UNITED STATESSECURITIES AND EXCHANGE
COMMISSIONWashington, D.C.  20549

FORM 10-K/AAmendment No. 1

|                                           
|-------------------------------------------
|[X]                                        
|For the Fiscal Year Ended December 31, 2005

OR

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

Commission File Number:
1-14316

APRIA HEALTHCARE GROUP INC.
(Exact Name of Registrant as Specified in Its Charter)

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

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

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

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

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

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

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

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

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

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

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

As of June 30, 2005 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 $34.64 per share as reported by the New York Stock Exchange, was
approximately $1,698,295,488. As of March 6, 2006, there were 59,352,414
shares of the Registrants common stock issued and 42,387,229 shares outstanding,
par value $0.001, which is the only class
of common stock of the Registrant.

Documents Incorporated by Reference:

The information called for by Part III is
incorporated by reference to the Definitive Proxy Statement for the 2006 Annual
Meeting of Stockholders of the Registrant which will be filed with the Securities
and Exchange Commission not later than 120 days after December 31, 2005.

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EXPLANATORY NOTE

Apria Healthcare Group Inc. is filing this Amendment No.
1 (this Amendment) to its Annual Report on Form 10-K for the fiscal year ended
December 31, 2005 which was originally filed with the Securities and Exchange Commission
on March 16, 2006 (Original Annual Report) to correct the following typographical
errors in the Consolidated Financial Statements:

|(1) | Consolidated Statements of Stockholders Equity and Comprehensive Income
           revised the December 31, 2004 total of Additional Paid-in Capital from
          $439,534 to $439,544 (dollars in thousands).
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Consolidated Statements of Cash Flows  revised the total of Net Cash
          Provided by Financing Activities for the Year ended December 31, 2003 from
          $12,901 to $112,901 (dollars in thousands).
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Notes to the Consolidated Financial Statements  Note 3, last table 
          revised the number of shares exercisable in the $6.50 to $10.75 range from
          25,588 to 28,588.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

This Amendment amends and restates the entire Form 10-K
for the prospective readers convenience. This Amendment does not reflect events
occurring after the filing of the Original Annual Report.  With the exception of the
foregoing corrections of typographical errors and a limited number of other immaterial
corrections, no other information in the Form 10-K for the fiscal year ended December 31, 2005
has been corrected or amended in this Form 10-K/A.

Pursuant to Rule 12b-15 promulgated under the Securities
Exchange Act of 1934, as amended, the certifications pursuant to Section 302 and Section
906 of the Sarbanes-Oxley Act of 2002, filed and furnished, respectively, as exhibits to
the Original Annual Report, have been re-executed and re-filed as of the date of this
Amendment. Also, Exhibit 23.1, Consent of Deloitte & Touche LLP, has been filed with
this amendment.  No other exhibits to the Original Annual Report are being re-filed with this
Amendment.

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APRIA HEALTHCARE GROUP INC.

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

---

Forward Looking Statements

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

PART I

ITEM 1.      BUSINESS

Apria Healthcare Group
Inc. provides a broad range of home healthcare services through approximately 500 branch
locations that serve patients in all 50 states. Apria has three major service lines: home
respiratory therapy, home infusion therapy and home medical equipment. The following table
provides examples of the services and products in each:

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

Strategy

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

| |  | Growth - Apria's  primary  focus is to restore  strong  organic  sales  growth  following a decline in revenue
during the third and fourth  quarters of 2005 and to increase  market  share in its core  service  lines.
The company will continue to invest in service line extensions.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Productivity  - Apria  continues to leverage its nationwide  infrastructure  to reduce costs by enhancing best
  practices and systems investments.                                                                                                                                     
| |  | Service - Apria differentiates itself from the competition by setting a high standard for customer service.                                                                                                                                                                             
| |  | People - Apria  recruits,  develops and advances  individuals  who are leaders in order to respond to changing
 market conditions and to maximize sales and earnings growth.                                                                                                            

Service Lines

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

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

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

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

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

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

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

Apria derives its
respiratory therapy revenues from the provision of oxygen
systems, ventilators, non-invasive positive pressure ventilators, continuous positive and
bi-level airway pressure devices, as well as from the provision of sleep apnea monitors,
nebulizers and home-delivered
respiratory medications and related services.

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

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

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

Depending on the therapy,
a broad range of venous access devices and pump technologies may be used to facilitate
homecare and patient independence. Apria employs licensed pharmacists and registered
high-tech infusion nurses who specialize in the delivery of home infusion therapy. They
are available to respond to emergencies and questions regarding therapy 24 hours a day,
seven days a week and to provide initial and ongoing training and education to the patient
and caregiver. Other support services include supply replenishment, pump management,
preventive maintenance, assistance with insurance questions and outcome reporting. Apria
currently operates 31 pharmacy locations nationwide to serve its home infusion patients.

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

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

Organization and Operations

Organization.Aprias approximately 500 branch locations are organized
          into three geographic divisions, which are further divided into 15 geographic
          regions. Each region consists of a number of branches and a regional office. The
          regional office provides each of its branches with management oversight and
          administrative and operational support services. The branch delivers home
          healthcare products and services to patients in their homes and to other care
          sites through the companys delivery fleet and its qualified delivery
          professionals and clinical employees.

While management oversight
is provided at the division and regional levels, the companys sales and business
operations functions are vertically integrated. The operations function is further divided
into receivables management, clinical services, logistics, regulatory compliance and
acquisition integration. Through this structure, all functions that are performed at the
division and regional level have direct reporting and accountability to corporate
headquarters. Apria believes that this structure provides control over and consistency
among its field locations. In accordance with Aprias strategy to identify
opportunities for efficiencies and productivity improvements, management continues to
evaluate the feasibility of centralizing certain functions that are currently performed at
the region or branch level.

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

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

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

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

Payors.Apria derives substantially all its revenues from third-party
  payors, including private insurers, managed care organizations, Medicare and
  Medicaid. For 2005, approximately 32% of Aprias net revenues were derived
  from Medicare and 7% from Medicaid. Generally, each third-party payor has
  specific requirements which must be met before claim submission will result in
  payment. Apria has policies and procedures in place to manage the claims
  submission process, including verification procedures to facilitate complete and
  accurate documentation. See Risk Factors  Medicare/Medicaid
  Reimbursement Rates.

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

Apria is expanding its use
of technology in areas such as electronic claims submission and electronic funds transfer
with managed care organizations to more efficiently process business transactions. This
can expedite claims processing and reduce the administrative cost associated with this
activity for both Apria and its customers/payors. Apria now submits approximately 77% of
its claims electronically. Management is also focusing its resources on developing
internal expertise with the unique reimbursement requirements of certain large third-party
payors, which should help reduce subsequent denials and shorten related collection
periods. Aprias policy is to collect co-payments from the patient or applicable
secondary payor. In the absence of a secondary payor, Apria generally requires the
co-payment at the time the patient is initially established with the product/service.
Subsequent months rental fees are billed to the patient. Management is also seeking
to streamline related processes in order to maximize the co-payment collection rate.

Marketing

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

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

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

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

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

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

Apria Great
Escapes® Travel Program. Aprias 500-branch network
facilitates travel for patients who require oxygen, home infusion or other products,
services and therapies. Apria coordinates equipment and service needs for thousands of
traveling patients annually, which enhances their mobility and quality of life.

Sales

Apria employs
approximately 600 sales professionals whose primary responsibility is to generate new
referrals and to maintain existing relationships for all of its service lines by targeting
key referral sources. Key customers include physicians and their staffs, hospital-based
healthcare professionals and managed care organizations, among others. Apria provides its
sales professionals with the necessary clinical and technical training to represent
Aprias major service offerings of home respiratory therapy, home infusion therapy
and home medical equipment. As larger segments of the marketplace become involved with
managed care, specially trained members of Aprias sales force provide the company
with a competitive advantage based on their working knowledge of pricing, contracting and
negotiating, and specialty-care management programs.

An integral component of
Aprias overall sales strategy is to increase volume through managed care referral
sources and traditional physician referral channels. Specific growth initiatives designed
to increase customer awareness of Aprias clinical and operational programs are in
place with the goal of securing a greater share of the traditional market. The ultimate
decision makers for healthcare services vary greatly, from closed model managed care
organizations to preferred provider networks, which are controlled by more traditional
means. Aprias selling structure and strategies are designed to adapt to changing
market factors and will continue to adjust as further changes in the industry occur.
Managed care organizations continue to represent a significant portion of Aprias
business in several of its primary metropolitan markets. No single account, however,
represented more than 9% of Aprias total net revenues for 2005. Among its more
significant managed care agreements during 2005 were Aetna Health Management, Kaiser
Foundation Health Plan and United HealthCare Services. The company recently signed a new
three-year contract with CIGNA Health Corporation, effective February 2006. Apria also
offers discount agreements and various fee-for-service arrangements to hospitals or
hospital systems whose patients have home healthcare needs. See Risk Factors 
Pricing Pressures and Managements Discussion and Analysis of Financial
Condition and Results of Operations.

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Competition

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

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

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

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

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

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

Government Regulation

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

Medicare and
Medicaid Reimbursement.In 2005, approximately 39% of Aprias revenues
were reimbursed under arrangements with Medicare and Medicaid. No other third-party payor
represents more than 9% of the companys revenues. The majority of the companys
revenues are derived from fees charged for patient care under fee-for-service
arrangements. Revenues derived from capitation arrangements represent less than 10% of
total net revenues for all periods presented.

Medicare
Reimbursement. There are a number of provisions contained within recent
legislation or proposed legislation that affect or may affect Medicare reimbursement
policies for items and services provided by Apria. Such provisions are outlined below in
the chronological order of the associated legislation.

---

Still pending from the
Balanced Budget Act of 1997 is the streamlined authority granted to the U.S. Department of
Health and Human Services, or HHS, to increase or reduce the reimbursement for home
medical equipment, including oxygen, by up to 15% each year under an inherent
reasonableness authority. The Centers for Medicare and Medicaid Services, or CMS,
issued a rule that established a process by which such adjustments may be made. The rule
applies to all Medicare Part B services except those paid under a physician fee schedule,
a prospective payment system, or a competitive bidding program. As of this date, neither
CMS nor the durable medical equipment regional carriers have used the expedited authority.

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

| |  | A freeze on annual  payment  increases  for durable  medical  equipment  The freeze
commenced  in 2004 and will  continue  through 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Reimbursement  reductions for five durable medical  equipment  categories,  including  oxygen   Reimbursement  for most of
  these  categories  is based on the median  price paid for such items on behalf of  beneficiaries  of federal  employee
  health  benefit  plans,  or FEHBP.  The new fee  schedules for most  products  went into effect  January 1, 2005.  The
  revised  pricing for oxygen and oxygen  equipment  was  implemented  on April 8, 2005.  Any 2005 claims for oxygen and
  oxygen equipment that had been submitted prior to the  implementation  of the new fee schedule were paid based on 2004
  pricing schedules and were not retroactively adjusted.                                                                                                                                                                                                                 
| |  | Reimbursement  reduction for inhalation drugs  The previous  reimbursement  rate of 95% of the average wholesale price was
reduced to 80% of the average  wholesale price,  effective January 1, 2004.  Beginning in January 2005,  reimbursement
for these drugs was further  reduced  through a shift to the  manufacturer-reported  average  sales price  (subject to
adjustment  each quarter) plus 6%, plus a separate  dispensing fee per patient  episode.  The dispensing fees for 2005
were  $57.00  for a 30-day  supply of  medications  and $80.00 for a 90-day  supply.  In its final 2006  physician  fee
schedule released on November 2, 2005, CMS established an initial
dispensing  fee of $57.00 for a 30-day  supply for a new patient,  and $33.00 for each 30-day supply  thereafter.  The
90-day dispensing fee has been lowered to $66.00.                                      
| |  | Establishment  of a competitive  bidding  program for Part B  Such a program would require that suppliers  wishing to provide certain
items to beneficiaries  submit bids to Medicare.  The program,  for as yet unspecified durable medical equipment items
and services, is to be phased in as follows: (i) 10 of the largest metropolitan  statistical areas in 2007; (ii) 80 of the
largest  metropolitan  statistical  areas in 2009; and (iii)  additional  areas after 2009. The  legislation  contains
special provisions for rural areas.  In September 2005, CMS issued its proposed quality standards for the program, to
which Apria provided written comments.  The final standards are expected to be published by CMS later in 2006.                                                                                                                                                     
| |  | Incentives for expansion of Medicare Part C  The Medicare  Modernization  Act includes  financial  incentives for managed
care plans to expand their  provision of Medicare  Advantage plans in 2006 in a stated effort to attract more Medicare
beneficiaries to managed care models.  The company maintains  contracts to provide  respiratory,  infusion and medical
equipment  and related  services to a  significant  number of managed care plans  nationwide,  and  believes  that the
Medicare Advantage expansion represents a growth opportunity starting in 2006.                                                                                                                                                                                                                                                                                                                           
| |  | Reimbursement  for home infusion  therapy  under  Medicare Part D   Currently,  a limited  number of infusion  therapies,
 supplies and equipment are covered by Medicare Part B. The Medicare  Modernization  Act provides expanded
coverage for the drugs only, but excludes coverage for the supplies and clinical services needed to safely and
effectively provide home infusion therapy services to patients in the home.  In the fourth quarter of 2005, the
Company contracted with a limited number of Medicare Part D prescription drug plans in order to provide
continuity of care for existing Medicare/Medicaid dual eligible patients in 2006.  Due to nationwide Part D
implementation issues experienced by home infusion providers in early 2006, the industry is continuing to
work with CMS to rectify the coverage and payment policies that are causing implementation challenges.

Revenue reductions
resulting from the provisions of the Medicare Modernization Act are estimated by Apria
management as follows: The revision to inhalation drug reimbursement in 2004 resulted in a
revenue reduction of approximately $15 million from 2003 levels. In 2005, pretax income
was reduced from 2004 levels by nearly $34 million as a result of the lower Medicare
pricing implemented in 2005 and related product pricing increases imposed by drug
manufacturers. In 2006, the revision to the dispensing fee is estimated to reduce revenues
by approximately $9 million. The impact of the competitive bidding program and the
Medicare Part C and D programs cannot be estimated at this time.

The Deficit Reduction Act
of 2005 was signed into law by the President in February 2006. Provisions that will impact
reimbursement to Apria are summarized as follows:

| |  | In 2007,  durable  medical  equipment  currently  categorized  in the  rent to cap  category  by CMS,  such as
  hospital beds,  wheelchairs,  nebulizers,  patient lifts and continuous positive airway pressure devices,
  will be considered  purchased  outright at the end of the rental period and the ownership of such devices
  will transfer  directly to the patients.  The rental period,  which had been 15 months with an option for
  the patients to purchase the  equipment,  will be reduced to 13 months.  The new 13-month  rental  period
  began on  January  1,  2006,  and  therefore  the first  month in which the new  policy  will  impact the
  company's  revenue is February  2007. In addition,  the bi-annual  service and  maintenance  fee that had
  been paid to  suppliers  after the rental  period  ended,  will be  eliminated.  Suppliers  will have the
  option of billing  Medicare for any repairs and  maintenance  performed on the  patient-owned  equipment.
  The act authorizes the Secretary of HHS to establish  service and/or  maintenance  fees that at this time
  cannot be estimated  or assured.  It is,  however,  unlikely  that Apria will  continue in the repair and
  maintenance business.                                                                   
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Reimbursement  for oxygen will convert from an ongoing  rental method to a rent to purchase.  The Act mandates
     that oxygen equipment  reimbursement will be limited to 36 months,  after which time the ownership of the
     equipment will transfer to the patient,  who will assume all  responsibility for identifying when repairs
     or preventive  maintenance are needed.  Providers would continue to be reimbursed for delivering portable
     oxygen to those  patients who require it. The Act applies to patients who were on service with  suppliers
     from  January 1, 2006  forward.  Accordingly,  the first  month in which the new policy  will  impact the
     company is January 2009. The act authorizes the Secretary of HHS to establish service and/or  maintenance
     fees  that at this time  cannot be  estimated  or  assured.  Due to the  bundled  nature of the  existing
     payment  method,  which  includes the  reimbursement  for contents,  all applicable  clinical,  delivery,
     after-hours,  billing/collection  and other patient support services, the industry will work with CMS and
     the Secretary to establish  fair and equitable fee  schedules for such  non-equipment  services.  The net
     impact of the changes cannot be estimated at this time.

