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

                                    Form 10-K

(Mark One)
 [ X ]          ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
                EXCHANGE ACT OF 1934
                For the fiscal year ended December 31, 2000   OR

 [   ]          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                SECURITIES EXCHANGE ACT OF 1934
                For the transition period from  ----------- to ----------------


                           Commission File No. 0-20619

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

                  Delaware                              58-2205984
     (State or other jurisdiction of         (IRS Employer Identification No.)
      incorporation or organization)

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

Registrant's telephone number, including area code (770) 767-4500

Securities registered pursuant to Section 12(b) of the Act:
         Title of each class          Name of each exchange on which registered
                                                       None

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

                Common Stock, par value $0.01 per share, together
                  with associated Common Stock Purchase Rights
                                (Title of class)

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 9, 2001,  there were 8,832,330  shares of Common Stock  outstanding.
The  aggregate  market  value  of the  Common  Stock of the  Registrant  held by
nonaffiliates was approximately  $112,480,415  based upon the closing sale price
on March 9, 2001.

                      DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the  Registrant's  definitive  Proxy  Statement  for the 2001 Annual
Meeting of Shareholders are incorporated by reference into Part III.


<PAGE>


                             MATRIA HEALTHCARE, INC.

                          2000 FORM 10-K ANNUAL REPORT

                                TABLE OF CONTENTS

PART I

       Item 1.           Business............................................3
       Item 2.           Properties..........................................8
       Item 3.           Legal Proceedings...................................9
       Item 4.           Submission of Matters to a Vote of Security Holders.9
       Special Item      Executive Officers of the Company...................9

PART II

       Item 5.           Market for the Company's Common Equity
                           and Related Stockholder Matters...................12
       Item 6.           Selected Financial Data.............................13
       Item 7.           Management's Discussion and Analysis of
                           Financial Condition and Results of Operations ....14
       Item 7a.          Quantitative and Qualitative Disclosures About
                           Market Risk.......................................19
       Item 8.           Financial Statements and Supplementary Data.........20
       Item 9.           Changes in and Disagreements with Accountants
                           on Accounting and Financial Disclosure............20

PART III

       Item 10.          Directors and Executive Officers of the Company.....21
       Item 11.          Executive Compensation .............................21
       Item 12.          Security Ownership of Certain Beneficial Owners
                           and Management....................................21
       Item 13.          Certain Relationships and Related Transactions .....21

PART IV

       Item 14.          Exhibits, Financial Statement Schedules and Reports
                           on Form 8-K...................................... 22

SIGNATURES             ..................................................... 27

<PAGE>


                                     PART I

Item 1.  Business.

     General.  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,  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's  headquarters  is
located in Marietta, Georgia.

     Matria  is  a  leading  provider  of  comprehensive,   integrated   disease
management  services to patients,  physicians,  health plans and employers.  The
Company's  disease  management  programs  focus on four of the five most  costly
chronic  diseases and acute  conditions:  high-risk  pregnancy and other women's
health  conditions,  diabetes,  and select  respiratory and cardiac  conditions.
Matria's telemedicine and fulfillment services complement its disease management
programs  and  emphasize  pro-active  management  of health  conditions  through
prevention, early detection, patient education, care coordination and self-care.

     Business Segments and Geographic  Areas. In 2000, the Company's  operations
consisted  of two  reportable  business  segments:  Women's  Health and Diabetes
Supplies and Services.  Information  regarding net sales,  operating income, and
total assets of each of the business  segments in which the Company  operated in
fiscal years 1998 through 2000, as well as information regarding revenues of the
Company  attributed to the geographic areas in which the Company operated during
those years,  is in note 15 of Notes to  Consolidated  Financial  Statements  on
pages F-20 through F-21 of this report.

     Women's  Health.  The  Women's  Health  segment  offers  a  wide  range  of
specialized   services   designed  to  assist   physicians  and  payors  in  the
cost-effective  management of maternity  patients.  Services include specialized
home nursing,  risk assessment,  patient education and management,  home uterine
contraction  monitoring,  infusion therapy,  gestational diabetes management and
other monitoring and clinical services as prescribed by the patient's physician.
The Women's  Health  segment is  headquartered  in Marietta,  Georgia and has 42
sites of  service  throughout  the  United  States,  15 of which are  monitoring
centers. All of the 42 sites are or are in the process of becoming accredited as
home care  organizations by the Joint Commission on Accreditation of Health Care
Organizations.  In addition,  the segment has two after-hours centers.  Although
this segment  maintains a dominant  market share,  the industry  continues to be
vulnerable  to  several  controversies  surrounding  the home  obstetrical  care
business,  including  academic debate as to the efficacy of certain services and
controversy  over the  "off-label"  use of certain  tocolytic  medications.  See
"Regulation and Healthcare Industry Changes" below in this Item 1.

