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

                                    FORM 10-K
(Mark One)

   [X]            ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                   For the Fiscal Year Ended December 31, 1999
                                       OR
   [ ]          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                           Commission File No. 1-14316

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

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

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

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

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

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

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

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

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

As  of  March  17,  2000,  there  were  outstanding  52,245,202  shares  of  the
Registrant's  common stock, par value $0.001,  which is the only class of common
stock of the Registrant.  As of March 17, 2000 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  $15.1875  per share as  reported by the New York
Stock Exchange, was approximately $618,242,453.

                       Documents Incorporated by Reference

None.
<PAGE>
                                     PART I

ITEM 1.  BUSINESS

GENERAL

     Apria Healthcare Group Inc. provides comprehensive home healthcare services
through  approximately  350 branch  locations  which  serve  patients  in all 50
states.  Apria has three major service lines:  home  respiratory  therapy,  home
infusion  therapy and home  medical  equipment.  The  following  table  provides
examples of the services and products in each:

SERVICE LINE                   EXAMPLES OF SERVICES AND PRODUCTS
------------------------       -------------------------------------------------
Home respiratory therapy       Provision  of  oxygen systems, home  ventilators,
                               sleep apnea equipment, nebulizers and respiratory
                               medications and related services

Home infusion therapy          Administration of  total  parenteral  or  enteral
                               nutrition,  anti-infectives,   pain   management,
                               chemotherapy and other  medications  and  related
                               services

Home medical equipment         Provision of patient room equipment,  principally
                               hospital beds, wheelchairs, ambulatory and safety
                               aids

     Apria was formed  through  the merger in 1995 of Homedco  Group,  Inc. into
Abbey Healthcare Group Incorporated. Abbey was incorporated in 1991 in the State
of Delaware.


BUSINESS STRATEGY

     Apria  adopted  and began  implementing  the  following  strategic  plan in
mid-1998.  The strategy is aimed at  maximizing  profitability  through five key
elements:

     REMAIN IN CORE  BUSINESSES,  WITH  INCREASED  EMPHASIS ON HOME  RESPIRATORY
THERAPY.  Apria  intends to remain in its core  businesses  of home  respiratory
therapy,  home  infusion  therapy and home  medical  equipment.  However,  Apria
expects to continue to increase  the  percentage  of net  revenues  generated by
respiratory  therapy with a  corresponding  reduction in the  percentage  of net
revenues generated by infusion therapy and home medical equipment.  Net revenues
for home respiratory  therapy,  as percentages of total net revenues,  were 64%,
59% and 51% for 1999,  1998 and 1997,  respectively.  Apria's  home  respiratory
therapy  service line  historically  has produced  higher  margins than its home
infusion therapy and home medical equipment service lines.

     DIVEST  OR CLOSE,  ON A  SELECTIVE  BASIS,  UNPROFITABLE  SERVICE  LINES IN
PARTICULAR  GEOGRAPHIC  AREAS.  During late 1998 and early 1999 Apria exited the
infusion  therapy  business  in Texas,  California,  Louisiana,  West  Virginia,
western  Pennsylvania  and  downstate  New  York.  Apria  then  reorganized  its
remaining infusion operations in 1999,  realizing  improvement in profitability,
contract   performance   and  therapy  mix.  Apria  continues  to  evaluate  the
profitability of all its contracts, service lines and locations.

     REDUCE COSTS IN CORPORATE AND FIELD OPERATIONS. Apria seeks to reduce costs
both at its corporate  headquarters and in its field  operations.  In late 1998,
the following steps were taken:

     - consolidation and closure of smaller branches, billing centers  and field
       support facilities throughout the United States
     - reduction of labor costs at its corporate and field locations
     - reduction of office space at its headquarters

In late 1999,  Apria completed the  centralization,  at the region level, of its
purchasing,  patient service  equipment  repair and  maintenance,  warehouse and
oxygen transfill functions.  Cost savings from this regional  centralization are
being realized through improved efficiency and tighter control over costs. Apria
continues to focus resources on identifying and implementing more cost-effective
and efficient methods of delivering products and services.

     IMPROVE APRIA'S CAPITAL STRUCTURE.  In accordance with its credit agreement
that was  amended  and  restated  in  November  1998,  Apria made a $50  million
prepayment on its  revolving  loan.  The agreement was further  amended in 1999.
Pursuant to one of the 1999  amendments,  Apria made an  additional  $50 million
prepayment from available cash. Other  amendments  permit  acquisitions  with an
aggregate  purchase price of up to $125 million through the maturity date of the
agreement,  and permit Apria to repurchase up to $50 million of its common stock
through the maturity date of the agreement.  In February 2000,  Apria  announced
that its  Board of  Directors  authorized  such a  repurchase  of  common  stock
depending on market conditions and other considerations.

     Apria's credit agreement matures  August  2001 and its $200  million 9 1/2%
senior  subordinated notes mature November 2002. Apria may need to refinance all
or a portion of its  indebtedness  on or before the respective  maturity  dates.
Apria will continue to pursue the optimal capital structure to meet its business
needs and to implement its strategy.

     EXPAND THROUGH INTERNAL GROWTH AND ACQUISITIONS.  Apria intends to continue
to expand through  internal growth and  acquisitions  in its target markets.  In
1999, Apria completed a number of acquisitions  with an aggregate  consideration
of $56.3 million. Apria plans to continue to pursue acquisitions in 2000 subject
to the  availability of attractive  opportunities  and limitations  contained in
Apria's  credit  agreement.  Apria  also  intends to focus its  internal  growth
primarily in the home respiratory therapy service line.

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


SERVICE LINES

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

     - providing  high-tech  infusion  nursing, respiratory  care  and  pharmacy
       services
     - educating patients and their caregivers about the illness and instructing
       them on self-care and the proper use of products in the home
     - monitoring patient compliance with individualized treatment plans
     - reporting to the physician and/or managed care organization
     - maintaining equipment
     - processing claims to third-party payors

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

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

                                                 Year Ended December 31,
                                             -------------------------------
                                             1999          1998         1997
                                             ----          ----         ----

     Respiratory therapy.................     64%           59%          51%
     Infusion therapy....................     19%           23%          24%
     Home medical equipment/other........     17%           18%          25%
                                             ----          ----         ----
           Total net revenues............    100%          100%         100%
                                             ====          ====         ====

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

     - chronic obstructive pulmonary disease ("COPD") such as emphysema, chronic
       bronchitis and asthma
     - nervous system-related respiratory conditions
     - congestive heart failure
     - lung cancer

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

     Approximately 63% of Apria's  respiratory therapy revenues are derived from
the provision of oxygen systems,  home  ventilators  and  nebulizers,  which are
devices  to  aerosolize  medication.  The  remaining  respiratory  revenues  are
generated from the provision of:

     - apnea monitors used to monitor the vital signs of newborns
     - continuous positive airway  pressure  devices used to control adult sleep
       apnea
     - noninvasive positive pressure ventilation
     - other respiratory therapy products, including medications

     Apria  has  developed  a home  respiratory  medication  service,  which  is
fulfilled through the Apria Pharmacy Network. Apria maintains a pharmacy license
in all states in which it is  required.  Through the  network,  Apria offers its
patients in all 50 states  physician-prescribed  medications  to  accompany  the
nebulizer through which they are administered. This comprehensive program offers
patients and payors a broad base of services from one source, including the home
delivery of medications in premixed unit dose form,  pharmacy services,  patient
education  and  claims  processing.   Apria  has  developed  a  secure  internet
application  that will  allow  physicians  to  prescribe  and order  medications
through  Apria's web site. The  application is currently  being tested and Apria
intends to launch it in 2000.

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

     - parenteral and enteral nutrition
     - anti-infectives
     - chemotherapy
     - other intravenous and injectable medications

     Depending on the therapy,  a broad range of venous access  devices and pump
technology may be used to facilitate  homecare and patient  independence.  Apria
employs licensed  pharmacists and registered  high-tech infusion nurses who have
specialized  skills in the delivery of home infusion  therapy.  Apria  currently
operates 27 pharmacy locations to serve its home infusion patients.

     A number of factors have  impacted the  profitability  of Apria's  infusion
therapy service line.  Increased  managed care  penetration has exposed Apria to
the intense price competition of these markets. The expectations of managed care
customers are very high,  however,  many are unwilling to tightly  control their
network of providers.  Hospitals,  traditionally  a major referral  source,  are
expanding  their own  infusion  services.  In response to these  factors,  Apria
performed a comprehensive  review of its infusion therapy business in the second
and third quarters of 1998. By early 1999, Apria had substantially completed the
process of exiting the infusion  service line in certain  geographic areas where
it  was  not  meeting   profitability   thresholds.   In  1999,  Apria  launched
standardization and other profitability improvement initiatives that resulted in
better  inventory  utilization,  growth in higher margin  business and increased
profitability.

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

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


ORGANIZATION AND OPERATIONS

     ORGANIZATION. Apria's approximately 350 branch locations are organized into
four geographic divisions, which are further divided into 15 geographic regions.
Each region is operated as a separate  business unit and consists of a number of
branches  and a  regional  office.  The  regional  office  provides  each of its
branches  with key support  services  such as sales,  billing,  purchasing,  and
equipment  maintenance,  repair  and  warehousing.  Each  branch  delivers  home
healthcare products and services to patients in their homes and other care sites
through the branch's delivery fleet and qualified  personnel.  This structure is
designed to create operating  efficiencies  associated with centralized services
while promoting responsiveness to local market needs.

     Although  Apria  continues  to operate  with a large  network  of  regional
operations,  in  late  1998  the  company  implemented  a  vertically-integrated
management  organization  in certain  key  functional  areas,  including  sales,
logistics,   operations  and  revenue   management  with  direct  reporting  and
accountability  to corporate  headquarters.  Apria  believes that this structure
provides more control and  consistency  among its regions and branches and helps
to develop  standard  policies  and  procedures  while  eliminating  many of the
problems inherent with a decentralized network. Its earliest  implementation was
in the area of sales and  operations.  Previously,  each  regional  manager  was
responsible  for all aspects of sales and operations,  including  generating new
business,  operating  branches and overseeing  reimbursement.  Under the current
structure,  the sales  organization  is responsible  for generating new business
from  both   traditional   and  managed  care  markets,   while  the  operations
organization  is  responsible  for  customer  service,  reimbursement  and asset
management.  In addition to the sales and  operations  functional  areas,  Apria
established  a  centralized   revenue   management   functional  area.   Revenue
management,  based at Apria's  headquarters,  works with the network of branches
and  regions  to  standardize  the  processes  of  order  intake,   billing  and
collections.  Apria has also established a coordinated  purchasing  structure to
obtain lower prices,  reduce  inventory  levels and improve the  distribution of
inventory items to the company's branch locations.

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

     OPERATING SYSTEMS AND CONTROLS.  The company's business is dependent,  to a
substantial  degree,  upon the quality of its  operating  and field  information
systems  for the  establishment  of  accurate  and  profitable  contract  terms,
accurate  order  entry and  pricing,  billing  and  collections,  and  effective
monitoring  and  supervision.  Difficulties  encountered  in the conversion to a
common  system of the  previously  separate  operations  of Abbey  and  Homedco,
following  their  1995  merger,  led  to a high  level  of  accounts  receivable
write-offs.  Also contributing to the write-offs were functional deficiencies of
the information systems.  Examples of such deficiencies  included  decentralized
pricing tables which forced  reliance on personnel at the numerous  branches and
billing centers to enter pricing updates on a timely basis, and the inability to
aggregate  data  at  a  regional  or  company-wide  level,   thereby  inhibiting
management's  ability to quickly  identify  negative  trends.  During 1997,  the
company committed to a two-year plan to implement a large-scale fully-integrated
enterprise  resource  planning  system  to  address  year  2000  issues  and  to
facilitate  correction  of  the  functional   shortcomings  referred  to  above.
Following a  reevaluation  of the costs,  benefits and risks of the  development
project,  the plan was canceled in 1998 except for the work  required to resolve
year 2000 issues. As a part of the decision to cancel the new system, management
performed an evaluation of its current systems. A significant conclusion of that
evaluation was that the platform on which the respiratory/home medical equipment
system  operates is adequate  but the  infusion  billing  system  operates on an
obsolete  platform  which is no longer  supported by the computer  industry.  To
mitigate this particular  risk,  address certain other weaknesses of the current
systems  and to  position  itself to meet  future  needs,  Apria  embarked  on a
reengineering of the systems with the primary focus on order entry,  billing and
accounts  receivable.  Some of the various  projects  include a rewriting of the
order entry,  billing and accounts  receivable  modules and the  installation of
supply  chain  management  software  to replace  the  inventory  and  purchasing
modules.  The  processing  of  transactions  for all  product  lines,  including
infusion  therapy,  will be addressed by these changes.  Apria believes that the
implementation  of these  changes,  many of which were  completed in 1999,  will
substantially improve its systems.  Nonetheless, such implementations could have
a  disruptive  effect on  billing  and  collection  activity.  See  "Business  -
Organization and Operations - Receivables Management".

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

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

     PAYORS.  Apria  derives  substantially  all its revenues  from  third-party
payors,  including private insurers,  managed care  organizations,  Medicare and
Medicaid. For 1999,  approximately 24% of Apria's net revenues were derived from
Medicare and 8% from Medicaid.  Generally,  each third-party  payor has specific
claims  requirements.  Apria has policies and  procedures in place to manage the
claims  submission  process,  including  verification  procedures  to facilitate
complete and accurate documentation.

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

     Apria believes that the primary factors  contributing to the unusually high
level of revenue adjustments post-merger included:

     - subsequent changes to estimated  revenue  amounts or denials for services
       not covered due to changes in patient's coverage
     - failure to document  initial  service authorizations or continued service
       authorizations in required timeframes
     - differences in  contract  prices  due   to  complex  contract  terms or a
       customer service  representative's  lack of familiarity with  a contract,
       payor or system price
     - high turnover of customer service and billing representatives

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

     The effects of all these factors  necessitated  charges to increase Apria's
allowance for revenue adjustments of $18.3 million and $40.0 million in 1998 and
1997, respectively,  and charges to increase the allowance for doubtful accounts
of $13.6 million and $61.4 million in 1998 and 1997, respectively.

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

     - software  enhancements   to   simplify  the  order-intake   process   and
       specifically the process of selecting  products/services  and  payors
     - enhanced  quality  assurance  programs  designed  to improve workflow and
       billing accuracy
     - realignment of  responsibility  for  revenue  qualification,  billing and
       collections within a defined functional group reporting  to the corporate
       office

     In 1999, accounts receivable  write-offs  decreased  significantly from the
levels experienced in the last few years.  Additionally,  days sales outstanding
("DSO") have been 56 days or fewer for each of the last five quarters,  compared
to a range of 87 to 111 days  during  1996 and 1997.  Apria  believes  the lower
write-offs  and  improved  DSO in 1999 are  attributable  to its  focus on order
entry, billing and collections by its centralized revenue management function as
well as to a  number  of new  system  improvements  and  enhanced  functionality
designed to automate and centralize certain processes and to provide more timely
error identification.

     Despite the improvements in accounts receivable in 1999,  collection of its
accounts  receivable  remains  one of Apria's  biggest  challenges.  Two factors
impacting the performance of accounts receivable are (1) continued high turnover
among  accounts  receivable  personnel in many of Apria's  locations and (2) the
inability to collect  contractually-due  receivables  from certain large managed
care  payors  on a timely  basis,  or at all.  To  address  the  high  turnover,
management is seeking to upgrade certain of its accounts  receivable  management
positions  to gain  more  stability  at that  level  and to  centralize  certain
functions  that  require a higher level of expertise  and  training.  To address
collection  issues with certain large  managed care payors,  Apria is developing
centralized  processing groups and is designing customized electronic interfaces
with certain large payors to facilitate  improved  communications and electronic
order intake and claims adjudication.  In certain cases, Apria may choose not to
renew  contracts  with payors who do not pay on a timely basis.  Apria will also
take  legal  action  to  enforce  its  contractual  rights,  if  necessary.  See
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations - Liquidity and Capital Resources".


MARKETING

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

     AUTOMATED  CALL  ROUTING  THROUGH A SINGLE  TOLL-FREE  NUMBER.  This allows
select  managed  care  organizations  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. The Joint Commission on Accreditation of Healthcare Organizations
is a nationally  recognized  organization  which develops  standards for various
healthcare  industry  segments  and  monitors  compliance  with those  standards
through  voluntary  surveys of participating  providers.  As the home healthcare
industry has grown, the need for objective  quality  measurements has increased.
Accreditation   by  the  Joint   Commission  on   Accreditation   of  Healthcare
Organizations  entails a lengthy review  process which is conducted  every three
years.  Accreditation  is  increasingly  being  considered  a  prerequisite  for
entering into contracts with managed care organizations at every level.  Because
accreditation  is expensive  and time  consuming,  not all  providers  choose to
undergo  the  process.  Due to  its  leadership  role  in  establishing  quality
standards for home  healthcare  and its active and early  participation  in this
process, Apria is viewed favorably by referring healthcare professionals. All of
Apria's  branch  locations  are  accredited  by or in the  process of  receiving
accreditation   from  the  Joint   Commission  on  Accreditation  of  Healthcare
Organizations. Apria's triennial survey cycle began in late 1999.

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

     - patient and/or environmental assessments
     - screening/diagnostics
     - patient education
     - clinical monitoring
     - pharmacological management
     - utilization and outcome reporting

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

     PATIENT  SATISFACTION.  In 1999, Apria centralized its patient satisfaction
survey function.  Previously,  Apria relied on its distributed branch network to
mail surveys to its discharged patients.  Centralization of the function ensures
the validity of the sampling  methodology  and has served to increase the survey
response rate from approximately 4% to a more  statistically-meaningful 30%. The
program  also  meets  the  Joint   Commission  on  Accreditation  of  Healthcare
Organizations' new requirements for outcome data.  Targeted member  satisfaction
studies for key managed care organizations are also conducted periodically.

     APRIA  GREAT  ESCAPES  TM  TRAVEL  PROGRAM.   Apria's   350-branch  network
facilitates  travel  for  patients  who are on  oxygen or other  therapies.  The
company  coordinates  equipment and service needs for thousands of patients each
quarter, which enhances their mobility and quality of life.


SALES

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

     An integral  component  of Apria's  overall  sales  strategy is to increase
volume through managed care organizations and traditional referral channels.  As
Apria's  various  served  markets  evolve,  the  ultimate  decision  makers  for
healthcare services vary greatly from closed model managed care organizations to
preferred  provider  networks  which are controlled by more  traditional  means.
Apria's  selling  structure and  strategies are driven largely by these changing
market  factors and will  continue to adjust as further  changes in the industry
occur. Managed care organizations continue to represent a significant portion of
Apria's  business  in several of its  primary  metropolitan  markets.  No single
account,  however,  represented  more than 8% of Apria's  total net revenues for
1999.  Among its more  significant  managed  care  agreements,  the  company has
contracts with  Aetna/U.S.  Healthcare/Prudential  Health Plans,  Gentiva Health
Services, Kaiser Permanente and United Healthcare Corporation. Apria also offers
discount  agreements and various  fee-for-service  arrangements  to hospitals or
hospital systems whose patients have home healthcare needs.


COMPETITION

     The  segment of the  healthcare  market in which  Apria  operates is highly
competitive. In each of its 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
     - access and responsiveness
     - price of services
     - overall ease of doing business
     - quality of care and service
     - range of home healthcare services

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

     - wide geographic coverage
     - ability to develop and  maintain  contractual relationships with  managed
       care organizations
     - access to capital

     It is increasingly  important to be able to integrate a broad range of home
healthcare  services  through a single  source.  Apria believes that it competes
effectively  in each of its  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  and  home  infusion  therapy  as  reflected  by the  Joint
Commission on  Accreditation  of Healthcare  Organizations  accreditation of its
branches.

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


GOVERNMENT REGULATION

     Apria is subject to extensive  government  regulation,  including  numerous
laws directed at preventing  fraud and abuse and laws  regulating  reimbursement
under  various  governmental  programs,  as  more  fully  described  below.  See
"Business - Risk Factors - Federal Investigations".

     MEDICARE  AND  MEDICAID  REIMBURSEMENT.  As  part  of the  Social  Security
Amendments of 1965,  Congress  enacted the Medicare  program which  provides for
hospital,  physician and other statutorily-defined health benefits for qualified
individuals such as persons over 65 and the disabled. The Medicaid program, also
established  by Congress in 1965,  is a joint  federal  and state  program  that
provides  certain  statutorily-defined  health  benefits  to  financially  needy
individuals who are blind, disabled, aged, or members of families with dependent
children.  In addition,  Medicaid  generally covers  financially needy children,
refugees  and  pregnant  women.  A  substantial  portion of  Apria's  revenue is
attributable  to  payments  received  from  third-party  payors,  including  the
Medicare  and  Medicaid  programs.  In 1999,  approximately  24% of Apria's  net
revenue was derived from Medicare and 8% from Medicaid.

