
been in effect at the beginning of the periods presented or that may be achieved in the
future.

|                                    | Year Ended December 31,
|----------------------------------- | -----------------------
|
|
|
|Net revenues                        |                        
|Net income                          |                        
|                                    |                        
|Basic net income per common share   |                        
|                                    |                        
|Diluted net income per common share |                        
|                                    |                        

NOTE 4 -- GOODWILL AND INTANGIBLE ASSETS

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

Aprias goodwill
impairment test is conducted at a reporting unit level and compares each
reporting units fair value to its carrying value. The company has determined that
its geographic regions are reporting units under SFAS No. 142. The measurement of
fair value for each region is based on an evaluation of future discounted cash flows and
is further tested using a multiple of earnings approach. For all years presented,
Aprias tests indicated that no impairment existed and, accordingly, no loss has been
recognized.

For the year ended
December 31, 2004, the net change in the carrying amount of goodwill of $125,091,000 is
the result of business combinations. All of the goodwill recorded in conjunction with
business combinations for the periods presented is expected to be deductible for tax
purposes.

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

|(in thousands)           |  |  | December 31, 2004 |        | December 31, 2003
|------------------------ |  |  | ----------------- | ------ | -----------------
|
|
|
|Covenants not to compete |  |  |                   | 4.7    |                  
|Tradenames               |  |  |                   | 1.7    |                  
|Customer lists           |  |  |                   | <  1.0 |                  
|                         |  |  |                   |        |                  
|                         |  |  |                   |        |                  
|                         |  |  |                   |        |                  

---

Amortization expense
amounted to $6,712,000 for the year ended December 31, 2004. Estimated amortization expense
for each of the fiscal years ending December 31, is presented below:

|Year Ending December 31, | (in thousands)
|------------------------ | --------------
|
|2005                     |               
|2006                     |               
|2007                     |               
|2008                     |               
|2009                     |               

NOTE 5 -- LONG-TERM DEBT

Long-term debt consists of
the following:

|                                                      | December 31,
|----------------------------------------------------- | ------------
|
|
|
|Notes payable relating to revolving credit
facilities |             
|Convertible senior notes                              |             
|Term loans payable                                    |             
|Capital lease obligations (see Note 9)                |             
|Other                                                 |             
|                                                      |             
|                                                      |             
|Less: current maturities                              |             
|                                                      |             
|                                                      |             
|                                                      |             

Revolving Credit
Facility: Aprias credit agreement with Bank of America and a syndicate of
lenders was amended and restated effective November 23, 2004. The amendment increased the
limit of the companys senior secured credit agreement to $500,000,000 from
$400,000,000. Prior to the amendment, the credit facilities consisted of a $100,000,000
revolving credit facility, a $125,000,000 five-year term loan and a $175,000,000
seven-year term loan. These loans were eliminated in favor of a $500,000,000 revolving
credit facility, from which proceeds were used to pay off the remaining balances on the
previous loans. The maturity date of the new revolver is November 23, 2009.

At December 31, 2004,
borrowings under the revolving credit facility were $224,750,000, outstanding letters of
credit totaled $3,855,000 and credit available under the revolving facility was
$271,395,000.

The senior secured credit
agreement permits Apria to select one of two variable interest rates. One option is the
base rate, which is expressed as the higher of (a) the Federal Funds rate plus 0.50% or
(b) the Bank of America prime rate. The other option is the Eurodollar rate, which is
based on the London Interbank Offered Rate. Interest on outstanding balances under the
senior secured credit agreement is determined by adding a margin to the Eurodollar rate or
base rate in effect at each interest calculation date. The applicable margin for the
revolving credit facility is based on Aprias debt rating as determined by either
S&P or Moodys with respect to the credit facility. The applicable margin ranges
from 0.75% to 1.50% for Eurodollar loans and from zero to 0.50% for base rate loans. The
effective interest rate at December 31, 2004, after consideration of the effect of the
swap agreements, was 3.66% on total borrowings of $224,750,000. Without the effect of the
swap agreements, such rate would have been 3.51%. The senior credit agreement also
requires payment of commitment fees ranging from 0.15% to 0.375% (also based on
Aprias debt rating) on the unused portion of the revolving credit facility.

Borrowings under the
senior secured credit facility are collateralized by substantially all of the assets of
Apria. At December 31, 2004, the company was in compliance with all of the financial
covenants required by the credit agreement.

The carrying value of the
revolving credit facility approximates fair value because the underlying instruments are
variable notes that reprice frequently.

---

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

The notes bear interest at
the rate of 3.375% per annum, which is payable on September 1 and March 1 of each year,
beginning on March 1, 2004. Also, during certain periods commencing on September 8, 2010,
Apria will pay contingent interest on the interest payment date for the applicable
interest period if the average trading price of the notes during the five trading days
ending on the third day immediately preceding the first day of the applicable interest
period equals or exceeds 120% of the principal amount of the notes. The contingent
interest payable per note will equal 0.25% per year of the average trading price of such
note during the applicable five trading-day reference period. During certain periods, the
notes are convertible into shares of Apria common stock, initially at a conversion rate of
28.6852 shares of common stock per $1,000 principal amount of notes, subject to adjustment
and under certain circumstances as outlined in the indenture.

The notes are unsecured
and unsubordinated obligations and are senior in right of payment to any subordinated debt
of the company. The notes rank junior to the companys senior secured credit facility
to the extent of the assets securing such indebtedness. The fair value of these notes, as
determined by reference to quoted market prices, is $287,878,000 at December 31, 2004.