     Diabetes Supplies and Services. The Company purchased the Diabetes Supplies
and Services  segment  business  effective  January 1, 1999. The segment has two
components:  diabetes disease management and fulfillment  services,  and medical
device design, development and manufacturing services.
<PAGE>

     The diabetes  disease  management and fulfillment  component sells insulin,
insulin  pumps,  syringes,  microsampling  products and other  prescription  and
non-prescription  drugs  used by  diabetics.  The  majority  of this  business's
fulfillment  sales are made on a mail-order  basis.  In addition,  this business
provides  diabetes  screening,   patient  education  and  other  self-management
supplies  and  services.  This  business  serves  patients in the United  States
through its  facilities  in Roanoke,  Virginia  and  Irvine,  California  and in
Germany through its facilities in Neumunster and Dresden, Germany. Approximately
44% and 47% of this business  component's  revenues were derived from its German
operations in 2000 and 1999, respectively.

     This segment's  medical devices component is the leading global supplier of
microsampling products, which are products used to obtain and test small samples
of blood.  Recently,  this  component of the business  changed its name to Facet
Technologies,  LLC  ("Facet").  Facet has a significant  presence in each of the
three major products of the  microsampling  market:  standard  lancets,  lancing
devices and safety lancets. Facet designs,  assembles,  packages and distributes
products  manufactured  by  Nissho  Corporation,   a  publicly  traded  Japanese
manufacturer  and  distributor of medical  equipment  with a core  competency in
needle-based technology.

     Facet operates from facilities in McDonough, Georgia, and Milton Keynes and
Northants,  England.  Its  products  are  shipped  primarily  to North and South
America, Europe and Asia. Approximately 24% and 21% of this business component's
revenues  were derived from sales outside of the United States in 2000 and 1999,
respectively.

     Because of the Company's  dependence on foreign  markets,  deterioration in
foreign economic conditions and currency exchange rate fluctuations could have a
material adverse effect on the Company's business. Due to the foregoing factors,
as  well as  foreign  local  commercial  and  economic  policies  and  political
uncertainties,  the Company believes its activities outside of the United States
involve greater risk than its domestic business.

     Discontinued  Operations.  The Company's former Cardiovascular  segment was
acquired  in July  1998 and was  operated  through  the  Company's  wholly-owned
subsidiary,  Quality  Diagnostic  Services,  Inc. ("QDS").  QDS provided cardiac
event monitoring services, holter monitoring services and pacemaker follow-up to
patients  throughout  the  United  States  from its  headquarters  in  Marietta,
Georgia. Effective February 1, 2001, the Company sold the business and assets of
QDS, excluding accounts receivable.  Through the divestiture of QDS, the Company
has discontinued its service offerings  related to cardiac  diagnostics and will
pursue the addition of coronary  artery  disease and  congestive  heart  failure
programs to its disease management offerings.

     Other.  In 2000,  the  Company  had two  components  that  were  below  the
quantitative  threshold  for  reporting:   respiratory  disease  management  and
clinical patient record software.  The respiratory  disease management  business
(Respiratory  Management  Services - "RMS"),  which began in July 1998, provides
respiratory  disease risk assessment,  screening and case management services to
patients throughout the United States from its headquarters in Marietta, Georgia
in  conjunction  with National  Jewish  Medical and Research  Center  ("National
Jewish"),  located in Denver,  Colorado.  The clinical  patient record  software
business  (Clinical-Management  Systems,  Inc. - "CMS")  marketed a  proprietary
automated patient record for obstetricians and gynecologists. The Company exited
from the clinical  patient  record  software  business in the second  quarter of
2000.