The Presidents
current budget proposal contains a provision to further reduce the monthly rental period
for oxygen from the now-mandated 36 months to 13 months. No further information is
available on the proposal and it is uncertain whether this provision will remain in the
budget that is ultimately approved by Congress.

Medicaid
Reimbursement. In 2001, some states began adopting alternative pricing
methodologies for certain drugs and biologicals under the Medicaid program. In at least 22
states, the changes reduced the level of reimbursement received by Apria without a
corresponding offset or increase to compensate for the service costs incurred. In several
of those states, Apria elected to stop accepting new Medicaid patient referrals for the
affected drugs and biologicals. Apria will continue, however, to provide services to
patients already on service, and for those who receive other Medicaid-covered respiratory,
home medical equipment or infusion therapies, if the reimbursement levels for those
services remain adequate. Further, in 2005, some states implemented other payment policy
changes or changed coverage criteria for medical equipment, enteral and infusion therapy
altogether. Currently, other states are considering reductions in Medicaid reimbursement
as they work through their respective states budget process. Apria management cannot
predict the outcome of such budget negotiations and whether other states will consider
reductions as well. See Risk Factors  Medicare/Medicaid Reimbursement
Rates.

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

Section 1874A of the
Social Security Act, as added by the Medicare Modernization Act, requires CMS to implement
Medicare contracting reform by 2011. On January 6, 2006, CMS announced the designation of
four specialty contractors, durable medical equipment Medicare administrative contractors
(DME MACs), which soon will be responsible for handling the administration of
Medicare claims from suppliers of durable medical equipment, orthotics, and prosthetics
(DMEPOS). Thus, all applicable claims will be handled by these new entities.
The new DME MACs will replace the existing DMERCs, effective July 1, 2006. Because the
full transition to the DME MACs from the DMERCs will not occur until that date, it is
difficult to speculate precisely how this transformation will affect DMEPOS suppliers. The
company cannot predict or estimate the potential impact of the change on its accounts
receivable performance at this time. See Risk Factors  Medicare/Medicaid
Reimbursement Rates.

HIPAA. 
          The Health Insurance Portability and Accountability Act of 1996, or
          HIPAA, is comprised of a number of components. Pursuant to the administrative
          simplification section of
          HIPAA, HHS has issued multiple regulations, each with its own compliance
          date.  For those regulations with a compliance date that has already passed, Apria
was materially compliant by the date required.  Remaining regulation under HIPAA that may
have a material effect on Apria govern  the following:

| |  | standards for a unique national health identifier for healthcare providers for use in connection
with standard transactions  compliance date: May 23, 2007  Apria expects to be
 materially compliant with these regulations by the compliance date; and
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the first installment of an interim enforcement rule, that when issued in full, will address
both substantive and procedural requirements for the imposition of civil monetary penalties.                                                                 

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

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

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

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

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

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

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

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

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

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

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

---

Employees

As of January 31, 2006,
Apria had 11,136 employees, of which 9,698 were full-time and 1,438 were part-time. None
of the companys employees is currently represented by a labor union or other labor
organization.

Website Access to Reports

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

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Executive Officers of the Registrant

Set forth below are the names, ages, titles
with Apria and past and present positions of the persons serving as Aprias executive officers
as of March 6, 2006:

|Name and Age               |  | Office and Experience                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|-------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
|Lawrence M. Higby, 60      |  | Chief Executive Officer and Director.
Mr. Higby was appointed Chief Executive Officer and Director in February 2002.  Mr. Higby also served as
Aprias Chief Executive Officer on an interim basis from January through May 1998.  He joined Apria in
November 1997 as President and Chief Operating Officer.  Prior to joining Apria, Mr. Higby served as President and Chief Operating
Officer of Unocals 76 Products Company and Group Vice President of Unocal Corporation from 1994 to 1997.
From 1986 to 1994, Mr. Higby held various positions with the Times Mirror Company, including Executive Vice
President, Marketing of the Los Angeles Times and Chairman of the Orange County Edition.
In 1986, Mr. Higby served as President and Chief Operating Officer of Americas Pharmacy, Inc., a division
of Caremark, Inc.     
|Lawrence A. Mastrovich, 44 |  | President and Chief Operating Officer.
 Mr. Mastrovich joined Apria
as Chief Operating Officer in April 2002 and was promoted to President in August 2004.
 From August 2001 to April 2002,
Mr. Mastrovich served as President and Chief Operating Officer of TechRx, a
pharmacy technology company. From April 2001 to August 2001, Mr. Mastrovich
served as Aprias Executive Vice President, Sales. From October 1998 to April
2001, Mr. Mastrovich served as Aprias Executive Vice President, Revenue Management. From
December 1997 to October 1998, Mr. Mastrovich served as Division Vice President, Operations for
Aprias Northeast Division.  Prior to that time, Mr. Mastrovich had served as a Regional Vice
President for Apria and its predecessor, Homedco, since 1994 and in various other capacities from 1987 to 1994.
|Amin I. Khalifa, 52        |  | Executive Vice President and
Chief Financial Officer. Mr. Khalifa joined Apria as Executive Vice
President and Chief Financial Officer in October 2003. From June 1999 to
September 2003, Mr. Khalifa served as Vice President and Chief Financial Officer
of Beckman Coulter, Inc., a manufacturer of diagnostic laboratory equipment and
instruments. From October 1996 to June 1999, Mr. Khalifa served as the Chief Financial
Officer of the Agricultural Sector of Monsanto Company, a life sciences company.  From
1994 to October 1996, Mr. Khalifa served as Senior Vice President, Chief Financial Officer for
Aetna Health Plans and as Senior Vice President, Strategy and Investor Relations for Aetna, Inc.                                                                                                                 
|W. Jeffrey Ingram, 38      |  | Executive Vice President, Sales.
Mr. Ingram was promoted to Executive Vice President, Sales in December of 2005.  From
January 2005 to November 2005, Mr. Ingram served as Senior Vice President, National Accounts.
From March 2003 to January 2005, Mr. Ingram served as Division Vice President, Sales
for Aprias Southeast Division.  From May 2001 to February 2003, Mr. Ingram served as
Region Vice President, Sales for Aprias Midsouth Region.  Prior to that time, Mr. Ingram had
served in various other sales positions with Apria since January 1994.                                                                                                                                                                                                                                                                     
|Daniel J. Starck, 39       |  | Executive Vice President, Customer Services.
Mr. Starck was promoted to Executive Vice President, Customer Services in November of 2005.
From July 2003 to November 2005, Mr. Starck served as Executive Vice President, Business Operations.
From April 2001 to July 2003, Mr. Starck served as Division Vice President, Operations for
Aprias Pacific Division.  From January 1998
to April 2001, Mr. Starck served as Regional Vice President, Operations for Aprias Northern California
Region.  Prior to that time, Mr. Starck had served in various other operations positions with
Apria since March 1992.                                                                                                                                                                                                                      

---

ITEM 1A. RISK FACTORS

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

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

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

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

Medicare.
          There are a number of provisions contained within recent legislation and
          proposed legislation that affect or may affect reimbursement policies for items
          and services provided by Apria. Certain of such provisions reduced 2004 net
          revenues by approximately $15 million and 2005 net revenues by an incremental
          $27 million. Other reimbursement changes in the legislation are still
          outstanding and will further reduce Aprias net revenues. See
          Business  Government Regulation  Medicare and Medicaid
          Reimbursement.

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

Medicare and Medicaid
payments accounted for approximately 32% and 7% of Aprias 2005 net revenues,
respectively. Apria cannot be certain of the ultimate impact of all legislated and
contemplated changes or provide assurance to its investors that additional reimbursement
reductions will not be made.

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

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

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

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 also
subject to strict limitations. In addition, strict licensing and safety requirements apply
to the provision of services, pharmaceuticals and equipment. Violations of these laws and
regulations could subject Apria to severe fines, facility shutdowns and possible exclusion
from participation in federal healthcare programs such as Medicare and Medicaid.
Government officials and the public will continue to debate healthcare reform. Changes in
healthcare law, new interpretations of existing laws, or changes in payment methodology
may have a dramatic effect on Aprias business and results of operations.

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

The current market
continues to exert pressure on healthcare companies to reduce healthcare costs, resulting
in reduced margins for home healthcare providers such as Apria. Larger group purchasing
organizations and supplier groups exert additional pricing pressure on home healthcare
providers. These include managed care organizations, which control an increasing portion
of the healthcare economy. Apria has a number of contractual arrangements with managed
care organizations and other parties, although no individual arrangement accounted for
more than 9% of Aprias net revenues in 2005.

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

ITEM 1B.      UNRESOLVED STAFF COMMENTS

None.

ITEM 2.      PROPERTIES

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

Apria has approximately
500 branch facilities that are organized into 15 regions. The regional facilities usually
house a branch and various regional support functions such as warehousing, repair, billing
and infusion pharmacy. These facilities are typically located in light industrial areas
and generally range from 30,000 to 150,000 square feet. The typical branch facility, other
than those that share a building with a region, is a combination warehouse and office and
can range from 1,000 to 50,000 square feet. Apria leases substantially all of its
facilities with lease terms of ten years or less.

ITEM 3.      LEGAL PROCEEDINGS

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

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

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

---

PART II

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

Market for the Registrants Common Equity

     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, 2005 |  |        |       
|First quarter                |  | $33.56 | $29.78
|Second quarter               |  | 36.75  | 29.05 
|Third quarter                |  | 35.55  | 31.56 
|Fourth quarter               |  | 32.84  | 20.51 
|Year ended December 31, 2004 |  |        |       
|First quarter                |  | $32.00 | $28.00
|Second quarter               |  | 30.74  | 27.44 
|Third quarter                |  | 32.00  | 26.25 
|Fourth quarter               |  | 34.95  | 26.97 

As of March 6, 2006, there
were 332 holders of record of Apria common stock. Apria has not paid any dividends since
its inception and does not intend to pay any dividends on its common stock in the
foreseeable future.

Equity Compensation Plans

The following table sets
forth information as of December 31, 2005 for Aprias equity compensation plans:

|Plan Category                                            |  | Number of Securitiesto be Issued Upon
Exercise ofOutstanding Optionsand Awards | Weighted AverageExercise Price of
Outstanding Optionsand Awards | Number ofSecurities RemainingAvailable for
Future Issuance
|-------------------------------------------------------- |  | ------------------------------------------------------------------------------ | --------------------------------------------------------------- | ----------------------------------------------------------
|
|Equity compensation plans   approved by stockholders     |  |                                                                                | 4,394,688                                                       |                                                           
|                                                         |  |                                                                                |                                                                 |                                                           
|Equity compensation plans not   approved by stockholders |  |                                                                                | 492,401                                                         |                                                           
|                                                         |  |                                                                                |                                                                 |                                                           
|Totals                                                   |  |                                                                                | 4,887,089                                                       |                                                           
|                                                         |  |                                                                                |                                                                 |                                                           

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

---

Issuer Purchases of Equity Securities

|Period                               | TotalNumber ofSharesPurchased | AveragePrice Paidper Share | Total Numberof SharesPurchased as Part
of PubliclyAnnounced Plansor Programs | Approximate DollarValue of Shares that May Yet Be
Purchased Under thePlans or Programs
|------------------------------------ | ----------------------------- | -------------------------- | ---------------------------------------------------------------------------- | --------------------------------------------------------------------------------------
|
|October 1 through October 31, 2005   |                               | -                          |                                                                              |                                                                                       
|November 1 through November 30, 2005 |                               | 7,337,526                  |                                                                              |                                                                                       
|December 1 through December 31, 2005 |                               | -                          |                                                                              |                                                                                       
|                                     |                               |                            |                                                                              |                                                                                       
|Total                                |                               | 7,337,526                  |                                                                              |                                                                                       
|                                     |                               |                            |                                                                              |                                                                                       

---

In October 2005,
Aprias Board of Directors authorized the company to repurchase up to $250,000,000
worth of its outstanding common stock.

On November 7, 2005, Apria
purchased 7,337,526 shares of its common stock for $175,000,000 through an accelerated
share repurchase program. Under the agreement, Aprias counterparty borrowed shares
that were sold to Apria at an initial price of $23.83. The counterparty then repurchased
shares over a period that began immediately after the sale of shares to Apria. The
repurchase transaction was completed in February 2006. The agreement contained a provision
that subjected Apria to a purchase price adjustment based on the volume weighted average
price of the companys common stock over the period during which the counterparty
purchased the shares. Such provision resulted in an additional $242,000 due that Apria
elected to settle in cash in February 2006. This amount was recorded as a liability at
December 31, 2005, with a corresponding charge to interest expense reflecting the change
in the fair value of the settlement contract.

Depending on market and
other considerations, the company may exercise the remaining $75,000,000 of the Board
authorization by repurchasing its common stock in open market or privately negotiated
transactions over the next four fiscal quarters.

---

ITEM 6.      SELECTED FINANCIAL DATA

The following table
presents Aprias selected financial data for the five years ended December 31, 2005.
The data set forth below have been derived from Aprias audited Consolidated
Financial Statements and are qualified by reference to, and should be read in conjunction
with, the Consolidated Financial Statements and related notes thereto and
Managements Discussion and Analysis of Financial Condition and Results of
Operations included in this report.

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

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Net income for 2005 reflects $16.3 million
in settlement costs and legal fees associated with the disposition of the previously-reported
federal investigation and qui tamlawsuits, net of taxes.  Net revenues for 2005 were
reduced by  $27.4 million in Medicare reimbursement reductions on respiratory
medications, certain durable medical equipment items and oxygen-related equipment.
The balance sheet
data at December 31, 2005 reflects the repurchase of common stock with $175 million in debt
borrowed from Aprias revolving line of credit. Net income per share for 2005 reflects the effect
of the share repurchase on weighted average shares.
|(2) | Net income for 2004 reflects the
write-off of deferred debt issuance costs of $2.7 million associated with the
November 2004 refinancing. Net revenues for 2004 were reduced by  $15.2 million
in Medicare reimbursement reductions on respiratory medications.                                                                                                                                                                                                                                                                                                                                                                                                   
|(3) | The balance sheet data at December 31,
2003 reflects the issuance of convertible senior notes in the aggregate principal
amount of $250 million and the concurrent repurchase of common stock with $100 million
of the proceeds.  Net income per share for 2003 reflects the effect of the share
repurchase.                                                                                                                                                                                                                                                                                                                                                      
|(4) | Net income for 2002 reflects the
impact of the favorable outcome of an income tax dispute that was settled in the fourth
quarter of 2002. The components of this impact include: income tax benefit
of $11.1 million, interest income of $4.0 million and related professional
fee expense of $1.7 million. Effective January 1, 2002, Apria adopted Statement
of Financial Accounting Standards No. 142 and accordingly ceased to amortize
goodwill.                                                                                                                                                                                                             

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

---

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

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

Aprias branch
locations are organized into 15 geographic regions. Each region consists of a number of
branches and a regional office that provides key administrative support services.
Management evaluates operating results on a geographic basis and, therefore, views each
region as an operating segment. All regions provide the same products and services,
including respiratory therapy, infusion therapy and home medical equipment and supplies.
Additional administrative and operational support services are provided at a corporate
level. Management continues to evaluate opportunities to gain efficiencies and cost
savings by consolidating regional functions. For financial reporting purposes, all the
companys operating segments are aggregated into one reportable segment in accordance
with the aggregation criteria of Statement of Financial Accounting Standards
(SFAS) No. 131, Disclosures about Segments of an Enterprise and Related
Information.

