<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    Form 10-K

 X   Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
---  Act of 1934 (NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996) For the fiscal 
     year ended December 31, 1996,

                                       or

     Transition Report Pursuant to Section 13 or 15(d) of the Securities
---  Exchange Act of 1934 (No Fee Required) For the transition period from
     ________________________ to _______________________

                           Commission File No. 0-20619
                                               -------

                             MATRIA HEALTHCARE, INC.
             (Exact name of registrant as specified in its charter)

          Delaware                                     58-220598
(State or other Jurisdiction of            (IRS Employer Identification No.)
 Incorporation or Organization)

        1850 Parkway Place                                 30067
         Marietta, Georgia                               (Zip Code)
(Address of principal executive offices)

        Registrant's telephone number, including area code (770) 423-4500

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

                                      None

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

                                  Common Stock
                          Common Stock Purchase Rights

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 11, 1997, there were 36,416,199 shares of Common Stock outstanding,
and the aggregate market value of the Common Stock of the Registrant held by
non-affiliates was approximately $148,460,690 based upon the closing sale price
of such stock on that date.

                      DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Registrant's definitive Proxy Statement for the 1997 Annual
Meeting of Shareholders are incorporated by reference into Part III.


<PAGE>   2

                             MATRIA HEALTHCARE, INC.

                          1996 FORM 10-K ANNUAL REPORT

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
<S>                                                                                 <C>
PART I............................................................................
                                                                              
                  Item 1.  Business...............................................   3
                  Item 2.  Properties.............................................  10
                  Item 3.  Legal Proceedings .....................................  11
                  Item 4.  Submission of Matters to a Vote of Security Holders....  12

PART II...........................................................................
                  Item 5.  Market for the Company's Common Equity
                               and Related Stockholder Matters ...................  13
                  Item 6.  Selected Financial Data ...............................  13
                  Item 7.  Management's Discussion and Analysis of
                               Financial Condition and Results of Operations......  14
                  Item 8.  Financial Statements and Supplementary Data ...........  19
                  Item 9.  Changes in and Disagreements with Accountants
                               on Accounting and Financial Disclosure ............  19

PART III..........................................................................
                  Item 10. Directors and Executive Officers ......................  19
                  Item 11. Executive Compensation ................................  19
                  Item 12. Security Ownership of Certain Beneficial
                           Owners and Management .................................  19
                  Item 13. Certain Relationships and Related Transactions ........  19


PART IV...........................................................................
                  Item 14. Exhibits, Financial Statement Schedules,
                           and Reports on Form 8-K ...............................  20
                                                                                              
SIGNATURES........................................................................  24

</TABLE>


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                                     PART I.

ITEM 1.  BUSINESS.

         INTRODUCTION. Matria Healthcare, Inc., a Delaware corporation ("Matria"
or the "Company"), was incorporated on October 4, 1995 for the purpose of the
merger (the "Merger") of Tokos Medical Corporation (Delaware), a Delaware
corporation ("Tokos"), and Healthdyne, Inc., a Georgia corporation
("Healthdyne"), with and into Matria. The effective date of the Merger was March
8, 1996. Prior to the Merger, Matria had no material assets or liabilities and
its then outstanding shares of common stock, par value $0.01 per share ("Matria
Common Stock"), were held exclusively by Tokos and Healthdyne. As a result of
the Merger, the operations and assets of Tokos and Healthdyne were consolidated
into Matria, and each share of common stock of Tokos and Healthdyne outstanding
on the effective date of the Merger was exchanged for one share of Matria Common
Stock.

         Matria is the leading provider of specialized obstetrical home
healthcare services which assist physicians in the management of high risk
pregnancies. In addition, Matria provides home healthcare services for the
management of other complicated obstetrical and gynecological conditions, such
as pregnancy induced hypertension. Matria's services are designed to achieve
improved medical outcomes at significant cost savings through the reduction of
patient hospitalization. Services offered by Matria include screening to assist
in the identification of women who may be at risk of complications during
pregnancy; maternal risk assessment and prenatal education for asymptomatic
patients; fetal fibronectin testing for use by physicians to predict the
likelihood of preterm delivery; daily management and education of high risk
patients; administration and supervision of a range of home infusion therapies
for obstetrical and gynecological conditions; and specialty obstetrical and
gynecological nursing.

         On June 1, 1996, the Company exercised an option and acquired the
remaining 85% ownership interest in National Reproductive Medical Centers, Inc.
("NRMC"), a multi-site provider of infertility treatment services headquartered
in California. Founded in 1987 and operating as "Pacific Fertility Centers",
NRMC provides a broad spectrum of diagnostic and therapeutic services to
infertile couples with particular emphasis on in-vitro fertilization and embryo
transfer procedures. The transaction, valued at $12.8 million, was paid for in a
combination of cash and common stock of Matria. The option to acquire NRMC was
obtained by Healthdyne prior to the merger.

         SERVICES. The Company offers a comprehensive range of specialized home
healthcare and risk assessment services designed to assist physicians in
managing high risk pregnancies and numerous other obstetrical and gynecological
conditions more cost effectively. Substantially all of the Company's revenues
are derived from these services.

         High Risk Pregnancy Management. The Company offers multiple levels of
high risk pregnancy management services to assist physicians in the early
detection of preterm labor and the management of complicated pregnancies. These
levels are designed to meet various patient acuity levels and range from low
intensity surveillance to comprehensive obstetrical home care. Each level
includes one or more of the following: the identification of women who may be at
risk for complications during pregnancy; the development of a program of care
for each patient; the education of the patient as to symptoms associated with
preterm labor; skilled perinatal nursing assessments of the patient's condition;
and the  

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use of perinatal nurses specializing in obstetrics to administer and
manage various therapies.

         A physician who chooses to utilize the Company's preterm labor
management services will prescribe the level of service offered by the Company
that the physician believes is appropriate for the patient's acuity level. The
patient is assigned to a perinatal nurse located in one of the Company's patient
service centers. This nurse is generally the patient's primary contact for the
duration of her treatment plan which typically lasts four to seven weeks
depending on the level of service prescribed and the time period until delivery.
At the time of the assignment, the nurse contacts the patient to discuss the
physician's treatment plan and instruct her in the use of any device if one has
been prescribed by her physician. The nurse will educate the patient with regard
to symptoms associated with preterm labor, the methods to detect such symptoms,
and proper methods of care to minimize complications during pregnancy. The nurse
contacts the patient on an as needed or daily basis depending on the program
prescribed to assess her condition, including any symptoms of preterm labor, to
provide emotional support and counseling, and to encourage compliance with the
physician's treatment plans. Through the daily contact with the patient and the
frequent assessment of symptoms associated with preterm labor, the Matria nurse
obtains information that assists the prescribing physician in the early
detection and treatment of preterm labor.

         In order to assist physicians in determining the most appropriate
treatment level for patients, the Company also markets a laboratory test,
developed with the assistance of the Company by Adeza Biomedical Corporation,
that can be utilized by physicians as an aid in determining the likelihood of
preterm labor commencing within a given time period from the date of the test.
The test, which is FDA approved, measures the existence of fetal fibronectin, a
protein present at various times in all pregnancies ("fFN"), in the vagina of
the patient and based thereon predicts the likelihood of delivery within a
fourteen day time period. See Item 3 "Legal Proceedings" for a description of
litigation commenced against the Company by Adeza Biomedical Corporation in
connection with this product.

         Physicians may also prescribe labor inhibiting drugs known as
tocolytics for patients who are symptomatic and in need of some form of
intervention. The Company provides supervision, including pharmaceutical support
and administration of this therapy regime to patients as an alternative to
hospitalization. Frequently, this therapy involves delivery of the drugs by
micro infusion pump. The Company monitors the patient's reactions to the therapy
on an on-going basis. Nurses report any change in patient status to the
patient's physician, as well as provide the physician with periodic reports
during the course of the therapy.

         Other Obstetrical and Gynecological Services. The Company provides a
broad range of skilled nursing, infusion therapy and patient management services
on a home care basis for a variety of obstetrical and gynecological conditions,
including pregnancy induced hypertension and gestational diabetes. Such
conditions may be treated with on-going nursing assessment and focused education
at various levels of frequency and intensity, other patient management and
diagnostic services, and blood and urine testing.

         Maternal Risk Assessment and Prenatal Education Services. The Company,
through its comprehensive MaternaLink(TM) Program, offers a comprehensive risk
assessment and patient education program designed to reduce maternity related
costs by providing expectant mothers with focused education and psychological
support and identifying pregnancies that may be high risk. The Company sells the
program to employers, managed care 

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organizations, health plans and other third-party payors or administrators who
make it available to their respective employees, insureds or members who are
pregnant. Through interviews with the expectant mother, the Company collects
data about the woman, her family/medical history and other circumstances that
might affect her pregnancy. Based on this information, the nurse provides the
woman with education regarding her specific risks, if any, and recommends
appropriate behavior modifications that may facilitate a healthy outcome.
Relevant information collected by the Company is summarized in reports and
provided to the participant's healthcare provider and case manager. Results of
program utilization and effect are summarized for the client in periodic
reports. The Company, working in conjunction with HMO's and other managed care
organizations demonstrated reported improved patient outcomes and documented
cost savings from its MaternaLink(TM) program.

         Infertility Services. Through its wholly-owned subsidiary, NRMC, Matria
provides a broad spectrum of diagnostic and therapeutic services to infertile
couples with particular emphasis on in-vitro fertilization and embryo transfer
procedures.

         PATIENT CARE INFORMATION SYSTEMS. Due to the acute nature of high risk
pregnancies, physicians, pharmacists and perinatal nurses must have prompt
access to a patient's medical history, current clinical status and treatment
plan. Matria's predecessor companies made substantial investments in the
development of information systems to support healthcare professionals in
detecting obstetrical complications, as well as in developing and implementing
individualized treatment plans for their patients. In addition, they created
systems to track patient outcomes and summarize data regarding patient care.
Matria has integrated and enhanced these systems.

         In addition to monitoring devices to access the patient's daily
condition, Matria has a data information system designed to assist managed care
organizations and physician groups in tracking outcomes and summarize data
regarding maternity-related care. This system consists of proprietary software
and processes that collect information about maternity related access, care,
utilization and satisfaction. Methodologies for analyzing data and presenting
information include the use of varied collection data tools, implementation of a
relational data base design and customization of reports to meet client
requirements.

         SERVICE LOCATIONS. Matria has approximately 37 service centers
throughout the United States and a number of additional sites of service. In
1996 Matria consolidated the number of its centers from approximately 83 to 37
in order to avoid duplication in a given geographic area and to benefit from the
synergies created through the Merger. All of the patient service centers operate
in accordance with policies, procedures and objectives established by Matria.

         JCAHO Accreditation. Matria is continuing the process substantially
completed by its predecessor companies of having its service centers accredited
by the Joint Commission on Accreditation of Health Care Organizations ("JCAHO").
Matria is currently in the process of reaccreditating the centers in Matria's
name.

         MARKETING AND SALES. Matria markets its services and products through a
dedicated direct sales force to physicians, other healthcare providers,
management service organizations and third-party payors. Matria also maintains a
group of clinical support specialists and a dedicated team of managed care
account managers to support and assist

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the direct sales force in these efforts. In its patient services business,
Matria stresses the clinical experience of its personnel, the quality of its
clinical services, and the cost and clinically effective nature of its therapies
when compared to hospitalization.

         Matria has a number of contractual and other arrangements with medical
professionals, institutions and third-party payors. These arrangements include
agreements with prepaid health plans under which Matria provides services to
members of the organization at discounted prices, and agreements with medical
professionals and institutions under which Matria provides certain services,
including reimbursement management and billing and collection services.

         REIMBURSEMENT. A significant portion of the Company's revenues are
affected directly by the reimbursement policies of third-party payors, such as
private insurance programs and state Medicaid programs. Matria attempts to focus
its marketing efforts on developing private pay accounts. In general, these
accounts pay at a higher rate than government payment programs. Changes in the
funding available from either third party or government payors or in their
reimbursement policies could have an adverse impact on the Company's business.

         Private insurance companies, including HMO's, are the primary source of
reimbursement for Matria, which assumed a substantial number of formal and
informal contractual relationships previously held by Tokos and Healthdyne with
these entities. During 1996, government payors accounted for approximately 7% of
Matria's revenues. Reimbursement for uterine activity monitoring is presently
available from approximately one-half of the 50 state Medicaid programs.

         Matria assists its patients in obtaining reimbursement from their
insurance companies or other third-party payors. Generally, Matria contacts the
patient's insurance company or other third-party payor before the commencement
of services in order to determine the patient's coverage and the percentage of
charges that the payor will reimburse. Matria's reimbursement specialists then
evaluate the patient's insurance to determine the proper procedures for
submission of reimbursable claims for payment. Matria typically obtains an
assignment of benefits from the patient that enables Matria to file claims for
its services with the third-party payor. In most cases, third-party payors
reimburse Matria directly for the portion of the charges the payor recognizes.

         HEALTH CARE REFORM. Legislative efforts continue at the federal and
state levels to control rising health care costs. Recently, federal initiatives
have been considered in the context of federal budget legislation. President
Clinton's fiscal year 1998 budget proposal would generally reduce payments to
Medicare and Medicaid providers and grant states broader authority to establish
Medicaid managed care systems. In addition, a number of states are considering
or have enacted health care reforms, including reforms through Medicaid
demonstration projects. These involve mandatory statewide managed care programs
for Medicaid beneficiaries under which payment is made to providers through
negotiated or capitated rates, as opposed to traditional fee-for-service or fee
schedule payments. There can be no assurance that future health care or budget
legislation or other health reform initiatives at the state or federal levels
will not have an adverse effect on the business of the Company.

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         REGULATION. Participants in the healthcare industry, including
providers of services such as those offered by Matria, are subject to extensive
federal, state and local regulation relating to, among other things, licensure,
conduct of operations and the addition of facilities and services, and there can
be no assurance that future regulatory changes will not have a material adverse
effect on the results of operations or financial condition of the Company. As a
provider of services to patients under various government programs, including
certain state Medicaid programs, Matria is subject to the federal fraud and
abuse laws. These laws prohibit among other things, (I) any bribe, kickback,
rebate, or payment of any other remuneration in return for the referral of
patients covered under federal healthcare programs including Medicare or
Medicaid, and (ii) the submission of false claims. Violations of these
provisions may result in civil and criminal penalties and exclusion from
participation in federal healthcare programs.

         The broad language of the anti-kickback statute has been interpreted by
certain courts and governmental enforcement agencies in a manner which could
impose liability on healthcare providers for engaging in a wide variety of
business transactions. Limited "safe harbor" regulations exempt certain
practices from enforcement action under the prohibitions. However, these safe
harbors are only available to transactions which fall entirely within the
narrowly defined guidelines.