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

|Year Ending December 31, | (in thousands)
|------------------------ | --------------
|
|2005                     |               
|2006                     |               
|2007                     |               
|2008                     |               
|2009                     |               
|Thereafter               |               
|                         |               
|                         |               
|                         |               

Total interest paid in 2004, 2003 and 2002 amounted to
$17,990,000, $10,297,000 and $13,691,000, respectively.

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

At December 31, 2004,
Apria had two interest rate swap agreements in effect to fix its LIBOR-based variable rate
debt, a three-year agreement with a notional amount of $25,000,000 and a fixed rate of
3.04%, and a four-year agreement with a notional amount of $25,000,000 and a fixed rate of
3.42%. Both interest rates are before applicable interest rate margins specified in the
applicable credit agreement. Apria also had two swap agreements with an aggregate notional
amount of $50,000,000 and fixed rates of 2.435% and 2.43%, before applicable interest
margins, that expired in December 2004. Prior to that, the company had two interest rate
swap agreements with a total notional amount of $100,000,000 and a fixed-rate of 2.58%
before applicable interest margin, that expired March 31, 2003. The swap agreements are
being accounted for as cash flow hedges under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. Accordingly, the difference between
the interest received and interest paid is reflected as an adjustment to interest expense.
For the years ended December 31, 2004, 2003 and 2002, Apria paid net settlement amounts of
$1,381,000, $1,917,000 and $780,000, respectively. At December 31, 2004, the aggregate
fair value of the swap agreements was a deficit of $42,000 and is reflected in the
accompanying balance sheet in other accrued liabilities. Unrealized gains and losses on
the fair value of the swap agreements are reflected, net of taxes, in other comprehensive
loss. Aprias exposure to credit loss under the swap agreements is limited to the
interest rate spread in the event of counterparty nonperformance. Apria does not
anticipate losses due to counterparty nonperformance as its counterparties to the various
swap agreements are nationally recognized financial institutions with strong credit
ratings.

---

NOTE 6 -- STOCKHOLDERS EQUITY

Treasury Stock: On
January 16, 2004, Apria prepaid $50,000,000 to repurchase 1,730,703 shares of its common
stock at a strike price of $28.89 through an accelerated share repurchase program. The
related contract, which had a scheduled settlement date of June 16, 2004, provided for
cash or net share settlement at Aprias election. The repurchase of the shares
required by the contract was completed on April 28, 2004 and the share price differential
was settled in cash on June 7, 2004, for a total cost of $53,033,000. During the third
quarter of 2004, the company purchased an additional 1,687,400 shares for $46,967,000,
thereby completing the share repurchase authorized by the Board of Directors.

During 2003, Apria
repurchased 4,526,000 shares of its common stock for $118,471,000. Of these amounts,
3,786,000 shares were repurchased for $100,000,000 in conjunction with the issuance of the
convertible senior notes. The company also repurchased 1,597,000 shares for $35,000,000 in
2002. With the exception of the shares acquired through the accelerated repurchase program
in 2004, all repurchases were made in open market transactions throughout the year. All
repurchased shares are being held in treasury.

Stock Compensation
Plans:Apria has various stock-based compensation plans, which are described below.
Management accounts for these plans under the recognition and measurement principles of
APB No. 25 and related interpretations. Compensation expense of $4,423,000 and $1,963,000
related to the issuance of restricted stock purchase rights and restricted stock awards is
included in net income for the years ended December 31, 2004 and 2003, respectively.
As of December 31, 2004, expense that may be recorded in future periods relating to
such awards amounted to $13,466,000.

For purposes of the pro
forma disclosure presented in Note 1, the fair value of each option grant is estimated on
the date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 2004, 2003 and 2002: risk-free interest
rates of 3.19%, 2.84% and 4.35%, respectively; dividend yield of 0% for all years;
expected lives of 4.51 years for 2004, 4.80 years in 2003 and 4.13 years in 2002 and
volatility of 43% for 2004, 54% for 2003 and 59% for 2002. See Note 1  Summary
of Significant Accounting Policies  Stock-based Compensation and Other Recent
Accounting Pronouncements.

Fixed Stock Options:Apria has various fixed stock option plans that provide for the granting of incentive
or non-statutory options to its key employees and non-employee members of the Board of
Directors. In the case of incentive stock options, the exercise price may not be less than
the fair market value of the companys stock on the date of the grant, and may not be
less than 110% of the fair market value of the companys stock on the date of the
grant for any individual possessing 10% or more of the voting power of all classes of
stock of the company. The dates at which the options become exercisable range from the
date of grant to five years after the date of grant and expire not later than ten years
after the date of grant. The weighted-average fair values of fixed stock options granted
during 2004, 2003 and 2002 were $12.07, $10.68 and $11.79, respectively.