     Customers,  Suppliers  and  Third-Party  Payors.  In  2000,  the  Company's
revenues  from  continuing  operations  (excluding  QDS) were  derived  from the
following types of customers: approximately 49% from private third-party payors,
25% from original equipment manufacturers,  11% from domestic government payors,
11% from foreign  healthcare  systems and 4% from employers.  The Women's Health
segment  generated  approximately  94% of its revenues from private  third-party
payors and 6% of its revenues  from domestic  government  payors in 2000. Of the
Diabetes Supplies and Services segment revenues in 2000,  approximately 48% were
obtained from original equipment manufacturers, 22% were from foreign healthcare
systems, 16% were from domestic government payors, 8% were from employers and 6%
were from private third-party payors.

     The  Company  markets  its  women's  health   services,   diabetes  disease
management  services,  and respiratory  disease  management  services and, until
February 1, 2001, marketed its cardiovascular services to patients,  physicians,
other  healthcare  providers  and  third-party  payors,  primarily  through  its
employee sales force. All of these businesses'  revenues depend on reimbursement
from third-party payors, such as managed care companies and government-sponsored
health insurance  programs.  Third-party  payors are having greater control over
patient access and increasingly use their significant bargaining power to secure
discounted rates and other  concessions  from providers.  This trend, as well as
other  changes  in  reimbursement  rates,   policies  or  payment  practices  by
third-party  payors (whether  initiated by the payor or legislatively  mandated)
could have an adverse impact on the Company's disease management businesses.
<PAGE>

     Facet markets its products  through its employee sales force. Its customers
include   original   equipment   manufacturers   of  blood   glucose  and  other
point-of-care  test kits,  as well as mail order  companies,  kit  companies and
distributors  that sell to the  acute  care,  alternate  care and  primary  care
markets.  Three major  original  equipment  manufacturer  customers  represented
approximately 83% of Facet's total sales in 2000.  Although the Company believes
its  relationships  with these  customers  are strong,  the loss of any of these
major customers could have a material adverse effect on this business component.
Additionally,  this  business  is  highly  dependent  on  its  exclusive  supply
relationship with Nissho  Corporation,  from which it purchases virtually all of
its products on favorable  payment  terms.  The exclusive  supply  agreement has
approximately two years remaining. Termination of the exclusive supply agreement
or failure to continue the exclusive  supply agreement on the terms currently in
effect would have a material  adverse effect on Facet's  business,  as would any
interruption  in the supply of products  from Nissho  Corporation,  whatever the
cause.

     The Company  marketed its clinical  patient  record  software to physicians
using a sales force employed by CMS.

     Seasonality.  The Women's  Health  segment's  revenues tend to be seasonal.
Revenues  typically  begin to  decrease  with the  onset of the  holiday  season
starting with  Thanksgiving,  causing the first quarter revenues of each year to
be less than those of the fourth  quarter of the previous  year.  The  Company's
other businesses do not reflect any significant degree of seasonality.

     Trademarks,  Licenses and Patents.  The Company owns a number of trademarks
and service marks which,  in the  aggregate,  are important to the marketing and
promotion of its products and services.  The Company does not believe,  however,
that any single  trademark  or  service  mark is  material  in  relation  to the
Company's  business  as a whole.  The  Company  generally  makes a  practice  of
protecting its most significant trademarks by registration.

     The Company has licensed its respiratory  disease management  programs from
National  Jewish.  Insofar as the licensed  programs are the  cornerstone of the
Company's  respiratory disease management  programs,  the license is material to
that  portion  of the  Company's  business.  Additionally,  the  Company  has an
exclusive,  perpetual right to use and purchase from Respironics,  Inc. the only
uterine activity monitor that has received pre-market approval from the Food and
Drug Administration  ("FDA") for home use on patients with a history of previous
preterm  birth.  The  Company's  rights  to the  monitors  had  been a  material
competitive  advantage in marketing the Company's  uterine  activity  monitoring
services.  In 2001, the FDA  reclassified the monitors from Class III into Class
II devices,  which will make  substantially  equivalent devices available to the
Company's  competitors,  without their having to receive pre-market approval. As
part of the reclassification, the FDA has imposed special controls on the use of
such devices.  It is not clear what impact these  developments  will have on the
Company's home uterine activity monitoring business.

     The Company does not possess any patents that are material to its business,
although the patents owned by Nissho  Corporation  and its  subcontractors  with
respect to products distributed by Facet are material to the continued marketing
of those products.

     Also, the Company considers its clinical and disease management programs to
be  proprietary  and material to the portion of the Company's  business to which
they relate.

     Any  impairment  of  the  Company's  rights  in the  intellectual  property
described above could have a material adverse effect on the particular  business
to which they relate.