     Medicare Legislation.  The Medicare Reform Act of 1997 contains a number of
provisions  that  are  affecting,   or  could   potentially   affect,   Medicare
reimbursement  levels to Apria.  On November  29, 1999,  the  Medicare  Balanced
Budget  Refinement  Act of  1999  was  passed,  which  provides  Apria  and  the
healthcare industry with some relief from the effects of the Medicare Reform Act
of 1997.

     Pursuant to the provisions of the Medicare Reform Act of 1997, the Medicare
reimbursement  rates for home oxygen therapy and respiratory  drugs were reduced
by 25% and 5%,  respectively.  This reduction was effective  January 1, 1998 and
was  followed  by an  additional  reimbursement  reduction  of 5% on home oxygen
therapy that became  effective on January 1, 1999.  The  estimated  decreases to
Apria's  1999 and 1998  revenues  and  operating  income  resulting  from  these
reimbursement  reductions  were  approximately  $10  million  and  $57  million,
respectively.  Other  provisions  of the  Medicare  Reform Act of 1997 that have
affected,  or are affecting,  levels of reimbursement to Apria for equipment and
services include:

     - a reduction of the Medicare update, or inflation factor, to zero for home
       medical  equipment, including oxygen, and home infusion  therapy for each
       of the years 1998 through 2002; some relief to this was provided  through
       the  Medicare   Balanced  Budget  Refinement  Act  of  1999  with limited
       reimbursement  increases  for  durable  medical  equipment,  supplies and
       oxygen in 2001 and 2002
     - a reduction of the Medicare reimbursement for drugs and biologicals
     - a  payment  freeze  between  1998  and  2002  for  parenteral and enteral
       nutrients, supplies and equipment at 1995 payment amounts

     Another  provision  of the  Medicare  Reform  Act of 1997  that may  affect
reimbursement  levels is the authority it granted to the Secretary of the Health
and Human Services  Department to increase or reduce the  reimbursement for home
medical  equipment,  including  oxygen,  by 15%  each  year  under  an  inherent
reasonableness procedure. However, under the provisions of the Medicare Balanced
Budget Refinement Act of 1999, any reimbursement  reductions  proposed under the
inherent  reasonableness  procedure  have been  delayed  until  (1) the  General
Accounting  Office has conducted a study to evaluate the impact of the authority
granted under this procedure,  and (2) the Health Care Financing  Administration
has promulgated a final rule implementing the inherent reasonableness  authority
based on a reevaluation of the  appropriateness  of the criteria included in the
interim regulations.

     The Medicare  Reform Act of 1997  mandates  that the Health Care  Financing
Administration  conduct competitive  bidding  demonstrations for Medicare Part B
items  and  services.  Pursuant  to this  mandate,  the  Health  Care  Financing
Administration  issued notices to providers,  including  Apria,  in Polk County,
Florida, of the structure and conditions for submitting bids to provide Medicare
beneficiaries with five categories of home medical equipment,  including oxygen,
hospital  beds,  enteral  products,   surgical  and  urological  supplies.   The
demonstration  commenced October 1, 1999. The competitive bidding demonstration,
the first of its kind by the Health Care Financing  Administration and the first
of five authorized by the Medicare Reform Act of 1997,  could provide the Health
Care  Financing  Administration  and  Congress  with a  model  for  implementing
competitive  pricing in all Medicare  Programs.  If such a  competitive  bidding
system were implemented,  it could result in lower reimbursement  rates, exclude
certain  items and  services  from  coverage or impose  limits on  increases  in
reimbursement rates. The Health Care Financing Administration recently announced
that the San Antonio,  Texas area will be the site of the second  demonstration.
This demonstration, which will commence January 1, 2001, will cover the counties
of Bexar, Comal and Guadalupe.

     The United States  General  Accounting  Office was directed by the Medicare
Reform  Act of 1997 to report in 18 months on the  effect of the  reductions  in
oxygen  reimbursement on accessibility to patients of home oxygen services.  The
General Accounting Office's report was released on April 5, 1999. The conclusion
of the report is that the  reduction in Medicare  payment  rates for home oxygen
has not had a major  impact on  patients'  access to home oxygen  equipment  and
services. The Secretary of Health and Human Services was directed to arrange for
peer review organizations to evaluate the access to, and quality of, home oxygen
equipment.

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

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

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

     PHYSICIAN   SELF-REFERRALS.   Certain  provisions  of  the  Omnibus  Budget
Reconciliation  Act of 1993,  commonly  known as  "Stark  II",  prohibit  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 to Apria 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,  home health services and parenteral
and enteral nutrition. In addition,  "financial relationship" is broadly defined
to include any  ownership or  investment  interest or  compensation  arrangement
pursuant to which a physician receives  remuneration from the provider at issue.
Violations   of  Stark  II  may  result  in  loss  of  Medicare   and   Medicaid
reimbursement,  civil penalties and exclusion from participation in the Medicare
and Medicaid  programs.  Stark II is broadly  written  and, at this point,  only
proposed  regulations  have been issued to clarify its meaning and  application.
Regulations  for a predecessor  law,  Stark I, were published in August 1995 and
remain in effect,  but provide little guidance on the application of Stark II to
Apria's business.  While the proposed Stark II regulations do not have the force
and effect of law,  they provide some guidance as to what may be included in the
final version.  Issued on January 9, 1998, the proposed  regulations  purport to
define previously  undefined key terms, clarify prior definitions and create new
exceptions for certain "fair market value" transactions, de minimis compensation
arrangements and discounts,  among others.  It is unclear when these regulations
will  be  finalized  and,  until  such  time,  they  cannot  be  relied  upon in
structuring  transactions.  In  addition,  a number of the states in which Apria
operates have similar prohibitions on physician self-referrals.  Finally, recent
enforcement  activity and resulting  case law  developments  have  increased the
legal risks of physician compensation arrangements that do not satisfy the terms
of  an  exception  to  Stark  II,  especially  in  the  area  of  joint  venture
arrangements with physicians.

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

     The False  Claims Act also allows a private  individual  to bring a qui tam
suit on behalf of the government against a healthcare provider for violations of
the  False  Claims  Act.  A qui tam  suit may be  brought  by,  with  only a few
exceptions,  any private  citizen who has material  information of a false claim
that has not yet been previously disclosed,  and even if disclosed, the original
source of the information leading to the public disclosure may still pursue such
a suit.  The private  plaintiff in such a suit is often a corporate  insider who
decides to become a whistleblower.  However, the law does not prohibit outsiders
from  pursuing  such suits and there has been an increase in outsiders  pursuing
them.

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

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

     Recently,   the  federal   government   has  made  a  policy   decision  to
significantly  increase the  financial  resources  allocated  to  enforcing  the
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.

     INTERNAL  CONTROLS.  Apria maintains  several programs designed to minimize
the  likelihood  that Apria  would  engage in  conduct  or enter into  contracts
violative of the fraud and abuse laws.  Contracts of the types  subject to these
laws are reviewed and approved by the corporate  contract  services and/or legal
departments.  Apria also maintains various educational programs designed to keep
its managers updated and informed on developments  with respect to the fraud and
abuse laws and to remind all employees of Apria's policy of strict compliance in
this area. While Apria believes its discount agreements,  billing contracts, and
various fee-for-service arrangements with other healthcare providers comply with
applicable laws and regulations, Apria cannot provide any assurance that further
judicial  interpretations of existing laws or legislative  enactment of new laws
will not have a material  adverse  effect on Apria's  business.  See "Business -
Risk Factors - Federal Investigations".
<PAGE>
     HEALTHCARE   REFORM   LEGISLATION.   Economic,   political  and  regulatory
influences  are  subjecting  the  healthcare  industry  in the United  States to
fundamental change.  Healthcare reform proposals have been formulated by members
of Congress and by the current  administration.  In addition, some of the states
in  which  Apria  operates   periodically  consider  various  healthcare  reform
proposals.  Apria anticipates that Congress and state legislatures will continue
to review  and  assess  alternative  healthcare  delivery  systems  and  payment
methodologies and public debate of these issues will continue in the future. Due
to uncertainties regarding the ultimate features of reform initiatives and their
enactment and implementation, Apria cannot predict which, if any, of such reform
proposals  will be adopted or when they may be adopted or that any such  reforms
will not have a material  adverse  effect on  Apria's  business  and  results of
operations.

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


EMPLOYEES

     As of March 1,  2000, Apria  had  8,622  employees,  of  which  7,345  were
full-time and 1,277 were  part-time.  The company's  employees are not currently
represented  by  a  labor  union  or  other  labor   organization,   except  for
approximately  17 employees in the State of New York.  Apria  believes  that its
employee relations are good.

     In February 2000, Apria's full-time  equivalents in the functional areas of
sales,  operations and administration  totaled 380, 6,831 and 866, respectively.
Full-time equivalents are computed by dividing the actual number of hours worked
in a given  period by the  "normal"  number of hours for that period  based on a
40-hour week.


                      EXECUTIVE OFFICERS OF THE REGISTRANT

     Set forth below are the names, ages, titles with Apria and present and past
positions of the persons serving as executive  officers of Apria as of March 20,
2000:
<TABLE>
<CAPTION>
            Name and Age                                       Office and Experience
<S>                                         <C>

Philip L. Carter, 51...............   Chief Executive  Officer and Director.  Mr. Carter has been Chief Executive  Officer and
                                      a Director of Apria since May 1998.  Prior to joining  Apria,  Mr.  Carter was President
                                      and  Chief  Executive  Officer of Mac Frugal's  Bargains -- Close-Outs  Inc., a chain of
                                      retail  discount   stores, since  1995  and  had  held  the  positions of Executive Vice
                                      President and Chief Financial Officer of Mac Frugal's from 1991 through 1995.

Lawrence M. Higby, 54..............   President  and  Chief  Operating  Officer.  Mr.  Higby  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
                                      from 1992 to 1994.

Michael R. Dobbs, 50 ..............   Executive Vice President, Logistics. Mr. Dobbs was promoted to Executive Vice President,
                                      Logistics in January 1999.  He served as Senior Vice President, Logistics from June 1988
                                      to January 1999. Prior to joining  Apria,  Mr. Dobbs served as Senior Vice  President of
                                      Distribution for Mac Frugal's Bargains -- Close-Outs Inc. from 1991 to January 1998.

John C. Maney, 40 .................   Executive Vice President and Chief Financial Officer.  Mr. Maney has been Executive Vice
                                      President  and Chief  Financial Officer since joining Apria in November  1998.  Prior to
                                      joining  Apria,  Mr. Maney  was  employed  by  Arthur  Andersen LLP since 1992 and was a
                                      partner of such firm from 1995 to 1998.

Lawrence A. Mastrovich, 38 ........   Executive Vice President, Revenue Management.  Mr. Mastrovich  was promoted to Executive
                                      Vice  President, Revenue  Management  in  October  1998.  He  served  as  Division  Vice
                                      President,  Operations  of  the  Northeast  Division from December 1997 to October 1998.
                                      Prior to  that  time he  had served  as  a Regional Vice President for Apria and Homedco
                                      since 1994 and in various other capacities from 1987 to 1994.

George J. Suda, 41 ................   Executive Vice President, Information Services.  Mr. Suda was promoted to Executive Vice
                                      President, Information Systems in March  2000.  Prior to his most recent  promotion,  he
                                      served as Senior Vice President, Information Systems since July 1998, as Vice President,
                                      Information Services Technology from June 1997 to July 1998 and as Director,  Technology
                                      from January 1997 to June  1997.  From  July  1994  to  January  1997,  Mr.  Suda  was a
                                      self-employed information services consultant, providing services to Abbey and Apria.

Dennis E. Walsh, 50................   Executive Vice President, Sales.  Mr. Walsh was promoted to  Executive  Vice  President,
                                      Sales in January 1998. Mr.  Walsh  served  as Senior Vice  President,  Western Zone from
                                      March 1997 to January  1998.  From June 1995 to March 1997,  he  served  as  Senior Vice
                                      President, Sales and Marketing.  He served as Vice  President,  Sales  of  Homedco  from
                                      November 1987 to June 1995.

Frank Bianchi, 55..................   Senior Vice President, Human  Resources.  Mr.  Bianchi  joined  Apria in May 1998 as its
                                      Senior Vice President, Human Resources.  Prior to joining  Apria,  Mr. Bianchi served as
                                      Senior Vice President, Human Resources for Mac Frugal's Bargains -- Close-Outs Inc. from
                                      1989 until January 1998.

Lisa M. Getson, 38.................   Senior Vice President, Business Development and Clinical Services.  Ms. Getson was named
                                      Senior Vice  President, Business Development and Clinical  Services in August 1998.  Ms.
                                      Getson was promoted to Senior Vice  President, Marketing in August 1997 after serving as
                                      Vice  President, Marketing from November 1995 to August 1997.  She served as Director of
                                      Marketing, Infusion  from June 1995 to November  1995. From May 1994 to June  1995,  she
                                      served as Director of Business  Development of Abbey. From 1989 to 1994, Ms. Getson held
                                      various  positions  with  Critical  Care  America,  including  Director of Marketing and
                                      Business Development from January 1993 to May 1994.

Robert S. Holcombe, 57.............   Senior  Vice  President, General  Counsel and  Secretary.  Mr. Holcombe was promoted  to
                                      Senior  Vice  President,  General  Counsel  and  Secretary  in  August  1997.  He served
                                      as  Vice President,  General  Counsel and Secretary  from May 1996 to August 1997. Prior
                                      to joining Apria,  Mr.  Holcombe  served as Senior Vice  President and  General  Counsel
                                      for  The  Cooper  Companies, Inc.,  a  diversified  specialty  healthcare  company, from
                                      December 1989 to April 1996.

James E. Baker, 48 ................   Vice  President,  Controller.  Mr. Baker  has  served  as Vice  President, Controller of
                                      Homedco and,  subsequently,  Apria, since August 1991. He served as Corporate Controller
                                      of Homedco from November 1987 to August 1991.
</TABLE>



                                  RISK FACTORS

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

- under the caption  "Business - Business Strategy" and elsewhere in this report
  as to measures  being  undertaken to improve  profitability, and plans for the
  future
- under the caption "Business - Organization  and Operations - Operating Systems
  and Controls"
- under  the  caption  "Business -  Organization  and  Operations -  Receivables
  Management"
- under the caption "Business -  Government  Regulation - Medicare  and Medicaid
  Reimbursement"
- under the caption "Business - Government Regulation - Internal Controls"
- under the caption "Legal Proceedings" and  elsewhere in this report concerning
  the outcome of pending legal proceedings
- under the caption "Management's Discussion and Analysis of Financial Condition
  and Results of Operations"
- under the caption "Quantitative and Qualitative Disclosures about Market Risk"
- under the caption "Notes to Consolidated  Financial Statements - Notes 1,7 and
  11"

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

COLLECTIBILITY  OF ACCOUNTS  RECEIVABLE - APRIA'S FAILURE TO MAINTAIN OR IMPROVE
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 RESULTS OF OPERATIONS AND FINANCIAL CONDITION.

     Apria  had  experienced  high  levels  of  accounts  receivable  write-offs
subsequent to the 1995 Abbey/Homedco  merger caused by the disruptive effects of
system conversions and process changes. In 1999, accounts receivable  write-offs
decreased  significantly  from the  levels  experienced  in the last few  years.
Additionally,  days sales outstanding have been 56 days or fewer for each of the
last five quarters,  compared to a range of 87 to 111 days during 1996 and 1997.
Despite these  improvements,  collection of accounts  receivable  remains one of
Apria's biggest  challenges,  requiring constant focus and involvement by senior
management and ongoing  enhancements  to information  systems and billing center
operating  procedures.  Further, some of Apria's payors 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 current  levels of  collectability  and days sales  outstanding  in
future  periods.  If Apria is unable to properly  bill and collect its  accounts
receivable, results will be adversely affected. See "Business - Organization and
Operations - Receivables  Management" and "Management's  Discussion and Analysis
of  Financial  Condition  and  Results of  Operations  -  Liquidity  and Capital
Resources".

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

     Pursuant to the provisions of the Medicare Reform Act of 1997, the Medicare
reimbursement  rates for home oxygen therapy and respiratory  drugs were reduced
by  25%  and  5%,  respectively,   effective  January  1,  1998.  An  additional
reimbursement reduction of 5% on home oxygen therapy was effective on January 1,
1999.  Also included in the Medicare Reform Act of 1997 was a freeze on Consumer
Price Index-based  reimbursement rate increases for 1998 through 2002 as well as
other  provisions  which  may  impact  reimbursement  rates in the  future.  The
Medicare  Balanced Budget  Refinement Act of 1999,  which was passed on November
29, 1999, provides some relief from the Consumer Price Index-based reimbursement
rate freeze and other  provisions  contained in the Medicare Reform Act of 1997.
However,  there can be no assurance that further  reimbursement  reductions will
not be made.  See  "Business -  Government  Regulation  - Medicare  and Medicaid
Reimbursement".

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

     Apria has received a number of subpoenas  and document  requests  from U.S.
Attorneys'  offices and from the U.S.  Department of Health and Human  Services.
The subpoenas and requests  generally ask for documents,  such as patient files,
billing records and other documents  relating to billing  practices,  related to
the company's  patients  whose  healthcare  costs are paid by Medicare and other
federal  programs.  Apria is cooperating  with the government in connection with
these  investigations  and is responding to the document requests and subpoenas.
On July 8, 1999, Apria announced that the company had received notification that
the U.S.  Attorney's office in Sacramento has closed its criminal  investigation
file relating to eight subpoenas that had been issued by that office.

     Apria has acknowledged that there may be errors and omissions in supporting
documentation  affecting a portion of its  billings.  If the U.S.  Department of
Justice were to conclude  that such errors and  omissions  constituted  criminal
violations,  or were to conclude that such errors and omissions  resulted in the
submission  of false  claims  to  federal  healthcare  programs  or  significant
overpayments by the government,  Apria could face criminal  charges and/or civil
claims for refunds,  administrative  sanctions  and  penalties  for amounts that
would be highly  material to its business,  results of operations  and financial
condition, including exclusion of Apria from participation in federal healthcare
programs.  Apria  believes  that the  assertion  of  criminal  charges  would be
unwarranted  and that the  company  would be in a  position  to assert  numerous
meritorious  defenses in the event that any material  civil claims are asserted.
However,  no assurance  can be provided as to whether any such charges or claims
will be  asserted  or as to the  outcome of any  possible  proceedings  that may
result from any such assertion of charges or claims.

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

     Following  the 1995 merger of Apria's  two  predecessor  corporations,  the
company has been adversely  affected by  difficulties  in  establishing a common
field information system for accurate order entry, pricing, billing, collections
and monitoring, as well as by ongoing operational problems such as high turnover
and training issues. To address these issues, management performed an evaluation
of its systems.  A significant  determination of the evaluation is that Apria is
at some risk in  continuing  to run its infusion  billing  system on its current
platform,  which is no longer  supported by the computer  industry.  To mitigate
this particular  risk,  address certain other  weaknesses of the current systems
and to position  itself to meet future needs,  Apria embarked on a reengineering
of the  systems  with the primary  focus on order  entry,  billing and  accounts
receivable. Some of the various projects include a rewriting of the order entry,
billing and accounts  receivable  modules and the  installation  of supply chain
management  software  to replace  the  inventory  and  purchasing  modules.  The
processing of transactions for all product lines,  including  infusion  therapy,
will be addressed by these  changes.  There can be no assurance  that the system
modifications  will resolve the problems  experienced  in prior  periods and the
implementation of these system changes could have a disruptive effect on billing
and collection activity. See "Business - Organization and Operations - Operating
Systems and Controls".

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

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

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

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  buyer and supplier  groups  exert  additional
pricing  pressure on home  healthcare  providers.  These  include  managed  care
organizations,  which control an increasing  portion of the healthcare  economy.
Apria has a number of contractual  arrangements with managed care  organizations
and other parties, although no individual arrangement accounted for more than 8%
of Apria's net revenues in 2000.  Certain  competitors  of Apria may have or may
obtain  significantly  greater financial and marketing  resources than Apria. In
addition,  relatively  few  barriers  to entry  exist in local  home  healthcare
markets. As a result, Apria could encounter increased  competition in the future
that may increase pricing pressure and limit its ability to maintain or increase
its market share. See "Business - Sales" and "Business - Competition".

ACQUISITION  STRATEGY - APRIA  MAY  NOT  BE  ABLE TO SUCCESSFULLY  IMPLEMENT ITS
ACQUISITION STRATEGY WHICH COULD HAVE AN ADVERSE EFFECT ON RESULTS OF OPERATIONS
AND FINANCIAL CONDITION.

     In pursuing its acquisition strategy, Apria may have difficulty identifying
appropriate  acquisition  candidates  and  consummating  transactions,  and  the
process of integrating  newly acquired  businesses may be costly and disruptive.
In  addition,  Apria  may not have  sufficient  available  funds to  pursue  its
acquisition  strategy.  Apria's credit  agreement was recently amended to permit
additional  acquisitions with an aggregate  purchase price of up to $125 million
through  August 9, 2001, the scheduled  maturity date of the agreement.  Through
March 20, 2000, Apria had expended  approximately $25 million of its acquisition
limit. If Apria is not successful in integrating  acquired  businesses,  results
will be adversely affected. See "Business - Business Strategy".