         In recent years, the federal government has significantly increased the
resources allocated to enforce the fraud and abuse laws. For example, the Office
of the Inspector General, in cooperation with other federal agencies, announced
a program, Operation Restore Trust, under which it is scrutinizing the
activities of home health agencies, durable medical equipment suppliers, skilled
nursing facilities, and hospices in California, Florida, Illinois, New York and
Texas, states in which Matria has significant operations. The Administration has
announced plans to expand Operation Restore Trust to all 50 states. Private
insurers and various state enforcement agencies also have increased their
scrutiny of healthcare claims in an effort to identify and prosecute fraudulent
and abusive practices. Matria maintains an internal regulatory compliance review
program and from time to time retains special counsel to provide advice on
compliance with such laws and regulations. However, no assurance can be given
that the practices of Matria, if reviewed, would be found to be in compliance
with such laws, as such laws ultimately may be interpreted.

         In 1995, the so-called "Stark II Law," went into effect. Stark II
imposes civil penalties and exclusions for certain specified referrals by
physicians to entities with which they have a financial relationship (subject to
specified exceptions). While implementing regulations have been issued relating
to referrals for clinical laboratory services, no implementing regulations have
been issued relating to referrals for other services subject to the
self-referral prohibitions. In addition, several states in which Matria operates
have laws that prohibit certain direct or indirect payments or fee-splitting
arrangements between healthcare providers if such arrangements are designed to
induce or encourage the referral of patients to a particular provider. Other
states have enacted or are considering legislation that either prohibits
"physician self-referral" arrangements or requires physicians to disclose any
financial interest they may have with a healthcare provider that such physicians
recommend to their patients. Possible sanctions for violations of these
restrictions include loss of licensure and civil and criminal penalties. Such
statutes and proposed legislation vary from state to state and seldom have been
interpreted by the courts or regulatory agencies. Strict enforcement of these
regulations is likely. In part as a result of these changes, Matria's
predecessor companies and, to a lesser extent, Matria have terminated various
partnerships, 

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Subchapter S corporations and other arrangements in which they were involved in
an attempt to ensure that physician referrals would not be precluded by these 
statutory prohibitions. Although substantially reduced from prior periods, 
Matria retains certain select financial relationships with physicians who may 
refer, or be in a position to refer, patients for services. Matria believes 
that these financial relationships meet applicable exceptions permitting 
referrals by such physicians. Matria may be required to further modify these 
arrangements, or forced to discontinue accepting referrals from such physicians
if the laws are subsequently interpreted to prohibit these relationships.

         Most of the medical products utilized by Matria for the provision of
its services are classified as medical devices under the Federal Food, Drug and
Cosmetic Act (the "FDC Act") and are subject to regulation by the FDA. In
addition, some of the services that Matria offers involve the provision of drugs
or tests that are regulated by the FDA under the FDC Act. While these medical
devices, drugs and tests are labeled for specific indications and cannot be
promoted for any other indications, physicians may and do prescribe them for
indications that have not been approved by the FDA. The FDA allows physicians to
prescribe drugs for such "off-label" indications under the "practice of
medicine" doctrine. For example, terbutaline is labeled for the treatment of
asthma but is frequently prescribed by obstetricians as a tocolytic for the
treatment of preterm labor. See Item 3 "Legal Proceedings" for a discussion of a
Petition filed with the FDA by the National Women's Health Network concerning
the use of subcutaneous terbutaline in the home. Any action by the FDA that
limits the ability of Matria to offer a high risk pregnancy management service
involving medical devices or the administration of drugs or tests for
indications for which they have not been labeled could have a material adverse
effect on the results of operations or financial condition of Matria.

         A variety of regulatory actions are available to the FDA in order to
ensure that regulated firms comply with the provisions of the FDC Act. Although
the Company does not anticipate any enforcement action against it, the
commencement of any such action which limits the manner in which Matria conducts
its business could have an adverse impact.

         In certain states, the provision of infusion services and other nursing
services to patients in their homes and the laboratory services related to fFN
are subject to state home healthcare licensing and/or certificate of need
("CON") requirements in the case of nursing services and laboratory licensing in
the case of fFN testing. The Company is engaged in an ongoing effort to obtain
information from state regulatory agencies on the application of new and
existing licensing and CON provisions applicable to its business activities. The
Company is not a licensed laboratory for purposes of performing actual fFN
laboratory analysis and relies upon Adeza and other licensed laboratories to
perform this process on its behalf. Additional licensing or other forms of
affiliations with licensed entities will be necessary, however, as eligibility
of fFN for reimbursement under state Medicaid programs increases. When
applicable, Matria also may be required either to obtain a license or other
regulatory approval before it renders nursing services directly in the home or
to affiliate with other licensed agencies in connection with the delivery of
such services. Although generally a standard aspect of conducting a healthcare
business, compliance with applicable requirements in certain instances can be
both burdensome and costly. Violation of these state statutes can result in
substantial fines and other penalties. The Company believes that it has obtained
or is in the process of obtaining licenses or establishing affiliations with
licensed entities for each facility for which licensing is required. This is an
area of increasing legislative activity, and there can be no assurance that the
Company will not become subject to regulatory and licensing statutes in other
states in which it operates.

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         In addition, Matria is subject to laws and regulations which relate to
business corporations in general, including antitrust laws, occupational health
and safety laws and environmental laws. None of these laws and regulations has
had a material adverse effect on the Company's business or competitive position
or required material capital expenditures on the part of the Company.

         Failure to comply with these laws or regulations applicable to the
Company could adversely affect Matria's ability to continue to provide, or to
receive reimbursement for, its products and services and could also subject
Matria and its officers to penalties. Changes in laws or interpretations of
existing laws or regulations could have a material adverse effect on permissible
activities of Matria, the relative costs of doing business and the amount of
reimbursement by government and other third-party payors. In addition, laws and
regulations often are adopted to regulate new products, services and industries.
Matria is unable to predict what legislation or regulations, if any, may be
adopted in the future relating to the Company's business or the healthcare
industry, including third-party reimbursement, or what effect any such
legislation or regulations may have on Matria.

         COMPETITION. The home obstetrical care services market in which Matria
competes is a relatively new market. As a result of the Merger, Matria believes
that it is both the leading provider (based on annual level of sales) of home
obstetrical care and the largest entity in this market whose services are
devoted exclusively to home obstetrical care. Competition exists in
substantially all of the metropolitan areas in which Matria maintains centers
from a number of local obstetrical providers and, in some instances, regional or
national companies. Matria actually provides the patient services for several
regional and national companies on a subcontract basis which offers Matria the
opportunity to participate with these more diversified service providers in
contracting with certain third-party payors who prefer to contract with a single
source for all home care services.

         The principal competitive factors for Matria are the therapies offered,
the expertise of its clinical employees, the ability to provide prompt and
reliable service, the price at which the services are offered, and the
regulatory requirements of the FDA. The Company believes that it generally
competes favorably with respect to these factors.

         RECENT CONTROVERSIES. The operations of Matria may be affected by
several controversies surrounding the home obstetrical care business. There has
been, and continues to be, debate within the medical community about how to
decrease the incidence of prematurity, which is a major cause of the high U.S.
infant mortality rate. Matria believes that increased surveillance of women at
risk of developing preterm labor can assist the physician in early diagnosis of
preterm labor and help improve the medical outcomes of complicated pregnancies.
Matria provides a comprehensive range of services to assist the physician in
this surveillance, including fFN testing, perinatal nursing, obstetrical
pharmacy services and tocolytic therapy. A significant portion of these services
includes the use of home uterine activity monitoring devices. In September 1992,
an eight member committee of the American College of Obstetricians and
Gynecologists ("ACOG") published an opinion stating, among other things, that
the use of home uterine activity monitoring devices has not been shown to
prevent prematurity; while the committee opinion represented a more recent
review of existing literature, there was essentially no change from its 1989
opinion regarding the independent benefit of home uterine activity monitoring.
Since that time, the FDA has approved the uterine activity monitors utilized by
Matria (the only provider of home

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obstetrical care with devices so approved) as safe and effective for the
prediction of the onset of preterm labor in women with a history of a previous
preterm delivery. While Matria does not believe that either home uterine
activity monitoring or any other diagnostic device can, in and of itself,
improve therapeutic outcomes (e.g., a mammogram cannot prevent breast cancer),
it does believe that monitoring can assist the physician in the early detection
of preterm labor. See Item 3 "Legal Proceedings" for a discussion of a Petition
recently filed by the National Women's Health Network ("NWHN").

         RESEARCH AND DEVELOPMENT. Matria's research and development strategy is
to develop new and more cost-effective service procedures for providing
obstetrical care to patients in the home environment, as well as to develop an
office-based patient record and clinical management system for use by physicians
in the management of their patients.

         EMPLOYEES. The Company currently employs a total of approximately 779
full-time employees and over 126 regular part-time employees. In addition, the
Company employs an additional 1,000 part-time clinical employees to provide
patient training and backup support on an "as needed" basis. None of the
Company's employees are represented by a union. The Company considers its
relationship with its employees to be satisfactory.

         PATENTS, TRADEMARKS AND LICENSES. Matria utilizes a number of
trademarks including, without limitation, System 37(R) and MaternaLink(TM), and
considers the same to be important to the marketing and promotion of its
services. Matria does not believe that it possesses any patents which are
material to its business although the patent possessed by Adeza for the use of
the fFN may be deemed to be material to the continued marketing of that product.
Matria's business does depend and will likely continue to depend on trade secret
protection to strengthen its proprietary position. Matria requires its employees
to execute appropriate confidentiality agreements in connection with their
employment. There can be no assurance that these agreements will not be breached
or that Matria will have adequate remedies for such breach. Furthermore, no
assurance can be given that competitors will not independently develop
substantially equivalent proprietary information or that Matria can meaningfully
protect its rights in unpatented proprietary technology. Litigation may be
necessary to protect trade secrets or "know-how" owned by Matria, which could
result in substantial costs to, and might have a material adverse effect on,
Matria.

ITEM 2.  PROPERTIES.

         Matria's principal executive and administrative offices are located at
1850 Parkway Place, Marietta, Georgia, and total approximately 99,400 square
feet. The facility is leased through February 28, 2003. The lease provides for
annual rental payments of $2.063 million.

         Additional properties also are leased for the other operations of
Matria. Matria's patient service centers are typically located in suburban
office parks and range between 600 and 6,500 square feet of space with an
average of approximately 3,500 square feet. Total square footage for these
facilities is approximately 126,000 square feet. These facilities are leased for
various terms through 2001 at aggregate annual rental of approximately $2.200
million. The former corporate headquarters of Tokos in Santa Ana, California,
with 115,000 square feet, will be leased through December 31, 1997 at an annual
rental of $588,000. The Company expects to terminate this lease effective
December 31, 1997 and relocate its occupants to smaller more appropriate
facilities.

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         In 1996, Matria relinquished or sublet a number of facilities as a part
of the consolidation of the business operations of Tokos and Healthdyne. Matria
believes that it has adequate facilities for the foreseeable future.

ITEM 3.  LEGAL PROCEEDINGS

         A complaint, filed by Adeza Biomedical Corporation ("Adeza") in the
Superior Court of Santa Clara County, California, was served on Matria on March
7, 1997. The complaint alleges that Matria breached an Exclusive Marketing
Agreement, dated December 31, 1991, as amended (the "Agreement"), between Adeza
and Tokos and was filed in an attempt to terminate the Agreement. Under the
Agreement, Tokos invested $10 million to assist Adeza in the development of a
test to predict the likelihood of the onset of preterm labor utilizing a fetal
fibronectin immunoassay ("fFN Test"). Matria denies these allegations and
intends to defend the matter vigorously.

         A complaint, filed by The Lindner Fund, Inc. in the Eastern District of
Missouri, was served on February 3, 1995 against Healthdyne and its former
subsidiary, Home Nutritional Services, Inc. ("HNS"), alleging that The Lindner
Fund would not have sold its investment in HNS on February 8, 1994 had
Healthdyne and HNS disclosed the potential sale of HNS. Damages have been
requested in the amount of $1,050,900, representing the aggregate difference
between the price received upon the sale of such stock by The Lindner Fund and
the $7.85 per share price paid by W.R. Grace & Co. on April 6, 1994 for HNS.
Healthdyne denied the allegations set forth in the complaint and Matria is
defending the matter vigorously.

         On July 17, 1996, the NWHN filed a Petition with the FDA and issued a
press release alleging that terbutaline, although widely prescribed by
physicians for the off-label use as a tocolytic, was unsafe when administered
subcutaneously in the home. The Company strongly disputes the assertions of the
NWHN and has both filed a response to the Petition with the FDA and commenced
litigation against the NWHN.

         In addition to the foregoing, Matria is subject to various legal claims
and actions incidental to its business and the businesses of its predecessors
and their respective subsidiaries, including product liability claims and
professional liability claims. Matria maintains, as did its predecessors,
insurance, including insurance covering professional and product liability
claims, with customary deductible amounts and, with the exception of one case
for which insurance in the amount of $10 million exists, has been indemnified by
Healthdyne Technologies, Inc., a former subsidiary of Healthdyne ("Healthdyne
Technologies"), with respect to any claim relating to equipment manufactured and
sold by Healthdyne Technologies, regardless of the date of manufacture of the
equipment in question or whether the claim arose before or after the May 22,
1995 spin-off of Healthdyne Technologies. There can be no assurance, however,
that (i) additional suits will not be filed in the future against Matria, (ii)
Matria's prior experience with respect to the disposition of its litigation
accurately indicates the results that will occur in pending or future cases, or
(iii) adequate insurance coverage will be available at acceptable prices for
incidents arising in the future.

                                       11

<PAGE>   12


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

                                 Not Applicable


SPECIAL ITEM.  EXECUTIVE OFFICERS OF THE COMPANY.

         The following sets forth certain information with respect to the
executive officers of the Company.

<TABLE>
<CAPTION>

         Name                       Age              Position with the Company
         ----                       ---              -------------------------
<S>                                 <C>              <C>  
Frank D. Powers                     48               Executive Vice President

J. Brent Burkey                     50               Senior Vice President, General Counsel
                                                     and Secretary

Donald R. Millard                   49               Senior Vice President-Finance,
                                                     Chief Financial Officer and
                                                     Treasurer
</TABLE>

         The executive officers of the Company are elected annually and serve 
at the pleasure of the Board of Directors.

         Mr. Powers has been Executive Vice President of the Company since 
March 8, 1996. Prior thereto, he served as President of Healthdyne Maternity
Management, a subsidiary of Healthdyne, from October 1989 until March 1996, and
as President of Healthdyne's Home Care Group from November 1986 to October 1989.
In addition, he was President of Healthdyne's Home Care Products Division from
September 1984 to November 1986 and Corporate Controller of Healthdyne from
January 1983 to September 1984.