     Competition.  The medical industry is  characterized by rapidly  developing
technology and increased competition.  In all its product and service lines, the
Company  competes with  companies,  both large and small,  located in the United
States and abroad.  Competition  is strong in all lines,  without  regard to the
number and size of the competing  companies  involved.  Certain of the Company's
competitors and potential  competitors  have  significantly  greater  financial,
technical and sales  resources  than the Company and may, in certain  locations,
possess  licenses  or  certificates  that permit  them to provide  products  and
services that the Company cannot currently provide.
<PAGE>

     Although the Women's  Health  segment is a leading  provider in its market,
with a market share of  approximately  85%, the Women's Health  business and the
Company's  other  disease  management  businesses  compete  with a vast and ever
increasing   number  of  competitors.   Competitors  of  the  Company's  disease
management businesses include national, regional and local home health agencies,
hospitals  and  physicians,  as well as other  companies  devoted  primarily  to
offering one or more products or services  similar or identical to those offered
by the Company,  such as diabetes  supplies or diabetes  education.  The Company
competes  on a  number  of  factors,  including  quality  of care  and  service,
reputation  within the  medical  community,  geographical  scope and price.  The
Company believes that its clinical expertise and coordinated approach to patient
services have enabled it to compete effectively.

     Competition  in  the  microsampling  business  of  the  Company's  Diabetes
Supplies and Services  segment also is based on quality,  service and price.  In
addition,  competition in research involving the development of new products and
the improvement of existing products is particularly  significant.  Competitors'
research  efforts  could  lead to the  obsolescence  of  some or all of  Facet's
products.  The  microsampling  industry  is  highly  fragmented,  with  numerous
competitors of all sizes. The quality of Facet's products, as well as its strong
distribution  system,  value-added  approach to customer service, and design and
development  expertise  have  enabled this  business to achieve its  significant
market share,  notwithstanding  the highly  competitive  environment in which it
operates.

     There can be no assurance that the Company will not encounter  increased or
more  effective  competition  in the future,  which  could  limit the  Company's
ability to maintain  or  increase  its  business  or render  some  products  and
services offered by Matria obsolete or non-competitive and which could adversely
affect the Company's operating results.

     Research  and  Development.   Facet  maintains  a  dedicated  research  and
development  staff at its  headquarters in McDonough,  Georgia.  This business's
research  and  development  activities  are key  factors in its  ability to stay
abreast of its competition.

     The Company's  Women's Health and Other  business  segments do not maintain
separate  research and development  teams.  Program  development and refinements
result from the cooperative efforts of the businesses'  clinical,  operating and
marketing staff, and these costs are charged to earnings when incurred.

     Regulation and Healthcare Industry Changes. All of the Company's businesses
are subject to varying  degrees of  government  regulation  in the  countries in
which they  operate.  There has been a trend in recent  years both in the United
States and outside of the United States toward more stringent regulation of, and
enforcement  of  requirements  applicable to,  healthcare  providers and medical
device  manufacturers.   The  continuing  trend  of  more  stringent  regulatory
oversight  in  healthcare,  enforcement  activities  and product  clearance  for
medical devices have caused healthcare providers and manufacturers to experience
more  uncertainty,  greater risk,  higher expenses and longer  approval  cycles.
Management does not expect this trend to change in the near or long term, in the
United States or abroad.

     In the United States, regulation of the healthcare industry is particularly
pervasive.  Many states require  providers of home health services,  such as the
Company's  Women's  Health  segment,  to be  licensed  as nursing or home health
agencies and to have medical waste disposal permits. In addition, the operations
of Matria's diabetes disease management businesses require Matria to be licensed
as a pharmacy in several states. Moreover,  certain employees of the Company are
subject  to state laws and  regulations  regarding  the ethics and  professional
practice of  pharmacy  and  nursing.  The Company may also be required to obtain
certification to participate in governmental payment programs,  such as Medicare
and Medicaid.  Some states have established Certificate of Need ("CON") programs
regulating the establishment or expansion of healthcare operations.  The failure
to obtain,  renew or maintain any of the required  licenses,  certifications  or
CONs could adversely affect the Company's disease management businesses.
<PAGE>

     In addition,  the Company is subject to various  federal and state statutes
regulating  payments to or relationships  with referral  sources.  Penalties for
violation  of  these   statutes   include   substantial   fines  and  penalties,
imprisonment  and  exclusion  from  participation  in  governmental   healthcare
programs.