A summary of the activity of
Aprias fixed stock options for 2004, 2003 and 2002 is presented below:

|                                   | 2004 |           | 2003 |   | 2002 
|---------------------------------- | ---- | --------- | ---- | - | -----
|
|
|
|Outstanding at beginning of year   |      | 4,425,954 |      | $ | 22.16
|Granted:                           |      |           |      |   |      
|Exercise price equal to fair value |      | 1,647,000 |      | $ | 31.45
|Exercised                          |      | (804,770  | )    | $ | 22.48
|Forfeited                          |      | (193,511  | )    | $ | 26.19
|                                   |      |           |      |   |      
|Outstanding at end of year         |      | 5,074,673 |      | $ | 24.97
|                                   |      |           |      |   |      
|Exercisable at end of year         |      | 2,503,546 |      | $ | 21.71
|                                   |      |           |      |   |      

---

The following table
summarizes information about fixed stock options outstanding at December 31, 2004:

|                 |  | Options Outstanding |           | Options Exercisable
|---------------- |  | ------------------- | --------- | -------------------
|
|
|
|$  6.69 - $12.19 |  |                     | 201,590   |                    
|$12.75 - $16.94  |  |                     | 328,861   |                    
|$17.38 - $19.63  |  |                     | 240,199   |                    
|$20.50 - $24.01  |  |                     | 1,679,898 |                    
|$24.18 - $26.23  |  |                     | 352,000   |                    
|$27.13 - $28.30  |  |                     | 767,125   |                    
|$30.20 - $33.40  |  |                     | 1,505,000 |                    
|                 |  |                     |           |                    
|$  6.69 - $33.40 |  |                     | 5,074,673 |                    
|                 |  |                     |           |                    

Performance-based Stock
Options:Included in Aprias stock-based compensation plans are provisions for
the granting of performance-based stock options. In 2004 and 2003, Apria granted options
in the form of restricted stock purchase rights to key members of senior management. These
options become exercisable over periods of six and seven years and expire not later than
ten years from the date of grant. Accelerated vesting will ensue upon the occurrence of
certain events or the achievement of certain cumulative financial targets based on two and
three year measurement periods. As of December 31, 2004, all options related to the
two-year measurement period had vested upon the achievement of certain cumulative
financial targets. The weighted-average fair value of performance-based stock options
granted during 2004 and 2003 was $24.98 and $21.06, respectively.

A summary of the activity of
Aprias performance-based stock options, including those granted in the form of
restricted stock purchase rights, for 2004, 2003 and 2002 is presented below:

|                                    | 2004 |         | 2003 |   | 2002
|----------------------------------- | ---- | ------- | ---- | - | ----
|
|
|
|Outstanding at beginning of year    |      | 603,972 |      | $ | 6.61
|Granted:                            |      |         |      |   |     
|Exercise price less than fair value |      | 110,000 |      | $ | 7.60
|Exercised                           |      | (88,500 | )    | $ | 6.50
|Forfeited                           |      | -       |      | $ | -   
|                                    |      |         |      |   |     
|Outstanding at end of year          |      | 625,472 |      | $ | 6.80
|                                    |      |         |      |   |     
|Exercisable at end of year          |      | 229,972 |      | $ | 6.79
|                                    |      |         |      |   |     

---

The following table summarizes information about
performance-based stock options outstanding at December 31, 2004:

|                  |  | Options Outstanding |         | Options Exercisable
|----------------- |  | ------------------- | ------- | -------------------
|
|
|
|$  6.46 - $  6.46 |  |                     | 455,000 |                    
|$  6.50 - $  6.50 |  |                     | 32,138  |                    
|$  7.05 - $18.56  |  |                     | 138,334 |                    
|                  |  |                     |         |                    
|$  6.46 - $18.56  |  |                     | 625,472 |                    
|                  |  |                     |         |                    

Apria granted restricted
stock awards to its non-employee directors during 2004 and 2003. The awards granted for
2004, representing 26,000 shares, will vest in April 2005. The awards granted in 2003,
representing 26,000 shares, vested and were released in April 2004. Apria also granted
restricted stock awards, representing 200,000 shares, to key members of senior management
on December 30, 2004. These awards will vest on December 31, 2011. Accelerated vesting
will ensue upon the occurrence of certain events and the achievement of certain cumulative
financial targets based on a three-year measurement period. Approximately 9,960,000 shares
of common stock are reserved for future issuance upon the exercise of stock options and
awards under all of Aprias active plans.

---

NOTE
7 -- INCOME TAXES

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

|                                      | December 31,
|------------------------------------- | ------------
|
|
|
|Deferred tax assets:                  |             
|Allowance for doubtful
accounts       |             
|Accruals                              |             
|Asset valuation
reserves              |             
|Net operating loss
carryforward       |             
|Intangible assets                     |             
|Other, net                            |             
|                                      |             
|                                      |             
|Less: valuation allowance             |             
|                                      |             
|Total deferred tax assets             |             
|                                      |             
|Deferred tax liabilities:             |             
|Tax over book depreciation            |             
|Tax over book goodwill
amortization   |             
|Other, net                            |             
|                                      |             
|Total deferred tax liabilities        |             
|                                      |             
|Net deferred tax (liabilities) assets |             
|                                      |             

The ultimate realization
of deferred tax assets is dependent upon the generation of future taxable income during
the periods in which temporary differences become deductible. In making an assessment
regarding the probability of realizing a benefit from these deductible differences,
management considers the companys current and past performance, the market
environment in which the company operates, tax planning strategies and the length of
carryforward periods.

During 2004, the valuation
allowance decreased by $6,803,000 due to the fact that state net operating loss
carryforwards, that were previously expected to expire, became realizable due to a change
in estimate of expected future period earnings.

At December 31, 2004, the
company has various apportioned state net operating loss carryforwards which resulted in a
deferred tax asset, net of federal tax benefit, of $12,329,000 in 2004 and $12,935,000 in
2003.