         Mr. Burkey has served as Senior Vice President, General Counsel and
Secretary of the Company since March 8, 1996. Prior thereto, he served as Senior
Vice President and General Counsel of Healthdyne from September 1987 to March
1996 and as Vice President and General Counsel of Healthdyne from November 1982
to September 1987. He also served as Secretary of Healthdyne from August 1984 to
March 1996 and as Assistant Secretary of Healthdyne from November 1982 to August
1984.

         Mr. Millard has served as Senior Vice President-Finance, Chief
Financial Officer and Treasurer of the Company since March 8, 1996. Prior
thereto, he served as Vice President-Finance and Chief Financial Officer of
Healthdyne from July 1987 to March 1996 and, in addition, was Treasurer of
Healthdyne from March 1990 to March 1996. Prior thereto, he was President of
Dental One, Inc. a dental healthcare provider, from December 1982 to June 1987.

                                       12

<PAGE>   13


                                     PART II

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

         Matria's Common Stock is traded in the over the counter market and is
quoted on the Nasdaq National Market ("NASDAQ") under the symbol "MATR". The
approximate number of record holders as of March 11, 1997 was 3,547.

         Trading in Matria Common Stock did not take place prior to the
effective date of the Merger except for the initial purchase of a limited number
of shares by Tokos and Healthdyne as part of the Company's incorporation.

         Neither Matria nor its predecessors paid any cash dividends with
respect to their respective common stocks and Matria does not intend to declare
any dividends in the near future. Matria is a party to an indenture assumed from
Healthdyne relating to subordinated debentures that contains provisions
restricting the payment of cash dividends during the continuation of a default
in the payment of interest on the subordinated debentures.

         The high and low sales price of Matria Common Stock from March 11, 1996
(the first day that trading occurred) through March 31, 1996 was $9.75 and
$7.50, respectively. In addition, the following table sets forth, for the
remaining calendar quarters indicated in 1996, the high and low sales prices of
Matria.

             CALENDAR QUARTER                         LOW         HIGH
             ----------------                         ---         ----
                  Second                              $7.375     $9.25
                  Third                                6.50       8.75
                  Fourth                               4.625      8.375


ITEM 6.  SELECTED FINANCIAL DATA

         The following selected financial information represents the financial
performance of Matria from March 1, 1996 through December 31, 1996 and for all
periods prior thereto Tokos (deemed for accounting purposes to be the acquiror
of Healthdyne in the Merger) and is derived from, and should be read in
conjunction with, the historical consolidated financial statements of Matria and
Tokos and the related notes thereto. For all practical purposes, Matria did not
engage in business prior to the effective date of the Merger, and the results of
Tokos are not necessarily indicative of Matria's future performance.

<TABLE>
<CAPTION>


                                                                         Year Ended December 31,
                                               -----------------------------------------------------------------------------

                                                    1996            1995            1994            1993           1992
                                                    ----            ----            ----            ----           ----

                                                                  (In thousands, except per share data)
Consolidated statements of operations:
<S>                                               <C>               <C>             <C>           <C>             <C>             
Revenues                                          $130,806          85,209          98,565        120,837         159,887

Operating expenses                                 122,686          83,990          96,640        117,460         128,262
Provision for doubtful accounts                      7,591           5,251           7,042         13,656          17,056
Amortization of goodwill and other
  intangibles                                       30,083           1,235             350            187             133
Settlement of litigation                                --           4,300              --             --              --
</TABLE>



                                      13
<PAGE>   14


<TABLE>
<CAPTION>

                                                                        Year Ended December 31,
                                               -----------------------------------------------------------------------------

                                                  1996            1995             1994           1993           1992
                                                  ----            ----             ----           ----           ----
<S>                                               <C>             <C>             <C>            <C>             <C> 
Restructuring, severance and other
  charges                                           22,525          2,456              --         14,000           2,982
                                                  --------        -------         -------        -------         -------
                                                   182,885         97,232         104,032        145,303         148,433
                                                  --------        -------         -------        -------         -------
Income (loss) from operations                      (52,079)       (12,023)         (5,467)       (24,466)         11,454

Interest income net                                    824            333              50             39              39
Other income net                                       134             46             108             --              --
                                                  --------        -------          ------        -------          ------
Income (loss) before income tax expense            (51,121)       (11,644)         (5,309)       (24,427)         11,493
Income tax expense                                      --            150             550          1,956           5,030
                                                  --------        -------         -------        -------         -------

Net earnings (loss)                               $(51,121)       (11,794)         (5,859)       (26,383)          6,463
                                                  ========        =======         =======        =======         =======

Earnings (loss) per common and common
equivalent share                                  $  (1.58)         (0.68)          (0.34)         (1.53)           0.37
                                                  ========        =======         =======        =======         =======

Weighted average number of common and common
equivalent shares outstanding
                                                    32,328         17,396          17,169         17,240          17,568
                                                  ========        =======          ======        =======         =======
</TABLE>

<TABLE>
<CAPTION>

                                                                               December 31,
                                               -----------------------------------------------------------------------------

                                                    1996            1995           1994            1993           1992
                                                    ----            ----           ----            ----           ----

                                                                              (In thousands)
Consolidated balance sheet data:
<S>                                               <C>               <C>             <C>            <C>             <C>
Total assets                                      $223,188          44,468          58,183         69,959          99,886
Long-term obligations, excluding current
 maturities                                          2,499           2,078           2,593          3,348           5,182
Shareholders' equity                               173,178          29,489          40,160         46,875          74,952

</TABLE>

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

General.

         On March 8, 1996, Tokos Medical Corporation ("Tokos") and Healthdyne,
Inc. (Healthdyne") merged with and into the Company, which was created solely
for the purpose of the Merger. Pursuant to the terms of the Agreement and Plan
of Merger, dated October 2, 1995, as amended, among Tokos, Healthdyne and the
Company, each share of common stock outstanding on March 8, 1996 of Tokos and
Healthdyne was exchanged for one share of the Company's Common Stock. The
Company issued approximately 17,007,000 shares of Common Stock to the former
Healthdyne shareholders and approximately 17,655,000 shares to Tokos
shareholders. The Merger was accounted for using the purchase method of
accounting, and Tokos was deemed to be the acquiror since its shareholders
received approximately 51% of the newly issued shares of Matria Common Stock.

         In March 1995, Healthdyne acquired a 15% ownership interest in NRMC for
$1.250 million cash, and effective June 1, 1996, the Company acquired the
remaining 85% by the issuance of 906,582 shares of the Company's Common Stock
and the assumption of NRMC common stock options which were converted into
options to purchase 60,604 shares of the 

                                       14
<PAGE>   15

Company's Common Stock with a total combined value of $7.121 million and cash
payments of $5.947 million, including transaction costs of $250,000. The
acquisition was accounted for using the purchase method of accounting.

         The Company's present operations and future prospects may be influenced
by several factors, including developments in the healthcare industry,
third-party reimbursement policies and practices, and changes in regulatory
requirements or the manner in which such requirements are enforced. As a result
of the increasing cost of health care in the United States and overall efforts
to reduce or control government and corporate spending, government and
third-party payors are becoming increasingly focused on promoting cost-effective
healthcare services, and payors, in particular, have become more involved in
decisions regarding diagnosis and treatment to ensure that care is delivered in
a cost-effective manner.

         Substantially all of the Company's current revenues are derived
directly from third-party payors for services rendered to patients by the
Company. The financial performance of all healthcare companies, including the
Company, could be adversely affected by the financial condition of certain
governmental and private payors and by their continuing efforts to reduce
healthcare costs by lowering reimbursement rates, increasing medical reviews of
invoices for services and negotiating for reduced contract rates. The Company
and its predecessor companies have responded to these developments by attempting
to emphasize cost-effective therapies and procedures, pre-qualifying insurance
coverage prior to the delivery of services and educating third-party payors on
the benefits of the Company's home therapies. Although reduction in the
reimbursement rates that the Company receives for services rendered could have
an adverse impact on the Company, the Company is hopeful that the overall
cost-effective nature of treatment in the home (as compared to hospitalization),
coupled with the potential benefits to be derived from prenatal care, will be
recognized and encouraged by any new healthcare initiatives.

         The trend within the healthcare industry to deliver quality healthcare
services in a more cost-effective manner had an impact on the Company's
predecessors and is expected to continue to have an impact on the Company.
Driven by employers and third-party payors, as well as by legislation and
regulation, prices for services provided to patients, in general, are being
reduced, cost-effective preventative health care is being stressed and
vertically integrated networks of care providers (some of whom are accepting the
insurance risk of providing care through capitation contracts with third-party
payors) are being established. Matria anticipates that this trend will continue
and is attempting to focus its efforts on services, some of which are offered in
conjunction with third-party payors, which it believes can benefit from this new
environment. There can be no assurance, however, that either additional changes
or presently unforeseen consequences from this trend may not develop.

         The following discussion of the results of operations and financial
condition of the Company, should be read in conjunction with consolidated
financial statements and related notes of the Company included in this Annual
Report on Form 10-K for the year ended December 31, 1996 as filed with the
Securities and Exchange Commission (the "Commission"). Since the financial
results prior to the Merger represent the results of Tokos only and since the
financial results of Matria for 1996 include the results of Healthdyne only
since March 1, 1996 and NRMC only since June 1, 1996 and also include certain
costs and expenses associated with the Merger, the historical results of
operations are not necessarily indicative of the results that will be achieved
by the Company during future periods.

                                       15
<PAGE>   16

RESULTS OF OPERATIONS.

         Revenues increased $45.597 million or 53.5% in 1996 and decreased
$13.356 million or 13.6% in 1995. The decline in revenues experienced by Tokos
in 1995 was primarily a result of decreases in preterm labor management patient
service days. This decline continued into 1996; however, it was offset by the
additional Healthdyne revenues included in the Company's revenues from March 1,
1996 and by the additional NRMC revenues included in the Company's revenues from
June 1, 1996.

         Additional revenues were also realized in 1996 from the marketing of
the fetal fibronectin immunoassay (fFN), a new in vitro diagnostic test used as
an aid in assessing the risk of preterm delivery in women. Through a marketing
agreement entered into by Tokos in 1991, the Company has exclusive rights to
market this test in the United States, Canada and Puerto Rico (See Item 3. - 
"Legal Proceedings" herein). The FDA approved this product in September 1995 and
the Company began marketing the test in 1996 as a means of predicting whether
preterm delivery was likely in women with symptoms associated with preterm
labor. In January 1997 the FDA expanded the marketing approval of fFN to also
include asymptomatic patients - women who do not have symptoms of preterm labor.

         Cost of revenues as a percent of revenues for 1996 increased to 42.7%
from 41.1% and 39.8% in 1995 and 1994, respectively. The increase in 1996 is due
primarily to the inclusion of the results of operations of NRMC since June 1,
1996, whose costs of revenues as a percentage of revenues for 1996 was 67.5%.
The preterm labor management business actually experienced a reduction in cost
of revenues as a percentage of revenues in 1996 primarily achieved through
consolidation of service sites and operating efficiencies related to the Merger.
The increase in 1995 from 1994 was primarily a result of revenues declining at a
faster rate than expenses.

         Selling and administrative expenses declined as a percentage of
revenues in 1996 to 50.8% from 56.9% and 56.6% in 1995 and 1994, respectively,
primarily due to synergies achieved as a result of the Merger.

         Excluding the amortization of the additional goodwill and other
intangibles associated with the Merger ($32.613 million per year for three
years and $29.946 million per year for two additional years), the Company
achieved annualized cost saving on a quarterly run rate basis compared to the
historical combined costs of Tokos and Healthdyne of approximately $28.000
million in 1996, primarily as a result of reductions of patient services center
expenses in overlapping geographic locations, elimination of duplicate
facilities including corporate headquarters, and synergies in staff and
functional areas. An additional amount in excess of $4.000 million of
annualized cost savings are expected to be achieved by the end of the second
quarter of 1997. No assurance can be given, however, that unforeseen
difficulties will not be encountered in completing the integration of the
operations of Tokos and Healthdyne or that the full benefits and attendant cost
savings expected from such integration will be realized or achieved in the
expected time frame.

         As a result of the Merger and the acquisition of NRMC, a large
percentage of the assets reflected on the Company's balance sheet are intangible
assets or goodwill (as opposed to tangible assets such as cash, accounts
receivable, inventory and equipment). At December 31, 1996, the Company's total
assets were $223.188 million, of which $148.099 million, or 66.4% of total
assets, were goodwill and intangibles. In addition, the amortization 

                                       16
<PAGE>   17

or any future write-down of such goodwill and intangibles by the Company could
have a material adverse effect on the results of operations of the Company.

         The Company provides for estimated uncollectible accounts as revenues
are recognized. The provision for doubtful accounts as a percentage of revenues
for the preterm labor management business was approximately 6% in 1996 and 1995
and 7% in 1994. The provision is adjusted periodically based upon the Company's
quarterly evaluation of historical collection experience, recoveries of amounts
previously provided, industry reimbursement trends and other relevant factors.
Therefore, the provision rate could vary on a quarterly basis. NRMC collects
substantially all charges for patient services at the time services are
provided. Therefore, the provision for doubtful accounts for NRMC is not
significant.

         During 1995, as Tokos' revenues continued to decline, specific
decisions were made and communicated by management related to cost reduction
efforts. The cost reduction plan consisted of reductions in the workforce
(comprised of personnel within information systems, reimbursement,
administrative support and to a lesser extent clinical services) and termination
of several facility leases. In connection with these cost reduction activities,
Tokos incurred $2.456 million of restructuring costs in 1995. In connection with
the Merger, the Company incurred approximately $22.525 million of restructuring
costs which were charged to operations in 1996. Of these costs, approximately
$12.000 million related to involuntary severance and relocation of employees,
$2.500 million related to the consolidation of facilities, $5.400 million
related to the write-down of software and equipment that will be obsolete as a
result of the adoption of new systems, and $2.625 million related to other
miscellaneous Merger related costs.

         Tokos recorded income tax expense of $150,000 related to state
franchise taxes in 1995. No state franchise tax has been recorded in 1996.
Neither Tokos in 1995 nor the Company in 1996 recorded federal or state income
tax benefits. The net tax operating loss will be available to offset future
taxable income, if any.

LIQUIDITY AND CAPITAL RESOURCES

         As of December 31, 1996 the Company had cash and short-term investments
of $24.640 million.

