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

                                    FORM 10-K


  [X]             ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                   For the Fiscal Year Ended December 31, 1998
                                       OR
  [ ]           TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                           Commission File No. 1-14316

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

          Delaware                                        33-0488566
(State or other jurisdiction of                        (I.R.S. Employer
 incorporation or organization)                         Identification)

         3560 Hyland Avenue                                 92626
          Costa Mesa, CA                                  (Zip Code)
(Address of principal executive offices)

       Registrant's telephone number, including area code: (714) 427-2000

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

                    Common Stock, $0.001 par value per share
                                (Title of class)

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

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

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

As  of  April  1,  1999,  there  were  outstanding   51,799,035  shares  of  the
Registrant's  common stock, par value $0.001,  which is the only class of common
stock of the Registrant.  As of April 1, 1999 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  $12.00 per share as  reported  by the  New York
Stock Exchange, was approximately $468,383,820.

                       Documents Incorporated by Reference

None.

<PAGE>

                                     PART I

ITEM 1.  BUSINESS

General

     Apria Healthcare Group Inc. provides comprehensive home healthcare services
through  approximately  320 branch  locations  which  serve  patients  in all 50
states.  Apria has three major service lines:  home  respiratory  therapy,  home
infusion  therapy,  and home medical  equipment.  The following  table  provides
examples of the services and products in each:

    SERVICE LINE                  EXAMPLES OF SERVICES AND PRODUCTS
    ------------                  ---------------------------------
    Home respiratory therapy      Provision  of oxygen  systems,  home 
                                  ventilators and nebulizers, which are
                                  devices to disperse medication as an aerosol

    Home infusion therapy         Administration of 24-hour access to
                                  intravenous or enteral nutrition, anti-
                                  infectives, chemotherapy and other medications

    Home medical equipment        Provision  of patient room equipment, 
                                  principally hospital beds, wheelchairs and
                                  ambulatory aids, to patients receiving care at
                                  home


     Apria was  formed  through  the  merger of Homedco  Group,  Inc.  and Abbey
Healthcare  Group  Incorporated.  Apria was incorporated in 1991 in the State of
Delaware.


BUSINESS STRATEGY

     The  management  and Board of Directors of Apria changed  substantially  in
1998.  Philip L. Carter became Chief  Executive  Officer in May 1998.  Under Mr.
Carter's  leadership,  Apria is  implementing  a  strategy  aimed  at  achieving
profitable operating results through the following principal elements:

     REMAIN IN CORE  BUSINESSES,  WITH  INCREASED  EMPHASIS ON HOME  RESPIRATORY
THERAPY.  Apria  intends to remain in its core  businesses  of home  respiratory
therapy,  home  infusion  therapy and home  medical  equipment.  However,  Apria
expects to increase  the  percentage  of net revenues  generated by  respiratory
therapy  with a  corresponding  reduction  in  the  percentage  of net  revenues
generated  by  infusion  therapy  and  home  medical  equipment.   Apria's  home
respiratory  therapy business  historically has produced higher margins than its
home infusion therapy and home medical equipment businesses.

     DIVEST OR CLOSE, ON A SELECTIVE BASIS,  UNPROFITABLE BUSINESS OPERATIONS IN
PARTICULAR  GEOGRAPHIC  AREAS. As of December 31, 1998, Apria had  substantially
completed  the  process of  exiting  the  infusion  therapy  business  in Texas,
California,  Louisiana, West Virginia,  western Pennsylvania,  and downstate New
York.  Apria  continues  to evaluate  the  profitability  of all its  contracts,
business  lines and locations to determine if further  divestitures  or closures
are appropriate.

     REDUCE COSTS IN CORPORATE AND FIELD OPERATIONS. Apria seeks to reduce costs
both at its corporate  headquarters  and in the field through:  

     -identifying improvement  opportunities in specific operating procedures in
     the  areas  of  purchasing,   distribution  and  inventory  management  and
     implementing  uniform operating  thresholds in order to increase efficiency
     and lower costs

     -consolidating  and closing  smaller  branches,  billing  centers and field
     support facilities  throughout  the  United  States

     -reducing labor costs at its corporate and field  locations;  approximately
     1,500 full-time equivalent positions were eliminated during 1998

     -reducing office space at its headquarters

Going forward,  Apria intends to continue to focus  resources on identifying and
implementing more  cost-effective  and efficient methods of delivering  products
and services.

     IMPROVE  APRIA'S  CAPITAL  STRUCTURE.  In November 1998,  Apria amended its
credit  agreement  which  resulted in a required $50 million  prepayment  of its
credit facility and revisions to certain  provisions  permitting Apria to pursue
acquisition  opportunities.  Pursuant to the amended credit agreement,  Apria is
required to pursue a debt or equity  offering to raise an additional $50 million
to further repay its term loan. The combination of these two actions is intended
to provide the company  with  somewhat  greater  flexibility  to  implement  its
business strategy which includes growth through acquisitions.

     EXPAND THROUGH  INTERNAL GROWTH AND  ACQUISITIONS.  Apria intends to expand
through  internal  growth  and  acquisitions  in its target  markets  subject to
limitations contained in Apria's bank credit agreement.  Apria plans to increase
its  acquisition  activity in 1999 and intends to focus growth  primarily in its
home respiratory therapy business.

     Achieving Apria's objectives is subject to competitive and other
factors outside of Apria's control. See "Business - Risk Factors".


LINES OF BUSINESS

         Apria derives substantially all of its revenue from the home healthcare
segment of the  healthcare  market in  principally  three  service  lines:  home
respiratory therapy,  including  home-delivered  respiratory  medications,  home
infusion therapy and home medical equipment.  In all three lines, Apria provides
patients  with a variety of clinical  services,  related  products and supplies,
most of which  are  prescribed  by a  physician  as part of a care  plan.  These
services include:

     -high-tech infusion nursing, respiratory care and pharmacy services

     -educating  patients and their caregivers about the illness and instructing
     them on self-care and the proper use of products in the home

     -monitoring patient compliance with individualized treatment plans

     -reporting to the physician and/or managed care organization

     -maintaining equipment

     -processing claims to third-party payors

Apria  provides  numerous  services  directly to its patients,  and purchases or
rents the products needed to complement the service.

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

                                                  Year Ended December 31,    
                                                  -----------------------    
                                              1998          1997         1996
                                              ----          ----         ----

      Respiratory therapy..................    59%           51%          50%
      Infusion therapy.....................    23%           24%          25%
      Home medical equipment/other.........    18%           25%          25%
                                              ----          ----         ----
            Total net revenues.............   100%          100%         100%
                                              ====          ====         ====


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

     -cystic fibrosis

     -nervous system-related respiratory conditions

     -chronic  diseases  relating  to  blocking or clogging of the lungs such as
     emphysema, chronic bronchitis and asthma

Apria employs a clinical  staff of  respiratory  care  professionals  to provide
support   to   its   home   respiratory    therapy   patients,    according   to
physician-directed treatment plans and a proprietary acuity program.

     Approximately 66% of Apria's  respiratory therapy revenues are derived from
the provision of oxygen systems,  home  ventilators  and  nebulizers,  which are
devices  to  aerosolize  medication.  The  remaining  respiratory  revenues  are
generated from the provision of:

     -apnea monitors used to monitor the vital signs of newborns

     -continuous  positive airway  pressure  devices used to control adult sleep
     apnea

     -noninvasive  positive pressure ventilation

     -other respiratory therapy products

     Apria  has  developed  a home  respiratory  medication  service,  which  is
fulfilled through the Apria Pharmacy Network. Through this network, Apria offers
its patients physician-prescribed medications to accompany the nebulizer through
which they are  administered.  This  comprehensive  program offers  patients and
payors a broad base of  services  from one  source,  including  the  delivery of
medications in premixed unit dose form, pharmacy services, patient education and
claims processing.

     INFUSION THERAPY. Home infusion therapy involves the administration of, and
24-hour access to:

     -parenteral and enteral nutrition

     -anti-infectives

     -chemotherapy

     -other intravenous and injectable medications

     Depending on the therapy,  a broad range of venous access  devices and pump
technology may be used to facilitate  homecare and patient  independence.  Apria
employs licensed  pharmacists and registered  high-tech infusion nurses who have
specialized  skills in the delivery of home infusion  therapy.  Apria  currently
operates 28 pharmacy locations to serve its home infusion patients.

     A number of factors have  impacted the  profitability  of Apria's  infusion
therapy business line. Increased managed care penetration has exposed Apria to
the intense price competition of these markets. The expectations of managed care
customers  are  becoming  cost-prohibitive  and  nursing  costs  are very  high.
Hospitals,  traditionally  a major  referral  source,  are  expanding  their own
infusion services. In response to these factors, Apria performed a comprehensive
review of its  infusion  therapy  business  in the second and third  quarters of
1998.  By the end of 1998,  Apria had  substantially  completed  the  process of
exiting  the  infusion  business  in certain  geographic  areas where it was not
meeting  profitability  thresholds.  Apria is  currently  working to improve the
profitability of its infusion  business in the remaining markets by implementing
standardization initiatives and optimal operating thresholds.

     HOME MEDICAL EQUIPMENT/OTHER.  Apria's primary emphasis in the home medical
equipment  line of  business  is on the  provision  of patient  room  equipment,
principally  hospital beds and wheelchairs.  Apria's integrated service approach
allows  patients  and managed  care  systems  accessing  either  respiratory  or
infusion therapy services to also access needed home medical equipment through a
single source.

     As Apria's managed care  organization  customer base has grown,  management
has recognized the need to expand its ability to provide value-added services to
managed  care  organizations.  Rather than  directly  provide  certain  non-core
services itself, Apria aligns itself with other segment leaders, such as medical
supply distributors,  through formal  relationships or ancillary networks.  Such
networks  must be  credentialed  and  qualified  by  Apria's  Clinical  Services
department.


ORGANIZATION AND OPERATIONS

     ORGANIZATION.  As a result of  reorganizations  effected  in 1998,  Apria's
approximately 320 branch locations are organized into four geographic divisions,
which are further divided into 15 geographic regions. Each region is operated as
a separate  business  unit and  consists of a number of branches  and a regional
office.  The regional  office  provides  each of its  branches  with key support
services such as billing,  purchasing and equipment repair. Each branch delivers
home healthcare  products and services to patients in their homes and other care
sites through the branch's  fleet and  qualified  personnel.  This  structure is
designed to create operating  efficiencies  associated with centralized services
while promoting responsiveness to local market needs.

     Although  Apria  continues  to operate  with a large  network  of  regional
operations, the company recently implemented a vertically-integrated  management
organization  in certain  key  functional  areas,  including  sales,  logistics,
operations and revenue  management with direct reporting and  accountability  to
corporate headquarters.  Apria believes that its new structure will provide more
controls  and  consistency  among its regions and  branches  and help to develop
standard policies and procedures while eliminating many of the problems inherent
with  a   decentralized   network  of  regions  and   branches.   Its   earliest
implementation  was in the  area  of  sales  and  operations.  Previously,  each
regional  manager  was  responsible  for all  aspects  of sales and  operations,
including generating new business,  operating branches and reimbursement.  Under
the new structure,  the sales  organization  is  responsible  for generating new
business from both  traditional  and managed care markets,  while the operations
organization  is  responsible  for  customer  service,  reimbursement  and asset
management.  In addition to the sales and  operations  functional  areas,  Apria
established  a  centralized   revenue   management   functional  area.   Revenue
management,  based at Apria's  headquarters,  works with the network of branches
and  regions  to  standardize  the  processes  of  order  intake,   billing  and
collections.  Apria has also established a coordinated  purchasing  structure to
obtain lower prices,  reduce  inventory  levels and improve the  distribution of
inventory items to the company's branch locations.

     CORPORATE  COMPLIANCE.  As a leader in the home healthcare industry,  Apria
has made a commitment to providing quality home healthcare services and products
while  maintaining  high standards of ethical and legal conduct.  Apria believes
that  operating its business  with honesty and  integrity is essential.  Apria's
Corporate  Compliance  Program is designed  to  accomplish  these goals  through
employee  education,   a  confidential   disclosure   program,   written  policy
guidelines, periodic reviews, compliance audits and other programs.

     OPERATING SYSTEMS AND CONTROLS.  The company's business is dependent,  to a
substantial  degree,  upon the quality of its  operating  and field  information
systems  for the  establishment  of  accurate  and  profitable  contract  terms,
accurate  order  entry and  pricing,  billing  and  collections,  and  effective
monitoring  and  supervision.  Difficulties  encountered  in the conversion to a
common  system of the  previously  separate  operations  of Abbey  and  Homedco,
following  their  1995  merger,  led  to a high  level  of  accounts  receivable
write-offs.  Also contributing to the write-offs were functional inadequacies of
the information systems.  Examples of such inadequacies  included  decentralized
pricing tables which forced  reliance on personnel at the numerous  branches and
billing centers to enter pricing updates on a timely basis; and the inability to
aggregate  data  at  a  regional  or  company-wide  level,   thereby  inhibiting
management's  ability to quickly  identify  negative  trends.  During 1997,  the
company committed to a two-year plan to implement a large-scale fully-integrated
enterprise  resource  planning system to address year 2000 issues and facilitate
correction  of the  functional  shortcomings  referred  to  above.  Following  a
reevaluation of the costs,  benefits and risks of the development  project,  the
plan was  canceled  in 1998 except for the work  required  to resolve  year 2000
issues,  which has been  substantially  completed.  As a part of the decision to
cancel  the new  system,  management  performed  an  evaluation  of its  current
systems.  A significant  conclusion of that  evaluation was that the platform on
which the  respiratory/home  medical  equipment  system  currently  operates  is
adequate but the infusion billing system operates on an obsolete  platform which
is no longer  supported by the computer  industry.  To mitigate this  particular
risk,  address  certain other  weaknesses of the current systems and to position
itself to meet future needs,  Apria embarked on a reengineering  of the systems.
The  project  includes a rewriting  of the order  entry,  billing  and  accounts
receivable  modules and the installation of supply chain management  software to
replace the inventory and purchasing modules. The processing of transactions for
all product  lines,  including  infusion  therapy,  will be  addressed  by these
changes.   Apria  believes  that  the   implementation  of  these  changes  will
substantially improve its systems. Nonetheless, such implementation could have a
disruptive  effect  on  billing  and  collection   activity.   See  "Business  -
Organization and Operations - Receivables Management".

     Management  is currently  giving a high priority to the  implementation  of
optimal operating standards throughout Apria. Apria has established  performance
indicators which measure operating results against expected thresholds,  for the
purpose of allowing  all levels of  management  to monitor,  identify and adjust
areas requiring  improvement.  Operating models with strategic targets have been
developed to move Apria toward more effectively  managing labor expenses and the
customer service,  accounts receivable,  clinical, and distribution areas of its
business.   Apria's  management  team  is  compensated  using  performance-based
incentives  focused  on  quality  revenue  growth,  gross  profit,  timely  cash
collections and improvement in operating income.

     Failure to resolve the  systems and  operational  problems  experienced  in
prior periods and to implement optimal operating  standards  successfully  would
have a significant negative impact on results of operations.

     PAYORS.  Apria  derives  substantially  all its revenues  from  third-party
payors,  including private insurers,  managed care  organizations,  Medicare and
Medicaid. For 1998,  approximately 26% of Apria's net revenues were derived from
Medicare and 10% from Medicaid.  Generally,  each third-party payor has specific
claims  requirements.  Apria has policies and  procedures in place to manage the
claims  submission  process,  including  verification  procedures  to facilitate
complete and accurate documentation.

     RECEIVABLES  MANAGEMENT.  Apria  operates in an  environment  with  complex
requirements  governing billing and reimbursement for its products and services.
Since the 1995  merger of Abbey and  Homedco,  Apria has had  difficulties  in a
number of areas  relating  to billing  and  subsequent  collection  of  accounts
receivable.  The merger resulted in a  restructuring  plan which included a very
rapid  consolidation of operating  locations and the conversion of all locations
to   standardized    information   systems.   There   were   over   100   branch
closures/consolidations    and   496    systems    conversions.    The    branch
closures/consolidations  were effected soon after the June 1995 merger,  but the
system  conversions were not completed until September 1996.  Together with very
high  employee  turnover  during  this  period,  the  consolidations  and system
conversions had a major impact on the revenue processes of order taking, product
delivery, billing and collections and ultimately led to a high level of accounts
receivable write-offs.

         Apria believes that the primary  factors  contributing to the unusually
high level of revenue adjustments  include:

     -subsequent  changes to estimated  revenue  amounts or denials for services
     not covered due to changes in patient's coverage

     -failure to document initial service  authorizations  or continued  service
     authorizations in required timeframes

     -differences in contract prices due to complex contract terms or a customer
     service  representative's  lack of  familiarity  with a contract,  payor or
     system price

     -high turnover of customer service and billing representatives

     The high level of bad debt  write-offs  can be  partially  attributable  to
Apria's high concentration of managed care business.  Apria has had difficulties
collecting its receivables from managed care payors.

     The effects of all these factors  necessitated  charges to increase Apria's
allowance  for  revenue  adjustments  of $18.3  million,  $40  million and $32.3
million  in 1998,  1997 and 1996,  respectively  and  charges  to  increase  the
allowance for doubtful  accounts of $13.6 million,  $61.4 million and $9 million
in 1998, 1997 and 1996, respectively.

     Although  management  addressed  these issues with a number of  initiatives
during 1996 and 1997, improvement in timely and accurate billings has been slow.
During 1998, Apria took several additional steps to address the most significant
factors  contributing to revenue  adjustments and write-offs which include:

     -software   enhancements   to  simplify   the   order-intake   process  and
     specifically the process of selecting products/services and payors

     -enhanced  quality  assurance  programs  designed to improve  workflow  and
     billing accuracy

     -aligning responsibility for revenue qualification, billing and receivables
     collections  within a defined  functional  group reporting to the corporate
     office


MARKETING

     Through its field sales  force,  Apria  markets its  services  primarily to
managed  care  organizations,  physicians,  hospitals,  medical  groups and home
health agencies and case managers.  The following sample  marketing  initiatives
address the requirements of its referring customers:

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

     JOINT COMMISSION ON ACCREDITATION  OF HEALTHCARE  ORGANIZATIONS.  The Joint
Commission  on  Accreditation  of  Healthcare   Organizations  is  a  nationally
recognized organization which develops standards for various healthcare industry
segments and monitors  compliance with those standards through voluntary surveys
of participating  providers. As the home healthcare industry has grown, the need
for objective  quality  measurements  has increased.  Accreditation by the Joint
Commission on Accreditation of Healthcare Organizations entails a lengthy review
process  which is conducted  every three years.  Accreditation  is  increasingly
being  considered a  prerequisite  for entering into contracts with managed care
organizations  at every  level.  Because  accreditation  is  expensive  and time
consuming,  not  all  providers  choose  to  undergo  the  process.  Due  to its
leadership  role in establishing  quality  standards for home healthcare and its
active and early  participation  in this process,  Apria is viewed  favorably by
referring  healthcare   professionals.   Substantially  all  of  Apria's  branch
locations are  accredited by or in the process of receiving  accreditation  from
the Joint Commission on Accreditation of Healthcare Organizations.

     CLINICAL MANAGEMENT SERVICES.  As more alternate site healthcare is managed
and directed by various managed care organizations,  new methods and systems are
sought to simultaneously control costs and improve outcomes. Apria has developed
a series of programs designed to proactively manage patients in conjunction with
a managed care partner and the patient's physician in an alternate site setting.
These  services may  include:

     -patient and environmental assessments

     -screening/diagnostics

     -patient education

     -clinical monitoring

     -pharmacological management

     -utilization and outcome reporting

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


SALES

     Apria  employs   approximately  380  sales   professionals   whose  primary
responsibility  is to  target  key  customers  for all  lines of  business.  Key
customers   include   but  are  not   limited   to   hospital-based   healthcare
professionals,  physicians  and their  staffs,  and managed care  organizations.
Sales  professionals are afforded the necessary  clinical and technical training
to represent Apria's major service offerings of home respiratory  therapy,  home
infusion  therapy  and  home  medical  equipment.  As  larger  segments  of  the
marketplace  become involved with managed care,  specific  portions of the sales
force's  working  knowledge  of  pricing,   contracting  and  negotiating,   and
specialty-care management programs are being enhanced as well.

     An integral  component  of Apria's  overall  sales  strategy is to increase
volume through managed care organizations and traditional referral channels.  As
Apria's  various  served  markets  evolve,  the  ultimate  decision  makers  for
healthcare services vary greatly from closed model managed care organizations to
preferred  provider  networks  which are controlled by more  traditional  means.
Apria's  selling  structure and  strategies are driven largely by these changing
market  factors  and will  continue to adjust as further  consolidation  occurs.
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 7% of Apria's  total net revenues for
1998.  Among its more  significant  managed  care  agreements,  the  company has
contracts with United  HealthCare  Corporation,  Kaiser  Permanente,  Aetna/U.S.
Healthcare Health Plans, Olsten Network Management,  Inc., Health Insurance Plan
of New York, PacifiCare Health Systems, Inc. and Humana Health Plans. Apria also
offers discount agreements and various fee-for-service arrangements to hospitals
or hospital systems whose patients have home healthcare needs.


COMPETITION

     The  segment of the  healthcare  market in which  Apria  operates is highly
competitive.  In each of its lines of  business  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

     -price of services

     -ease of doing business

     -quality of care and service

     -range of home healthcare services

     The competitive factors most important in the larger,  national markets are
the foregoing  factors and:

     -wide geographic coverage

     -ability to develop and  maintain  contractual  relationships  with managed
     care organizations

     -access to capital

It is  increasingly  important  to be able to  integrate  a broad  range of home
healthcare  services  through a single  source.  Apria believes that it competes
effectively  in each of its  business  lines  with  respect  to all of the above
factors  and that it has an  established  record as a quality  provider  of home
respiratory  therapy  and  home  infusion  therapy  as  reflected  by the  Joint
Commission on  Accreditation  of Healthcare  Organizations  accreditation of its
branches.

     Other  types of  healthcare  providers,  including  hospitals,  home health
agencies and health maintenance organizations, have entered, and may continue to
enter,  Apria's  various  lines  of  business.  Depending  on  their  individual
situation,  it is possible  that Apria's  competitors  may have,  or may obtain,
significantly greater financial and marketing resources than Apria.


GOVERNMENT REGULATION

     Apria is subject to extensive  government  regulation,  including  numerous
laws directed at preventing  fraud and abuse and laws  regulating  reimbursement
under various governmental programs, as more fully described below.

     MEDICARE  AND  MEDICAID  REIMBURSEMENT.  As  part  of the  Social  Security
Amendments of 1965, Congress enacted the Medicare program which provides for
hospital,  physician and other statutorily-defined health benefits for qualified
individuals such as persons over 65 and the disabled. The Medicaid program, also
established  by Congress in 1965,  is a joint  federal  and state  program  that
provides  certain  statutorily-defined  health  benefits  to  financially  needy
individuals who are blind, disabled, aged, or members of families with dependent
children.  In addition,  Medicaid  generally covers  financially needy children,
refugees and pregnant women.

     A  substantial  portion of  Apria's  revenue is  attributable  to  payments
received from third-party  payors,  including the Medicare and Medicaid programs
and  private  insurers.  In 1998,  approximately  26% of Apria's net revenue was
derived from  Medicare and 10% from  Medicaid.  Effective  January 1, 1998,  the
Medicare  reimbursement rates for home oxygen therapy and respiratory drugs were
reduced by 25% and 5%, respectively,  pursuant to the provisions of the Balanced
Budget Act of 1997. The estimated decrease in 1998 revenues and operating income
resulting from these  reimbursement  reductions is approximately $57 million.  A
further reimbursement reduction of 5% on home oxygen therapy became effective on
January 1, 1999. For each of the years 1998 through 2002,  the Medicare  update,
or  inflation  factor,  for  Medicare-covered   home  medical  equipment,   home
respiratory  therapy and home infusion  therapy is zero.  The levels of revenues
and profitability of Apria, similar to those of other healthcare companies, have
been and will  continue  to be subject to the effect of changes in  coverage  or
payment rates by third-party payors.

     Medicare carriers are private  organizations  that contract to serve as the
government's agents for the processing of claims for items and services provided
under Part B of the Medicare program.  These carriers and Medicaid agencies also
periodically  conduct  pre-payment and post-payment  reviews and other audits of
claims submitted.  Medicare and Medicaid agents are under increasing pressure to
scrutinize  healthcare  claims more closely.  In addition,  the home  healthcare
industry is  generally  characterized  by long  collection  cycles for  accounts
receivable  due  to  the  complex  and  time-consuming  requirements,  including
collection of medical necessity documentation,  for obtaining reimbursement from
private and  governmental  third-party  payors.  Such long collection  cycles or
reviews and/or similar audits of Apria's claims and related  documentation could
result in significant recoupments or denials.

     The  Balanced  Budget  Act  of  1997  contained  other  items  that  affect
reimbursement  for home medical  equipment and services  under  Medicare Part B,
including  the  provision  described  above to freeze the  Consumer  Price Index
adjustments for the years 1998 through 2002. The General  Accounting  Office was
directed by the Balanced Budget Act of 1997 to report in 18 months on the effect
of the reductions in oxygen  reimbursement  on accessibility by patients to home
oxygen  services.  The  General  Accounting  Office's  report is  expected to be
released around April 1, 1999; home oxygen  industry  representatives  have been
provided an opportunity to preview the draft report.  The primary  conclusion of
the draft report is that the reduction in Medicare payment rates for home oxygen
has not had a major impact on access to home oxygen equipment and services.  The
Secretary  of Health and Human  Services was directed to arrange for peer review
organizations to evaluate the access to, and quality of, home oxygen equipment.

     Other  provisions  of the  Balanced  Budget  Act of 1997 that are likely to
affect levels of  reimbursement  to Apria for home medical  equipment  under the
Medicare program include:

     -new authority of the Secretary of Health and Human Services to increase or
     reduce the  reimbursement for home medical equipment by 15% each year under
     an inherent reasonableness procedure

     -a reduction of the Medicare  reimbursement  for drugs and biologicals from
     the current level of (a) the lower of the estimated acquisition cost or (b)
     the  national  average  wholesale  price,  to 95% of the  national  average
     wholesale price with a dispensing fee paid to Apria's pharmacy

     -a  payment  freeze  between  1998  and  2002 for  parenteral  and  enteral
     nutrients, supplies and equipment at 1995 payment amounts

     Under the Balanced  Budget Act of 1997,  some changes to the payment  rules
for home health agencies may impact how Medicare payments are made to suppliers.
Currently,  Apria submits  Medicare  bills under Medicare Part B and is paid for
certain  items and services  furnished to Medicare Part B patients who are being
treated  by a home  health  agency  and  are  under a plan of  care.  Under  the
prospective payment system mandated by the new legislation, home health agencies
may be  required  to submit  and  receive  payment  for all  items and  services
furnished under a plan of care. Therefore,  once a prospective payment system is
implemented  for home health  agencies,  Apria's ability to continue to bill and
receive payments directly from the Medicare program, for at least those patients
who also meet the home health agency  coverage  requirements,  may cease.  Apria
will still be able to provide  items and  services  to Medicare  patients  under
arrangements  with the home health  agencies,  but Apria would be  considered  a
vendor and payments  might be subject to  contractual  agreements.  Although the
prospective payment system for home health agencies is scheduled to be effective
October 1, 1999, the Health Care Financing Administration has indicated that due
to implementation  delays relating to the year 2000 issue, there likely will not
be any changes before 2000.

     Finally,  the Balanced  Budget Act of 1997 proposed that  suppliers of home
medical  equipment  be  required  to post  surety  bonds  equal  to 15% of their
previous  year's Medicare  revenues,  in a minimum amount of $50,000 and up to a
maximum of $3 million,  as a condition of participation in the Medicare program.
The bonds would be used to secure  suppliers'  performance  and compliance  with
Medicare  program rules and  requirements.  The deadline for securing such bonds
has been extended indefinitely,  as the Health Care Financing  Administration is
reviewing the bonding  requirements  pursuant to a recommendation  by the United
States General Accounting Office.

     The Balanced  Budget Act of 1997  mandates  that the Health Care  Financing
Administration  conduct competitive  bidding  demonstrations for Medicare Part B
items  and  services.  Pursuant  to this  mandate,  the  Health  Care  Financing
Administration has issued notice to providers,  including Apria, in Polk County,
Florida, of the structure and conditions for submitting bids to provide Medicare
beneficiaries with five categories of home medical equipment,  including oxygen,
hospital  beds,  enteral  products,   surgical  and  urological  supplies.   The
competitive  bidding  demonstration,  the first of its kind by the  Health  Care
Financing Administration and the first of five authorized by the Medicare Reform
Act of 1997, could provide the Health Care Financing Administration and Congress
with a model for implementing  competitive pricing in all Medicare Programs.  If
such a competitive  bidding  system were  implemented,  it could result in lower
reimbursement  rates, exclude certain items and services from coverage or impose
limits on increases in reimbursement rates.

     OPERATION RESTORE TRUST. In May 1995, the federal  government  announced an
initiative, known as Operation Restore Trust, which would increase significantly
the financial and human resources allocated to combating healthcare fraud, waste
and abuse.  Private  insurers and various state  enforcement  agencies also have
increased  their  scrutiny of  healthcare  claims in an effort to  identify  and
prosecute  fraudulent and abusive practices.  Under Operation Restore Trust, the
Office of the Inspector  General of the Department of Health and Human Services,
in cooperation with other federal and state agencies,  initially  focused on the
activities  of  home  health  agencies,   hospices,  durable  medical  equipment
suppliers  and  nursing  homes  in  New  York,  Florida,  Illinois,  Texas,  and
California,  states in which  Apria  has  significant  operations.  In May 1997,
Operation  Restore  Trust  expanded to include 12 more states and, in 1998, to a
total of 24  states  and  Puerto  Rico,  with  the  government  indicating  that
Operation  Restore  Trust  was  being  incorporated  as  a  permanent  operation
throughout all government healthcare organizations nationwide.

     THE ANTI-KICKBACK STATUTE. As a provider of services under the Medicare and
Medicaid programs, Apria is subject to the Medicare and Medicaid fraud and abuse
laws  (sometimes  referred to as the  "anti-kickback  statute").  At the federal
level,  the  anti-kickback  statute  prohibits any bribe,  kickback or rebate in
return for the  referral of  patients  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 the Civilian Health and Medical Program of the Uniformed
Services,  among others.  Violations of the anti-kickback  statute may result in
civil and criminal  penalties and exclusion  from  participation  in the federal
healthcare  programs.  In addition,  a number of states in which Apria  operates
have laws that  prohibit  certain  direct or indirect  payments  (similar to the
anti-kickback   statute)  or  fee-splitting   arrangements   between  healthcare
providers, if such arrangements are designed to induce or encourage the referral
of patients to a particular provider.  Possible sanctions for violation of these
restrictions  include exclusion from state funded healthcare  programs,  loss of
licensure  and civil and criminal  penalties.  Such  statutes vary from state to
state,  are often  vague  and have  seldom  been  interpreted  by the  courts or
regulatory agencies.