Income tax expense
(benefit) consists of the following:

|          | Year Ended December 31,
|--------- | -----------------------
|
|
|
|Current:  |                        
|Federal   |                        
|State     |                        
|          |                        
|          |                        
|          |                        
|Deferred: |                        
|Federal   |                        
|State     |                        
|          |                        
|          |                        
|          |                        
|          |                        
|          |                        

The exercise of stock
options granted under Aprias various stock option plans resulted in compensation of
$6,810,000, $6,204,000 and $27,601,000, during 2004, 2003 and 2002, respectively. These
amounts are taxable income to the employee and are deductible by the company for federal
and state tax purposes but are not recognized as expense for financial reporting purposes.
Such tax benefits are included in additional paid-in capital.

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

|                                                                    | Year Ended December 31,
|------------------------------------------------------------------- | -----------------------
|
|
|
|Income tax expense at statutory
rate                                |                        
|Non-deductible expenses                                             |                        
|State taxes, net of federal benefit
   and state loss carryforwards |                        
|Change in valuation allowance                                       |                        
|Settlement of income tax dispute                                    |                        
|Other                                                               |                        
|                                                                    |                        
|                                                                    |                        
|                                                                    |                        

Net income taxes paid
(received) in 2004, 2003 and 2002 amounted to $35,564,000, $50,359,000 and $(3,165,000),
respectively.

The company believes it
has adequately provided for income tax issues not yet resolved with federal, state and
local tax authorities. At December 31, 2004, $19,200,000, net of tax benefit, was accrued
for such federal, state and local tax matters and is included in income taxes payable.
Although not probable, the most adverse resolution of these federal, state and local
issues could result in additional charges to earnings in future periods in addition to the
$19,200,000 currently provided. Based upon a consideration of all relevant facts and
circumstances, the company does not believe the ultimate resolution of tax issues for all
open tax periods will have a materially adverse effect upon its results of operations or
financial condition.

---

NOTE 8 -- PER SHARE AMOUNTS

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

|                                                                                                   | Year Ended December 31,
|-------------------------------------------------------------------------------------------------- | -----------------------
|
|
|
|Numerator:                                                                                         |                        
|Net income                                                                                         |                        
|Numerator for basic and diluted per
share amounts  net income    available to
common stockholders |                        
|Denominator:                                                                                       |                        
|Denominator for basic per share
    amounts  weighted-average shares                              |                        
|Effect of dilutive securities:                                                                     |                        
|Employee stock options and awards                                                                  |                        
|                                                                                                   |                        
|Total dilutive
potential common shares                                                             |                        
|                                                                                                   |                        
|Denominator for diluted per share
amounts  adjusted    weighted-average shares                    |                        
|                                                                                                   |                        
|Basic net income per common share                                                                  |                        
|                                                                                                   |                        
|Diluted net income per common share                                                                |                        
|                                                                                                   |                        
|Employee stock options excluded from
the computation  of diluted per share amounts:                |                        
|Shares for which exercise
price exceeds      average market price of
common stock                  |                        
|                                                                                                   |                        
|Average exercise price per share that
exceeds  average market price of common stock                |                        
|                                                                                                   |                        

---

NOTE 9 -- LEASES

Apria leases substantially all
of its facilities. In addition, delivery vehicles and office equipment are leased under
operating leases. Lease terms are generally ten years or less with renewal options for
additional periods. Many leases provide that the company pay taxes, maintenance, insurance
and other expenses. Rentals are generally increased annually by the Consumer Price Index,
subject to certain maximum amounts defined within individual agreements.

Apria occasionally
subleases unused facility space when a lease buyout is not a viable option. Sublease
income, in amounts not considered material, is recognized monthly and is offset against
facility lease expense. Net rent expense in 2004, 2003 and 2002 amounted to $72,330,000,
$68,141,000 and $62,383,000, respectively.

In addition, during 2004,
2003 and 2002, Apria acquired information systems and software totaling $3,156,000,
$366,000 and $5,937,000, under capital lease arrangements with lease terms ranging from 24
to 36 months. Amortization of the leased information systems and software amounted to
$1,767,000, $1,953,000 and $1,367,000 in 2004, 2003 and 2002, respectively.

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

|                              | December 31,
|----------------------------- | ------------
|
|
|
|Information systems           |             
|Software                      |             
|Less accumulated depreciation |             
|                              |             
|                              |             
|                              |             

Future minimum payments,
by year and in the aggregate, required under capital lease obligations and noncancelable
operating leases consist of the following at December 31, 2004:

|(in thousands)                                   | CapitalLeases |  | OperatingLeases
|------------------------------------------------ | ------------- |  | ---------------
|
|2005                                             |               |  | $              
|2006                                             |               |  |                
|2007                                             |               |  |                
|2008                                             |               |  |                
|2009                                             |               |  |                
|Thereafter                                       |               |  |                
|                                                 |               |  |                
|                                                 |               |  |                
|                                                 |               |  |                
|Less interest included in minimum lease payments |               |  |                
|                                                 |               |  |                
|Present value of minimum lease payments          |               |  |                
|Less current portion                             |               |  |                
|                                                 |               |  |                
|                                                 |               |  | $              
|                                                 |               |  |                

NOTE 10 -- EMPLOYEE BENEFIT PLANS

Apria has a 401(k) defined
contribution plan, whereby eligible employees may contribute up to 35% of their annual
base earnings. The company matches 50% of the first 8% of employee contributions. Total
expenses related to the defined contribution plan were $4,588,000, $4,456,000 and
$4,569,000 in 2004, 2003 and 2002, respectively.