         Net cash provided by operating activities was $4.833 million for 1996,
compared with $3.314 million provided in 1995 and $6.607 million provided in
1994. In 1996, net cash flow was reduced by payments of approximately $14.720
million for Merger related costs, $5.345 million for the settlement of a former
Tokos shareholders lawsuit and $5.947 million related to the purchase of NRMC.
Net cash used by investing activities was $3.588 million, $2.222 million and
$2.389 million in 1996, 1995 and 1994, respectively. The increase in 1996 is
primarily due to an increase in capital expenditures relating to the upgrade of
clinical computer systems at the Company's sites of service. It is anticipated
that the Company's capital expenditures in 1997 will not exceed those in 1996.
During 1995, Tokos purchased certain physician-owned companies for which it
originally provided services and during 1995 and the first quarter of 1996,
Healthdyne purchased the minority interest of certain affiliated partnerships.
Notes issued in connection with these acquisitions have a balance outstanding
of $1.831 million at December 31, 1996. The remaining balances are to be paid
at various times over the next four years.

                                       17

<PAGE>   18


         In July 1995, Tokos reached a $10.000 million settlement, subject to
court approval, with the plaintiffs in a class action securities lawsuit. Tokos
accrued an aggregate liability, net of insurance proceeds, of $5.750 million for
its portion of the settlement. Prior to the Merger, Tokos paid $750,000 toward
the settlement. Final court approval of the settlement was received in June 1996
and in July 1996 the Company made the final $5.000 million payment in cash,
together with accrued interest of $344,623.

         The Company incurred substantial costs in connection with the Merger.
These costs include: (I) restructuring costs incurred by the Company of
approximately $22.525 million, consisting of $12.000 million relating to
severance costs and relocations of employees, $2.500 million of lease
termination costs for duplicate facilities, $5.400 million for the write-off of
computer equipment and $2.625 million for other Merger-related expenses; (ii)
additional liabilities incurred by Healthdyne as a result of the Merger of
approximately $9.350 million, consisting of $9.200 million relating to severance
costs of terminated employees and $150,000 for patient service centers
specifically identified to be closed; and (iii) transaction costs of
approximately $3.700 million, consisting of $2.275 million for investment
banking fees, $1.000 million for legal and accounting fees and $425,000 for
other costs such as document printing and mailing and filing fees. As of
December 31, 1996 the remaining liability for these estimated costs was
approximately $14.000 million.

         Additionally, the Company may be required to make additional severance
payments of approximately $2.235 million in accordance with employment
agreements with certain officers of Tokos and Healthdyne, and may be required to
place in trust approximately $3.200 million under a retirement benefit awards
program for such officers.

         The Company believes that its current cash balances, including those
acquired from Healthdyne and NRMC, and expected cash flows from operations and
investing activities, will be sufficient to finance its current operations and
fund any expansion of NRMC's business for the foreseeable future.

         This Management's Discussion and Analysis contains forward-looking
statements including statements concerning expected increases in revenues
arising from the Merger, expected increased revenues arising from the marketing
of fetal fibronectin immunoassay, expected synergies arising from the Merger,
the effect of goodwill on the company's results of operations, capital
expenditures to be made in the future and the adequacy of the Company's sources
of cash to finance its current and future operations. These forward-looking
statements involve a number of risks and uncertainties. In addition to the
factors discussed above, among other factors that could cause actual results to
differ materially are the following: business conditions and growth in the home
healthcare industry and the general economy; competitive factors, such as the
possible entry of large diversified healthcare companies into the obstetrical
home healthcare business; new technologies and pricing pressures; changes in
third-party reimbursement policies and practices and regulatory requirements
applicable to the Company's business; the continued availability for sale of
existing products and services; management decisions to pursue new product lines
or lines of business which involve additional costs, risks or capital
expenditures; and the risk factors listed from time to time in the Company's SEC
reports, including but not limited to, its Annual Report on Form 10-K for the
year ended December 31, 1996.

                                      18

<PAGE>   19


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

         The following Consolidated Financial Statements of the Company and its
subsidiaries and independent auditors' report thereon are included as pages F-1
through F-25 of this Annual Report on Form 10-K:
                                                                            
                                                                       PAGE
Independent Auditors' Reports                                           F-1
                                                                        F-1A
                                                                              
Consolidated Balance Sheets - December 31, 1996 and 1995                F-2
                                                                              
Consolidated Statements of Operations - Years Ended                          
December 31, 1996, 1995 and 1994                                        F-4
                                                                              
Consolidated Statements of Shareholders' Equity - Years                       
Ended December 31, 1996, 1995 and 1994                                  F-5
                                                                              
Consolidated Statements of Cash Flows - Years Ended                           
December 31, 1996, 1995 and 1994                                        F-7
                                                                              
Notes to Consolidated Financial Statements                              F-9
                                                                              

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

     None.

                                    PART III

ITEMS 10-13.

         The information contained under the heading "Management of the Company"
in the Company's definitive proxy materials for its 1997 Annual Meeting of
Shareholders, to be filed with the Securities and Exchange Commission, is
incorporated by reference herein. Additional information relating to the
executive officers of the Company is included as a Special Item in Part I of
this Annual Report on Form 10-K

         For purposes of determining the aggregate market value of the Company's
common stock held by nonaffiliates, shares held by all directors and executive
officers of the Company have been excluded. The exclusion of such shares is not
intended to, and shall not, constitute a determination as to which persons may
be "affiliates" of the Company as defined by the Securities and Exchange
Commission.

         Based on a review of Forms 3, 4, and 5 and amendments thereto, provided
to the Company in order to determine compliance with individual filing
requirements of Section (16a) of the Securities Exchange Act of 1934 (the
"Act"), the Company is not aware of any applicable person who failed to comply
with the Act during the 1996 fiscal year.


                                      19
<PAGE>   20


                                     PART IV

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

         (a)(1)The following consolidated financial statements of the Company
and its subsidiaries and report of independent auditors thereon are included as
pages F-1 through F-25 of this Annual Report on Form 10-K:
                                                                      PAGE
Independent Auditors' Reports                                          F-1
                                                                       F-1A
                                                              
Consolidated Balance Sheets - December 31, 1996 and 1995               F-2
                                                              
Consolidated Statements of Operations - Years Ended           
December 31, 1996, 1995 and 1994                                       F-4
                                                              
Consolidated Statements of Shareholders' Equity - Years Ended 
December 31, 1996, 1995 and 1994                                       F-5
                                                              
Consolidated Statements of Cash Flows - Years Ended           
December 31, 1996, 1995 and 1994                                       F-7
                                                              
Notes to Consolidated Financial Statements                             F-9
                                                              

         (a)(2) The following supporting financial statement schedule and report
of independent auditors thereon are included as part of this Annual Report on
Form 10-K:

              Independent Auditors' Report.

              Schedule II - Valuation and Qualifying Accounts.

         All other Schedules are omitted because the required information is
inapplicable or information is presented in the Consolidated Financial
Statements or related notes.

         (a)(3) Exhibits:

         The following exhibits are incorporated by reference herein as part of
this Report as indicated:


      EXHIBIT         DESCRIPTION
      NUMBER
          2           Agreement and Plan of Merger, dated October 2, 1995, as
                      amended, between Healthdyne, Tokos and Registrant
                      (included as Appendix A to the Joint Proxy 
                      Statement/Prospectus filed as part of the Company's
                      Registration Statement No. 333-00781 on Form  S-4
                      (Registration No. 333-00781) filed February 7, 1996 (the
                      "Form S-4") and incorporated herein by reference).
          3.1         Amended and Restated Certificate of Incorporation
                      (included as Appendix D to 

                                      20

<PAGE>   21

                      the Joint Proxy Statement/Prospectus filed as a part of 
                      the Company's Form S-4 and incorporated herein by 
                      reference).
          3.2         Bylaws (included as Appendix E to the Joint Proxy
                      Statement/Prospectus filed as part of the Company's Form
                      S-4 and incorporated herein by reference).
          4.1         Indenture dated as of December 1, 1986, between Healthdyne
                      and National Bank of Georgia, trustee, for 8% Convertible
                      Subordinated Indentures due December 31, 2001 (filed as
                      Exhibit (4)(b) to the Healthdyne Annual Report on Form
                      10-K for the year ended December 31, 1986 and incorporated
                      herein by reference).
         10.1         Form of Rights  Agreement  between  Registrant and 
                      SunTrust Bank,  Atlanta (filed as Exhibit 10.1 to the
                      Company's Form S-4 and incorporated herein by reference).
         10.2         1996 Stock Incentive Plan (included as Appendix F-I to the
                      Joint Proxy Statement/Prospectus filed as a part of the
                      Company's Form S-4 and incorporated herein by reference).
         10.3         1996 Directors' Non-Qualified Stock Option Plan (included
                      as Appendix F-II to the Joint Proxy Statement/Prospectus
                      filed as a part of the Company's Form S-4 and incorporated
                      herein by reference).
         10.4         1996 Employee Stock Purchase Plan (included as Appendix
                      F-III to the Joint Proxy Statement/Prospectus filed as a
                      part of the Company's Form S-4 and incorporated herein by
                      reference).
         10.5         Corporate Services Agreement, dated as of April 21, 1995,
                      between Healthdyne and Healthdyne Technologies (filed as
                      Exhibit 10.21 to the Technologies Form 8-K and
                      incorporated herein by reference).
         10.6         Tax Indemnification Agreement, dated as of April 21, 1995,
                      between Healthdyne and Healthdyne Technologies (filed as
                      Exhibit 10.20 to the Technologies Form 8-K and
                      incorporated herein by reference).
         10.7         Tax Sharing Agreement, dated as of March 31, 1993, between
                      Healthdyne and Healthdyne Technologies (filed as an
                      Exhibit to the Registration Statement on Form S-1 of
                      Healthdyne Technologies (Registration No. 33-60708), dated
                      April 6, 1993, and incorporated herein by reference).
         10.8         Agreement Concerning Taxes, dated as of April 21, 1995, 
                      between Healthdyne, Healthdyne Technologies and Health 
                      Scan Products, Inc. (filed as an exhibit to the 
                      Technologies Form 8-K, and incorporated herein by 
                      reference).
         10.9         OEM Design and Manufacturing Agreement, dated as of April
                      21, 1995, between Healthdyne and Healthdyne Technologies
                      (filed as Exhibit 10.22 to the Technologies Form 8-K and
                      incorporated herein by reference).
         10.10        Distribution Agreement, dated as of October 20, 1995,  
                      between Healthdyne and Healthdyne Information 
                      Enterprises, Inc. ("HIE") (filed as Exhibit 2.1 to 
                      Amendment No. 1 to the Registration Statement on
                      Form S-1 of HIE (Registration No. 33-96478) dated 
                      October 24, 1995 (the "HIE Form S-1"), and incorporated 
                      herein by reference).
         10.11        Tax Indemnity Agreement, dated as of October 20, 1995,
                      between Healthdyne and HIE (filed as Exhibit 10.2 to
                      Amendment No. 1 to the HIE Form S-1 and incorporated
                      herein by reference).


                                      21


<PAGE>   22

         10.12        Tax Disaffiliation Agreement, dated as of October 20,
                      1995, between Healthdyne and HIE (filed as Exhibit 10.3 to
                      Amendment No. 1 to the HIE Form S-1 and incorporated
                      herein by reference).
         10.13        Severance Compensation and Restrictive Covenant Agreement,
                      dated October 2, 1995, between Healthdyne and Frank D.
                      Powers (filed as Exhibit 10.22 to the Company's Form S-4
                      and incorporated herein by reference).
         10.14        Form of Healthdyne Executive Non-qualified Retirement Plan
                      and Trust (filed as Exhibit (10) (qq) to the Healthdyne
                      Annual Report on Form 10-K for the year ended December 31,
                      1994 and incorporated herein by reference).
         10.15        Amendment No. 1 to Employment Agreement, dated as of
                      October 2, 1995, between Tokos and Robert F. Byrnes 
                      (filed as Exhibit 10.24 to the Company's Form S-4 and 
                      incorporated herein by reference).  
         10.16        Amendment No. 1 to Employment Agreement, dated as of 
                      October 2, 1995, between Tokos and Nicholas A.
                      Mione (filed as Exhibit 10.25 to the Company's Form S-4 
                      and incorporated herein by reference).
         10.17        Amendment No. 1 to Employment Agreement, dated as of 
                      October 2, 1995, between Tokos and Terry Bayer (filed as 
                      Exhibit 10.26 to the Company's Form S-4 and incorporated
                      herein by reference).
         10.18        Exclusive Marketing Agreement, dated December 31, 1991,
                      between Tokos and Adeza Biomedical Corporation (filed as
                      an Exhibit to the Tokos Annual Report on Form 10-K dated
                      March 27, 1992 with those portions omitted for
                      confidentiality reasons filed separately with the
                      Commission and incorporated herein by reference).
         10.19        Form of Tokos Executive Non-qualified Retirement Plan and
                      Trust (filed as Exhibit 10.29 to the Company's Form S-4 
                      and incorporated herein by reference).
         10.20        Employment Agreement, dated as of June 1, 1995, between
                      Tokos and Nicholas A. Mione (filed as Exhibit 10.30 to the
                      Company's Form S-4 and incorporated herein by reference).
         10.21        Employment Agreement, dated as of May 1, 1995, between
                      Tokos and Robert F. Byrnes (filed as Exhibit 10.31 to the
                      Company's Form S-4 incorporated herein by reference).
         10.22        Employment Agreement, dated as of January 1, 1995, between
                      Tokos and Terry P. Bayer (filed as Exhibit to the
                      Company's Form S-4 and incorporated herein by reference).
         10.23        Amended and Restated Severance Compensation and
                      Restrictive Covenant Agreement, dated October 2, 1995,
                      between Healthdyne and Parker H. Petit (filed as Exhibit
                      (10)(ggg) to the Healthdyne Quarterly Report on Form 10-Q
                      for the period ended September 30, 1995 and incorporated
                      herein by reference).
         10.24        Amended and Restated Severance Compensation and
                      Restrictive Covenant Agreement, dated October 2, 1995,
                      between Healthdyne and J. Brent Burkey (filed as Exhibit
                      (10)(ddd) to the Healthdyne Quarterly Report on Form 10-Q
                      for the period ended September 30, 1995 and incorporated
                      herein by reference).
         10.25        Amended and Restated Severance Compensation and
                      Restrictive Covenant Agreement, dated October 2, 1995,
                      between Healthdyne and Donald R. Millard (filed as Exhibit
                      (10)(fff) to the Healthdyne Quarterly Report on Form 10-Q
                      for the 

                                      22
<PAGE>   23

                      period ended September 30, 1995 and incorporated
                      herein by reference).
         10.26        Form of Promissory Note with Tokos officers and related
                      Security Agreement (filed as an Exhibit to the Tokos
                      Registration Statement on Form S-1 (Registration No.
                      33-33340) and incorporated herein by reference).
         10.27        Amended and Restated Severance Compensation and
                      Restrictive Covenant Agreement, dated October 2, 1995,
                      between Healthdyne and J. Terry Dewberry (filed as Exhibit
                      (10)(eee) to the Healthdyne Quarterly Report on Form 10-Q
                      for the period ended September 30, 1995 and incorporated
                      herein by reference).
         10.28        Amended and Restated Severance Compensation and
                      Restrictive Covenant Agreement dated October 2, 1995,
                      between Healthdyne and J. Paul Yokubinas (filed as Exhibit
                      (10)(hhh) to the Healthdyne Quarterly Report on Form 10-Q
                      for the period ended September 30, 1995 and incorporated
                      herein by reference).
         10.29        Agreement and Plan of Merger, dated June 24, 1996, between
                      National Reproductive Medical Centers, Inc. ("NRMC"),
                      Matria, NRMC Acquisition Corporation and certain NRMC
                      shareholders (filed as Exhibit 2.1 to the Matria Current
                      Report on Form 8-K dated July 10, 1996).
         10.30        Shareholders Agreement, dated February 28, 1995, among
                      Healthdyne, Inc. (a predecessor of Matria), certain
                      shareholders of National Reproductive Medical Centers,
                      Inc. ("NRMC") and NRMC (filed as Exhibit 99.3 to the
                      Matria Current Report on Form 8-K dated July 10, 1996).