     PHYSICIAN SELF-REFERRALS. Subject to certain exceptions, certain provisions
of the Omnibus Budget  Reconciliation Act of 1993, commonly known as "Stark II",
prohibit  a  physician  from  referring   Medicare  and  Medicaid  patients  for
"designated  health  services" to an entity with which the physician or a member
of such  physician's  immediate  family has a financial  relationship.  The term
"designated  health services"  includes several services  commonly  performed or
supplied by Apria, including durable medical equipment, home health services and
parenteral  and enteral  nutrition.  In addition,  "financial  relationship"  is
broadly defined to include any ownership or investment  interest or compensation
arrangement  pursuant  to  which a  physician  receives  remuneration  from  the
provider at issue.  Violations  of Stark II may result in loss of  Medicare  and
Medicaid reimbursement,  civil penalties and exclusion from participation in the
Medicare and Medicaid  programs.  Stark II is broadly written and at this point,
only  proposed   regulations  have  been  issued  to  clarify  its  meaning  and
application.  Regulations  for a  predecessor  law,  Stark I, were  published in
August 1995 and remain in effect, but provide little guidance on the application
of Stark II to Apria's business.  While the proposed Stark II regulations do not
have the force and effect of law,  they provide some  guidance as to what may be
included  in the  final  version.  Issued  on  January  9,  1998,  the  proposed
regulations  purport to define  previously  undefined  key terms,  clarify prior
definitions   and  create  new   exceptions  for  certain  "fair  market  value"
transactions,  de minimis compensation arrangements and discounts, among others.
It is unclear when these regulations will be finalized and until such time, they
cannot be relied upon in structuring transactions.  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,  and even if disclosed, the original
source of the information leading to the public disclosure may still pursue such
a suit. The typical private  plaintiff in such a suit is a corporate insider who
decides to become a whistleblower.  However, the law does not prohibit outsiders
from  pursuing  such suits and there has been an increase in outsiders  pursuing
them.

     In a qui tam suit, the private  plaintiff is  responsible  for initiating a
lawsuit that may eventually lead to the government  recovering money of which it
was  defrauded.  After the private  plaintiff  has  initiated  the lawsuit,  the
government  must  decide  whether to  intervene  in the  lawsuit  and become the
primary  prosecutor.  In the event the government  declines to join the lawsuit,
the private  plaintiff  may choose to pursue the case  alone,  in which case the
private  plaintiff's  counsel  will have primary  control  over the  prosecution
(although  the  government  must be kept apprised of the progress of the lawsuit
and will still  receive at least 70% of any  recovered  amounts).  In return for
bringing the suit on the  government's  behalf,  the statute  provides  that the
private  plaintiff  is to receive  up to 30% of the  recovered  amount  from the
litigation proceeds if the litigation is successful. Recently, the number of qui
tam suits brought against healthcare  providers has increased  dramatically.  In
addition, at least five states - California,  Illinois,  Florida, Tennessee, and
Texas - have enacted  laws  modeled  after the False Claims Act that allow those
states to recover money which was fraudulently obtained by a healthcare provider
from the state (e.g.,  Medicaid funds provided by the state). Apria is presently
named as a defendant in at least one qui tam suit,  brought by Kirk  Corsello in
January  1998,  which  alleges  that  the  company  paid  illegal  kickbacks  to
physicians  and  physician  groups  in  Florida  in  exchange  for  home  oxygen
referrals.  The  government  recently  announced  that it  would  not  join  Mr.
Corsello's suit at the present time; however, Mr. Corsello has indicated that he
will continue to pursue the lawsuit.  It is Apria's position that the assertions
brought by Mr. Corsello with respect to the company are unwarranted. However, no
assurance can be provided as to the outcome of this litigation.

     OTHER  FRAUD  AND  ABUSE  LAWS.  The  Health   Insurance   Portability  and
Accountability Act of 1996 created in part, two new federal crimes: "Health Care
Fraud" and "False  Statements  Relating to Health Care Matters." The Health Care
Fraud statute prohibits  knowingly and willfully  executing a scheme or artifice
to defraud any  healthcare  benefit  program.  A violation  of this statute is a
felony and may result in fines and/or imprisonment. The False Statements statute
prohibits  knowingly  and  willfully  falsifying,  concealing  or  covering up a
material  fact by any trick,  scheme or device or making any  materially  false,
fictitious or fraudulent statement in connection with the delivery of or payment
for  healthcare  benefits,  items or services.  A violation of this statute is a
felony and may result in fines and/or imprisonment.

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

     INTERNAL  CONTROLS.  Apria maintains  several programs designed to minimize
the  likelihood  that Apria  would  engage in  conduct  or enter into  contracts
violative of the fraud and abuse laws.  Contracts of the types  subject to these
laws are  reviewed  and  approved at the  corporate  level.  Apria  maintains an
extensive  contract  compliance review program  established and monitored by its
legal department.  Apria also maintains various educational programs designed to
keep its managers updated and informed on developments with respect to the fraud
and  abuse  laws and to  remind  all  employees  of  Apria's  policy  of  strict
compliance in this area. While Apria believes its discount  agreements,  billing
contracts,  and  various  fee-for-service  arrangements  with  other  healthcare
providers comply with applicable laws and regulations,  Apria cannot provide any
assurance that further judicial  interpretations of existing laws or legislative
enactment  of new laws  will not  have a  material  adverse  effect  on  Apria's
business. See "Business - Risk Factors".

     HEALTHCARE   REFORM   LEGISLATION.   Economic,   political  and  regulatory
influences  are  subjecting  the  healthcare  industry  in the United  States to
fundamental change.  Healthcare reform proposals have been formulated by members
of Congress and by the current  administration.  In addition, some of the states
in  which  Apria  operates   periodically  consider  various  healthcare  reform
proposals.  Apria anticipates that Congress and state legislatures will continue
to review  and  assess  alternative  healthcare  delivery  systems  and  payment
methodologies and public debate of these issues will continue in the future. Due
to uncertainties regarding the ultimate features of reform initiatives and their
enactment and implementation, Apria cannot predict which, if any, of such reform
proposals  will be adopted or when they may be adopted or that any such  reforms
will not have a material  adverse  effect on  Apria's  business  and  results of
operations.

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


EMPLOYEES

     As of March 1,  1999,  Apria  had  8,175  employees,  of which  6,824  were
full-time and 1,351 were  part-time.  The company's  employees are not currently
represented  by  a  labor  union  or  other  labor   organization,   except  for
approximately  20 employees in the State of New York.  Apria  believes  that its
employee relations are good.

     The following  table  presents the number of Apria's  full-time  equivalent
employees in each of Apria's  functional  departments  for the month of February
1999. Full-time  equivalents are computed by dividing the actual number of hours
worked in a given period by the  "normal"  number of hours for that period based
on a 40-hour week.

           Functional Department                          FTEs
           ---------------------                          ----
           Sales                                           370
           Respiratory therapy                             651
           Nursing                                         188
           Pharmacy                                        228
           Patient Services                              1,355
           Reimbursement                                 1,501
           Repair                                          207
           Delivery                                      1,850
           Warehouse                                       297
           Administrative                                  866
                                                         ----- 
               Total                                     7,513
                                                         =====


                      EXECUTIVE OFFICERS OF THE REGISTRANT

     Set forth below are the names, ages, titles with Apria and present and past
positions of the persons serving as executive  officers of Apria as of March 31,
1999:
<TABLE>

            Name and Age                                          Office and Experience
            ------------                                          ---------------------
<S>                               <C>                                                                                            
Philip L. Carter, 50............  Chief Executive  Officer and Director.  Mr. Carter has been Chief  Executive  Officer and a
                                  Director of Apria since May 1998.  Prior to joining  Apria,  Mr.  Carter was  President and
                                  Chief  Executive  Officer of Mac  Frugal's  Bargains o  Close-Outs  Inc., a chain of retail
                                  discount  stores,  since 1995 and had held the  positions of Executive  Vice  President and
                                  Chief Financial Officer of Mac Frugal's from 1991 through 1995.

Lawrence M. Higby, 53...........  President and Chief Operating  Officer.  Mr. Higby joined Apria in November 1997.  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 from 1992 to 1994.

Michael R. Dobbs, 49 ...........  Executive Vice  President,  Logistics.  Mr. Dobbs was promoted to Executive Vice President,
                                  Logistics in January 1999.  He served as Senior Vice  President,  Logistics  from June 1988
                                  to January  1999.  Prior to joining  Apria,  Mr. Dobbs  served as Senior Vice  President of
                                  Distribution for Mac Frugal's Bargains o Close-Outs Inc. from 1991 to January 1998.

John C. Maney, 39 ..............  Executive Vice  President and Chief  Financial  Officer.  Mr. Maney has been Executive Vice
                                  President  and Chief  Financial  Officer since  joining  Apria in November  1998.  Prior to
                                  joining Apria,  Mr. Maney was employed by Arthur  Andersen LLP since 1992 and was a partner
                                  of such firm from 1995 to 1998.

Lawrence A. Mastrovich, 37 .....  Executive Vice President,  Business  Operations.  Mr.  Mastrovich was promoted to Executive
                                  Vice  President,   Business  Operations  in  October  1998.  He  served  as  Division  Vice
                                  President,  Operations of the Northeast  Division from December 1997 to October 1998. Prior
                                  to that time he had served as a Regional  Vice  President  for Apria and Homedco since 1994
                                  and in various other capacities from 1987 to 1994.

Dennis E. Walsh, 49.............  Executive  Vice  President,  Sales.  Mr. Walsh was promoted to  Executive  Vice  President,
                                  Sales in January 1998. Mr. Walsh served as Senior Vice  President,  Western Zone from March
                                  1997 to January  1998.  From June 1995 to March 1997,  he served as Senior Vice  President,
                                  Sales and Marketing.  He served as Vice  President,  Sales of Homedco from November 1987 to
                                  June 1995.

Frank Bianchi, 54...............  Senior  Vice  President,  Human  Resources.  Mr.  Bianchi  joined  Apria in May 1998 as its
                                  Senior Vice  President,  Human  Resources.  Prior to joining  Apria,  Mr. Bianchi served as
                                  Senior Vice  President,  Human  Resources for Mac Frugal's  Bargains o Close-Outs Inc. from
                                  1989 until January 1998.

Lisa M. Getson, 37..............  Senior Vice President,  Business  Development and Clinical  Services.  Ms. Getson was named
                                  Senior Vice  President,  Business  Development  and Clinical  Services in August 1998.  Ms.
                                  Getson was promoted to Senior Vice  President,  Marketing  in August 1997 after  serving as
                                  Vice  President,  Marketing  from November  1995 to August 1997.  She served as Director of
                                  Marketing,  Infusion  from June 1995 to  November  1995.  From May 1994 to June  1995,  she
                                  served as Director of Business  Development  of Abbey.  From 1989 to 1994,  Ms. Getson held
                                  various positions with Critical Care America,  including Director of Marketing and Business
                                  Development from January 1993 to May 1994.

Robert S. Holcombe, 56..........  Senior Vice President,  General Counsel and Secretary.  Mr. Holcombe was promoted to Senior
                                  Vice  President,  General  Counsel  and  Secretary  in  August  1997.  He  served  as  Vice
                                  President,  General  Counsel and Secretary  from May 1996 to August 1997.  Prior to joining
                                  Apria,  Mr.  Holcombe  served as Senior Vice  President and General  Counsel for The Cooper
                                  Companies,  Inc., a diversified  specialty healthcare company,  from December 1989 to April
                                  1996.

George J. Suda, 40 .............  Senior  Vice  President,  Information  Services.  Mr.  Suda was  promoted  to  Senior  Vice
                                  President,  Information  Systems in July  1998.  He served as Vice  President,  Information
                                  Services  Technology  from June 1997 to July 1998 and as Director,  Technology from January
                                  1997  to  June  1997.  From  July  1994 to  January  1997,  Mr.  Suda  was a  self-employed
                                  information services consultant, providing services to Abbey and Apria.

James E. Baker, 47 .............  Vice President,  Controller.  Mr. Baker has served as Vice President, Controller of Homedco
                                  and,  subsequently,  Apria, since August 1991. He served as Corporate Controller of Homedco
                                  from November 1987 to August 1991.

</TABLE>

                                  RISK FACTORS  

     This  report  contains  forward-looking  statements,  which are  subject to
numerous  factors (many of which are beyond the company's  control)  which could
cause  actual  results to differ  materially  from those in the  forward-looking
statements.  Such forward looking  statements  include,  but are not limited to,
statements as to anticipated  futute results,  developments  and occurrences set
forth or implied:

     - under the caption  "Business - Business  Strategy" and elsewhere in this
    report as to measures being undertaken to improve  profitability,  and plans
    for the future

     - under the caption  "Business - Organization  and Operations - Operating
     Systems and Controls

     - under the caption "Business - Government Regulation - Internal Controls

     - under the  caption  "Legal  Proceedings"  and  elsewhere  in this  report
     concerning the outcome of pending legal proceedings

     - under the caption  "Management's  Discussion  and  Analysis of  Financial
     Condition and Results of Operations - Liquidity and Capital Resources"

     - concerning Year 2000 compliance

     - under the caption "Quantitative and Qualitative  Disclosures About Market
     Risk"

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

HIGH LEVERAGE AND RESTRICTIVE COVENANTS - APRIA'S SUBSTANTIAL INDEBTEDNESS COULD
ADVERSELY AFFECT THE FINANCIAL HEALTH OF APRIA.

Apria has now and will continue to have a significant amount of indebtedness. At
December 31, 1998, Apria had total  indebtedness of  approximately  $489 million
and stockholders' deficit of approximately $132 million.

Covenants contained in Apria's bank credit agreement and the indenture governing
Apria's  outstanding 9 1/2% senior  subordinated notes due 2002 contain material
restrictions  on Apria's  operations,  including its ability to incur debt, make
certain investments and encumber or dispose of assets. Pursuant to the indenture
governing the outstanding notes,  Apria is not currently  permitted to incur any
indebtedness  (other  than  certain  refinancing   indebtedness)  and  does  not
anticipate that it will be entitled to incur additional  indebtedness through at
least the third quarter of 1999. In addition,  financial  covenants contained in
Apria's bank credit  agreement  could lead to a default in the event  results of
operations do not meet Apria's plans.

Apria's substantial indebtedness could have important consequences to Apria. For
example, it could:

     -increase  Apria's  vulnerability  to general adverse economic and industry
     conditions

     -limit   Apria's   ability  to  fund  future   working   capital,   capital
     expenditures,  acquisitions and other general corporate  requirements

     -require  Apria to  dedicate  a  substantial  portion of its cash flow from
     operations  to  payments  on  its   indebtedness,   thereby   reducing  the
     availability   of  its  cash  flow  to  fund   working   capital,   capital
     expenditures, acquisitions and other general corporate purposes

     -limit Apria's  flexibility in planning for, or reacting to, changes in its
     business and the industry in which it operates

     -place Apria at a competitive disadvantage compared to its competitors that
     have less debt

     -limit, along with the financial and other restrictive covenants in Apria's
     indebtedness, among other things, its ability to borrow additional funds

See "Management's  Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources".

ABILITY TO SERVICE  DEBT - TO SERVICE  ITS  INDEBTEDNESS,  APRIA WILL  REQUIRE A
SIGNIFICANT  AMOUNT OF CASH.  APRIA'S  ABILITY TO GENERATE  CASH DEPENDS ON MANY
FACTORS BEYOND APRIA'S CONTROL.

Apria's  ability to make  payments on and to refinance its  indebtedness  and to
fund planned capital expenditures will depend on its ability to generate cash in
the  future.  This,  to a  certain  extent,  is  subject  to  general  economic,
financial,  competitive,  legislative,  regulatory  and other  factors  that are
beyond Apria's control.

Based on its  current  level of  operations  and  anticipated  cost  savings and
operating improvements,  Apria believes its cash flow from operations, available
cash and potentially  available  borrowings under its bank credit agreement will
be  adequate  to meet its future  liquidity  needs for at least the next  twelve
months. Apria cannot assure prospective  investors,  however,  that its business
will generate sufficient cash flow from operations,  that currently  anticipated
cost savings and operating  improvements  will be realized on schedule or at all
or that  future  borrowings  will be  available  to Apria  under its bank credit
agreement in an amount  sufficient to enable Apria to pay its indebtedness or to
fund Apria's other liquidity needs. Apria may need to refinance all or a portion
of its  indebtedness  on or before  maturity.  Apria cannot  assure  prospective
investors that it will be able to refinance any of its  indebtedness,  including
its bank  credit  agreement  on  commercially  reasonable  terms or at all.  See
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations - Liquidity and Capital Resources."

CHANGES IN COMPANY'S  BUSINESS  STRATEGY - APRIA MAY NOT BE ABLE TO SUCCESSFULLY
IMPLEMENT  ITS NEWLY  DEVELOPED  BUSINESS  STRATEGY  WHICH COULD HAVE AN ADVERSE
EFFECT ON RESULTS OF OPERATIONS AND FINANCIAL CONDITION.

The  management and Board of Directors of Apria changed  substantially  in 1998.
Apria's  new  management  revised  business  plans,   management  structure  and
operating  procedures and strategies,  and plans significant further changes for
the future. These changes involve substantial costs and inevitable disruption of
business  operations.  Changes in operating  procedures  and  strategies,  while
designed  to  improve  efficiency,  may not  produce  the  cost  reductions  and
efficiencies  anticipated.  In pursuing its acquisition strategy, Apria may have
difficulty  identifying  appropriate  acquisition  candidates  and  consummating
transactions,  and the process of integrating  newly acquired  businesses may be
costly and  disruptive.  In addition,  Apria may not have  sufficient  available
funds to pursue its acquisition  strategy.  Apria is currently limited to making
acquisitions  not to exceed $25  million per  acquisition  or $62 million in the
aggregate prior to August 9, 2001, the scheduled  maturity date of the company's
bank credit agreement. Results of operations in future periods will be dependent
upon the success of Apria's  business  strategy.  If Apria is not  successful in
achieving  anticipated  cost reductions and revenue  increases,  results will be
adversely affected. See "Business - Business Strategy".

SIGNIFICANT  RECENT  LOSSES  AND  LIQUIDITY  LIMITATIONS  -  APRIA  MAY  NOT  BE
SUCCESSFUL IN ITS EFFORTS TO SUSTAIN THE REVERSAL OF ITS RECENT  HISTORICAL  NET
LOSSES.

Apria has suffered significant net losses in the last two fiscal years. Although
Apria  reported  a  profit  for the  fourth  quarter  of 1998,  there  can be no
assurance  that  Apria  will be able to  continue  its  turnaround  and  operate
profitably in the future.  Due to restrictions in Apria's bank credit  agreement
and the  indenture  governing the company's  9-1/2% senior  subordinated  notes,
Apria,  at least  through  September  30, 1999,  must  successfully  utilize its
existing resources in order to finance its operations and implement its business
strategy.  While  existing  cash  reserves  appear  sufficient  to meet  Apria's
identified  needs for the  remainder  of 1999,  Apria  cannot  assure  that such
existing  resources  will  be  adequate  for  such  purposes  indefinitely.  See
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations - Liquidity and Capital Resources".

FEDERAL  INVESTIGATIONS  - THE  OUTCOME  OF THE  INVESTIGATIONS  THAT  THE  U.S.
DEPARTMENT OF JUSTICE IS CURRENTLY CONDUCTING ON APRIA'S MEDICARE,  MEDICAID AND
OTHER BILLING  PRACTICES COULD HAVE A NEGATIVE IMPACT ON APRIA'S  OPERATIONS AND
FINANCIAL CONDITION.

Since June 1998,  Apria has  received  a total of nine  subpoenas  from the U.S.
Attorneys' offices in Sacramento and San Diego, California, requesting documents
related to the company's  billing  practices.  The documents  requested  include
those located at Apria's corporate headquarters in Costa Mesa,  California,  and
offices in San Diego and Sacramento,  California, and Canonsburg,  Pennsylvania.
Apria has substantially completed the process of complying with the subpoenas.

Apria  has  experienced  problems  as a result  of errors  and  deficiencies  in
supporting documentation affecting a portion of its billings, including billings
under the Medicare and Medicaid programs. If the U.S. Department of Justice were
to conclude that such errors and deficiencies  constituted  criminal violations,
or were to conclude that such errors and deficiencies resulted in the submission
of false  claims to federal  healthcare  programs,  Apria  could  face  criminal
charges and/or civil claims,  administrative sanctions and penalties for amounts
that  would be highly  material  to its  business,  results  of  operations  and
financial condition,  including exclusion of Apria from participation in federal
healthcare  programs.  Such amounts could include  claims for treble damages and
penalties  of up to  $10,000  per false  claim  submitted  by Apria to a federal
healthcare  program. It is the company's position that the assertion of criminal
charges  or the  assertion  of any such  claims  would be  unwarranted.  If such
charges or claims were  asserted,  Apria believes that it would be in a position
to assert  numerous  defenses.  However,  no assurance can be provided as to the
outcome of any such possible proceedings.

Presently,  Apria  is  unaware  of what  claims  or  proceedings,  if  any,  the
government may be contemplating with respect to these subpoenas.

COLLECTIBILITY  OF ACCOUNTS  RECEIVABLE  - APRIA'S  FAILURE TO IMPROVE  ACCOUNTS
RECEIVABLE  MANAGEMENT  WOULD HAVE A SIGNIFICANT  NEGATIVE  IMPACT ON RESULTS OF
OPERATIONS AND FINANCIAL CONDITION.

Results of operations  have been  adversely  affected by high levels of accounts
receivable  write-offs.  Apria  wrote  off  accounts  receivable  totaling  $246
million,  $302 million and $269.5 million in 1998, 1997 and 1996,  respectively.
Initially  caused  by  the  disruptive  effects  of the  1995  and  1996  system
conversions  effected in conjunction  with the  Abbey/Homedco  merger,  the high
level of accounts receivable write-offs are largely due to billing problems such
as untimely billing,  improper and/or untimely  preparation of, and deficiencies
in, reimbursement documentation,  problems with the billing systems and the high
concentration of managed care payors from whom it has been difficult to collect.
Apria records  receivables upon confirmation of the delivery of medical services
or  products  which  is  typically  prior to  billing  and the  preparation  and
submission of reimbursement documentation, which can create increased collection
risks if invoices and documentation  are not prepared  correctly and on a timely
basis.  Although management has implemented a number of initiatives and invested
significant  resources  to address the  problems,  the high level of  write-offs
continued  into  1998.  There can be no  assurance  that the  collectibility  of
Apria's  recorded  accounts  receivable  will  improve in the near  future.  See
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations - Liquidity and Capital Resources".

OPERATING SYSTEMS AND CONTROLS - APRIA'S  IMPLEMENTATION  OF SIGNIFICANT  SYSTEM
MODIFICATIONS TO ADDRESS SYSTEM PROBLEMS EXPERIENCED IN PRIOR PERIODS COULD HAVE
A DISRUPTIVE EFFECT ON BILLING AND COLLECTION ACTIVITY AND COULD ULTIMATELY HAVE
A SIGNIFICANT NEGATIVE IMPACT ON RESULTS OF OPERATIONS AND FINANCIAL CONDITION.

Following the 1995 merger of Apria's two predecessor  corporations,  the company
has been adversely  affected by  difficulties in the  establishment  of a common
field information system for accurate order entry, pricing, billing, collections
and monitoring, as well as by ongoing operational problems such as high turnover
and training issues. To address these issues, management performed an evaluation
of its current  systems.  A significant  determination of the evaluation is that
Apria is at some risk in  continuing to run its infusion  billing  system on its
current  platform,  which is no longer  supported by the computer  industry.  To
mitigate this risk,  Apria is currently  converting  the infusion  system to the
operating  platform  on which  the  respiratory/home  medical  equipment  system
currently operates. To address the system problems experienced since the merger,
Apria is rewriting the order entry,  billing and accounts receivable modules and
is installing  supply chain  management  software to replace the  purchasing and
inventory modules.  There can be no assurance that the system modifications will
resolve the problems  experienced  in prior  periods and the  implementation  of
these system  changes could have a disruptive  effect on billing and  collection
activity.  See "Business - Organization  and Operations - Operating  Systems and
Controls".

PERSONNEL TURNOVER - IF APRIA'S HIGH LEVEL OF PERSONNEL TURNOVER  CONTINUES,  IT
IS UNLIKELY THAT THE COMPANY WILL BE ABLE TO SUCCESSFULLY IMPLEMENT ITS BUSINESS
STRATEGIES,  WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON RESULTS OF OPERATIONS
AND FINANCIAL CONDITION.

Apria's annual turnover has been at approximately 30% for most of 1998, 1997 and
1996.  Apria's  turnover  has  been  highest  among  senior  management,  middle
management and the sales force. The turnover has been largely due to uncertainty
about  Apria's  future,  its  strategies  and the mix of products  and  services
offered.  No assurance can be given that recent changes in senior management and
efforts to establish a comprehensive strategy will reduce this turnover.

GOVERNMENT  REGULATION;   HEALTHCARE  REFORM  -  NON-COMPLIANCE  WITH  LAWS  AND
REGULATIONS  APPLICABLE TO APRIA'S BUSINESS AND FUTURE CHANGES IN THOSE LAWS AND
REGULATIONS COULD HAVE A MATERIAL ADVERSE EFFECT ON APRIA.

Apria is subject to stringent laws and regulations at both the federal and state
levels, requiring compliance with burdensome and complex billing, substantiation
and  record-keeping  requirements.  Financial  relationships  between  Apria and
physicians  and other  referral  sources are subject to strict  limitations.  In
addition,  the provision of services,  pharmaceuticals and equipment are subject
to strict  licensing  and  safety  requirements.  Violations  of these  laws and
regulations could subject Apria to severe fines, facility shutdowns and possible
exclusion from participation in federal healthcare programs such as Medicare and
Medicaid.

Government  officials and the public will continue to debate healthcare  reform.
Changes in healthcare law, new  interpretations  of existing laws, or changes in
payment  methodology may have a dramatic effect on Apria's  business and results
of operations. See "Business - Government Regulation".

MEDICARE  REIMBURSEMENT RATES - CONTINUED  REDUCTIONS IN MEDICARE  REIMBURSEMENT
RATES  COULD  HAVE A  MATERIAL  ADVERSE  EFFECT ON  RESULTS  OF  OPERATIONS  AND
FINANCIAL CONDITION.

Pursuant to the  provisions  of the  Balanced  Budget Act of 1997,  the Medicare
reimbursement  rates for home oxygen therapy and respiratory  drugs were reduced
by  25%  and  5%,  respectively,   effective  January  1,  1998.  An  additional
reimbursement reduction of 5% on home oxygen therapy was effective on January 1,
1999.  Also included in the Balanced  Budget Act of 1997 is a freeze on Consumer
Price Index-based  reimbursement rate increases for 1998 through 2002 as well as
other provisions which may impact  reimbursement  rates in the future.  At least
three  products   Apria   provides  have  been   identified  as  potential  1999
reimbursement  reduction  candidates.  See  "Business - Government  Regulation -
Medicare and Medicaid Reimbursement".

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
like Apria.  Larger buyer and supplier groups exert additional  pricing pressure
on home healthcare  providers.  These include managed care organizations,  which
control an increasing portion of the healthcare  economy.  Apria has a number of
contractual  arrangements  with managed care  organizations  and other  parties,
although no  individual  arrangement  accounted  for more than 7% of Apria's net
revenues in fiscal 1997 or 1998. Certain competitors of Apria have or may obtain
significantly greater financial and marketing resources than Apria. In addition,
relatively few barriers to entry exist in local home  healthcare  markets.  As a
result,  Apria  could  encounter  increased  competition  in the future that may
increase  pricing  pressure  and limit its ability to  maintain or increase  its
market share. See "Business - Sales" and "Business - Competition".

YEAR 2000  COMPLIANCE - APRIA COULD BE ADVERSELY  AFFECTED IF YEAR 2000 PROBLEMS
ARE SIGNIFICANT.

The year 2000 issue is the result of many  software  applications  being written
using two digits rather than four to define the applicable year, which may cause
the  application to recognize a date using "00" as the year 1900 rather than the
year  2000.  This  could  result in system  failure  or  malfunction.  Apria has
substantially  completed the necessary  modifications  to its field  information
systems and is in the process of evaluating its ancillary systems to ensure that
they  are  year  2000-compliant.  Further,  Apria is  assessing  the  year  2000
readiness of its external business partners such as payors, banks and suppliers.
If Apria is unable to resolve  all its year 2000  issues,  including  those with
external agents,  it may have a material  adverse effect on Apria's  operations.
See "Management's  Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources".


ITEM 2.  PROPERTIES

     Apria's  headquarters are located in Costa Mesa,  California and consist of
approximately  112,000  square feet of office space.  The lease expires in 2001.
Apria has approximately 320 branch facilities serving patients in all 50 states.
These branch  facilities  are typically  located in light  industrial  areas and
average  approximately  10,000  square  feet.  Each  facility  is a  combination
warehouse and office, with approximately 50% of the square footage consisting of
warehouse  space.  Apria leases  substantially  all of its facilities with lease
terms of generally five years or less.


ITEM 3.  LEGAL PROCEEDINGS

     Apria and certain of its present and former officers  and/or  directors are
defendants in a class action lawsuit,  In Re Apria  Healthcare  Group Securities
Litigation,  filed  in the U.S.  District  Court  for the  Central  District  of
California,  Southern  Division  (Case  No.  SACV98-217  GLT).  This  case  is a
consolidation  of three similar  class  actions filed in March and April,  1998.
Pursuant to a court order dated May 27,  1998,  the  plaintiffs  in the original
three class  actions  filed a  Consolidated  Amended  Class Action  Complaint on
August 6, 1998. The amended complaint purports to establish a class of plaintiff
shareholders who purchased Apria's common stock between May 22, 1995 and January
20,  1998.  No class has been  certified  at this time.  The  amended  complaint
alleges,  among other things,  that the defendants made false and/or  misleading
public  statements  regarding Apria and its financial  condition in violation of
federal  securities laws. The amended complaint seeks  compensatory and punitive
damages as well as other relief.

     Two similar class actions were filed during July 1998 in Superior  Court of
California for the County of Orange:  Schall v. Apria  Healthcare Group Inc., et
al. (Case No. 797060) and Thompson v. Apria  Healthcare Group Inc., et al. (Case
No. 797580).  These two actions were consolidated by a court order dated October
22, 1998. The parties have agreed that a new and first amended complaint will be
filed.  Apria  anticipates  that  allegations  similar to those  asserted in the
amended  complaint  in the federal  action will be asserted in the  consolidated
state  action,  although  the claims will be founded on state law, as opposed to
federal law.