---

NOTE 11 -- COMMITMENTS AND CONTINGENCIES

Litigation: As
previously reported, since mid-1998 Apria has been the subject of an investigation
conducted by the U.S. Attorneys office in Los Angeles and the U.S. Department of
Health and Human Services. The investigation concerns the documentation supporting
Aprias billing for services provided to patients whose healthcare costs are paid by
Medicare and other federal programs. Apria is cooperating with the government and has
responded to various document requests and subpoenas.

The investigation relates
to two civil qui tam lawsuits against Apria filed under seal on behalf of the
government. In 2004 the government for the first time provided Apria with redacted copies
of the complaints in these lawsuits. On the copies provided to Apria, the names of the
plaintiffs, the courts and the dates instituted were blacked out. In general, both
complaints allege that for an unspecified period of time commencing in 1995 Apria
knowingly engaged in various schemes to defraud the government by submitting false claims
for payment and by manipulating and falsifying documentation in support of such claims.
The complaints do not quantify the alleged damages sought and do not identify any of the
particular individuals, patient accounts or Apria facilities alleged to be involved in any
improper billing. To date, the U.S. Attorneys office has not informed Apria of any
decision to intervene in the qui tam actions; however, it could reach a decision
with respect to intervention at any time.

Apria has acknowledged
that there may be errors and omissions in supporting documentation affecting a portion of
its billings. However, it believes that most of the alleged documentation errors and
omissions should not give rise to any liability. Accordingly, Apria believes that most of
the assertions made by the government and the qui tam plaintiffs are legally and
factually incorrect and that Apria is in a position to assert numerous meritorious
defenses.

During the past several
years, Apria and representatives of the government have been analyzing and discussing the
documentation underlying Aprias billings to the federal government for services
provided by Apria from mid-1995 through 1998 to a sample of 300 patients selected by the
government. Government representatives and counsel for the plaintiffs asserted in 2001
that, by a process of extrapolation from the patient files in the sample to all of
Aprias government billings during the sample period, Apria could have a very
significant liability to the government under the False Claims Act. Differences between
Apria and the government have been reduced on a number of issues as a result of the
analysis and discussions referred to above. Consequently, while Aprias potential
liability could still be very material, Apria believes that the amount the government is
now seeking is significantly less than asserted in 2001.

Apria and government
representatives are continuing to explore whether it will be possible to resolve this
matter on a basis that would be considered fair and reasonable by all parties.
Notwithstanding the progress made to date in reducing the differences between Apria and
the government, there remain significant disagreements as to the number and the legal
implications of billing documentation deficiencies in the 300-patient sample. Accordingly,
Apria cannot provide any assurances as to the outcome of its discussions with the
government, or as to the outcome of the qui tam litigation in the absence of a
settlement. Management cannot estimate the possible loss or range of loss that may result
from these proceedings and, therefore, has not recorded any related accruals.

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

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

Medicare
Reimbursement: In December 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003, which is herein referred to as the Medicare Modernization Act,
became law. The Medicare Modernization Act includes a number of provisions that affect
Medicare Part B reimbursement policies for items and services provided by Apria, the most
significant of which are:

| |  | 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 went into effect January 1, 2005. The reimbursement reduction for oxygen, however,
is delayed until the Office of the Inspector General provides the Centers for Medicare and
Medicaid Services, or CMS, with the additional data required to establish pricing.
Providers are currently being reimbursed for oxygen based on 2004 fee schedules, with an indication
from CMS that no retroactive adjustment will be made once the new pricing is in effect.
Further, a freeze on annual payment increases for durable medical equipment has been
instituted from 2004 through 2008.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Reimbursement reduction 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, as
defined by the Medicare Modernization Act, plus 6%, plus a separate dispensing fee per
patient episode. The dispensing fees for 2005 have been established at $57.00 for a 30-day
supply of medications and $80.00 for a 90-day supply.                                                                                                                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Establishment of a competitive bidding program  Such a program would require that
suppliers wishing to provide certain items to beneficiaries submit bids to Medicare. The
program, for as yet unspecified durable medical equipment items and services, is to be
transitioned into (i) 10 of the largest metropolitan statistical areas in 2007; (ii) 80 of
the largest metropolitan statistical areas in 2009; and (iii) additional areas after 2009.
The legislation contains special provisions for rural areas.                                                                                                                                                                                                                                                                                                                                                           
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Reimbursement for home infusion therapy under Medicare Part D -- Currently, a limited
number of infusion therapies, supplies and equipment is covered by Medicare Part B. The
Medicare Modernization Act provides expanded coverage for home infusion drugs. The
industry is currently working with CMS to further define the coverage and payment policies
that will govern the administration of this benefit, which takes effect in 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Incentives for expansion of Medicare Part C -- The Medicare Modernizaion Act includes
financial incentives for managed care plans to expand their provision of Medicare
Advantage plans in 2006 in a stated effort to attract more Medicare beneficiaries to
managed care models. The company maintains contracts to provide respiratory, 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 starting in mid-2006.                                                                                                                                                                                                                                                                                                                

Aprias management
estimates that the revision to inhalation drug reimbursement in 2004 resulted in a revenue
reduction from 2003 levels of approximately $15 million. Once the 2005 oxygen fee
schedules are released, management will provide an estimate of the aggregate impact of all
reimbursement reductions that will be in effect for 2005. The impact of the competitive
bidding program scheduled to commence in 2007 cannot be estimated at this time.