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

| |  | Growth - Apria's  primary  focus is to restore  strong  organic  sales  growth  following a decline in revenue
during the third and fourth  quarters of 2005 and to increase  market  share in its core  service  lines.
The company will continue to invest in service line extensions.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Productivity  - Apria  continues to leverage its nationwide  infrastructure  to reduce costs by enhancing best
  practices and systems investments.                                                                                                                                     
| |  | Service - Apria differentiates itself from the competition by setting a high standard for customer service.                                                                                                                                                                             
| |  | People - Apria  recruits,  develops and advances  individuals  who are leaders in order to respond to changing
 market conditions and to maximize sales and earnings growth.                                                                                                            

Critical Accounting
Policies.Aprias management considers the accounting policies that
govern revenue recognition and the determination of the net realizable value of accounts
receivable to be the most critical in relation to the companys consolidated
financial statements. These policies require the most complex and subjective judgments of
management. Additionally, the accounting policies related to goodwill, long-lived assets
and income taxes require significant judgment.

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

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

Goodwill and
Long-lived Assets.Goodwill arising from business combinations represents the
excess of the purchase price over the estimated fair value of the net assets of the
acquired business. Pursuant to SFAS No. 142, Goodwill and Other Intangible
Assets, goodwill is tested annually for impairment or more frequently if
circumstances indicate the potential for impairment. Also, management tests for impairment
of its intangible assets and long-lived assets on an ongoing basis and whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. Aprias goodwill impairment test is conducted at a reporting
unit level and compares each reporting units fair value to its carrying value.
The company has determined that its geographic regions are reporting units under SFAS
No. 142. The measurement of fair value for each region is based on an evaluation of
future discounted cash flows and is further tested using a multiple of earnings approach.
In projecting its reporting units cash flows, management considers industry growth
rates and trends, known and potential reimbursement reductions, cost structure changes and
local circumstances specific to a region. Based on its tests and reviews, no impairment of
its goodwill, intangible assets or other long-lived assets existed at December 31, 2005.
However, future events or changes in current circumstances could affect the recoverability
of the carrying value of goodwill and long-lived assets. Should an asset be deemed
impaired, an impairment loss would be recognized to the extent the carrying value of the
asset exceeded its estimated fair market value.

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

Clinical Expense
Reclassification.Certain respiratory therapy and infusion therapy nursing
expenses, which were previously presented in the selling, distribution and administrative
line, are now included in cost of net revenues. This change was made in response to a
request made by the Securities and Exchange Commission accounting staff.

The respiratory therapy
and infusion therapy nursing expenses that have been reclassified to cost of net revenues
are comprised primarily of employee salary and benefit costs and fees paid to contracted
workers who are deployed to service a patient. Aprias respiratory therapy and
infusion therapy nursing personnel are also engaged in a number of administrative and
marketing tasks, and accordingly, the related costs remain classified within selling,
distribution and administrative expenses.

Apria adopted the
classification described above in 2005. Infusion therapy nursing expenses for 2003 and
2004 have been reclassified to conform to the current year presentation, however the
respiratory therapy expenses remain in the selling distribution and administrative line
for 2003 and 2004. During those years, the data was not captured in sufficient detail to
make a corresponding reclassification.

The following table
sets forth a summary of the current classification of respiratory therapy and
infusion therapy nursing expenses in dollars and percentages of net revenues:

|                                         | Year Ended December 31,
|---------------------------------------- | -----------------------
|
|
|
|Cost of net revenues                     |                        
|Selling, distribution and administrative |                        
|                                         |                        
|Total clinical expenses                  |                        
|                                         |                        

The amounts in the table
above are exclusive of the nursing costs associated with a small ancillary nursing service
business that are currently, and were previously, presented within the cost of net
revenues line. Such costs totaled $682,000, $819,000 and $838,000 for 2005, 2004 and 2003,
respectively.

---

Results of Operations

Net
Revenues. Net revenues were $1,474 million in 2005, $1,451 million in 2004
and $1,381 million in 2003. Growth rates were 1.6% and 5.1% in 2005 and 2004,
respectively. The growth rate in 2005 was impacted by Medicare reimbursement reductions
that went into effect January 1, 2005 for respiratory drugs and certain durable medical
equipment items. An additional reduction on oxygen and oxygen equipment, with an initial
effective date of January 1, 2005, was delayed until April 8, 2005. The combined
reduction totaled $27.4 million in 2005. The transition out of the Gentiva CareCentrix
Inc. contract, that commenced in 2004, continued into the first half of 2005 which
resulted in an incremental revenue reduction of $18.4 million. Adding back these
reductions, along with $4.2 million in aggregate pricing reductions in three major managed
care contracts, the revenue increase in 2005 would have been 5.0%. Based on certain
assumptions and its analysis, Apria management estimates that acquisitions contributed
approximately $68 million in net revenues in 2005.

In addition to the pricing
reduction noted above that was isolated for three of the companys large contracts,
pricing compression within the overall managed care payor sector was a prime factor for
the slow revenue growth, especially within the home medical equipment/other and
respiratory medications lines. Growth in the respiratory oxygen and enteral lines,
however, remained strong.

Revenue growth in 2004 was
negatively affected by the Medicare reimbursement reduction for respiratory medications
that went into effect January 1, 2004. Also, revenues in that period declined as Apria
transitioned out of the Gentiva CareCentrix Inc. contract which management chose not to
renew for 2004 due to pricing differences. The effect in 2004 of the Medicare reduction
was $15.2 million and the reduction in revenues as a result of the Gentiva transition was
$47.4 million. Revenues generated from acquisitions were estimated at $82 million in 2004.

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

The company recently
signed a new three-year contract with CIGNA Health Corporation, effective February 2006,
which is estimated to contribute approximately $25 million in net revenues in 2006. Apria
had previously serviced CIGNA members under a subcontracting arrangement with Gentiva
prior to 2004. Further, given Aprias high volume of managed care business, it is
well-positioned among its competitors with respect to the Medicare Advantage plan
expansion. See Medicare Reimbursement.

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

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

Respiratory
Therapy.Respiratory therapy revenues are derived primarily from the provision of
oxygen systems, home ventilators, sleep apnea equipment, nebulizers, respiratory
medications and related services. Revenues from the respiratory therapy service line
increased in 2005 by 1.9% when compared to 2004 and increased by 6.5% in 2004 when
compared to 2003. The Medicare reimbursement reduction for respiratory medications and
oxygen and oxygen equipment caused declines of 2.5% and 1.6% in revenues for 2005 and
2004, respectively. Declines in the respiratory medications line had the greatest impact
on the overall respiratory growth rate. Revenues from the medications line declined in
2005 by 14.3%, or 7.6% on a pre-Medicare reduction basis. Revenues from oxygen and oxygen
equipment increased by 1.2%, or 4.3% on a pre-Medicare reduction basis. Acquisitions of
respiratory businesses accounted for most of the growth in the respiratory therapy revenue
line.

Infusion
Therapy.The infusion therapy service line involves the administration of drugs or
nutrients directly into the body intravenously through a needle or catheter. Infusion
therapy services also include administering enteral nutrients directly into the
gastrointestinal tract through a feeding tube. Infusion therapy revenues increased 3.9% in
2005 versus 2004 and 2.0% in 2004 when compared to 2003. Growth in enteral nutrition, one
of the strongest contributors in the infusion line, grew by 9.0% in 2005 and 5.9% in 2004.
The 2004 enteral nutrition growth rate was negatively impacted by the Gentiva contract
exit. Excluding enteral nutrition, revenues for the remainder of the infusion line have
been virtually flat during the 2003 to 2005 period.

Home Medical
Equipment/Other.Home medical equipment/other revenues are derived from the
provision of equipment to assist patients with ambulation, safety and general care in and
around the home. Home medical equipment/other revenues decreased by 2.7% in 2005 and
increased by 2.5% in 2004. Diabetic supplies grew 38.5% in 2005 when compared to 2004.
This growth is directly attributable to the March 2004 acquisition of a company that
entered the diabetic supply market just prior to being acquired by Apria. Excluding the
growth in diabetic supplies, home medical equipment/other revenue experienced a 4.5%
decline in 2005 when compared to 2004. Medicare reimbursement reductions implemented in
2005 that impacted this line of business totaled approximately $3.1 million. Additionally,
hospital utilization rates for many of the companys managed care contractors were
down in the last half of 2005, which served to further depress growth in home medical
equipment/other revenues.

Medicare
Reimbursement. There are a number of provisions contained within recent
legislation or proposed legislation that affect or may affect Medicare reimbursement
policies for items and services provided by Apria. Such provisions are outlined below in
the chronological order of the associated legislation.

Still pending from the
Balanced Budget Act of 1997 is the streamlined authority granted to the U.S. Department of
Health and Human Services, or HHS, to increase or reduce the reimbursement for home
medical equipment, including oxygen, by up to 15% each year under an inherent
reasonableness authority. The Centers for Medicare and Medicaid Services, or CMS,
issued a rule that established a process by which such adjustments may be made. The rule
applies to all Medicare Part B services except those paid under a physician fee schedule,
a prospective payment system, or a competitive bidding program. As of this date, neither
CMS nor the durable medical equipment regional carriers have used the expedited authority.

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

| |  | A freeze on annual  payment  increases  for durable  medical  equipment  The freeze
commenced  in 2004 and will  continue  through 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Reimbursement  reductions for five durable medical  equipment  categories,  including  oxygen   Reimbursement  for most of
  these  categories  is based on the median  price paid for such items on behalf of  beneficiaries  of federal  employee
  health  benefit  plans,  or FEHBP.  The new fee  schedules for most  products  went into effect  January 1, 2005.  The
  revised  pricing for oxygen and oxygen  equipment  was  implemented  on April 8, 2005.  Any 2005 claims for oxygen and
  oxygen equipment that had been submitted prior to the  implementation  of the new fee schedule were paid based on 2004
  pricing schedules and were not retroactively adjusted.                                                                                                                                                                                                             
| |  | Reimbursement  reduction for inhalation drugs  The previous  reimbursement  rate of 95% of the average wholesale price was
reduced to 80% of the average  wholesale price,  effective January 1, 2004.  Beginning in January 2005,  reimbursement
for these drugs was further  reduced  through a shift to the  manufacturer-reported  average  sales price  (subject to
adjustment  each quarter) plus 6%, plus a separate  dispensing fee per patient  episode.  The dispensing fees for 2005
were  $57.00  for a 30-day  supply of  medications  and $80.00 for a 90-day  supply.  In its final 2006  physician  fee
schedule released on November 2, 2005,  CMS established an initial
dispensing  fee of $57.00 for a 30-day  supply for a new patient,  and $33.00 for each 30-day supply  thereafter.  The
90-day dispensing fee has been lowered to $66.00.                                 
| |  | Establishment  of a competitive  bidding  program for Part B  Such a program would require that suppliers  wishing to provide certain
items to beneficiaries  submit bids to Medicare.  The program,  for as yet unspecified durable medical equipment items
and services, is to be phased in as follows:  (i) 10 of the largest metropolitan  statistical areas in 2007; (ii) 80 of the
largest  metropolitan  statistical  areas in 2009; and (iii)  additional  areas after 2009. The  legislation  contains
special provisions for rural areas.  In September 2005, CMS issued its proposed quality standards for the program,
to which Apria provided written comments. The final standards are expected to be published by CMS later in 2006.                                                                                                                                                 
| |  | Incentives for expansion of Medicare Part C  The Medicare  Modernization  Act includes  financial  incentives for managed
care plans to expand their  provision of Medicare  Advantage plans in 2006 in a stated effort to attract more Medicare
beneficiaries to managed care models.  The company maintains  contracts to provide  respiratory,  infusion and medical
equipment  and related  services to a  significant  number of managed care plans  nationwide,  and  believes  that the
Medicare Advantage expansion represents a growth opportunity starting in 2006.                                                                                                                                                                                                                                                                                                                       
| |  | Reimbursement  for home infusion  therapy  under  Medicare Part D   Currently,  a limited  number of infusion  therapies,
 supplies and equipment are covered by Medicare Part B. The Medicare  Modernization  Act provides expanded coverage for
drugs only, but excludes coverage for the supplies and clinical services needed to safely and effectively provide home
infusion therapy services to patients in the home.  In the fourth quarter of 2005, the Company contracted with a
limited number of Medicare Part D prescription drug plans in order to provide continuity of care for
existing Medicare/Medicaid dual eligible patients in 2006.  Due to nationwide Part D implementation
issues experienced by home infusion providers in early 2006, the industry is continuing to work with CMS
to rectify the coverage and payment policies that are causing implementation challenges.

Revenue reductions
resulting from the provisions of the Medicare Modernization Act are estimated by Apria
management as follows: The revision to inhalation drug reimbursement in 2004 resulted in a
revenue reduction of approximately $15 million from 2003 levels. In 2005, pretax income
was reduced from 2004 levels by nearly $34 million as a result of the lower Medicare
pricing implemented in 2005 and related product pricing increases imposed by drug
manufacturers. In 2006, the revision to the dispensing fee is estimated to reduce revenues
by approximately $9 million. The impact of the competitive bidding program and the
Medicare Part C and D programs cannot be estimated at this time.

The Deficit Reduction Act
of 2005 was signed into law by the President in February 2006. Provisions that will impact
reimbursement to Apria are summarized as follows:

| |  | In 2007,  durable  medical  equipment  currently  categorized  in the  rent to cap  category  by CMS,  such as
  hospital beds,  wheelchairs,  nebulizers,  patient lifts and continuous positive airway pressure devices,
  will be considered  purchased  outright at the end of the rental period and the ownership of such devices
  will transfer  directly to the patients.  The rental period,  which had been 15 months with an option for
  the patients to purchase the  equipment,  will be reduced to 13 months.  The new 13-month  rental  period
  began on  January  1,  2006,  and  therefore  the first  month in which the new  policy  will  impact the
  company's  revenue is February  2007. In addition,  the bi-annual  service and  maintenance  fee that had
  been paid to  suppliers  after the rental  period  ended,  will be  eliminated.  Suppliers  will have the
  option of billing  Medicare for any repairs and  maintenance  performed on the  patient-owned  equipment.
  The act authorizes the Secretary of HHS to establish  service and/or  maintenance  fees that at this time
  cannot be estimated  or assured.  It is,  however,  unlikely  that Apria will  continue in the repair and
  maintenance business.                                                                   
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Reimbursement  for oxygen will convert from an ongoing  rental method to a rent to purchase.  The Act mandates
     that oxygen equipment  reimbursement will be limited to 36 months,  after which time the ownership of the
     equipment will transfer to the patient,  who will assume all  responsibility for identifying when repairs
     or preventive  maintenance are needed.  Providers would continue to be reimbursed for delivering portable
     oxygen to those  patients who require it. The Act applies to patients who were on service with  suppliers
     from  January 1, 2006  forward.  Accordingly,  the first  month in which the new policy  will  impact the
     company is January 2009. The act authorizes the Secretary of HHS to establish service and/or  maintenance
     fees  that at this time  cannot be  estimated  or  assured.  Due to the  bundled  nature of the  existing
     payment  method,  which  includes the  reimbursement  for contents,  all applicable  clinical,  delivery,
     after-hours,  billing/collection  and other patient support services, the industry will work with CMS and
     the Secretary to establish  fair and equitable fee  schedules for such  non-equipment  services.  The net
     impact of the changes cannot be estimated at this time.