UPCOMING  MATURITY  OF  LONG-TERM  DEBT - APRIA  MAY NOT BE ABLE TO SUCCESSFULLY
REFINANCE ITS LONG-TERM DEBT ON OR BEFORE MATURITY, WHICH COULD ADVERSELY AFFECT
THE FINANCIAL HEALTH OF APRIA.

     Apria's  credit  agreement,  under  which it had total  borrowings  of $219
million at December 31, 1999,  matures on August 9, 2001. Apria's $200 million 9
1/2%  senior  subordinated  notes are due  November  1, 2002.  Apria may need to
refinance  all or a portion of its  indebtedness  on or before  maturity.  Apria
cannot  provide  assurance  that  it  will  be  able  to  refinance  any  of its
indebtedness  on  commercially  reasonable  terms or at all.  See  "Management's
Discussion  and  Analysis of  Financial  Condition  and Results of  Operations -
Liquidity and Capital Resources".


ITEM 2.  PROPERTIES

     Apria's  headquarters are located in Costa Mesa,  California and consist of
approximately  112,000  square feet of office space.  The lease expires in 2001.
Apria has approximately 350 branch facilities serving patients in all 50 states.
These branch  facilities  are typically  located in light  industrial  areas and
average  approximately 10,500 square feet. The typical facility is a combination
warehouse and office, with approximately 50% of the square footage consisting of
warehouse  space.  Apria leases  substantially  all of its facilities with lease
terms of ten years or less.


ITEM 3.  LEGAL PROCEEDINGS

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

     Two similar  class  actions were filed  during  July,  1998 in the Superior
Court for the State of  California  for the  County of  Orange:  Schall v. Apria
Healthcare Group Inc., et al. (Case No. 797060) and Thompson v. Apria Healthcare
Group Inc., et al. (Case No. 797580).  These two actions were  consolidated by a
court order dated October 22, 1998 (Master Case No.  797060).  On June 14, 1999,
the plaintiffs  filed a Consolidated  Amended Class Action  Complaint  asserting
claims founded on state law and on Sections 11  and 12(2) of the 1933 Securities
Act.

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

     Apria has  received a number of subpoenas  and  inquiries  from  government
agencies  requesting  documents  related to the  company's  billing for patients
whose  healthcare  costs are paid by Medicare and other  federal  programs.  See
"Business - Risk Factors - Federal Investigations".

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


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

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



                                     PART II

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

     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, 1999
----------------------------
  First Quarter                                  $12.0000       $ 7.1250
  Second Quarter                                  22.0625        11.5000
  Third Quarter                                   20.5000        12.5625
  Fourth Quarter                                  18.0000        12.3125


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

     As of March 15,  2000  there  were 751  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.  Apria has a
credit agreement which prohibits the payment of dividends.

<PAGE>
ITEM 6.  SELECTED FINANCIAL DATA

     The following table presents selected  financial data of Apria for the five
years ended  December 31, 1999.  The data set forth below have been derived from
the audited  Consolidated  Financial  Statements  of Apria and are  qualified by
reference to, and should be read in conjunction with, the Consolidated Financial
Statements and related notes thereto and  "Management's  Discussion and Analysis
of Financial Condition and Results of Operations" included in this report.
<TABLE>
<CAPTION>

                                                                              Year Ended December 31,
                                                        -----------------------------------------------------------------
                                                          1999(1)      1998(2,3)    1997(2,4)     1996(2,5)   1995(5,6,7)
                                                        ----------   ------------  -----------   -----------  -----------
                                                                     (in thousands, except per share amounts)
Statements of Operations Data:
<S>                                                     <C>          <C>           <C>           <C>          <C>
Net revenues ........................................   $  940,024   $  933,793    $1,180,694    $1,181,143   $1,133,600
Gross profit ........................................      672,110      603,098       729,512       780,468      772,601
Income (loss) from continuing operations
   before extraordinary items .......................      204,135     (207,938)     (272,608)       33,300      (71,478)

Net income (loss) ...................................      204,135     (207,938)     (272,608)       33,300      (74,476)

Per share amounts:
    Income (loss) from continuing operations
       before extraordinary items ...................   $     3.93   $    (4.02)   $    (5.30)   $     0.66    $   (1.52)
    Basic income (loss) per common share ............   $     3.93   $    (4.02)   $    (5.30)   $     0.66    $   (1.58)

Per share amounts - assuming dilution:
    Income (loss) from continuing operations
       before extraordinary items ...................   $     3.81   $    (4.02)   $    (5.30)   $     0.64    $   (1.52)
    Diluted income (loss) per common share ..........   $     3.81   $    (4.02)   $    (5.30)   $     0.64    $   (1.58)

Balance Sheet Data:
Working capital .....................................   $   79,644   $   14,929    $  169,090    $  311,991    $ 198,630
Total assets ........................................      629,051      496,598       757,170     1,149,110      979,985
Long-term obligations, including current maturities..      417,729      488,586       548,905       634,864      500,307
Stockholders' equity (deficit) ......................       75,469     (131,657)       74,467       342,935      284,238
</TABLE>

(1)  As  described  in  Item 7 and  in  Note  7 to  the  Consolidated  Financial
     Statements,  net income for 1999  reflects  an income tax benefit of $131.0
     million that was  primarily  attributable  to the release of the  company's
     valuation allowance in the fourth quarter of 1999.

(2)  As described in Item 7, Apria recorded  significant  charges to provide for
     estimated losses related to accounts receivable. In 1998, $18.3 million was
     recorded to  increase  the  allowance  for  revenue  adjustments  and $22.7
     million was charged to increase the allowance for doubtful accounts.  These
     charges  relate  primarily  to  changes  in  collection   policies  and  in
     conjunction  with certain  portions of the business  from which the company
     exited.  Apria recorded  charges of $40.0 million and $32.3 million in 1997
     and 1996,  respectively,  to increase the allowance for revenue adjustments
     and $61.4  million  and $9.0  million  in 1997 and 1996,  respectively,  to
     increase  the  allowance  for  doubtful  accounts.  These  charges were due
     primarily  to  the  residual   effects  of  the  1995  and  1996   facility
     consolidations  and system  conversions  effected in  conjunction  with the
     1995 Abbey/Homedco merger.

(3)  As  described  in  Item 7 and  in  Notes  3,  4 and 13 to the  Consolidated
     Financial  Statements,  the  operations  data for 1998  include  impairment
     charges of $76.2  million to write down the carrying  values of  intangible
     assets  and  $22.2  million  to  write-off  information  systems  hardware,
     internally-developed  software  and  assets  associated  with  the  exit of
     portions of the business.

(4)  As  described  in Item 7 and in Notes 3,  4, 7  and 13 to the  Consolidated
     Financial  Statements,  the  operations  data for 1997 include  significant
     adjustments  and charges to write down the  carrying  values of  intangible
     assets and information systems hardware and  internally-developed  software
     of  $133.5  million  and  $26.8  million,  respectively,  to  increase  the
     valuation allowance on deferred tax assets by $30.0 million, and to provide
     for estimated  shortages  related to patient  service  assets  inventory of
     $33.1 million.

(5)  The per share  amounts  prior to 1997 have been  restated  as  required  to
     comply with Statement of Financial  Accounting  Standards No. 128, Earnings
     per Share. For further discussion, see Note 8 to the Consolidated Financial
     Statements.

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

(7)  The  Statements of  Operations  and Balance Sheet Data reflect the June 28,
     1995  Abbey/Homedco  merger  using  the   pooling-of-interests   method  of
     accounting.


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

<PAGE>
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

     Apria operates in the home  healthcare  segment of the healthcare  industry
and provides services in the home respiratory therapy, home infusion therapy and
home medical equipment areas. In all three lines, Apria provides patients with a
variety of clinical  services and related  products and supplies,  most of which
are  prescribed  by a physician  as part of a care plan.  Apria  provides  these
services  to  patients  in the home  throughout  the United  States  through its
approximately 350 branch locations.  Management  measures operating results on a
geographic basis and, therefore,  views each branch as an operating segment. All
the branches  offer the same  services,  except that  infusion  services are not
offered  in all the  geographic  markets  in which  the  company  operates.  For
financial  reporting   purposes,   all  the  company's  operating  segments  are
aggregated into one reportable segment.

     BACKGROUND.  In July 1998,  after an evaluation  of the  business,  Apria's
management   adopted  a  strategic   plan  designed  to  improve  the  company's
performance.  The key  elements  of the  strategy  are:  (1)  remain in the core
businesses, with an increased emphasis on respiratory therapy, (2) withdraw from
unprofitable components of the business,  including the infusion therapy service
line in certain  geographic areas, (3) institute a comprehensive  cost reduction
and capital  conservation  program, (4) pursue expansion through internal growth
and  acquisitions,  and (5)  reexamine  the debt and  capital  structure  of the
company.  Significant actions taken by management since it adopted the strategic
plan  include  the sale of the  California  component  of the  infusion  therapy
service line ("the infusion  sale"),  the exit of the infusion  therapy  service
line in Texas, Louisiana, West Virginia,  western Pennsylvania and downstate New
York  and the  consolidation  or  closure  of  certain  small  branch  locations
throughout the United States.  Other significant actions include the termination
of plans to proceed with the  capital-intensive  implementation of an enterprise
resource  planning  system,  a  significant  reduction of corporate and regional
labor and general  administrative  costs and the  development of a comprehensive
plan to  capture  cost  savings  in the areas of  purchasing,  distribution  and
inventory management.  Further,  amendments to Apria's credit agreement resulted
in, among other items,  significant prepayments against its bank loans to reduce
long-term  debt and the ability to complete up to $125  million in  acquisitions
and repurchase up to $50 million of Apria's common stock.

     TAX BENEFIT.  Net income for 1999 reflects a tax benefit of $131.0  million
attributable to the release of a previously established valuation allowance. The
recognition  of the tax  benefit is a  non-recurring  item and while it does not
impact  cash flow or  operating  income,  it does have the effect of  increasing
reported net income and net income per common share.  See "Results of Operations
- Income Taxes".


RESULTS OF OPERATIONS

     NET REVENUES. Substantially all of Apria's revenues are reimbursed by third
party payors, including Medicare,  Medicaid and managed care organizations.  Due
to the nature of the industry and the  reimbursement  environment in which Apria
operates, certain estimates are required in recording net revenues.  Inherent in
these  estimates  is the risk that they will have to be revised or updated,  and
the changes recorded in subsequent  periods,  as additional  information becomes
available to management.

     Net revenues increased to $940.0 million in 1999, up from $933.8 million in
1998.  The primary  reasons for the increase are new contracts with regional and
national payors, the acquisition of complementary businesses and price increases
in certain managed care agreements.  Net revenues  increased in 1999 despite the
third  quarter  1998 exit from the  infusion  therapy  service  line in  certain
geographic markets, the 5% reduction in Medicare reimbursement rates in 1999 for
home oxygen therapy,  and the exit from contractual  arrangements  that were not
meeting minimum profitability standards.  These factors are discussed more fully
in the service line sections below.

     Net revenues for 1998  decreased 21% from 1997 levels.  A number of factors
contributed   to  the  decline,   including   the  25%   reduction  in  Medicare
reimbursement  rates for home oxygen therapy.  Further,  in June of 1997,  Apria
determined  that its  strategy to focus on  increasing  the managed  care market
share had  negatively  impacted  its  financial  performance,  particularly  for
infusion  therapy,  because  of  significant  managed  care  price  compression,
difficulties  in billing and  collecting  from  managed care  organizations  and
related  losses  of  traditional   referral  business.   In  response  to  these
conditions,  management  reevaluated  its  strategies  and began efforts to exit
certain managed care contracts not meeting minimum profitability  thresholds, as
well as certain lower-margin service lines and began to reemphasize  traditional
referral-based  business  from sources such as  physicians,  hospitals,  medical
groups  and  home  health  agencies.

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

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

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

                                                 Year Ended December 31,
                                              -----------------------------
                                               1999       1998        1997
                                               ----       ----        ----
                                                      (in millions)

     Respiratory therapy...................   $  599     $  553      $  606
     Infusion therapy......................      179        211         281
     Home medical equipment/other..........      162        170         294
                                              ------     ------      ------
          Total net revenues..............    $  940     $  934      $1,181
                                              ======     ======      ======

     Respiratory Therapy.  Pursuant to the provisions of the Medicare Reform Act
of  1997,  the  Medicare   reimbursement  rates  for  home  oxygen  therapy  and
respiratory drugs were reduced by 25% and 5%,  respectively.  This reduction was
effective  January 1, 1998 and was  followed by an  additional  5%  reduction in
reimbursement  rates for home oxygen  therapy that became  effective  January 1,
1999.  The estimated  decrease in 1999 and 1998  revenues and  operating  income
resulting from these  reimbursement  reductions is approximately $10 million and
$57 million, respectively.  Also included in the Medicare Reform Act of 1997 was
a freeze on Consumer  Price  Index-based  increases  from  January 1, 1998 until
2002. A provision of the Medicare  Balanced Budget Refinement Act of 1999, which
is discussed  more fully below,  provides  some relief from this freeze  through
limited reimbursement increases in 2001 and 2002.

     Despite  the   additional  5%  Medicare   reimbursement   rate   reduction,
respiratory therapy revenues increased by 8.3% in 1999. This increase is largely
due to a sales  focus  on the  higher-margin  respiratory  service  line and the
impact of acquisitions consummated in 1999. See "Liquidity & Capital Resources -
Business Combinations".

     Infusion  Therapy.  The  decrease in infusion  therapy  revenues in 1999 as
compared to 1998 is directly  attributable  to the exit of the infusion  service
line in selected  areas.  The exit reduced 1999  revenues by  approximately  $40
million.  The  infusion  line in 1999 was also  impacted by the  termination  of
low-margin  contracts.  These  decreases  were offset  somewhat by growth in the
remaining geographic areas in which Apria engages in the infusion business.

     The decrease in infusion  therapy revenues in 1998, as compared to 1997, is
primarily  due to the  termination  of  unprofitable  contracts  and  formidable
competition  at the local and national  levels.  Also  impacting  1998  infusion
therapy revenues was the exit of the infusion service line in certain geographic
markets.  The decision was made at the end of the third  quarter of 1998 and the
transition  out of the service line in  substantially  all of the selected areas
took place in the fourth quarter of 1998. The impact on 1998 revenues during the
transition period was a reduction of approximately $9.5 million.

     Home  Medical   Equipment/Other.   Home  medical  equipment/other  revenues
decreased by 4.7% in 1999 when  compared to 1998.  The  decrease  was  primarily
attributable to the sales focus on the higher-margin respiratory therapy service
line,  the contract  review  process and to, a lesser  extent,  decreases in the
medical supply and nursing lines that Apria began exiting in late 1997.

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

     The Consumer Price  Index-based  Medicare  reimbursement  issues  discussed
above are also applicable to the home medical equipment/other line.

     Revenue  Adjustments.  Due to the  complexity of many  third-party  billing
arrangements  and  uncertainty  of  reimbursement  amounts for certain  services
and/or from certain payors,  adjustments to billed amounts are fairly common and
are typically  identified and recorded at the point of cash  application,  claim
denial or upon  account  review.  Examples of such revenue  adjustments  include
subsequent  changes to  estimated  revenue  amounts or denials for  services not
covered due to changes in the patient's coverage,  failure subsequent to service
delivery to obtain written  confirmation  of  authorization  or other  necessary
documentation,  and differences in contract prices due to complex contract terms
or a biller's lack of familiarity with a contract or payor.  Further,  increases
in average  collection  periods result in a high level of  unidentified  revenue
adjustments  accumulating  in  accounts  receivable.  Subsequent  to the  system
conversions  and  branch  consolidations   effected  in  1995  and  1996,  Apria
experienced  increasing levels of revenue  adjustments.  The related disruptions
and employee turnover impeded normal processing and account reviews and resulted
in a high rate of billing problems.  Although  management took a number of steps
to address  the  billing  and  collection  problems,  the high levels of revenue
adjustments persisted.  Due to the existence of unidentified revenue adjustments
in accounts  receivable,  management estimates and records an allowance for such
adjustments.  In 1998  and  1997,  management  recorded  adjustments  to  reduce
revenues  and  accounts   receivable  by  $18.3   million  and  $40.0   million,
respectively.  In 1999, the level of revenue adjustments decreased significantly
from the levels  experienced  in the last few years and days  sales  outstanding
have  been 56 days or fewer for each of the last five  quarters,  compared  to a
range of 87 to 111 days during 1996 and 1997. Management is continuing to take a
number of steps to  further  reduce the  frequency  of  revenue  adjustments  as
discussed below. See "Liquidity and Capital Resources - Accounts Receivable".

     Medicare  Reimbursement Update. The Medicare Balanced Budget Refinement Act
of 1999 provides  Apria and the home  healthcare  industry with some relief from
the effects of certain provisions  contained in the Medicare Reform Act of 1997.
Among the relief items included in the Medicare  Balanced Budget  Refinement Act
of  1999  that  are  pertinent  to  Apria  is a  limited  increase  in  Medicare
reimbursement  for durable  medical  equipment,  supplies and oxygen in 2001 and
2002. Also included is a provision that will delay any reimbursement  reductions
for home  medical  equipment  that may result  from an  inherent  reasonableness
procedure. Further, the Medicare Balanced Budget Refinement Act of 1999 includes
a provision that excludes home medical equipment, including oxygen, from changes
in payment rules related to products and services  provided  through home health
agencies.

     GROSS PROFIT.  Gross margins were 71.5% in 1999, 64.6% in 1998 and 61.8% in
1997. Much of the improvement in 1999 is attributable to the continued exit from
low-profit  service  lines and  contracts  and the  increase in the share of the
higher-margin  respiratory  therapy  line  relative  to  total  business.  Also,
improved pricing negotiated for inventory, patient service equipment and related
goods  improved  margins  in 1999.  Further,  in early  1999,  management  began
implementing  standardization  initiatives and optimal operating models intended
to achieve cost savings and operational  efficiencies in the functional areas of
purchasing  and supply  management,  inventory  management and vehicle fleet and
delivery  management.  By the end of 1999, the  implementation was substantially
complete.

     Gross margin improvement in 1999 was also impacted by the following charges
recorded at September  30, 1998 and  reflected in the 1998 gross  margins:  $5.4
million to settle  certain  procurement  contracts,  $3.5 million to provide for
oxygen cylinder  losses,  $2.8 million to provide for losses and obsolescence in
inventory and patient service  equipment and $3.5 million related to the exit of
the infusion service line in selected  markets.  Despite these charges,  Apria's
gross margin  improved in 1998,  when  compared to 1997.  This  improvement  was
primarily  attributable  to  eliminating  contracts  not  meeting  profitability
standards and was realized  despite the decrease in revenues due to the Medicare
reimbursement  rate  reductions  and the third  quarter  charges  listed  above.
Reflected in Apria's  gross  margins for 1997 were charges of $23.0  million and
$10.1  million  recorded  in the second and fourth  quarters,  respectively,  to
increase the inventory and patient service equipment reserves.

     PROVISION FOR DOUBTFUL  ACCOUNTS.  The provision for doubtful accounts as a
percentage  of net  revenues  was 3.7%,  8.1% and 10.3% in 1999,  1998 and 1997,
respectively.  The decrease in 1999 in the provision for doubtful accounts, as a
percentage of net revenues,  is largely  attributable  to an  improvement in the
aging of accounts receivable.  This improvement is demonstrated by a decrease in
the 12-month  average of accounts aged in excess of 180 days from 29.2% of total
accounts  receivable in 1998 to 22.2% in 1999, which management  believes is due
to the process and system  improvements it has  implemented.  See "Liquidity and
Capital Resources - Accounts Receivable".

     The 1998  provision  for  doubtful  accounts  includes:  $12.1  million  to
increase the  allowance  for doubtful  accounts due to a change in  management's
collection  policy,  $1.5 million for specific  uncollectible  accounts and $9.1
million to increase the allowance for doubtful  accounts on accounts  receivable
associated with the infusion sale and other business  closures.  In August 1998,
management  reviewed  the historic  performance  and  collectibility  of Apria's
accounts receivable portfolio. Management considered the continued high-level of
bad debt  write-offs  and  reviewed its existing  policies  and  procedures  for
estimating  the  collectibility  of  its  accounts   receivable.   In  response,
management  decided to change the  collection  policy and  formally  shifted the
focus of the collection  function to the more current  balances and assigned the
older  accounts  to  outside  collection  agencies.   Management  believes  this
concentration  on more current  balances  limits the amount of receivables  that
age.  Consequently,  the accounts that do age will  undoubtedly  be  receivables
where  collection  will be  difficult.  With this change in  collection  policy,
management  revised its estimate of the allowance for doubtful  accounts in 1998
by  increasing  the  allowance  related to balances  over 180 days  outstanding.
Accordingly,  management  recorded an adjustment in the third quarter of 1998 to
increase the allowance for doubtful  accounts by $12.1  million.  See "Liquidity
and Capital Resources - Accounts Receivable".