The Balanced Budget Act of
1997 contained several provisions that lowered Aprias Medicare reimbursement levels.
Subsequent legislationthe Medicare Balanced Budget Refinement Act of 1999 and the
Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act of
2000mitigated some of the effects of the original legislation. The Medicare
Modernization Act also addressed some of the issues pending from the earlier legislation.
However, still pending from the 1997 Legislation is the streamlined authority granted to
the Secretary of 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. In December 2002, CMS issued an interim
final rule that establishes 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. As of this date, neither
CMS nor the durable medical equipment regional carriers have used the expedited authority.

Supplier
Concentration: Apria currently purchases approximately 56% of its patient service
equipment and supplies from four vendors. Although there are a limited number of
suppliers, management believes that other vendors could provide similar products on
comparable terms. However, a change in suppliers could cause delays in service delivery
and possible losses in revenue, which could adversely affect operating results.

Guarantees and
Indemnities: From time to time Apria enters into certain types of contracts that
contingently require the company to indemnify parties against third party claims. These
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 or 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 employment
relationship.

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.

---

NOTE 12 -- SERVICE/PRODUCT LINE DATA

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

|                             | Year Ended December 31,
|---------------------------- | -----------------------
|
|
|
|Net revenues:                |                        
|Respiratory therapy          |                        
|Infusion therapy             |                        
|Home medical equipment/other |                        
|                             |                        
|Total net revenues           |                        
|                             |                        
|Gross profit:                |                        
|Respiratory therapy          |                        
|Infusion therapy             |                        
|Home medical equipment/other |                        
|                             |                        
|Total gross profit           |                        
|                             |                        

---

NOTE 13 -- SELECTED QUARTERLY FINANCIAL DATA (unaudited)

|                                |  | Quarter
|------------------------------- |  | -------
|
|
|
|2004                            |  |        
|Net revenues                    |  | $      
|Gross profit                    |  |        
|Operating income                |  |        
|Net income                      |  |        
|                                |  |        
|Basic income per common share   |  | $      
|Diluted income per common share |  | $      
|2003                            |  |        
|Net revenues                    |  | $      
|Gross profit                    |  |        
|Operating income                |  |        
|Net income                      |  |        
|                                |  |        
|Basic income per common share   |  | $      
|Diluted income per common share |  | $      

Net income for the third
quarter of 2004 was impacted by year-to-date adjustment to lower the effective income
tax rate.  State net operating loss carryforwards, that were previously expected to
expire, became realizable due to a change in estimate of expected future period earnings.

        
        

---

APRIA HEALTHCARE GROUP INC.

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

|                                                                   | Additions | 
|------------------------------------------------------------------ | --------- | 
|
|
|                                                                  
|Year ended December 31, 2004                                       |           | 
|Deducted from asset accounts:                                      |           | 
|Allowance for doubtful accounts                                    |           | 
|Reserve for inventory and patient
     service equipment shortages |           | 
|Year ended December 31, 2003                                       |           | 
|Deducted from asset accounts:                                      |           | 
|Allowance for doubtful accounts                                    |           | 
|Reserve for inventory and patient
     service equipment shortages |           | 
|Year ended December 31, 2002                                       |           | 
|Deducted from asset accounts:                                      |           | 
|Allowance for doubtful accounts                                    |           | 
|Reserve for inventory and patient
     service equipment shortages |           | 

---

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

Dated:  March 16, 2005

| | APRIA HEALTHCARE GROUP INC./s/ LAWRENCE M. HIGBY
Lawrence M. HigbyChief Executive Officer
| | -----------------------------------------------------------------------------------------

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

|Signature                                        |  | Title                                                                             |  | Date          
|------------------------------------------------ |  | --------------------------------------------------------------------------------- |  | --------------
|
|/s/ LAWRENCE M. HIGBYLawrence M. Higby           |  | Chief Executive Officer and
Director(Principal Executive Officer)                 |  | March 16, 2005
|/s/ AMIN I. KHALIFAAmin I. Khalifa               |  | Executive Vice President and
Chief Financial Officer(Principal Financial Officer) |  | March 16, 2005
|/s/ ALICIA PRICEAlicia Price                     |  | Vice President and Controller
(Principal Accounting Officer)                      |  | March 16, 2005
|/s/ RALPH V. WHITWORTHRalph V. Whitworth         |  | Director and Chairman of the Board                                                |  | March 16, 2005
|/s/ VICENTE ANIDO, JR.Vicente Anido, Jr.         |  | Director                                                                          |  | March 16, 2005
|/s/ I.T. CORLEYI.T. Corley                       |  | Director                                                                          |  | March 16, 2005
|/s/ DAVID L. GOLDSMITHDavid L. Goldsmith         |  | Director                                                                          |  | March 16, 2005
|/s/ RICHARD H. KOPPESRichard H. Koppes           |  | Director                                                                          |  | March 16, 2005
|/s/ PHILIP R. LOCHNER, JR.Philip R. Lochner, Jr. |  | Director                                                                          |  | March 16, 2005
|/s/ JERI L. LOSEJeri L. Lose                     |  | Director                                                                          |  | March 16, 2005
|/s/ BEVERLY B. THOMASBeverly B. Thomas           |  | Director                                                                          |  | March 16, 2005