The Presidents
current budget proposal contains a provision to further reduce the monthly rental period
for oxygen from the now-mandated 36 months to 13 months. No further information is
available on the proposal and it is uncertain whether this provision will remain in the
budget that is ultimately approved by Congress.

Medicaid
Reimbursement. In 2001, some states began adopting alternative pricing
methodologies for certain drugs and biologicals under the Medicaid program. In at least 22
states, the changes reduced the level of reimbursement received by Apria without a
corresponding offset or increase to compensate for the service costs incurred. In several
of those states, Apria elected to stop accepting new Medicaid patient referrals for the
affected drugs and biologicals. Apria will continue, however, to provide services to
patients already on service, and for those who receive other Medicaid-covered respiratory,
home medical equipment or infusion therapies, if the reimbursement levels for those
services remain adequate. Further, in 2005, some states implemented other payment policy
changes or changed coverage criteria for medical equipment, enteral and infusion therapy
altogether. Currently, other states are considering reductions in Medicaid reimbursement
as they work through their respective states budget process. Apria management cannot
predict the outcome of such budget negotiations and whether other states will consider
reductions as well.

Gross
Profit. Gross margins were 67.5% in 2005, 71.2% in 2004 and 71.8% in 2003.
The reported margins include the effects of reclassifying certain respiratory therapy and
infusion therapy nursing expenses from the selling, distribution and administration line.
Excluding this impact, the margin declined by 1.5% between 2005 and 2004 and by .8%
between 2004 and 2003. The declines are primarily due to the Medicare reimbursement
reductions, managed care revenue pricing reductions and the effects of the non-renewal of
the Gentiva contract in 2004. Further eroding the gross margin in 2005 is a
manufacturers price increase for a particular respiratory drug, effected
concurrently with higher government reimbursement for that drug. This price increase is
estimated to have a $6.5 million negative impact on Aprias gross margin for 2005.
Mitigating some of the negative pressure on the gross margin in 2005 was a decrease in
depreciation expense, which is due to the decrease in patient service equipment
expenditures. See Clinical Expense Reclassification.

Provision for
Doubtful Accounts.The provision for doubtful accounts is based on
managements estimate of the net realizable value of accounts receivable after
considering actual write-offs of specific receivables. Accounts receivable estimated to be
uncollectible are provided for by applying specific percentages to each receivables aging
category, which is determined by the number of days the receivable is outstanding. For
2005, 2004 and 2003, the provision for doubtful accounts as a percentage of net revenues
was 3.2%, 3.3% and 3.7%, respectively. The slight improvement in 2005 versus 2004 is due
to strong cash collections, particularly in the fourth quarter. The improvement in 2004
when compared to 2003 is also attributable to strong cash collections and a lower
allowance requirement indicated by the companys analysis of subsequent realization
data.

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

Selling, distribution and
administrative expenses, expressed as percentages of net revenues, were 53.7% in 2005,
53.6% in 2004 and 53.3% in 2003. These reported percentages include the effects of
reclassifying certain respiratory therapy and infusion therapy nursing expenses to cost of
net revenues. Excluding this impact, the selling, distribution and administrative
percentage increased 2.4% in 2005. Approximately half of this increase is attributable to
the lower revenues resulting from the Medicare and managed care pricing changes noted
above without a corresponding reduction in the companys actual cost of providing
those products and services. Higher fuel prices and vehicle maintenance expenditures,
rising medical benefit costs and outsourced collection fees also factored into the
increase. Advertising costs related to the companys diabetic supply business also
increased year to year as a result of the companys entry into this market late in
the first quarter of 2004. Other incremental costs include severance charges related to
the departure of two executives and a reduction in workforce at the Corporate office, both
in the first quarter of 2005, and the departure of three executives during the fourth
quarter of 2005. See Clinical Expense Reclassification.

Qui Tam Settlement
and Related Costs. As previously reported, Apria was the subject of an
investigation launched in mid-1998 by the U.S. Attorneys office in Los Angeles and
the U.S. Department of Health and Human Services. The investigation concerned the
documentation supporting Aprias billing for services provided to patients whose
healthcare costs were paid by Medicare and other federal programs. The investigation
related to two civil qui tam lawsuits against Apria filed by individuals suing on
behalf of the government. Apria and representatives of the government and the individual
plaintiffs reached a preliminary agreement in early August 2005 to settle these lawsuits
for the aggregate sum of $17.6 million, without any admission of wrongdoing by Apria. The
settlement was finalized in a definitive agreement that was fully executed and became
effective on September 30, 2005, and Apria paid the settlement amount on that date. Apria
also incurred $1.7 million in legal fees and other related costs.

Amortization of
Intangible Assets.Amortization of intangible assets was $6.9 million in
2005, $6.7 million in 2004 and $3.7 million in 2003. The increase in amortization expense
in 2005 and 2004, when compared to 2003, is directly attributable to the increased level
of acquisition activity in 2004 and continued fast pace in 2005. See Liquidity
and Capital Resources  Business Combinations.

Interest Expense and
Income and Write-off of Deferred Debt Issuance Costs. Interest expense was
$23.0 million in 2005, $20.8 million in 2004 and $15.8 million in 2003. Interest income
was $853,000, $779,000 and $786,000 in 2005, 2004 and 2003, respectively. The increase in
interest expense in 2005 is primarily attributable to the increase in long-term debt
incurred to repurchase $175 million of Aprias common stock. The increase in base
interest rates during 2005 also contributed to the increase.

Interest expense was
higher in 2004, when compared to 2003, due to the impact of a full year of interest on the
$250 million convertible senior notes that were issued in August 2003. The interest
increases were partially offset by interest reductions resulting from a decrease in
borrowings under the credit agreement due to scheduled principal amortization payments and
by the expiration in March 2003 of two interest rate swap agreements that had fixed
interest at higher rates on a portion of Aprias debt.

In 2004, the company wrote
off $2.7 million in unamortized debt issuance costs in conjunction with the November 2004
refinancing of the companys bank loans. See Liquidity and Capital Resources
 Long-term Debt and Treasury Stock.

Income Tax Expense.Income taxes were $40.4 million in 2005, which reflects a higher rate
resulting from the portion of the settlement of two qui tam lawsuits that was
non-deductible for tax purposes. This increase was offset by a decrease in the valuation
allowance and a corresponding reduction of the tax provision that was recorded in the
first quarter of 2005 and by a decrease from the release of state tax contingencies due to
a change in estimate during the fourth quarter of 2005.

Income taxes were $64.3
million and $70.6 million for 2004 and 2003, respectively, and were provided at the
effective tax rates expected to be applicable for each year.

Apria utilized $5.0
million of federal net operating loss carryforwards in 2004. The remaining federal net
operating loss carryforwards of $7.1 million expired unused on December 31, 2004.
Additionally, at December 31, 2005, the company had various apportioned state net
operating loss carryforwards of $8.8 million, net of federal tax benefit.

The company believes it
has adequately provided for income tax issues not yet resolved with federal, state and
local tax authorities. At December 31, 2005, $16.7 million, net of tax benefit, was
accrued for such federal, state and local tax matters and is included in income taxes
payable. Although not probable, the most adverse resolution of these federal, state and
local issues could result in additional charges to earnings in future periods in addition
to the $16.7 million currently provided. Based upon a consideration of all relevant facts
and circumstances, the company does not believe the ultimate resolution of tax issues for
all open tax periods will have a material adverse effect upon its results of operations or
financial condition.

Inflation. Apria experiences pricing pressures in the form of continued reductions in
 reimbursement rates, particularly from managed care organizations and from
 governmental payors such as Medicare and Medicaid. The company is also impacted
 by rising costs for certain inflation-sensitive operating expenses such as labor
 and employee benefits, facility and equipment leases, and vehicle fuel.

---

Liquidity and Capital Resources

Aprias principal
source of liquidity is its operating cash flow, which is supplemented by a $500 million
revolving credit facility. In recent years, Apria has generated operating cash flows in
excess of its operating needs, which has afforded it the ability to pursue acquisitions
and fund patient service equipment purchases to support revenue growth. Aprias
management believes that its operating cash flow will continue to be sufficient to fund
its operations and growth strategies. However, in late 2005, Apria drew upon its revolving
credit facility for the $175 million common stock repurchase; in 2006, the company may
repurchase an additional $75 million of its stock; and in September 2008, the holders of
the $250 million convertible senior notes will have an opportunity to require Apria to
repurchase some or all of the notes. Accordingly, Apria management has begun to explore
financing alternatives.

Further, Apria has
initiated a project to implement a new enterprise-wide system. The overall objective of
the project is to deliver the necessary technology and automation across the organization
to enable service improvements, productivity and access to information. Management is
currently in the system selection phase and expects to progress to initial phases of
development later in 2006. Cash expenditures for 2006, which include related
infrastructure upgrades and software development costs, are estimated in the $15 million
to $20 million range. The total cost of the project will be determined once a system
selection has been made and the project planning is completed.

Cash
Flow. Cash provided by operating activities in 2005 was $206.3 million
compared to $271.6 million in 2004 and $269.4 million in 2003. The decrease in operating
cash flow in 2005 is due primarily to the Medicare reimbursement reductions and related
product cost increases; the qui tam lawsuit settlement and related fees; and a
$16.5 million increase in tax payments between the periods. The increase in 2004, when
compared to 2003, is largely due to the increase in net income before items not requiring
cash and the timing of disbursements processed against accounts payable and other
accruals. These items were partially offset by a larger increase in accounts receivable in
2004 than in 2003, which resulted from acquisition activity.

Cash used in investing
activities was $223.6 million, $281.4 million and $248.2 million in 2005, 2004 and 2003,
respectively. Changes between the periods in the level of business combinations executed
directly impact this line. The reduction in purchases of patient service and other
equipment in 2005 is directly attributable to controls placed on inventory and purchasing.

Cash provided by financing
activities was $1.2 million in 2005 compared to a use of cash of $111.4 million in 2004.
Financing activities provided cash of $112.9 million in 2003. In 2005, the company
borrowed from its revolving credit facility to repurchase $175 million worth of its common
stock. Excluding this repurchase, the company would have had a reduction in long-term debt
of $10.5 million. Cash used in 2004 primarily relates to a $100 million stock repurchase
and scheduled principal payments made against term loans prior to the November 2004
refinancing. Cash provided in 2003 reflects net proceeds received upon the issuance of
$250 million of 3.375% convertible senior notes. Also, the company repurchased a total of
$118.5 million of its common stock in 2003, $100 million of which was purchased with the
convertible note proceeds.

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

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

---

Accounts
Receivable. Accounts receivable before allowance for doubtful accounts
increased to $268 million at December 31, 2005 from $264 million at the same date in 2004.
Days sales outstanding (calculated as of each period-end by dividing accounts receivable,
less allowance for doubtful accounts, by the 90-day rolling average of net revenues) were
57 days at December 31, 2005 compared to 52 at December 31, 2004. The increase in days
sales outstanding is a result of the decrease in net revenues for the fourth quarter (or
last 90 days) of 2005, when compared to the same period at the end of 2004, without a
corresponding decrease in the accounts receivable balance.

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

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

Unbilled
Receivables.Included in accounts receivable are earned but unbilled receivables
of $39.0 million and $36.3 million at December 31, 2005 and 2004, respectively. Delays,
ranging from a day up to several weeks, between the date of service and billing can occur
due to delays in obtaining certain required payor-specific documentation from internal and
external sources. Earned but unbilled receivables are aged from date of service and are
considered in Aprias analysis of historical performance and collectibility. The
higher unbilled amount at December 31, 2005 is largely due to acquisitions effected during
2005. The time-consuming processes of converting patient files onto Aprias systems
and obtaining provider numbers from governmental payors routinely delay billing of the
newly acquired business.

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

The branch locations serve
as the primary point from which inventories and patient service equipment are delivered to
patients. Certain products and services, such as infusion therapy and respiratory
medications, bypass the branches and are provided directly to patients from pharmacies or
other central locations. The branches are supplied with inventory and equipment from
central warehouses that service specific areas of the country. Such warehouses are also
responsible for repairs and scheduled maintenance of patient service equipment, which adds
to the frequent movement of equipment between locations. Further, the majority of
Aprias patient service equipment is located in patients homes. While
utilization varies widely between equipment types, on the average, approximately 80% of
equipment is on rent at any given time. Inherent in this asset flow is the fact that
losses will occur. Management has successfully instituted a number of controls over the
companys inventories and patient service equipment to minimize such losses.
Depending on the product type, the company performs physical inventories on an annual or
quarterly basis. Inventory and patient service equipment balances in the financial records
are adjusted to reflect the results of these physical inventories. Inventory and patient
service equipment losses for 2005, 2004 and 2003, were $868,000, $2.0 million, and $2.4
million, respectively.

Long-term
Debt. Aprias credit agreement with Bank of America and a syndicate of
lenders consists of a $500 million revolving credit facility that has a maturity date of
November 23, 2009. The senior secured credit agreement permits Apria to select one of two
variable interest rates. One option is the base rate, which is expressed as the higher of
(a) the Federal Funds rate plus 0.50% or (b) the Bank of America prime rate. The other
option is the Eurodollar rate, which is based on the London Interbank Offered Rate.
Interest on outstanding balances under the senior secured credit agreement is determined
by adding a margin to the Eurodollar rate or base rate in effect at each interest
calculation date. The applicable margin for the revolving credit facility is based on
Aprias debt rating as determined by Standard and Poors Ratings Services or
Moodys Investor Services with respect to the credit facility. The applicable margin
ranges from 0.75% to 1.50% for Eurodollar loans and from zero to 0.50% for base rate
loans. The senior credit agreement also requires payment of commitment fees ranging from
0.15% to 0.375% (also based on Aprias debt rating) on the unused portion of the
revolving credit facility. The effective interest rate at December 31, 2005, after
consideration of the effect of the swap agreements described below, was 4.40%. See
Hedging Activities.

---

In November 2005, Standard
and Poors Ratings Services downgraded its rating on Aprias bank debt from BBB-
to BB+. The effect of this action was to increase the applicable margin from 1.0% to 1.25%
and to increase the commitment fee on the unused line from .20% to .25%, in accordance
with the bank credit agreement. In March 2006, Moodys Investor Services announced
that they placed Apria under review for possible downgrade. Should the outcome of such
review result in a downgrade, it is not expected to have a further impact on Aprias
interest rates.

Borrowings under the
senior secured credit facility are collateralized by substantially all of the assets of
Apria. At December 31, 2005, the company was in compliance with all of the financial
covenants required by the credit agreement.

On December 31, 2005
outstanding borrowings on the revolving credit facility were $390 million. Outstanding
letters of credit totaled $3.9 million and credit available under the revolving facility
was $106.1 million.