     Apria believes that it has meritorious  defenses to the plaintiffs' claims,
and it intends to vigorously  defend itself in both the federal and state cases.
In the opinion of Apria's  management,  the ultimate  disposition of these class
actions  will not have a  material  adverse  effect on the  company's  financial
condition or results of operations.

     Apria has  received  nine  subpoenas  from the U.S.  Department  of Justice
requesting documents related to the company's billing practices. See "Business -
Risk Factors - Federal Investigation".

     Apria is presently named as a defendant in at least one whistleblower  suit
brought  under the False  Claims Act. See  "Business -  Government  Regulation -
Other Fraud and Abuse Laws".

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


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

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


                                     PART II

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

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

                                           High           Low
                                           ----           ---
Year ended December 31, 1998                 
  First Quarter                          $14.1250      $ 8.3125
  Second Quarter                          10.0000        6.0625
  Third Quarter                            7.1875        4.0000
  Fourth Quarter                           9.0625        2.5625

Year ended December 31, 1997
  First Quarter                          $20.6250      $16.5000
  Second Quarter                          19.3750       15.0000
  Third Quarter                           18.5000       12.7500
  Fourth Quarter                          17.0000       13.0625


     As of March 31,  1999  there  were 848  holders  of record of Apria  common
stock.

     Apria has not paid any dividends since its inception and does not intend to
pay any dividends on its common stock in the  foreseeable  future.  In addition,
Apria has a bank credit agreement which prohibits the payment of dividends.

<PAGE>


ITEM 6.  SELECTED FINANCIAL DATA

     The following  table  presents  selected  financial  data of Apria,  giving
effect,  in periods  prior to June 28, 1995, to the merger  between  Homedco and
Abbey using the  pooling-of-interests  method of accounting,  for the five years
ended  December  31,  1998.  The data set forth below have been derived from the
audited  Consolidated  Financial  Statements  of  Apria  and  are  qualified  by
reference to, and should be read in conjunction with, the Consolidated Financial
Statements and related notes thereto and  "Management's  Discussion and Analysis
of Financial  Condition and Results of Operations"  included in this report.  As
discussed  in  the  Notes  to the  Consolidated  Financial  Statements,  certain
adjustments have been made to conform the two companies' accounting practices.
<TABLE>
<CAPTION>
                                                                         Year Ended December 31,
                                                     -----------------------------------------------------------------
                                                     1998(1,2)    1997(1,3)    1996(1,4)    1995(4,5,6)   1994(4,6,7)   
                                                     ---------    ---------    ---------    -----------   -----------
                                                                    (in thousands, except per share amounts)
Statements of Operations Data:
<S>                                                  <C>          <C>          <C>           <C>           <C>       
Net revenues....................................     $  933,793   $1,180,694   $1,181,143    $1,133,600    $  962,812
Gross profit....................................        603,098      729,512      780,468       772,601       675,122
(Loss) income from continuing operations
   before extraordinary items...................       (207,938)    (272,608)      33,300       (71,478)       35,616

Net (loss) income...............................       (207,938)    (272,608)      33,300       (74,476)       39,031

Per share amounts:
    (Loss) income from continuing operations
       before extraordinary items...............     $    (4.02)   $   (5.30)  $     0.66     $   (1.52)    $    0.84
    Net (loss) income per common share..........     $    (4.02)   $   (5.30)  $     0.66     $   (1.58)    $    0.92

Per share amounts - assuming dilution:
    (Loss) income from continuing operations
       before extraordinary items...............     $    (4.02)   $   (5.30)  $     0.64     $   (1.52)    $    0.78
    Net (loss) income per common share..........     $    (4.02)   $   (5.30)  $     0.64     $   (1.58)    $    0.85

Balance Sheet Data:
Working capital.................................     $    14,929   $  169,090  $  311,991     $ 198,630     $ 157,608
Total assets....................................         496,598      757,170   1,149,110       979,985       856,167
Long-term obligations,
  including current maturities..................         488,586      548,905     634,864       500,307       438,304
Stockholders' equity (deficit)..................        (131,657)      74,467     342,935       284,238       261,910
</TABLE>

(1)  As described in Item 7, Apria recorded  significant  charges to provide for
     estimated losses related to accounts receivable. In 1998, $18.3 million was
     recorded to  increase  the  allowance  for  revenue  adjustments  and $22.7
     million was charged to increase the allowance for doubtful accounts.  These
     charges  relate  primarily  to  changes  in  collection   policies  and  in
     conjunction  with certain  portions of the business  from which the company
     exited. Apria recorded charges of $40 million and $32.3 million in 1997 and
     1996,  respectively,  to increase the allowance for revenue adjustments and
     $61.4 million and $9 million in 1997 and 1996,  respectively,  to increase 
     the  allowance for doubtful  accounts.  These  charges were due  primarily
     to the residual  effects  of  the 1995 and 1996 facility consolidations and
     system conversions effected in conjunction with the Abbey/Homedco merger.

(2)  As  described  in  Item 7 and  in  Notes  3,  4 and 14 to the  Consolidated
     Financial  Statements,  the  operations  data for 1998 includes  impairment
     charges of $76.2  million to write down the carrying  values of  intangible
     assets  and  $22.2  million  to  write-off  information  systems  hardware,
     internally-developed  software  and  assets  associated  with  the  exit of
     portions of the business.

(3)  As  described  in Item 7 and in  Notes  3, 4, 8 and 14 to the  Consolidated
     Financial  Statements,  the operations  data for 1997 includes  significant
     adjustments  and charges to write down the  carrying  values of  intangible
     assets and information systems hardware and  internally-developed  software
     of  $133.5  million  and  $26.8  million,  respectively,  to  increase  the
     valuation  allowance on deferred tax assets by $30 million,  and to provide
     for estimated  shortages  related to patient  service  assets  inventory of
     $33.1 million.

(4)  The per share  amounts  prior to 1997 have been  restated  as  required  to
     comply with Statement of Financial  Accounting  Standards No. 128, Earnings
     per Share. For further discussion, see Note 9 to the Consolidated Financial
     Statements.

(5)  In 1995,  Apria  incurred  charges  related  to merger,  restructuring  and
     integration activities in conjunction with the Abbey/Homedco merger.

(6)  The  Statements of  Operations  and Balance Sheet Data reflect the June 28,
     1995  Abbey/Homedco  merger  using  the   pooling-of-interests   method  of
     accounting.  Accordingly,  the financial data for all periods prior to June
     28, 1995 have been restated as though the two companies had been combined.

(7)  In  1994, Apria  disposed  of  its 51%  interest in  Abbey  Pharmaceutical
     Services, Inc.

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 including home respiratory therapy, home infusion therapy,
home medical  equipment and other services.  In all three lines,  Apria provides
patients with a variety of clinical  services and related products and supplies,
most of which  are  prescribed  by a  physician  as part of a care  plan.  Apria
provides  these  services to patients in the home  throughout  the United States
through its 320 branch  locations.  Management  measures  operating results on a
geographic basis and, therefore,  views each branch as an operating segment. All
the branches  offer the same  services,  except that  infusion  services are not
offered  in all the  geographic  markets  in which  the  company  operates.  For
financial  reporting   purposes,   all  the  company's  operating  segments  are
aggregated into one reportable segment.

     BACKGROUND.  In  June  1997,  Apria  announced  that  it  had  retained  an
investment   banking  firm  as  its  financial   advisor  to  explore  strategic
alternatives to enhance  shareholder value,  including the possible sale, merger
or  recapitalization  of Apria.  During the first quarter of 1998, Apria entered
into a  recapitalization  agreement;  however,  the agreement was  terminated by
mutual  consent of the  parties on April 3, 1998.  This  process  and  resulting
uncertainties are believed to have adversely affected Apria's financial results.
By May 1998, Apria's active exploration of strategic alternatives was terminated
as a result of hiring a new Chief  Executive  Officer  and other key  management
executives and the reconfiguration of the Board of Directors.

     In July 1998,  after an evaluation of the business,  Apria's new management
team announced its strategic plan, or "reorganization", to improve the company's
performance.  The key elements of the reorganization are: (1) no change would be
made to the  fundamental  nature of the business,  (2) Apria would withdraw from
unprofitable  components  of the  business,  which  would  include  exiting  the
infusion therapy business in certain  geographic areas, (3) a comprehensive cost
reduction and capital conservation program would be instituted,  (4) Apria would
pursue expansion through internal growth and acquisitions,  and (5) the debt and
capital structure would be reexamined.  Significant actions taken by Apria's new
management  team since it  announced  the  reorganization  include:  a change in
management's  collection  policy and a  refinement  of the  accounts  receivable
collectibility  estimation  methodologies  as described  below,  the sale of the
California component of the infusion therapy business ("the infusion sale"), the
exit of the  infusion  therapy  business  in Texas,  Louisiana,  West  Virginia,
western  Pennsylvania and downstate New York and the consolidation or closure of
certain small branch locations throughout the United States (collectively,  "the
exited businesses").  Other significant actions include the termination of plans
to proceed with the  capital-intensive  implementation of an enterprise resource
planning  system,  a significant  reduction of corporate and regional  labor and
general  administrative  costs and the  development of a  comprehensive  plan to
capture  cost savings in the areas of  purchasing,  distribution  and  inventory
management.


RESULTS OF OPERATIONS

     NET REVENUES. Substantially all of Apria's revenues are reimbursed by third
party  payors,  including  Medicare,  Medicaid and managed  care  organizations,
representing approximately 26%, 10% and 40% of total revenues, respectively.

     Due to the nature of the  industry  and the  reimbursement  environment  in
which Apria operates,  certain estimates are required in recording net revenues.
Inherent  in these  estimates  is the risk that they will have to be  revised or
updated,   and  the  changes  recorded  in  subsequent  periods,  as  additional
information becomes available to management.

     In June of 1997,  Apria determined that its strategy to focus on increasing
managed care market share had  negatively  impacted its  financial  performance,
particularly  for infusion  therapy,  because of significant  managed care price
compression,   difficulties   in  billing  and  collecting   from  managed  care
organizations and related losses of traditional  referral business.  In response
to these conditions,  management reevaluated its strategies and began efforts to
exit  certain   managed  care  contracts  not  meeting   minimum   profitability
thresholds,  as  well  as  certain  lower-margin  service  lines  and  began  to
reemphasize traditional referral-based business from sources such as physicians,
hospitals, medical groups and home health agencies.

     Service lines targeted for exit in 1997 included medical supplies,  women's
health  and  nursing   management,   which   represented   annual   revenues  of
approximately  $55.8  million.  Some  portion of the medical  supply and nursing
business is expected to continue due to core service line customer requirements.
Through  the end of 1997,  Apria had  exited  contracted  business  representing
approximately  $25  million in annual  revenues.  The  contract  review  process
continued  into  1998  resulting  in  the  termination  of  contracts   totaling
approximately  $19 million in annual revenues.  A consequence of the initiatives
to exit  certain  service  lines and to exit  certain  low-margin  managed  care
contracts was the loss of related  business  which Apria would have preferred to
retain.

     In addition to the specific  quantifiable  reductions to revenue  mentioned
herein,  revenues were adversely impacted by various other factors.  In mid-1997
Apria began a process to explore the  feasibility of entering into a transaction
such as a sale, merger or recapitalization.  Apria entered into an agreement for
a  recapitalization  transaction  during  the first  quarter  of 1998  which was
subsequently   terminated.   The  entire  process   created  an  environment  of
uncertainty,  both  within  Apria  and with its  customers  and  other  business
partners.  During  this same  period  there  were a number of  changes in senior
management  and to the Board of Directors,  which added to the  distraction  and
raised more  uncertainty.  These issues led Apria to be  characterized in a very
negative  light in various  newspapers  and trade  journals.  Also,  during this
period of turmoil,  Apria found it very  difficult to attract and retain quality
sales personnel which left many geographic sales territories  lacking sufficient
coverage to compete  effectively.  All of these factors have adversely  impacted
revenues, but attributing dollar amounts to each would not be feasible.

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

                                                 Year Ended December 31,    
                                                 -----------------------    
                                               1998       1997       1996
                                               ----       ----       ----
                                                     (in millions)

     Respiratory therapy...................   $  553     $  606      $  594
     Infusion therapy......................      211        281         293
     Home medical equipment/other..........      170        294         294
                                              ------     ------      ------
           Total net revenues..............   $  934     $1,181      $1,181
                                              ======     ======      ======

     Respiratory  Therapy. The decrease in respiratory revenues in 1998 compared
to 1997 is almost entirely due to the reduction of Medicare  reimbursement rates
pursuant to the provisions of the Balanced Budget Act of 1997. Effective January
1,  1998,  the  Medicare   reimbursement  rates  for  home  oxygen  therapy  and
respiratory  drugs  were  reduced  by 25% and 5%,  respectively.  The  estimated
decrease  in  1998  revenues  and   operating   income   resulting   from  these
reimbursement  reductions is approximately $57 million. A further  reimbursement
reduction  of 5% on home oxygen  therapy  became  effective  on January 1, 1999,
which is estimated to reduce 1999 revenues and operating income by approximately
$11 million.  Also  effective  January 1, 1998,  was a freeze on Consumer  Price
Index-based increases until 2002.

     The increase in  respiratory  therapy  revenues in 1997 over 1996 is due to
Apria's concerted effort in early 1997 to refocus on respiratory  therapy and to
increase  the number of  territories  covering  this  higher-margin  traditional
business.

     Infusion  Therapy.  The  decrease in infusion  therapy  revenues in 1998 is
primarily  due to the  termination  of  unprofitable  contracts  and  formidable
competition  at the local and national  levels.  Also  impacting  1998  infusion
therapy revenues was the decision to sell/exit the infusion  business in certain
geographic  markets.  The decision was made at the end of the third  quarter and
the  transition out of the business in  substantially  all of the selected areas
took  place in the  fourth  quarter.  The  impact on 1998  revenues  during  the
transition  period was a reduction of  approximately  $9.5  million.  The annual
revenues represented by these infusion locations is approximately $52 million.

     The decrease in infusion  revenues in 1997 as compared to 1996 reflects the
early effects of the contract termination process, the increased competition and
the company's focus on the respiratory business.

     Home  Medical   Equipment/Other.   Home  medical  equipment/other  revenues
decreased significantly in 1998 as compared to 1997. The primary causes were due
to  discontinuing  the medical  supply,  women's  health and nursing  management
service lines and terminating  unprofitable contracts.  Further, the termination
of contracts or loss of business in the respiratory  and infusion  therapy lines
resulted  in  the  loss  of   collateral   business   within  the  home  medical
equipment/other line.

     Home medical equipment/other revenues remained flat from 1997 to 1996. This
represents growth in the early part of 1997 due to Apria's emphasis on obtaining
managed  care  business  as offset by the loss of  medical  supply  and  nursing
revenues in the latter part of 1997.

     The freeze on Consumer Price Index-based Medicare  reimbursement  increases
discussed above is applicable to certain patient service  equipment items within
Apria's home medical equipment line.

     Revenue  Adjustments.  Due to the  complexity of many  third-party  billing
arrangements  and  uncertainty  of  reimbursement  amounts for certain  services
and/or from certain payors,  adjustments to billed amounts are fairly common and
are typically  identified and recorded at the point of cash  application,  claim
denial or upon  account  review.  Examples of such revenue  adjustments  include
subsequent  changes to  estimated  revenue  amounts or denials for  services not
covered due to changes in the patient's coverage;  failure subsequent to service
delivery to obtain written  confirmation  of  authorization  or other  necessary
documentation;  and differences in contract prices due to complex contract terms
or a biller's lack of familiarity with a contract or payor.  Further,  increases
in Apria's average  collection  periods have increased the level of unidentified
revenue  adjustments   accumulating  in  accounts  receivable.   These  problems
originated during the system conversions and branch  consolidations  effected in
1995 and 1996.  The related  disruptions  and employee  turnover  impeded normal
processing and account reviews and resulted in a high rate of billing  problems.
Although  management  has taken a number of steps to  address  the  billing  and
collection problems, the high levels of revenue adjustments have persisted.  Due
to the existence of  unidentified  revenue  adjustments in accounts  receivable,
management  estimates  and records an allowance for such  adjustments.  In 1998,
1997 and 1996,  management recorded  adjustments to reduce revenues and accounts
receivable by $18.3 million, $40.0 million and $32.3 million,  respectively. See
"Liquidity and Capital Resources - Accounts Receivable".

     GROSS PROFIT.  Gross margins were 64.6% in 1998, 61.8% in 1997 and 66.1% in
1996.  Despite the decrease in revenues due to the Medicare  reimbursement  rate
reductions,  Apria's  gross margin  improved in 1998.  The  improvement  in 1998
versus 1997 is  attributable  to a number of factors,  the most  significant  of
which is the  elimination  of  contracts  not meeting  profitability  standards.
Mitigating  the  improvement  were  certain  charges  recorded  during the third
quarter  reorganization  including  $5.4 million to settle  certain  procurement
contracts,  $3.5 million to provide for estimated losses in the company's oxygen
cylinders and $1.6 million to write-off  operational  assets in conjunction with
exiting certain portions of the infusion business.

     As part of the new  management  team's  strategy,  a  consulting  firm  was
engaged to help identify  opportunities  for  operational  improvement  and cost
savings in the functional areas of purchasing and supply  management,  inventory
management  and vehicle  fleet and delivery  management.  A plan was adopted and
implementation  began in early 1999.  Included  in the plan are  standardization
initiatives and optimal operating models.

     The  deterioration in the gross margin in 1997 as compared to 1996 was due,
in part, to the downward pressure of managed care pricing on gross margins. Also
contributing  to the decrease  were charges of $23.0  million and $10.1  million
recorded  in the second and fourth  quarters of 1997,  respectively.  The second
quarter charge of $23.0 million was estimated based on the  preliminary  results
of asset verification and physical inventory  procedures performed in the second
quarter. The adjustment was sufficient to cover actual write-offs resulting from
the third quarter  completion of the company's asset  verification  and physical
inventory procedures.  The charge was primarily due to untimely inventory relief
processes  that were  among the  residual  effects  of the 1995 and 1996  system
conversions  and related high employee  turnover.  The fourth  quarter charge of
$10.1 million was an adjustment  for  additional  inventory  shortages  incurred
since the  completion  of the  second  and third  quarter  asset  verifications.
Because of the  inventory  relief  problem,  management  performed  supplemental
physical  inventory  procedures at a sampling of branches in the fourth quarter.
The  procedure  indicated  continuing  inventory and patient  service  equipment
shortages,  therefore  management  estimated  and  recorded  an  increase to the
related reserves.  Also contributing to the decrease in gross profit in 1997 was
an increase in patient service equipment depreciation of $17.3 million over 1996
due to higher levels of asset purchases in 1996 and 1995.

     PROVISION FOR DOUBTFUL  ACCOUNTS.  The provision for doubtful accounts as a
percentage  of net  revenues  was 8.1%,  10.3% and 5.7% in 1998,  1997 and 1996,
respectively.  In August 1998,  management reviewed the historic performance and
collectibility of Apria's accounts receivable  portfolio.  Management considered
the  continued  high-level  of bad debt  write-offs  and  reviewed  its existing
policies  and  procedures  for  estimating  the  collectibility  of its accounts
receivable. In response,  management decided to change the collection policy and
is formally  shifting the focus of the  collection  function to the more current
balances and is assigning  the older  accounts to outside  collection  agencies.
Management  believes this  concentration on more current balances will limit the
amount of  receivables  that age.  Consequently,  the accounts  that do age will
undoubtedly be receivables where collection will be difficult.  With this change
in collection policy,  management  developed a new estimate of the allowance for
doubtful  accounts by increasing the allowance related to balances over 180 days
outstanding. Accordingly, management recorded an adjustment in the third quarter
of 1998 to increase the allowance for doubtful  accounts by $12.1  million.  The
1998  provision  includes $1.5 million for specific  uncollectible  accounts and
charges totaling $9.1 million to increase the allowance for accounts  associated
with the infusion sale and the exited  businesses.  See  "Liquidity  and Capital
Resources - Accounts Receivable".

     The 1997  provision for doubtful  accounts  included  adjustments  of $55.0
million  and  $6.4  million   recorded  in  the  second  and  fourth   quarters,
respectively,  to increase  the  allowance  for  doubtful  accounts.  The second
quarter  adjustment was necessary  because  improvement in the aging of accounts
receivable  and in  collection  timing  and  rates  did not  meet  expectations.
Management  had  expected  the  impact  of the  1996  field  information  system
conversions  and high turnover  among billing and  collection  personnel to have
substantially  reversed by the middle of 1997.  However,  the dollar  amount and
percentage of accounts aged over 180 days at May 31, 1997 remained comparable to
the December 31, 1996 amount and days sales  outstanding  had  decreased by only
five days. Additionally,  Apria had just changed its business strategy to review
its managed care  contracts and exit those not meeting  profitability  standards
and to exit  unprofitable  service  lines such as supplies and nursing that were
attractive  to  many  managed  care  customers.  These  strategies  put  Apria's
relationship with certain of its managed care customers in jeopardy,  which when
coupled with the  company's  poor  experience  in  collecting  receivables  with
managed care payors,  heightened  management's concerns. Due to the managed care
issues and the failure to realize the  expected  increases  in  collections  and
improvement  in the aging,  management  increased  its  allowance  estimate  for
accounts aged over 180 days to provide for write-offs of older accounts expected
to be taken in the ensuing months. The adjustment also provided for an increased
allowance estimate for accounts aged less than 180 days, necessitated by billing
and collection  difficulties  that continued into early 1997. The fourth quarter
adjustment  resulted primarily from refinements to Apria's allowance  estimation
procedures made in conjunction with  management's  year-end analysis of accounts
receivable. Specifically, based on tests of subsequent realization and review of
patient billing files at selected billing locations, further increases were made
to the  percentages  applied to Apria's  accounts  receivable  aging to estimate
allowance  amounts.  In  addition,  due to an  increasing  tendency  for certain
managed care payors to accumulate  significant  amounts of patient  balances,  a
specific  review and  allowance  estimation  was performed for payors with large
aggregate  patient  balances.  See "Liquidity  and Capital  Resources - Accounts
Receivable".

     SELLING,   DISTRIBUTION  AND  ADMINISTRATIVE.   Selling,  distribution  and
administrative  expenses as a percentage of net revenues  were 61.6%,  52.2% and
49.1%  for  1998,  1997,  and  1996,  respectively.  The  increase  in  selling,
distribution  and  administrative  expenses as a percent of revenue from 1997 to
1998 is directly attributable to the lower revenue base in 1998. Actual expenses
for 1998  decreased  $40.8  million from the previous  year.  In response to the
reduction  in revenues,  management  has taken steps to reduce  costs,  the most
significant  of  which  was a  reduction  in the  company's  labor  force  which
commenced in the fourth  quarter of 1997 and  continued  throughout  1998.  From
September 30, 1997 to December 31, 1998, Apria reduced its full-time  equivalent
employees by  approximately  1,700. The majority of the labor reductions made in
1998 resulted from the third quarter  reorganization of Apria's field operations
into 16  geographic  regions  (previously  23,  currently  15) and  through  the
elimination of positions at the company's corporate headquarters.

     Selling,  distribution  and  administrative  expenses include the following
reorganization  charges in the third  quarter of 1998:  $3.8 million loss on the
infusion sale,  $1.8 million to record certain costs  associated with the exited
businesses, $3.9 million in severance, stay bonuses and other employee costs and
$2.0  million  in  lease   liability  on  vacant   facilities  due  to  facility
consolidation  activities.  Other charges  recorded in the third quarter of 1998
include additional amounts for legal fees and settlements.

     Selling,  distribution and administrative expenses for 1997 increased $35.7
million over 1996. The increase was due, in part, to increased  staffing  levels
in those  functional areas where the company had been  experiencing  operational
difficulties.  Third  and  fourth  quarter  terminations  of  approximately  525
employees  resulted in severance  and related  excise tax charges  totaling $7.9
million.  Charges of $2.3 million were also recorded in 1997 in connection  with
exiting certain business lines and closing facilities.

     AMORTIZATION OF INTANGIBLE  ASSETS.  Amortization of intangible  assets was
$12.5  million,  $16.8  million  and  $16.9  million  in 1998,  1997  and  1996,
respectively.  The decrease in 1998 is due to the write-off of impaired goodwill
of $76.2 million in the third  quarter of 1998 and $133.5  million in the fourth
quarter of 1997.  The  resulting  reduction in  amortization  expense was offset
slightly by a reduction in the amortization period for infusion-related goodwill
from 40 years to 20 years.

     IMPAIRMENT OF INTANGIBLE ASSETS. In 1998, the deterioration in the infusion
therapy industry and Apria's decision to withdraw from the infusion  business in
certain  geographic  markets served as indicators of potential  intangible asset
impairment.  Other indicators of potential  impairment  identified by management
include, among other issues, the company's depressed common stock price, failure
to meet its already  lowered  financial  expectations,  the threat of  continued
Medicare  reimbursement   reductions,   government  investigations  against  the
company,  slower than  expected  progress in  improving  its revenue  management
process,   and  reported  financial   difficulties  within  major  managed  care
organizations  with which the company does  business,  resulting  in  collection
difficulties.  Management  conducted an evaluation of the carrying  value of the
company's  recorded  intangible  assets.   Management   considered  current  and
anticipated industry conditions,  recent changes in its business strategies, and
current  and  anticipated  operating  results.  The  evaluation  resulted  in an
impairment  charge of $76.2  milllion which was recorded in the third quarter of
1998.  The charge  includes a write-off  of $4.8  million in  intangible  assets
associated with the exit of the infusion business in certain areas.

     Certain 1997 conditions,  including Apria's failure to meet projections and
expectations,  declining gross margins,  recurring operating losses, significant
downward adjustment to the company's projections for 1998 and a depressed common
stock value, were identified by management as indicators of potential intangible
asset  impairment.  In the  fourth  quarter  of 1997,  management  conducted  an
evaluation of the carrying value and amortization periods of recorded intangible
assets.  Management  considered  current and  anticipated  industry  conditions,
recent changes in its business strategies and current and anticipated  operating
results. The evaluation resulted in an impairment charge of $133.5 million which
was recorded in the fourth quarter of 1997. In  conjunction  with the impairment
evaluation,  management reduced the amortization  period for goodwill related to
acquired  infusion  therapy  businesses from 40 years to 20 years. The remaining
infusion-related goodwill is being amortized over the years remaining assuming a
20-year life from date of acquisition.

     For  purposes of  assessing  impairment,  assets were grouped at the branch
level,  which is the lowest  level for which there are  identifiable  cash flows
that are largely independent. A branch location was deemed to be impaired if the
company's  estimate of undiscounted cash flows was less than the carrying amount
of the long-lived  assets and goodwill at the branch.  In estimating future cash
flows,  management used its best estimates of anticipated operating results over
the  remaining  useful  life  of the  assets  where,  in the  case  of the  1997
computation,  the useful life is the amortization period before giving effect to
the reduction in the infusion  business  goodwill from 40 to 20 years. For those
branches  identified  as  impaired,  the amount of  impairment  was  measured by
comparing  the  carrying  amount of the  long-lived  assets and  goodwill to the
estimated fair value for each branch. Fair value was estimated using a valuation
technique based on the present value of the expected future cash flows.

     IMPAIRMENT OF LONG-LIVED ASSETS AND  INTERNALLY-DEVELOPED  SOFTWARE. One of
the actions taken in 1998 as a result of  management's  new strategic  direction
was the termination of the project to implement an enterprise  resource planning
(ERP)  system.   Accordingly,   Apria  wrote  off  related  software  and  other
capitalized  costs of $7.5 million in the third  quarter of 1998. As part of the
decision to terminate the ERP project,  management evaluated its current systems
to  determine  their  long-term  viability in the context of Apria's new overall
strategic direction. It was determined that Apria was at some risk in continuing
to run the infusion  billing  system on its current  platform which is no longer
supported by the  computer  industry.  To mitigate the risk,  Apria is currently
converting the infusion system to the IBM AS/400 operating platform on which the
respiratory/home medical equipment system currently operates. Also, Apria is now
proceeding with a number of  enhancements to the systems which rendered  certain
previously-developed    modules   obsolete.   Further,   pharmacy   and   branch
consolidations and closures rendered a variety of computer  equipment  obsolete.
Due to its age and technological  obsolescence,  it was deemed to have no future
value.  As a result of these  actions,  Apria  recorded an impairment  charge of
$11.8  million at September 30, 1998.  Apria also  recognized  additional  asset
impairments  during  1998  of  $1.4  million  in  conjunction  with  the  exited
businesses   and  $1.4   million   related  to  other   facility   closures  and
consolidations.

     During 1997,  management  reevaluated  its current  information  systems in
light of year 2000 risks and ongoing operational difficulties and concluded that
significant  additional  costs would be necessary to adequately  correct  system
deficiencies and improve  functionality.  Accordingly,  the decision was made to
replace Apria's systems, including  internally-developed  software, with a large
scale,   fully-integrated   enterprise  resource  planning  system.  A  two-year
development  and  implementation  plan was approved by the Board of Directors in
December 1997. The project was subsequently terminated as discussed above.

     In light of the evaluation and decisions during 1997,  management  reviewed
the carrying value of the capitalized software and recorded an impairment charge
of $20.2  million.  The charge  included  (1) a $3.9  million  reduction  to the
carrying value of Apria's branch information system ("ACIS") program development
costs,   (2)  an  $11.4  million   write-off  of  costs   associated  with  ACIS
implementation  and conversion,  and (3) a $4.9 million  write-off of costs of a
specialized  telecommunications  software program  developed for ApriaDirect,  a
clinical program that was discontinued in December 1997.

     In connection with management's evaluation of Apria's  internally-developed
software, management also conducted a review of the company's computer hardware,
including telecommunications equipment.  Equipment with a carrying value of $6.6
million  was  identified  as  functionally  obsolete or no longer in use and was
written off in 1997.

     INTEREST EXPENSE. Interest expense was $46.9 million in 1998, $50.4 million
in 1997 and $49.2 million in 1996. Long-term debt levels, although lower than in
1997,  remained  constant  throughout  1998 until  November,  when a $50 million
payment was made as a requirement of the amended and restated credit  agreement.
However,  Apria's effective  interest rate increased  steadily over 1998, as the
company did not meet the required levels of funded  indebtedness to consolidated
EBITDA,  the  financial  ratio  governing  the  applicable  interest rate margin
available  to the company.  Apria's  cash  balances  have  increased  from $16.3
million at December 31, 1997 to $75.5 million at December 31, 1998. The interest
income from the  accumulated  cash reserves has helped to mitigate the impact of
higher effective interest rates.