     Moreover,  many of the  medical  products  utilized  by the Company 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. Certain recent FDA actions with respect to home uterine  activity  monitors
were discussed above in this Item 1 under "Trademarks, Licenses and Patents." In
addition,  some of the  Company's  services  involve  the use of drugs  that are
regulated by the FDA under the FDC Act.  Although medical devices and drugs used
by the Company 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
and medical  devices for such  "off-label"  indications  under the  "practice of
medicine" doctrine. Nevertheless, the Company believes that publicity concerning
the off-label use of  terbutaline  sulfate has adversely  affected the Company's
Women's Health segment's business, and any future adverse publicity or increased
FDA scrutiny surrounding  off-label use of any drugs and devices utilized in the
Company's business may have a further adverse impact on the Company's business.

     As a  result  of  the  Company's  desire  to  assure  compliance  with  the
increasingly  complex regulatory  environment for the healthcare  industry,  the
Company  maintains a company-wide  compliance  program,  developed in accordance
with federal guidelines.

     Although the Company believes its operations as currently  conducted are in
material compliance with existing applicable laws and regulations,  there can be
no assurance  that the Company  will not become the subject of a  regulatory  or
other investigation or proceeding or that its interpretations of applicable laws
and regulations will not be challenged.  The defense of any such challenge could
result in substantial cost to the Company and diversion of management's time and
attention.  Thus, any such challenge could have a material adverse effect on the
Company's business, regardless of whether it ultimately is sustained.  Moreover,
the  Company  believes  that its  businesses  will  continue  to be  subject  to
increasing regulation, the scope and effect of which the Company cannot predict.

     The  healthcare  industry in the United States is  experiencing a period of
extensive  change due to economic  forces,  regulatory  influences and political
initiatives.  Market-driven reforms from forces within the industry are exerting
pressure on healthcare companies to reduce healthcare costs. These market-driven
changes  are  resulting  in  industry  wide  consolidation  that is  expected to
increase the downward  pressure on  healthcare  companies'  profit  margins,  as
larger  buyer  and  supplier  groups  exert  pricing   pressures  on  healthcare
companies.  In  addition,  from  time to time  federal  and  state  legislatures
consider  healthcare  reform  proposals.   The  ultimate  timing  or  effect  of
legislative  efforts and  market-driven  reforms cannot be predicted,  and these
initiatives may adversely impact Matria's business.

     Employees.  The  Company  currently  employs a total of  approximately  899
full-time employees and over 70 regular part-time  employees.  In addition,  the
Company employs an additional 895 part-time clinical employees to provide, among
other things,  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.
<PAGE>

     Forward-Looking  Statements. This Annual Report on Form 10-K, including the
information  incorporated by reference herein,  contains various forward-looking
statements  and  information  that  are  based  on  the  Company's  beliefs  and
assumptions,  as well as information  currently  available to the Company.  From
time to time,  the Company and its  officers,  directors or  employees  may make
other oral or written  statements  (including  statements  in press  releases or
other  announcements) that contain  forward-looking  statements and information.
Without  limiting  the  generality  of  the  foregoing,   the  words  "believe",
"anticipate",   "estimate",  "expect",  "intend",  "plan",  "seek"  and  similar
expressions,  when  used in this  Form 10-K and in such  other  statements,  are
intended to identify  forward-looking  statements.  All statements  that express
expectations and projections with respect to future matters, including,  without
limitation,  statements  relating to growth,  new lines of business  and general
optimism about future operating results,  are  forward-looking  statements.  All
forward-looking   statements   and   information   in  this  Annual  Report  are
forward-looking  statements  within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended,  and are intended to be covered by the safe harbors created thereby.
Such forward-looking statements are not guarantees of future performance and are
subject  to risks,  uncertainties  and other  factors  that may cause the actual
results,  performance or achievements  of the Company to differ  materially from
historical   results  or  from  any  results   expressed   or  implied  by  such
forward-looking  statements.  Such  factors  include,  without  limitation:  (i)
changes in  reimbursement  rates,  policies or payment  practices by third-party
payors,  whether  initiated by the payor or legislatively  maintained;  (ii) the
loss of major  customers;  (iii)  termination of the Company's  exclusive supply
agreement  with Nissho  Corporation  or failure to continue the agreement on the
terms  currently  in  effect;   (iv)  impairment  of  the  Company's  rights  in
intellectual  property;  (v) increased or more effective  competition;  (vi) new
technologies  that render  obsolete or  non-competitive  products  and  services
offered by the Company;  (vii) changes in laws or regulations  applicable to the
Company or failure to comply with existing laws and  regulations;  (viii) future
healthcare  or budget  legislation  or other  health  reform  initiatives;  (ix)
increased  exposure to professional  negligence  liability;  (x) difficulties in
successfully   integrating  recently  acquired  businesses  into  the  Company's
operations  and  uncertainties   related  to  the  future  performance  of  such
businesses;  (xi) losses due to foreign currency  exchange rate  fluctuations or
deterioration  of  economic  conditions  in foreign  markets;  (xii)  changes in
company-wide  or  business  unit  strategies;  (xiii) the  effectiveness  of the
Company's  advertising,   marketing  and  promotional  programs;   (xiv)  market
acceptance of the Company's disease management  products;  and (xv) increases in
interest rates. Many of such factors are beyond the Company's ability to control
or  predict,  and  readers  are  cautioned  not to put  undue  reliance  on such
forward-looking  statements.  The Company  disclaims any obligation to update or
review any forward-looking  statements contained in this Annual Report or in any
statement referencing the risk factors and other cautionary statements set forth
in this Annual Report, whether as a result of new information,  future events or
otherwise,  except as may be required by the Company's disclosure obligations in
filings it makes with the Securities and Exchange  Commission (the "Commission")
under federal securities laws.