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

     SELLING,   DISTRIBUTION  AND  ADMINISTRATIVE.   Selling,  distribution  and
administrative  expenses as a percentage  of net  revenues was 54.7%,  61.6% and
52.2% for 1999,  1998,  and 1997,  respectively.  The  improvement  in 1999,  as
compared to 1998 is largely attributable to the realization of the benefit for a
full year in 1999 of various cost reduction measures that were effected in 1998,
such  as  labor  force  reductions  and  facility  consolidations.  Further,  as
discussed more fully above, the standardization  initiatives implemented in 1999
in the functional  areas of purchasing  and supply  management and vehicle fleet
and delivery  management  improved the selling,  distribution and administrative
line.

     Also   contributing   to  the   decrease  in  selling,   distribution   and
administrative  expenses in 1999, as compared to 1998, are the following charges
that were  recorded  in the third  quarter  of 1998:  $3.8  million  loss on the
infusion  sale,  $1.8 million to record certain costs  associated  with business
closures,  $3.9 million in severance,  stay bonuses and other employee costs and
$2.0  million  in  lease   liability  on  vacant   facilities  due  to  facility
consolidation activities.

     The  increase in selling,  distribution  and  administrative  expenses as a
percent  of  revenue  from 1997 to 1998 is  directly  attributable  to the lower
revenue base in 1998.  Actual expenses for 1998 decreased $41.2 million from the
previous year. In response to the reduction in revenues,  management  took steps
to reduce costs,  the most significant of which was a reduction in the company's
labor  force  which  commenced  in the  fourth  quarter  of 1997  and  continued
throughout 1998. From September 30, 1997 to December 31, 1998, Apria reduced its
full-time equivalent employees by approximately 1,700. The majority of the labor
reductions  made in 1998  resulted  from the  third  quarter  reorganization  of
Apria's field  operations into 16 geographic  regions  (previously 23, currently
15)  and  through  the  elimination  of  positions  at the  company's  corporate
headquarters.

     AMORTIZATION OF INTANGIBLE  ASSETS.  Amortization of intangible  assets was
$8.0  million,  $12.5  million  and  $16.8  million  in  1999,  1998  and  1997,
respectively.  The  decreases  in 1999  and  1998  are due to the  write-off  of
impaired  goodwill  of $76.2  million  in the third  quarter  of 1998 and $133.5
million in the fourth quarter of 1997. The resulting  reduction in  amortization
expense  was offset  slightly  by a  reduction  in the  amortization  period for
infusion-related goodwill from 40 years to 20 years as of the beginning of 1998.
The reduction in  amortization  expense in 1999 was further offset by additional
amortization  expense that was incurred due to the intangible assets recorded in
conjunction  with  acquisitions  effected  in 1999.  See  "Liquidity  &  Capital
Resources - Business Combinations".

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

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

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

     IMPAIRMENT OF LONG-LIVED ASSETS AND  INTERNALLY-DEVELOPED  SOFTWARE. One of
the actions  taken in 1998 was the  termination  of the project to  implement an
enterprise  resource  planning  system.  Accordingly,  Apria  wrote off  related
software and other  capitalized  costs of $7.5  million in the third  quarter of
1998.  As part of the decision to terminate  the  enterprise  resource  planning
project,  management  evaluated its current systems to determine their long-term
viability  in the  context of Apria's new overall  strategic  direction.  It was
determined that Apria was at some risk in continuing to run the infusion billing
system on a platform which is no longer supported by the computer  industry.  To
mitigate   the  risk,   Apria  is   converting   the   infusion   system  to  an
industry-supported   operating  platform.  Also,  Apria  effected  a  number  of
enhancements to the systems which rendered certain  previously-developed modules
obsolete.  Further,  pharmacy and branch  consolidations and closures rendered a
variety  of  computer  equipment  obsolete.  Due to its  age  and  technological
obsolescence,  it was  deemed  to have no  future  value.  As a result  of these
actions,  Apria recorded an impairment  charge of $11.9 million at September 30,
1998.  Apria also recognized  additional asset  impairments  during 1998 of $1.4
million in conjunction with the exited service lines and $1.4 million related to
other facility closures and consolidations.

     During 1997,  management  reevaluated  its current  information  systems in
light of year 2000 risks and ongoing operational difficulties and concluded that
significant  additional  costs would be necessary to adequately  correct  system
deficiencies and improve  functionality.  Accordingly,  the decision was made to
replace Apria's systems, including  internally-developed  software, with a large
scale,   fully-integrated   enterprise  resource  planning  system.  A  two-year
development  and  implementation  plan was approved by the Board of Directors in
December 1997. The project was  subsequently  terminated as discussed  above. In
light of the evaluation and decisions made during 1997,  management reviewed the
carrying value of the capitalized  software and recorded an impairment charge of
$20.2 million.  The charge included (1) a $3.9 million reduction to the carrying
value of Apria's branch information  system ("ACIS") program  development costs,
(2) an $11.4 million write-off of costs associated with ACIS  implementation and
conversion,  and  (3)  a  $4.9  million  write-off  of  costs  of a  specialized
telecommunications  software  program  developed  for  ApriaDirect,  a  clinical
program that was discontinued in December 1997. In connection with  management's
evaluation of Apria's internally-developed software, management also conducted a
review  of  the  company's  computer  hardware,   including   telecommunications
equipment.  Equipment  with a carrying  value of $6.6 million was  identified as
functionally obsolete or no longer in use and was written off in 1997.

     INTEREST EXPENSE. Interest expense was $42.5 million in 1999, $46.9 million
in 1998 and $50.4 million in 1997. The decrease in 1999 is directly attributable
to the  reduction in long-term  debt,  but was offset by higher  interest  rates
incurred  on the bank  loans as a result  of the  amended  and  restated  credit
agreement  that was  placed  into  effect in  November  1998.  Primarily  due to
payments of $74.8  million  made on its  long-term  debt in 1999,  Apria's  cash
balances have decreased from $75.5 million at December 31, 1998 to $20.5 million
at December 31, 1999, which resulted in a decrease in interest income.

     The  decrease  in  1998,  when  compared  to  1997,  was  also due to lower
long-term  debt levels as offset by higher  interest  rates.  Apria's  effective
interest rate  increased  steadily  during 1998 because the company did not meet
the required  levels of funded  indebtedness  to  consolidated  earnings  before
interest,  taxes,  depreciation  and  amortization  ("EBITDA"),  which  was  the
financial ratio that governed the applicable  interest rate margin  available to
the company.  Apria's cash balances increased from $16.3 million at December 31,
1997 to $75.5  million at  December  31,  1998.  The  interest  income  from the
accumulated  cash  reserves  helped to mitigate  the impact of higher  effective
interest rates. See "Liquidity and Capital Resources - Long-term Debt".

     INCOME  TAXES.  The income tax benefit for 1999 is $131.0  million,  and is
primarily  attributable to the release of the company's $158.9 million valuation
allowance.  Management  evaluated  the  available  evidence in  determining  the
realizability  of the net deferred  tax assets at December 31, 1999.  Management
concluded  it is more  likely  than not that the  company  will  realize its net
deferred tax assets. In reaching this conclusion,  significant  weight was given
to the company's  continued  quarterly and 1999 annual  profitability  under new
management.  Additional  positive  evidence  consisted  of  the  divestiture  of
unprofitable  service lines, the  stabilization  of reimbursement  rates in the
current year, and management's ability to develop and achieve internal financial
forecasts.

     At December 31, 1999, Apria had net operating loss  carryforwards  ("NOLs")
for federal  income taxes of  approximately  $225  million,  expiring in varying
amounts  in the  years  2003  through  2013 and other  net  deductible  items of
approximately  $125 million that are expected to be realized in future  periods.
Management believes that its strategies will result in sufficient taxable income
during the carryforward period to utilize Apria's NOLs.

     Income tax expense for 1998 amounted to $3.0  million,  which was primarily
state taxes  payable on a basis other than, or in addition to,  taxable  income.
The remaining amount of income tax expense included estimated settlement amounts
for in-progress state tax audits. Certain of these tax expense items resulted in
increases  to deferred  tax assets for which no benefit was recorded in 1998 due
to offsetting increases to the valuation allowance.

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


LIQUIDITY AND CAPITAL RESOURCES

     OPERATING  CASH FLOW.  Cash  provided by operating  activities  in 1999 was
$80.0 million as compared to $133.9  million in 1998 and $104.1 million in 1997.
In addition to the  significant  increase in net income in 1999,  operating cash
flow in 1999  compared  to 1998 was  impacted  by  changes  in  working  capital
requirements and expenditures for capitalized  patient service  equipment.  With
the  implementation  of  the  new  strategy  in  late  1998,  Apria  experienced
consecutive  quarter-over-quarter growth in revenues and increases in net income
and EBITDA  throughout  1999.  With this growth,  Apria's  working capital needs
increased. In 1999, operating assets and liabilities had a net increase of $60.4
million,  compared to a net  decrease  of $43.6  million in 1998.  Purchases  of
capitalized  patient  service  equipment  increased  by  $28.3  million  in 1999
compared to 1998 to support growth in the respiratory therapy patient base.

     The primary  reasons for the improvement in operating cash flow in 1998, as
compared  to 1997,  was the  decrease in  accounts  receivable  as compared to a
significant  increase  in  1997.  Also  contributing  to the  increase  in  1998
operating  cash  flow  was a  reduction  in net  purchases  of  patient  service
equipment  over 1997  levels and the fact that less cash was used in 1998 due to
the timing of payments against accounts payable.

     ACCOUNTS  RECEIVABLE.  Accounts  receivable  before  allowance for doubtful
accounts  increased  by $26.8  million  during  1999.  The  increase  is largely
attributable to a trend of quarter-over-quarter  revenue increases that began in
the fourth  quarter of 1998 and continued  throughout  all of 1999.  Also,  cash
collected  was 98.9% of net revenues in 1999,  down from 110.8% in 1998 and 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)  was 56 days  at  December  31,  1999  compared  to 53 days at
December 1998.

     Other  accounts   receivable   indicators   monitored  by  management  show
improvement  in 1999  when  compared  to recent  years.  As  indicated  above in
"Results of Operations - Provision for Doubtful Accounts",  the 12-month average
of  accounts  aged in  excess  of 180 days as a  percentage  of  total  accounts
receivable  decreased  in 1999 when  compared  to 1998.  Write-offs  of accounts
receivable  totaled $128 million in 1999, down from $246 million  written-off in
1998.

     Despite the improvements in accounts receivables in 1999, collection of its
accounts  receivables  remains one of Apria's  biggest  challenges.  Two factors
impacting the performance of accounts receivable are (1) continued high turnover
among  accounts  receivable  personnel in many of Apria's  locations and (2) the
inability to collect  contractually-due  receivables  from certain large managed
care payors on a timely basis, or at all.

     Historical  Issues.  In 1996,  1997,  and 1998 Apria  recorded  significant
charges to increase its allowances for doubtful accounts and revenue adjustments
due to  problems  originating  with the 1995  Abbey/Homedco  merger.  The merger
resulted in a  restructuring  plan that included a very rapid  consolidation  of
operating  locations  and  the  conversion  of  all  locations  to  standardized
information  systems.  During the last six months of 1995,  over 1,100 employees
were terminated and over 100 branch  locations were closed or consolidated  with
other  branches.  Beginning  with the  consummation  of the merger,  each branch
information system was first converted to the predominant system in place within
its region.  Conversion  of the branches to the standard,  company-wide  systems
then occurred on a region-by-region  basis. Because of the conversion to interim
systems prior to final conversion,  locations representing  approximately 80% of
Apria's net revenues  underwent  conversion.  Ultimately,  a total of 496 system
conversions  were completed;  232 were completed  during 1995 and 264 during the
first three quarters of 1996.

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

     Improvement  Actions.  In response to these problems and the resulting high
rates of bad debt write-offs and revenue  adjustments,  management  instituted a
number of  measures in 1996 and 1997  designed  to help  resolve the billing and
collection difficulties.  Subsequent to their implementation,  improvements were
noted in several receivables-related  statistics. However, management recognized
that  many  problems  still  persisted,   and  therefore,   instituted   further
improvement measures.  During the first quarter of 1998, management  reorganized
its field  operations  to create a separate  "revenue  management"  organization
which  encompasses  the  functions  of  order-taking,   patient   qualification,
documentation  coordination,  timely  filing and prompt  follow-up.  The revenue
management   organization   reports  directly  to  corporate   headquarters  and
specifically to an Executive Vice President position. The organization structure
was  intended to  facilitate  improved  communications  and  accountability.  In
conjunction with the  reorganization,  processes and procedures were reviewed to
identify  additional  opportunities  for  improvement.  As a result,  additional
personnel  were  placed in  quality  assurance  positions  to help  ensure  that
products   and   services   were   billed   more   accurately   and  timely  and
responsibilities were consolidated to allow specifically  qualified personnel to
support,  direct and train the revenue management staff. Task forces were formed
to visit the billing  centers to ensure  compliance  with  policies and standard
procedures.  Also,  software  enhancements to simplify the order-intake  process
were introduced.

     Apria  believes  the lower  write-offs  and  improved  aging in 1999,  when
compared to recent years, are attributable to its focus on order entry,  billing
and collections by its centralized revenue management function and to new system
improvements  and  functionality  designed to automate  and  centralize  certain
processes and to provide more timely error  identification.  Further, to address
the high  turnover,  management  is seeking to upgrade  certain of its  accounts
receivable  management  positions  to gain more  stability  at that level and to
centralize  certain  functions  that  require a higher  level of  expertise  and
training.  To address  collection  issues with certain large managed care payors
Apria is developing  centralized  processing groups and is designing  customized
electronic interfaces to facilitate improved communications and electronic order
intake and claims  adjudication.  In certain cases Apria may choose not to renew
contracts  with  payors who do not pay on a timely  basis.  Apria will also take
legal action to enforce its contractual rights, if necessary.

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

     Unbilled  Receivables.  Included  in  accounts  receivable  are  earned but
unbilled receivables of $23.0 million and $25.3 million at December 31, 1999 and
1998,  respectively.  There  is a delay  of  approximately  a day or two,  up to
several weeks or more in some cases, between the date of service and billing due
to  delays in  obtaining  certain  required  payor-specific  documentation  from
internal and external sources. Such documentation would include internal records
of proof of  service  and  written  authorizations  from  physicians  and  other
referral sources.  Earned but unbilled receivables are aged from date of service
and  are  considered  in  Apria's   analysis  of  historical   performance   and
collectibility.

     LONG-TERM  DEBT.  Apria's  credit  agreement  with a syndicate of banks was
amended  and  restated  in  November  of 1998 and  further  amended in  January,
February,  April and October of 1999. The November 1998 amendment required a $50
million  permanent   repayment  of  the  loan  upon  execution.   The  remaining
indebtedness  under the credit  agreement was  restructured  into a $288 million
term loan and a $30 million  revolving  credit  facility with a maturity date of
August 9, 2001.  Pursuant to the April 1999 amendment,  Apria made an additional
$50 million payment against the term loan.

     Term loan principal  payments are payable  quarterly,  in varying  amounts,
from March 31, 1999 through June 30, 2001.  Further,  from the effective date of
the November  1998 amended and restated  credit  agreement to December 31, 1998,
and  during  the  first  quarter  of  1999,  Apria  was  subject  to  prepayment
requirements  on the term loan  based on excess  cash  flow (as  defined  by the
agreement).  The  resulting  prepayments  of $6.9  million  reduced the required
amount of the  quarterly  term loan payment that was due March 31, 1999 to zero.
No additional prepayments based on excess cash flow are required.

     The amended and restated credit  agreement,  as further amended by the four
amendments in 1999, allows Apria to make acquisitions with an aggregate purchase
price of up to $125 million effective October 22, 1999 through the maturity date
of the agreement.  At March 20, 2000,  Apria had $99.5 million  remaining on its
acquisition allotment.  The agreement,  as amended, also provides Apria with the
ability to  repurchase  up to $50 million of its common stock through the credit
agreement maturity date, subject to annual limitations.

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

     Borrowings under the credit  agreement are secured by substantially  all of
Apria's assets and the agreement also imposes numerous restrictions,  including,
but not limited to,  covenants  requiring the  maintenance of certain  financial
ratios,  limitations on additional  borrowings,  capital expenditures,  mergers,
acquisitions  and  investments,  and  restrictions on cash dividends,  loans and
other distributions.

     At December 31, 1999, total  borrowings under the credit agreement  totaled
$219.1 million,  none of which were advanced from the revolving credit facility.
At December 31,  1999,  outstanding  letters of credit  totaled $3.8 million (as
reduced from $10.3 million at December 31, 1998) and credit  available under the
revolving credit facility was $26.2 million.  On March 10, 2000, the outstanding
letter of credit total was further reduced to $1.0 million.

     Under  the  indenture   governing   Apria's  $200  million  9  1/2%  senior
subordinated  notes,  which mature November 1, 2002, Apria must satisfy a 3.0 to
1.0 fixed charge  coverage ratio test in order to incur most types of additional
indebtedness.  At December 31, 1999, Apria's fixed charge coverage ratio exceeds
the required minimum.

     DISPOSITIONS AND BUSINESS  COMBINATIONS.  During 1998, management performed
an extensive  profitability  study to identify  service lines and/or  geographic
markets as potential  candidates  for exit.  Most  significant  of the decisions
arising  from the study was the decision to withdraw  from the infusion  service
line in California,  Texas, Louisiana,  West Virginia,  western Pennsylvania and
downstate New York. Shortly after Apria announced its plans to exit the infusion
line in these geographic markets, a buyer emerged for the California  locations.
Crescent Healthcare,  Inc. purchased  substantially all the assets and business,
excluding  accounts  receivable,  of the California  infusion  locations.  Apria
recorded  a $3.8  million  loss on the sale in the third  quarter  of 1998.  The
transition  out of the service line in  substantially  all of the selected areas
took  place in the fourth  quarter of 1998.  The  operations  of these  infusion
locations  had  revenues of $41.5  million  and $72.7  million in 1998 and 1997,
respectively.  Gross profits were $14.9 million and $32.1 million, respectively,
for the same periods.

     Apria  periodically  makes  acquisitions  of  complementary  businesses  in
specific geographic markets. The transactions are accounted for as purchases and
the  results  of  operations  of the  acquired  companies  are  included  in the
accompanying statement of operations from the date of acquisition. The aggregate
consideration  of the  acquisitions  that closed  during 1999 was $56.3  million
(cash paid for  acquisitions  and  related  contingent  consideration  was $53.4
million in 1999).  Allocation of the total consideration  includes $49.3 million
to intangible assets, $4.4 million to patient service equipment and $2.0 million
to accounts receivable.  Goodwill is being amortized over 20 years and covenants
not to compete are being amortized over the life of the respective agreements.

     YEAR  2000  COMPLIANCE.  The year  2000  issue is the  result  of  computer
programs  being  written  using  two  digits  rather  than  four to  define  the
applicable  year.  Date-sensitive  application  software  programs and operating
systems may  recognize  a date using "00" as 1900  rather than 2000.  This could
result in system failure or  miscalculations,  which could cause a disruption of
operations.  Apria's  management  began the process of evaluating its systems in
late 1997 and completed the necessary modifications on schedule. Management also
identified certain potential risks with external agents such as vendors,  payors
and  suppliers  with whom Apria  conducts  business  via  electronic  interface.
Testing of the more  significant  interfaces  was  completed on schedule.  Also,
Apria faced a potential risk with certain of its patient service equipment items
that have  microprocessors  with date  functionality.  Management  requested and
obtained year-2000 compliance  certification  letters from substantially all its
primary vendors.

     Apria  did  not  experience  any  significant   issues  during  the  actual
transition  to the year 2000.  The few minor issues that were  encountered  were
resolved within hours.  Further,  Apria has  successfully  completed two monthly
business cycles in 2000 without any significant issues. The year 2000 task force
will remain  intact  until at least the end of the first  quarter to monitor the
company's  business  processes  and ensure they  continue to function  properly.

     Apria does not believe the costs of its year 2000 remediation  efforts were
material. To date, such costs have been expensed as incurred.

     OTHER.  Apria's  management  believes that cash provided by operations  and
amounts  available  under its  existing  credit  facilities  together  with cash
invested in its money market  account will be  sufficient to finance its current
operations for at least the next year.

<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Apria currently utilizes no material derivative financial  instruments that
may expose the company to significant market risk. However,  Apria is subject to
interest rate changes on its variable  rate term loan under the  company's  bank
credit  agreement  that may affect the fair value of that debt and cash flow and
earnings.  Based on the term  debt  outstanding  at  December  31,  1999 and the
current market perception,  a 50 basis point increase in the applicable interest
rates would decrease Apria's annual cash flow and earnings by approximately $1.2
million.  Conversely, a 50 basis point decrease in the applicable interest rates
would increase annual cash flow and earnings by $1.2 million.


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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


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

     None.