     INCOME  TAXES.  Income  tax  expense  for  1998  was $3  million,  which is
primarily  state taxes payable on a basis other than, or in addition to, taxable
income. At December 31, 1998, Apria had net operating carryforwards ("NOLs") for
federal income taxes of approximately $380 million,  expiring in varying amounts
in the years 2003 through 2013. In evaluating the  realizability  of the NOLs at
December 31, 1998,  various  positive and  negative  factors  pertaining  to the
existence of sufficient  projected taxable income within the carryforward period
were  considered.   Management  believes  that  its  strategies  may  result  in
sufficient  taxable  income during the  carryforward  period to utilize  Apria's
NOLs. However, the achievement of future taxable income is dependent upon future
events and economic,  regulatory and other factors  largely out of  management's
control. Therefore, such future taxable income is not assured.  Additionally, in
evaluating  whether  a  valuation  allowance  is  appropriate,  management  also
considered  the  significant  negative  factors  existing at December  31, 1998,
including:  Apria's recent historical financial and tax losses make it difficult
to conclude a valuation  allowance  is not needed;  Apria has, in recent  years,
been unable to meet its operating  plans;  and while  management has implemented
new  strategies  to achieve  profitability  and  reported a profit in the fourth
quarter of 1998, there can be no assurances that operating profits will continue
in any future period or that management  will be successful in implementing  all
its  strategies,  including its growth plans.  In  considering  the positive and
negative factors at this time,  management concluded that it is more likely than
not that Apria will be unable to utilize the NOLs except for future reversals of
existing  taxable  temporary  differences,  and  consequently,  has  recorded  a
valuation allowance of $159 million at December 31, 1998.

     Income tax expense for 1997  amounted to $36.6  million and included  $30.0
million to increase  the  valuation  allowance  for  deferred  tax assets due to
recurring tax losses and lower estimates of future taxable income. The remaining
amount of income tax expense  includes  estimated  state taxes  payable based on
factors other than income,  estimated  settlement  amounts for in-progress state
tax  audits,  foreign  taxes  related to the sale in 1997 of Apria's  15% equity
interest in a United Kingdom-based  company and the settlement amount paid on an
examination  of Apria's  federal tax returns for 1992 through  1995.  Certain of
these tax expense  items  resulted in increases to deferred tax assets for which
no benefit was recorded in 1997 due to  offsetting  increases  to the  valuation
allowance.

     Income tax expense for 1996 amounted to $18.7 million and  represented  36%
of income  before  taxes.  The  deductibility  in 1996 of certain  accruals  and
merger-related  reserves established in 1995 resulted in a tax loss, an increase
in  refundable  taxes due to a  carryback  of a portion  of the tax loss,  and a
decrease in net deferred tax assets.


LIQUIDITY AND CAPITAL RESOURCES

     OPERATING  CASH FLOW. In 1998 Apria  generated  $133.9 million in operating
cash  flow  compared  to  $104.1  million  generated  in 1997 and  cash  used in
operating  activities  of $59.3  million  in 1996.  The  primary  reason for the
improvement in 1998 operating cash flow was the decrease in accounts  receivable
as compared to a significant increase in 1997. Also contributing to the increase
in 1998  operating  cash flow was a 39%  reduction  in net  purchases of patient
service  equipment over 1997 levels and the fact that less cash was used in 1998
due to the timing of payments  against  accounts payable and payroll and related
costs.

     ACCOUNTS  RECEIVABLE.  Accounts  receivable  before  allowance for doubtful
accounts  decreased by $147.7 million during 1998. The decrease is  attributable
to the decline in net revenues,  a high-level of bad debt write-offs and revenue
adjustments  and cash  collections  in excess of trailing net  revenues.  During
1998, Apria wrote-off accounts receivable totaling $246 million.  Cash posted to
accounts receivable was 104.5% of trailing net revenues for 1998.

     Background.  Apria's  accounts  receivable  problems  originated  with  the
Abbey/Homedco  merger.  The 1995 merger  resulted in a  restructuring  plan that
included a very rapid consolidation of operating locations and the conversion of
all locations to standardized information systems. During the last six months of
1995, over 1,100  employees were  terminated and over 100 branch  locations were
closed or consolidated  with other branches.  Beginning with the consummation of
the  merger,   each  branch  information  system  was  first  converted  to  the
predominant system in place within its region. Conversion of the branches to the
standard,  company-wide  systems  then  occurred  on a  region-by-region  basis.
Because  of the  conversion  to  interim  systems  prior  to  final  conversion,
locations  representing  approximately  80% of Apria's  net  revenues  underwent
conversion.  Ultimately,  a total of 496 system conversions were completed;  232
were completed during 1995 and 264 during the first three quarters of 1996.

     The disruptions caused by the branch consolidations and systems conversions
had a major impact on the functions of order taking,  product delivery,  billing
and  collections.  Existing  employees  challenged with learning new systems and
high turnover  during this period  created  serious  training  issues.  Further,
familiarity with the complex and payor-specific billing requirements is critical
to ensure proper and timely billing and collections.  Much of this expertise was
lost due to the high turnover among billing and collection personnel.

     Improvement  actions.  In response to these problems and the resulting high
rates of bad debt write-offs and revenue  adjustments,  management  instituted a
number of measures.  In 1996,  such measures  included the  implementation  of a
collection incentive program with special emphasis on older accounts, the hiring
of  additional  management-level  billing and  collection  personnel and systems
reinforcement  training. In 1997, Apria instituted a process review of the field
information  systems to identify  opportunities  to improve billing  processing,
timeliness and accuracy.  Management also validated and corrected system pricing
files and  implemented  billing center audits to assess  compliance with billing
practices  and  procedures.   During  the  first  quarter  of  1998,  management
reorganized  its field  operations  to create a  separate  "revenue  management"
organization   which   encompasses  the  functions  of   order-taking,   patient
qualification,  documentation coordination,  timely filing and prompt follow-up.
The revenue management  organization reports directly to corporate  headquarters
and specifically to a newly created Executive Vice President  position.  The new
organization  structure was intended to facilitate  improved  communications and
accountability. In conjunction with the reorganization, processes and procedures
were reviewed to identify additional opportunities for improvement. As a result,
additional  personnel were placed in quality assurance  positions to help ensure
that  products  and  services  were  more   accurately  and  timely  billed  and
responsibilities were consolidated to allow specifically  qualified personnel to
support,  direct and train the revenue management staff. Task forces were formed
to visit the billing  centers to ensure  compliance  with  policies and standard
procedures.  Also,  software  enhancements to simplify the order-intake  process
were introduced.

     Allowance  evaluation.  Accounts  receivable is reduced by an allowance for
estimated  revenue  adjustments  and further netted by an allowance for doubtful
accounts to reflect  accounts  receivable  in the  financial  statements  at net
realizable value. Bad debt and revenue  adjustment  allowances are analyzed on a
combined basis. Management uses actual write-off  classifications in conjunction
with  historical  experience  and account  reviews to determine the  appropriate
categorization of revenue adjustments and bad debts, both reserved and expensed.
Apria's  methodology for estimating  allowances for  uncollectible  accounts and
providing for the related revenue  adjustments and bad debt expense  involves an
extensive,  balanced evaluation of operating statistics,  historical realization
data and accounts receivable aging trends. Also considered are relevant business
conditions  such  as  system  conversions,  facility  consolidations,   business
combinations,  Medicare  carrier  conditions and extent of contracted  business.
Finally,  specific  reviews  of  certain  large  and/or  problematic  payors are
performed. Management periodically refines the analysis and allowance estimation
process to consider any changes in related  policies and procedures  such as the
recent change in focus to  collecting  the more current  accounts.  Accordingly,
management  adjusts the combined  allowance to reflect its best  estimate of the
allowance  required at each reporting date. See "Results of Operations - Revenue
Adjustments and Provision for Doubtful Accounts".

     Unbilled  receivables.  Included  in  accounts  receivable  are  earned but
unbilled  receivables of $25.3 million and $31.9 milion at December 31, 1998 and
1997,  respectively.  There  is a delay  of  approximately  a day or two,  up to
several weeks or more in some cases, between the date of service and billing due
to  delays in  obtaining  certain  required  payor-specific  documentation  from
internal and external sources. Such documentation would include internal records
of proof of  service  and  written  authorizations  from  physicians  and  other
referral sources.  Earned but unbilled receivables are aged from date of service
and  are  considered  in  Apria's   analysis  of  historical   performance   and
collectibility.

     LONG-TERM  DEBT.  Apria's  credit  agreement  with a syndicate of banks was
amended and  restated  in  November  of 1998 and further  amended in January and
February  of 1999.  The  November  amendment  required a $50  million  permanent
repayment  of the loan upon  execution.  The  remaining  indebtedness  under the
credit  agreement  was  restructured  into a $288  million  term  loan and a $30
million  revolving  credit  facility with a maturity date of August 9, 2001. The
amended and restated agreement currently requires that Apria issue not less than
$50 million of senior subordinated convertible debentures or senior subordinated
notes by April 23,  1999,  the net proceeds of which must be applied to the term
loan.

     The amended and restated credit agreement allows Apria to make acquisitions
under an acquisition "basket" provision of up to $62 million, subject to certain
restrictions,   that  may  be  increased   given  certain  levels  of  financial
performance by Apria.  In 1999, the  acquisition  limit is subject to dollar for
dollar  reduction by the amount of any unusual cash  expenses (as defined by the
agreement) incurred and paid in 1999.

     Term loan principal  payments are payable  quarterly,  in varying  amounts,
commencing  on March 31, 1999 and  continuing  through June 30,  2001.  Further,
between the  effective  date of the November  amendment and the earlier of April
23, 1999 or the issuance date of the  debentures  or notes,  Apria is subject to
prepayment  requirements  on the term loan based on excess cash flow (as defined
by the  agreement).  The  resulting  prepayments  of $6.9  million  reduced  the
required  amount of the quarterly  term loan payment that was due March 31, 1999
to zero, and no additional prepayments based on excess cash flow are required.

     The amended and restated credit agreement permits Apria to elect one of two
variable rate interest  options at the time an advance is made. The first option
is a rate expressed as 2.5% plus the higher of the Federal Funds Rate plus 0.50%
per annum or the Bank of America  "reference"  rate. The second option is a rate
based  on the  London  Interbank  Offered  Rate  ("LIBOR")  plus  an  additional
increment of 3.5% per annum.  The agreement  requires payment of commitment fees
of 0.75% on the unused portion of the revolving credit facility.

     Borrowings under the credit  agreement are secured by substantially  all of
Apria's assets and the agreement also imposes numerous restrictions,  including,
but not limited to,  covenants  requiring the  maintenance of certain  financial
ratios,  limitations on additional  borrowings,  capital expenditures,  mergers,
acquisitions  and  investments,  and  restrictions on cash dividends,  loans and
other  distributions.  Further,  the agreement  requires that Apria  maintain at
least $35 million in its  depository  accounts  until the issuance of the senior
subordinated convertible debentures or senior subordinated notes.

     At December 31, 1998, total  borrowings under the credit agreement  totaled
$288 million, none of which were advanced from the revolving credit facility. At
December 31,  1998,  outstanding  letters of credit  totaled  $10.3  million and
credit  available under the revolving credit facility was $19.7 million (subject
to the restriction under the indenture discussed below).

     Under  the  indenture   governing   Apria's  $200  million  9  1/2%  senior
subordinated  notes due November 1, 2002,  Apria's ability to incur indebtedness
becomes restricted at times when the company's "fixed charge coverage ratio" (as
defined in the  indenture) is less than 3.0 to 1.0.  Charges taken in the second
and fourth  quarters  of 1997 and in the third  quarter of 1998  resulted in the
fixed  charge  coverage  ratio  being less than 3.0 to 1.0.  This  condition  is
expected  to  continue at least  through  the third  quarter of 1999.  Apria has
changed its cash management  procedures to avoid the need to incur  indebtedness
that would  otherwise  require a modification  of the terms of the indenture and
has  accumulated  a balance in its money market  account of $78 million at March
15, 1999.

     OTHER BALANCE SHEET CHANGES.  The decrease in "accrued  payroll and related
taxes and  benefits" at December 31, 1998,  compared to December 31, 1997 is due
to a decrease  of three days in the  accrual  of  payroll-related  costs and the
reduced workforce.  At December 31, 1997, "other assets" was primarily comprised
of payments for  businesses  acquired  late in the year.  The payments were then
allocated to the various underlying acquired assets in early 1998.

     DISPOSITIONS  AND BUSINESS  COMBINATIONS.  As part of Apria's new strategic
direction,  management  performed an extensive  profitability  study to identify
service lines and/or geographic  markets as potential  candidates for exit. Most
significant of the decisions arising from the study was the decision to withdraw
from the infusion  business in  California,  Texas,  Louisiana,  West  Virginia,
western  Pennsylvania and downstate New York.  Shortly after Apria announced its
plans to exit the infusion line in these geographic markets, a buyer emerged for
the California locations.  Crescent Healthcare, Inc. purchased substantially all
the  assets and  business,  excluding  accounts  receivable,  of the  California
infusion locations.  Apria recorded a $3.8 million loss on the sale in the third
quarter of 1998. In the other locations where Apria decided to exit the infusion
business,  management  worked with its business partners to modify contracts and
transfer patients to other providers. This transition was substantially complete
by the end of 1998. The  operations of these infusion  locations had revenues of
$41.5  million,  $72.7  million  and  $86.2  million  in 1998,  1997  and  1996,
respectively. Gross profits were $14.9 million, $32.1 million and $46.9 million,
respectively, for the same periods.

     Apria  periodically  makes  acquisitions  of  complementary  businesses  in
specific geographic markets.  Cash paid for acquisitions that closed during 1998
totaled $2.7 million.

     PURCHASE COMMITMENTS.  On September 1, 1994, Apria entered into a five-year
agreement,  which was  subsequently  amended in June 1996,  to purchase  medical
supplies  totaling $132 million with minimum annual purchases  ranging from $7.5
million in the first year to $36.5  million in the third  through  fifth  years.
Failure to  purchase  at least 90% of the annual  commitment  would  result in a
penalty of 10% of the  difference  between the annual  commitment and the actual
purchases,  beginning  with the 12-month  period ended August 31, 1996.  In late
1997,  management  made the strategic  decision to exit the  low-margin  medical
supply  business  and has  been  working  with the  vendor  to  restructure  the
agreement.  In the interim,  the company  continues to purchase  needed  medical
supplies  from this  vendor,  subject to the pricing  established  under the old
agreement.  The company failed to meet the minimum  purchase  commitment for the
12-month period ended August 31, 1998, and,  consequently,  incurred a liability
for penalties of $1.2 million on the purchase shortfall.

     YEAR 2000 COMPLIANCE.  As the year 2000 approaches,  an issue impacting all
companies has emerged regarding how existing  application  software programs and
operating  systems can  accommodate  this date value.  In brief,  many  existing
application programs in the marketplace were designed to accommodate a two-digit
date position which represents the year (e.g.,  "95" is stored on the system and
represents the year 1995). Consequently, the year 1999 could be the maximum date
value that systems would be able to accurately process.

     Internal  operating  systems.  Beginning  in late 1997,  Apria  conducted a
comprehensive review of its operating and field information  systems,  including
an assessment of the nature and potential  extent of the impact of the year 2000
issue.  As a result,  Apria began the  modification  process of its  software in
order  for its  computer  systems  to  function  properly  in the year  2000 and
thereafter. Apria utilized internal resources to reprogram and test the software
for the necessary year 2000  modifications.  Apria's  systems also underwent two
external  assessments  of the year 2000 issue and  received a "low" risk rating.
The  modification  and testing were  completed on schedule  and  management  now
considers its operating and field information  systems year  2000-compliant.  To
further ensure a smooth  transition into the year 2000,  management  will, among
other measures,  suspend software updates between November 1999 and January 2000
and form a special team to address any related problems that may arise.

     Apria has not  developed  a formal  contingency  plan in the event that the
system  modifications prove to be inadequate.  Such inadequacies could result in
system  failure or  miscalculations.  This  would  cause  disruptions  to normal
business processes  including,  among other things,  the temporary  inability to
process  transactions and generate billings.  If such a disruption continued for
an extended  period,  it could have a material  adverse effect on the results of
operations, cash flow and financial condition of Apria.

     Apria is currently in the process of assessing and addressing any potential
issues with its ancillary software packages that perform less-critical functions
and  any  other   electronic   mechanisms   that   could   have   date-sensitive
microprocessors.

     External  risks.  Apria depends on electronic  interfaces  with many of its
business  partners to conduct many of its day-to-day  functions.  Such functions
include  payments to and from  suppliers  and payors,  transfer of funds between
Apria's banks,  and electronic  billing and supply  ordering.  Apria has been in
contact with its more critical  business  partners to obtain  assurance of their
year  2000-readiness  and is currently in the process of  scheduling  live tests
with the regional  Medicare  carriers  responsible for processing  approximately
one-fourth of Apria's reimbursements.  As a contingency, in the event of failure
on the part of an external agent, the exchange of data and payments can continue
via paper documents and more  traditional  methods.  Further,  Apria has revised
contracts with certain of its managed care payors to include remedies should the
payor fail to reimburse the company on a timely basis due to their own year 2000
problems.

     Another area of potential risk is with certain  patient  service  equipment
items that have  microprocessors  with date functionality that could malfunction
in the year 2000. Although Apria has found the majority of such  microprocessors
include duration time clocks and not date time clocks,  management has initiated
formal  communications with its suppliers to obtain assurance that the equipment
they  supply  is  year   2000-compliant.   To  date,  Apria  has  received  year
2000-compliance  certification  letters  from  substantially  all of its primary
vendors  and  approximately  40% of the  entire  set of  vendors  from  which it
requested such assurance.

     If Apria is  unable  to  resolve  all its year 2000  issues  with  external
agents, it may have a material adverse effect on the company's business, results
of operations or financial condition.

     Costs.  Apria  does not  believe  the  costs of its year  2000  remediation
efforts  are  material.  To date,  such costs have been  expensed  as  incurred.
Management's  expectations  about year 2000-related costs yet to be incurred are
subject to various  uncertainties  that could  cause the actual  costs to differ
materially from those expectations.  Such uncertainties  include the adequacy of
the modifications made to Apria's operating and field information  systems,  the
success of the  company in  identifying  and  resolving  any  problems  with its
ancillary  systems  or  electronic  mechanisms  and the year  2000-readiness  of
Apria's business partners.

     OTHER.  Apria's  management  believes  that  cash  provided  by  operations
together  with cash  invested in its money market  account will be sufficient to
finance its current operations for at least the next year or until the borrowing
restriction described above is eliminated.


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Apria currently utilizes no material derivative financial instruments which
expose the company to significant  market risk.  However,  interest rate changes
may affect the cash flow,  earnings,  and the fair value of its term debt due to
differences  between the market interest rates and the rates at the inception of
these financial instruments.  Based on Apria's term debt outstanding at December
31,  1998 and  current  market  perception,  a 50 basis  point  increase  in the
interest  rates as of December 31, 1998 would  result in a net  reduction of the
market value of the  instruments of $4.6 million.  Conversely,  a 50 basis point
decrease in the  interest  rates would result in an $4.7 million net increase in
the market value of Apria's term debt outstanding at December 31, 1998.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The Reports of Independent Auditors,  Consolidated Financial Statements and
Consolidated  Financial  Statement Schedule listed in the "Index to Consolidated
Financial Statements and Financial Statement Schedule" are filed as part of this
report.


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

     Effective July 6, 1998, Apria changed its independent auditors. Previous to
that date,  the  independent  auditors  were Ernst & Young LLP.  The decision to
change  independent  auditors was not  recommended or approved in advance by the
Audit Committee of Apria's Board of Directors.  The reports of Ernst & Young LLP
on Apria's Consolidated Financial Statements for the fiscal years ended December
31, 1997 and 1996 contained no adverse opinion or disclaimer of opinion,  and no
such  report  was  qualified  or  modified  as to  uncertainty,  audit  scope or
accounting  principles.  Also,  for the fiscal years ended December 31, 1997 and
1996 and  during  the  year-to-date  period  ended  July 6, 1998  there  were no
disagreements  regarding  any  matter of  accounting  principles  or  practices,
financial  statement  disclosure,  or auditing scope or procedure.  Furthermore,
during the same periods,  no event requiring  disclosure under Item 304(a)(2) of
Regulation S-K occurred between Apria and Ernst & Young LLP.

     Effective  July 15,  1998,  Apria  engaged  Deloitte  &  Touche  LLP as its
principal  accountants to audit its  Consolidated  Financial  Statements for the
fiscal year ended December 31, 1998.  During the fiscal years ended December 31,
1997 and 1996 and each  subsequent  interim period prior to engaging  Deloitte &
Touche LLP,  Apria did not consult  Deloitte & Touche LLP  regarding  either the
application of accounting principles to a specified transaction,  or the type of
opinion that might be rendered on Apria's Consolidated Financial Statements.

     The  Company  has since  adopted a policy  that any  future  changes in its
independent  auditors  will be  reviewed  and  approved  in advance by the Audit
Committee of the Board of Directors.

<PAGE>

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

EXECUTIVE OFFICERS

     Information  regarding  Apria's  executive  officers is set forth under the
caption "Executive Officers of the Registrant" in Item 1 hereof.

DIRECTORS

     Set forth below are the names,  ages and past and present  positions of the
persons serving as Apria's Directors as of March 31, 1999:
<TABLE>
<CAPTION>
                                            Business Experience During Last                 Director    Term
 Name and Age                                Five Years and Directorships                    Since     Expires
 ------------                                ----------------------------                    -----     -------

<S>                             <C>                                                           <C>        <C> 
 David H. Batchelder, 49        Principal and Managing Member of Relational Investors,  LLC   1998       2001
                                since March 1996.  He has served as the  Chairman and Chief
                                Executive  Officer  of  Batchelder  &  Partners,   Inc.,  a
                                financial  advisory and investment banking firm based in La
                                Jolla,   California,   since  1988.   Mr.   Batchelder  was
                                appointed  by the Board of Directors in July 1998 to fill a
                                vacancy.  Mr.  Batchelder  also  serves  as a  director  of
                                Morrison Knudsen Corporation and Nuevo Energy Company.

 Philip L. Carter, 50           Chief  Executive  Officer and a Director of Apria since May  1998       2000
                                1998.  Prior to joining  Apria,  Mr.  Carter was  President
                                and Chief  Executive  Officer  of Mac  Frugal's  Bargains o
                                Close-Outs Inc., a chain of retail discount  stores,  since
                                1995  and  had  held  the   positions  of  Executive   Vice
                                President and Chief Financial  Officer of Mac Frugal's from
                                1991 through 1995.

 David L. Goldsmith, 51         Managing  Director of RS Funds,  an  investment  management  1987**     1999
                                firm.  Prior to  joining RS Funds in  February  1999 he had
                                served  as  Managing   Director  of   Robertson,   Stephens
                                Investment Management,  an investment management firm owned
                                by   Bank   of   America   National   Trust   and   Savings
                                Association.  He was affiliated with Robertson,  Stephens &
                                Company LLC and its  predecessors  from 1981 through  1999.
                                Mr.   Goldsmith  is  also  a  director  of  Balanced   Care
                                Corporation.

 Leonard Green, 72              President and Chief Executive  Officer of Green  Management  1993*      1999
                                and  Investment  Co.,  a  private   investment   management
                                company,  since 1985.  Mr.  Green also serves as a director
                                of Lincoln Services Corp.

 Richard H. Koppes, 52          Of Counsel to Jones,  Day,  Reavis & Pogue, a law firm, and  1998       1999
                                serves as a Consulting  Professor of Law and Co-Director of
                                Education  Programs at Stanford  University  School of Law.
                                He also served as a principal of American  Partners Capital
                                Group, a venture  capital and consulting  firm, from August
                                1996 to December  1998.  From May 1986  through  July 1996,
                                Mr.  Koppes  held  several  positions  with the  California
                                Public  Employees'  Retirement  System,  including  General
                                Counsel,   Interim  Chief  Executive   Officer  and  Deputy
                                Executive  Officer.  Mr. Koppes is also a director of Mercy
                                Healthcare,  a non-profit  hospital system.  Mr. Koppes was
                                appointed  by the Board of  Directors in May 1998 to fill a
                                newly created seat on the Board.

 Philip R. Lochner, Jr., 56     Senior Vice President - Administration  of Time Warner Inc.  1998       2001
                                from  July  1991  to July  1998.  From  March  1990 to June
                                1991, Mr. Lochner was a Commissioner  of the Securities and
                                Exchange  Commission.  He  is  a  member  of  the  Advisory
                                Council  of  Republic  New York  Corporation.  He is also a
                                Trustee  of  The   Canterbury   School.   Mr.  Lochner  was
                                initially  appointed by the Board of Directors in June 1998
                                to fill a newly  created  seat on the Board and was elected
                                by the shareholders to a full term in July 1998.

 Beverly Benedict Thomas, 56    Principal   of   BBT   Strategies,    a   consulting   firm  1998       2001
                                specializing  in public  affairs  and  strategic  planning.
                                Previously,  Ms.  Thomas was a principal of UT  Strategies,
                                Inc.,  a  public  affairs  firm,  from  1995  to  1997  and
                                Assistant  Treasurer of the State of  California  from 1991
                                to 1995.  In  addition to serving as a director of Catellus
                                Real Estate  Development  Corporation,  a diversified  real
                                estate  operating  company,  Ms.  Thomas  also  serves as a
                                Commissioner of the Los Angeles City Employees'  Retirement
                                System.  From  1993  to  1995,  Ms.  Thomas  served  on the
                                Boards  of  the  California  Public  Employees'  Retirement
                                System  and  the  California   State  Teachers   Retirement
                                System.  Ms.  Thomas was  initially  appointed by the Board
                                of Directors  in June 1998 to fill a newly  created seat on
                                the Board and was  elected  by the  shareholders  to a full
                                term in July 1998.

 H. J. Mark Tompkins, 58        Independent  investment  and corporate  advisor,  President  1997       2000
                                and  Chief  Executive  Officer  of  Exfinco,   S.a.r.l.,  a
                                Belgian company engaged in investment advisory  activities,
                                from 1994 until  1997.  Mr.  Tompkins  was  appointed  by a
                                committee  of the Board of  Directors in March 1997 to fill
                                a vacancy and was thereafter  elected to a full term by the
                                shareholders.  Mr. Tompkins  was  a  member  of  the  Abbey
                                Board of Directors  from  September  1992 until the time of
                                the merger and is  currently a director of Kemgas  Limited.
                                He is also a director  and  Chairman of  Partners  Holdings
                                PLC, a publicly  owned  company  whose shares are traded on
                                an exchange in the United  Kingdom.  From 1987 through June
                                1994, Mr. Tompkins  served as Chief Executive  Officer of a
                                French investment advisory concern, Cofinex, E.u.r.l..

 Ralph V. Whitworth, 43         Chairman  of the Board of  Directors  of Apria  since April  1998       2000
                                28, 1998.  Mr.  Whitworth is also a principal  and Managing
                                Member of Relational  Investors,  LLC, a private investment
                                company.  He is also a partner in  Batchelder  &  Partners,
                                Inc.,  a financial  advisory  and  investment-banking  firm
                                based in La Jolla,  California.  From 1988 until 1996,  Mr.
                                Whitworth  was  president of Whitworth  and  Associates,  a
                                corporate  advisory firm. Mr.  Whitworth was appointed by a
                                Committee  of the Board of  Directors  in  January  1998 to
                                fill  a  newly  created  seat.  Mr.  Whitworth  is  also  a
                                director of CD Radio, Inc., Wilshire Technologic,  Inc. and
                                Waste Management, Inc.
</TABLE>
------------

*     Director of Abbey from the date shown until the date of the merger,  after
      which the company's name was changed to its current name.  Director of the
      company from the date of the merger until the present.

**    Director  of  Homedco  from the date shown  until the date of the  merger.
      Director of the company from the date of the merger until the present.

COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT BY CERTAIN COMPANY AFFILIATES

     Section 16(a) of the Exchange Act requires Apria's  Directors and officers,
and  persons  who own more  than 10% of a  registered  class of  Apria's  equity
securities,  to file  reports of  ownership  and changes in  ownership  with the
Securities  and  Exchange  Commission  and The New  York  Stock  Exchange,  Inc.
Directors,  officers,  and greater  than 10%  stockholders  are  required by the
Securities  and  Exchange  Commission  to furnish the company with copies of the
reports they file.

     Based  solely on its  review  of the  copies of such  reports  and  written
representations  from certain  reporting  persons that certain  reports were not
required  to be filed by such  persons,  the  company  believes  that all of its
Directors,  officers and greater than 10%  beneficial  owners  complied with all
filing  requirements  applicable to them with respect to transactions during the
1998 fiscal year.


ITEM 11.  EXECUTIVE COMPENSATION

SUMMARY OF EXECUTIVE COMPENSATION

     The following table sets forth all compensation for the 1998, 1997 and 1996
fiscal years paid to or earned by each  individual  who served as Apria's  Chief
Executive Officer,  as well as the four other most highly compensated  executive
officers during the 1998 fiscal year.
<TABLE>
<CAPTION>

                                                               SUMMARY COMPENSATION TABLE

                                                                                 Long-Term(1)
                                                                                 Compensation
                                                    Annual Compensation            Options             All Other
                                                 Salary(2)         Bonus           Granted            Compensation
Name                                   Year         ($)             ($)              (#)                  ($)
------------------------------------   ----     -----------     ----------     ---------------      ----------------
<S>                                    <C>        <C>             <C>               <C>              <C>    
Philip L. Carter...................    1998       330,499         300,000           750,000                   --
  Chief Executive Officer(3)           1997            --              --                --                   --
                                       1996            --              --                --                   --

Jeremy M. Jones....................    1998        48,820              --             1,666            1,937,804(5)
  Chairman of the Board                1997       467,013              --                --                4,750(6)
  and Chief Executive Officer(4)       1996       464,320              --            20,000                4,750(6)

Lawrence M. Higby..................    1998       424,113             n/a(8)        300,000                   --
  President and Chief                  1997        40,969              --           150,000                   --
  Operating Officer (7)                1996            --              --                --                   --

Lawrence A. Mastrovich.............    1998       175,075             n/a(8)         75,000                3,940(6)
  Executive Vice President,            1997       111,956          41,754                --                4,238(6)
  Business Operations (9)              1996       104,748           4,867             4,000                3,437(6)

Dennis E. Walsh....................    1998       237,971          n/a(8)           100,000                3,940(6)
  Executive Vice President,            1997       188,962              --                --               10,720(10)
  Sales                                1996       177,666           4,080             4,000                4,750(6)

Lisa M. Getson.....................    1998       151,172             n/a(8)         40,000                3,940(6)
  Senior Vice President, Business      1997       137,801           4,500                --                4,750(6)
  Development and Clinical             1996       127,775           7,978             5,500                4,750(6)
  Services

Robert S. Holcombe.................    1998       292,869             n/a(8)         40,000                3,940(6)
  Senior Vice President,               1997       263,162           4,410                --                6,571(13)
  General Counsel and                  1996       153,455           7,000            35,000(12)          150,324(14)
  Secretary (11)
</TABLE>
------------------------------------

(1)  Apria has not issued stock appreciation  rights or restricted stock awards.
     The company  currently  has no "long-term  incentive  plan" as that term is
     defined in the applicable rules.