---

|Exhibit No. |  | EXHIBIT INDEXDescription                                                                                                                                                                                       |  | Reference
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------
|
|3.1         |  | Restated Certificate of
Incorporation of Registrant.                                                                                                                                                           |  | (c)      
|            |  |                                                                                                                                                                                                                |  |          
|3.2         |  | Certificate of Ownership
and Merger merging Registrant into Abbey and amending Abbeys
Restated Certificate of Incorporation to change Abbeys name to "Apria
Healthcare Group Inc."                           |  | (g)      
|            |  |                                                                                                                                                                                                                |  |          
|3.3         |  | Certificate of Amendment
of Certificate of Incorporation of Registrant                                                                                                                                         |  |          
|            |  |                                                                                                                                                                                                                |  |          
|3.4         |  | Amended and Restated Bylaws
of Registrant, as amended on November 20, 2002.                                                                                                                                    |  | (h)      
|            |  |                                                                                                                                                                                                                |  |          
|4.1         |  | Specimen Stock Certificate
of the Registrant.                                                                                                                                                                  |  | (g)      
|            |  |                                                                                                                                                                                                                |  |          
|4.2         |  | Certificate of Designation of
the Registrant                                                                                                                                                                   |  | (c)      
|            |  |                                                                                                                                                                                                                |  |          
|4.3         |  | Indenture dated August 20,
2003, between Registrant and U.S. Bank National Association,
as trustee, describing the Registrants issuance of 3.375% Convertible Senior
Notes due 2033.                          |  | (k)      
|            |  |                                                                                                                                                                                                                |  |          
|4.4         |  | First Supplemental Indenture
dated December 14, 2004, supplementing and amending the indenture dated August
20, 2003.                                                                                          |  |          
|            |  |                                                                                                                                                                                                                |  |          
|10.1        |  | 1991 Stock Option Plan                                                                                                                                                                                         |  | (a)      
|            |  |                                                                                                                                                                                                                |  |          
|10.2        |  | Schedule of Registration
Procedures and Related Matters                                                                                                                                                        |  | (b)      
|            |  |                                                                                                                                                                                                                |  |          
|10.3        |  | 401(k) Savings Plan, restated
effective October 1, 1993, amended December 28, 1994.                                                                                                                            |  | (e)      
|            |  |                                                                                                                                                                                                                |  |          
|10.4        |  | Amendment Number Two to the
401(k) Savings Plan, dated June 27, 1995.                                                                                                                                          |  | (h)      
|            |  |                                                                                                                                                                                                                |  |          
|10.5        |  | Apria/Homedco Stock Incentive
Plan, dated June 28, 1995.                                                                                                                                                       |  | (d)      
|            |  |                                                                                                                                                                                                                |  |          
|10.6        |  | Amended and Restated 1992
Stock Incentive Plan.                                                                                                                                                                |  | (e)      
|            |  |                                                                                                                                                                                                                |  |          
|10.7        |  | Amendment Number Three to
the 401(k) Savings Plan, effective January 1, 1996.                                                                                                                                  |  | (h)      
|            |  |                                                                                                                                                                                                                |  |          
|10.8        |  | Amendment 1996-1 to the
1991 Stock Option Plan, dated October 28, 1996.                                                                                                                                        |  |          
|            |  |                                                                                                                                                                                                                |  |          
|10.9        |  | Amendment 1996-1 to the
Amended and Restated 1992 Stock Incentive Plan, dated October 28, 1996.                                                                                                                |  |          
|            |  |                                                                                                                                                                                                                |  |          
|10.10       |  | Amended and Restated 1997 Stock
Incentive Plan, dated February 27, 1997, as amended through June 30, 1998.                                                                                                     |  |          
|            |  |                                                                                                                                                                                                                |  |          
|10.11       |  | 1998 Nonqualified Stock
Incentive Plan, dated December 15, 1998                                                                                                                                                |  |          
|            |  |                                                                                                                                                                                                                |  |          
|10.12       |  | Amendment No. 1 to the 1998
Nonqualified Stock Incentive Plan, dated January 31, 2001.                                                                                                                         |  | (f)      
|            |  |                                                                                                                                                                                                                |  |          
|10.13       |  | Internationl Swaps and Derivatives
Association, Inc. Master Agreement dated December 3, 2002, between Registrant and
Credit Lyonnais New York Branch.                                                          |  | (h)      
|            |  |                                                                                                                                                                                                                |  |          
|10.14       |  | Schedule to the Master Agreement
dated December 3, 2002, between Registrant and Credit Lyonnais New York Branch.                                                                                               |  | (h)      
|            |  |                                                                                                                                                                                                                |  |          
|10.15       |  | International Swaps and
Derivatives Association, Inc. Master Agreement dated December 3, 2002, between
Registrant and Bank of Nova Scotia.                                                                     |  | (h)      
|            |  |                                                                                                                                                                                                                |  |          
|10.16       |  | Schedule to the Master Agreement
dated December 3, 2002, between Registrant and Bank of Nova Scotia.                                                                                                           |  | (h)      
|            |  |                                                                                                                                                                                                                |  |          
|10.17       |  | Amendment to Executive Severance Agreement
dated March 18, 2003, between Registrant and Anthony S. Domenico.                                                                                                   |  | (h)      
|            |  |                                                                                                                                                                                                                |  |          
|10.18       |  | Form of Stock Ownership Requirements
Agreement, dated February 18, 2003, between Registrant and its exective officers,
and Exhibit A thereto, Stock Ownership Requirements for Senior Executive Officers.      |  | (i)      
|            |  |                                                                                                                                                                                                                |  |          
|10.19       |  | Apria Healthcare Group Inc. 2003
Performance Incentive Plan, dated July 17, 2003.                                                                                                                              |  | (j)      
|            |  |                                                                                                                                                                                                                |  |          
|10.20       |  | Prepaid Forward Commitment
to Repurchase Shares of Apria Common Stock, dated January 16, 2004, between Registrant
and Credit Suisse First Boston Capital LLC.                                                  |  | (m)      
|            |  |                                                                                                                                                                                                                |  |          
|10.21       |  | Settlement Agreement Related
to the Repurchase of Apria Common Stock, dated January 16, 2004, between Registrant
and Credit Suisse First Boston Capital LLC.                                                   |  | (m)      
|            |  |                                                                                                                                                                                                                |  |          
|10.22       |  | Executive Severance Agreement
dated April 23, 2004, between Registrant and Amin I. Khalifa.                                                                                                                    |  | (n)      
|            |  |                                                                                                                                                                                                                |  |          
|10.23       |  | Executive Severance Agreement
dated April 23, 2004, between Registrant and John J. McDowell.                                                                                                                   |  | (n)      
|            |  |                                                                                                                                                                                                                |  |          
|10.24       |  | Executive Severance Agreement
dated April 23, 2004, between Registrant and Daniel J. Starck.                                                                                                                   |  | (n)      
|            |  |                                                                                                                                                                                                                |  |          
|10.25       |  | Fourth Amended and Restated
Credit Agreement dated November 23, 2004, among Registrant and
certain of its subsidiaries, Bank of America, N.A., The Bank of Nova Scotia and
certain other lending institutions. |  | (o)      
|            |  |                                                                                                                                                                                                                |  |          
|            |  |                                                                                                                                                                                                                |  |          
|14.1        |  | Registrants
Code of Ethical Business Conduct.                                                                                                                                                                 |  | (l)      
|            |  |                                                                                                                                                                                                                |  |          
|21.1        |  | List of Subsidiaries.                                                                                                                                                                                          |  |          
|            |  |                                                                                                                                                                                                                |  |          
|23.1        |  | Consent of Deloitte & Touche
LLP, Independent Registered Public Accounting Firm.                                                                                                                               |  |          
|            |  |                                                                                                                                                                                                                |  |          
|31.1        |  | Certification 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 the Chief
Executive Officer pursuant to 18 U.S.C. Section 1350.                                                                                                                               |  |          
|            |  |                                                                                                                                                                                                                |  |          
|32.2        |  | Certification of the Chief
Financial Officer pursuant to 18 U.S.C. Section 1350.                                                                                                                               |  |          