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

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

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

During 2005, Apria had two
interest rate swap agreements in effect to fix its LIBOR-based variable rate debt. One
such agreement, which had a notional amount of $25 million and a fixed rate of 3.04%,
expired in December 2005. The other agreement, also with a notional amount of $25 million
and a fixed rate of 3.42%, expires December 2006. During the second quarter of 2005, Apria
entered into two new interest rate swap agreements. The forward-starting contracts, each
with a notional amount of $25 million, became effective in January 2006. Both agreements
have a three-year term with fixed rates of 4.38% and 4.44%. Apria also had two swap
agreements with an aggregate notional amount of $50 million that expired in December 2004.

The swap agreements are
being accounted for as cash flow hedges under SFAS No. 133, Accounting for
Derivative and Hedging Activities. Accordingly, the difference between the interest
received and interest paid is reflected as an adjustment to interest expense. For 2005,
Apria received a net settlement amount of $11,000. Unrealized gains and losses on the fair
value of the swap agreements are reflected, net of taxes, in other comprehensive
income/loss. At December 31, 2005, the aggregate fair value of the swap agreements was an
asset of $769,000. While no assurances can be made, Apria does not anticipate losses due
to counterparty nonperformance as its counterparties to the various swap agreements are
nationally recognized financial institutions with strong credit ratings.

Treasury
Stock.In October 2005, Aprias Board of Directors authorized the
company to repurchase up to $250 million worth of its outstanding common stock.

On November 7, 2005, Apria
purchased 7.3 million shares of its common stock for $175 million through an accelerated
share repurchase program. Under the agreement, Aprias counterparty borrowed shares
that were sold to Apria at an initial price of $23.83. The counterparty then repurchased
shares over a period that commenced immediately after the sale of shares to Apria. The
repurchase transaction was completed in February 2006. The agreement contained a provision
that subjected Apria to a purchase price adjustment based on the volume weighted average
price of the companys common stock over the period during which the counterparty
purchased the shares. Such provision resulted in an additional $242,000 owed to the
counterparty that Apria elected to settle in cash in February 2006. This amount was
recorded as a liability at December 31, 2005, with a corresponding charge to interest
expense reflecting the change in the fair value of the settlement contract.

Depending on market and
other considerations, the company may decide to repurchase $75 million of its common stock
over the next four fiscal quarters in accordance with the remaining Board authorization.

In January 2004, Apria
prepaid $50 million to repurchase 1.7 million shares of its common stock at a strike price
of $28.89 through an accelerated share repurchase program. The repurchase of the shares
was completed in April 2004 and the share price differential was settled in cash in June
2004, for a total cost of $53 million. During the third quarter of 2004, the company
purchased an additional 1.7 million shares for $47 million. All repurchased common shares
are being held in treasury.

Business
Combinations.Apria periodically acquires complementary businesses in
specific geographic markets. Because of the potential for a higher gross margin, Apria
targets respiratory therapy businesses. These transactions are accounted for as purchases
and the results of operations of the acquired companies are included in the accompanying
statements of operations from the dates of acquisition. In accordance with SFAS No. 142,
goodwill is no longer being amortized. Covenants not to compete are being amortized over
the life of the respective agreements. Tradenames and customer lists are being amortized
over the period of their expected benefit.

The aggregate
consideration for the 21 acquisitions that closed during 2005 was $103.0 million.
Allocation of this amount includes $86.1 million to goodwill and $7.7 million to other
intangible assets. Apria closed 27 acquisitions in both 2004 and in 2003 for aggregate
consideration of $148.7 million and $98.0 million, respectively. Cash paid for
acquisitions, which includes amounts deferred from prior year acquisitions, totaled $105.5
million, $144.2 million and $99.4 million in 2005, 2004 and 2003, respectively.

Off-Balance Sheet Arrangements

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

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

---

ITEM 7A.      
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

At December 31, 2005,
Aprias revolving credit facility borrowings totaled $390 million. The bank credit
agreement governing the revolver provides interest rate options based on the following
indices: Federal Funds Rate, the Bank of America prime rate or the London Interbank
Offered Rate, or LIBOR. All such interest rate options are subject to the application of
an interest margin as specified in the bank credit agreement. At December 31, 2005, all of
Aprias outstanding revolving debt was tied to LIBOR.

During 2005, Apria had two
interest rate swap agreements in effect to fix its LIBOR-based variable rate debt. One of
the agreements, which expired in December 2005, had a notional amount of $25 million and a
fixed rate of 3.04%. The other agreement, which will expire in December 2006, has a
notional amount of $25 million and a fixed rate of 3.42%. During the second quarter of
2005, the company entered into two new interest rate swap agreements. The forward starting
contracts, each with a notional amount of $25 million, became effective in January 2006.
Both agreements have a three-year term with fixed rates of 4.38% and 4.44%.

Based on the revolving
debt outstanding and the swap agreements in place at December 31, 2005, a 100 basis point
change in the applicable interest rates would increase or decrease Aprias annual
cash flow and pretax earnings by approximately $3.65 million. See Managements
Discussion and Analysis of Financial Condition and Results of Operations  Long-term
Debt  Hedging Activities.

ITEM 8.     
 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

None.

ITEM 9A.      CONTROLS AND PROCEDURES

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

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

---

MANAGEMENTS REPORT ON INTERNAL CONTROL OVER
FINANCIAL REPORTING

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

Under the supervision and
with the participation of management, including the principal executive and financial
officers, the company has conducted an evaluation of the effectiveness of its internal
control over financial reporting based on the framework in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this evaluation, management has concluded that its internal
control over financial reporting was effective as of December 31, 2005.

Managements
assessment of the effectiveness of internal control over financial reporting as of
December 31, 2005 has been audited by Deloitte & Touche LLP, an independent registered
public accounting firm, as stated in its report on managements assessment of
Aprias internal control over financial reporting, which is included herein.

March 16, 2006

---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited
managements assessment, included in the accompanying Managements Report on
Internal Control Over Financial Reporting, that Apria Healthcare Group Inc. and
subsidiaries (the Company) maintained effective internal control over
financial reporting as of December 31, 2005, based on criteria established in Internal
ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations
of the Treadway Commission. The Companys management is responsible for maintaining
effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting.  Our responsibility is to
express an opinion on managements assessment and an opinion on the effectiveness of
the Companys internal control over financial reporting based on our audit.

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

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

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

In our opinion,
managements assessment that the Company maintained effective internal control over
financial reporting as of December 31, 2005, is fairly stated, in all material respects,
based on the criteria established in Internal ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. 
Also in our opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2005, based on the criteria
established in Internal ControlIntegrated Frameworkissued by the Committee
of Sponsoring Organizations of the Treadway Commission.

We have also
audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated financial statements and financial statement schedule as
of and for the year ended December 31, 2005 of the Company and our report dated March 16,
2006 expressed an unqualified opinion on those financial statements and the financial
statement schedule.

/s/ DELOITTE & TOUCHE
LLP

Costa Mesa, California
March 16, 2006

---

ITEM 9B.     OTHER INFORMATION

None.

PART III

ITEM 10.      DIRECTORS AND OFFICERS OF THE REGISTRANT

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

ITEM 11.      EXECUTIVE COMPENSATION

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

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

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

ITEM 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

ITEM 14.      PRINCIPAL ACCOUNTING FEES AND SERVICES

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

PART IV

ITEM 15.      EXHIBITS, FINANCIAL
STATEMENT SCHEDULE

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

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

---

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE

|                                                                                                                              | 
|----------------------------------------------------------------------------------------------------------------------------- | 
|CONSOLIDATED FINANCIAL STATEMENTS                                                                                             | 
|Report of Independent Registered
Public Accounting Firm                                                                       | 
|Consolidated Balance Sheets - December 31,
2005 and 2004                                                                      | 
|Consolidated Statements of Income - Years
ended December 31, 2005, 2004 and 2003                                              | 
|Consolidated Statements of Stockholders
Equity and Comprehensive Income -       Years
ended December 31, 2005, 2004 and 2003 | 
|Consolidated Statements of Cash Flows -
Years ended December 31, 2005, 2004 and 2003                                          | 
|Notes to Consolidated Financial
Statements                                                                                    | 
|FINANCIAL STATEMENT SCHEDULE                                                                                                  | 
|Schedule II - Valuation and Qualifying
Accounts                                                                               | 

---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited
the accompanying consolidated balance sheets of Apria Healthcare Group Inc. and
subsidiaries (the Company) as of December 31, 2005 and 2004, and the related
consolidated statements of income, stockholders equity and comprehensive income, and
cash flows for each of the three years in the period ended December 31, 2005.  Our
audits also included the financial statement schedule for each of the three years in the
period ended December 31, 2005, included in the index at Item 15(a)(2). These consolidated
financial statements and the financial statement schedule are the responsibility of the
Companys management.  Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our audits.

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

In our opinion,
such consolidated financial statements present fairly, in all material respects, the
financial position of Apria Healthcare Group Inc. and subsidiaries as of December 31, 2005
and 2004, and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2005, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, such financial
statement schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the information
set forth therein.

We have also
audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the effectiveness of the Companys internal control over financial
reporting as of December 31, 2005, based on the criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission and our report dated March 16, 2006 expressed an unqualified
opinion on managements assessment of the effectiveness of the Companys
internal control over financial reporting and an unqualified opinion on the effectiveness
of the Companys internal control over financial reporting.

/s/ DELOITTE & TOUCHE
LLP

Costa Mesa, California
March 16, 2006

---

APRIA HEALTHCARE GROUP INC.

CONSOLIDATED BALANCE SHEETS

|                                                                     | December 31,
|-------------------------------------------------------------------- | ------------
|
|
|
|ASSETS                                                               |             
|CURRENT ASSETS                                                       |             
|Cash and cash equivalents                                            |             
|Accounts receivable, less allowance
for doubtful accounts of $41,527 |             
|and $45,064 at December 31, 2005 and
2004, respectively              |             
|Inventories, net                                                     |             
|Deferred income taxes                                                |             
|Prepaid expenses and other current assets                            |             
|                                                                     |             
|TOTAL CURRENT ASSETS                                                 |             
|                                                                     |             
|PATIENT SERVICE EQUIPMENT, less accumulated depreciation of          |             
|$446,728 and $420,714 at December 31, 2005 and 2004, respectively    |             
|PROPERTY, EQUIPMENT AND IMPROVEMENTS, NET                            |             
|DEFERRED INCOME TAXES                                                |             
|GOODWILL                                                             |             
|INTANGIBLE ASSETS, NET                                               |             
|DEFERRED DEBT ISSUANCE COSTS, NET                                    |             
|OTHER ASSETS                                                         |             
|                                                                     |             
|                                                                     |             
|                                                                     |             
|LIABILITIES AND STOCKHOLDERS EQUITY                                 |             
|CURRENT LIABILITIES                                                  |             
|Accounts payable                                                     |             
|Accrued payroll and related taxes and benefits                       |             
|Accrued insurance                                                    |             
|Income taxes payable                                                 |             
|Other accrued liabilities                                            |             
|Current portion of long-term debt                                    |             
|                                                                     |             
|TOTAL CURRENT LIABILITIES                                            |             
|                                                                     |             
|LONG-TERM DEBT, net of current portion                               |             
|DEFERRED INCOME TAXES                                                |             
|OTHER NON-CURRENT LIABILITIES                                        |             
|COMMITMENTS AND CONTINGENCIES (Notes 9 & 11)                         |             
|STOCKHOLDERS EQUITY                                                 |             
|Preferred stock, $.001 par value: 10,000,000 shares authorized;      |             
|none issued                                                          |             
|Common stock, $.001 par value: 150,000,000 shares authorized;        |             
|59,215,749 and 58,236,364 shares issued at December 31,
2005 and     |             
|2004, respectively; 42,250,564
and 48,608,705 outstanding            |             
|at December 31, 2005 and 2004, respectively                          |             
|Additional paid-in capital                                           |             
|Treasury stock, at cost; 16,965,185 and 9,627,659 shares at          |             
|December 31, 2005 and 2004, respectively                             |             
|Retained earnings                                                    |             
|Accumulated other comprehensive income (loss)                        |             
|                                                                     |             
|                                                                     |             
|                                                                     |             
|                                                                     |             
|                                                                     |             

See notes to consolidated
financial statements.

---

APRIA HEALTHCARE GROUP INC.

CONSOLIDATED STATEMENTS OF INCOME

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

See notes to consolidated financial
statements.

---

APRIA HEALTHCARE GROUP INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY AND COMPREHENSIVE INCOME

|                                                                  | Retained | Accumulated | 
|----------------------------------------------------------------- | -------- | ----------- | 
|
|
|
|
|Balance at December 31, 2002                                      |          | 56,581      | 
|Exercise of stock options                                         |          | 736         | 
|Tax benefits related to stock options                             |          |             | 
|Compensatory stock options   
and awards                          |          |             | 
|Repurchases of common stock                                       |          |             | 
|Unrealized gain on interest rate
   swap agreements, net of taxes |          |             | 
|Net income                                                        |          |             | 
|                                                                  |          |             | 
|Total
comprehensive income                                        |          |             | 
|                                                                  |          |             | 
|Balance at December 31, 2003                                      |          | 57,317      | 
|                                                                  |          |             | 
|Exercise of stock options                                         |          | 893         | 
|Tax benefits related to stock options                             |          |             | 
|Compensatory stock options   
and awards                          |          | 26          | 
|Repurchases of common stock                                       |          |             | 
|Unrealized gain on interest rate
   swap agreements, net of taxes |          |             | 
|Net income                                                        |          |             | 
|                                                                  |          |             | 
|Total
comprehensive income                                        |          |             | 
|                                                                  |          |             | 
|Balance at December 31, 2004                                      |          | 58,236      | 
|                                                                  |          |             | 
|Exercise of stock options                                         |          | 937         | 
|Tax benefits related to stock options                             |          |             | 
|Compensatory stock options   
and awards                          |          | 43          | 
|Repurchases of common stock                                       |          |             | 
|Unrealized gain on interest rate
   swap agreements, net of taxes |          |             | 
|Net income                                                        |          |             | 
|                                                                  |          |             | 
|Total
comprehensive income                                        |          |             | 
|                                                                  |          |             | 
|Balance at December 31, 2005                                      |          | 59,216      | 
|                                                                  |          |             | 

See notes to consolidated financial
statements.

---

APRIA HEALTHCARE GROUP INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

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

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

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

Purchases of patient service equipment and property, equipment and improvements exclude purchases
 that remain unpaid
at the end of the respective year.  Such amounts are then included in the following years
purchases.  Unpaid purchases were $10,754, $10,895 and $6,496 at December 31,  2005, 2004 and 2003, respectively.

See notes to consolidated
financial statements.

---

APRIA HEALTHCARE GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Company Background and
Segment Reporting: Apria operates in the home healthcare segment of the healthcare
industry, providing a variety of clinical services and related products and supplies as
prescribed by a physician or authorized by a case manager as part of a care plan.
Essentially all products and services offered by the company are provided through the
companys network of approximately 500 branch facilities, which are located
throughout the United States and are currently organized into 15 geographic regions. Each
region consists of a number of branches and a regional office, which provides key
administrative support services. The companys chief operating decision maker
evaluates operating results on a geographic basis and, therefore, views each region as an
operating segment. All regions provide the same products and services, including
respiratory therapy, infusion therapy and home medical equipment and supplies. Additional
administrative and operational support services are provided at a corporate level and at a
consolidated field level. For financial reporting purposes, all of the companys
operating segments are aggregated into one reportable segment in accordance with the
aggregation criteria of Statement of Financial Accounting Standards (SFAS) No.
131, Disclosures about Segments of an Enterprise and Related Information.