(2)  These  amounts  include an  automobile  allowance  which is paid as salary.
     Salary is paid on the basis of bi-weekly pay periods, with payment for each
     period being made during the week  following  its  termination.  Due to the
     fact that 1998  contained  a payment  date for a pay period  which ended in
     1997,  amounts  reported  as salary  paid for 1998 vary  slightly  from the
     actual amounts of the 1998 salaries of the executive  officers listed above
     who were with Apria as of January 1, 1998.

(3)  Mr. Carter became Apria's Chief Executive Officer on May 5, 1998.

(4)  Mr. Jones resigned as Chairman of the Board and Chief Executive  Officer of
     Apria on January 19, 1998. He resigned as a director on May 27, 1998.

(5)  This amount includes $1,819,694 in severance payments made or to be made in
     1998 and 1999 and a $118,110  payment  for earned but unused  vacation  and
     holiday time.

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

(7)  Mr. Higby also acted as Apria's  Chief  Executive  Officer from January 19,
     1998 until May 5, 1998.  Mr.  Higby was first  employed  by the  company in
     November, 1997.

(8)  Individual 1998 bonuses have not been determined as of the filing date.

(9)  Mr.  Mastrovich  was promoted from Vice  President - Operations,  Northeast
     Division on October 1, 1998.

(10) This amount  includes a $4,750  contribution to Apria's 401(k) Savings Plan
     in the  name of the  individual  and a $5,520  cash  award  for  individual
     achievement called the "Chairman's Circle Award".

(11) Mr. Holcombe was first employed by Apria in May 1996.

(12) Mr. Holcombe was awarded 35,000 option shares in May 1996 when he was first
     employed by Apria.  Those options were surrendered by him in exchange for a
     subsequent  grant of 30,000  option  shares.  He was also awarded a further
     option to purchase an additional 5,000 shares.

(13) This amount includes a $4,750 annual contribution to Apria's 401(k) Savings
     Plan in the name of the  individual and a  reimbursement  of $1,821 for tax
     liabilities  incurred in connection  with the  reimbursement  of relocation
     costs.

(14) This amount consists of various relocation expenses reimbursed by Apria.


SUMMARY OF OPTION GRANTS

     The following table provides  information with respect to grants of options
to all individuals serving as Apria's Chief Executive Officer and the four other
most  highly  compensated  executive  officers of the  company,  during the 1998
fiscal year.
<TABLE>
<CAPTION>
                                                          OPTION GRANTS TABLE

                                                                                             Potential Realizable
                             Number of                                                       Value at Accrual Rate
                             Securities       % of Total                    Expiration       of Stock Appreciation
                             Underlying     Options Granted                   Date of         for Option Term ($)
                              Options       to Employees in     Exercise      Options       ------------------------
Name                          Granted         Fiscal Year       Price ($)     Granted           5%            10%
-----------------------     ------------   -----------------    ---------   -----------     ----------    ----------
<S>                           <C>               <C>               <C>          <C>           <C>          <C>       
Philip L. Carter              750,000           21.40%            9.00         5/5/08        4,245,038    10,757,758
Jeremy M. Jones                 1,666            0.05%           13.875       2/24/08           14,537        36,840
Lawrence M. Higby             300,000(1)         8.60%           10.004(2)        (3)        1,887,438     4,783,139
Lawrence A. Mastrovich         75,000            2.10%            6.50        7/17/08          306,586       776,950
Dennis E. Walsh               100,000            2.90%            6.50        7/17/08          408,782     1,035,933
Lisa M. Getson                 40,000            1.10%            6.50        7/17/08          163,513       414,373
Robert S. Holcombe             40,000            1.10%            6.50        7/17/08          163,513       414,373
</TABLE>
----------------------

(1)  This amount does not include an option for 50,000  shares issued in January
     1998 under the company's  Amended and Restated 1992 Stock Incentive Plan to
     replace  an option  on the same  terms  for an  identical  number of shares
     erroneously  issued under the company's  1997 Stock  Incentive  Plan during
     1997.  This amount  includes an option for 40,000 shares  approved in 1998,
     which did not become effective until January 4, 1999. The remaining options
     for shares  included in this amount were  approved and became  effective in
     1998.

(2)  The value  shown is an  average.  Options  for  150,000  shares are or will
     become exercisable at $12.875 per share,  options for 110,000 shares are or
     will be exercisable  at $6.50 per share,  and options for 40,000 shares are
     or will be exercisable at $8.875 per share.

(3)  The options for 150,000  shares expire on January 26, 2008, the options for
     110,000  shares expire on July 17, 2008,  and the options for 40,000 shares
     expire on January 4, 2009.


SUMMARY OF OPTIONS EXERCISED

     The following table provides information with respect to the exercise
of stock  options by all persons who served as Apria's Chief  Executive  Officer
during the 1998 fiscal year and the four other most highly compensated executive
officers of the company  during the 1998 fiscal year,  together  with the fiscal
year-end value of unexercised options.
<TABLE>
<CAPTION>
             AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUE

                                                         Number of Securities
                                                        Underlying Unexercised       Value of Unexercised In-
                                                              Options at                the-Money-Options at
                               Shares                       Fiscal Year End              Fiscal Year End(1)   
                             Acquired on   Value(1)    -------------------------     -------------------------
                              Exercise     Realized    Exercisable/Unexercisable     Exercisable/Unexercisable
-----------------------      -----------   --------    -------------------------     -------------------------
Name                             (#)          ($)                (#)/(#)                       ($)/($)
-----------------------      -----------   --------    -------------------------     -------------------------
<S>                               <C>           <C>         <C>                                 <C>
Philip L. Carter                  0             0           375,000/375,000                     0/0
Jeremy M. Jones                   0             0           516,322/1,666                       0/0
Lawrence M. Higby                 0             0            30,000/380,000                     0/268,125
Lawrence A. Mastrovich          4,000        41,625          35,200/88,200                 40,600/182,813
Dennis E. Walsh                   0             0            61,120/138,880                     0/243,750
Lisa M. Getson                    0             0             8,200/44,500                      0/97,500
Robert S. Holcombe                0             0            14,000/61,000                      0/97,500
</TABLE>
----------------------


(1)  Market value of the  securities  underlying the options at exercise date or
     year-end,  as the  case  may  be,  minus  the  exercise  or base  price  of
     "in-the-money"  options and transaction  costs. The market value of Apria's
     common stock at the close of trading on December 31, 1998 was $8.9375.


COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

     No member of the Compensation Committee since January 1, 1998 was either an
officer or employee of the company.

DIRECTORS' FEES

     All Directors of Apria are reimbursed for their out-of-pocket expenses
incurred  in  connection  with  attending  Board  and  Committee  meetings.  All
non-employee  Directors  receive:  (i)  $1,000  per Board or  Committee  meeting
attended in person  ($1,500 per  Committee  meeting for the  Director who is the
Committee's  chairman) and (ii) $500 per Board or Committee meeting attended via
telephone.  In  addition,  each  non-employee  Director  receives  an  option to
purchase  25,000 shares of the company's  common stock,  at fair market value on
the date of  grant,  for each  year  that he has been a member  of the  Board of
Directors.

EMPLOYMENT AND SEVERANCE AGREEMENTS

     Apria has employment or severance  agreements with the following  executive
officers listed in the Summary Compensation Table.

     PHILIP L. CARTER. Pursuant to an employment agreement which is scheduled to
expire on April 30, 2002, Mr. Carter serves as Apria's Chief Executive  Officer.
The  agreement  provides  that Mr.  Carter is to  receive  an  annual  salary of
$600,000 and is entitled to  participate  in Apria's  annual  bonus,  incentive,
stock and all other benefit plans generally  available to executive  officers of
the company.  Mr. Carter is entitled to receive performance bonuses of up to 80%
of his annual  salary.  Mr.  Carter is also  entitled to receive (i)  reasonable
access to the company's  accountants for financial planning,  (ii) an annual car
allowance,  and (iii)  reimbursement  of certain other expenses.  If the company
terminates  Mr.  Carter's  employment  without  cause,  or if he terminates  his
employment  with good reason  (including  upon a change in control),  Mr. Carter
shall  receive a lump sum  severance  payout equal to three times the sum of (i)
his annual salary, (ii) the average of his two most recent annual bonuses, (iii)
his annual car allowance,  and (iv) an additional amount estimated at $5,000. In
addition,  the company  shall be  required to provide an office and  secretarial
support  at  a  cost  of  not  more  than  $50,000  during  the  year  following
termination.  Finally,  upon any such  termination  not for  cause or with  good
reason,  all stock options held by Mr. Carter shall vest and remain  exercisable
for a period of three years.

     LAWRENCE M. HIGBY.  Pursuant to an employment  agreement which is scheduled
to expire on January 18, 2001, Mr. Higby serves as President and Chief Operating
Officer of the company.  The agreement  provides that Mr. Higby is to receive an
annual salary of not less than $400,000 (his current annual salary is $400,004),
subject to annual increases at the discretion of the Compensation Committee, and
is entitled to  participate  in Apria's stock option plans and all other benefit
programs generally available to executive officers of the company.  Mr. Higby is
also  entitled to receive (i) such bonuses as the  Compensation  Committee  may,
from time to time, in its sole discretion  award,  (ii) an automobile  allowance
and  (iii)  reimbursement  of  certain  other  expenses.  He  is  also  provided
reasonable access to Apria's accountants for personal financial planning. If the
company  terminates  Mr.  Higby's  employment  without  cause,  or if Mr.  Higby
terminates his employment with good reason (including upon a change in control),
Mr. Higby is entitled to a lump sum  severance  payment equal to three times his
base salary plus an additional  amount determined as set forth in the employment
agreement.  In addition, all unvested stock options from the 150,000 share grant
issued to Mr. Higby on January 26, 1998, will  immediately  become  exercisable,
and all of his vested  options  will  remain  exercisable  for a period of three
years following such termination.

     JEREMY M. JONES.  Apria had an employment  agreement  with Mr.  Jones,  who
voluntarily  resigned  from his  positions  as  Chairman  of the Board and Chief
Executive  Officer  of the  company  and  from  his  positions  with  all of its
subsidiaries  as of  January  19,  1998.  Pursuant  to  Mr.  Jones's  employment
agreement, he was to serve as Chairman of the Board and Chief Executive Officer.
The agreement  provided for an annual salary of not less than $390,000,  subject
to annual increases at the discretion of the  Compensation  Committee (as of the
date of his resignation,  Mr. Jones's annual salary was $460,000). Mr. Jones was
also entitled to (i) such bonuses as the Compensation Committee would, from time
to time,  in its sole  discretion  award,  (ii) an automobile  allowance,  (iii)
reimbursement of certain other expenses, (iv) reasonable access to the company's
accountants and counsel for personal financial planning and legal services,  and
(v)  participation  in the company's  various  benefit plans.  In addition,  his
resignation  agreement  provided  that the  previously  unvested  190,000  share
portion of Mr. Jones's total  outstanding  options to purchase 516,322 shares of
common stock became fully vested and each option will remain exercisable for its
stated  term  as  though  Mr.  Jones  had not  terminated  his  employment.  The
employment  agreement also contained severance  provisions which were superseded
by an agreement  entered into at the time of his  resignation.  Pursuant to that
agreement,  Mr. Jones (i) was paid a lump sum  severance  payment of  $1,753,900
(subject  to  withholding  for  federal  and  state  taxes)  at the  time of his
resignation  and (ii) is being provided with an office and  associated  services
for a period of two years from the date of his resignation.

     ROBERT S. HOLCOMBE, DENNIS WALSH, LARRY MASTROVICH AND LISA GETSON. In June
1997, Messrs. Holcombe, Walsh and Mastrovich and Ms. Getson (each referred to as
"Executive" below) entered into executive severance agreements with the company.
Pursuant to each agreement,  each Executive  serves in a position and undertakes
duties at Apria's  discretion.  As of December 31, 1998, Mr.  Holcombe served as
Senior Vice President,  General Counsel and Secretary of the company,  Mr. Walsh
served as Executive Vice President,  Sales, Mr.  Mastrovich  served as Executive
Vice  President,  Business  Operations  and Ms.  Getson  served as  Senior  Vice
President,  Business Development and Clinical Services.  Each agreement provides
that the Executive's salary shall be at the company's discretion. As of February
28, 1999, Mr. Holcombe's  annual salary was $280,000,  Mr. Walsh's annual salary
was  $220,000,  Mr.  Mastrovich's  annual  salary was $180,000 and Ms.  Getson's
annual salary was $137,800. Each Executive is entitled to participate in Apria's
stock  option  plans and all  other  benefit  programs  generally  available  to
executive officers of the company at the company's discretion. Each Executive is
also  entitled to receive (i) such bonuses as the  Compensation  Committee  may,
from time to time,  in its sole  discretion  award,  and (ii)  reimbursement  of
certain other expenses at the company's discretion. If the company terminates an
Executive's  employment  without cause,  each Executive is entitled to a payment
equal to his or her annual base salary plus an additional  amount  determined as
set forth in the  agreement.  However,  if such  termination  occurs  during the
two-year period following a change of control of the company,  Messrs.  Holcombe
and Walsh and Ms.  Getson shall each be entitled to a payment equal to two times
his or her base salary plus an additional  amount determined as set forth in the
agreement.  Such payments shall be payable in periodic  installments over one or
two years in exchange for a valid release of claims  against the company.  In no
event  will any  Executive  receive  a  payment  which  would be deemed to be an
"excess parachute payment" under Section 280G of the Code.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth information as of March 31, 1999 with
respect to the  beneficial  ownership of Apria's common stock by each person who
is known by the  company  to  beneficially  own more than 5% of  Apria's  common
stock,  each  Director of the company,  each person who served as Apria's  Chief
Executive  Officer  during  1998,  and the four  other most  highly  compensated
executive  officers who were  serving in such  capacity as of December 31, 1998,
and all  Directors  and  executive  officers  as a group.  Except  as  otherwise
indicated,  beneficial  ownership includes both voting and investment power with
respect to the shares shown.
<TABLE>
<CAPTION>
                                                       SECURITY OWNERSHIP TABLE

                                                                 Amount and Nature of         Percent of
Name Of Beneficial Owner                                         Beneficial Ownership           Class
------------------------                                         --------------------           -----
<S>                                                                   <C>                       <C>   
Relational Investors, LLC (1)                                         6,923,766                 13.37%
David H. Batchelder (1)                                               6,897,100                 13.32
Ralph V. Whitworth (1)                                                6,823,766                 13.18
Joel L. Reed(1)                                                       6,797,100                 13.12
Richard C. Blum & Associates, L.P. (2)                                5,425,000                 10.48
Richard C. Blum & Associates, Inc. (2)                                5,425,000                 10.48
Richard C. Blum (2)                                                   5,425,000                 10.48
Lazard Freres & Co. LLC(3)                                            2,911,700                  5.62
Peter C. Cooper(4)                                                    2,836,900                  5.47
Gilbert E. LeVasseur(4)                                               2,836,900                  5.47
Cooper & LeVasseur(4)                                                 2,836,900                  5.47
Cooper Capital, LLC(4)                                                2,836,900                  5.47
George L. Argyros(5)                                                  2,770,434                  5.35
Jeremy M. Jones (6)                                                   1,255,980                  2.42
Philip L. Carter(7)                                                     400,000                    *
David L. Goldsmith(8)                                                   351,902                    *
Lawrence M. Higby (9)                                                    70,000                    *
Dennis E. Walsh (10)                                                     78,400                    *
Leonard Green (11)                                                       51,666                    *
H.J. Mark Tompkins(12)                                                   41,766                    *
Lawrence A. Mastrovich (13)                                              39,655                    *
Richard H. Koppes(14)                                                    26,500                    *
Philip R. Lochner, Jr.(15)                                               26,000                    *
Beverly Benedict Thomas(16)                                              25,000                    *
Robert S. Holcombe(17)                                                   29,200                    *
Lisa M. Getson(18)                                                        8,200                    *
All current directors and executive officers as a group                                      
(19 persons)(19)                                                      8,399,814                 16.60%
</TABLE>
------------------
*     Less than 1%

(1)  According to a Schedule 13D, dated September 29, 1997,  amendments  thereto
     dated   January  27,  1998,   February  3,  1998  and  November  23,  1998,
     respectively,  and a  Form  3,  all of  which  have  been  filed  with  the
     Securities and Exchange Commission,  Relational  Investors,  LLC ("RILLC"),
     its  affiliated  companies  and  Messrs.  Batchelder,  Whitworth  and Reed,
     individually  and as  Managing  Members  of  RILLC,  have sole  voting  and
     dispositive  power as to 6,923,766  shares,  which amount  includes  51,666
     shares subject to options that are currently exercisable.  6,797,100 of the
     shares  are held by  RILLC or by  limited  partnerships  (Relational  Coast
     Partners, L.P., Relational Investors, L.P., Relational Fund Partners, L.P.,
     or Relational  Partners,  L.P.) of which RILLC is the sole general partner.
     Mr.  Whitworth,  who became a Director of Apria of January 27, 1998,  holds
     currently exercisable options to acquire 26,666 shares, and Mr. Batchelder,
     who became a Director of Apria on July 28, 1998,  holds 75,000  shares in a
     personal  account  and a  currently  exercisable  option to acquire  25,000
     shares.  Mr. Reed's holdings are all through RILLC.  The mailing address of
     Relational  Investors,  LLC and each of Messrs.  Whitworth,  Batchelder and
     Reed is 4330 La Jolla  Village  Drive,  Suite 220,  San  Diego,  California
     92122.

(2)  According to a Form 3 filed with the Securities and Exchange  Commission on
     September 10, 1998,  Richard C. Blum & Associates,  Inc.,  the sole general
     partner  of  Richard  C. Blum &  Associates,  L.P.  and  Richard  C.  Blum,
     President,   Chairman  and  majority  stockholder  of  Richard  C.  Blum  &
     Associates,  Inc.,  reported indirect ownership of 5,425,000 shares.  These
     shares are owned directly by three limited  partnerships  for which Richard
     C. Blum & Associates,  L.P. is the sole general partner and five investment
     advisory  accounts for which Richard C. Blum & Associates,  L.P.  exercises
     voting and investment  discretion.  According to a Schedule 13D, dated July
     17, 1998,  and an amendment  thereto dated August 10, 1998,  filed with the
     Securities and Exchange Commission,  Richard C. Blum & Associates, L.P. has
     sole  voting and sole  dispositive  power over  these  shares.  As the sole
     general  partner of Richard C. Blum & Associates,  L.P.,  Richard C. Blum &
     Associates,  Inc. is deemed the beneficial owner of the shares beneficially
     owned by Richard C. Blum &  Associates,  L.P. As  President,  Chairman  and
     majority stockholder of Richard C. Blum & Associates, Inc., Richard C. Blum
     might be deemed to be the beneficial owner of the shares beneficially owned
     by Richard C. Blum & Associates,  Inc. Richard C. Blum & Associates,  L.P.,
     Richard C. Blum & Associates,  Inc. and Richard C. Blum disclaim beneficial
     ownership  of the shares  owned  directly by Richard C. Blum &  Associates,
     L.P.'s partnerships and investment advisory clients except to the extent of
     any pecuniary  interest  therein.  The mailing address of Richard C. Blum &
     Associates, L.P., Richard C. Blum & Associates, Inc. and Richard C. Blum is
     909 Montgomery Street, Suite 400, San Francisco, California 94133.

(3)  According  to a Schedule  13G,  dated  February  16,  1999,  filed with the
     Securities  and Exchange  Commission,  Lazard  Freres Co. LLC, a registered
     investment  advisor,  has sole voting power as to 2,765,800 shares and sole
     dispositive  power as to 2,911,700  shares.  The mailing  address of Lazard
     Freres Co. LLC is 30 Rockefeller Plaza, New York, New York 10020.

(4)  According to a Schedule 13D dated March 17, 1999, filed with the Securities
     and Exchange  Commission Peter C. Cooper  ("Cooper"),  Gilbert E. LeVasseur
     ("LeVasseur"),  Cooper &  LeVasseur,  LLC ("C&L") and Cooper  Capital,  LLC
     ("Cooper  Capital")  reported  beneficial  ownership of  2,836,900  shares.
     Cooper and LeVasseur  are private  investors.  Cooper  Capital is a limited
     liability company of which Cooper is the sole manager,  serves as a general
     partner or managing member of certain private  investment  funds and is the
     general  partner of a private  investment fund limited  partnership  called
     Clifton Investments,  L.P. ("Clifton").  C&L is a limited liability company
     managed by Cooper Capital and LeVasseur and is the sole general  partner of
     two  private  investment  fund  limited  partnerships  called  C&L  Capital
     Partners,  L.P.  ("Fund I") and C&L Capital  Partners II, L.P. ("Fund II").
     LeVasseur  also  serves as the  Trustee of a  revocable  trust  ("LeVasseur
     Trust").  Based on the foregoing  relationships,  Cooper,  Cooper  Capital,
     LeVasseur and C&L report that they share  dispositive and voting power with
     respect  to  1,089,000  shares  beneficially  owned  by Fund I and Fund II,
     Cooper and Cooper Capital report that they have sole dispositive and voting
     power with  respect to 948,940  shares  beneficially  owned by Clifton  and
     LeVasseur  reports  that he holds sole  dispositive  and voting  power with
     respect to 789,950 shares owned by the LeVasseur Trust. The remaining 9,010
     shares do not appear to have been accounted for specifically in the filing.
     Cooper,  LeVasseur,  Cooper  Capital and C&L list their mailing  address as
     2010 Main Street, Suite 1220, Irvine, CA 92614.

(5)  According to a Schedule 13D Amendment,  dated June 25, 1998, filed with the
     Securities and Exchange  Commission,  Mr.  Argyros has sole  investment and
     dispositive  power as to all 2,770,434  shares.  This number includes 6,666
     shares  subject to options  that are  currently  exercisable.  This  number
     includes  2,430,670  shares  owned by HBI  Financial,  Inc.,  of which  Mr.
     Argyros is the sole  shareholder.  This  number also  includes  (1) 280,912
     shares held in trust by two  private  charitable  foundations  of which Mr.
     Argyros is a vice president and director with respect to which he disclaims
     beneficial  ownership,  (2) 500 shares held in a charitable  trust of which
     Mr.  Argyros is a trustee but not a  beneficiary  with  respect to which he
     disclaims beneficial  ownership,  (3) 31,050 shares held in a trust for the
     benefit  of  Mr.  Argyros'  children,   for  which  Mr.  Argyros  disclaims
     beneficial   ownership   and  (4)  20,636   shares  held  by  Mr.   Argyros
     individually.  The amount  listed does not include  3,450  shares held in a
     trust of which Mr.  Argyros is not a trustee  for the benefit of certain of
     Mr.  Argyros'  adult  children who do not share his  household for which he
     disclaims  beneficial  ownership  and 2,400 shares held in a trust of which
     Mr. Argyros is not a trustee for the benefit of Mr. Argyros'  mother-in-law
     for which he  disclaims  beneficial  ownership.  Mr.  Argyros  resigned his
     position as Chairman of the Board effective as of May 27, 1998. The mailing
     address for Mr. Argyros is c/o Arnel Development  Company,  949 South Coast
     Drive, Suite 600, Costa Mesa, California 92626.

(6)  Includes 517,988 shares subject to options that are currently  exercisable.
     Also includes (1) 500,262  shares held in a family trust of which Mr. Jones
     is a trustee,  (2)  18,000  shares  held in trusts  for the  benefit of Mr.
     Jones'  grandchildren for which Mr. Jones disclaims  beneficial  ownership,
     (3) 29,730  shares held in a trust for the benefit of Mr.  Jones'  children
     for which Mr. Jones disclaims  beneficial  ownership and (4) 190,000 shares
     held in an  income  trust  for  the  benefit  of Mr.  Jones'  children  and
     grandchildren for which Mr. Jones disclaims beneficial ownership. Mr. Jones
     resigned as Chairman of the Board and Chief Executive  Officer effective as
     of January 19,  1998.  He resigned his position as Director of Apria on May
     27, 1998.

(7)  Includes 375,000 shares subject to options that are currently  exercisable.
     Mr.  Carter became a Director and the Chief  Executive  Officer of Apria on
     May 5, 1998.

(8)  Includes 50,666 shares subject to options that are currently exercisable.

(9)  Includes 60,000 shares subject to options that are currently exercisable.

(10) Includes 78,400 shares subject to options that are currently exercisable or
     will become exercisable on or before May 31, 1999.

(11) Includes  50,666 shares subject to options that are currently  exercisable.
     Also includes 1,000 shares held by Mr. Green's spouse.

(12) Includes  31,666 shares subject to options that are currently  exercisable.
     Does not include  300,000  shares held through a company  which is owned by
     trusts of which Mr. Tompkins is a contingent  beneficiary.  Said trusts are
     irrevocable,  and  neither  Mr.  Tompkins  nor any member of his  immediate
     family has any investment control with respect to the trusts or the company
     owned by them.

(13) Includes 38,800 shares subject to options that are currently exercisable or
     will become exercisable on or before May 31, 1999.

(14) Includes  25,000 shares subject to options that are currently  exercisable.
     Mr. Koppes became a member of the Board of Directors on May 5, 1998.

(15) Includes  25,000 shares subject to options that are currently  exercisable.
     Mr. Lochner became a member of the Board of Directors on June 30, 1998.

(16) Includes  25,000 shares subject to options that are currently  exercisable.
     Ms. Thomas became a member of the Board of Directors on June 30, 1998.

(17) Includes  14,000 shares subject to options that are currently  exercisable.
     Also includes 200 shares held by Mr. Holcombe's spouse.

(18) All  shares  listed  are  shares  subject  to  options  that are  currently
     exercisable.

(19) Includes shares owned by certain  trusts.  Also includes  1,057,764  shares
     subject  to  options  that  are  currently   exercisable   or  will  become
     exercisable on or before May 31, 1999.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

CERTAIN TRANSACTIONS

     As disclosed in a  Registration  Statement  on Form S-3  (Registration  No.
333-68031)  filed with the  Securities  and Exchange  Commission on November 25,
1998 in  connection  with a proposed  offering of 10%  convertible  subordinated
debentures,   the  company  entered  into  a  Standby  Purchase  Agreement  with
Relational  Investors,  LLC. Under the Standby Purchase Agreement,  in the event
the proposed debenture offering is consummated,  Relational Investors,  LLC will
receive from Apria a  $1,000,000  standby fee as well as  reimbursement  for all
costs and  expenses  (including  legal  fees)  incurred in  connection  with the
offering.

<PAGE>

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K

(a)  1.  The  documents  described  in  the  "Index  to  Consolidated  Financial
     Statements  and Financial  Statement  Schedule" are included in this report
     starting at page F-1.

     2.   The  financial  statement  schedule  described  in  the  "Index  to
     Consolidated  Financial  Statements and  Financial  Statement  Schedule" is
     included in this report starting on page S-1.

     All  other  schedules  for  which  provision  is  made  in  the  applicable
     accounting  regulations of the  Securities and Exchange  Commission are not
     required under the related instructions or are inapplicable,  and therefore
     have been omitted.

     3.   Exhibits included or incorporated herein:

          See Exhibit Index.

(b)  Reports on Form 8-K:

          On November  27, 1998,  Apria filed a Current  Report on Form 8-K with
     the Securities and Exchange Commission reporting that on November 25, 1998,
     Apria had issued a press  release  related to its filing of a  registration
     statement on Form S-3 regarding its  previously-announced  rights  offering
     and the record date therefor.

<PAGE>
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                        AND FINANCIAL STATEMENT SCHEDULE

                                                                        Page
                                                                        ----
CONSOLIDATED FINANCIAL STATEMENTS
  Reports of Independent Auditors...................................     F-1
  Consolidated Balance Sheets - December 31,
    1998 and 1997...................................................     F-3
  Consolidated Statements of Operations - Years
    ended December 31, 1998, 1997 and 1996..........................     F-4
  Consolidated Statements of Stockholders' Equity
    (Deficit) - Years ended December 31, 1998, 1997 and 1996........     F-5
  Consolidated Statements of Cash Flows - Years
    ended December 31, 1998, 1997 and 1996..........................     F-6
  Notes to Consolidated Financial Statements........................     F-7

CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
  Schedule II - Valuation and Qualifying Accounts...................     S-1

<PAGE>

                          INDEPENDENT AUDITORS' REPORT



Board of Directors and Stockholders of
Apria Healthcare Group Inc.

     We have  audited  the  accompanying  consolidated  balance  sheet  of Apria
Healthcare  Group Inc. as of December  31,  1998,  and the related  consolidated
statements of  operations,  stockholders'  deficit,  and cash flows for the year
then ended. Our audit also included the financial  statement  schedule as of and
for the year ended  December  31, 1998  included in the Index at Item  14(a)(2).
These consolidated financial statements and 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 audit.

     We conducted  our audit in  accordance  with  generally  accepted  auditing
standards.  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 audit provides a reasonable basis for our opinion.

     In our opinion,  the consolidated  financial  statements present fairly, in
all material respects,  the financial position of Apria Healthcare Group Inc. as
of December 31, 1998,  and the results of its  operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
Also, in our opinion,  such  consolidated  financial  statement  schedule,  when
considered  in  relation  to the basic  financial  statements  taken as a whole,
presents fairly, in all material respects, the information set forth therein.


/s/ DELOITTE & TOUCHE LLP



Costa Mesa, California
March 29, 1999

<PAGE>

                         REPORT OF INDEPENDENT AUDITORS




Stockholders and Board of Directors
Apria Healthcare Group Inc.:


     We have  audited  the  accompanying  consolidated  balance  sheet  of Apria
Healthcare  Group Inc. as of December  31,  1997,  and the related  consolidated
statements of  operations,  stockholders'  equity and cash flows for each of the
two years in the period ended  December 31,  1997.  Our audit also  includes the
financial  statement  schedule in the Index at Item 14A insofar as it relates to
the years ended  December  31, 1997 and 1996.  These  financial  statements  and
schedule are the responsibility of the management of Apria Healthcare Group Inc.
Our  responsibility  is to express an opinion on these financial  statements and
schedule based on our audits.

     We conducted  our audits in accordance  with  generally  accepted  auditing
standards.  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 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,  the consolidated  financial  statements  referred to above
present fairly, in all material respects, the consolidated financial position of
Apria Healthcare  Group Inc. at December 31, 1997, and the consolidated  results
of its  operations  and cash flows for each of the two years in the period ended
December 31, 1997, in conformity with generally accepted accounting  principles.
Also, in our opinion,  the related  financial  statement  schedule insofar as it
relates to the years  ended  December  31,  1997 and 1996,  when  considered  in
relation to the basic financial statements taken as a whole,  presents fairly in
all material respects the information set forth therein.

                                       /s/ ERNST & YOUNG LLP



Orange  County,  California
March 11, 1998 (except for the second  paragraph of
Note 12, as to which the date is April 9, 1998)

<PAGE>
<TABLE>
                           APRIA HEALTHCARE GROUP INC.