---

|    |  | References  Documents filed with the
Securities and Exchange Commission                                                                    
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Incorporated by
reference to Registration Statement on Form S-1 (Registration No. 33-44690), as
filed on December 23, 1991.                 
|    |  |                                                                                                                                             
|(b) |  | Incorporated by
reference to Registration Statement on Form S-4 (Registration No. 33-69094), as
filed on September 17, 1993.                
|    |  |                                                                                                                                             
|(c) |  | Incorporated by
reference to Registration Statement on Form S-4 (Registration No. 33-90658), and
its appendices, as filed on March 27, 1995.
|    |  |                                                                                                                                             
|(d) |  | Incorporated by
reference to Registration Statement on Form S-8 (Registration No. 33-94026), as
filed on June 28, 1995.                     
|    |  |                                                                                                                                             
|(e) |  | Incorporated by
reference to Registration Statement on Form S-8 (Registration No. 33-80581), as
filed on December 19, 1995.                 
|    |  |                                                                                                                                             
|(f) |  | Incorporated by
reference to Annual Report on Form 10-K for the year ended December 31, 2000.                                               
|    |  |                                                                                                                                             
|(g) |  | Incorporated by
reference to Annual Report on Form 10-K for the year ended December 31, 2001.                                               
|    |  |                                                                                                                                             
|(h) |  | Incorporated by
reference to Annual Report on Form 10-K for the year ended December 31, 2002.                                               
|    |  |                                                                                                                                             
|(i) |  | Incorporated by
reference to Quarterly Report on Form 10-Q dated March 31, 2003, as
filed on May 15, 2003.                                  
|    |  |                                                                                                                                             
|(j) |  | Incorporated by
reference to Quarterly Report on Form 10-Q dated June 30, 2003, as
filed on August 12, 2003.                                
|    |  |                                                                                                                                             
|(k) |  | Incorporated by
reference to Quarterly Report on Form 10-Q dated September 30, 2003, as
filed on November 14, 2003.                         
|    |  |                                                                                                                                             
|(l) |  | Incorporated by
reference to Annual Report on Form 10-K for the year ended December
31, 2003.                                               
|    |  |                                                                                                                                             
|(m) |  | Incorporated by
reference to Quarterly Report on Form 10-Q dated March 31, 2004, as
filed on May 10, 2004.                                  
|    |  |                                                                                                                                             
|(n) |  | Incorporated by
reference to Quarterly Report on Form 10-Q dated June 30, 2004, as
filed on August 6, 2004.                                 
|    |  |                                                                                                                                             
|(o) |  | Incorporated by
reference to Current Report on Form 8-K dated November 23, 2004, as filed
on November 30, 2004.