Respiratory therapy,
infusion therapy and home medical equipment represent approximately 69%, 17% and 14% of
total 2005 revenues, respectively. The gross margins in 2005 for these services and
related products were 74%, 51% and 56%, respectively, after the reclassification of
certain clinical expenses to the cost of net revenues. See Note 1  Respiratory
Therapy Expenses and Note 1  Nursing Expenses.

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

Revenue Recognition and
Concentration of Credit Risk: Revenues are recognized on the date services and related
products are provided to patients and are recorded at amounts estimated to be received
under reimbursement arrangements with third-party payors, including private insurers,
prepaid health plans, Medicare and Medicaid. For the years 2005, 2004 and 2003, revenues
reimbursed under arrangements with Medicare and Medicaid were approximately 39%, 38% and
35%, respectively, as a percentage of total revenues. In all three years presented, no
other third-party payor group represented more than 9% of the companys revenues. The
majority of the companys revenues are derived from fees charged for patient care
under fee-for-service arrangements. Revenues derived from capitation arrangements
represented less than 10% of total net revenues for 2005, 2004 and 2003.

Cash and Cash
Equivalents: Apria maintains cash with various financial institutions. These financial
institutions are located throughout the United States and the companys cash
management practices limit exposure to any one institution. Outstanding checks, which are
reported as a component of accounts payable, were $20,647,000 and $23,031,000 at December
31, 2005 and 2004, respectively. Management considers all highly liquid instruments
purchased with a maturity of less than three months to be cash equivalents.

Accounts
Receivable: Included in accounts receivable are earned but unbilled receivables of
$39,015,000 and $36,264,000 at December 31, 2005 and 2004, respectively. Delays ranging
from a day up to several weeks between the date of service and billing can occur due to
delays in obtaining certain required payor-specific documentation from internal and
external sources. Earned but unbilled receivables are aged from date of service and are
considered in Aprias analysis of historical performance and collectibility.

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

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

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

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

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

---

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

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

The carrying value of
capitalized software is reviewed if the facts and circumstances suggest that it may be
impaired. Indicators of impairment may include a subsequent change in the extent or manner
in which the software is used or expected to be used, a significant change to the software
is made or expected to be made or the cost to develop or modify internal-use software
exceeds that expected amount. Management does not believe any impairment of its
capitalized software existed at December 31, 2005.

Goodwill: Goodwill
arising from business combinations represents the excess of the purchase price over the
estimated fair value of the net assets of the businesses acquired. In accordance with the
provisions of SFAS No. 142, Goodwill and Other Intangible Assets, goodwill is
not amortized but tested annually for impairment or more frequently if circumstances
indicate the possibility of impairment. Management does not believe any impairment
of its goodwill existed at December 31, 2005.

Intangible Assets:
Intangible assets consist of covenants not to compete, tradenames and customer lists, all
of which resulted from business combinations. The values assigned to the covenants are
amortized on a straight-line basis over their contractual terms, which range from three to
five years. The customer list and tradename valuations are amortized over their period of
expected benefit, which averages 7.6 months and 24 months, respectively.

Management reviews for
impairment of intangible assets and long-lived assets on an ongoing basis and whenever
events or changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Management does not believe any impairment of its intangible assets or
long-lived assets existed at December 31, 2005.

Fair Value of Financial
Instruments:The carrying value of Aprias bank debt approximates fair value
because the underlying instruments are variable notes that reprice frequently. The fair
value of the convertible senior notes, as determined by reference to quoted market prices,
is $240,625,000 and $287,878,000 at December 31, 2005 and 2004, respectively. The carrying
amounts of cash and cash equivalents, accounts receivable, trade payables and accrued
expenses approximate fair value because of their short maturity.

---

Respiratory Therapy
Expenses: Respiratory therapy expenses presented within cost of net revenues for 2005
are comprised primarily of employee salary and benefit costs or contract fees paid to
respiratory therapists and other related professionals who are deployed to service a
patient. Aprias respiratory therapy personnel are also engaged in a number of
administrative and marketing tasks, and accordingly, these costs are classified within
selling, distribution and administrative expenses and amounted to $18,807,000 in 2005.

Apria adopted the
classification described above in 2005. During prior years, the data was not captured in
the detail necessary to make a corresponding reclassification. Therefore, all respiratory
therapy expenses for 2004 and 2003 are classified within selling, distribution and
administrative expenses and totaled $50,004,000 and $49,249,000 for those years,
respectively.

Nursing Expenses:
Nursing expenses presented within cost of net revenues are comprised primarily of employee
salary and benefit costs and fees paid to contracted workers who are deployed to service a
patient. The majority of these costs relate to the companys infusion therapy service
line which were previously classified as selling, distribution and administrative
expenses. Additional nursing costs that are currently, and were previously, presented
within the cost of net revenues relate to a small ancillary nursing service business that
generates approximately $1,000,000 in revenue annually.

Apria adopted the
classification described above in 2005. Certain nursing expenses incurred by the infusion
therapy business, including administrative and marketing costs, remain within selling,
distribution and administrative expenses and totaled $3,948,000, $4,189,000 and $4,636,000
for 2005, 2004 and 2003, respectively.

Distribution
Expenses: Distribution expenses are included in selling, distribution and
administrative expenses and totaled $171,724,000, $157,142,000, and $143,352,000 in 2005,
2004, and 2003, respectively. Such expense represents the cost incurred to deliver product
to the end user. Included are leasing, maintenance, licensing and fuel costs associated
with the companys vehicle fleet; salaries and other costs related to drivers and
dispatch personnel; and amounts paid to courier and other outside shipping vendors. Such
expenses fall within the definition of shipping and handling costs as
discussed in Emerging Issues Task Force No. 00-10 Accounting for Shipping and
Handling Fees and Costs, which permits their income statement classification within
selling and administrative expenses.

Advertising:
Advertising costs are initially established as a prepaid expense and amortized over the
period of expected benefit. Such expenses are included in selling, distribution and
administrative expenses and amounted to $6,844,000, $4,799,000 and $3,155,000 for 2005,
2004 and 2003, respectively.

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

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

Stock-based
Compensation:The company accounts for its stock-based compensation plans under the
recognition and measurement principles of Accounting Principles Board (APB)
Opinion No. 25,Accounting for Stock Issued to Employees,and
related interpretations. Apria has adopted the disclosure provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, as amended by SFAS No. 148,
Accounting for Stock-Based Compensation  Transition and Disclosure  an
amendment of FASB Statement No. 123. For the years ended December 31, 2005, 2004 and
2003, net income reflects compensation expense for restricted stock awards and restricted
stock purchase rights valued in accordance with APB No. 25. Had compensation expense for
all of the companys stock-based compensation awards been recognized based on the
fair value recognition provisions of SFAS No. 123, Aprias net income and per share
amounts would have been adjusted to the pro forma amounts indicated below. The pro forma
compensation expense presented in 2005 reflects the November acceleration of the vesting
of certain stock options. See Note 1  Recent Accounting Pronouncements 
SFAS No. 123R and Note 6  Stockholders Equity.

---

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

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 2005, 2004 and
2003: risk-free interest rates of 3.78%, 3.19% and 2.84%, respectively; dividend yield of
0% for all years; expected lives of 4.13 years for 2005, 4.51 years in 2004 and 4.80 years
in 2003 and volatility of 32% for 2005, 43% for 2004 and 54% for 2003.

Comprehensive Income:For the years ended December 31, 2005, 2004 and 2003, the difference between net
income and comprehensive income is $482,000, $904,000 and $314,000, respectively, net of
taxes, which is attributable to unrealized gains on various interest rate swap agreements,
which are accounted for as cash flow hedges.

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

Recent Accounting
Pronouncements: In November 2004, the Financial Accounting Standards Board
(FASB) issued SFAS No. 151, Inventory Costs, which amends and
clarifies previous guidance on the accounting for abnormal amounts of idle facility
expense, freight, handling costs and spoilage. Abnormal amounts of these costs should be
recognized as current period charges rather than as a portion of inventory cost.
Additionally, SFAS No. 151 requires that the allocation of fixed production overhead be
based on the normal capacity of the production facilities, which refers to a range of
production levels within which ordinary variations are expected. The statement is
effective for inventory costs incurred during fiscal years beginning after June 15, 2005.
Accordingly, Apria adopted the statement January 1, 2006. The adoption of SFAS
No. 151 is not expected to have a material effect on the companys consolidated
financial statements.

---

In December 2004, the FASB
issued SFAS No. 123R, Share-Based Payment. This statement replaces SFAS No.
123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No.
25, Accounting for Stock Issued to Employees. SFAS No. 123R requires a company
to measure the cost of employee services received in exchange for an award of equity
instruments based on the grant date fair value of the award. The cost will be recognized
over the period during which the employee is required to provide service in exchange for
the award (usually the vesting period). Apria adopted the statement January 1, 2006 and
has employed the modified prospective method of transition. Management currently estimates
that adoption of SFAS No. 123R will increase share-based compensation expense in 2006 by
approximately $2,500,000.

In May 2005, the FASB
issued SFAS No. 154, Accounting Changes and Error Corrections, which replaces
APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3,
Reporting Accounting Changes in Interim Financial Statements. SFAS No. 154
changes the accounting for, and the reporting of, a change in accounting principle. The
statement also defines and requires retrospective application of a change in accounting
principle to prior periods financial statements unless impracticable. If
retrospective application is impracticable, the new accounting principle must be applied
to the asset and liability balances as of the beginning of the earliest period practicable
and a corresponding adjustment to the opening balance of retained earnings for the same
period, rather than being reported in the income statement. Additionally, SFAS No. 154
addresses a change in accounting for estimates effected by a change in accounting
principle and redefines restatement as a revision to reflect the correction of an error.
The statement is effective for accounting changes and error corrections made in fiscal
years beginning after December 15, 2005. Accordingly, Apria adopted the statement January
1, 2006. The adoption of SFAS No. 154 is not expected to have a material effect on
the companys consolidated financial statements.

In February 2006, the FASB
issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments. The
statement amends SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities and SFAS No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. The statement is effective for
all financial instruments acquired or issued after the beginning of an entitys first
fiscal year that begins after September 15, 2006. Although management is currently
evaluating the statement, the companys planned adoption of SFAS No. 155 on January
1, 2007 is not expected to have a material effect on the companys consolidated
financial statements.

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

NOTE 2 -- PROPERTY, EQUIPMENT AND IMPROVEMENTS

Property, equipment and
improvements consist of the following:

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

NOTE 3 -- BUSINESS COMBINATIONS

During 2005, Apria
acquired 21 complementary businesses within specific geographic markets, comprised
primarily of home respiratory therapy businesses. Similarly, the company acquired 27
companies during each of the years ending 2004 and 2003. For all periods presented, these
all-cash transactions were accounted for as purchases and, accordingly, the results of
operations of the acquired businesses are included in the consolidated income statements
from the dates of acquisition. The purchase prices were allocated to the various
underlying tangible and intangible assets and liabilities on the basis of estimated fair
value.

Of the
acquisitions that closed during 2005, the largest was Aprias purchase of the home healthcare
division of Air Liquide Healthcare America Corporation d/b/a Vitalaire Healthcare, Inc., with an
effective date of June 30, 2005.  Included in the cash purchase price of
$40,839,000 was goodwill of $33,867,000, other intangible assets of
$3,010,000 and patient service equipment of $3,310,000.

The following table
summarizes the allocation of the aggregate annual purchase price for acquisitions made during
the years indicated, including adjustments to the purchase accounting from the preceding
year and payments deferred from prior years. In 2005, such payments totaled
$8,575,000. At December 31, 2005 and 2004, outstanding deferred consideration totaled
$5,682,000 and $8,575,000, respectively, and is included in the consolidated balance
sheets in other accrued liabilities.

Cash paid for
acquisitions:

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

---

The following supplemental
unaudited pro forma information presents the combined operating results of Apria and the
businesses that were acquired by Apria during 2005 and 2004, as if the acquisitions had
occurred at the beginning of each of the periods presented. The pro forma information is
based on the historical financial statements of Apria and those of the acquired
businesses. Amounts are not necessarily indicative of the results that may have been
obtained had the combinations been in effect at the beginning of the periods presented or
that may be achieved in the future.

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

NOTE 4 -- GOODWILL AND INTANGIBLE ASSETS

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

---

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

For the year ended
December 31, 2005, the net change in the carrying amount of goodwill of $85,362,000 is the
result of business combinations. All of the goodwill recorded in conjunction with business
combinations for the periods presented is expected to be deductible for tax purposes.

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

|(in thousands)           |  |  | December 31, 2005 |     | December 31, 2004
|------------------------ |  |  | ----------------- | --- | -----------------
|
|
|
|Covenants not to compete |  |  |                   | 4.9 |                  
|Tradenames               |  |  |                   | 2.0 |                  
|Customer lists           |  |  |                   | 0.6 |                  
|                         |  |  |                   |     |                  
|                         |  |  |                   | 3.0 |                  
|                         |  |  |                   |     |                  

Amortization expense
amounted to $6,941,000 for the year ended December 31, 2005. Estimated amortization expense
for each of the fiscal years ending December 31, is presented below:

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

---

NOTE 5 -- LONG-TERM DEBT

Long-term debt consists of
the following:

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

Revolving Credit
Facility: Aprias credit agreement with Bank of America and a syndicate of
lenders consists of a $500,000,000 revolving credit facility that matures November 23,
2009.

At December 31, 2005,
borrowings under the revolving credit facility were $390,000,000, outstanding letters of
credit totaled $3,855,000 and credit available under the revolving facility was
$106,145,000.

The senior secured credit
agreement permits Apria to select one of two variable interest rates. One option is the
base rate, which is expressed as the higher of (a) the Federal Funds rate plus 0.50% or
(b) the Bank of America prime rate. The other option is the Eurodollar rate, which is
based on the London Interbank Offered Rate (LIBOR). Interest on outstanding
balances under the senior secured credit agreement is determined by adding a margin to the
Eurodollar rate or base rate in effect at each interest calculation date. The applicable
margin for the revolving credit facility is based on Aprias debt rating as
determined by either Standard and Poors Ratings Services or Moodys Investor
Services with respect to the credit facility. The applicable margin ranges from 0.75% to
1.50% for Eurodollar loans and from zero to 0.50% for base rate loans. The senior credit
agreement also requires payment of commitment fees ranging from 0.15% to 0.375% (also
based on Aprias debt rating) on the unused portion of the revolving credit facility.
The effective interest rate at December 31, 2005, after consideration of the effect of the
swap agreements, was 4.40%. Without the effect of the swap agreements, such rate would
have been 5.64%.

In November 2005, Standard
and Poors Ratings Services downgraded its rating on Aprias bank debt from BBB-
to BB+. The effect of this action was to increase the applicable margin from 1.0% to 1.25%
and to increase the commitment fee on the unused line from .20% to .25%, in accordance
with the bank credit agreement. In March 2006, Moodys Investor Services announced
that they placed Apria under review for possible downgrade. Should the outcome of such
review result in a downgrade, it is not expected to have a further impact on Aprias
interest rates.

Borrowings under the
senior secured credit facility are collateralized by substantially all of the assets of
Apria. At December 31, 2005, the company was in compliance with all of the financial
covenants required by the credit agreement.

---

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

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

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

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

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

Total interest paid in 2005, 2004 and 2003 amounted to
$18,783,000, $18,090,000 and $10,297,000, respectively.