     The following exhibits are incorporated by reference herein from the
Company's Annual Report on Form 10-K for the year ended December 31, 1995 as
part of this Report:

         3.1          Restated Certificate of Incorporation.
         4.3          Supplemental Indenture dated March 7, 1996, between the
                      Company and SouthTrust Estate & Trust Company of Georgia,
                      N.A., Trustee to Indenture, dated December 1, 1986, for 8%
                      Convertible Subordinated Debentures due December 31, 2001.

     The following exhibits are filed as part of this Report:

         10.31        Amendment No. 1 dated May 8, 1996 to Exclusive Marketing
                      Agreement, dated December 31, 1991, between Tokos and 
                      Adeza Biomedical Corporation.
         21.0         List of Subsidiaries.
         23.0         Accountants' Consents to incorporation by reference in 
                      the Company's Registration Statements Nos. 333-781, 
                      333-02283 and 333-11143.
         27.0         Financial Data Schedule (for SEC use only)
      (b.)            Reports on Form 8-K.
                      None.



                                      23
<PAGE>   24


                                   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.

                                 MATRIA HEALTHCARE, INC.


March 24, 1997                   By: /s/ Parker H. Petit
                                    ------------------------------------------
                                    Parker H. Petit, Chairman of the
                                    Board and Office of the President


March 24, 1997                   By: /s/ Robert F. Byrnes
                                    ------------------------------------------
                                    Robert F. Byrnes, Office of the President


March 24, 1997                   BY: /s/ Donald R. Millard
                                    ------------------------------------------
                                    Donald R. Millard, Office of the President,
                                    Senior Vice President-Finance, Chief
                                    Financial Officer and Treasurer
                                    (Principal Financial and Accounting
                                    Officer)


                  KNOW ALL MEN BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Donald R. Millard as his or her
true and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for and in his or her name, place and stead, in any and all
capacities, to sign any and all amendments to this Annual Report on Form l0-K,
and to file the same, with all exhibits thereto, and other documents in
connection therewith with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent full power and authority to do and to perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully and to all intents and purposes as he or she might or would
do in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.

                  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/ Parker H. Petit                  Director                   March 24, 1997
----------------------- 
Parker H. Petit


/s/ Robert F. Byrnes                 Director                   March 24, 1997
-----------------------
Robert F. Byrnes


/s/ Craig T. Davenport               Director                   March 24, 1997
-----------------------
Craig T. Davenport

                                      24
<PAGE>   25

                                     
       Signature                     Title                     Date



                                     
/s/ Thomas W. Erickson               Director                  March 24,1997
-----------------------------
Thomas W. Erickson


/s/ David L. Goldsmith               Director                  March 24, 1997
-----------------------------
David L. Goldsmith

                                     
-----------------------------        Director                  March 24, 1997
Carl E. Sanders


-----------------------------        Director                  March 24, 1997
Jacquelyn M. Ward

                                     
/s/ Morris S. Weeden                 Director                  March 24, 1997
-----------------------------
Morris S. Weeden

                                                               
/s/ Frederick P. Zuspan, M.D.        Director                  March 24, 1997
-----------------------------
Frederick P. Zuspan, M.D.


                                      25

<PAGE>   26


                          INDEPENDENT AUDITORS' REPORT


The Board of Directors and Shareholders
Matria Healthcare, Inc.:


We have audited the accompanying consolidated balance sheet of Matria
Healthcare, Inc. (formerly Tokos Medical Corporation (Delaware)) and
subsidiaries as of December 31, 1996, and the related consolidated statements
of operations, shareholders' equity, and cash flows for the year then ended.
These consolidated financial statements are the responsibility of the Company's
management.  Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.  The accompanying financial statements
of Matria Healthcare, Inc. as of December 31, 1995, and for the two years then
ended, were audited by other auditors whose report thereon dated February 22,
1996 expressed an unqualified opinion on those statements.

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

In our opinion, the 1996 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Matria
Healthcare, Inc. and subsidiaries as of December 31, 1996, and the results of
their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles.




                                                        KPMG PEAT MARWICK LLP

Atlanta, Georgia
March 7, 1997

                                      F-1

<PAGE>   27
                         REPORT OF INDEPENDENT AUDITORS


Shareholders and Board of Directors
Tokos Medical Corporation (Delaware)


We have audited the consolidated balance sheets of Tokos Medical Corporation
(Delaware) and subsidiaries as of December 31, 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the two years in the period then ended.  Our audits also included the
financial statement schedule listed in the index at item 14(a).  These
financial statements and schedule are the responsibility of the Company's
management.  Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
from 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, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Tokos
Medical Corporation (Delaware) at December 31, 1995, and the consolidated
results of its operations and its cash flows for each of the two years in the
period then ended in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.



                                             /s/ ERNST & YOUNG LLP
                                     --------------------------------------


Orange County, California
February 22, 1996, except for Note 13,
as to which the date is March 8, 1996



                                      F-1a
<PAGE>   28


                    MATRIA HEALTHCARE, INC. AND SUBSIDIARIES

                          Consolidated Balance Sheets

                (Amounts in thousands, except per share amounts)



<TABLE>
<CAPTION>
                                                                  December 31,
                                                                ----------------
                            Assets                                1996     1995
                            ------                              --------  ------
<S>                                                             <C>       <C>

Current assets:
  Cash and cash equivalents (note 9)                              $6,930   4,422
  Short-term investments (note 9)                                 17,710   3,273
  Trade accounts receivable, less allowances of $26,198 and
    $20,296 at December 31, 1996 and 1995, respectively           29,456  17,490
  Inventories                                                        867   1,356
  Prepaid expenses and other current assets                        1,628   1,449
                                                                --------  ------
          Total current assets                                    56,591  27,990

Property and equipment, net (note 3)                              15,220   7,610
Excess of cost over net assets of businesses acquired,
  less accumulated amortization of $29,804 and $1,967 at
  December 31, 1996 and 1995, respectively (note 2)              142,126   4,556
Intangible assets, less accumulated amortization of $2,222 and
  $587 at December 31, 1996 and 1995, respectively (note 2)        5,973   1,034
Other assets                                                       3,278   3,278
                                                                --------  ------
                                                                $223,188  44,468
                                                                ========  ======
</TABLE>



See accompanying notes to consolidated financial statements.

                                      F-2
<PAGE>   29

<TABLE>
<CAPTION>
                                                                    December 31,
                                                                 -------------------
             Liabilities and Shareholders' Equity                  1996       1995
             ------------------------------------                ---------  --------
<S>                                                              <C>        <C>

Current liabilities:
  Current installments of long-term debt and obligations
    under capital leases(notes 2, 4, 9, and 11)                  $   2,521     1,914
  Accounts payable, principally trade                                6,486     2,560
  Accrued liabilities (notes 5 and 10)                              25,559     6,695
                                                                 ---------  --------
        Total current liabilities                                   34,566    11,169

Long-term debt and obligations under capital leases, excluding
  current installments (notes 2, 4, 9, and 11)                       2,499     2,078
Accrued pension cost (note 8)                                        4,096         -
Other long-term liabilities                                          8,849     1,732
                                                                 ---------  --------
        Total liabilities                                           50,010    14,979
                                                                 ---------  --------

Shareholders' equity (note 7):
  Preferred stock, $.01 and $.001 par value at December 31,
    1996 and 1995, respectively.  Authorized 50,000 and
    2,000 shares at December 31, 1996 and 1995, respectively;
    none issued                                                          -         -
  Common stock, $.01 and $.001 par value at December 31,
    1996 and 1995, respectively.  Authorized 100,000 and
    60,000 shares at December 31, 1996 and 1995, respectively;
    issued 36,318 and 17,661 shares at December 31, 1996 and
    1995, respectively; outstanding 36,318 and 17,549 shares at
    December 31, 1996 and 1995, respectively                           363        18
  Additional paid-in capital                                       281,318    87,608
  Accumulated deficit                                            (105,089)  (53,968)
  Notes receivable and accrued interest from officers              (3,414)   (3,630)
  Treasury stock, at cost                                                -     (539)
                                                                 ---------  --------
        Total shareholders' equity                                 173,178    29,489

Commitments and contingencies (notes 8, 11, and 12)
                                                                 ---------  --------

                                                                  $223,188    44,468
                                                                 =========  ========
</TABLE>



                                      F-3
<PAGE>   30


                    MATRIA HEALTHCARE, INC. AND SUBSIDIARIES

                     Consolidated Statements of Operations

                (Amounts in thousands, except per share amounts)



<TABLE>
<CAPTION>
                                                    Years ended December 31,
                                                  ----------------------------
                                                    1996      1995      1994
                                                  --------  --------  --------
 <S>                                              <C>       <C>       <C>

 Revenues                                         $130,806    85,209    98,565
 Cost of revenues                                   55,911    35,017    39,216
 Selling and administrative expenses                66,493    48,460    55,807
 Provision for doubtful accounts                     7,591     5,251     7,042
 Research and development expenses                     282       513     1,617
 Amortization of goodwill and intangibles           30,083     1,235       350
 Restructuring expenses (note 10)                   22,525     2,456         -
 Settlement of litigation (note 12)                      -     4,300         -
                                                  --------  --------  --------
         Operating loss                            (52,079)  (12,023)   (5,467)

 Interest income                                     1,177       848       461
 Interest expense                                     (353)     (515)     (411)
 Other income, net                                     134        46       108
                                                  --------  --------  --------
         Loss before income tax expense            (51,121)  (11,644)   (5,309)

 Income tax expense (note 6)                             -       150       550
                                                  --------  --------  --------

         Net loss                                 $(51,121)  (11,794)   (5,859)
                                                  ========  ========  ========

 Net loss per common share                        $  (1.58)     (.68)     (.34)
                                                  ========  ========  ========

 Weighted average number of common shares           32,328    17,396    17,169
                                                  ========  ========  ========
</TABLE>



See accompanying notes to consolidated financial statements.

                                      F-4
<PAGE>   31


                    MATRIA HEALTHCARE, INC. AND SUBSIDIARIES

                Consolidated Statements of Shareholders' Equity

                       (Amounts and shares in thousands)



<TABLE>
<CAPTION>
                                                                               
                                                                               Notes
                                                                             receivable                           
                                    Common stock   Additional                and accrued    Treasury stock        Total
                                   --------------   paid-in    Accumulated  interest from  -----------------  shareholders'
                                   Shares  Amount   capital      deficit      officers     Shares    Amount      equity
                                   ------  ------  ----------  -----------  -------------  -------  --------  -------------
<S>                                <C>     <C>     <C>         <C>          <C>            <C>      <C>       <C>

Balance, December 31, 1993         17,376  $   17      86,413      (36,094)       (2,306)    (235)  $(1,155)         46,875
Issuance of common stock -
  exercise of options                  31       -          95            -             -        -         -              95
Issuance of treasury stock to
  employee stock purchase plan
  and other stock awards                -       -           -         (173)            -       89       447             274
Treasury stock purchased                -       -           -            -             -      (10)      (50)            (50)
Acceptance of note receivable
  from officer                          -       -           -            -        (1,012)       -         -          (1,012)
Accrued interest on officer notes       -       -           -            -          (174)       -         -            (174)
Other equity transactions               4       -          11            -             -        -         -              11
Net loss                                -       -           -       (5,859)            -        -         -          (5,859)
                                   ------  ------  ----------  -----------  ------------   -------  --------  -------------
Balance, December 31, 1994         17,411      17      86,519      (42,126)       (3,492)    (156)     (758)         40,160

Issuance of common stock -
  exercise of options                 250       1       1,089            -             -        -         -           1,090
Issuance of treasury stock to
  employee stock purchase plan
  and other stock awards                -       -           -          (48)            -       44       219             171
Acceptance of note receivable
  from officer                          -       -           -            -           (80)       -         -             (80)
Payment on note receivable
  from officers                         -       -           -            -           122        -         -             122
Accrued interest on officer notes       -       -           -            -          (180)       -         -            (180)
Net loss                                -       -           -      (11,794)            -        -         -         (11,794)
                                   ------  ------  ----------  -----------  ------------   -------  --------  -------------

Balance, December 31, 1995         17,661  $   18      87,608      (53,968)       (3,630)    (112)  $  (539)         29,489
                                   ======  ======  ==========  ===========   ===========   ======   =======   =============
</TABLE>


                                                                     (Continued)

                                      F-5
<PAGE>   32


                    MATRIA HEALTHCARE, INC. AND SUBSIDIARIES

                Consolidated Statements of Shareholders' Equity

                       (Amounts and shares in thousands)



<TABLE>
<CAPTION>
                                                                                         
                                                                                Notes    
                                                                             receivable                                   
                                       Common stock   Additional            and accrued    Treasury stock       Total    
                                      --------------  paid-in  Accumulated  interest from  ----------------  shareholders'
                                      Shares  Amount  capital    deficit      officers     Shares   Amount      equity
                                      ------  ------  -------  -----------  -------------  -------  -------  -------------
<S>                                   <C>     <C>     <C>      <C>          <C>            <C>      <C>      <C>

Balance, December 31, 1995            17,661     $18   87,608      (53,968)        (3,630)    (112)   $(539)        29,489
Issuance of common stock:
  Acquisition of Healthdyne, Inc.     17,007     170  182,826            -              -        -        -        182,996
  Exercise of options                    824       7    4,298            -              -        -        -          4,305
  Employee Stock Purchase Plan            33       -      214            -              -        -        -            214
  Conversion of subordinated
    debentures                             9       -       43            -              -        -        -             43
  Acquisition of National
    Reproductive Medical
    Center, Inc.                         899       9    7,112            -              -        -        -          7,121
  Payment on debt resulting from
    acquisition of minority interest
    of partnerships                       40       -      335            -              -        -        -            335
Change in par value of common stock        -     159     (159)           -              -        -        -              -
Purchase of treasury stock                 -       -        -            -              -       43     (420)          (420)
Cancellation of treasury stock          (155)      -     (959)           -              -      155      959              -
Payment on note receivable from
  officers                                 -       -        -            -            350        -        -            350
Accrued interest on officer notes          -       -        -            -           (134)       -        -           (134)
Net loss                                   -       -        -      (51,121)             -        -        -        (51,121)
                                      ------  ------  -------  -----------  -------------  -------  -------  -------------

Balance, December 31, 1996            36,318    $363  281,318     (105,089)        (3,414)       -       $-        173,178
                                      ======  ======  =======  ===========  =============  =======  =======  =============
</TABLE>



See accompanying notes to consolidated financial statements.