                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

EXECUTIVE OFFICERS

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


DIRECTORS

     Set forth below are the names,  ages and past and present  positions of the
persons serving as Apria's Directors as of March 1, 2000:
<TABLE>
<CAPTION>

                                                  Business Experience During Last                   Director     Term
     Name and Age                                   Five Years and Directorships                      Since     Expires
     ------------                                 -------------------------------                   --------    -------

<S>                                   <C>                                                             <C>        <C>
David H. Batchelder, 50               Principal and Managing Member of Relational Investors,  LLC     1998       2000
                                      since  March  1996.   Since  1998  he  has  served  as  the
                                      Chairman  and  Chief  Executive  Officer  of  Batchelder  &
                                      Partners,   Inc.,  a  financial   advisory  and  investment
                                      banking  firm  based in San Diego,  California,  which is a
                                      registered   broker-dealer   under  Section  15(b)  of  the
                                      Securities Exchange  Act  of  1934  and  a  member  of  the
                                      National  Association of  Securities  Dealers,   Inc..  Mr.
                                      Batchelder  also serves as a director  of Morrison  Knudsen
                                      Corporation,  Nuevo Energy Company and ICN Pharmaceuticals,
                                      Inc.

Philip L. Carter, 51                  Chief  Executive  Officer and a Director of Apria since May    1998       2000
                                      1998.  Prior to joining  Apria,  Mr.  Carter was  President
                                      and Chief  Executive  Officer  of Mac Frugal's  Bargains --
                                      Close-Outs Inc., a chain of retail discount  stores,  since
                                      1995  and  had  held  the   positions  of  Executive   Vice
                                      President and Chief Financial  Officer of Mac Frugal's from
                                      1991 through 1995.

David L. Goldsmith, 51                Managing   Director  of  RS   Investment   Management,   an    1987*      2000
                                      investment  management firm. Prior to joining RS Investment
                                      Management   in  February   1999,  he  served  as  Managing
                                      Director of Robertson,  Stephens Investment Management,  an
                                      investment   management  firm  owned  by  Bank  of  America
                                      National Trust and Savings  Association.  He was affiliated
                                      with   Robertson,   Stephens   &   Company   LLC   and  its
                                      predecessors  from 1981  through  1999.  Mr.  Goldsmith  is
                                      also a director of Balanced Care Corporation.

Richard H. Koppes, 53                 Of Counsel to Jones,  Day,  Reavis & Pogue, a law firm, and    1998       2000
                                      a Consulting  Professor of Law and Co-Director of Education
                                      Programs at Stanford  University  School of Law. He  served
                                      as  a  principal  of  American  Partners  Capital  Group, a
                                      venture  capital and consulting  firm, from August 1996  to
                                      December 1998. From May 1986 through  July 1996, Mr. Koppes
                                      held  several   positions   with   the  California   Public
                                      Employees' Retirement  System,  including  General Counsel,
                                      Interim  Chief  Executive   Officer  and  Deputy  Executive
                                      Officer. Mr. Koppes is also a director of Mercy Healthcare,
                                      a non-profit hospital system.

Philip R. Lochner, Jr., 57            Senior Vice President - Administration  of Time Warner Inc.    1998       2000
                                      from  July  1991  to July  1998.  From  March  1990 to June
                                      1991, Mr. Lochner was a Commissioner  of the Securities and
                                      Exchange  Commission.  He  is  a  member  of  the  Advisory
                                      Council of Republic New York  Corporation and of the  Board
                                      of Directors of Clarcor, Inc.  He is also a Trustee of  The
                                      Canterbury School.

Beverly Benedict Thomas, 57           Principal   of   BBT   Strategies,    a   consulting   firm    1998       2000
                                      specializing  in public  affairs  and  strategic  planning.
                                      Previously,  Ms.  Thomas was a principal of UT  Strategies,
                                      Inc.,  a  public  affairs  firm,  from  1995  to  1997  and
                                      Assistant  Treasurer of the State of  California  from 1991
                                      to 1995.  In  addition to serving as a director of Catellus
                                      Real Estate  Development  Corporation,  a diversified  real
                                      estate  operating  company,  Ms.  Thomas  also  serves as a
                                      Commissioner of the Los Angeles City Employees'  Retirement
                                      System.  From  1993  to  1995,  Ms.  Thomas  served  on the
                                      Boards  of  the  California  Public  Employees'  Retirement
                                      System and the California State Teachers Retirement System.

Ralph V. Whitworth, 44                Chairman  of the Board of  Directors  of Apria  since April    1998       2000
                                      28, 1998.  Mr.  Whitworth is also a principal  and Managing
                                      Member of Relational  Investors,  LLC, a private investment
                                      company.  He is also a partner in  Batchelder  &  Partners,
                                      Inc.,  a financial  advisory  and  investment-banking  firm
                                      based in San Diego,  California  which is  registered  as a
                                      broker-dealer   under  Section  15(b)  of  the   Securities
                                      Exchange   Act  of  1934  and  a  member  of  the  National
                                      Association  of  Securities  Dealers,  Inc. From 1988 until
                                      1996,   Mr.   Whitworth  was  president  of  Whitworth  and
                                      Associates,  a corporate  advisory firm.  Mr.  Whitworth is
                                      also a director of Sirius  Radio,  Inc.,  Tektronix,  Inc.,
                                      Mattel, Inc. and Waste Management, Inc.

</TABLE>
____________

*    Director of Homedco Group,  Inc., from the date shown until the date of the
     merger. Director of Apria from the date of the merger until the present.


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

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

     Based  solely on its  review  of the  copies of such  reports  and  written
representations  from certain  reporting  persons that certain  reports were not
required to be filed by such  persons,  the  company  believes  that,  except as
provided below,  all of its Directors,  officers and greater than 10% beneficial
owners complied with all filing requirements  applicable to them with respect to
transactions  during  the  1999  fiscal  year.  The one  exception  to  complete
compliance with such filing  requirements is that a Form 4 filing for Relational
Investors,  LLC  and its  affiliated  entities  reflecting  the  acquisition  of
4,066,500  shares of the  company's  common stock on various dates in April 1999
was not filed until May 17, 1999.



ITEM 11.  EXECUTIVE COMPENSATION

SUMMARY OF EXECUTIVE COMPENSATION

     The following table sets forth all compensation for the 1999, 1998 and 1997
fiscal years paid to or earned by Apria's Chief  Executive  Officer,  as well as
the four other most highly compensated executive officers during the 1999 fiscal
year.
<TABLE>
<CAPTION>

                                                      Summary Compensation Table

                                                                                 Long-Term(1)
                                                                                 Compensation
                                                   Annual Compensation             Options            All Other
                                                 Salary(2)         Bonus          Granted(3)         Compensation
Name                                   Year         ($)             ($)              (#)                  ($)
-------------------------------------  -------  -------------   ------------  -------------------  ------------------
<S>                                    <C>        <C>             <C>                <C>                  <C>
Philip L. Carter.....................  1999       613,694         480,000            75,000               3,430(5)
  Chief Executive Officer (4)          1998       330,499         300,000           750,000                   -
                                       1997             -               -                 -                   -

Lawrence M. Higby....................  1999       418,386         329,600            40,000               3,295(5)
  President and Chief                  1998       424,113          20,000           300,000                   -
  Operating Officer (6)                1997        40,969               -           150,000                   -

John C. Maney........................  1999       358,522         280,000            30,000               1,615(5)
  Executive Vice President             1998        37,347         100,000           225,000                   -
  and Chief Financial Officer (7)      1997             -               -                 -                   -

Dennis E. Walsh......................  1999       234,702         182,160            30,000               2,890(5)
  Executive Vice President,            1998       237,971          18,750           100,000               3,940(5)
  Sales                                1997       188,962               -                 -              10,720(8)

Robert S. Holcombe...................  1999       292,439         228,800            20,000               3,160(5)
  Senior Vice President,               1998       292,869          19,500            40,000               3,940(5)
  General Counsel and                  1997       263,162           4,410                 -               6,571(9)
  Secretary
</TABLE>


(1)  Apria has not issued stock appreciation  rights or restricted stock awards.
     The company has made no payments under any "long-term  incentive  plan" (as
     that term is defined in the  applicable  rules)  during the fiscal years in
     question.

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

(3)  The option grants for 1999 were awarded by the company's Board of Directors
     in October 1999 but did not become effective and were not fixed as to price
     until January 3, 2000.

(4)  Mr. Carter was first employed by the company in May 1998.

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

(6)  Mr. Higby was first employed by the company in November 1997.

(7)  Mr. Maney was first employed by the company in November 1998.

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

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

SUMMARY OF OPTION GRANTS

     The following table provides  information with respect to grants of options
to Apria's Chief  Executive  Officer and the four other most highly  compensated
executive  officers of the  company,  during the 1999 fiscal  year.  The options
granted in 1999 were  awarded by the  company's  Board of  Directors  in October
1999, but the grants did not become effective and the option price was not fixed
until January 3, 2000.
<TABLE>
<CAPTION>

                                                          Option Grants Table

                             Number of                                                       Potential Realizable
                             Securities        % of Total                    Expiration      Value at Accrual Rate
                             Underlying     Options Granted                   Date of        of Stock Appreciation
                              Options       to Employees in     Exercise      Options         for Option Term ($)
                                                                                           --------------------------
Name                          Granted        Fiscal Year(1)     Price ($)     Granted          5%            10%
--------------------------  -------------   -----------------  -----------  -------------  ------------  ------------
<S>                           <C>                <C>             <C>           <C>           <C>         <C>
Philip L. Carter              75,000             5.0%            16.9375       1/03/10       798,891     2,024,550
Lawrence M. Higby             40,000(1)          2.6%            16.9375       1/03/10       426,076     1,079,753
John C. Maney                 30,000             2.0%            16.9375       1/03/10       319,557       809,814
Dennis E. Walsh               30,000             2.0%            16.9375       1/03/10       319,557       809,814
Robert S. Holcombe            20,000             1.3%            16.9375       1/03/10       213,038       539,822
</TABLE>

----------------------

(1)  This amount or  calculation  does not  include an option for 40,000  shares
     approved in 1998, which did not become effective until January 4, 1999.

<PAGE>
SUMMARY OF OPTIONS EXERCISED

     The following  table provides  information  with respect to the exercise of
stock options by Apria's Chief Executive  Officer and the four other most highly
compensated  executive  officers  of the company  during the 1999  fiscal  year,
together with the fiscal year-end value of unexercised options.
<TABLE>
<CAPTION>



                            Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Value

                                                           Number of Securities
                                                          Underlying Unexercised       Value of Unexercised In-
                                                                Options at               The-Money Options at
                               Shares                         Fiscal Year-End              Fiscal Year-End(1)
                             Acquired on    Value(1)   ----------------------------  -----------------------------
                              Exercise      Realized    Exercisable/Unexercisable     Exercisable/Unexercisable
                            -------------- ----------- ----------------------------- -----------------------------
Name                             (#)          ($)                (#)/(#)                       ($)/($)
--------------------------- -------------- ----------- ----------------------------- -----------------------------
<S>                               <C>           <C>          <C>                        <C>
Philip L. Carter                  0             0            562,500/187,500            $5,027,344/$1,675,781
Lawrence M. Higby                 0             0             90,000/360,000             $318,750/$2,530,000
John C. Maney                     0             0            168,750/56,250              $2,235,937/$745,312
Dennis E. Walsh                 48,000       366,000          40,800/111,200              $1,350/$1,144,650
Robert S. Holcombe                0             0             21,000/54,000                $11,812/$465,375
</TABLE>

----------------------

(1)  Market value of the  securities  underlying the options at exercise date or
     year-end,  as the  case  may  be,  minus  the  exercise  or base  price  of
     "in-the-money" options. The market value of a share of Apria's common stock
     at the close of trading on December 31, 1999 was $17.9375.



COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

     No member of the  Compensation  Committee since January 1, 1999, was either
an officer or employee of the company.


DIRECTORS' FEES

     All  Directors of Apria are  reimbursed  for their  out-of-pocket  expenses
incurred in connection  with  attending  Board and related  Committee  meetings.
During  1999,  all  non-employee  Directors  received:  (i)  $1,000 per Board or
Committee  meeting  attended  in person  ($1,500 per  Committee  meeting for the
Director  who is the  Committee's  chairperson)  and  (ii)  $500  per  Board  or
Committee  meeting  attended  via  telephone.  Beginning  on  January  1,  2000,
Committee  chairpersons  receive $2,000 for each Committee  meeting  attended in
person.  In  addition,  for services  rendered  during  1999,  the  non-employee
Chairman  of the Board was granted an option to  purchase  20,000  shares of the
company's common stock, and each non-employee  Director was granted an option to
purchase  10,000  shares.  The  amount  of the  annual  stock  option  grant  to
non-employee  directors  (other  than the  Chairman)  is expected to increase to
15,000  shares  beginning  in 2000.  The  options  are  granted at a purchase or
exercise price equal to the fair market value on the date of grant.


EMPLOYMENT AND SEVERANCE AGREEMENTS

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

     PHILIP L. CARTER.  Pursuant to an employment  agreement  dated May 5, 1998,
Mr. Carter serves as Apria's Chief Executive Officer. The agreement, as amended,
provides  that Mr.  Carter is to receive  an annual  salary of  $650,000  and is
entitled to  participate  in Apria's  annual bonus,  incentive,  stock and other
benefit  plans  generally  available to executive  officers of the company.  Mr.
Carter is  entitled  to receive  performance  bonuses of up to 80% of his annual
salary.  Mr.  Carter is also  entitled to receive (i)  reasonable  access to the
company's accountants for financial planning, (ii) an annual car allowance,  and
(iii)  reimbursement  of certain other expenses.  If the company  terminates Mr.
Carter's  employment without cause, or if he terminates his employment with good
reason (including upon a change in control), Mr. Carter shall receive a lump sum
severance payout equal to three times the sum of (i) his annual salary, (ii) the
average of his two most recent annual  bonuses,  (iii) his annual car allowance,
and (iv) an  additional  amount  estimated at $5,000.  In addition,  the company
shall be required to provide an office and secretarial  support at a cost of not
more than $50,000 during the year following termination.  Finally, upon any such
termination  not for cause or with good  reason,  all stock  options held by Mr.
Carter shall vest and remain exercisable for a period of three years.

     LAWRENCE M. HIGBY.  Pursuant to an employment  agreement which is scheduled
to expire on January 18, 2001,  Mr. Higby serves as Apria's  President and Chief
Operating Officer. The agreement provides that Mr. Higby is to receive an annual
salary  of not less than  $400,000  (his  current  annual  salary is  $440,000),
subject to annual increases at the discretion of the Compensation Committee, and
is entitled to  participate  in Apria's stock option plans and all other benefit
programs generally available to executive officers of the company.  Mr. Higby is
also  entitled to receive (i) such bonuses as the  Compensation  Committee  may,
from time to time, in its sole discretion  award,  (ii) an automobile  allowance
and  (iii)  reimbursement  of  certain  other  expenses.  He  is  also  provided
reasonable access to Apria's accountants for personal financial planning. If the
company  terminates  Mr.  Higby's  employment  without  cause,  or if Mr.  Higby
terminates his employment with good reason (including upon a change in control),
Mr. Higby is entitled to a lump sum  severance  payment equal to three times the
sum of (i) his annual  salary,  (ii) the average of his two most  recent  annual
bonuses, (iii) his annual car allowance, and (iv) an additional amount estimated
at $5,000. In addition,  all unvested stock options from the 150,000 share grant
issued to Mr. Higby on January 26, 1998, will  immediately  become  exercisable,
and all of his vested  options  will  remain  exercisable  for a period of three
years following such termination.

     JOHN C. MANEY.  Pursuant to an employment  agreement  which is scheduled to
expire on April 30,  2002, Mr. Maney serves as Apria's  Executive Vice President
and Chief Financial Officer.  The agreement provides for an annual salary of not
less  than  $350,000,  subject  to annual  increases  at the  discretion  of the
company,  except that the  increases  for 2000,  2001 and 2002 shall not be less
than 5% for each year. Mr. Maney's current annual salary is $375,000.  Mr. Maney
is entitled to participate in Apria's annual bonus,  incentive,  stock and other
benefit  programs  generally  available  to the Chief  Executive  Officer of the
company,  including  an  incentive  bonus  of up to 80% of  his  annual  salary.
Mr. Maney  is also  entitled to (i) such bonuses as the  Compensation  Committee
may,  from  time to  time,  in its sole  discretion  award,  (ii) an  automobile
allowance,  and (iii)  reimbursement  of certain other expenses.  If the company
terminates  Mr.  Maney's  employment  without  cause,  or if he  terminates  his
employment  with good reason  (including  upon a change in  control),  Mr. Maney
shall receive a lump sum severance  payout equal to two times the sum of (i) his
annual salary, (ii) the average of his two most recent annual bonuses, (iii) his
annual car  allowance,  and (iv) an additional  amount  estimated at $5,000.  In
addition,  the vested  portion of the 225,000 share stock option grant issued to
Mr. Maney in 1998 will remain  exercisable for a period of three years following
such termination.

     ROBERT S. HOLCOMBE AND DENNIS  WALSH.  In June 1997,  Messrs.  Holcombe and
Walsh (each referred to as "Executive"  below) entered into executive  severance
agreements with the company.  Pursuant to each agreement,  each Executive serves
in a position and undertakes  duties at Apria's  discretion.  As of December 31,
1999,  Mr.  Holcombe  served as  Senior  Vice  President,  General  Counsel  and
Secretary  of the company and Mr.  Walsh  served as  Executive  Vice  President,
Sales.  Each  agreement  provides  that the  Executive's  salary shall be at the
company's  discretion.  Currently,  Mr. Holcombe's annual salary is $300,000 and
Mr. Walsh's annual salary is $240,000. Each Executive is entitled to participate
in Apria's stock option plans and all other benefit programs generally available
to executive officers of the company at the company's discretion. Each Executive
is also entitled to receive (i) such bonuses as the Compensation  Committee may,
from time to time,  in its sole  discretion  award,  and (ii)  reimbursement  of
certain other expenses at the company's discretion. If the company terminates an
Executive's  employment  without cause,  each Executive is entitled to a payment
equal to the sum of (i) his  annual  salary,  (ii) the  average  of his two most
recent annual  bonuses,  (iii) his annual car allowance,  and (iv) an additional
amount  estimated at $5,000.  However,  if such  termination  occurs  during the
two-year period following a change of control of the company,  Messrs.  Holcombe
and Walsh  shall each be  entitled  to a payment  equal to twice such sum.  Such
payments shall be payable in periodic installments over one or two years.


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following  table sets forth  information as of February 29, 2000,  with
respect to the  beneficial  ownership of Apria's common stock by each person who
is known by the  company  to  beneficially  own more than 5% of  Apria's  common
stock, each Director of the company,  Apria's Chief Executive Officer,  the four
other  most  highly  compensated  executive  officers  who were  serving in such
capacity as of December 31, 1999, and all Directors and executive  officers as a
group. Except as otherwise indicated,  beneficial ownership includes both voting
and investment power with respect to the shares shown.
<TABLE>

                                                 Security Ownership Table
<CAPTION>
                                                                 Amount and Nature of        Percent of
Name of Beneficial Owner                                         Beneficial Ownership          Class
------------------------                                         --------------------          -------
<S>                                                                  <C>                        <C>
Relational Investors, LLC (1)                                        10,981,900                 21.02%
David H. Batchelder (1)                                              11,091,900                 21.23
Ralph V. Whitworth (1)                                               11,028,566                 21.11
Joel L. Reed (1)                                                     10,981,900                 21.02
Barclay's Global Investors, N.A. (2)                                  3,129,569                  5.99
Barclays Global Fund Advisors (2)                                        28,183                    *
Peter C. Cooper (3)                                                   2,836,900                  5.43
Gilbert E. LeVasseur (3)                                              2,836,900                  5.43
Cooper & LeVasseur (3)                                                2,836,900                  5.43
Cooper Capital, LLC (3)                                               2,836,900                  5.43
George L. Argyros (4)                                                 2,770,434                  5.30
Philip L. Carter (5)                                                    587,500                  1.12
David L. Goldsmith (6)                                                  361,902                    *
Lawrence M. Higby (7)                                                   229,998                    *
Dennis E. Walsh (8)                                                     107,466                    *
John C. Maney (9)                                                       176,750                    *
Richard H. Koppes (10)                                                   37,000                    *
Philip R. Lochner, Jr. (11)                                              36,000                    *
Beverly Benedict Thomas (12)                                             35,000                    *
Robert S. Holcombe (13)                                                  65,366                    *
All current directors and executive officers as a group              13,235,489                 25.33
(17 persons) (14)
</TABLE>
__________________
*     Less than 1%

(1)  According to a Schedule  13D  Amendment,  dated April 19, 1999,  and Form 4
     filings  dated May 14 and December  16, 1999,  all of which have been filed
     with the  Securities and Exchange  Commission,  Relational  Investors,  LLC
     ("RILLC"), its affiliated companies and Messrs.  Batchelder,  Whitworth and
     Reed,  individually and as Managing Members of RILLC,  have sole voting and
     dispositive  power as to 11,138,566  shares,  which amount  includes 81,666
     shares subject to options that are currently exercisable. 10,981,900 of the
     shares  are held by  RILLC or by  limited  partnerships  (Relational  Coast
     Partners, L.P., Relational Investors, L.P., Relational Fund Partners, L.P.,
     or Relational  Partners,  L.P.) of which RILLC is the sole general partner.
     Mr. Whitworth,  who is the non-employee  Chairman of the company's Board of
     Directors,  holds currently  exercisable  options to acquire 46,666 shares,
     and Mr.  Batchelder,  who  also  serves  as a  non-employee  member  of the
     company's Board of Directors, holds 75,000 shares in a personal account and
     currently exercisable options to acquire 35,000 shares. Mr. Reed's holdings
     are all through RILLC. The mailing address of Relational Investors, LLC and
     each of Messrs.  Whitworth,  Batchelder  and Reed is 11975 El Camino  Real,
     Suite 300, San Diego,  California  92130.