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

During 2005, Apria had two
interest rate swap agreements in effect to fix its LIBOR-based variable rate debt. One of
the agreements, which expired in December 2005, had a notional amount of $25,000,000 and a
fixed rate of 3.04%. The other agreement, which will expire in December 2006, has a
notional amount of $25,000,000 and a fixed rate of 3.42%. During the second quarter of
2005, the company entered into two new interest rate swap agreements. The forward starting
contracts, each with a notional amount of $25,000,000, became effective in January 2006.
Both agreements have a three-year term with fixed rates of 4.38% and 4.44%. Apria also had
two swap agreements with an aggregate notional amount of $50,000,000 and fixed rates of
2.435% and 2.43%, that expired in December 2004.

The swap agreements are
being accounted for as cash flow hedges under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. Accordingly, the difference between
the interest received and interest paid is reflected as an adjustment to interest expense.
For the years ended December 31, 2005, 2004 and 2003, Apria received (paid) net settlement
amounts of $11,000, ($1,381,000) and ($1,917,000), respectively. At December 31, 2005, the
aggregate fair value of the swap agreements was an asset of $769,000 and is reflected in
the accompanying consolidated balance sheets in other assets. Unrealized gains and losses
on the fair value of the swap agreements are reflected, net of taxes, in other
comprehensive income. Aprias exposure to credit loss under the swap agreements is
limited to the interest rate spread in the event of counterparty nonperformance. Apria
does not anticipate losses due to counterparty nonperformance as its counterparties to the
various swap agreements are nationally recognized financial institutions with strong
credit ratings.

---

NOTE 6 -- STOCKHOLDERS EQUITY

Treasury Stock:
In October 2005, Apria's Board of Directors authorized the company to repurchase up to
$250,000,000 worth of its outstanding common stock.

On November 7, 2005, Apria
purchased 7,337,526 shares of its common stock for $175,000,000 through an accelerated
share repurchase program. Under the agreement, Aprias counterparty borrowed shares
that were sold to Apria at an initial price of $23.83. The counterparty then repurchased
shares over a period that began immediately after the sale of shares to Apria. The
repurchase transaction was completed in February 2006. The agreement contained a provision
that subjected Apria to a purchase price adjustment based on the volume weighted average
price of the companys common stock over the period during which the counterparty
purchased the shares. Such provision resulted in an additional $242,000 due that Apria
elected to settle in cash in February 2006. This amount was recorded as a liability at
December 31, 2005, with a corresponding charge to interest expense reflecting the change
in the fair value of the settlement contract.

Depending on market and
other considerations, the company may decide to repurchase $75 million of its common stock
over the next four fiscal quarters in accordance with the remaining Board authorization.

In January 2004, Apria
prepaid $50,000,000 to repurchase 1,730,703 shares of its common stock at a strike price
of $28.89 through an accelerated share repurchase program. The repurchase of the shares
was completed in April 2004 and the share price differential was settled in cash in June
2004, for a total cost of $53,033,000. During the third quarter of 2004, the company
purchased an additional 1,687,400 shares in open market transactions for $46,967,000.
During 2003, Apria repurchased 4,527,000 shares of its common stock for $118,471,000. Of
these amounts, 3,786,000 shares were repurchased for $100,000,000 in conjunction with the
issuance of the convertible senior notes. With the exception of the shares acquired
through the accelerated repurchase program, the other repurchases were made in open market
transactions.

All repurchased shares are
being held in treasury.

Stock Compensation
Plans:Apria has various stock-based compensation plans, which are described below.
Management accounts for these plans under the recognition and measurement principles of
APB No. 25 and related interpretations. Compensation expense of $3,259,000 and $4,423,000
related to the issuance of restricted stock purchase rights and restricted stock awards is
included in net income for the years ended December 31, 2005 and 2004, respectively. As of
December 31, 2005, unamortized expense relating to such rights and awards, as measured
under APB No. 25, amounted to $11,414,000.

---

Stock Option
Acceleration: On November 30, 2005, the Compensation Committee of the Board of
Directors of Apria approved the acceleration of vesting of certain outstanding employee
stock options with per share prices above $26.00, so that each such option became fully
vested. As a result of this action, options to purchase 863,227 shares of Apria common
stock became immediately exercisable. The accelerated options represented approximately
18.6% of Aprias total outstanding options at the time of the action.

The purpose of
accelerating the vesting of these options was to eliminate the compensation expense that
Apria would otherwise recognize in the consolidated statements of income in future
financial statements with respect to these options upon the adoption of SFAS No. 123R.
More than half of the accelerated options would have vested according to their terms
during 2006 and more than 77% would have vested by February 2007. As a result of the
acceleration, the company expects to reduce its future share-based compensation expense by
approximately $7,580,000.

Fixed Stock Options:Apria has various fixed stock option plans that provide for the granting of incentive
or non-statutory options to its key employees and non-employee members of the Board of
Directors. In the case of incentive stock options, the exercise price may not be less than
the fair market value of the companys stock on the date of the grant, and may not be
less than 110% of the fair market value of the companys stock on the date of the
grant for any individual possessing 10% or more of the voting power of all classes of
stock of the company. The dates at which the options become exercisable range from the
date of grant to five years after the date of grant and expire not later than ten years
after the date of grant. The weighted-average fair values of fixed stock options granted
during 2005, 2004 and 2003 were $10.11, $12.07 and $10.68, respectively.

---

A summary of the activity of
Aprias fixed stock options for 2005, 2004 and 2003 is presented below:

|                                   | 2005 |           | 2004 |   | 2003 
|---------------------------------- | ---- | --------- | ---- | - | -----
|
|
|
|Outstanding at beginning of year   |      | 5,074,673 |      | $ | 24.97
|Granted:                           |      |           |      |   |      
|Exercise price equal to fair value |      | 49,000    |      | $ | 32.45
|Exercised                          |      | (907,001  | )    | $ | 22.73
|Forfeited                          |      | (166,055  | )    | $ | 29.20
|                                   |      |           |      |   |      
|Outstanding at end of year         |      | 4,050,617 |      | $ | 25.38
|                                   |      |           |      |   |      
|Exercisable at end of year         |      | 3,803,607 |      | $ | 25.62
|                                   |      |           |      |   |      

---

The following table
summarizes information about fixed stock options outstanding at December 31, 2005:

|                 |  | Options Outstanding |           | Options Exercisable
|---------------- |  | ------------------- | --------- | -------------------
|
|
|
|$  6.69 - $16.94 |  |                     | 443,451   |                    
|$16.95 - $21.40  |  |                     | 668,134   |                    
|$21.41 - $24.01  |  |                     | 666,236   |                    
|$24.02 - $30.20  |  |                     | 903,793   |                    
|$30.21 - $30.40  |  |                     | 730,003   |                    
|$30.41 - $34.59  |  |                     | 639,000   |                    
|                 |  |                     |           |                    
|$  6.69 - $34.59 |  |                     | 4,050,617 |                    
|                 |  |                     |           |                    

Performance-based Stock
Options:Included in Aprias stock-based compensation plans are provisions for
the granting of performance-based stock options. In 2004 and 2003, Apria granted options
in the form of restricted stock purchase rights to key members of senior management. These
options become exercisable over periods of six and seven years and expire not later than
ten years from the date of grant. Accelerated vesting will ensue upon the occurrence of
certain events or the achievement of certain cumulative financial targets based on two and
three year measurement periods. At December 31, 2004, all options related to the two-year
measurement period had vested upon the achievement of certain cumulative financial
targets. The financial performance target for the three-year measurement period ended
December 31, 2005 was not met, and therefore, none of the related awards vested. The
weighted-average fair value of performance-based stock options granted during 2004 and
2003 was $24.98 and $21.06, respectively.

A summary of the activity of
Aprias performance-based stock options, including those granted in the form of
restricted stock purchase rights, for 2005, 2004 and 2003 is presented below:

|                                    | 2005 |         | 2004 |   | 2003
|----------------------------------- | ---- | ------- | ---- | - | ----
|
|
|
|Outstanding at beginning of year    |      | 625,472 |      | $ | 6.80
|Granted:                            |      |         |      |   |     
|Exercise price less than fair value |      | -       |      | $ | -   
|Exercised                           |      | (29,384 | )    | $ | 6.48
|Forfeited                           |      | (24,000 | )    | $ | 6.46
|                                    |      |         |      |   |     
|Outstanding at end of year          |      | 572,088 |      | $ | 6.83
|                                    |      |         |      |   |     
|Exercisable at end of year          |      | 200,588 |      | $ | 6.84
|                                    |      |         |      |   |     

---

The following table summarizes information about
performance-based stock options outstanding at December 31, 2005:

|                  |  | Options Outstanding |         | Options Exercisable
|----------------- |  | ------------------- | ------- | -------------------
|
|
|
|$  6.46 - $  6.46 |  |                     | 415,000 |                    
|$  6.50 - $10.75  |  |                     | 152,088 |                    
|$18.56 - $18.56   |  |                     | 5,000   |                    
|                  |  |                     |         |                    
|$  6.46 - $18.56  |  |                     | 572,088 |                    
|                  |  |                     |         |                    

Apria granted restricted
stock awards to its non-employee directors during 2005, 2004 and 2003. The awards granted
for 2005, representing 17,000 shares, will vest in April 2006. The awards granted in 2004,
representing 26,000 shares, vested and were released in April 2005. The awards granted in
2003, representing 26,000 shares, vested and were released in April 2004. Apria also
granted restricted stock awards to key members of senior management during 2005 and 2004.
The awards granted during 2005, representing 64,384 shares, will vest in one-third
increments starting June 2006. The awards granted during 2004, representing 200,000
shares, will vest on December 31, 2011. Accelerated vesting will ensue upon the occurrence
of certain events and the achievement of certain cumulative financial targets based on a
three-year measurement period. Approximately 8,965,000 shares of common stock are reserved
for future issuance upon the exercise of stock options and awards under all of
Aprias active plans.

NOTE 7 -- INCOME TAXES

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

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

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

During 2005, the valuation
allowance decreased by $2,218,000 due to the fact that state net operating loss
carryforwards, that were previously expected to expire, became realizable due to a change
in estimate of expected future period earnings.

Income tax expense
(benefit) consists of the following:

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

The exercise of stock
options granted under Aprias various stock option plans resulted in compensation of
$10,129,000, $6,810,000 and $6,204,000, during 2005, 2004 and 2003, respectively. These
amounts are taxable income to the employee and are deductible by the company for federal
and state tax purposes but are not recognized as expense for financial reporting purposes.
Such tax benefits are included in additional paid-in capital.

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

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

Net income taxes paid in
2005, 2004 and 2003 amounted to $52,099,000, $35,564,000 and $50,359,000, respectively.

The company believes it
has adequately provided for income tax issues not yet resolved with federal, state and
local tax authorities. At December 31, 2005, $16,738,000, net of tax benefit, was accrued
for such federal, state and local tax matters and is included in income taxes payable.
Although not probable, the most adverse resolution of these federal, state and local
issues could result in additional charges to earnings in future periods in addition to the
$16,738,000 currently provided. Based upon a consideration of all relevant facts and
circumstances, the company does not believe the ultimate resolution of tax issues for all
open tax periods will have a materially adverse effect upon its results of operations or
financial condition.

---

NOTE 8 -- PER SHARE AMOUNTS

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

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

---

NOTE 9 -- LEASES

Apria leases all of its
facilities. Lease terms are generally ten years or less with renewal options for
additional periods. The company 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. In addition, delivery
vehicles and office equipment are leased under operating leases. 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. Net rent expense in 2005, 2004 and 2003 amounted to
$74,835,000, $72,330,000 and $68,141,000, respectively.

In addition, during 2004
and 2003, Apria acquired information systems hardware and software totaling $3,156,000 and
$366,000, under capital lease arrangements with lease terms ranging from 24 to 36 months.
Amortization of information systems hardware and software under capital lease amounted to
$709,000, $1,767,000 and $1,953,000 in 2005, 2004 and 2003, respectively. During 2005,
there were no purchases of assets made under capital lease arrangements.

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

|                                            | December 31,
|------------------------------------------- | ------------
|
|
|
|Information systems  hardware and software |             
|Less accumulated depreciation               |             
|                                            |             
|                                            |             
|                                            |             

Future minimum payments,
by year and in the aggregate, required under capital lease obligations and noncancelable
operating leases consist of the following at December 31, 2005:

|(in thousands)                                   | CapitalLeases |  | OperatingLeases
|------------------------------------------------ | ------------- |  | ---------------
|
|2006                                             |               |  | $              
|2007                                             |               |  |                
|2008                                             |               |  |                
|2009                                             |               |  |                
|2010                                             |               |  |                
|Thereafter                                       |               |  |                
|                                                 |               |  |                
|                                                 |               |  |                
|                                                 |               |  |                
|Less interest included in minimum lease payments |               |  |                
|                                                 |               |  |                
|Present value of minimum lease payments          |               |  |                
|Less current portion                             |               |  |                
|                                                 |               |  |                
|                                                 |               |  | $              
|                                                 |               |  |                

NOTE 10 -- EMPLOYEE BENEFIT PLANS

Apria has a 401(k) defined
contribution plan, whereby eligible employees may contribute up to 35% of their annual
base earnings. During the three years ended 2005, the company matched 50% of the first 8%
of employee contributions. Total expenses related to the defined contribution plan were
$4,970,000, $4,588,000 and $4,456,000 in 2005, 2004 and 2003, respectively.

---

NOTE 11 -- COMMITMENTS AND CONTINGENCIES

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

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

Medicare
Reimbursement: There are a number of provisions contained within recent legislation or
proposed legislation that affect or may affect Medicare reimbursement policies for items
and services provided by Apria. The company cannot be certain of the ultimate impact of
all legislated and contemplated changes, and therefore, cannot provide assurance that
these changes will not have a material adverse effect on Aprias results of
operations.

Supplier
Concentration: Apria currently purchases approximately 59% of its patient service
equipment and supplies from four vendors. Although there are a limited number of
suppliers, management believes that other vendors could provide similar products on
comparable terms. However, a change in suppliers could cause delays in service delivery
and possible losses in revenue, which could adversely affect operating results.

Guarantees and
Indemnities: From time to time Apria enters into certain types of contracts that
contingently require the company to indemnify parties against third party claims. These
contracts primarily relate to (i) certain asset purchase agreements, under which the
company may provide customary indemnification to the seller of the business being
acquired; (ii) certain real estate leases, under which the company may be required to
indemnify property owners for environmental or other liabilities, and other claims arising
from the companys use of the applicable premises; and (iii) certain agreements with
the companys officers, directors and employees, under which the company may be
required to indemnify such persons for liabilities arising out of their relationship with
the company.

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

---

NOTE 12 -- SERVICE/PRODUCT LINE DATA

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

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

Net revenues for 2005
reflect Medicare reimbursement reductions on respiratory medications, certain durable
medical equipment items and oxygen and oxygen-related equipment. Respiratory therapy
revenues for 2004 reflect Medicare reimbursement reductions on respiratory medications.

Respiratory and infusion
therapy gross profits were reduced by respiratory therapy and nursing expenses that were
previously classified within selling, distribution and administrative expense. Respiratory
therapy expenses totaling $34,669,000 were reclassified to cost of respiratory net
revenues in 2005. Nursing expenses reclassified to cost of infusion net revenues totaled
$8,396,000, $9,825,000 and $12,034,000 for 2005, 2004 and 2003, respectively. See Note 1 
Respiratory Therapy Expenses and Note 1  Nursing Expenses.