                                      F-6
<PAGE>   33
                    MATRIA HEALTHCARE, INC. AND SUBSIDIARIES

                     Consolidated Statements of Cash Flows

                             (Amounts in thousands)



<TABLE>
<CAPTION>
                                                               Years ended December 31,
                                                             -----------------------------
                                                               1996       1995      1994
                                                             ---------  --------  --------
<S>                                                          <C>        <C>        <C>

Cash flows from operating activities:
  Net loss                                                   $(51,121)  (11,794)   (5,859)
  Adjustments to reconcile net loss to net cash provided by
    operating activities:
     Depreciation and amortization                             34,263     6,019     6,842
     Provision for doubtful accounts                            7,591     5,251     7,042
     Settlement of shareholder litigation                           -     4,300         -
     Reserve for patient service equipment, patient
        monitoring devices, and investments in other
        healthcare entities                                         -       625         -
     Accrued interest on officer notes                           (134)     (180)     (174)
     Write-off of intangible assets                               990         -         -
     Loss on sale of fixed assets                                 493         -         -
     Minority interest in net earnings of partnerships            151         -         -
     Sales (purchases) of short-term investments               15,656       235       (73)
     Other                                                          -       145         8
   (Increase) decrease in:
     Trade accounts receivable                                 (8,598)      795    (1,919)      
     Inventories                                                1,230       (96)     (214)      
     Prepaid expenses and other current assets                  3,582     1,022     4,584      
     Other assets                                               1,469      (615)     (214)      
   Increase (decrease):                                                                         
     Accounts payable                                           2,388      (693)       41      
     Accrued and other liabilities                             (3,127)   (1,700)   (3,457)      
                                                             --------   -------   -------       
           Net cash provided by operating activities            4,833     3,314     6,607      
                                                             --------   -------   -------      
                                                                                                
Cash flows from investing activities:                                                           
  Acquisition of physician-owned companies, net of                                              
    cash acquired                                                (567)     (865)     (435)      
  Acquisition of businesses, net of cash acquired              (3,414)        -         -      
  Purchases of property and equipment                          (3,868)   (1,357)   (1,954)      
  Proceeds from disposal of property and equipment              4,261         -         -      
                                                             ---------  -------    ------      
           Net cash used in investing activities               (3,588)   (2,222)   (2,389)      
                                                             ---------  -------    ------      
</TABLE>

                                                                     (Continued)

                                      F-7

<PAGE>   34
                    MATRIA HEALTHCARE, INC. AND SUBSIDIARIES

                     Consolidated Statements of Cash Flows

                             (Amounts in thousands)



<TABLE>
<CAPTION>
                                                                                       Years ended December 31,
                                                                                     ----------------------------
                                                                                      1996       1995       1994
                                                                                     ------     ------    ------ 
<S>                                                                                  <C>       <C>       <C>
Cash flows from financing activities:
  Proceeds from issuance of long-term debt                                            1,542         -         -
  Principal repayments of long-term debt and obligations
    under capital leases                                                             (4,501)   (7,122)   (3,096)
  Proceeds from issuance of common stock                                              4,519     1,210       250
  Purchase of treasury stock                                                           (420)        -       (50)
  Treasury stock issued                                                                   -       219       447
  Treasury stock contributions to employee stock purchase plan                            -      (168)     (327)
  Acceptance of note receivable from officers                                             -       (80)   (1,012)
  Proceeds from payments on notes receivable from officers                              350       122         -
  Distributions to minority interest in partnerships                                   (227)        -         -
  Other long-term debt and equity transactions                                            -         -         9
                                                                                    -------  --------  --------
Net cash provided by (used in) financing activities                                   1,263    (5,819)   (3,779)
                                                                                    -------  --------  --------
           Net increase (decrease) in cash and short-term
              investments                                                             2,508    (4,727)      439

Cash and cash equivalents at beginning of year                                        4,422     9,149     8,710
                                                                                    -------  --------  --------
Cash and cash equivalents at end of year                                           $  6,930     4,422     9,149
                                                                                    =======  ========  ========
Supplemental disclosures of cash paid for:
  Interest                                                                         $    382       341       416
                                                                                    =======  ========  ========
  Income taxes                                                                     $     96        96       336
                                                                                    =======  ========  ========
Supplemental disclosures of noncash investing and
  financing activities:
    Conversion of 8% convertible subordinated
      debentures                                                                   $     43         -         -
                                                                                    =======  ========  ========
    Common stock issued for payment on debt
      resulting from acquisition of minority
      interest of partnerships                                                     $    335         -         -
                                                                                    =======  ========  ========

    Equipment acquired under capital
      lease obligations                                                             $   292       604         - 
                                                                                    =======  ========  ========
</TABLE>



See accompanying notes to consolidated financial statements.


                                       F-8
<PAGE>   35


                    MATRIA HEALTHCARE, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

           (Amounts in thousands, except share and per share amounts)

                       December 31, 1996, 1995, and 1994


(1)  Summary of Significant Accounting Policies

  (a)  Business

       On March 8, 1996, Tokos Medical Corporation (Delaware)  - ("Tokos") and
       Healthdyne, Inc. ("Healthdyne") merged with and into Matria Healthcare,
       Inc. ("Matria" or the "Company"), a Delaware corporation created solely
       for the purpose of the merger.  Pursuant to the terms of the Agreement
       and Plan of Merger, dated October 2, 1995, as amended, each share of
       Tokos and Healthdyne common stock outstanding on March 8, 1996 was
       exchanged for one share of Matria common stock.  Based on the
       outstanding shares of the respective companies, Tokos shareholders
       received approximately 51% of the combined shares of Matria common stock
       (see note 2).

       The Company is a nationwide provider of specialized obstetrical home
       healthcare, home pregnancy monitoring, and risk assessment services
       which assist physicians and payors in the management of high-risk
       pregnancies and numerous other obstetrical and gynecological conditions.
       The Company also provides diagnosis and treatment of fertility
       disorders.

  (b)  Basis of Financial Statement Presentation

       The consolidated financial statements have been prepared in conformity
       with generally accepted accounting principles.  In preparing the
       consolidated financial statements, management is required to make
       estimates and assumptions that affect the reported amounts of assets and
       liabilities as of the date of the consolidated balance sheet and income
       and expenses for the period.  Actual results could differ from those
       estimates.

       The consolidated financial statements include the accounts of Matria
       Healthcare, Inc. and all of its majority owned subsidiaries and
       partnerships.  All significant intercompany balances and transactions
       have been eliminated in consolidation.

  (c)  Revenue and Allowances for Uncollectible Accounts

       Revenues are generated from the Company's own patient service centers,
       the rental of medical products, and fees from patient service operations
       managed by the Company.  Revenues are recognized as the related services
       are rendered and are net of estimated contractual allowances which the
       Company makes and adjusts from time to time to reflect its estimates,
       based on historical collection experience, including recoveries in excess
       of amounts previously estimated, of the difference between amounts billed
       and amounts which it has or expects to receive in full settlement from
       primary third-party payors, secondary payors, and patients.  Accordingly,
       the ultimate collectibility of a substantial portion of the Company's
       trade accounts receivable is susceptible to changes in third-party
       reimbursement policies.


                                                                (Continued)
                                      F-9
<PAGE>   36


                    MATRIA HEALTHCARE, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

           (Amounts in thousands, except share and per share amounts)


       A provision for doubtful accounts is made for revenues estimated to be
       uncollectible and is adjusted periodically based upon the Company's
       evaluation of current industry conditions, historical collection
       experience, and other relevant factors which, in the opinion of
       management, deserve recognition in estimating the allowance for
       uncollectible accounts.

  (d)  Concentration of Credit Risk

       Financial instruments which potentially expose the Company to
       concentrations of credit risk consist primarily of cash and equivalents,
       short-term investments, and accounts receivable with third-party payors.
       The Company invests its available cash in debt instruments of the
       United States Government and municipal bonds.  The Company has
       established guidelines relative to diversification and maturities that
       maintain safety and liquidity.  These guidelines are periodically
       reviewed and modified to take advantage of trends in yields and interest
       rates.  The collectibility of accounts receivable from third-party
       payors is directly affected by conditions and changes in the insurance
       industry and governmental programs, which are taken into account by the
       Company in computing and evaluating its allowance for doubtful accounts.

  (e)  Cash and Cash Equivalents

       Cash and cash equivalents consist of cash and interest-bearing deposits.
       For purposes of the statements of cash flows, the Company considers all
       highly liquid debt instruments with original maturities of three months
       or less to be cash equivalents.

  (f)  Short-Term Investments

       Short-term investments consist of United States Government and municipal
       bonds.  Under the provisions of Statement of Financial Accounting
       Standards No. 115, Accounting for Certain Investments in Debt and Equity
       Securities, the Company classifies its short-term investments as trading
       securities which are carried at fair value with any unrealized gains and
       losses included in earnings.  Unrealized gains (losses) of $(131), $101,
       and $(73) are included in the consolidated statements of operations for
       the years ended December 31, 1996, 1995, and 1994, respectively.

  (g)  Inventories

       Inventories are stated at the lower of cost (first-in, first-out) or
       market (net realizable value).

  (h)  Property and Equipment

       Property and equipment are stated at cost, less accumulated depreciation
       and amortization.  Depreciation is provided primarily on the
       straight-line method over the estimated useful lives of the assets
       ranging from three to ten years.  Amortization of leasehold improvements
       and leased equipment is recorded over the shorter of the lives of the
       related assets or the lease terms.


                                                                (Continued)
                                      F-10
<PAGE>   37


                    MATRIA HEALTHCARE, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

           (Amounts in thousands, except share and per share amounts)


  (i)  Excess of Cost Over Net Assets of Businesses Acquired

       The excess of cost over net assets of businesses acquired (goodwill) is
       being amortized using the straight-line method over periods ranging from
       5 to 20 years.  At each balance sheet date, the Company assesses the
       recoverability of goodwill by determining whether the amortization of
       the goodwill balance over its remaining life can be recovered through
       undiscounted future operating cash flows of the acquired operation.  The
       amount of goodwill impairment, if any, is measured based upon projected
       discounted future operating cash flows using a discount rate reflecting
       the Company's average cost of funds.

  (j)  Intangible Assets

       Intangible assets consist of purchased software and covenants not to
       compete.  These costs are being amortized on a straight-line basis over
       a period of three years.

  (k)  Stock Option Plans

       Prior to January 1, 1996, the Company accounted for its stock option
       plans in accordance with the provisions of Accounting Principles Board
       ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and
       related interpretations.  As such, compensation expense to be recognized
       over the related vesting period would generally be determined on the date
       of grant only if the current market price of the underlying stock
       exceeded the exercise price.  On January 1, 1996, the Company adopted
       Statement of Financial Accounting Standards No. 123, Accounting for
       Stock-Based Compensation ("SFAS 123"), which permits entities to
       recognize as expense over the vesting period the fair value of all
       stock-based awards on the date of grant.  Alternatively, SFAS 123 also
       allows entities to continue to apply the provisions of APB Opinion No. 25
       and provide pro forma net earnings (loss) and pro forma earnings (loss)
       per share disclosures for employee stock option grants made in 1995 and
       future years as if the fair-value based method defined in SFAS 123 had
       been applied.  The Company has elected to continue to apply the
       provisions of APB Opinion No. 25 and provide the pro forma disclosure
       provisions of SFAS 123 (see note 7).


                                                                (Continued)
                                      F-11
<PAGE>   38


                    MATRIA HEALTHCARE, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

           (Amounts in thousands, except share and per share amounts)


  (l)  Impairment of Long-Lived Assets and Long-Lived Assets to Be
       Disposed Of

       The Company adopted the provisions of SFAS No. 121, Accounting for the
       Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
       Of, on January 1, 1996.  This Statement requires that long-lived assets
       and certain identifiable intangibles be reviewed for impairment whenever
       events or changes in circumstances indicate that the carrying amount of
       an asset may not be recoverable.  Recoverability of assets to be held
       and used is measured by a comparison of the carrying amount of an asset
       to future net cash flows expected to be generated by the asset.  If such
       assets are considered to be impaired, the impairment to be recognized is
       measured by the amount by which the carrying amount of the assets exceed
       the fair value of the assets.  Assets to be disposed of are reported at
       the lower of the carrying amount or fair value less costs to sell.
       Adoption of this Statement did not have a material impact on the
       Company's financial position, results of operations, or liquidity.

  (m)  Income Taxes

       The Company accounts for income taxes using an asset and liability
       approach in accordance with Statement of Financial Accounting Standards
       No. 109 ("SFAS 109").  Under SFAS 109, deferred income taxes are
       recognized for the tax consequences of "temporary differences" by
       applying enacted statutory tax rates applicable to future years to
       differences between the financial statement carrying amounts and the tax
       bases of existing assets and liabilities.  Additionally, the effect on
       deferred taxes of a change in tax rates is recognized in earnings in the
       period that includes the enactment date.

       Investment and research and experimental tax credits are accounted for
       on the flow-through method.

  (n)  Net Loss Per Share of Common Stock

       The net loss per common share was computed by dividing the net loss for
       the year by the weighted average number of shares of common stock
       outstanding.  Outstanding stock options have been excluded from the
       computation as these options are anti-dilutive.

  (o)  Reclassifications

       Certain amounts in the 1995 and 1994 consolidated financial statements
       have been reclassified to conform to presentations adopted in 1996.
       Included in these reclassifications are the assets and liabilities of a
       subsidiary to be sold in 1997 which have been reclassified to prepaid
       expenses and other current assets.