(2)  According  to a Schedule  13G,  dated  February  10,  2000,  filed with the
     Securities  and  Exchange  Commission,   Barclays  Global  Investors,  N.A.
     ("BGI"),  a bank as defined in Section  3(a)(6) of the Securities  Exchange
     Act of  1934,  has  sole  voting  power  as to  2,975,069  shares  and sole
     dispositive power as to 3,129,569 shares. A related entity, Barclays Global
     Fund  Advisors  ("BGF"),  which is also a bank,  has sole  dispositive  and
     voting power as to 28,183 shares.  The mailing address of BGI and BGF is 45
     Fremont Street, San Francisco, California 94105.

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

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

(5)  Includes 562,500 shares subject to options that are currently exercisable.

(6)  Includes  300,236  held in a shared  trust  with Mr.  Goldsmith's  wife and
     61,666 shares subject to options that are currently exercisable.

(7)  Includes 219,998 shares subject to options that are currently exercisable.

(8)  Includes 107,466 shares subject to options that are currently exercisable.

(9)  Includes 168,750 shares subject to options that are currently exercisable.

(10) Includes 35,000 shares subject to options that are currently exercisable.


(11) Includes 35,000 shares subject to options that are currently exercisable.

(12) Includes 34,000 shares subject to options that are currently exercisable.

(13) Includes  47,666 shares subject to options that are currently  exercisable.
     Also includes 200 shares held by Mr. Holcombe's wife.

(14) Includes shares owned by certain  trusts.  Also includes  1,697,604  shares
     subject to options that are currently exercisable.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

CERTAIN TRANSACTIONS

     None.



                                     PART IV

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

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

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

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

     3.  Exhibits included or incorporated herein:

         See Exhibit Index.

(b)   Reports on Form 8-K:

         No reports on  Form  8-K  were filed  during the fourth  quarter of the
         fiscal year  covered by  this report.



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

                                                                                                              Page
                                                                                                              ----
CONSOLIDATED FINANCIAL STATEMENTS
<S>                                                                                                            <C>
  Reports of Independent Auditors.........................................................................     F-1
  Consolidated Balance Sheets - December 31, 1999 and 1998................................................     F-3
  Consolidated Statements of Operations - Years ended December 31, 1999, 1998 and 1997....................     F-4
  Consolidated Statements of Stockholders' Equity (Deficit) - Years ended December 31, 1999,
    1998 and 1997.........................................................................................     F-5
  Consolidated Statements of Cash Flows - Years ended December 31, 1999, 1998 and 1997....................     F-6
  Notes to Consolidated Financial Statements..............................................................     F-7

CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
  Schedule II - Valuation and Qualifying Accounts.........................................................     S-1
<PAGE>
</TABLE>




                          INDEPENDENT AUDITORS' REPORT



Board of Directors and Stockholders of
Apria Healthcare Group Inc.

     We have  audited  the  accompanying  consolidated  balance  sheets of Apria
Healthcare Group Inc. and subsidiaries (the company) as of December 31, 1999 and
1998,  and the related  consolidated  statements  of  operations,  stockholders'
equity  (deficit),  and cash flows for the years  then  ended.  Our audits  also
included the financial statement schedule as of and for the years ended December
31, 1999 and 1998,  included in the Index at Item 14(a)(2).  These  consolidated
financial   statements   and  this   financial   statement   schedule   are  the
responsibility of the company's management.  Our responsibility is to express an
opinion on these consolidated  financial statements and this financial statement
schedule based on our audits.

     We conducted our audits in accordance  with  auditing  standards  generally
accepted in the United States of America.  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,  1999  and  1998,  and the  results  of their
operations  and their cash flows for the years  then  ended in  conformity  with
accounting principles generally accepted in the United States of America.  Also,
in our opinion, such consolidated 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.


/s/ DELOITTE & TOUCHE LLP



Costa Mesa, California
February 17, 2000
<PAGE>


                         REPORT OF INDEPENDENT AUDITORS




Stockholders and Board of Directors
Apria Healthcare Group Inc.


     We have audited the  consolidated  balance sheet of Apria  Healthcare Group
Inc. as of December 31, 1997 (not separately  presented herein), and the related
consolidated  statements of operations,  stockholders' equity and cash flows for
the year then ended.  Our audit also included the financial  statement  schedule
listed  in the Index at Item  14(a)  insofar  as it  relates  to the year  ended
December   31,  1997.   These   financial   statements   and  schedule  are  the
responsibility   of  the   management  of  Apria   Healthcare   Group  Inc.  Our
responsibility  is to  express  an opinion  on these  financial  statements  and
schedule based on our audit.

     We conducted our audit in  accordance  with  auditing  standards  generally
accepted in the 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 financial  statements.  An
audit also includes  assessing the accounting  principles  used and  significant
estimates  made by  Management,  as well as  evaluating  the  overall  financial
statement  presentation.  We believe that our audit provides a reasonable  basis
for our opinion.

     In our opinion,  the consolidated  financial  statements  referred to above
present fairly, in all material respects, the consolidated financial position of
Apria Healthcare  Group Inc. at December 31, 1997, and the consolidated  results
of its operations and its cash flows for the year then ended, in conformity with
accounting  principles  generally  accepted in the United  States.  Also, in our
opinion,  the related financial  statement schedule insofar as it relates to the
year ended December 31, 1997, when considered in relation to the basic financial
statements  taken as a whole,  presents  fairly  in all  material  respects  the
information set forth therein.


                                            /s/ ERNST & YOUNG LLP



Orange County, California
March 11, 1998


<PAGE>
<TABLE>
                                                   APRIA HEALTHCARE GROUP INC.

                                                   CONSOLIDATED BALANCE SHEETS
<CAPTION>
                                                                                              December 31,
                                                                                       -------------------------
                                                                                         1999             1998
                                                                                         ----             ----
                                       ASSETS                                               (in thousands)

CURRENT ASSETS
<S>                                                                                    <C>              <C>
  Cash and cash equivalents......................................................      $ 20,493         $ 75,475
  Accounts receivable, less allowance for doubtful accounts of $44,652 and
    $35,564 at December 31, 1999 and 1998, respectively..........................       149,767          132,028
  Inventories, net...............................................................        18,505           16,617
  Deferred income taxes..........................................................        42,595                -
  Prepaid expenses and other current assets......................................         7,665            4,917
                                                                                       --------         --------
         TOTAL CURRENT ASSETS....................................................       239,025          229,037
PATIENT SERVICE EQUIPMENT, less accumulated depreciation of
   $277,915 and $249,921 at December 31, 1999 and 1998, respectively.............       126,486          130,652
PROPERTY, EQUIPMENT AND IMPROVEMENTS, NET........................................        41,503           51,996
DEFERRED INCOME TAXES............................................................        95,974                -
INTANGIBLE ASSETS, NET...........................................................       125,641           84,365
OTHER ASSETS.....................................................................           422              548
                                                                                       --------         --------
                                                                                       $629,051         $496,598
                                                                                       ========         ========


                                         LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

CURRENT LIABILITIES
  Accounts payable...............................................................      $ 47,202         $ 46,573
  Accrued payroll and related taxes and benefits.................................        26,478           25,455
  Accrued insurance..............................................................        10,866           13,092
  Other accrued liabilities......................................................        51,307           54,549
  Current portion of long-term debt..............................................        23,528           74,439
                                                                                       --------         --------
         TOTAL CURRENT LIABILITIES...............................................       159,381          214,108
LONG-TERM DEBT...................................................................       394,201          414,147
COMMITMENTS AND CONTINGENCIES....................................................             -                -
STOCKHOLDERS' EQUITY (DEFICIT)
  Preferred Stock, $.001 par value:
    10,000,000 shares authorized; none issued....................................             -                -
  Common Stock, $.001 par value:
    150,000,000 shares authorized; 52,054,974 and 51,785,263 shares issued
    and outstanding at December 31, 1999 and 1998, respectively..................            52               52
  Additional paid-in capital.....................................................       328,894          325,903
  Accumulated deficit............................................................      (253,477)        (457,612)
                                                                                       --------         --------
                                                                                         75,469         (131,657)
                                                                                       --------         --------
                                                                                       $629,051         $496,598
                                                                                       ========         ========
</TABLE>

                 See notes to consolidated financial statements.

<PAGE>
<TABLE>
                                    APRIA HEALTHCARE GROUP INC.

                              CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
                                                                   Year Ended December 31,
                                                           --------------------------------------
                                                               1999          1998         1997
                                                               ----          ----         ----
                                                            (in thousands, except per share data)

<S>                                                        <C>           <C>            <C>
Net revenues...........................................    $   940,024   $   933,793    $1,180,694
Costs and expenses:
   Cost of net revenues:
      Product and supply costs.........................        183,406       238,656       334,766
      Patient service equipment depreciation...........         73,138        76,974        84,932
      Nursing services.................................          2,011         2,309        15,973
      Other............................................          9,359        12,756        15,511
                                                            ----------    ----------     ---------
                                                               267,914       330,695       451,182
   Provision for doubtful accounts.....................         34,314        75,319       121,908
   Selling, distribution and administrative............        514,041       574,895       616,113
   Amortization of intangible assets...................          8,048        12,496        16,833
   Impairment of intangible assets.....................              -        76,223       133,542
   Impairment of long-lived assets and
     internally-developed software.....................              -        22,187        26,781
                                                            ----------    ----------     ---------
                                                               824,317     1,091,815     1,366,359
                                                            ----------    ----------     ---------
     OPERATING INCOME (LOSS)............................       115,707      (158,022)     (185,665)
Interest expense.......................................         42,526        46,916        50,393
                                                            ----------    ----------     ---------
    INCOME (LOSS) BEFORE TAXES.........................         73,181      (204,938)     (236,058)
Income tax (benefit) expense...........................       (130,954)        3,000        36,550
                                                            ----------    ----------     ---------
    NET INCOME (LOSS)..................................     $  204,135    $ (207,938)   $ (272,608)
                                                            ==========    ==========    ==========

Basic income (loss) per common share...................     $     3.93    $    (4.02)   $    (5.30)
                                                            ==========    ==========    ==========
Diluted income (loss) per common share.................     $     3.81    $    (4.02)   $    (5.30)
                                                            ==========    ==========    ==========
</TABLE>
                 See notes to consolidated financial statements.
<PAGE>
<TABLE>
                                                   APRIA HEALTHCARE GROUP INC.

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

<S>                                            <C>        <C>               <C>         <C>               <C>
Balance at December 31, 1996............       51,203     $    51           $319,950    $   22,934       $  342,935
Exercise of stock options...............          365                          4,013                          4,013
Other...................................                                         127                            127
Net loss ...............................                                                  (272,608)        (272,608)
                                               ------     -------           --------    ----------       ----------
Balance at December 31, 1997............       51,568          51            324,090      (249,674)          74,467

Exercise of stock options...............          217           1              1,685                          1,686
Other...................................                                         128                            128
Net loss................................                                                  (207,938)        (207,938)
                                               ------     -------           --------    ----------       ----------
Balance at December 31, 1998............       51,785          52            325,903      (457,612)        (131,657)

Exercise of stock options...............          270                          2,671                          2,671
Tax benefits related to stock options...                                         235                            235
Other...................................                                          85                             85
Net income..............................                                                   204,135          204,135
                                               ------     -------           --------    ----------       ----------
Balance at December 31, 1999............       52,055     $    52           $328,894    $ (253,477)      $   75,469
                                               ======     =======           ========    ==========       ==========
</TABLE>

                 See notes to consolidated financial statements.
<PAGE>
<TABLE>
                                                   APRIA HEALTHCARE GROUP INC.

                                              CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
                                                                                                 Year Ended December 31,
                                                                                           -----------------------------------
                                                                                              1999        1998         1997
                                                                                              ----        ----         ----
                                                                                                     (in thousands)
OPERATING ACTIVITIES
<S>                                                                                        <C>        <C>          <C>
Net income (loss).....................................................................     $ 204,135   $(207,938)   $(272,608)
Items included in net income (loss) not requiring (providing) cash:
    Provision for doubtful accounts...................................................        34,314      75,319      121,908
    Provision for revenue adjustments.................................................             -      18,302       40,000
    Provision for inventory and patient service equipment shortages/obsolescence......         3,968      23,305       35,300
    Depreciation......................................................................        92,312     104,031      118,054
    Amortization of intangible assets.................................................         8,048      12,496       16,833
    Amortization of deferred debt costs...............................................         4,471       1,747        1,197
    Impairment of intangible assets...................................................             -      76,223      133,542
    Impairment of long-lived assets and internally-developed software.................             -      22,187       26,781
    Deferred income taxes.............................................................      (138,569)          -       29,963
    Other, net........................................................................        (1,444)      3,113       (1,917)
Change in operating assets and liabilities, net of effects of acquisitions:
    (Increase) decrease in accounts receivable........................................       (49,802)     31,733      (80,229)
    (Increase) decrease in inventories................................................        (3,668)       (612)       2,722
    (Increase) decrease in prepaids and other current
       assets (including prepaid income taxes)........................................        (1,086)      7,262       32,758
    Decrease in other non-current assets..............................................           126         525          508
    Increase (decrease) in accounts payable...........................................           629       5,276      (34,503)
    Decrease in accrued expenses......................................................        (6,589)       (564)      (2,680)
Net purchases of patient service equipment, net of effects of acquisitions ...........       (66,825)    (38,461)     (63,519)
                                                                                            --------    --------     --------
         NET CASH PROVIDED BY OPERATING ACTIVITIES....................................        80,020     133,944      104,110

INVESTING ACTIVITIES
    Purchases of property, equipment and
      improvements, net of effects of acquisitions....................................        (8,294)    (14,607)     (21,047)
    Proceeds from disposition of assets...............................................         1,038       3,170        8,212
    Acquisitions and payments of contingent consideration.............................       (53,427)     (2,727)     (11,283)
                                                                                            --------    --------     --------
         NET CASH USED IN INVESTING ACTIVITIES........................................       (60,683)    (14,164)     (24,118)

FINANCING ACTIVITIES
    Payments on term loan.............................................................       (68,938)          -            -
    Proceeds under revolving credit facility..........................................             -           -      129,950
    Payments under revolving credit facility..........................................             -     (50,000)    (211,950)
    Payments on other long-term debt..................................................        (5,826)     (8,773)     (11,793)
    Capitalized debt costs, net.......................................................        (2,226)     (3,535)        (825)
    Issuances of common stock.........................................................         2,671       1,686        4,013
                                                                                            --------    --------     --------
         NET CASH USED IN FINANCING ACTIVITIES........................................       (74,319)    (60,622)     (90,605)
                                                                                            --------    --------     --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS..................................       (54,982)     59,158      (10,613)
Cash and cash equivalents at beginning of year........................................        75,475      16,317       26,930
                                                                                            --------    --------     --------
         CASH AND CASH EQUIVALENTS AT END OF YEAR.....................................      $ 20,493    $ 75,475     $ 16,317
                                                                                            ========    ========     ========
</TABLE>

                 See notes to consolidated financial statements.

<PAGE>
                           APRIA HEALTHCARE GROUP INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

     Company  Background  and  Segment  Reporting:  Apria  operates  in the home
healthcare  segment of the healthcare  industry and provides services  including
home respiratory  therapy,  home infusion  therapy,  home medical  equipment and
other services to patients in the home  throughout the United States through its
approximately 350 branch locations.  Respiratory  therapy,  infusion therapy and
home medical equipment/other represented approximately 64%, 19% and 17% of total
1999 revenues,  respectively. The gross margins in 1999 for respiratory therapy,
infusion  therapy  and  home  medical  equipment/other  were  79%,  59% and 58%,
respectively.

     As of December 31, 1998,  Apria adopted  Statement of Financial  Accounting
Standards No. 131,  "Disclosures  About  Segments of an  Enterprise  and Related
Information" ("SFAS No. 131"), which became effective for fiscal years beginning
after December 15, 1997.  Management  measures operating results on a geographic
basis  and,  therefore,  views  each  branch as an  operating  segment.  All the
branches offer the same services,  except that infusion services are not offered
in all the  geographic  markets in which the  company  operates.  For  financial
reporting purposes, all the company's operating segments are aggregated into one
reportable  segment.  Consequently,  SFAS No. 131 had no effect on the company's
consolidated financial statement disclosure.

     Revenue   Recognition  and  Concentration  of  Credit  Risk:  Revenues  are
recognized  on the date  services and related  products are provided to patients
and are  recorded  at  amounts  estimated  to be  received  under  reimbursement
arrangements  with a large  number  of  third-party  payors,  including  private
insurers, prepaid health plans, Medicare and Medicaid.  Approximately 32% of the
company's  1999 revenues are  reimbursed  under  arrangements  with Medicare and
Medicaid.  In 1999, no other  third-party  payor group represented 8% or more of
the company's revenues.  The majority of the company's revenues are derived from
fees  charged  for patient  care under  fee-for-service  arrangements.  Revenues
derived from  capitation  arrangements  represented 9% of total net revenues for
1999.

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

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

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

     Cash and Cash  Equivalents:  Apria  maintains  cash with various  financial
institutions.  These financial  institutions  are located  throughout the United
States and the company's  cash  management  practices  limit exposure to any one
institution.  Outstanding checks in excess of bank balances,  which are reported
as a component of accounts payable, were $14,229,000 and $15,102,000 at December
31,  1999  and  1998,  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 $22,987,000  and  $25,262,000 at December 31, 1999 and
1998, respectively.

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

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

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

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

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

     Intangible  and Other  Long-lived  Assets:  Intangible  assets  consist  of
covenants not to compete and goodwill  arising from business  combinations  (see
Note  2).  The  values  assigned  to  intangible   assets  are  amortized  on  a
straight-line basis. Covenants are amortized over contractual terms, which range
from two to 10 years.  Goodwill,  representing  the excess of the purchase price
over the  estimated  fair value of the net assets of the acquired  business,  is
amortized  over the period of  expected  benefit.  The  amortization  period for
substantially all of the company's  goodwill is 20 years.  Prior to December 31,
1997 the amortization  period for goodwill related to acquired  infusion therapy
businesses was 40 years.

     Management  reviews for  impairment  of  long-lived  assets and  intangible
assets  to be held and  used in the  company's  operations  whenever  events  or
changes in  circumstances  indicate that the carrying amount of an asset may not
be recoverable. For purposes of assessing impairment,  assets are grouped at the
branch  level which is the lowest  level for which there are  identifiable  cash
flows that are largely  independent of the cash flows of other groups of assets.
Goodwill is generally separately  identified by acquisition and branch location.
However, for multi-location  acquisitions,  goodwill is allocated to branches on
the basis of annual revenues as of the acquisition  date.  Management  deems the
long-lived  and/or  intangible  assets of a branch to be impaired  if  estimated
expected undiscounted future cash flows are less than the carrying amount of the
assets.  Estimates of expected future cash flows are based on management's  best
estimates of anticipated operating results over the remaining useful life of the
assets. For those branches identified as containing impaired assets, the company
measures the impairment as the amount by which the carrying  amount of the asset
exceeds the fair value of the asset.  In estimating the fair value of the asset,
management utilizes a valuation technique based on the present value of expected
future cash flows.  Management does not believe any impairment of its long-lived
assets or intangible assets existed at December 31, 1999.

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

     Advertising:  Advertising  costs  amounting to  $2,528,000,  $3,295,000 and
$4,088,000 for 1999, 1998 and 1997,  respectively,  are expensed as incurred and
included in "Selling, distribution and administrative expenses."

     Income Taxes:  Apria provides for income taxes under the liability  method.
Accordingly,  deferred  income tax  assets  and  liabilities  are  computed  for
differences  between  the  financial  statement  and tax  bases  of  assets  and
liabilities.  These differences will result in taxable or deductible  amounts in
the  future,  based on enacted tax laws and rates  applicable  to the periods in
which  the  differences  are  expected  to  affect  taxable  income.   Valuation
allowances  are  established  when  necessary  to reduce  deferred tax assets to
amounts which are more likely than not to be realized.  The provision for income
taxes  represents the tax payable or refundable for the period plus or minus the
change during the period in deferred tax assets and liabilities.

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

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

     Comprehensive  Income:  As of December 31, 1998, Apria adopted Statement of
Financial Accounting Standards No. 130, "Reporting  Comprehensive Income" ("SFAS
No. 130"),  which became effective for fiscal years beginning after December 15,
1997.  Adoption  of SFAS No.  130 had no  effect on the  company's  consolidated
financial statements.