                           CONSOLIDATED BALANCE SHEETS

                                     ASSETS
<CAPTION>
                                                                       December 31, 
                                                                       ------------ 
                                                                   1998            1997
                                                                   ----            ----
                                                                      (in thousands)
CURRENT ASSETS
<S>                                                             <C>             <C>      
  Cash and cash equivalents ................................    $  75,475       $  16,317
  Accounts receivable, less allowance for doubtful
    accounts of $35,564 and $58,413 at December 31,
    1998 and 1997, respectively ............................      132,028         256,845
  Inventories, net..........................................       16,617          26,082
  Refundable and prepaid income taxes ......................            -           2,576
  Prepaid expenses and other current assets ................        4,917           9,753
                                                                ---------       ---------
         TOTAL CURRENT ASSETS ..............................      229,037         311,573
PATIENT SERVICE EQUIPMENT, less accumulated
  depreciation of $249,921 and $245,772 at
  December 31, 1998 and 1997, respectively .................      130,652         184,704
PROPERTY, EQUIPMENT AND IMPROVEMENTS, NET ..................       51,996          87,583
INTANGIBLE ASSETS, NET .....................................       84,365         167,620
OTHER ASSETS ...............................................          548           5,690
                                                                ---------       ---------
                                                                $ 496,598       $ 757,170
                                                                =========       =========

                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

CURRENT LIABILITIES
  Accounts payable .........................................    $  51,252       $  50,691
  Accrued payroll and related taxes
    and benefits ...........................................       25,455          40,397
  Accrued insurance ........................................       13,092          12,247
  Other accrued liabilities ................................       49,870          30,463
  Current portion of long-term debt ........................       74,439           8,685
                                                                ---------       ---------
         TOTAL CURRENT LIABILITIES .........................      214,108         142,483
LONG-TERM DEBT .............................................      414,147         540,220
COMMITMENTS AND CONTINGENCIES ..............................            -               -
STOCKHOLDERS' EQUITY (DEFICIT)
  Preferred Stock, $.001 par value:
      10,000,000 shares authorized; none issued ............            -               -
    Common Stock, $.001 par value:
      150,000,000 shares authorized; 51,785,263
      and 51,568,525 shares issued and outstanding
      at December 31, 1998 and 1997, respectively ..........           52              51
  Additional paid-in capital ...............................      325,903         324,090
  Retained deficit .........................................     (457,612)       (249,674)
                                                                ---------       ---------
                                                                 (131,657)         74,467
                                                                ---------       ---------
                                                                $ 496,598       $ 757,170
                                                                =========       =========
</TABLE>
                 See notes to consolidated financial statements.
<PAGE>
<TABLE>
                           APRIA HEALTHCARE GROUP INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
                                                              Year Ended December 31,                
                                                              -----------------------                
                                                         1998          1997           1996
                                                         ----          ----           ----
                                                      (in thousands, except per share data)

<S>                                                 <C>            <C>             <C>       
Net revenues ....................................   $   933,793    $ 1,180,694     $1,181,143
Costs and expenses:
   Cost of net revenues:
      Product and supply costs ..................       238,656        334,766        311,539
      Patient service equipment depreciation ....        76,974         84,932         67,658
      Nursing services ..........................         2,309         15,973          9,798
      Other .....................................        12,756         15,511         11,680
                                                    -----------    -----------     ----------
                                                        330,695        451,182        400,675
   Provision for doubtful accounts ..............        75,319        121,908         67,040
   Selling, distribution and administrative .....       574,895        616,113        580,436
   Amortization of intangible assets ............        12,496         16,833         16,920
   Impairment of intangible assets ..............        76,223        133,542              -
   Impairment of long-lived assets and
     internally-developed software ..............        22,187         26,781              -
   Employee contracts, benefit plan and
     claim settlements ..........................             -              -         14,795
                                                    -----------    -----------     ----------
                                                      1,091,815      1,366,359      1,079,866
                                                    -----------    -----------     ----------
    OPERATING (LOSS) INCOME .....................      (158,022)      (185,665)       101,277
Interest expense ................................        46,916         50,393         49,249
                                                    -----------    -----------     ----------
    (LOSS) INCOME BEFORE TAXES ..................      (204,938)      (236,058)        52,028
Income tax expense ..............................         3,000         36,550         18,728
                                                    -----------    -----------     ----------
 NET (LOSS) INCOME ..............................   $  (207,938)   $  (272,608)    $   33,300
                                                    ===========    ===========     ==========


Basic (loss) income per common share ............   $     (4.02)   $     (5.30)    $     0.66
                                                    ===========    ===========     ==========

Diluted (loss) income per common share ..........   $     (4.02)   $     (5.30)    $     0.64
                                                    ===========     ===========    ==========
</TABLE>
                  See  notes  to  consolidated  financial statements.
<PAGE>
<TABLE>
                           APRIA HEALTHCARE GROUP INC.

            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<CAPTION>
                                                                   Additional   Retained         Total
                                                Common Stock        Paid-in     (Deficit)    Stockholders'
                                              Shares   Par Value    Capital     Earnings   Equity (Deficit)
                                              ------   ---------    -------     --------   ----------------
                                                                (in thousands)

<S>                                         <C>         <C>         <C>         <C>           <C>      
Balance at December 31, 1995 .............    49,692    $   50      $294,522    $ (10,334)    $ 284,238
Issuance of Common Stock .................        20                     242                        242
Exercise of stock options ................     1,491         1        14,717                     14,718
Notes receivable payments ................                               198                        198
Tax benefits related to stock options ....                            10,229                     10,229
Other ....................................                                42          (32)           10
Net income ...............................                                         33,300        33,300
                                            --------    ------      --------    ---------     ---------
Balance at December 31, 1996 .............    51,203        51       319,950       22,934       342,935

Exercise of stock options ................       365                   4,013                      4,013
Other ....................................                               127                        127
Net loss .................................                                       (272,608)     (272,608)
                                            --------    ------      --------    ---------     ---------
Balance at December 31, 1997 .............    51,568        51       324,090     (249,674)       74,467

Exercise of stock options ................       217         1         1,685                      1,686
Other ....................................                               128                        128
Net loss .................................                                       (207,938)     (207,938)
                                            --------    ------      --------    ---------     ---------
Balance at December 31, 1998 .............    51,785    $   52      $325,903    $(457,612)    $(131,657)
                                            ========    ======      ========    =========     =========
</TABLE>
                 See notes to consolidated financial statements.
<PAGE>
<TABLE>
                           APRIA HEALTHCARE GROUP INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
                                                                     Year Ended December 31,    
                                                                     -----------------------    
                                                                 1998          1997         1996
                                                                 ----          ----         ----
                                                                          (in thousands)
OPERATING ACTIVITIES
<S>                                                           <C>          <C>           <C>      
Net (loss) income ..........................................  $(207,938)   $ (272,608)   $  33,300
Items included in net (loss) income not
  requiring (providing) cash:
    Provision for doubtful accounts ........................     75,319       121,908       67,040
    Provision for revenue adjustments ......................     18,302        40,000       32,300
    Provision for inventory and patient
      service equipment shortages/obsolescence .............     23,305        35,300       10,513
    Depreciation ...........................................    104,031       118,054       93,123
    Amortization of intangible assets ......................     12,496        16,833       16,920
    Amortization of deferred debt costs ....................      1,747         1,197        1,703
    Impairment of intangible assets ........................     76,223       133,542            -
    Impairment long-lived assets and
      internally-developed software ........................     22,187        26,781            -
    Loss (gain) on disposition of assets ...................      2,985        (2,044)         340
    Deferred income taxes ..................................          -        29,963       15,920
Change in operating assets and liabilities,
  net of effects of acquisitions:
    Decrease (increase) in accounts receivable .............     31,733       (80,229)    (176,551)
    (Increase) decrease in inventories .....................       (612)        2,722      (12,903)
    Decrease in prepaids and other current
      assets (including prepaid income taxes) ..............      7,262        32,758        2,544
    Decrease in other non-current assets ...................        525           508          310
    Decrease in accounts payable ...........................       (162)      (33,153)     (17,033)
    Increase in accruals and other
      non-current liabilities ..............................      5,842         1,378        3,175
    Decrease in accrued restructuring costs ................       (968)       (5,408)     (11,953)
Net purchases of patient service equipment,
  net of effects of acquisitions ...........................    (38,461)      (63,519)    (118,372)
Other ......................................................        128           127          329
                                                              ---------     ---------    ---------
         NET CASH PROVIDED BY (USED IN)
         OPERATING ACTIVITIES ..............................    133,944       104,110      (59,295)

INVESTING ACTIVITIES
    Purchases of property, equipment and
      improvements, net of effects of acquisitions .........    (14,607)      (21,047)     (54,207)
    Proceeds from disposition of assets ....................      3,170         8,212          317
    Acquisitions and payments of
      contingent consideration .............................     (2,727)      (11,283)     (14,815)
                                                              ---------     ---------    ---------
         NET CASH USED IN INVESTING ACTIVITIES .............    (14,164)      (24,118)     (68,705)

FINANCING ACTIVITIES
    Proceeds under revolving credit facility ...............          -       129,950      775,125
    Payments under revolving credit facility ...............    (50,000)     (211,950)    (641,425)
    Payments of senior and other long-term debt ............     (8,773)      (11,793)     (11,445)
    Capitalized debt costs, net ............................     (3,535)         (825)      (1,312)
    Issuances of Common Stock ..............................      1,686         4,013       15,158
                                                              ---------     ---------    ---------
         NET CASH (USED IN) PROVIDED
         BY FINANCING ACTIVITIES ...........................    (60,622)      (90,605)     136,101
                                                              ---------     ---------    ---------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .......     59,158       (10,613)       8,101
Cash and cash equivalents at beginning of year..............     16,317        26,930       18,829
                                                              ---------     ---------    ---------
         CASH AND CASH EQUIVALENTS AT END OF YEAR ..........  $  75,475     $  16,317    $  26,930
                                                              =========     =========    =========
</TABLE>
                 See  notes  to  consolidated  financial statements.
<PAGE>


<PAGE>


                           APRIA HEALTHCARE GROUP INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Basis of Presentation:  The accompanying  consolidated financial statements
include the accounts of Apria Healthcare  Group Inc.  ("Apria" or "the company")
and its  subsidiaries.  All significant  intercompany  transactions and accounts
have been eliminated.

     Company  Background:  Apria operates in the home healthcare  segment of the
healthcare  industry and provides services  including home respiratory  therapy,
home infusion therapy,  home medical equipment and other services to patients in
the home  throughout  the United  States  through its  approximately  320 branch
locations.  Management  measures  operating  results on a geographic  basis and,
therefore, views each branch as an operating segment. All the branches offer the
same  services,  except  that  infusion  services  are  not  offered  in all the
geographic  markets  in which the  company  operates.  For  financial  reporting
purposes,   all  the  company's  operating  segments  are  aggregated  into  one
reportable  segment.  Respiratory  therapy,  infusion  therapy and home  medical
equipment/other  represented  approximately  59%,  23%  and  18% of  total  1998
revenues,  respectively.  The gross  margins  in 1998 for  respiratory  therapy,
infusion  therapy  and  home  medical  equipment/other  were  74%,  52% and 50%,
respectively.

     Operations:  Apria reported a net loss of  $272,608,000  for the year ended
December  31,  1997  due  primarily  to  (1)  recognition  of  intangible  asset
impairment, (2) high levels of bad debt write-offs and revenue adjustments,  (3)
impairment   of   certain   of   its    information    systems    hardware   and
internally-developed software, (4) severance and related costs associated with a
reduction  in  its  labor  force,   and  (5)  charges  for  excess   quantities,
obsolescence and shrinkage of patient service equipment and inventory  primarily
reflecting the results of expanded  asset  verification  and physical  inventory
procedures performed due to the impact of systems conversions and high turnover.
Consequently,  Apria reported an accumulated deficit of $249,674,000 at December
31, 1997.

     Apria has reported a net loss of  $207,938,000  for the year ended December
31,  1998,  primarily  due to  reductions  in Medicare  reimbursement  rates and
charges taken in the third quarter  including:  (1) recognition of impairment in
its goodwill and other intangible  assets, (2) charges taken in conjunction with
exiting certain product lines in specific  geographic  areas, (3) adjustments to
revenue and the allowance for doubtful accounts due to changes in the credit and
collection  policies,  and (4)  impairment  of  certain  long-lived  assets  and
internally-developed  software.  As a result of the losses,  Apria's accumulated
retained deficit increased to $457,612,000 at December 31, 1998.

     Despite the losses  recognized  during the year ended  December  31,  1998,
Apria  generated  cash flow from  operations  of  $133,944,000  for the year and
recognized  a net profit of  $2,326,000  (unaudited)  for the fourth  quarter of
1998.

     In July 1998,  after an  evaluation of the  business,  Apria  announced its
strategic  plan to improve the  company's  performance.  The key elements of the
strategic plan are: (1) no change would be made to the fundamental nature of the
business, (2) Apria would withdraw from unprofitable components of the business,
which would include exiting certain portions of the infusion  therapy  business,
(3) a  comprehensive  cost reduction and capital  conservation  program would be
instituted,  (4) the debt and capital structure would be examined, and (5) Apria
would pursue expansion through internal growth and acquisitions.  In the opinion
of management,  the  implementation of these plans contributed  significantly to
the profitable results in the fourth quarter of 1998;  however,  there can be no
assurance that Apria will continue to achieve profitability. Management believes
that Apria has sufficient  sources of financing to continue  operations and fund
its expansion  plans  throughout  1999;  however,  if this is not the case,  the
company  will need to obtain  additional  capital and there can be no  assurance
that  any  additional  equity  or  debt  financing  will be  available.  Apria's
long-term success is dependent on management's  ability to successfully  execute
its strategic plan and,  ultimately,  the company's ability to achieve sustained
profitable operations.

     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 a large  number  of  third-party  payors,  including  private
insurers, prepaid health plans, Medicare and Medicaid.  Approximately 36% of the
company's  1998 revenues are  reimbursed  under  arrangements  with Medicare and
Medicaid.  In 1998, no other  third-party  payor group represented 7% 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  7%, 6% and 6% of total net
revenues for 1998, 1997 and 1996, respectively.

     Apria  establishes  allowances for revenue  adjustments  which are normally
identified and recorded at the point of cash application or upon account review.
Revenue  adjustments  result  from  differences  between  estimated  and  actual
reimbursement amounts, failures to obtain authorizations acceptable to the payor
or other specified billing documentation, changes in coverage or payor and other
reasons  unrelated to credit risk.  The  allowance  for revenue  adjustments  is
deducted  directly from gross accounts  receivable.  Management also establishes
allowances for those accounts from which payment is not expected to be received,
although services were provided and revenue was earned.

     Management  performs  various  analyses to estimate the revenue  adjustment
allowance  and the  allowance for doubtful  accounts.  Specifically,  management
considers  historical   realization  data,  accounts  receivable  aging  trends,
operating  statistics  and  relevant  business  conditions.  Apria  periodically
refines its procedures for estimating the allowances for revenue adjustments and
doubtful accounts based on experience with the estimation process and changes in
circumstances.  The  estimation  process  was  modified  in 1997 to  include  an
evaluation  of the  collectibility  of amounts owed by  third-party  payors with
aggregate patient balances  exceeding a specified amount and further modified in
1998 to reflect  changes in the company's  collection  policies and  procedures.
Because  of  continuing  changes  in the  healthcare  industry  and  third-party
reimbursement,  it is  reasonably  possible that  management's  estimates of net
collectible revenues could change in the near term, which could have a favorable
or unfavorable impact on operations and cash flows.

     Use of Accounting  Estimates:  The  preparation of financial  statements in
conformity with generally accepted accounting  principles requires management to
make assumptions  that affect the amounts  reported in the financial  statements
and accompanying notes. Actual results could differ from those estimates. Due to
the  nature  of the  industry  and the  reimbursement  environment  in which the
company  operates,  certain  estimates  are required in recording  net revenues.
Inherent  in these  estimates  is the risk that they will have to be  revised or
updated,   and  the  changes  recorded  in  subsequent  periods,  as  additional
information becomes available to management.

     Cash and Cash  Equivalents:  Apria  maintains  cash with various  financial
institutions.  These financial  institutions  are located  throughout the United
States and the company's  cash  management  practices  limit exposure to any one
institution.  Outstanding checks in excess of bank balances,  which are reported
as a component of accounts payable, were $15,102,000 and $13,309,000 at December
31,  1998  and  1997,  respectively.  Management  considers  all  highly  liquid
instruments  purchased  with a  maturity  of less than  three  months to be cash
equivalents.  As further discussed in Note 5, use of $35,000,000 of Apria's cash
balance is temporarily restricted.

     Accounts  Receivable:  Included  in  accounts  receivable  are  earned  but
unbilled  receivables  of $25,262,000  and  $31,919,000 at December 31, 1998 and
1997, respectively.

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

     Patient Service  Equipment:  Patient service equipment  consists of medical
equipment  provided to in-home  patients and is stated at cost.  Depreciation is
provided using the  straight-line  method over the estimated useful lives of the
equipment, which range from one to 10 years.

     Property, Equipment and Improvements:  Property, equipment and improvements
are stated at cost. Depreciation is provided using the straight-line method over
the estimated  useful lives of the property.  Included in property and equipment
are assets under capitalized leases which consist solely of computer  equipment.
Depreciation  for  equipment  under  capitalized  leases is  provided  using the
straight-line  method over the estimated useful life. Estimated useful lives for
each of the categories presented in Note 3 are as follows:  land improvements --
seven years; building and leasehold improvements -- the shorter of the remaining
lease  term or seven  years;  equipment  and  furnishings  -- three to 15 years;
information systems -- two to four years.

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

     The  carrying  value of  capitalized  software is reviewed if the facts and
circumstances  suggest that it may be impaired.  Indicators  of  impairment  may
include a  subsequent  change in the extent or manner in which the  software  is
used or expected to be used,  a  significant  change to the  software is made or
expected  to be made or the cost to  develop  or  modify  internal-use  software
exceeds that  expected  amount.  If events and  circumstances  indicate that the
software is impaired,  management applies its policy for measuring and recording
impairment of its intangible and other long-lived assets, as described below.

     Intangible  and Other  Long-lived  Assets:  Intangible  assets  consist  of
covenants not to compete and goodwill  arising from business  combinations  (see
Note  2).  The  values  assigned  to  intangible   assets  are  amortized  on  a
straight-line basis. Covenants are amortized over contractual terms, which range
from 3 to ten years.  Goodwill,  representing  the excess of the purchase  price
over the  estimated  fair value of the net assets of the acquired  business,  is
amortized  over the period of  expected  benefit.  The  amortization  period for
goodwill is  generally  20 years.  Prior to December  31, 1997 the  amortization
period for  goodwill  related to acquired  infusion  therapy  businesses  was 40
years.

     Management  reviews for  impairment  of  long-lived  assets and  intangible
assets  to be held and  used in the  company's  operations  whenever  events  or
changes in  circumstances  indicate that the carrying amount of an asset may not
be recoverable. For purposes of assessing impairment,  assets are grouped at the
branch  level which is the lowest  level for which there are  identifiable  cash
flows that are largely  independent of the cash flows of other groups of assets.
Goodwill is generally separately  identified by acquisition and branch location.
However, for multi-location  acquisitions,  goodwill is allocated to branches on
the basis of annual revenues as of the acquisition  date.  Management  deems the
long-lived  and/or  intangible  assets of a branch to be impaired  if  estimated
expected  undiscounted future cash flows is less than the carrying amount of the
assets.  Estimates of expected future cash flows are based on management's  best
estimates of anticipated operating results over the remaining useful life of the
assets. For those branches identified as containing impaired assets, the company
measures the impairment as the amount by which the carrying  amount of the asset
exceeds the fair value of the asset.  In estimating the fair value of the asset,
management utilizes a valuation technique based on the present value of expected
future cash flows.

     Fair Value of Financial  Instruments:  The fair value of long-term debt and
letters of credit is  determined  by  reference  to  borrowing  rates  currently
available  to Apria for loans with  similar  terms and average  maturities.  The
carrying  amounts  of cash and cash  equivalents,  accounts  receivables,  trade
payables  and accrued  expenses  approximate  fair value  because of their short
maturity.

     Advertising:  Advertising  costs  amounting to  $3,295,000,  $4,088,000 and
$6,095,000 for 1998, 1997 and 1996,  respectively,  are expensed as incurred and
included in "Selling, distribution and administrative expenses."

     Income Taxes:  Apria provides for income taxes under the liability  method.
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 enacted tax laws and rates  applicable  to the periods in
which  the  differences  are  expected  to  affect  taxable  income.   Valuation
allowances  are  established  when  necessary  to reduce  deferred tax assets to
amounts which are more likely than not to be realized.  The provision for income
taxes  represents the tax payable or refundable for the period plus or minus the
change during the period in deferred tax assets and liabilities.

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

     Stock-based  Compensation:  Apria grants  options to employees  for a fixed
number of shares with an exercise price equal to the fair value of the shares at
the date of grant.  The company  accounts for stock option  grants in accordance
with APB Opinion No. 25, Accounting for Stock Issued to Employees ("APB No. 25")
and, accordingly, recognizes no compensation expense for the stock option grants
to employees.  However, Apria has adopted the disclosure provisions of Statement
of  Financial   Accounting   Standards  No.  123,   Accounting  for  Stock-based
Compensation ("SFAS No. 123") (see Note 6).

     New  Accounting  Pronouncements:  As of December  31, 1998,  Apria  adopted
Statement of Financial  Accounting  Standards No. 130, "Reporting  Comprehensive
Income", and Statement of Financial  Accounting Standards No. 131,  "Disclosures
About Segments of an Enterprise and Related Information". Both statements, which
became effective for fiscal years beginning after December 15, 1997 did not have
any effect on the company's consolidated financial statements.

     Statement  of  Financial  Accounting  Standards  No. 133,  "Accounting  for
Derivative  Instruments and Hedging  Activities"  ("SFAS No. 133") was issued in
June 1998 and  establishes  accounting  and reporting  standards for  derivative
instruments,   including  certain  derivative   instruments  imbedded  in  other
contracts, and for hedging activities.  It requires that an entity recognize all
derivatives  as either  assets or  liabilities  in the  statements  of financial
position  and  measure  those  instruments  at fair  value.  Apria's  management
believes that adoption of SFAS No. 133,  which is required in fiscal 2000,  will
not have a material impact on its consolidated financial statements.

     AICPA  Statement of Position  98-1,  "Accounting  for the Costs of Computer
Software  Developed or Obtained for Internal  Use" ("SOP  98-1"),  was issued in
March 1998 and will be effective for the company  beginning in fiscal 1999.  SOP
98-1  broadly  defines  and  provides  guidance on  accounting  for the costs of
computer software developed or obtained for internal use. SOP 98-1 requires that
computer software costs incurred in the preliminary project stage be expensed as
incurred.  The  provisions  of SOP 98-1  apply to  internal-use  software  costs
incurred in those fiscal years for all  projects,  including  those  projects in
progress upon initial  application  of the  statement.  Costs  incurred prior to
initial application of this statement, whether capitalized or not, should not be
adjusted to the amounts  that would have been  capitalized  had this SOP been in
effect when those costs were incurred.  Apria has already adopted  substantially
all of the provisions of SOP 98-1,  therefore formal adoption is not expected to
have an impact on Apria's consolidated financial statements.

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


NOTE 2 -- BUSINESS COMBINATIONS AND DISPOSITIONS

     During  1998,  1997 and 1996,  Apria  acquired  a number  of  complementary
businesses in specific  geographic markets.  The businesses,  none of which were
individually  significant,  were  purchased  for  cash.  The  transactions  were
accounted  for as purchases  and,  accordingly,  the  operations of the acquired
businesses are included in the  consolidated  statements of operations  from the
dates  of  acquisition.  The  purchase  prices  were  allocated  to the  various
underlying  tangible  and  intangible  assets  and  liabilities  on the basis of
estimated fair value.

     The following  table  summarizes the  allocation of the purchase  prices of
acquisitions made by the company,  including non-cash  financing  activities and
payments of  contingent  consideration:

                                                    Year Ended  December 31, 
                                                    ----------  ------------ 
                                                   1998       1997       1996
                                                   ----       ----       ----
                                                         (in thousands)

     Fair value of assets acquired............   $ 2,610    $ 11,729   $ 15,356
     Liabilities paid (assumed), net..........       117        (446)      (541)
                                                 -------    --------   --------
           Cash paid..........................   $ 2,727    $ 11,283   $ 14,815
                                                 =======    ========   ========

     The fair  value of assets  acquired  during  1998,  1997 and 1996  includes
intangible assets of $1,653,000, $7,368,000 and $5,880,000, respectively.

     During the third  quarter  of 1998,  Apria sold its  infusion  business  in
California  to  Crescent  Healthcare,  Inc.  and  decided  to exit the  infusion
business in Texas, Louisiana, West Virginia,  western Pennsylvania and downstate
New York.  Charges  of  $7,263,000  related  to the  wind-down  of  unprofitable
infusion  operations and a $3,798,000  loss on sale of the  California  business
were  recorded.  The  operations  of these  infusion  locations  had revenues of
$41,480,000,  $72,677,000  and  $86,242,000  for the years 1998,  1997 and 1996,
respectively.

     In January 1997, Apria sold all of its 15% equity interest in Omnicare plc,
a United  Kingdom-based  public limited company,  to a former director of Apria.
Cash  proceeds  from  the  sale  were  $2,791,000  which  resulted  in a gain of
$1,232,000.

     In March 1997, Apria sold its  Medicare-certified  home health agency,  M&B
Ventures,  Inc.,  for cash proceeds of $2,400,000 and recorded a loss on sale of
$784,000.  The company also disposed of several  branch  locations in California
and  Arizona in the latter  part of 1997.  Cash  proceeds  from these sales were
$1,189,000  which  resulted in a net gain of  $386,000.  The  operations  of M&B
Ventures and the disposed branches had revenues of approximately  $4,648,000 and
$11,082,000 for 1997 and 1996, respectively.

     In September 1997,  Apria exercised its warrants to purchase 247,500 shares
of common stock of Living Centers of America,  Inc. The  subsequent  sale of the
shares netted cash proceeds and a gain of $1,350,000.


NOTE 3 -- PROPERTY, EQUIPMENT AND IMPROVEMENTS

     Property, equipment and improvements consist of the following:

                                                              December 31,
                                                              ------------
                                                          1998           1997
                                                          ----           ----
                                                             (in thousands)

     Land and improvements.......................       $     53      $     53
     Buildings and leasehold improvements........         20,561        23,283
     Equipment and furnishings...................         47,413        71,815
     Information systems.........................         38,091        75,012
                                                        --------      --------
                                                         106,118       170,163
         Less accumulated depreciation...............    (54,122)      (82,580)
                                                        --------      --------
                                                        $ 51,996      $ 87,583
                                                        ========      ========

     One of the actions taken in 1998 as a result of management's  new strategic
direction was the termination of the project to implement an enterprise resource
planning (ERP) system.  Accordingly,  Apria wrote off related software and other
capitalized  costs of  $7,548,000  in the third  quarter of 1998. As part of the
decision to terminate the ERP project,  management evaluated its current systems
to  determine  their  long-term  viability in the context of the  company's  new
overall strategic direction. It was determined that the company was at some risk
in continuing to run the infusion billing system on its current platform,  which
is no longer  supported by the computer  industry.  To mitigate this risk, Apria
began  in 1998 to  convert  the  infusion  system  to the IBM  AS/400  operating
platform  on which  the  respiratory/home  medical  equipment  system  currently
operates.  The company also installed a number of  enhancements  to the systems,
rendering certain previously-developed modules obsolete. Additionally,  pharmacy
and  branch  consolidations  and  closures  resulted  in a variety  of  computer
equipment  that  was  no  longer  needed.  Due  to  its  age  and  technological
obsolescence,  it was  deemed  to have no  future  value.  As a result  of these
actions, Apria recorded an impairment charge of $11,843,000 in the third quarter
of 1998.

     In the fourth  quarter of 1997,  Apria  wrote  down the  carrying  value of
internally-developed   software  by  $20,225,000   and  computer   equipment  by
$6,556,000.   The  software   impairment  charge  consisted  of  $15,305,000  of
capitalized development and implementation costs related to the company's branch
information  system  (ACIS)  which  management  had  committed  to  replace  and
$4,920,000   of   capitalized   development   costs   related   to   specialized
telecommunications  software  for  ApriaDirect,  a  clinical  program  that  was
discontinued  in  December  1997.  The  computer  equipment   impairment  charge
consisted   of  computer  and   telecommunications   equipment   identified   as
functionally obsolete or no longer in use.


NOTE 4 -- INTANGIBLE ASSETS

     Intangible  assets  consist of the  following:

                                                      December 31,
                                                      ------------
                                                   1998          1997
                                                   ----          ----
                                                     (in thousands)

     Covenants not to compete.............       $ 17,780      $ 30,874
     Goodwill.............................        101,365       198,930
                                                 --------     ---------
                                                  119,145       229,804
     Less accumulated amortization........        (34,780)      (62,184)
                                                 --------      --------
                                                 $ 84,365      $167,620
                                                 ========      ========

     1998 Impairment of Intangible  Assets:  The  deterioration  in the infusion
therapy  industry  and  management's  decision  to  withdraw  from the  infusion
business  in  certain  geographic  markets  served as  indicators  of  potential
intangible asset impairment. Other indicators of potential impairment identified
by management include,  among other issues, the company's declining common stock
price, failure to meet its already lowered financial expectations, the threat of
continued Medicare reimbursement  reductions,  government investigations against
the  company,  slower  than  expected  progress  in  improving  its  billing and
collection  process,  and reported financial  difficulties  within major managed
care  organizations  with which Apria does  business,  resulting  in  collection
difficulties.  In the third quarter of 1998,  management conducted an evaluation
of the carrying value of the company's recorded  intangible  assets.  Management
considered current and anticipated  industry  conditions,  recent changes in its
business  strategies,   and  current  and  anticipated  operating  results.  The
evaluation  resulted in an impairment  charge of  $76,223,000,  which includes a
write-off of  $4,771,000 in intangible  assets  associated  with the exit of the
infusion business in certain areas.

     1997 Impairment of Intangible  Assets:  Certain 1997 conditions,  including
Apria's failure to meet projections and  expectations,  declining gross margins,
recurring  operating losses,  significant  downward  adjustment to the company's
projections  for 1998 and a declining  common stock value,  were  identified  by
management as indicators of potential intangible asset impairment. In the fourth
quarter of 1997,  management  conducted an evaluation of the carrying  value and
amortization  periods  of  recorded  intangible  assets.  Management  considered
current and  anticipated  industry  conditions,  recent  changes in its business
strategies  and  current  and  anticipated  operating  results.  The  evaluation
resulted  in an  impairment  charge of  $133,542,000  which was  recorded in the
fourth  quarter  of  1997.  In  conjunction  with  the  impairment   evaluation,
management  reduced the  amortization  period for  goodwill  related to acquired
infusion   therapy   businesses  from  40  years  to  20  years.  The  remaining
infusion-related goodwill is being amortized over the years remaining assuming a
20-year life from date of acquisition.