---

NOTE 13 -- SELECTED QUARTERLY FINANCIAL DATA (unaudited)

|                                    |  | Quarter
|----------------------------------- |  | -------
|
|
|
|2005                                |  |        
|Net revenues                        |  | $      
|Gross profit                        |  |        
|Operating income                    |  |        
|Net income                          |  |        
|                                    |  |        
|Basic net income per common share   |  | $      
|Diluted net income per common share |  | $      
|2004                                |  |        
|Net revenues                        |  | $      
|Gross profit                        |  |        
|Operating income                    |  |        
|Net income                          |  |        
|                                    |  |        
|Basic net income per common share   |  | $      
|Diluted net income per common share |  | $      

Net income for the second
quarter of 2005 was impacted by the initial accrual of $20,000,000 for the settlement
costs and legal fees associated with the previously reported federal investigation and
qui tamlawsuits.  See Note 11  Commitments and Contingencies.
     Net income for the third quarter of 2004 was impacted
by a year-to-date adjustment to lower the effective income tax rate.  State net operating
loss carryforwards that were previously expected to expire became realizable due to a
change in estimate of expected future earnings.

        
        

---

APRIA HEALTHCARE GROUP INC.

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

|(in thousands)                                                     | Balance atBeginningof Period | Charged toCosts andExpenses | Deductions | Balance atEnd ofPeriod
|------------------------------------------------------------------ | ---------------------------- | --------------------------- | ---------- | ----------------------
|                                                                  
|Year ended December 31, 2005                                       |                              |                             |            |                       
|Deducted from asset accounts:                                      |                              |                             |            |                       
|Allowance for doubtful accounts                                    |                              |                             | $          | 45,064                
|Reserve for inventory and patient
     service equipment shortages |                              |                             | $          | 3,230                 
|Year ended December 31, 2004                                       |                              |                             |            |                       
|Deducted from asset accounts:                                      |                              |                             |            |                       
|Allowance for doubtful accounts                                    |                              |                             | $          | 38,531                
|Reserve for inventory and patient
     service equipment shortages |                              |                             | $          | 1,377                 
|Year ended December 31, 2003                                       |                              |                             |            |                       
|Deducted from asset accounts:                                      |                              |                             |            |                       
|Allowance for doubtful accounts                                    |                              |                             | $          | 32,206                
|Reserve for inventory and patient
     service equipment shortages |                              |                             | $          | 3,999                 

---

SIGNATURES

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

Dated:  March 23, 2006

| | APRIA HEALTHCARE GROUP INC./s/ ROBERT S. HOLCOMBE
Robert S. HolcombeExecutive Vice President, General Counsel and Secretary
| | ---------------------------------------------------------------------------------------------------------------------------

---

|Exhibit No. |  | EXHIBIT INDEXDescription                                                                                                                                                                                       |  | Reference
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------
|
|3.1         |  | Restated Certificate of
Incorporation of Registrant.                                                                                                                                                           |  | (c)      
|            |  |                                                                                                                                                                                                                |  |          
|3.2         |  | Certificate of Ownership
and Merger merging Registrant into Abbey and amending Abbeys
Restated Certificate of Incorporation to change Abbeys name to Apria
Healthcare Group Inc.                           |  | (f)      
|            |  |                                                                                                                                                                                                                |  |          
|3.3         |  | Certificate of Amendment
of Certificate of Incorporation of Registrant.                                                                                                                                        |  | (m)      
|            |  |                                                                                                                                                                                                                |  |          
|3.4         |  | Amended and Restated Bylaws
of Registrant, as amended on November 20, 2002.                                                                                                                                    |  | (g)      
|            |  |                                                                                                                                                                                                                |  |          
|3.5         |  | Amended and Restated Bylaws
of Registrant, as amended on March 1, 2006.                                                                                                                                        |  | (p)      
|            |  |                                                                                                                                                                                                                |  |          
|4.1         |  | Specimen Stock Certificate
of the Registrant.                                                                                                                                                                  |  | (f)      
|            |  |                                                                                                                                                                                                                |  |          
|4.2         |  | Certificate of Designation of
the Registrant.                                                                                                                                                                  |  | (c)      
|            |  |                                                                                                                                                                                                                |  |          
|4.3         |  | Indenture dated August 20,
2003, between Registrant and U.S. Bank National Association,
as trustee, describing the Registrants issuance of 3.375% Convertible Senior
Notes due 2033.                          |  | (i)      
|            |  |                                                                                                                                                                                                                |  |          
|4.4         |  | First Supplemental Indenture
dated December 14, 2004, supplementing and amending the indenture dated August
20, 2003.                                                                                          |  | (m)      
|            |  |                                                                                                                                                                                                                |  |          
|10.1        |  | 1991 Stock Option Plan.                                                                                                                                                                                        |  | (a)      
|            |  |                                                                                                                                                                                                                |  |          
|10.2        |  | Schedule of Registration
Procedures and Related Matters.                                                                                                                                                       |  | (b)      
|            |  |                                                                                                                                                                                                                |  |          
|10.3        |  | 401(k) Savings Plan, restated
effective October 1, 1993, amended December 28, 1994.                                                                                                                            |  | (d)      
|            |  |                                                                                                                                                                                                                |  |          
|10.4        |  | Amendment Number Two to the
401(k) Savings Plan, dated June 27, 1995.                                                                                                                                          |  | (g)      
|            |  |                                                                                                                                                                                                                |  |          
|10.5        |  | Amended and Restated 1992
Stock Incentive Plan.                                                                                                                                                                |  | (d)      
|            |  |                                                                                                                                                                                                                |  |          
|10.6        |  | Amendment Number Three to
the 401(k) Savings Plan, effective January 1, 1996.                                                                                                                                  |  | (g)      
|            |  |                                                                                                                                                                                                                |  |          
|10.7        |  | Amendment 1996-1 to the
1991 Stock Option Plan, dated October 28, 1996.                                                                                                                                        |  | (m)      
|            |  |                                                                                                                                                                                                                |  |          
|10.8        |  | Amendment 1996-1 to the
Amended and Restated 1992 Stock Incentive Plan, dated October 28, 1996.                                                                                                                |  | (m)      
|            |  |                                                                                                                                                                                                                |  |          
|10.9        |  | Amended and Restated 1997 Stock
Incentive Plan, dated February 27, 1997, as amended through June 30, 1998.                                                                                                     |  | (m)      
|            |  |                                                                                                                                                                                                                |  |          
|10.10       |  | 1998 Nonqualified Stock
Incentive Plan, dated December 15, 1998.                                                                                                                                               |  | (m)      
|            |  |                                                                                                                                                                                                                |  |          
|10.11       |  | Amendment No. 1 to the 1998
Nonqualified Stock Incentive Plan, dated January 31, 2001.                                                                                                                         |  | (e)      
|            |  |                                                                                                                                                                                                                |  |          
|10.12       |  | International Swaps and
Derivatives Association, Inc. Master Agreement dated December 3, 2002, between
Registrant and Bank of Nova Scotia.                                                                     |  | (g)      
|            |  |                                                                                                                                                                                                                |  |          
|10.13       |  | Apria Healthcare Group Inc. 2003
Performance Incentive Plan, dated July 17, 2003.                                                                                                                              |  | (h)      
|            |  |                                                                                                                                                                                                                |  |          
|10.14       |  | Form of Director Stock Option Agreement as granted under the Registrants
2003 Performance Incentive Plan.                                                                                                     |  | (r)      
|            |  |                                                                                                                                                                                                                |  |          
|10.15       |  | Form of Director Restricted Stock Award Agreement as granted under the Registrants
2003 Performance Incentive Plan.                                                                                           |  | (r)      
|            |  |                                                                                                                                                                                                                |  |          
|10.16       |  | Form of Employee Stock Option Agreement as granted under the Registrants
2003 Performance Incentive Plan.                                                                                                     |  | (r)      
|            |  |                                                                                                                                                                                                                |  |          
|10.17       |  | Form of Employee Restricted Stock Purchase Rights Award Agreement as granted under
the Registrants 2003 Performance Incentive Plan.                                                                           |  | (r)      
|            |  |                                                                                                                                                                                                                |  |          
|10.18       |  | Form of Employee Time-Based Restricted Stock Award Agreement as granted under the
Registrants 2003 Performance Incentive Plan.                                                                                |  | (r)      
|            |  |                                                                                                                                                                                                                |  |          
|10.19       |  | Form of Employee Performance-Based Restricted Stock Award Agreement as granted
under the Registrants 2003 Performance Incentive Plan.                                                                         |  | (r)      
|            |  |                                                                                                                                                                                                                |  |          
|10.20       |  | Executive Severance Agreement
dated April 23, 2004, between Registrant and Amin I. Khalifa.                                                                                                                    |  | (k)      
|            |  |                                                                                                                                                                                                                |  |          
|10.21       |  | Executive Severance Agreement
dated April 23, 2004, between Registrant and Daniel J. Starck.                                                                                                                   |  | (k)      
|            |  |                                                                                                                                                                                                                |  |          
|10.22       |  | Fourth Amended and Restated
Credit Agreement dated November 23, 2004, among Registrant and
certain of its subsidiaries, Bank of America, N.A., The Bank of Nova Scotia and
certain other lending institutions. |  | (l)      
|            |  |                                                                                                                                                                                                                |  |          
|10.23       |  | Confirmation dated April 22,
2005, executed relative to the Master Agreement dated December 3, 2002, between
Registrant and Bank of Nova Scotia.                                                               |  | (n)      
|            |  |                                                                                                                                                                                                                |  |          
|10.24       |  | Executive Severance Agreement
dated June 13, 2005, between Registrant and Jeri L. Lose.                                                                                                                        |  | (n)      
|            |  |                                                                                                                                                                                                                |  |          
|10.25       |  | Amended and Restated
Employment Agreement dated October 20, 2005, between Registrant and Lawrence
A. Mastrovich.                                                                                               |  | (o)      
|            |  |                                                                                                                                                                                                                |  |          
|10.26       |  | Letter Agreement with
respect to the Accelerated Share Repurchase transaction dated November 7, 2005,
between Registrant and Citibank, N.A., acting through Citigroup Global Markets,
Inc., as agent.          |  | (o)      
|            |  |                                                                                                                                                                                                                |  |          
|10.27       |  | Resignation and General
Release Agreement effective January 3, 2006, between Registrant and
Anthony S. Domenico.                                                                                               |  | (r)      
|            |  |                                                                                                                                                                                                                |  |          
|10.28       |  | Resignation and General
Release Agreement effective January 3, 2006, between Registrant and John J.
McDowell.                                                                                                  |  | (r)      
|            |  |                                                                                                                                                                                                                |  |          
|10.29       |  | Form of Indemnity Agreement for Non-Employee
Directors.                                                                                                                                                        |  | (q)      
|            |  |                                                                                                                                                                                                                |  |          
|10.30       |  | 2006 Executive Bonus Plan.                                                                                                                                                                                     |  | (r)      
|            |  |                                                                                                                                                                                                                |  |          
|10.31       |  | Executive Severance
Agreement dated March 14, 2006, between Registrant and W. Jeffrey Ingram.                                                                                                                  |  | (r)      
|            |  |                                                                                                                                                                                                                |  |          
|14.1        |  | Registrants
Code of Ethical Business Conduct.                                                                                                                                                                 |  | (j)      
|            |  |                                                                                                                                                                                                                |  |          
|21.1        |  | List of Subsidiaries.                                                                                                                                                                                          |  | (r)      
|            |  |                                                                                                                                                                                                                |  |          
|23.1        |  | Consent of Deloitte & Touche
LLP, Independent Registered Public Accounting Firm.                                                                                                                               |  |          
|            |  |                                                                                                                                                                                                                |  |          
|31.1        |  | Certification of Chief Executive
Officer pursuant to Securities Exchange Act Rule 13a-14(a).                                                                                                                   |  |          
|            |  |                                                                                                                                                                                                                |  |          
|31.2        |  | Certification of Chief Financial
Officer pursuant to Securities Exchange Act Rule 13a-14(a).                                                                                                                   |  |          
|            |  |                                                                                                                                                                                                                |  |          
|32.1        |  | Certification of the Chief
Executive Officer pursuant to 18 U.S.C. Section 1350.                                                                                                                               |  |          
|            |  |                                                                                                                                                                                                                |  |          
|32.2        |  | Certification of the Chief
Financial Officer pursuant to 18 U.S.C. Section 1350.                                                                                                                               |  |          

---

|    |  | References  Documents filed with the
Securities and Exchange Commission                                                                    
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Incorporated by
reference to Registration Statement on Form S-1 (Registration No. 33-44690), as
filed on December 23, 1991.                 
|    |  |                                                                                                                                             
|(b) |  | Incorporated by
reference to Registration Statement on Form S-4 (Registration No. 33-69094), as
filed on September 17, 1993.                
|    |  |                                                                                                                                             
|(c) |  | Incorporated by
reference to Registration Statement on Form S-4 (Registration No. 33-90658), and
its appendices, as filed on March 27, 1995.
|    |  |                                                                                                                                             
|(d) |  | Incorporated by
reference to Registration Statement on Form S-8 (Registration No. 33-80581), as
filed on December 19, 1995.                 
|    |  |                                                                                                                                             
|(e) |  | Incorporated by
reference to Annual Report on Form 10-K for the year ended December 31, 2000.                                               
|    |  |                                                                                                                                             
|(f) |  | Incorporated by
reference to Annual Report on Form 10-K for the year ended December 31, 2001.                                               
|    |  |                                                                                                                                             
|(g) |  | Incorporated by
reference to Annual Report on Form 10-K for the year ended December 31, 2002.                                               
|    |  |                                                                                                                                             
|(h) |  | Incorporated by
reference to Quarterly Report on Form 10-Q dated June 30, 2003, as
filed on August 12, 2003.                                
|    |  |                                                                                                                                             
|(i) |  | Incorporated by
reference to Quarterly Report on Form 10-Q dated September 30, 2003, as
filed on November 14, 2003.                         
|    |  |                                                                                                                                             
|(j) |  | Incorporated by
reference to Annual Report on Form 10-K for the year ended December
31, 2003.                                               
|    |  |                                                                                                                                             
|(k) |  | Incorporated by
reference to Quarterly Report on Form 10-Q dated June 30, 2004, as
filed on August 6, 2004.                                 
|    |  |                                                                                                                                             
|(l) |  | Incorporated by
reference to Current Report on Form 8-K dated November 23, 2004, as filed
on November 30, 2004.                             
|    |  |                                                                                                                                             
|(m) |  | Incorporated by reference
to Annual Report on Form 10-K for the year ended December 31, 2004.                                               
|    |  |                                                                                                                                             
|(n) |  | Incorporated by reference
to Quarterly Report on Form 10-Q dated June 30, 2005, as filed on August 15, 2005.                                
|    |  |                                                                                                                                             
|(o) |  | Incorporated by reference
to Quarterly Report on Form 10-Q dated September 30, 2005, as filed on November 9, 2005.                          
|    |  |                                                                                                                                             
|(p) |  | Incorporated by reference to Current Report on Form 8-K dated March 1, 2006, as filed
on March 7, 2006.                                     
|    |  |                                                                                                                                             
|(q) |  | Incorporated by reference to Current Report on Form 8-K dated March 8, 2006, as filed
on March 14, 2006.                                    
|    |  |                                                                                                                                             
|(r) |  | Incorporated by reference to Annual Report on Form 10-K for the year ended December 31,
2005, as filed March 16, 2006.