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

     Statement  of  Financial  Accounting  Standards  No. 137,  "Accounting  for
Derivative  Instruments and Hedging  Activities - Deferral of the Effective Date
of SFAS No. 133", issued in June 1999, defers the effective date of Statement of
Financial Accounting  Standards No. 133, "Accounting for Derivative  Instruments
and Hedging  Activities"  ("SFAS No. 133"),  which was issued in June 1998. SFAS
No. 133 establishes  accounting and reporting  standards for hedging  activities
and  for  derivative  instruments,   including  certain  derivative  instruments
embedded  in  other  contracts.   It  requires  that  an  entity  recognize  all
derivatives  as either  assets or  liabilities  in the  statements  of financial
position and measure those  instruments at fair value.  Adoption is required for
fiscal years beginning  after June 15, 2000.  Apria's  management  believes that
adoption  of SFAS  No.  133 will not have a  material  impact  on its  financial
statements.

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


NOTE 2 -- BUSINESS COMBINATIONS AND DISPOSITIONS

     During  1999,  1998 and 1997,  Apria  acquired  a number  of  complementary
businesses  in specific  geographic  markets and were  purchased  for cash.  The
transactions were accounted for as purchases and, accordingly, the operations of
the  acquired  businesses  are  included  in  the  consolidated   statements  of
operations from the dates of acquisition.  The purchase prices were allocated to
the various  underlying  tangible and intangible  assets and  liabilities on the
basis of estimated fair value.

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

                                                   Year Ended  December 31,
                                               --------------------------------
                                                 1999       1998         1997
                                                 ----       ----         ----
                                                       (in thousands)

     Fair value of assets acquired........     $56,313     $ 2,610      $11,729
     Liabilities paid (assumed), net......      (2,886)        117         (446)
                                               -------     -------      -------
           Cash paid......................     $53,427     $ 2,727      $11,283
                                               =======     =======      =======

     The fair  value of assets  acquired  during  1999,  1998 and 1997  includes
intangible assets of $49,324,000, $1,653,000 and $7,368,000, respectively.

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

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

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

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


NOTE 3 -- PROPERTY, EQUIPMENT AND IMPROVEMENTS

     Property,  equipment and improvements consist of the following:
                                                           December 31,
                                                       -------------------
                                                         1999       1998
                                                         ----       ----
                                                          (in thousands)

     Land and improvements........................     $      -   $     53
     Buildings and leasehold improvements.........       20,787     20,561
     Equipment and furnishings....................       44,960     47,413
     Information systems..........................       43,391     38,091
                                                       --------   --------
                                                        109,138    106,118
     Less accumulated depreciation................      (67,635)   (54,122)
                                                       --------   --------
                                                       $ 41,503   $ 51,996
                                                       ========   ========

     In 1998, Apria  discontinued the  implementation of an enterprise  resource
planning  system.  Accordingly,  Apria  wrote  off  related  software  and other
capitalized  costs of  $7,548,000  in the third  quarter of 1998. As part of the
decision to terminate  the  enterprise  resource  planning  project,  management
evaluated  its current  systems to determine  their  long-term  viability in the
context of the company's new overall strategic direction. It was determined that
the company was at some risk in continuing to run the infusion billing system on
its current platform,  which is no longer supported by the computer industry. To
mitigate this risk, Apria is in the process of converting the infusion system to
an industry-supported operating platform. The company also installed a number of
enhancements  to the systems,  rendering  certain  previously-developed  modules
obsolete. Additionally, pharmacy and branch consolidations and closures resulted
in a variety of computer equipment that was no longer needed. Due to its age and
technological  obsolescence,  it was deemed to have no future value. As a result
of these  actions,  Apria  recorded an impairment  charge of  $11,843,000 in the
third  quarter of 1998.  In the fourth  quarter  of 1997,  Apria  wrote down the
carrying  value of  internally-developed  software by  $20,225,000  and computer
equipment by $6,556,000. The software impairment charge consisted of $15,305,000
of capitalized  development  and  implementation  costs related to the company's
branch  information  system  which  management  had  committed  to  replace  and
$4,920,000   of   capitalized   development   costs   related   to   specialized
telecommunications  software  for  ApriaDirect,  a  clinical  program  that  was
discontinued  in  December  1997.  The  computer  equipment   impairment  charge
consisted   of  computer  and   telecommunications   equipment   identified   as
functionally obsolete or no longer in use.


NOTE 4 -- INTANGIBLE ASSETS

     Intangible assets consist of the following:
                                                     December 31,
                                               ------------------------
                                                 1999            1998
                                                 ----            ----
                                                    (in thousands)
     Covenants not to compete...........       $ 16,034        $ 17,780
     Goodwill...........................        149,352         101,365
                                               --------        --------
                                                165,386         119,145
     Less accumulated amortization......        (39,745)        (34,780)
                                               --------        --------
                                               $125,641        $ 84,365
                                               ========        ========

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

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

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


NOTE 5 -- CREDIT FACILITY AND LONG-TERM DEBT

     Long-term  debt  consists  of the  following:

                                                            December  31,
                                                      ------------------------
                                                        1999            1998
                                                        ----            ----
                                                            (in thousands)

     Term loan payable.........................       $219,062        $288,000
     9.5% senior subordinated notes............        200,000         200,000
     Capital lease obligations (see Note 9)....          4,032           8,196
                                                      --------        --------
                                                       423,094         496,196
     Less: Current maturities..................        (23,528)        (74,439)
           Unamortized deferred debt costs.....         (5,365)         (7,610)
                                                      --------        --------
                                                      $394,201        $414,147
                                                      ========        ========

     Credit  Agreement:  Apria's  credit  agreement  with Bank of America  and a
syndicate  of banks was  amended  and  restated  in November of 1998 and further
amended in January,  February, April and October of 1999. The November amendment
required a  $50,000,000  permanent  repayment  of the loan upon  execution.  The
remaining  indebtedness  under the  credit  agreement  was  restructured  into a
$288,000,000  term  loan  and a  $30,000,000  revolving  line of  credit  with a
maturity date of August 9, 2001.  Pursuant to the April  amendment,  the company
made a required $50,000,000 payment against the term loan.

     Term loan principal payments are payable quarterly  commencing on March 31,
1999 and continuing  through June 30, 2001.  Repayments of the term loan in 1999
totaled  $68,938,000  and  included  $6,938,000  in excess  cash flow  payments,
$12,000,000  in  scheduled  quarterly  payments  and  a  $50,000,000   mandatory
repayment  related to the April  amendment.  Between the  effective  date of the
November amendment and the date of the April amendment,  the company was subject
to  prepayments  of the term loan based on excess  cash flow (as  defined by the
agreement).  The resulting prepayments of $6,938,000 reduced the required amount
of the quarterly  payment due March 31, 1999 to zero. No additional  prepayments
based on excess cash flow are required.

     The April amendment removed the requirement that Apria issue $50,000,000 in
senior subordinated convertible debentures by April 23, 1999 and the requirement
that the company  maintain  minimum  cash  balances of  $35,000,000  through the
consummation of the debt offering.

     The October amendment permits acquisitions with an aggregate purchase price
of up to  $125,000,000  through the maturity date of the agreement.  The October
amendment  also relaxes  other  limitations  associated  with  acquisitions  and
provides the company with the ability to  repurchase  up to  $50,000,000  of its
common  stock  through the credit  agreement  maturity  date,  subject to annual
limitations and compliance with Apria's other debt instruments.

     The  amended  agreement  permits  Apria to elect one of two  variable  rate
interest  options at the time an advance is made.  The first option is expressed
as 2.50% plus the higher of (a) the Bank of America "reference rate" and (b) the
Federal  Funds Rate plus 0.50% per annum.  The second  option is a rate based on
the London Interbank  Offered Rate plus 3.50% per annum. The effective  interest
rate at December 31, 1999 was 10.00% for term loan  borrowings of  $219,062,000.
The credit agreement  requires payment of commitment fees of 0.75% on the unused
portion of the revolving credit facility.

     Borrowings  under the credit facility are  collateralized  by substantially
all of the  assets of  Apria.  The  agreement  contains  numerous  restrictions,
including but not limited to,  covenants  requiring the  maintenance  of certain
financial ratios,  limitations on additional  borrowings,  capital expenditures,
mergers,  acquisitions and investments and restrictions on cash dividends, loans
and other distributions. At December 31, 1999, the company is in compliance with
the financial covenants required by the credit agreement.

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

     Apria had no derivative  securities as of December 31, 1999. The company is
exposed to changes in interest  rates  through its bank  credit  facility  which
offers the variable rate interest options discussed above.

     At December 31, 1999, the company's  outstanding letters of credit amounted
to  $3,800,000  and credit  available  under the revolving  credit  facility was
$26,200,000.

     9 1/2%  Senior  Subordinated  Notes:  Apria's  $200,000,000  9 1/2%  senior
subordinated  notes mature  November 1, 2002 and are  subordinated to all senior
debt of the company and are senior in right of payment to  subordinated  debt of
the company. The fair value of these notes, as determined by reference to quoted
market prices,  is $196,080,000  and $199,260,000 at December 31, 1999 and 1998,
respectively.

     Under the  indenture  governing  Apria's  senior  subordinated  notes,  the
company's ability to incur additional  indebtedness  becomes restricted when the
company's fixed charge coverage ratio (as defined in the indenture) is less than
3.0 to 1.0. At December 31, 1999,  the  company's  fixed charge  coverage  ratio
exceeds the minimum required by the indenture.

     Maturities of long-term debt, exclusive of capital lease obligations are as
follows:
                                                              (in thousands)

     2000...................................................     $ 20,000
     2001...................................................      199,062
     2002...................................................      200,000
                                                                 --------
                                                                 $419,062
                                                                 ========

     Total  interest  paid in  1999,  1998  and 1997  amounted  to  $37,923,000,
$44,989,000 and $53,222,000, respectively.


NOTE 6 -- STOCKHOLDERS' EQUITY

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

     Stock Compensation Plans: Apria has various stock-based compensation plans,
which are described below.  Management  applies the provisions of APB No. 25 and
related interpretations in accounting for its plans. No compensation expense has
been  recognized  upon granting of options under its fixed stock option plans or
its  performance-based   plans.  Had  compensation  expense  for  the  company's
stock-based compensation plans been recognized based on the fair value of awards
at the date of grant,  consistent  with the method of SFAS No. 123,  Apria's net
income  (loss) and per share  amounts  would have been adjusted to the pro forma
amounts  indicated  below.  The  provisions of SFAS No. 123 have been applied to
awards with grant dates  beginning  January 1, 1995  through  December 31, 1999,
only.  Therefore,  until the rules are  applied  to all  outstanding,  nonvested
awards,  the compensation  expense  reflected in the pro forma amounts presented
below is not indicative of future amounts.

                                              1999         1998         1997
                                              ----         ----         ----
                                           (in thousands, except per share data)
   Net income (loss):
     As reported........................   $ 204,135    $(207,938)   $(272,608)
     Pro forma..........................   $ 196,971    $(212,518)   $(276,213)

   Basic net income (loss) per share:
     As reported........................   $    3.93    $   (4.02)   $   (5.30)
     Pro forma..........................   $    3.79    $   (4.11)   $   (5.37)

   Diluted net income (loss) per share:
     As reported........................   $    3.81    $   (4.02)   $   (5.30)
     Pro forma..........................   $    3.71    $   (4.11)   $   (5.37)

     For purposes of pro forma  disclosure,  the fair value of each option grant
is estimated on the date of grant using the Black-Scholes  option-pricing  model
with the following  weighted  average  assumptions used for grants in 1999, 1998
and 1997:  risk-free  interest rates ranging from 6.81% to 6.89%, 5.72% to 4.16%
and 6.45% to 5.82%,  respectively;  dividend yield of 0% for all years; expected
lives of 5.08 years for 1999,  5.36 years for 1998 and 6.50 years for 1997;  and
volatility of 64% for 1999, 63% for 1998 and 55% for 1997.

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

     A summary of the status of Apria's  fixed stock  options as of December 31,
1999,  1998 and 1997, and the activity during the years ending on those dates is
presented below:
<TABLE>
<CAPTION>

                                                      1999                          1998                      1997
                                            -------------------------     -------------------------   -------------------------
                                                         Weighted-                     Weighted-                   Weighted-
                                                          Average                       Average                     Average
                                              Shares   Exercise Price       Shares   Exercise Price     Shares   Exercise Price
                                            ---------  --------------     ---------  --------------   ---------  --------------
<S>                                         <C>            <C>            <C>           <C>           <C>           <C>
Outstanding at beginning of year..........  2,300,969      $14.73         2,803,952     $ 17.46       3,431,472     $ 17.12
Granted:
  Exercise price equal to fair value......    563,332      $18.06           774,994     $  8.78         201,000     $ 15.86
  Exercise price greater than fair value..     50,000      $18.45            75,000     $ 12.56          53,000     $ 18.25
Exercised.................................   (189,241)     $10.24          (104,638)    $  4.33        (304,635)    $  9.95
Forfeited.................................   (105,977)     $17.59        (1,248,339)    $ 17.90        (576,885)    $ 18.94
                                            ---------                    ----------                   ---------
Outstanding at end of year................  2,619,083      $15.73         2,300,969     $ 14.73       2,803,952     $ 17.46
                                            =========                    ==========                   =========
Exercisable at end of year................  1,792,519      $15.14         1,701,287     $ 14.20       1,469,113     $ 16.19
                                            =========                    ==========                   =========
Weighted-average fair value of options
granted during the year...................                 $10.79                       $  5.30                     $  9.91
</TABLE>


     The  following  table  summarizes  information  about fixed  stock  options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>

                                                        Options Outstanding                          Options Exercisable
                                          -----------------------------------------------      -------------------------------
                                                             Weighted-
                                                              Average
                                              Number         Remaining        Weighted-             Number        Weighted-
                                            Outstanding     Contractual        Average            Exercisable      Average
Range of Exercise Prices                  As of 12/31/99  Life (in years)  Exercise Price       As of 12/31/99  Exercise Price
------------------------                  --------------  ---------------  --------------       --------------  --------------
<S>   <C>      <C>                            <C>              <C>             <C>                  <C>             <C>
      $ 1.50 - $ 6.69                         269,676          8.08            $ 5.67               269,676         $ 5.67
      $ 7.68 - $ 9.00                         309,033          8.18            $ 8.97               309,033         $ 8.97
      $ 9.06 - $12.25                         281,502          6.22            $11.91               161,502         $11.70
      $13.69 - $16.63                         310,006          7.18            $15.67               205,006         $15.89
      $16.94 - $18.50                         794,520          8.20            $17.85               247,740         $17.33
      $18.69 - $29.00                         654,346          6.04            $22.18               599,562         $22.34
                                            ---------                                             ---------
      $ 1.50 - $29.00                       2,619,083          7.31            $15.73             1,792,519         $15.14
                                            =========                                             =========
</TABLE>

     Performance-Based   Stock   Options:   Included   in  Apria's   stock-based
compensation  plans are provisions for the granting of  performance-based  stock
options.  In 1998,  Apria  granted such stock option awards to its key employees
and to key members of senior  management.  The options become exercisable over a
period of seven  years and  expire  not  later  than ten years  from the date of
grant.  Accelerated vesting will ensue upon the occurrence of certain events and
on  designated  dates on which the average fair market  value of Apria's  common
stock during any period of 90 consecutive  calendar days subsequent to the grant
date shall not have been less than a  targeted  per share  price.  On January 1,
2000,  approximately  two-thirds  of these  non-vested  performance-based  stock
options  vested under the  accelerated  provisions  of the plan.  The  remaining
one-third of these options will vest on January 1, 2001.

     Also,  the  company  has a Long-Term  Senior  Management  Equity Plan which
provides for the granting of non-statutory stock option awards to key members of
senior  management  at fair  market  value  on the date of the  grant.  The plan
provides for vesting at certain time intervals and accelerated  vesting upon the
occurrence  of certain  events and the  achievement  of certain  cumulative  and
annual earnings per share targets. As of March 1999, all outstanding options had
vested.  Since 1995, no options have been granted under this plan and no further
grants are authorized.  Options awarded under this plan expire 10 years from the
date of grant.

     A summary of the status of the Apria's  performance-based  stock options as
of December 31, 1999, 1998 and 1997, and the activity during the years ending on
those dates is presented below:
<TABLE>
<CAPTION>
                                                     1999                           1998                         1997
                                            -------------------------     -------------------------     -----------------------
                                                         Weighted-                     Weighted-                   Weighted-
                                                          Average                       Average                     Average
                                              Shares   Exercise Price       Shares   Exercise Price      Shares  Exercise Price
                                            ---------  --------------     ---------  --------------     -------  --------------
<S>                                         <C>           <C>               <C>         <C>             <C>          <C>
Outstanding at beginning of year..........  3,410,862     $  7.55           836,602     $ 11.24         919,722      $11.24
Granted:
  Exercise price equal to fair value......    124,500     $ 13.54         2,767,000     $  6.88               -
  Exercise price greater than fair value..     20,000     $  6.50           136,500     $  6.50               -
Exercised.................................    (80,470)    $ 11.00          (112,100)    $ 11.00         (60,440)     $11.15
Forfeited.................................   (266,500)    $  6.50          (217,140)    $ 10.85         (22,680)     $11.30
                                            ---------                     ---------                     -------
Outstanding at end of year................  3,208,392     $  7.77         3,410,862     $  7.55         836,602      $11.24
                                            =========                     =========                     =======
Exercisable at end of year................    871,142     $  9.70           610,622     $ 10.53         641,842      $11.25
                                            =========                     =========                     =======

Weighted-average fair value of options
granted during the year...................                $  7.38                        $ 4.52                           -
</TABLE>

The following table summarizes information about performance-based stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
                                                        Options Outstanding                          Options Exercisable
                                          ----------------------------------------------       -------------------------------
                                                             Weighted-
                                                              Average
                                              Number         Remaining        Weighted-             Number         Weighted-
                                            Outstanding     Contractual        Average            Exercisable       Average
Range of Exercise Prices                  As of 12/31/99  Life (in years)  Exercise Price       As of 12/31/99  Exercise Price
------------------------                  --------------  ---------------  --------------       --------------  --------------
<S>          <C>                            <C>                <C>            <C>                    <C>           <C>
   $  4.69 - $  6.50                        2,054,000          8.58           $  6.39                68,750        $  4.69
   $  6.75 - $  9.00                          610,000          8.41           $  8.75               342,500        $  8.72
   $ 11.00 - $ 18.56                          544,392          3.47           $ 11.90               459,892        $ 11.19
                                            ---------                                               -------
   $  4.69 - $ 18.56                        3,208,392          7.68           $  7.77               871,142        $  9.70
                                            =========                                               =======
</TABLE>

     Approximately  9,893,000  shares of common  stock are  reserved  for future
issuance upon exercise of stock options under these plans.

<PAGE>
NOTE 7 -- INCOME TAXES

     Significant  components of Apria's  deferred tax assets and liabilities are
as follows:
<TABLE>
<CAPTION>
                                                             December 31,
                                                     ---------------------------
                                                        1999             1998
                                                        ----             ----
                                                            (in thousands)
Deferred tax liabilities:
<S>                                                  <C>              <C>
  Tax over book depreciation.......................  $ (16,579)       $ (20,361)
  Intangible assets................................          -           (1,855)
  Other, net.......................................       (559)            (364
                                                     ---------        ---------
        Total deferred tax liabilities.............    (17,138)         (22,580)

Deferred tax assets:
  Allowance for doubtful accounts..................     20,860           24,353
  Accruals.........................................     12,827           17,889
  Asset valuation reserves.........................     11,693            6,240
  Net operating loss carryforward, limited
     by Section 382................................     89,104          128,285
  AMT and research credit carryovers...............      6,859            4,500
  Intangible assets................................     14,021                -
  Other, net.......................................        343              305
                                                     ---------        ---------
        Total deferred tax assets..................    155,707          181,572

Valuation allowance................................          -         (158,992)

                                                     ---------        ---------
             Net deferred tax assets...............   $138,569        $       -
                                                     =========        =========
</TABLE>
     The  company's net current  deferred tax assets and net long-term  deferred
tax assets are $42,595,000 and $95,974,000  respectively.  The difference in the
company's deferred tax assets from 1998 to 1999 is primarily attributable to the
current  year  reversal  of  the  company's  previously   established  valuation
allowance and utilization of current year net operating loss carryforwards.

     At December 31, 1999,  Apria's  federal net  operating  loss  carryforwards
("NOLs")  approximated  $225,000,000,  expiring in varying  amounts in the years
2003 through 2013.  Additionally,  the company has various state  operating loss
carryforwards  that began to expire in 1997. As a result of an ownership  change
in 1992 that met specified criteria of Section 382 of the Internal Revenue Code,
future use of a portion of the federal and state  operating  loss  carryforwards
generated prior to 1992 are each limited to  approximately  $5,000,000 per year.
Because of the annual limitation,  approximately  $57,000,000 of each of Apria's
federal  and state  operating  loss  carryforwards  may expire  unused.  The net
operating loss  carryforward  amount in the related  deferred tax asset excludes
such amount.