                                                                (Continued)
                                      F-12
<PAGE>   39


                    MATRIA HEALTHCARE, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

           (Amounts in thousands, except share and per share amounts)


(2) Acquisitions

    As discussed in note 1(a), on March 8, 1996, Tokos and Healthdyne merged
    with and into Matria (the "Merger") with Tokos deemed to be the acquirer
    since Tokos shareholders received the majority of Matria common stock. The
    purchase price of Healthdyne was based upon the number of shares of
    Healthdyne common stock (including options to purchase shares of Healthdyne
    common stock) outstanding on the date the Merger was consummated and the
    average trading value of Tokos common stock for two trading days
    immediately prior to and two trading days immediately after the
    announcement date of the Merger.  17,007,000 shares of Matria common stock
    with a value of $182,996 were issued to Healthdyne shareholders.  The
    Merger was accounted for in accordance with the purchase method of
    accounting with the results of operations of the business acquired included
    from the effective date of the acquisition.  The acquisition resulted in
    purchased software of $5,000, executive noncompete agreements of $3,000,
    and cost over net assets acquired of $149,731.

    The purchased fair value of the net tangible assets of Healthdyne included
    $9,150 of estimated severance payments for Healthdyne employees resulting
    from the merger, and $200 of facilities costs for patient service centers
    specifically identified to be closed. Accrued severance costs of $4,597
    remained at December 31, 1996.

    In February 1995, Healthdyne converted a $250 note receivable from National
    Reproductive Medical Center, Inc. ("NRMC"), a California fertility clinic,
    into 14,280 shares of NRMC's Series C convertible preferred stock and
    acquired an additional 57,120 shares of NRMC's Series C convertible
    preferred stock for $1,000.  Assuming a conversion ratio of preferred to
    common stock of 1:1, the 71,400 shares acquired constituted approximately
    11.11% of the fully diluted common shares of NRMC.  In June 1996, the
    Company exercised an option to acquire the remaining outstanding stock of
    NRMC for $5,697 in cash and 899,000 shares of Matria common stock with a
    value of $7,121 on the date of acquisition.  This acquisition was accounted
    for using the purchase method of accounting with the results of operations
    of the business acquired included from the effective date of the
    acquisition.  The acquisition resulted in excess of cost over net assets
    acquired of approximately $15,053.

    Unaudited pro forma results of operations as if Healthdyne and NRMC had
    been acquired January 1, 1995 are as follows: 


<TABLE>
<CAPTION>
                                          Years ended December 31,
                                         -------------------------- 
                                            1996          1995 
                                         ------------  ------------
<S>                                       <C>           <C>
                  Revenues                $147,732       169,715
                  Net loss                 (58,011)      (45,785)
                  Net loss per share         (1.63)        (1.30)
</TABLE>


    The following is a summary of assets acquired, liabilities assumed, and
    consideration paid in connection with these 1996 acquisitions:


<TABLE>
<CAPTION>
                                                        Healthdyne   NRMC
                                                        ----------  -------
     <S>                                                <C>         <C>

     Fair value of assets acquired, including goodwill   $ 221,436   17,970
     Cash paid for the assets acquired                           -   (5,447)
     Common stock issued for the assets acquired          (182,997)  (7,121)
     Acquisition costs paid                                 (3,700)    (250)
                                                        ----------  -------

     Liabilities assumed                                 $  34,739    5,152
                                                        ==========  =======
</TABLE>



                                                                (Continued)
                                      F-13
<PAGE>   40


                    MATRIA HEALTHCARE, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

           (Amounts in thousands, except share and per share amounts)


    The Company had previously entered into agreements with certain
    physician-owned companies to provide its basic core high-risk pregnancy and
    related healthcare services to the patients of the companies for a fee.
    During 1996 and 1995, the Company purchased certain of these
    physician-owned companies for $611 and $1,094 in cash and $179 and $1,475
    in notes payable, respectively.  These acquisitions were accounted for
    using the purchase method of accounting with the results of operations of
    the businesses acquired included from the effective date of the
    acquisitions.  The acquisitions resulted in excess of cost over net assets
    acquired of approximately $746 and $1,679 for 1996 and 1995, respectively.

(3) Property and Equipment

    Property and equipment are summarized as follows:


<TABLE>
<CAPTION>
                                                         December 31,
                                                        ---------------
                                                         1996     1995
                                                        -------  ------
        <S>                                             <C>      <C>

        Rental assets                                   $17,493   6,849
        Machinery, equipment, and fixtures               13,926  15,585
        Leasehold improvements                            1,794   1,116
                                                        -------  ------
                                                         33,213  23,550
        Less accumulated depreciation and amortization   17,993  15,940
                                                        -------  ------

                                                        $15,220   7,610
                                                        =======  ======
</TABLE>

                                                                (Continued)
                                      F-14
<PAGE>   41
                    MATRIA HEALTHCARE, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

           (Amounts in thousands, except share and per share amounts)


(4)  Long-Term Debt


<TABLE>
 <S>                                                             <C>     <C>
 Long-term debt is summarized as follows:
                                                                 December 31,
                                                                 --------------
                                                                 1996    1995
                                                                 ------  ------

 Convertible subordinated debentures and note (net of
   discount of $128 at December 31, 1996); interest at 8%
   payable annually; maturing on December 31, 2001;
   convertible into the Company's common stock at $4.90
   per share; redeemable by the Company at face value            $1,294       -
 Unsecured promissory note issued in connection with buyout
   of minority partnership interest; interest at 9% payable
   annually; principal payable in annual installments
   through August 1997                                              200       -
 Unsecured, noninterest-bearing obligations incurred in
   connection with buyout of physician-owned companies;
   payable at various dates through June 1999                     1,631   2,198
 Capital lease obligations; interest ranging from 3% to 20%
   with various monthly payments and maturing at various
   dates through October 2001                                     1,303     717
 Note payable to equipment financing company; interest
   at 10% per annum, payable in monthly installments
   through July 1998                                                376     648
 Other debt; interest at rates ranging from approximately 6% to
   10%; a portion secured by rental assets and other property;
   payable in monthly installments through August 1997              216     429
                                                                 ------  ------
        Total long-term debt                                      5,020   3,992

 Less current installments                                        2,521   1,914
                                                                 ------  ------

        Long-term debt, excluding current installments           $2,499   2,078
                                                                 ======  ======
</TABLE>


    In October 1994, the Company entered into a revolving line of credit with a
    commercial lender.  Under the terms of this credit facility, the Company
    could borrow up to $10,000 based upon the value of eligible collateral as
    defined in the credit agreement.  Borrowings under this agreement bore
    interest at a rate of 2% over prime, and were secured by certain of the
    Company's assets, principally accounts receivable.  At December 31, 1995,
    there were no outstanding borrowings under this agreement.  The credit 
    agreement was canceled in March 1996.


                                                                (Continued)
                                      F-15

<PAGE>   42


                    MATRIA HEALTHCARE, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

           (Amounts in thousands, except share and per share amounts)


    Approximate aggregate minimum annual payments due on long-term debt for the
    five years subsequent to December 31, 1996 are as follows:


<TABLE>
            <S>                         <C>
            1997                        $2,521
            1998                           725
            1999                           413
            2000                            49
            2001                         1,312
                                        ------

                                        $5,020
                                        ======
</TABLE>


(5)  Accrued Liabilities

    Accrued liabilities are summarized as follows:


<TABLE>
<CAPTION>
                                                       December 31,
                                                     ---------------
                                                      1996     1995
                                                     -------  ------
            <S>                                      <C>      <C>

            Accrued salaries, wages, and incentives   $4,220     626
            Accrued severance                          4,597       -
            Accrued litigation settlement                  -   5,151
            Accrued restructuring costs                9,359      50
            Deferred revenue                           3,402       -
            Other                                      3,981     868
                                                     -------  ------

                                                     $25,559   6,695
                                                     =======  ======
</TABLE>


(6)  Income Taxes

    The components of income tax expense are as follows:


<TABLE>
<CAPTION>
                                           Years ended December 31,
                                         ----------------------------
                                           1996      1995      1994
                                         --------  --------  --------
          <S>                            <C>       <C>       <C>

          Current expense (benefit):
            Federal                      $      -         -      (168)
            State                               -       150       250
                                         --------  --------  --------
                                                        150        82
          Deferred expense - Federal            -         -       468
                                         --------  --------  --------

               Total income tax expense  $      -       150       550
                                         ========  ========  ========
</TABLE>



                                                                (Continued)
                                      F-16
<PAGE>   43


                    MATRIA HEALTHCARE, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

           (Amounts in thousands, except share and per share amounts)


    Below is a reconciliation of the expected income tax benefit (based on the
    U.S. Federal statutory income tax rate of 35%) to the actual income tax
    expense:


<TABLE>
<CAPTION>
                                                  Years ended December 31,
                                                -----------------------------
                                                  1996       1995      1994
                                                ---------  --------  --------
  <S>                                           <C>        <C>       <C>

  Computed expected income tax benefit          $ (17,892)   (4,076)   (1,858)
  Increase (decrease) resulting from:
    Losses in excess of allowable carrybacks        7,529     4,022     2,003
    Nontaxable municipal interest income             (385)        -         -
    Nondeductible expenses                         10,748         -         -
    State income taxes, net of Federal benefit          -        98       163
    Other, net                                          -       106       242
                                                ---------  --------  --------

                                                $       -       150       550
                                                =========  ========  ========
</TABLE>


    At December 31, 1996, the Company had the following estimated credit and
    operating loss carryforwards available for Federal income tax reporting
    purposes to be applied against future taxable income and tax liabilities:


<TABLE>
<CAPTION>
                                    General      Net
                         Year of    business  operating
                        expiration   credit     loss
                        ----------  --------  ---------
                        <S>         <C>       <C>

                          1997      $    344          -
                          1998           283         94
                          1999           100        523
                          2000            79        990
                          2001            97      1,537
                          2002            43      3,252
                          2003            61      2,922
                          2004           151      6,198
                          2005             -      7,137
                          2006             -          -
                          2007             -      4,475
                          2008             -      7,266
                          2009             -     15,241
                          2010             -      7,182
                          2011             -     26,202
                                    --------  ---------

                                    $  1,158     83,019
                                    ========  =========
</TABLE>



                                                                (Continued)
                                      F-17
<PAGE>   44


                    MATRIA HEALTHCARE, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

           (Amounts in thousands, except share and per share amounts)


    The net operating loss carryforward of $83,019 includes deductions of
    approximately $15,211 related to the exercise of stock options which will
    be credited to additional paid-in capital when recognized.  A portion of
    the net operating loss ($15,600) is limited, by the Internal Revenue Code
    Section 382, to an annual utilization of $2,300.  The total net operating
    loss is limited to an annual utilization of approximately $17,000.  The
    Company also has available alternative minimum tax (AMT) credit
    carryforwards of approximately $1,473 available to offset regular income
    tax, if any, in future years.  The AMT credit carryforwards do not expire.
    The AMT net operating loss carryforward is approximately $69,485.

    At December 31, 1996 and 1995, the Company had deferred tax assets of
    approximately $52,843 and $24,802, respectively, before valuation
    allowances.  The valuation allowance is based on the likelihood that a
    substantial portion of the deferred tax asset will not be realized.  The
    increase in the valuation allowance of $28,041 during 1996 was equal to the
    increase in the deferred asset.

    At December 31, 1996 and 1995, deferred income taxes consist of future tax
    benefits attributable to:


<TABLE>
<CAPTION>
                                                            1996      1995
                                                          --------  --------
    <S>                                                   <C>       <C>

    Assets (liabilities):
     Allowance for doubtful accounts                      $  4,564     2,054
     Accruals and reserves not deducted for tax purposes     8,629     2,812
     Depreciation and amortization                           7,524     5,979
     Net operating loss carryforwards                       29,057    12,130
     Credit carryforwards                                    2,631     1,609
     Contribution carryforward                                 438       218
                                                          --------  --------
          Total                                             52,843    24,802

    Less valuation allowance                               (52,843)  (24,802)
                                                          --------  --------

          Net deferred tax asset                          $      -         -
                                                          ========  ========
</TABLE>


(7)  Shareholders' Equity

      Capital Stock

      The authorized capital stock of the Company at December 31, 1995
      consisted of 60,000 shares of common stock, $.001 par value, and 2,000
      shares of convertible preferred stock, $.001 par value.  In conjunction
      with the Merger, the authorized capital stock was increased to 100,000
      shares of common stock, $.01 par value, and 50,000 shares of preferred
      stock, $.01 par value.

                                                                (Continued)
                                     F-18
<PAGE>   45


                    MATRIA HEALTHCARE, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

           (Amounts in thousands, except share and per share amounts)


      Stock Option Plans

      Prior to the Merger, the Company maintained a stock option plan for the
      benefit of key employees and directors under which options granted expire
      ten years from the date of grant.  In connection with the Merger, the
      Company assumed options outstanding under the Healthdyne option plans.
      Both the Company's options and Healthdyne's options outstanding on the
      date of the merger became fully vested.  All other terms and conditions
      of the options remained the same as they were prior to the Merger.  As of
      the date of the Merger, the Company adopted two stock option plans for
      the benefit of key employees and nonemployee directors.  A total of 1,250
      shares of the Company's common stock have been authorized for issuance
      under these plans.  Stock options granted under these plans are
      exercisable in equal amounts over three years and expire in ten years.

      The Company has elected to follow APB Opinion No. 25 and related
      interpretations in accounting for its stock options.  Under APB Opinion
      No. 25, because the exercise price of the Company's employee stock options
      equals the market price of the underlying stock on the date of grant, no
      compensation expense is recognized.  However, SFAS 123, requires
      presentation of pro forma net earnings (loss) and earnings (loss) per
      share as if the Company had accounted for its employee stock options
      granted subsequent to December 31, 1994, under the fair value method of
      that statement.  For purposes of pro forma disclosure, the estimated fair
      value of the options is amortized to expense over the vesting period.
      Under the fair value method, the Company's net loss and loss per share
      would have been increased  as follows:

<TABLE>
<CAPTION>
                                        1996       1995
                                      --------   ------- 
                      <S>             <C>        <C>

                      Net loss        $(52,279)  (12,218)
                                      ========   ======= 

                      Loss per share    $(1.62)     (.70)
                                      ========   ======= 
</TABLE>


      Because SFAS 123 is applicable only to options granted subsequent to
      December 31, 1994, and the options generally have a three-year vesting
      period, the pro forma effect will not be fully reflected until 1998.

      The weighted-average fair value of the individual options granted during
      1996 and 1995 is estimated as $3.03 and $2.52, respectively, on the date
      of grant.  The fair values for both years were determined using a
      Black-Scholes option-pricing model with the following assumptions.