     Measurement of  Impairment:  For purposes of assessing  impairment,  assets
were grouped at the branch level,  which is the lowest level for which there are
identifiable  cash flows that are largely  independent.  A branch  location  was
deemed to be impaired if management's  estimate of  undiscounted  cash flows was
less than the  carrying  amount of the  long-lived  assets and  goodwill  at the
branch. In estimating  future cash flows,  management used its best estimates of
anticipated  operating  results  over the  remaining  useful  life of the assets
where, in the case of the 1997 computation,  the useful life is the amortization
period before giving effect to the reduction in the infusion  business  goodwill
from 40 to 20 years.  For those branches  identified as impaired,  the amount of
impairment  was measured by  comparing  the  carrying  amount of the  long-lived
assets and goodwill to the estimated fair value for each branch.  Fair value was
estimated using a valuation technique based on the present value of the expected
future cash flows.


NOTE 5 -- CREDIT FACILITY AND LONG-TERM DEBT

     Long-term debt consists of the following:
                                                               December 31,
                                                               ------------
                                                            1998         1997
                                                            ----         ----
                                                             (in thousands)

     Notes payable relating to revolving 
       credit facilities..............................   $       -     $338,000
     Term loans payable...............................     288,000            -
     9.5% senior subordinated notes...................     200,000      200,000
     Other, interest at rates ranging from
       0% to 4.1%, payments due at various
       dates through December 1998....................           -          172
     Capital lease obligations (see Note 10)..........       8,196       16,555
                                                          --------     --------
                                                           496,196      554,727
     Less: Current maturities.........................     (74,439)      (8,685)
           Unamortized deferred debt costs............      (7,610)      (5,822)
                                                          --------     --------
                                                          $414,147     $540,220
                                                          ========     ========

     Credit  Agreement:  Apria's  credit  agreement  with Bank of America  and a
syndicate  of banks was  amended  and  restated  in November of 1998 and further
amended in January and February of 1999.  In  connection  with the November 1998
amendment,  the company made a required  $50,000,000  repayment of the revolving
credit facility.  The remaining  indebtedness under the credit agreement,  which
expires in August 2001, was  restructured  into a  $288,000,000  term loan and a
$30,000,000 revolving credit facility.  Term loan principal payments are payable
quarterly  commencing on March 31, 1999 and continuing  through June 30, 2001 in
the following amounts:  $4,000,000  quarterly in 1999,  $5,000,000  quarterly in
2000 and $10,000,000 quarterly thereafter until maturity.

     The amended credit agreement  currently  requires that Apria issue not less
than $50,000,000 of senior subordinated notes or senior subordinated convertible
debentures  by April 23, 1999,  the net proceeds of which must be applied to the
term loan.  Additionally,  between the effective date of the November  amendment
and the  earlier  of  April  23,  1999 or the  issuance  date  of the  notes  or
debentures,  the  company is subject  to  prepayments  of the term loan based on
excess cash flow (as defined by the  agreement).  The resulting  prepayments  of
$6,938,000  reduced the required  amount of the quarterly term loan payment that
was due March 31, 1999 to zero. No additional  prepayments  based on excess cash
flow will be required.

     The amended credit agreement also allows Apria to make  acquisitions  under
an  acquisition  "basket"  provision  of up to  $62,000,000,  subject to certain
restrictions,   that  may  be  increased   given  certain  levels  of  financial
performance by the company.  In 1999, the acquisition limit is subject to dollar
for dollar  reduction by the amount of any unusual cash  expenses (as defined by
the agreement) incurred and paid in 1999.

     The  amended  agreement  permits  Apria to elect one of two  variable  rate
interest  options at the time an advance is made.  The first option is expressed
as 2.50% plus the higher of (a) the Bank of America "reference rate" and (b) the
Federal  Funds Rate plus 0.50% per annum.  The second  option is a rate based on
the London Interbank  Offered Rate plus 3.50% per annum. The effective  interest
rate at December 31, 1998 was 9.125% for term loan  borrowings of  $288,000,000.
The credit agreement  requires payment of commitment fees of 0.75% on the unused
portion of the revolving credit facility.

     Borrowings  under the credit facility are  collateralized  by substantially
all of the  assets of  Apria.  The  agreement  contains  numerous  restrictions,
including but not limited to,  covenants  requiring the  maintenance  of certain
financial ratios,  limitations on additional  borrowings,  capital expenditures,
mergers,  acquisitions and investments and restrictions on cash dividends, loans
and other  distributions.  The agreement also requires that the company maintain
minimum cash balances of  $35,000,000  through the  consummation  of the debt or
equity offering.  Additionally,  the credit agreement allows for certain charges
from the fourth  quarter of 1997,  the third  quarter of 1998 and  unusual  cash
expenses in 1999,  totaling  $81,740,000,  $181,079,000  and up to  $17,500,000,
respectively,  to be excluded from the calculation of specific  financial ratios
when determining  covenant  compliance.  At December 31, 1998, the company is in
compliance with the financial covenants required by the credit agreement.

     The carrying amount of the term loan approximates fair market value because
the underlying instruments are variable notes that reprice frequently.

     Apria had no derivative  securities as of December 31, 1998. The company is
exposed to changes in  interest  rates as a result of its bank  credit  facility
which is based on the variable rate interest options discussed above.

     At December 31, 1998, the company's  outstanding letters of credit amounted
to $10,276,000  and credit  available  under the revolving  credit  facility was
$19,724,000 (subject to the restriction under the Indenture described below).

     9 1/2%  Senior  Subordinated  Notes:  Apria's  $200,000,000  9 1/2%  senior
subordinated  notes mature  November 1, 2002 and are  subordinated to all senior
debt of the company and senior in right of payment to  subordinated  debt of the
company.  The fair value of these notes,  as  determined  by reference to quoted
market prices,  is $199,260,000  and $211,540,000 at December 31, 1998 and 1997,
respectively.

     Under the  indenture  governing  Apria's  senior  subordinated  notes,  the
company's  ability to incur  indebtedness  becomes  restricted at times that the
company's  "Fixed Charge  Coverage  Ratio" (as defined in the indenture) is less
than 3.0 to 1.0.  Charges  taken  against  revenues in the third quarter of 1998
resulted in the Fixed  Charge  Coverage  Ratio being less than 3.0 to 1.0.  This
condition  is expected to continue at least  through the third  quarter of 1999.
Apria has  changed  its cash  management  procedures  so as to avoid the need to
incur  indebtedness  in  violation  of  the  terms  of  the  indenture  and  has
accumulated a cash balance of $75,184,000 as of February 28, 1999.

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

(in thousands)

     1999..........................................    $  68,938
     2000..........................................       20,000
     2001..........................................      199,062
     2002..........................................      200,000
                                                        --------
                                                        $488,000
                                                        ========

     Total  interest  paid in  1998,  1997  and 1996  amounted  to  $44,989,000,
$53,222,000 and $44,341,000, respectively.


NOTE 6 -- STOCKHOLDERS' EQUITY

     Common Stock: Apria has granted  registration  rights to certain holders of
common stock under which the company is obligated to pay the expenses associated
with those registration rights.

     Preferred  Stock Purchase  Rights:  Under Apria's  preferred stock purchase
rights plan, the company's common  stockholders hold one right for each share of
common stock outstanding.  If the rights become exercisable,  each right (unless
held by the person or group causing the rights to become exercisable) will allow
its holder to  purchase  one  one-hundredth  of a share of Junior  Participating
Stock ("Junior  Preferred Shares") at a price of $130 per one one-hundredth of a
Junior  Preferred  Share,   subject  to  adjustment.   The  rights  will  become
exercisable if a person,  or group of affiliated  persons,  acquires  beneficial
ownership  of 15% or more of the  company's  common  stock,  unless the Board of
Directors  determines the transaction to be fair and in the best interest of the
company and its  stockholders.  Each Junior  Preferred Share will be entitled to
preferential  dividend and liquidation payments,  preferential  consideration in
the event of any merger,  consolidation  or other  transaction in which stock is
exchanged and 100 votes which vote together with common stock. In addition, upon
exercise  of a right,  each  holder of shares of common  stock  will  receive an
additional  amount of common  stock having a market value equal to two times the
then current  purchase price of the right.  However,  Apria's Board of Directors
has retained the right to redeem the rights in whole,  but not in part, at $0.01
per right within ten (10) days after they become exercisable.

     Stock Compensation Plans: Apria has various stock-based compensation plans,
which are described below.  Management  applies the provisions of APB No. 25 and
related Interpretations in accounting for its plans. No compensation expense has
been  recognized  upon  granting of options  under its fixed stock option plans,
performance-based  plan or its stock purchase plan. Had compensation expense for
the company's  stock-based  compensation plans been recognized based on the fair
value of  awards at the date of grant,  consistent  with the  method of SFAS No.
123, Apria's net (loss) income and per share amounts would have been adjusted to
the pro forma amounts  indicated below. The provisions of SFAS No. 123 have been
applied  to  awards  with  grant  dates in 1998,  1997,  1996  and  1995,  only.
Therefore, until the rules are applied to all outstanding, nonvested awards, the
compensation  expense  reflected in the pro forma amounts presented below is not
indicative of future amounts.

                                            1998          1997         1996
                                            ----          ----         ----
                                                 (in thousands, except
                                                    per share data)
Net (loss) income:
    As reported .....................    $(207,938)    $(272,608)   $  33,300
    Pro forma .......................    $(212,518)    $(276,213)   $  29,649

Basic net (loss) income per share:
    As reported .....................    $   (4.02)    $   (5.30)   $    0.66
    Pro forma .......................    $   (4.11)    $   (5.37)   $    0.58

Diluted net (loss) income per share:
    As reported .....................    $   (4.02)    $   (5.30)   $    0.64
    Pro forma .......................    $   (4.11)    $   (5.37)   $    0.58


     For purposes of pro forma  disclosure,  the fair value of each option grant
is estimated on the date of grant using the Black-Scholes  option-pricing  model
with the following  weighted  average  assumptions used for grants in 1998, 1997
and 1996:  risk-free  interest rates ranging from 5.72% to 4.16%, 6.45% to 5.82%
and 6.91% to 6.33%,  respectively;  dividend yield of 0% for all years; expected
lives  ranging  from 5.36  years for 1998,  6.50 years for 1997 and 1.25 to 6.58
years for 1996; and volatility of 63% for 1998, 55% for 1997 and 43% for 1996.

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

     A summary of the status of Apria's  fixed stock  options as of December 31,
1998,  1997 and 1996, and the activity during the years ending on those dates is
presented below:
<TABLE>
                          
<CAPTION>
                                                       1998                          1997                           1996 
                                             ------------------------       -----------------------      -------------------------
                                                          Weighted-                     Weighted-                      Weighted-
                                                           Average                       Average                        Average
                                              Shares    Exercise Price       Shares   Exercise Price       Shares    Exercise Price
                                             ---------  --------------     ---------- ---------------    ----------  --------------
<S>                                          <C>           <C>              <C>            <C>            <C>            <C>   
Outstanding - beginning of year...........   2,803,952     $17.46           3,431,472      $17.12         4,111,824      $15.22
Granted:
  Exercise price equal to fair value......     774,994     $ 8.78             201,000      $15.86           710,800      $18.60
  Exercise price greater than fair value..      75,000     $12.56              53,000      $18.25            10,000      $28.25
  Exercise price less than fair value.....           -                              -                        25,000      $10.00
Exercised.................................    (104,638)    $ 4.33            (304,635)     $ 9.95        (1,073,804)     $ 9.67
Forfeited.................................  (1,248,339)    $17.90            (576,885)     $18.94          (352,348)     $20.41
                                            ----------                      ---------                    ----------
 
Outstanding - end of year.................   2,300,969     $14.73           2,803,952      $17.46         3,431,472      $17.12
                                            ==========                     ==========                    ==========

Exercisable at end of year................   1,701,287     $14.20           1,469,113      $16.19         1,281,402      $13.99
                                            ==========                      =========                    ==========

Weighted-average fair value of options
granted during the year...................                 $ 5.30                          $ 9.91                        $ 9.92
</TABLE>

The following table summarizes information about fixed stock options outstanding
at December 31, 1998:
<TABLE>
                         
<CAPTION>
                                                     Options Outstanding                          Options Exercisable         
                                       -----------------------------------------------       -----------------------------  
                                                          Weighted
                                                           Average
                                           Number         Remaining        Weighted-             Number         Weighted-
                                         Outstanding     Contractual        Average            Exercisable       Average
Range of Exercise Prices               As of 12/31/98  Life (in years)  Exercise Price       As of 12/31/98  Exercise Price
------------------------               --------------  ---------------  --------------       --------------  --------------
<S>                                       <C>               <C>             <C>                  <C>             <C>   
    $ 1.50 - $ 6.69                       353,609           8.48            $ 5.71               353,609         $ 5.71
    $ 7.68 - $ 9.00                       314,904           9.07            $ 8.95               314,904         $ 8.95
    $ 9.06 - $12.23                       292,960           7.14            $11.66               134,626         $11.18
    $12.25 - $16.63                       327,521           6.89            $15.06               191,521         $14.65
    $16.87 - $18.50                       417,995           7.44            $17.34               236,495         $17.33
    $20.00 - $29.00                       593,980           6.49            $22.64               470,132         $23.21
                                        ---------                                              ---------

    $ 1.50 - $29.00                     2,300,969           7.46            $14.73             1,701,287         $14.20
</TABLE>

     Performance-Based   Stock   Options:   Included   in  Apria's   stock-based
compensation  plans are provisions for the granting of  performance-based  stock
options.  In 1998,  Apria  granted such stock option awards to its key employees
and to key members of senior  management.  The options become exercisable over a
period of seven  years and  expire  not  later  than ten years  from the date of
grant.  Accelerated vesting will occur upon the occurrence of certain events and
on  designated  dates on which the average fair market  value of Apria's  common
stock during any period of 90 consecutive  calendar days subsequent to the grant
date shall not have been less than a targeted per share  price.  No options have
vested under the accelerated provisions.

     Also,  the  company  has a Long-Term  Senior  Management  Equity Plan which
provides for the granting of non-statutory stock option awards to key members of
senior  management  at fair  market  value  on the date of the  grant.  The plan
provides for vesting at certain time intervals and accelerated  vesting upon the
occurrence  of certain  events and the  achievement  of certain  cumulative  and
annual earnings per share targets.  Due to the change in control in 1995,  which
caused specific criteria in the plan to be met, half of the outstanding  options
vested. An additional 32% of the outstanding options vested in 1995 based on the
achievement of the targeted  cumulative earnings per share amount. The remaining
18% of the outstanding  options became exercisable in March 1999 upon release of
1998  financial  results.  Since the 1995  change in  control,  no options  were
granted under this plan and no further grants are  authorized.  Options  awarded
under this plan expire 10 years from the date of grant.

     A summary of the status of the Apria's  performance-based  stock options as
of December 31, 1998, 1997 and 1996, and the activity during the years ending on
those dates is presented below:
<TABLE>
                       
<CAPTION>
                                                      1998                            1997                        1996 
                                             -------------------------     ------------------------     -------------------------
                                                          Weighted-                    Weighted-                     Weighted-
                                                           Average                      Average                       Average
                                              Shares    Exercise Price      Shares   Exercise Price       Shares   Exercise Price
                                             ---------  ---------------    --------  ---------------    ---------  ---------------
<S>                                            <C>          <C>             <C>          <C>            <C>            <C>   
Outstanding - beginning of year...........     836,602      $11.24          919,722      $11.24         1,365,400      $11.20
Granted:
  Exercise price equal to fair value......   2,767,000      $ 6.88                -                             -
  Exercise price greater than fair value..     136,500      $ 6.50                -                             -
Exercised.................................    (112,100)     $11.00          (60,440)     $11.15          (416,878)     $11.13
Forfeited.................................    (217,140)     $10.85          (22,680)     $11.30           (28,800)     $11.00
                                             ---------                    ---------                     ---------

Outstanding - end of year.................   3,410,862      $ 7.55          836,602      $11.24           919,722      $11.24
                                             =========                    =========                     =========

Exercisable at end of year................     610,622      $10.53          641,842      $11.25           702,282      $11.24
                                             =========                    =========                     =========


Weighted-average fair value of options
granted during the year...................                   $4.52                            -                            -
</TABLE>

     The following table summarizes  information about  performance-based  stock
options outstanding at December 31, 1998:
<TABLE>
                 
<CAPTION>

                                                        Options Outstanding                         Options Exercisable
                                          ----------------------------------------------        ----------------------------
                                                             Weighted
                                                              Average
                                              Number         Remaining        Weighted-             Number        Weighted-
                                            Outstanding     Contractual        Average            Exercisable      Average
Range of Exercise Prices                  As of 12/31/98  Life (in years)  Exercise Price       As of 12/31/98 Exercise Price
------------------------                  --------------  ---------------  --------------       -------------- --------------
<S>                                          <C>                <C>             <C>                   <C>           <C>   
   $ 4.69 - $ 6.50                           2,300,500          9.57            $ 6.40                12,500        $ 4.69
   $ 6.75 - $ 9.00                             570,000          9.36            $ 8.74               115,000        $ 8.58
   $11.00 - $13.50                             540,362          3.36            $11.16               483,122        $11.15
                                             ---------                                               -------

   $ 4.69 - $13.50                           3,410,862          8.55            $ 7.55               610,622        $10.53
</TABLE>

     Approximately  9,664,000  shares of common  stock are  reserved  for future
issuance upon exercise of stock options under these plans.


NOTE 7 -- CERTAIN OPERATING STATEMENT CAPTIONS

     Employee  Contracts,  Benefit Plan and Claim  Settlements:  In 1996,  Apria
recorded $14,795,000 for employee contract,  benefit plan and claim settlements.
The accrual  included  $5,272,000  for legal  settlements  and related  costs in
excess of amounts  previously accrued and $6,223,000 to cover the settlement and
associated  costs  related to the  termination  of a proposed  merger with Vitas
Healthcare  Corporation.  Also in 1996, a $3,300,000  increase to the settlement
loss on the termination of the Abbey  Healthcare  Group  Incorporated  ("Abbey")
defined benefit pension plan was recorded based on updated actuarial estimates.


NOTE 8 -- INCOME TAXES

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

                                                            December 31, 
                                                            ------------ 
                                                       1998              1997
                                                       ----              ----
                                                           (in thousands)
Deferred tax liabilities:
  Tax over book depreciation .................       $  20,361        $  20,402
  Intangible assets ..........................           1,855              727
  Other, net .................................             364              206
                                                     ---------        ---------
     Total deferred tax liabilities ..........          22,580           21,335

Deferred tax assets:
  Allowance for doubtful accounts ............          24,353           33,150
  Accruals ...................................          17,889           15,041
  Asset valuation reserves ...................           6,240            4,058
  Net operating loss carryforward,
    limited byss.382 .........................         128,285           66,416
  AMT and research credit carryovers .........           4,500            4,500
  Other, net .................................             305              475
                                                     ---------        ---------
     Total deferred tax assets ...............         181,572          123,640
Valuation allowance ..........................        (158,992)        (102,305)
                                                     ---------        ---------
     Net deferred tax assets .................          22,580           21,335
                                                     =========        =========

     At December 31, 1998, Apria's federal operating loss carryforwards ("NOLs")
approximated $380,000,000, expiring in varying amounts in the years 2003 through
2013.  Additionally,  the company has various state operating loss carryforwards
which began to expire in 1997. As a result of an ownership change in 1992, which
met specified  criteria of Section 382 of the Internal Revenue Code,  future use
of a portion of the federal and state  operating  loss  carryforwards  generated
prior to 1992 are each limited to approximately  $5,000,000 per year. Because of
the annual limitation,  approximately $57,000,000 of each of Apria's federal and
state  operating loss  carryforwards  may expire unused.  The net operating loss
carryforward amount included in deferred tax asset excludes such amount.

     In evaluating the  realizability of the NOLs at December 31, 1998,  various
positive  and  negative  factors  pertaining  to  the  existence  of  sufficient
projected  taxable  income  within  the  carryforward  period  were  considered.
Management  believes that its strategies may result in sufficient taxable income
during the carryforward period to utilize Apria's NOLs. However, the achievement
of  future  taxable  income  is  dependent  upon  future  events  and  economic,
regulatory and other factors  largely out of  management's  control.  Therefore,
such future taxable income is not assured. Additionally, in evaluating whether a
valuation  allowance is appropriate,  management also considered the significant
negative  factors  existing at December  31,  1998,  including:  Apria's  recent
historical  financial  and tax losses make it  difficult to conclude a valuation
allowance  is not needed;  Apria has, in recent  years,  been unable to meet its
operating  plans; and while management has implemented new strategies to achieve
profitability  and reported a profit in the fourth quarter of 1998, there can be
no assurances that operating  profits will continue in any future period or that
management will be successful in implementing all its strategies,  including its
growth plans.  In  considering  the positive and negative  factors at this time,
management  concluded  that it is more likely than not that Apria will be unable
to utilize the NOLs except for future  reversals of existing  taxable  temporary
differences,   and   consequently   has   recorded  a  valuation   allowance  of
approximately $158,992,000 at December 31, 1998.

     In the  fourth  quarter  of  1997,  the  company  increased  its  valuation
allowance for deferred tax assets due to recurring  tax losses and  management's
reduced  expectations of future taxable income.  No assumption of future taxable
income was made due to the company's significant cumulative recent losses.

     Income tax (benefit) expense consists of the following:

                                                   Year Ended December 31,   
                                                   -----------------------    
                                                 1998       1997       1996
                                                 ----       ----       ----
                                                       (in thousands)
Current:
  Federal...................................  $      -   $  3,623    $ (7,917)
  State ....................................     2,000      1,964         177
  Foreign ..................................     1,000      1,000           -
                                              --------   --------    --------
                                                 3,000      6,587      (7,740)
Deferred:
  Federal ..................................         -     25,768      14,106
  State ....................................         -      4,195       1,814
                                              --------   --------    --------
                                                           29,963      15,920

Tax benefits credited to paid-in
  capital and goodwill .....................         -          -      10,548
                                              --------    --------   --------
                                              $  3,000   $ 36,550    $ 18,728
                                              ========   ========    ========

     The exercise of stock options  granted  under Apria's  various stock option
plans gives rise to  compensation  which is includable as taxable  income to the
employee and deductible by the company for federal and state tax purposes but is
not recognized as expense for financial reporting  purposes.  The tax benefit of
stock  option  exercises  in 1998 and 1997 is included in Apria's net  operating
loss carryforward and therefore not reflected as a credit to paid-in capital. In
addition,  the  recognition,  for income tax purposes,  of certain  deferred tax
assets relating to acquired  businesses  reduces related  goodwill for financial
reporting purposes.

     Current state income tax expense for all periods  presented  includes state
tax  amounts  accrued and paid on a basis other than income and in 1998 and 1997
includes  the  estimated  settlement  amounts  of state  income  tax  audits  in
progress.  Current  foreign  income tax  expense in 1998 and 1997  includes  the
estimated  foreign taxes payable on the sale of Apria's 15% interest in Omnicare
plc as well as  estimated  settlement  amounts on foreign tax audits in progress
(see Note 2).

     Current  federal  income tax expense in 1997  represents the amount settled
and paid in connection  with an audit of Apria's  federal income tax returns for
tax years ending in 1992 through 1995. The amount paid represents an increase to
certain deferred tax assets for which no benefit was recorded in 1997 because an
offsetting increase to the valuation allowance was recorded.

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

<TABLE>
<CAPTION>
                                                              Year Ended December 31,       
                                                              -----------------------       
                                                           1998        1997        1996
                                                           ----        ----        ----
                                                                 (in thousands)

<S>                                                     <C>         <C>         <C>     
Income tax (benefit) expense at statutory rate.....     $(71,728)   $(82,621)   $ 18,210
Non-deductible merger costs and amortization
  and impairment loss on goodwill .................       21,000      48,783       2,150
State and foreign taxes, net of federal
  benefit and state loss carryforwards ............          422       7,159       1,991
Increase in valuation allowance for
  deferred items previously recognized ............            -      25,768           -
Tax benefit of net operating loss not
  currently recognized ............................       53,306      33,816       3,734
Expense (benefit) of deferred items
  not previously recognized .......................            -           -      (7,914)
Other .............................................            -       3,645         557
                                                        --------    --------    --------
                                                        $  3,000    $ 36,550    $ 18,728
                                                        ========    ========    ========
</TABLE>
     Net income taxes refunded in 1998,  1997 and 1996,  amounted to $3,103,000,
$26,426,000 and $963,000, respectively.


NOTE 9 - PER SHARE AMOUNTS

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

<TABLE>
<CAPTION>
                                                              Year Ended December 31,           
                                                              -----------------------           
                                                           1998         1997       1996
                                                           ----         ----       ----
                                                      (in thousands, except per share data)
Numerator:
<S>                                                     <C>          <C>          <C>    
   (Loss) income before extraordinary charge ......     $(207,938)   $(272,608)   $33,300
   Numerator for basic per share amounts - (loss)
      income attributable to common stockholders ..     $(207,938)   $(272,608)   $33,300

   Numerator for diluted per share amounts - (loss)
      income attributable to common stockholders ..     $(207,938)   $(272,608)   $33,300

Denominator:
   Denominator for basic per share
      amounts - weighted average shares ...........        51,732       51,419     50,811

   Effect of dilutive securities:
      Employee stock options ......................             -            -      1,371
                                                        ---------    ---------    -------
      Dilutive potential common shares ............             -            -      1,371
                                                        ---------    ---------    -------
   Denominator for diluted per share amounts -
       adjusted weighted average shares ...........        51,732       51,419     52,182
                                                        =========    =========    =======

Basic (loss) income per share amounts .............     $   (4.02)   $   (5.30)   $  0.66
                                                        =========    =========    =======
Diluted (loss) income per share amounts ...........     $   (4.02)   $   (5.30)   $  0.64
                                                        =========    =========    =======


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

      Exercise price exceeds average market
         price of common stock ....................         5,433        1,814         44
      Other .......................................            63          468          -
                                                        ---------    ---------    -------
                                                            5,496        2,282         44
                                                        =========    =========    =======

Average exercise price per share that exceeds
   average market price of common stock ...........     $   10.74    $   20.13    $ 27.18
                                                        =========    =========    =======
</TABLE>

     Because net losses were incurred in 1998 and 1997, the impact of options is
antidilutive in those years and there is no difference between basic and diluted
per share amounts.

     For additional disclosure regarding employee stock options, see Note 6.


NOTE 10 -- LEASES

     Apria operates principally in leased offices and warehouse  facilities.  In
addition,  delivery vehicles and office equipment are leased.  Lease terms range
from one to ten years with renewal options for additional  periods.  Many leases
provide that the company pay taxes,  maintenance,  insurance and other expenses.
Rentals are generally  increased annually by the Consumer Price Index subject to
certain maximum amounts defined within individual agreements.

     Apria  occasionally  subleases unused facility space when a lease buyout is
not a viable option.  Sublease income,  in amounts not considered  material,  is
recognized  monthly  and is offset  against  facility  lease  expense.  Net rent
expense  in  1998,  1997 and  1996  amounted  to  $57,670,000,  $52,802,000  and
$46,493,000, respectively.

     In addition,  during 1998,  1997 and 1996,  Apria acquired  patient service
equipment,  information systems and equipment and furnishings totaling $263,000,
$7,235,000 and $12,021,000,  respectively, under capital lease arrangements with
lease terms ranging from two to five years.  Amortization  of the leased patient
service equipment, information systems and equipment and furnishings amounted to
$9,562,000, $8,578,000 and $9,314,000 in 1998, 1997 and 1996, respectively.

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

                                                             December 31, 
                                                             ------------ 
                                                          1998         1997
                                                          ----         ----
                                                            (in thousands)

    Patient service equipment........................   $      -    $  1,930
    Information systems .............................     33,306      33,901
    Equipment and furnishings .......................          -       3,648
                                                        --------    --------
                                                          33,306      39,479
    Less accumulated depreciation ...................    (26,044)    (21,210)
                                                        --------    --------
                                                        $  7,262    $ 18,269
                                                        ========    ========

     Future  minimum  payments,  by year and in the  aggregate,  required  under
noncancellable  operating  leases and capital lease  obligations  consist of the
following at December 31, 1998:

                                                     Capital         Operating
                                                     Leases           Leases
                                                     ------           ------
                                                           (in thousands)

    1999.........................................   $  5,814        $  43,377
    2000.........................................      2,760           36,033
    2001.........................................          4           28,490
    2002.........................................          -           19,614
    2003.........................................          -           11,770
    Thereafter...................................          -           23,458
                                                    --------        ---------
                                                       8,578         $162,742
    Less interest included in 
      minimum lease payments.....................       (382)
                                                    --------
    Present value of minimum lease payments......      8,196
    Less current portion.........................     (5,501)
                                                    --------
                                                    $  2,695
                                                    ========

NOTE 11 -- EMPLOYEE BENEFIT PLANS

     Apria has a 401(k) defined  contribution  plan,  whereby eligible employees
may contribute up to 16% of their annual basic earnings. The company matches 50%
of the first 8% of employee contributions. Total expenses related to the defined
contribution  plan were $3,539,000,  $3,791,000 and $4,370,000 in 1998, 1997 and
1996, respectively.

     Apria had a defined benefit pension plan, covering substantially all former
Abbey  employees,   which  was  terminated  in  1995.  In  connection  with  the
termination,  Apria  recognized  costs of $3,300,000 in 1996.  All benefits were
distributed to participants in 1997.


NOTE 12 -- COMMITMENTS AND CONTINGENCIES

     Litigation:  Apria is engaged in the defense of certain claims and lawsuits
arising out of the ordinary  course and conduct of its business,  the outcome of
which are not  determinable  at this time.  In the  opinion of  management,  any
liability  that might be incurred by the company  upon the  resolution  of these
claims and lawsuits will not, in the aggregate,  have a material  adverse effect
on Apria's consolidated  results of operations and financial position.  In 1998,
1997 and 1996,  certain  claims and  lawsuits  were settled and the company paid
amounts,  including  the cost of  defense,  totaling  approximately  $2,125,000,
$3,277,000  and  $16,619,000,  respectively.  Charges  to income of  $6,590,000,
$2,760,000 and $11,533,000 were taken in 1998, 1997 and 1996,  respectively,  to
provide for  probable  losses  related to matters  arising in each period and to
revise estimates for matters arising in previous  periods.  Management is unable
to estimate the range of possible loss for all other claims and lawsuits.