     Apria released its net valuation  allowance of  $158,992,000  in the fourth
quarter of 1999.  Management  evaluated  the  available  positive  and  negative
evidence in  determining  the  realizability  of the net  deferred tax assets at
December  31,  1999.  Management  concluded  it is more likely than not that the
company will realize its net deferred tax assets.  In reaching this  conclusion,
significant  weight  was given to the  company's  continued  quarterly  and 1999
annual   profitability  under  new  management.   Additional  positive  evidence
consisted of the divestiture of unprofitable service lines, the stabilization of
reimbursement rates in the current year, and management's ability to develop and
achieve internal financial forecasts.

<PAGE>
     Income tax (benefit) expense consists of the following:

                                                 Year Ended December 31,
                                           ------------------------------------
                                              1999        1998          1997
                                              ----        ----          ----
                                                     (in thousands)
Current:
  Federal................................  $   1,470    $      -      $   3,623
  State..................................      6,145       2,000          1,964
  Foreign................................          -       1,000          1,000
                                           ---------    --------      ---------
                                               7,615       3,000          6,587
Deferred:
  Federal................................   (123,495)          -         25,768
  State..................................    (15,074)          -          4,195
                                           ---------    --------      ---------
                                            (138,569)          -         29,963

                                           ---------    --------      ---------
                                           $(130,954)   $  3,000      $  36,550
                                           =========    ========      =========

     The exercise of stock options  granted  under Apria's  various stock option
plans gives rise to  compensation  that is includable  as taxable  income to the
employee and deductible by the company for federal and state tax purposes but is
not recognized as expense for financial reporting purposes.

     Current  federal  income tax  expense  for 1999  represents  the  company's
expected  federal  alternative  minimum  tax  liability.  This  amount  is  also
reflected as a deferred tax asset in the  accompanying  balance  sheet.  Current
federal  income tax expense in 1997  represents  the amount  settled and paid in
connection  with an audit of Apria's  federal  income tax  returns for tax years
ending in 1992 through 1995.  The amount paid  represents an increase to certain
deferred  tax  assets  for which no  benefit  was  recorded  in 1997  because an
offsetting increase to the valuation allowance was recorded.

     Current state income tax expense for each period  presented  includes state
tax amounts accrued and paid on a basis other than income. The current liability
also includes  estimated  settlement  amounts for state income tax examinations.
During 1999, the company settled its foreign tax liabilities associated with the
foreign tax audits.

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

                                                                                Year Ended December 31,
                                                                         -------------------------------------
                                                                            1999          1998          1997
                                                                            ----          ----          ----
                                                                                     (in thousands)

<S>                                                                      <C>            <C>           <C>
Income tax expense (benefit) at statutory rate........................   $  25,613      $(71,728)     $(82,621)
Non-deductible merger costs and amortization
  and impairment loss on goodwill.....................................       1,628        21,000        48,783
State and foreign taxes, net of federal
  benefit and state loss carryforwards................................       4,073           422         7,159
(Decrease) increase in valuation allowance for
  deferred items (currently) previously recognized....................    (158,992)            -        25,768
Tax benefit of net operating loss not currently recognized............           -        53,306        33,816
Other.................................................................      (3,276)            -         3,645
                                                                         ---------      --------      --------
                                                                         $(130,954)     $  3,000      $ 36,550
                                                                         =========      ========      ========
</TABLE>
     Net income  taxes  paid  (refunded)  in 1999,  1998 and 1997,  amounted  to
$2,679,000, $(3,103,000) and $(26,426,000), respectively.


NOTE 8 -- PER SHARE AMOUNTS

     The  following  table sets forth the  computation  of basic and diluted per
share amounts:
<TABLE>
<CAPTION>
                                                                    Year Ended December 31,
                                                             ------------------------------------
                                                                 1999        1998        1997
                                                                 ----        ----        ----
                                                             (in thousands, except per share data)
Numerator:
<S>                                                           <C>         <C>          <C>
  Net income (loss) .....................................     $ 204,135   $(207,938)   $(272,608)
  Numerator for basic per share amounts - income (loss)
    attributable to common stockholders .................     $ 204,135   $(207,938)   $(272,608)

  Numerator for diluted per share amounts - income (loss)
    attributable to common stockholders .................     $ 204,135   $(207,938)   $(272,608)

  Denominator:
    Denominator for basic per share
      amounts - weighted average shares .................        51,940      51,732       51,419

    Effect of dilutive securities:
      Employee stock options ............................         1,590           -            -
                                                               --------    --------     --------
      Dilutive potential common shares ..................         1,590           -            -
                                                               --------    --------     --------
    Denominator for diluted per share amounts - adjusted
       weighted average shares ..........................        53,530      51,732       51,419
                                                               ========    ========     ========

Basic income (loss) per share amounts ...................      $   3.93    $  (4.02)    $  (5.30)
                                                               ========    ========     ========
Diluted income (loss) per share amounts .................      $   3.81    $  (4.02)    $  (5.30)
                                                               ========    ========     ========

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

    Exercise price exceeds average market
      price of common stock .............................         1,789       5,433        1,814
    Other ...............................................             -          63          468
                                                               --------    --------     --------
                                                                  1,789       5,496        2,282
                                                               ========    ========     ========
Average exercise price per share that exceeds
  average market price of common stock ..................      $  19.11    $  10.74     $  20.13
                                                               ========    ========     ========

</TABLE>
     Because net losses were incurred in 1998 and 1997, the impact of options is
antidilutive in those years and there is no difference between basic and diluted
per share amounts.  For additional  disclosure regarding employee stock options,
see Note 6.


NOTE 9 -- LEASES

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

     Apria  occasionally  subleases unused facility space when a lease buyout is
not a viable option.  Sublease income,  in amounts not considered  material,  is
recognized  monthly  and is offset  against  facility  lease  expense.  Net rent
expense  in  1999,  1998 and  1997  amounted  to  $55,465,000,  $57,670,000  and
$52,802,000, respectively.

     In addition,  during 1999,  1998 and 1997,  Apria acquired  patient service
equipment,   information   systems  and  equipment  and   furnishings   totaling
$1,662,000,   $263,000  and  $7,235,000,   respectively,   under  capital  lease
arrangements  with lease terms ranging from two to five years.  Amortization  of
the leased  patient  service  equipment,  information  systems and equipment and
furnishings amounted to $2,245,000,  $9,562,000 and $8,578,000 in 1999, 1998 and
1997, respectively.

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

                                                         December 31,
                                                  -------------------------
                                                     1999            1998
                                                     ----            ----
                                                       (in thousands)

     Information systems.......................   $  9,223         $ 33,306
     Less accumulated depreciation.............     (5,143)         (26,044)
                                                  --------         --------
                                                  $  4,080         $  7,262
                                                  ========         ========

     Future  minimum  payments,  by year and in the  aggregate,  required  under
noncancellable  operating  leases and capital lease  obligations  consist of the
following at December 31, 1999:

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

     2000...............................................    $ 3,655    $  46,848
     2001...............................................        518       37,230
     2002...............................................          -       24,020
     2003...............................................          -       13,967
     2004...............................................          -        9,644
     Thereafter.........................................          -       18,367
                                                            -------     --------
                                                              4,173     $150,076
     Less interest included in minimum lease payments...       (141)    ========
                                                            -------
     Present value of minimum lease payments............      4,032
     Less current portion...............................     (3,528)
                                                            -------
                                                            $   504
                                                            =======


NOTE 10 -- EMPLOYEE BENEFIT PLANS

     Apria has a 401(k) defined  contribution  plan,  whereby eligible employees
may contribute up to 16% of their annual basic earnings. The company matches 50%
of the first 8% of employee contributions. Total expenses related to the defined
contribution  plan were $3,405,000,  $3,539,000 and $3,791,000 in 1999, 1998 and
1997, 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 outcome 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 the  company  upon the
resolution  of these  claims and  lawsuits  will not, in the  aggregate,  have a
material  adverse  effect on  Apria's  consolidated  results of  operations  and
financial  position.  In 1999,  1998 and 1997,  certain claims and lawsuits were
settled and the company paid amounts,  including  the cost of defense,  totaling
approximately $3,844,000,  $2,125,000 and $3,277,000,  respectively.  Charges to
income of $1,389,000,  $6,590,000 and  $2,760,000  were taken in 1999,  1998 and
1997, respectively, to provide for probable losses related to matters arising in
each period and to revise  estimates  for matters  arising in previous  periods.
Management is unable to estimate the range of possible loss for all other claims
and lawsuits.

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

     Two similar class actions were filed during July, 1998 in Superior Court of
California for the County of Orange:  Schall v. Apria  Healthcare Group Inc., et
al. (Case No. 797060) and Thompson v. Apria  Healthcare Group Inc., et al. (Case
No. 797580).  These two actions were consolidated by a court order dated October
22, 1998 (Master Case No.  797060).  On June 14, 1999,  the  plaintiffs  filed a
Consolidated  Amended Class Action  Complaint  asserting claims founded on state
law and on Sections 11 and 12(2) of the 1933 Securities Act.

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

     Certain  Concentrations:  Approximately 64% of Apria's revenues are derived
from the provision of respiratory  therapy  services,  a significant  portion of
which is reimbursed under the federal  Medicare  program.  Effective  January 1,
1998,  reimbursement  for home oxygen services and respiratory drugs was reduced
by 25% and 5%, respectively. An additional 5% reduction for home oxygen services
was  effective  January 1, 1999.  The impact of the  reductions  on revenues was
approximately $10,000,000 and $57,000,000 for 1999 and 1998, respectively.

     Apria  currently  purchases   approximately  44%  of  its  patient  service
equipment and supplies from five suppliers.  Although there are a limited number
of suppliers,  management  believes that other  suppliers  could provide similar
products on comparable terms.  However, a change in suppliers could cause delays
in service  delivery and possible losses in revenue which could adversely affect
operating results.

     Other:  Apria has received a number of subpoenas and document requests from
U.S.  Attorneys'  offices  and from the U.S.  Department  of  Health  and  Human
Services.  The  subpoenas  and requests  generally  ask for  documents,  such as
patient files, billing records and other documents related to billing practices,
related to the company's  patients whose  healthcare  costs are paid by Medicare
and  other  federal  programs.  Apria  is  cooperating  with the  government  in
connection with these  investigations and is responding to the document requests
and subpoenas.  On July 8, 1999,  Apria  announced that the company had received
notification  that the U.S.  Attorney's  office in  Sacramento  has  closed  its
criminal  investigation file relating to eight subpoenas that had been issued by
that office.

     Apria has acknowledged that there may be errors and omissions in supporting
documentation  affecting a portion of its  billings.  If the U.S.  Department of
Justice were to conclude  that such errors and  omissions  constituted  criminal
violations,  or were to conclude that such errors and omissions  resulted in the
submission  of false  claims  to  federal  healthcare  programs  or  significant
overpayments by the government,  Apria could face criminal  charges and/or civil
claims for refunds,  administrative  sanctions  and  penalties  for amounts that
would be highly  material to its business,  results of operations  and financial
condition, including exclusion of Apria from participation in federal healthcare
programs.  Apria  believes  that the  assertion  of  criminal  charges  would be
unwarranted  and that the  company  would be in a  position  to assert  numerous
meritorious  defenses in the event that any material  civil claims are asserted.
However,  no assurance  can be provided as to whether any such charges or claims
will be  asserted  or as to the  outcome of any  possible  proceedings  that may
result from any such assertion of charges or claims.


NOTE 12 -- SERVICE/PRODUCT LINE DATA

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

                                                  Year Ended December 31,
                                           ------------------------------------
                                              1999         1998          1997
                                              ----         ----          ----
                                                     (in thousands)

     Respiratory.......................    $ 598,901    $ 552,725    $  605,387
     Infusion therapy..................      179,148      211,176       281,178
     Home medical equipment/other......      161,975      169,892       294,129
                                           ---------    ---------    ----------
              Total net revenues......     $ 940,024    $ 933,793    $1,180,694
                                           =========    =========    ==========


 NOTE 13 -- SELECTED QUARTERLY FINANCIAL DATA (unaudited)
<TABLE>
<CAPTION>
                                                                                    QUARTER
                                                            ------------------------------------------------------
                                                              First         Second            Third        Fourth
                                                              -----         ------            -----        ------
                                                                     (in thousands, except per share data)

         1999
         <S>                                                <C>             <C>           <C>             <C>
         Net revenues...................................    $228,294        $232,040      $ 237,367       $242,323
         Gross profit...................................    $162,225        $165,291      $ 170,761       $173,833
         Operating income...............................    $ 27,274        $ 28,307      $  29,385       $ 30,741
         Net income.....................................    $ 15,562        $ 17,804      $  18,895       $151,874

         Basic income per common share..................    $   0.30        $  0.34       $    0.36       $   2.92
         Diluted income per common share................    $   0.30        $  0.33       $    0.35       $   2.83


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

         Basic (loss) income per common share...........    $  (0.13)       $ (0.17)      $   (3.76)      $   0.04
         Diluted (loss) income per common share.........    $  (0.13)       $ (0.17)      $   (3.76)      $   0.04
</TABLE>

     Fourth  Quarter - 1999:  Net income for the fourth quarter of 1999 includes
an income tax benefit of  $131,357,000  which is primarily  attributable  to the
release of the company's valuation allowance. Management evaluated the available
positive and  negative  evidence in  determining  the  realizability  of the net
deferred tax assets at December 31, 1999. Management concluded it is more likely
than not that the company will realize its net deferred tax assets.  In reaching
this  conclusion,  significant  weight  was  given  to the  company's  continued
quarterly  profitability  since the fourth quarter of 1998.  Additional positive
evidence  consisted  of the  divestiture  of  unprofitable  service  lines,  the
stabilization  of  reimbursement  rates in the current  year,  and  management's
ability to develop and achieve internal financial forecasts (see Note 7).

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

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

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

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

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



<PAGE>
<TABLE>
                                                      APRIA HEALTHCARE GROUP INC.

                                            SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                                                            (in thousands)
<CAPTION>



                                                                           Additions
                                                                     -----------------------
                                                        Balance at   Charged to   Charged to               Balance at
                                                        Beginning    Costs and      Other                    End of
                                                        of Period    Expenses      Accounts    Deductions    Period
                                                        ----------   ----------   ----------   ----------  ----------

Year ended December 31, 1999
Deducted from asset accounts:
<S>                                                      <C>         <C>         <C>            <C>         <C>
   Allowance for revenue adjustments................     $ 38,400    $      -    $      -       $  8,487    $ 29,913
   Allowance for doubtful accounts..................       35,564      34,314         827 (a)     26,053      44,652
   Reserve for inventory shortages..................        7,660       2,919      (1,206)(c)      5,504       3,869
   Reserve for patient service equipment shortages..        8,137       1,049       1,206 (c)      3,902       6,490
                                                         --------    --------    --------       --------    --------
                  Totals............................     $ 89,761    $ 38,282    $    827       $ 43,946    $ 84,924
                                                         ========    ========    ========       ========    ========

Year ended December 31, 1998
Deducted from asset accounts:
   Allowance for revenue adjustments................     $ 38,058    $      -    $ 18,302 (b)   $ 17,960    $ 38,400
   Allowance for doubtful accounts..................       58,413      75,319          71 (a)     98,239      35,564
   Reserve for inventory shortages..................        6,373       8,598      (2,000)(c)      5,311       7,660
   Reserve for patient service equipment shortages..        3,900      14,707       2,000 (c)     12,470       8,137
                                                         --------    --------    --------       --------    --------
                  Totals............................     $106,744    $ 98,624    $ 18,373       $133,980    $ 89,761
                                                         ========    ========    ========       ========    ========


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

</TABLE>
---------------------------------------------------------------------


(a)  Includes amounts added in conjunction with business acquisitions.

(b)  Amount  charged  against  net  revenues.  See  Note 11 to the  Consolidated
     Financial Statements.

(c)  Transfers between reserves.

<PAGE>
                                   SIGNATURES

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


Dated: March 27, 2000

                                          APRIA HEALTHCARE GROUP INC.

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

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

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

/s/ PHILIP L. CARTER
-----------------------
Philip L. Carter             Chief Executive Officer              March 27, 2000


/s/ JOHN C. MANEY
-----------------------
John C. Maney                Executive Vice President and         March 27, 2000
                             Chief Financial Officer
                             (Principal Financial Officer)

/s/ JAMES E. BAKER
-----------------------
James E. Baker               Vice President, Controller           March 27, 2000
                             (Principal Accounting Officer)


/s/ RALPH V. WHITWORTH
-----------------------
Ralph V. Whitworth           Director, Chairman of the Board      March 27, 2000


/s/ DAVID H. BATCHELDER
-----------------------
David H. Batchelder          Director                             March 27, 2000


/s/ DAVID L. GOLDSMITH
-----------------------
David L. Goldsmith           Director                             March 27, 2000


/s/ RICHARD H. KOPPES
-----------------------
Richard H. Koppes            Director                             March 27, 2000


/s/ PHILIP R. LOCHNER
-----------------------
Philip R. Lochner            Director                             March 27, 2000


/s/ BEVERLY B. THOMAS
-----------------------
Beverly B. Thomas            Director                             March 27, 2000
<PAGE>
<TABLE>
                                                   EXHIBIT INDEX
<CAPTION>
Exhibit
Number                    Description                                                                               Reference
-------                   -----------                                                                               ---------
<S>     <C>                                                                                                            <C>
3.1     Restated Certificate of Incorporation of Registrant.                                                           (d)

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

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

3.4     Certificate of Amendment of Certificate of Incorporation of Apria Healthcare Group Inc.                        (o)

3.5     Amended and Restated Bylaws of Registrant, as amended on October 29, 1999.                                     (p)

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

4.2     Indenture dated November 1, 1993, by and among Abbey,  certain  Subsidiary  Guarantors  defined therein and
        U.S. Trust Company of California, N.A., as filed on Form SE.

4.3     Specimen Stock Certificate of the Registrant.                                                                  (h)

4.4     Certificate of Designation of the Registrant.                                                                  (d)

10.1    1991 Stock Option Plan.                                                                                        (a)

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

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

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

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

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

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

10.8    Amendment 1996-1 to the 1991 Stock Option Plan, dated October 28, 1996.                                        (m)

10.9    Amendment 1996-1 to the Amended and Restated 1992 Stock Incentive Plan, dated October 28, 1996.                (m)

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

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

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

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

10.14   Non-qualified Stock Option Agreement dated May 5, 1998, between Registrant and Philip L. Carter.               (m)

10.15   Amended and Restated 1997 Stock Incentive Plan, dated February 27, 1997, as amended through June 30, 1998.     (m)

10.16   Employment Agreement dated October 19, 1998, between Registrant and John C. Maney.                             (m)

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

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

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

10.20   1998 Non-qualified Stock Incentive Plan, dated December 15, 1998.                                              (m)

10.21   Amendment to Employment Agreement dated January 1, 1999, between Registrant and Philip L. Carter.              (m)

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

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

10.24   Amended and Restated  Executive  Severance  Agreement dated February 26, 1999, between Registrant and Frank
        Bianchi.                                                                                                       (m)

10.25   Amended and Restated Executive  Severance Agreement dated February 26, 1999, between Registrant and Michael
        R. Dobbs.                                                                                                      (m)

10.26   Amended and Restated  Employment  Agreement  dated  February 26, 1999,  between  Registrant and Lawrence M.
        Higby.                                                                                                         (m)

10.27   Third  Amendment to Amended and  Restated  Credit  Agreement  dated April 22, 1999,  among  Registrant  and
        certain of its  subsidiaries,  Bank of America  National Trust and Savings  Association and other financial
        institutions party to the Credit Agreement.                                                                    (n)

10.28   Fourth  Amendment to Amended and Restated  Credit  Agreement dated October 22, 1999,  among  Registrant and
        certain of its subsidiaries,  Bank of America National  Association and other financial  institutions party
        to the Credit Agreement.                                                                                       (p)

10.29   Second Amendment to Employment Agreement dated October 29, 1999, between Registrant and Philip L. Carter.

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

21.1    List of Subsidiaries.

23.1    Consent of Ernst & Young  LLP, Independent Auditors.

23.2    Consent of Deloitte & Touche LLP, Independent Auditors.

27.1    Financial Data Schedule.
</TABLE>

    References - Documents filed with the Securities and Exchange Commission

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

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

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

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

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

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

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

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

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

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

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

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

(m)  Incorporated  by reference to Annual Report on Form 10-K for the year ended
     December 31, 1998.

(n)  Incorporated by reference to Quarterly  Report on Form 10-Q dated March 31,
     1999, as filed on May 14, 1999.

(o)  Incorporated  by reference to Quarterly  Report on Form 10-Q dated June 30,
     1999, as filed on August 12, 1999.

(p)  Incorporated by reference to Quarterly  Report on Form 10-Q dated September
     30, 1999, as filed on November 12, 1999.

                               COPIES OF EXHIBITS

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