<TABLE>
<CAPTION>
                                             1996     1995
                                            -------  -------
                   <S>                      <C>      <C>

                   Dividend yield           None     None
                   Volatility               40%      51%
                   Risk-free interest rate  6.25%    6.00%
                   Expected life            5 Years  3 Years
</TABLE>




                                                                (Continued)
                                      F-19
<PAGE>   46


                    MATRIA HEALTHCARE, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

           (Amounts in thousands, except share and per share amounts)


A summary of stock option transactions under these plans is shown below:


<TABLE>
<CAPTION>
                                         1996                   1995                 1994
                                  --------------------   --------------------  -------------------
                                              Weighted               Weighted             Weighted
                                               average               average              average
                                              exercise               exercise             exercise
                                   Shares       price      Shares     price     Shares     price
                                  ---------  ----------  ---------  --------  ---------  --------
<S>                               <C>        <C>          <C>        <C>       <C>        <C>

Outstanding at beginning of year  2,032,429    $    5.97  2,152,844     $5.68  1,701,787     $6.41
Assumed from Heathdyne option     1,108,888         3.34          -         -          -         -
  plans
Granted                             919,920         8.14    670,500      6.37    667,250      4.52
Exercised                          (823,881)        4.47   (250,273)     3.43    (39,912)     3.10
Canceled                           (148,855)        7.57   (540,642)     6.62   (176,281)     7.52
                                  ---------        -----  ---------  --------  ---------  --------

Outstanding at end of year        3,088,501    $    6.00  2,032,429     $5.97  2,152,844     $5.68
                                  =========        =====  =========  ========  =========  ========

Exercisable at year-end           2,262,627    $    5.18    202,913     $3.41    282,301     $3.15
                                  =========        =====  =========  ========  =========  ========
</TABLE>


The following table summarizes information concerning outstanding and
exercisable options at December 31, 1996:


<TABLE>
<CAPTION>
                         Options outstanding                            Options exercisable  
                    -------------------------------                   -----------------------
                                       Weighted          Weighted                   Weighted 
   Range of                            average           average                    average  
   exercise           Shares          remaining          exercise       Shares      exercise 
     price          outstanding    contractual life       price       exercisable    price   
---------------     -----------    ----------------      --------     -----------  ----------
<S>                 <C>                 <C>              <C>          <C>          <C>       
                                                                                             
$  .67 - $ 5.00     1,110,870           3.87             $ 2.98       1,083,198    $   3.01  
$ 5.00 - $10.00     1,926,134           8.05               7.41       1,128,094        6.66  
$10.00 - $20.00        21,147           3.47              11.25          20,985       11.26  
$20.00 - $30.00        30,350           4.72              23.22          30,350       23.22  
</TABLE>


Employee Stock Purchase Plan

The Company maintains an Employee Stock Purchase Plan (the "Purchase Plan") to
encourage ownership of its common stock by employees.  The Purchase Plan
provides for the purchase of up to 500 shares of the Company's common stock by
eligible employees of the Company and its subsidiaries.  Under the Purchase
Plan, the Company may conduct an offering each fiscal quarter of its common
stock to eligible employees.  The participants of the Purchase Plan can elect to
purchase common stock at the lower of 85% of the fair market value per share on
either the first or last business day of the quarter, limited to a maximum of
either 10% of the employee's compensation or 1,000 shares of common stock per
quarter.  A participant immediately ceases to be a participant in the Purchase
Plan upon termination of his or her employment for any reason.  During 1996,
1995, and 1994, respectively, 33, 34, and 56 shares of common stock were issued
under the Purchase Plan.  Compensation cost related to this plan determined
under SFAS 123 had an insignificant effect on the pro forma net loss and pro
forma loss per share disclosed above.              


                                                              (Continued)
                                      F-20
<PAGE>   47


                    MATRIA HEALTHCARE, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

           (Amounts in thousands, except share and per share amounts)


      Shareholder Rights Plan

      In connection with the merger, Matria established a Shareholders' Rights
      Agreement.  If a person or group acquires beneficial ownership of 15% or
      more of the Company's outstanding common stock or announces a tender
      offer or exchange that would result in the acquisition of a beneficial
      ownership of 20% or more of the Company's outstanding common stock, the
      rights detach from the common stock and are distributed to shareholders
      as separate securities.  Each right entitles its holder to purchase one
      one-hundredth of a share (a unit) of common stock, at a purchase price of
      $61 per unit.  The rights, which do not have voting power, expire on
      March 9, 2006 unless previously distributed and may be redeemed by the
      Company in whole at a price of $.01 per right any time before and within
      10 days after their distribution.  If the Company is acquired in a merger
      or other business combination transaction, or 50% of its assets or
      earnings power are sold at any time after the rights become exercisable,
      the rights entitle a holder to buy a number of common shares of the
      acquiring company having a market value of twice the exercise price of
      the right.  If a person acquires 20% of the Company's common stock or if
      a 15% or larger holder merges with the Company and the common stock is
      not changed or exchanged in such merger, or engages in self-dealing
      transactions with the Company, each right not owned by such holder
      becomes exercisable for the number of common shares of the Company having
      a market value of twice the exercise price of the right.

(8)  Employee Benefit Plans

    The Company maintains a 401(k) defined contribution plan for the benefit of
    its employees.  The Company's obligation for contributions under the 401(k)
    plan is limited to the lesser of (i) one-half of each participant's
    contributions but not more than 2.5% of the participant's base salary or
    (ii) 20% of the Company's pretax earnings before consideration of this
    contribution.  Discretionary Company contributions are allowed under the
    plan.  Contributions to the plan for the years ended December 31, 1996,
    1995, and 1994 were approximately $376, $-0-, and $-0-, respectively.

    During 1996, the Company established a nonqualified defined benefit pension
    plan for the benefit of a certain select group of senior management.  The
    benefits are based on the employee's compensation during the three calendar
    years in which the individual's base salary is the highest and actual years
    of service.  At December 31, 1996, the plan is unfunded.  Management has
    not determined whether and when the plan will be funded in future periods.

                                                                (Continued)
                                      F-21
<PAGE>   48


                    MATRIA HEALTHCARE, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

           (Amounts in thousands, except share and per share amounts)


    The following table sets forth the plan's funded status at December 31,
    1996:


<TABLE>
<S>                                                                    <C>  <C>
   Actuarial present value of accumulated benefit obligation,
      including vested benefit of $3,586                               $3,586
                                                                       ======

   Projected benefit obligation for service rendered to date           $4,057
   Plan assets at fair value                                                -
                                                                       ------
   Projected benefit obligation in excess of plan assets                4,057

   Unrecognized net gain from past experience different from
      that assumed and effects of changes in assumptions                  759
   Prior service cost not yet recognized in net periodic pension cost    (720)
                                                                       ------

   Accrued pension cost                                                $4,096
                                                                       ======

Net pension cost for 1996 included the following components:

      Service cost                                                     $  179
      Interest cost on projected benefit obligation                       292
      Net amortization and deferral                                        64
                                                                       ------

      Net periodic pension cost                                        $  535
                                                                       ======
</TABLE>


    The weighted average assumed discount rate used to measure the accumulated
    and projected benefit obligations was 7.5%.  The weighted average rate of
    compensation increase was 5.0%.

(9)  Fair Value of Financial Instruments

    Statement of Financial Accounting Standards No. 107, Disclosures about Fair
    Value of Financial Instruments, requires that the Company disclose
    estimated fair values for its financial instruments.  Fair value estimates,
    methods, and assumptions are set forth below for the Company's financial
    instruments.

      (a)  Cash and Short-Term Investments

           The carrying amount approximates fair value because of the short
           maturity of these instruments or because they are marked to market.

      (b)  Long-Term Debt

           The Company estimates that the carrying amount of the Company's
           long-term debt approximates the fair value based on the current
           rates offered to the Company for debt of the same remaining
           maturities.


                                                                (Continued)
                                      F-22
<PAGE>   49


                    MATRIA HEALTHCARE, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

           (Amounts in thousands, except share and per share amounts)


(10) Restructuring

    During 1996, in connection with the Merger, the Company incurred
    restructuring charges of $22,525 related to severance costs for 278
    involuntarily terminated employees in the executive, sales, clinical
    service, and administrative support functions.  Also, lease terminations
    and other facilities-related exit costs arising from closing duplicate
    patient service centers and consolidation of two corporate headquarters
    were incurred.  In addition, computer and patient service equipment was
    determined to be incompatible with nursing station software to be used by
    Matria and computer hardware and software was determined to be obsolete by
    adoption of new systems.

    A summary of the components of the 1996 restructuring charges follows:


<TABLE>
               <S>                                        <C>
                  Employee severance                      $10,750
                  Relocation                                1,250
                  Duplicate/excess facility costs           2,500
                  Write-off of excess/obsolete equipment    5,400
                  Other                                     2,625
                                                          -------

                                                          $22,525
                                                          =======

               The following restructuring costs were included
               in accrued liabilities at December 31, 1996:

                  Employee severance                       $7,405
                  Duplicate/excess facility costs             924
                  Other                                     1,030
                                                          -------

                                                           $9,359
                                                          =======
</TABLE>


    During 1995, the Company incurred restructuring costs of $2,456 related to
    cost reduction efforts as the Company's revenues continued to decline.  The
    cost reduction plan consisted of reductions in the Company's workforce of
    approximately 105 employees in the information systems, reimbursement,
    administrative, and clinical service functions, and termination of several
    facilities.  At December 31, 1995, all amounts had been expended.

    A summary of the components of the 1995 restructuring charges follows:


<TABLE>
                           <S>                 <C>
                           Employee severance  $1,834
                           Facility closing       332
                           Other                  290
                                               ------

                                               $2,456
                                               ======
</TABLE>



                                                                (Continued)
                                      F-23
<PAGE>   50



                    MATRIA HEALTHCARE, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

           (Amounts in thousands, except share and per share amounts)


(11) Commitments

    The Company is committed under noncancelable operating lease agreements for
    facilities and equipment.  Future minimum operating lease payments and the
    present value of the future minimum capital lease payments as of December
    31, 1996 are as follows:


<TABLE>
<CAPTION>
                                        Operating           Capital
Years ending December 31,                leases             leases
-------------------------               ---------           -------
<S>                                        <C>                <C>
       1997                                $7,577             672
       1998                                 6,442             427
       1999                                 5,519             339
       2000                                 3,454              54
       2001                                 2,869              19
       2002 and thereafter                  4,418               -
                                           ------          ------
                                           30,279           1,511
                                           ======

       Less interest                                          208
                                                             ----

       Present value of future minimum
          capital lease payments                           $1,303
                                                           ======
</TABLE>

    Amortization of leased assets is included in depreciation expense.

    Rental expense for cancelable and noncancelable leases was approximately
    $3,259, $3,637, and $3,293 for the years ended December 31, 1996, 1995, and
    1994, respectively.

(12) Contingencies

    The Company and its subsidiaries are involved in various claims and legal
    actions arising in the ordinary course of business.  In the opinion of
    management, based in part on the advice of counsel, the ultimate
    disposition of these matters will not have a material adverse effect on the
    Company's consolidated balance sheet, results of operations, or liquidity.

    On March 7, 1997, Adeza Biomedical Corporation ("Adeza"), a Delaware
    corporation, that, in conjunction with the Company, developed an immunoassay
    test utilizing fetal fibronectin ("fFN") to predict the likelihood of the
    onset of preterm delivery, initiated litigation against the Company in the
    Superior Court of Santa Clara County, California seeking    to terminate the
    Exclusive Marketing Agreement, dated as of December 31, 1991, as amended,
    between Adeza and the Company (the "Marketing Agreement").  The suit
    alleges, among other things, that the Company breached the Marketing
    Agreement by failing to utilize its best efforts to market fFN
    notwithstanding the fact that the Company sales to date substantially exceed
    the minimum level of sales required thereunder.  The Marketing Agreement
    grants the Company the exclusive right to market fFN in the United States of
    America, Canada, and Puerto Rico and, in addition, gives the Company an
    absolute license to the fFN technology in order for the Company to
    manufacture the fFN product in the event of a default by Adeza. The Company
    intends to deny the allegations in the Complaint, to defend the matter
    vigorously, and to assert all remedies available to it.

                                                                (Continued)
                                      F-24
<PAGE>   51




                    MATRIA HEALTHCARE, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

           (Amounts in thousands, except share and per share amounts)


    In July 1995, the Company reached a $10,000 settlement with the plaintiffs
    in a class action securities suit.  The Company's cost of settlement, after
    adjustment for insurance proceeds directly deposited in an escrow account
    pursuant to the settlement, was $5,750.  The Company paid $750 in 1995 and
    the remaining $5,000 in 1996.  The charge to income in 1995 of $4,300 was in
    addition to the aggregate amount of $1,450 which had been previously accrued
    in selling and administrative expenses.

    A complaint was filed on February 1, 1995 by The Lindner Fund, Inc. in the
    Eastern District of Missouri against Healthdyne and its former subsidiary
    HNS alleging that The Lindner Fund would not have sold its investment in HNS
    on February 8, 1994 had Healthdyne and HNS disclosed the potential sale of
    HNS.  Damages have been requested in the amount of $1,051, representing the
    aggregate difference between the price received upon the sale of such stock
    by The Lindner Fund and the $7.85 per share price paid by W. R. Grace & Co.
    on April 6, 1994 for HNS.  Healthdyne denied the allegations set forth in
    the complaint and Matria is currently defending the matter vigorously.

(13) Quarterly Financial Information - Unaudited

    Presented below is a summary of the unaudited consolidated quarterly
    financial information for the years ended December 31, 1996 and 1995.


<TABLE>
<CAPTION>
                                                  Quarter
                                    ------------------------------------
                                     Fourth    Third   Second    First
                                    --------  -------  -------  --------
       <S>                          <C>       <C>      <C>      <C>
       1996:
         Revenues                    $36,205   35,799   34,716    24,086
         Net loss from operations    (14,120)  (7,344)  (8,566)  (21,091)
         Net loss per common share      (.39)    (.20)    (.25)     (.96)

       1995:
         Revenues                    $19,787   20,545   21,525    23,352
         Net loss from operations     (2,127)    (995)  (6,251)   (2,421)
         Net loss per common share      (.12)    (.06)    (.36)     (.14)
</TABLE>


                                      F-25

<PAGE>   52
                          INDEPENDENT AUDITORS' REPORT


The Board of Directors and Shareholders
Matria Healthcare, Inc.

Under date of March 7, 1997, we reported on the consolidated balance sheet of
Matria Healthcare, Inc. and subsidiaries as of December 31, 1996 and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the year ended December 31, 1996, as contained in the annual report
on Form 10-K for the year 1996. In connection with our audit of the
aforementioned consolidated financial statements, we also audited the related
consolidated financial statement schedule as listed in the accompanying index.
This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement schedule based on our audit.

In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.

                                           KPMG PEAT MARWICK LLP

Atlanta, Georgia
March 7, 1997