     Apria and certain of its present and former officers  and/or  directors are
defendants in a class action lawsuit,  In Re Apria  Healthcare  Group Securities
Litigation,  filed  in the U.S.  District  Court  for the  Central  District  of
California,  Southern  Division  (Case  No.  SACV98-217  GLT).  This  case  is a
consolidation  of three similar  class  actions filed in March and April,  1998.
Pursuant to a court order dated May 27,  1998,  the  plaintiffs  in the original
three class  actions  filed a  Consolidated  Amended  Class Action  Complaint on
August 6, 1998. The amended complaint purports to establish a class of plaintiff
shareholders who purchased Apria's common stock between May 22, 1995 and January
20,  1998.  No class has been  certified  at this time.  The  amended  complaint
alleges,  among other things,  that the defendants made false and/or  misleading
public  statements  regarding Apria and its financial  condition in violation of
federal  securities laws. The amended complaint seeks  compensatory and punitive
damages as well as other relief.

     Two similar class actions were filed during July 1998 in Superior  Court of
California for the County of Orange:  Schall v. Apria  Healthcare Group Inc., et
al. (Case No. 797060) and Thompson v. Apria  Healthcare Group Inc., et al. (Case
No. 797580).  These two actions were consolidated by a court order dated October
22, 1998. The parties have agreed that a new and first amended complaint will be
filed.  Apria  anticipates  that  allegations  similar to those  asserted in the
amended  complaint  in the federal  action will be asserted in the  consolidated
state  action,  although  the claims will be founded on state law, as opposed to
federal law.

     Apria believes that it has meritorious  defenses to the plaintiffs' claims,
and it intends to vigorously  defend itself in both the federal and state cases.
In the opinion of Apria's  management,  the ultimate  disposition of these class
actions  will not have a  material  adverse  effect on the  company's  financial
condition or results of operations.

     Purchase commitments:  On September 1, 1994, Apria entered into a five-year
agreement,  which was  subsequently  amended in June 1996,  to purchase  medical
supplies totaling $132,000,000, with annual purchases ranging from $7,500,000 in
the first year to  $36,500,000  in the third  through  fifth  years.  Failure to
purchase at least 90% of the annual  commitment would result in a penalty of 10%
of the  difference  between  the annual  commitment  and the  actual  purchases,
beginning  with the  12-month  period  ended  August  31,  1996.  In late  1997,
management  made the strategic  decision to exit the  low-margin  medical supply
business and has been working with the vendor to restructure  the agreement.  In
the interim, the company continues to purchase needed medical supplies from this
vendor, subject to the pricing established under the old agreement.  The company
failed to meet the minimum  purchase  commitment  for the 12-month  period ended
August 31,  1998,  and,  consequently,  incurred a liability  for  penalties  of
$1,180,000 on the purchase shortfall.

     Certain  Concentrations:  Approximately 59% of Apria's revenues are derived
from the provision of respiratory  therapy  services,  a significant  portion of
which is reimbursed under the federal  Medicare  program.  Effective  January 1,
1998,  reimbursement  for  home  oxygen  services  was  reduced  by 25%  with an
additional  5%  reduction  in 1999  and  subsequent  years.  Apria's  management
estimates  the impact of the  additional  5%  reduction  on 1999  revenues to be
approximately  $11,000,000.  Also  effective  January  1, 1998,  Consumer  Price
Index-based  reimbursement increases on home medical equipment were frozen until
2002.

     Apria  currently  purchases   approximately  40%  of  its  patient  service
equipment and supplies from four suppliers.  Although there are a limited number
of suppliers,  management  believes that other  suppliers  could provide similar
products on comparable terms.  However, a change in suppliers could cause delays
in service  delivery and possible losses in revenue which could adversely affect
operating results.

     Other:  Since June 1998,  Apria has received a total of nine subpoenas from
the U.S. Attorneys' offices in Sacramento and San Diego, California,  requesting
documents related to the company's billing  practices.  The documents  requested
include  those  located  at  Apria's  corporate   headquarters  in  Costa  Mesa,
California, and offices in San Diego and Sacramento, California, and Canonsburg,
Pennsylvania.  Apria has  substantially  completed the process of complying with
the subpoenas.

     Apria has  experienced  problems as a result of errors and  deficiencies in
supporting documentation affecting a portion of its billings, including billings
under the Medicare and Medicaid programs. If the U.S. Department of Justice were
to conclude that such errors and deficiencies  constituted  criminal violations,
or were to conclude that such errors and deficiencies resulted in the submission
of false  claims to federal  healthcare  programs,  Apria  could  face  criminal
charges and/or civil claims,  administrative sanctions and penalties for amounts
that  would be highly  material  to its  business,  results  of  operations  and
financial condition,  including exclusion of Apria from participation in federal
healthcare  programs.  Such amounts could include  claims for treble damages and
penalties  of up to  $10,000  per false  claim  submitted  by Apria to a federal
healthcare  program. It is the company's position that the assertion of criminal
charges  or the  assertion  of any such  claims  would be  unwarranted.  If such
charges or claims were  asserted,  Apria believes that it would be in a position
to assert  numerous  defenses.  However,  no assurance can be provided as to the
outcome of any such possible proceedings.

     Presently,  Apria is unaware of what  claims or  proceedings,  if any,  the
government may be contemplating with respect to these subpoenas.

     As disclosed in a  Registration  Statement  on Form S-3  (Registration  No.
333-68031)  filed with the  Securities  and Exchange  Commission on November 25,
1998 in  connection  with a proposed  offering of 10%  convertible  subordinated
debentures,   the  company  entered  into  a  Standby  Purchase  Agreement  with
Relational  Investors,  LLC. Under the Standby Purchase Agreement,  in the event
the proposed debenture offering is consummated,  Relational Investors,  LLC will
receive from Apria a  $1,000,000  standby fee as well as  reimbursement  for all
costs and  expenses  (including  legal  fees)  incurred in  connection  with the
proposed offering.


NOTE 13 - SERVICE/PRODUCT LINE DATA

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

                                           Year Ended December 31,           
                                           -----------------------           
                                      1998         1997           1996
                                      ----         ----           ----
                                              (in thousands)

Respiratory ................        $552,725    $  605,387    $  594,362
Infusion therapy ...........         211,176       281,178       293,321
HME/Other ..................         169,892       294,129       293,460
                                    --------    ----------    ----------
     Total net revenues             $933,793    $1,180,694    $1,181,143
                                    ========    ==========    ==========


 NOTE 14 -- SELECTED QUARTERLY FINANCIAL DATA (Unaudited)


                                                   QUARTER
                                                   -------
                                   First      Second       Third       Fourth
                                   -----      ------       -----       ------
                                       (in thousands, except per share data)

1998
Net revenues ................    $250,538    $240,627    $ 219,367    $ 223,261
Gross profit ................     164,680     159,830      122,371      156,217
Operating income (loss) .....       5,375       3,109     (180,378)      13,872
Net (loss) income ...........    $ (6,607)   $ (8,956)   $(194,701)   $   2,326


Net (loss) income per share .    $  (0.13)   $  (0.17)   $   (3.76)   $    0.04
Net (loss) income per share -
    assuming dilution .......    $  (0.13)   $  (0.17)   $   (3.76)   $    0.04

1997
Net revenues ................    $313,863    $295,735    $ 304,356    $ 266,740
Gross profit ................     209,184     167,272      199,706      153,350
Operating income (loss) .....      41,910     (57,144)      28,474     (198,905)
Net income (loss) ...........    $ 19,240    $(69,876)   $  16,186    $(238,158)


Net income (loss) per share .    $   0.38    $  (1.36)   $    0.31    $   (4.62)
Net income (loss) per share -
    assuming dilution .......    $   0.37    $  (1.36)   $    0.31    $   (4.62)

     Third Quarter - 1998:  The operating  results for the third quarter of 1998
include adjustments to reduce revenue and accounts receivable by $14,642,000 and
to  increase  bad debt  expense  and the  allowance  for  doubtful  accounts  by
$12,065,000.  During the third quarter of 1998, a new  management  team reviewed
the effect of certain procedural initiatives and system enhancements  introduced
earlier  in the  year to  improve  billing  procedures  and  reduce  write-offs.
Although cash collections in excess of trailing revenues were strong, write-offs
increased from the second quarter.  Also,  specific payor reviews indicated that
collectibility of certain  receivables was in question,  particularly those aged
in excess  of 180  days.  Based  upon  these  reviews,  a  definitive  change in
collection  strategy  was  implemented  which  shifted the focus from efforts to
collect  aged  accounts  receivable  to the more  current  outstanding  amounts.
Management  believes a concerted  effort that focuses on current  accounts  will
better utilize the company's  resources to collect the  receivables  before they
age, when they undoubtedly become more difficult to collect. As a result of this
change in collection  procedure and policy,  management  increased its allowance
for account  balances over 180 days.  The  adjustment to revenue  represents the
estimated amount of accounts  receivable that will ultimately be written off due
to reasons  unrelated to credit risk. Also recorded was a provision for specific
accounts identified as uncollectible  totaling $1,529,000 and an increase to the
allowance  for doubtful  accounts  related to the  infusion  sale and the exited
businesses totaling $9,128,000.

     During the third  quarter  of 1998,  Apria sold its  infusion  business  in
California  and exited the  infusion  business  in certain  geographic  markets.
Charges  of  $7,263,000  related  to  the  wind-down  of  unprofitable  infusion
operations  were  recorded  in  addition  to a  $3,798,000  loss  on sale of the
California business.

     One of the actions taken as part of  management's  new strategic  direction
was the termination of the project to implement an enterprise  resource planning
(ERP)  system.   Accordingly,   Apria  wrote-off   related  software  and  other
capitalized  costs of  $7,548,000  in the third  quarter of 1998. As part of the
decision to terminate the ERP project,  management evaluated its current systems
to  determine  their  long-term  viability in the context of the  company's  new
overall strategic direction. It was determined that the company was at some risk
in continuing to run the infusion  billing system on its current  platform which
is no longer  supported by the computer  industry.  To mitigate  this risk,  the
company is currently  converting the infusion system to the IBM/AS400  operating
platform  on which  the  respiratory/home  medical  equipment  system  currently
operates.  Apria is also proceeding with a number of enhancements to the systems
which  renders  certain  previously-developed  modules  obsolete.  Additionally,
pharmacy and branch  consolidations  and closures rendered a variety of computer
equipment obsolete. Due to its age and technological obsolescence, it was deemed
to have no  future  value.  As a result  of these  actions,  Apria  recorded  an
impairment charge of $11,843,000 at September 30, 1998.

     Based on  management's  third quarter  evaluation of the carrying  value of
intangible assets, an impairment charge of $76,223,000 was recorded.  The charge
reduced  the  carrying  value of the  company's  intangible  assets  to  reflect
management's  estimate of fair value.  Also included in the impairment charge is
the write-off of $4,771,000 in intangible  assets primarily  associated with the
exit of the infusion business in certain areas (see Note 4).

     In the  third  quarter  of  1998,  Apria  also  recorded  charges  totaling
$3,939,000 for severance and other employee  costs,  $5,400,000 to settle issues
related to several  procurement  contracts,  $3,476,000 to provide for estimated
oxygen cylinder losses,  $2,841,000 to write-off  obsolete inventory and patient
service   equipment  and  $2,068,000   for  lease   liability  due  to  facility
consolidation activities.

     Fourth Quarter - 1997: The operating results for the fourth quarter of 1997
included  adjustments to reduce  revenue and accounts  receivable by $20,000,000
and to increase bad debt  expense and the  allowance  for  doubtful  accounts by
$6,423,000.  The  adjustment  to revenue  represented  the  estimated  amount of
year-end accounts  receivable that would be written off due to reasons unrelated
to credit risk.  Both  adjustments  resulted  primarily from  refinements to the
company's  estimation  procedures  which  were made as a result of  management's
year-end  analysis of accounts  receivable.  Specifically,  tests of  subsequent
realization and reviews of patient billing files at selected  billing  locations
indicated the need to increase the percentages  reserved for certain  categories
of aged accounts receivable. Additionally, payor-specific reviews were performed
and  allowances  estimated for certain  managed care payors that were showing an
increasing tendency to accumulate large patient balances.

     An adjustment of $20,225,000  was recorded in the fourth quarter of 1997 to
write down the carrying value of  internally-developed  software  resulting from
management's  decision  to  replace  the  company's  internally-developed  field
information system. In connection with management's  evaluation of the company's
internally-developed  software, a review was conducted of the company's computer
hardware,  including  telecommunications  equipment.  Equipment  with a carrying
value of $6,556,000 was identified as functionally  obsolete or no longer in use
and was written off (see Note 3).

     Based  on  management's  year-end  evaluation  of the  carrying  value  and
amortization  periods of intangible assets, an impairment charge of $133,542,000
was  recorded  in the fourth  quarter of 1997 to reduce  the  carrying  value of
recorded goodwill to management's estimate of fair value (see Note 4).

     The fourth  quarter  of 1997 also  includes a  $10,100,000  adjustment  for
additional  shortages  of  patient  service  equipment  and  inventory  based on
supplemental  physical inventory  procedures performed at a sampling of branches
in the fourth quarter.  The procedure indicated continuing inventory and patient
service  equipment  shortages,  therefore  management  estimated and recorded an
increase to the related  reserves.  In  addition,  management's  fourth  quarter
decision  to  terminate  approximately  524  employees  resulted  in a  year-end
severance  accrual  of  $6,000,000.  Other  fourth  quarter  charges  included a
$2,151,000  accrual  of  incentive  compensation,   related  to  fourth  quarter
initiatives,  a  $2,298,000  accrual  of costs  associated  with the  closure of
certain facilities and the company's  ApriaDirect Clinical program, a $2,000,000
accrual of  interest on a tax  settlement  and  certain  excise  taxes and other
miscellaneous accruals of $1,250,000.

     Apria also recorded an  adjustment to increase its valuation  allowance for
net  deferred tax assets due to recurring  tax losses and  management's  reduced
expectations for 1998 (see Note 8).

     Second Quarter - 1997:  The second quarter of 1997 included  adjustments to
reduce revenue and accounts  receivable by $20,000,000  and to increase bad debt
expense and the allowance for doubtful accounts by $55,000,000.  The adjustments
resulted from the lack of improvement  in both the aging of accounts  receivable
and the length of  collection  periods.  Management  expected the impact of 1996
computer  system  conversions  and the high  turnover  rate  among  billing  and
collection  personnel  to be  substantially  reversed  by the  middle  of  1997.
However,  the dollar amount and percentage of accounts aged over 180 days at May
31, 1997 remained comparable to the December 31, 1996 amount and percentage, and
days sales outstanding decreased by only five days. Additionally, Apria had just
changed its  business  strategy to review its managed  care  contracts  and exit
those not meeting profitability standards and to exit unprofitable service lines
such  as  supplies  and  nursing  that  were  attractive  to many  managed  care
customers. These strategies put Apria's relationship with certain of its managed
care  customers  in  jeopardy,  which  when  coupled  with  the  company's  poor
experience  in  collecting  receivables  with managed  care  payors,  heightened
management's concerns. Due to the managed care issues and the failure to realize
the expected  increases in collections and improvement in the aging,  management
increased its allowance  estimate for accounts aged over 180 days to provide for
write-offs of older accounts expected to be taken in the ensuing months. The bad
debt adjustment also provided for an increased  allowance  estimate for accounts
aged less than 180 days,  necessitated  by billing and  collection  difficulties
that  continued   into  early  1997.  The  provision  for  revenue   adjustments
represented  management's  estimate  of accounts  originated  in 1997 that would
ultimately be written off for reasons  unrelated to credit.  The  adjustment was
necessitated by the continuing incidence of billing problems and long collection
periods which caused  increased  levels of unidentified  revenue  adjustments to
accumulate in accounts receivable.

     The  second  quarter  of 1997 also  included a  $23,000,000  adjustment  to
provide for shortages in patient service equipment and inventory. The amount was
estimated based on the preliminary  results of asset  verification  and physical
inventory  procedures  performed  in the  second  quarter.  The  adjustment  was
sufficient  to  cover  actual  write-offs   resulting  from  the  third  quarter
completion  of  the  company's  asset   verification   and  physical   inventory
procedures.  The  shortages  were  primarily  due to untimely  inventory  relief
processes  that were  among the  residual  effects  of the 1995 and 1996  system
conversions and related high employee turnover.

<PAGE>
<TABLE>
                           APRIA HEALTHCARE GROUP INC.

                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                                 (in thousands)

<CAPTION>
                                                                            Additions 
                                                                    ------------------------
                                                        Balance at  Charged to    Charged to                Balance at
                                                        Beginning   Costs and       Other                     End of
                                                        of Period    Expenses      Accounts     Deductions    Period 
                                                        ---------    --------      --------     ----------    ------ 
<S>                                                     <C>          <C>         <C>             <C>          <C>
Year ended December 31, 1998 
---------------------------- 
Deducted from asset accounts:
   Allowance for revenue adjustments ..............     $ 38,058     $      -     $ 18,302 (b)   $ 17,960     $ 38,400
   Allowance for doubtful accounts ................       58,413       75,319           71 (a)     98,239       35,564
   Reserve for inventory shortages ................        6,373        8,598       (2,000)(c)      5,311        7,660
   Reserve for patient service
     equipment shortages ..........................        3,900       14,707        2,000 (c)     12,470        8,137
                                                        --------     --------     --------       --------     --------
                  Totals ..........................     $106,744     $ 98,624     $ 18,373       $133,980     $ 89,761
                                                        ========     ========     ========       ========     ========

Year ended December 31, 1997
----------------------------
Deducted from asset accounts:
   Allowance for revenue adjustments ..............     $ 32,300     $      -     $ 40,000 (b)    $ 34,242     $ 38,058
   Allowance for doubtful accounts ................       73,809      121,908        1,697 (a)     139,001       58,413
   Reserve for inventory shortages ................        1,825       26,716            -          22,168        6,373
   Reserve for patient service
     equipment shortages ..........................        4,812        8,584            -           9,496        3,900
                                                        --------     --------     --------        --------     --------
                  Totals ..........................     $112,746     $157,208     $ 41,697        $204,907     $106,744
                                                        ========     ========     ========        ========     ========


Year ended December 31, 1996
----------------------------
Deducted from asset accounts:
   Allowance for revenue adjustments ..............     $      -     $      -     $ 32,300 (b)    $      -     $ 32,300
   Allowance for doubtful accounts ................       86,567       67,040          608 (a)      80,406       73,809
   Reserve for inventory shortages ................        5,754        3,013            -           6,942        1,825
   Reserve for patient service
     equipment shortages ..........................       11,860        7,500            -          14,548        4,812
                                                        --------     --------     --------        --------     --------
                  Totals ..........................     $104,181     $ 77,553     $ 32,908        $101,896     $112,746
                                                        ========     ========     ========        ========     ========
</TABLE>

(a)  Includes amounts added in conjunction with business acquisitions.
(b)  Amount  charged  against  net  revenues.  See  Note 12 to the  Consolidated
     Financial Statements.
(c)  Transfers between reserves.


<PAGE>



                                   SIGNATURES

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

Dated:  April 5, 1999

                                               APRIA HEALTHCARE GROUP INC.

                                               By:   /s/ PHILIP L. CARTER
                                                  ------------------------------
                                                  Chief Executive Officer

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

     Signature                       Title                            Date
     ---------                       -----                            ----

/s/ PHILIP L. CARTER     
-----------------------
Philip L. Carter             Chief Executive Officer               April 5, 1999


/s/ JOHN C. MANEY
-----------------------
John C. Maney                Executive Vice President and          April 5, 1999
                             Chief Financial Officer
                             (Principal Financial Officer)

/s/ JAMES E. BAKER       
-----------------------
James E. Baker               Vice President, Controller            April 5, 1999
                             (Principal Accounting Officer)


/s/ RALPH V. WHITWORTH
-----------------------
Ralph V. Whitworth           Director, Chairman of the Board       April 5, 1999


/s/ DAVID H. BATCHELDER  
-----------------------
David H. Batchelder          Director                              April 5, 1999


/s/ DAVID L. GOLDSMITH  
-----------------------
David L. Goldsmith           Director                              April 5, 1999


/s/ LEONARD GREEN        
-----------------------
Leonard Green                Director                              April 5, 1999


/s/ RICHARD H. KOPPES    
-----------------------
Richard H. Koppes            Director                              April 5, 1999


/s/ PHILIP R. LOCHNER
-----------------------
Philip R. Lochner            Director                              April 5, 1999


/s/ BEVERLY B. THOMAS
-----------------------
Beverly B. Thomas            Director                              April 5, 1999


/s/ H.J. MARK TOMPKINS
-----------------------
H.J. Mark Tompkins           Director                              April 5, 1999

<PAGE>
<TABLE>

                                  EXHIBIT INDEX
<CAPTION>
Exhibit
Number                            Description                                                                         Page/Ref.
------                            -----------                                                                         ---------
<S>      <C>                                                                                                             <C>  
3.1      Restated Certificate of Incorporation of Registrant.                                                            (f)

3.2      Certificate of Ownership and Merger merging Apria  Healthcare Group Inc. into Abbey and amending Abbey's
         Restated Certificate of Incorporation to change Abbey's name to "Apria Healthcare Group Inc."                   (i)

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

4.1      Form of 9-1/2% Senior Subordinated Note due 2002.                                                               (b)

4.2      Indenture dated November 1, 1993, by and among Abbey, certain Subsidiary  Guarantors defined therein and
         U.S. Trust Company of California, N.A.                                                                          (d)

4.3      Shareholder  Rights  Agreement  dated  February  8,  1995,  between  Abbey  and  U.  S.  Stock  Transfer
         Corporation, as Rights Agent.                                                                                   (e)

4.4      Specimen Stock Certificate of the Registrant.

4.5      Certificate of Designation of the Registrant.                                                                   (f)

4.6      Amendment  No. 1 to the Rights  Agreement  dated as of June 30, 1997, by and among  Registrant,  Norwest
         Bank Minnesota, N.A. and U.S. Stock Transfer Corporation.                                                       (p)

10.1     1991 Stock Option Plan.                                                                                         (a)

10.2     Schedule of Registration Procedures and Related Matters.                                                        (c)

10.3     401(k) Savings Plan, restated effective October 1, 1993, amended December 28, 1994.                             (k)

10.4     Stock Incentive Plan, dated June 28, 1995.                                                                      (g)

10.5     Amended and Restated 1992 Stock Incentive Plan.                                                                 (k)

10.6     Amendment Number Two to the 401(k) Savings Plan, dated June 28, 1995.                                           (l)

10.7      Building Lease, dated July 21, 1995, between C.J. Segerstrom & Sons, a California general  partnership,
         and Apria  Healthcare,  Inc.  for 10  locations  within  Harbor  Gateway  Business  Center,  Costa Mesa,        (l)
         California.

10.8     Assignment,  Assumption and Consent Re: Lease (dated December 1, 1988, between C.J. Segerstrom & Sons, a
         California  general  partnership,  and Abbey  Medical,  Inc. for premises  located within Harbor Gateway
         Business Center, Costa Mesa, California),  executed by Abbey Medical, Inc. and Apria Healthcare, Inc. as
         of July 21, 1995 and executed by C.J.  Segerstrom & Sons, a California general  partnership,  as of July        (j)
         24, 1995.

10.9     First Amendment to Complete  Restatement of Lease Amendments and Amendment to Building Lease, dated July
         24, 1996, between C.J. Segerstrom & Sons, a California general partnership,  and Apria Healthcare, Inc.,
         amending the Building Lease, dated July 21, 1995, between the parties.                                          (n)

10.10    Assignment and  Assumption of Lease  (Building  Lease,  dated July 21, 1995,  between C.J.  Segerstrom &
         Sons,  a California  general  partnership,  and Apria  Healthcare,  Inc.),  dated as of January 1, 1996,
         between Apria Healthcare, Inc. and Registrant.                                                                  (n)

10.11    Amendment Number Three to the 401(k) Savings Plan, dated January 1, 1996.                                       (l)

10.12    Amendment 1996-1 to the 1991 Stock Option Plan, dated October 28, 1996.

10.13    Amendment 1996-1 to the Amended and Restated 1992 Stock Incentive Plan, dated October 28, 1996.

10.14    Executive Severance Agreement dated June 28, 1997 between Registrant and James E. Baker.

10.15    Executive Severance Agreement dated June 28, 1997, between Registrant and Lisa M. Getson.                      (o) 
                                                                                                                        

10.16    Executive Severance Agreement dated June 28, 1997, between Registrant and Robert S. Holcombe.                  (o) 
                                                                                                                        

10.17    Executive Severance Agreement dated June 28, 1997, between Registrant and Lawrence Mastrovich.


10.18    Executive Severance Agreement dated June 28, 1997, between Registrant and George J. Suda.

10.19    Executive Severance Agreement dated June 28, 1997, between Registrant and Dennis E. Walsh.                     (o)
                                                                                                                        

10.20    Resignation  and General  Release  Agreement  dated January 19, 1998,  between  Registrant and Jeremy M.
         Jones.                                                                                                         (s)

10.21    Security Agreement dated March 13, 1998, between Registrant,  Apria Healthcare, Inc., and certain of its
         subsidiaries and Bank of America National Trust & Savings Association.                                         (s)

10.22    First  Amendment  to  Security  Agreement  dated April 15,  1998,  among  Registrant  and certain of its
         subsidiaries,  Bank of America  National Trust & Savings  Association,  NationsBank  of Texas,  N.A. and
         other financial institutions party to the Credit Agreement.                                                    (s)

10.23    Employment Agreement dated May 5, 1998, between Registrant and Philip L. Carter.                               (u)

10.24    Non-qualified Stock Option Agreement dated May 5, 1998, between Registrant and Philip L. Carter.

10.25    Amended and Restated 1997 Stock Incentive Plan, dated February 27, 1997, as amended through June 30, 1998.

10.26    Employment Agreement dated October 19, 1998, between Registrant and John C. Maney.

10.27    Standby Purchase Agreement dated November 3, 1998, between Registrant and Relational  Investors,  LLC, on
         behalf of the entities named therein.                                                                          (v)

10.28    Registration Rights Agreement dated November 3, 1998, between Registrant and Relational  Investors,  LLC,
         on behalf of the entities named therein.                                                                       (v)

10.29    Amended and Restated  Credit  Agreement  dated November 13, 1998,  between  Registrant and certain of its
         subsidiaries  and  Bank  of  America  National  Trust  and  Savings  Association,   and  other  financial
         institutions party to the Credit Agreement.                                                                    (v)

10.30    Amended and Restated  Guaranty dated November 13, 1998,  made by various  Guarantors  defined  therein in
         favor of Bank of America National Trust and Savings Association.

10.31    Second  Amendment to Security  Agreement  dated  November 13, 1998,  among  Registrant and certain of its
         subsidiaries and Bank of America National Trust and Savings Association and other financial  institutions
         party to the Credit Agreement.

10.32    1998 Non-qualified Stock Incentive Plan, dated December 15, 1998.

10.33    Amendment to Employment Agreement dated January 1, 1999, between Registrant and Philip L. Carter.

10.34    First  Amendment to Amended and Restated  Credit  Agreement  and Consent  dated  January 15, 1999,  among
         Registrant and certain of its  subsidiaries,  Bank of America National Trust and Savings  Association and
         other financial institutions party to the Credit Agreement.

10.35    Second  Amendment to Amended and Restated Credit  Agreement dated February 23, 1999, among Registrant and
         certain of its subsidiaries,  Bank of America National Trust and Savings  Association and other financial
         institutions party to the Credit Agreement.

10.36    Amended and Restated Executive  Severance Agreement dated February 26, 1999, between Registrant and Frank
         Bianchi.

10.37    Amended and Restated  Executive  Severance  Agreement  dated  February 26, 1999,  between  Registrant and
         Michael R. Dobbs.

10.38    Amended and Restated  Employment  Agreement dated February 26, 1999,  between  Registrant and Lawrence M.
         Higby.

16.1     Letter dated July 8, 1998 from Ernst & Young, LLP addressed to the Securities and Exchange Commission.         (t)

21.1     List of Subsidiaries.

23.1     Consent of Ernst & Young  LLP, Independent Auditors.

23.2     Consent of Deloitte & Touche LLP, Independent Auditors.

27.1     Financial Data Schedule.
</TABLE>

    REFERENCES -- DOCUMENTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION

(a)  Incorporated   by   reference  to   Registration   Statement  on  Form  S-1
     (Registration No. 33-44690), as filed on December 23, 1991.

(b)  Incorporated   by   reference  to   Registration   Statement  on  Form  S-1
     (Registration No. 33-69078), as filed on September 17, 1993.

(c)  Incorporated   by   reference  to   Registration   Statement  on  Form  S-4
     (Registration No. 33-69094), as filed on September 17, 1993.

(d)  Incorporated  by reference to Annual Report on Form 10-K for the year ended
     January 1, 1994.

(e)  Incorporated  by reference to Current Report on Form 8-K, as filed on March
     20, 1995.

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

(g)  Incorporated   by   reference  to   Registration   Statement  on  Form  S-8
     (Registration No. 33-94026), as filed on June 28, 1995.

(h)  Incorporated  by  reference  to final joint proxy  statement/prospectus  as
     filed pursuant to Rule 424(b) on May 26, 1995.

(i)  Incorporated  by reference to Quarterly  Report on Form 10-Q dated June 30,
     1995, as filed on August 14, 1995.

(j)  Incorporated by reference to Quarterly  Report on Form 10-Q dated September
     30, 1995, as filed on November 14, 1995.

(k)  Incorporated   by   reference  to   Registration   Statement  on  Form  S-8
     (Registration No. 33-80581), as filed on December 19, 1995.

(l)  Incorporated  by reference to Annual Report on Form 10-K for the year ended
     December 31, 1995.

(m)  Incorporated by reference to  Registration  Statement on Amendment No. 1 to
     Form S-4 (Registration No. 333-09407), as filed on August 27, 1996.

(n)  Incorporated  by reference to Annual Report on Form 10-K for the year ended
     December 31, 1996.

(o)  Incorporated  by reference to Quarterly  Report on Form 10-Q dated June 30,
     1997, as filed on August 14, 1997.

(p)  Incorporated by reference to Registration  Statement on Form 8-A/A as filed
     on July 10, 1997.

(q)  Incorporated by reference to Quarterly  Report on Form 10-Q dated September
     30, 1997, as filed on November 14, 1997.

(r)  Incorporated   by   reference  to   Registration   Statement  on  Form  S-8
     (Registration No. 333-42775), as filed on December 19, 1997.

(s)  Incorporated  by reference to Annual Report on Form 10-K for the year ended
     December 31, 1997.

(t)  Incorporated  by reference to Current  Report on Form 8-K, as filed on July
     6, 1998.

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

(v)  Incorporated by reference to Quarterly  Report on Form 10-Q dated September
     30, 1998, as filed on November 16, 1998.



                               COPIES OF EXHIBITS

Copies of exhibits will be provided upon written request and payment of a fee of
$.25 per page plus  postage.  The  written  request  should be  directed  to the
Financial  Reporting  Department (Attn: Ms. Donna Draper), at the address of the
company set forth on the first page of this Form 10-K.