Item 2.  Properties.

     Matria's principal executive and administrative offices are located at 1850
Parkway Place,  Marietta,  Georgia, and total approximately 107,609 square feet.
The facility is leased through February 28, 2003.

     Additional  properties also are leased for the other  operations of Matria.
The Women's Health  segment's  patient service centers are typically  located in
suburban  office parks and range between 600 and 5,200 square feet of space with
an average of  approximately  2,200 square feet.  Total square footage for these
facilities is approximately  88,000 square feet. These facilities are leased for
various terms through 2004.
<PAGE>

     Facet's current  headquarters  facility  consists of  approximately  48,000
square feet of office and warehouse space in McDonough,  Georgia.  Effective May
1, 2001,  its  headquarters  will  relocate to another  facility  in  McDonough,
Georgia,  which will consist of  approximately  70,000 square feet of office and
warehouse  space.  The  lease  term on this new  facility  will  expire in 2008.
Effective April 2001, Facet will occupy approximately 9,000 square feet of space
in the Matria  headquarters  building.  This lease expires on February 28, 2003.
Facet also leases  approximately  1,000 square feet of warehouse space in Milton
Keynes,  England under an automatically  renewable lease, which can be cancelled
with six months  notice.  It also has a 200  square  foot  office in  Northants,
England under a lease that expires in July 2001 with automatic  annual  renewals
and which is expected to be amended to allow for a longer term.

     The Company's  diabetes disease  management  business  maintains its United
States  headquarters  in  Roanoke,  Virginia,  where its  facility  consists  of
approximately  24,000 square feet of office and warehouse space, which is leased
through  November  2005.  The  former  Van Nuys,  California  operation  of this
business moved to an existing Matria facility in Irvine, California in May 2000.
This  business also  maintains  leased  facilities  in  Neumunster  and Dresden,
Germany,  consisting of approximately 3,200 and 6,500 square feet, respectively.
The  Neumunster  lease is a month to month tenancy and the Dresden lease expires
in 2005.

     These facilities are generally in good condition,  and Matria believes that
they are adequate for and suitable to its requirements.

Item 3.  Legal Proceedings

     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. As did its predecessors, Matria maintains insurance, including insurance
covering  professional and product liability claims,  with customary  deductible
amounts. 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 or claims made in
the future.

Item 4.  Submission of Matters to a Vote of Security Holders.

     A special meeting of stockholders of the Company was held December 5, 2000.
The only matter  voted upon at the meeting was the  approval of an  amendment to
the  Company's  Certificate  of  Incorporation  to effect a reverse  stock split
whereby the Company  would issue one new share of Common  Stock in exchange  for
not less than three nor more than five  shares of  outstanding  Common  Stock to
reduce  proportionately  the number of authorized  shares of Common  Stock.  The
stockholders approved the reserve stock split as follows:

         Affirmative Votes          Negative Votes            Abstentions

             28,371,336               3,401,990                  51,905

     Following such approval,  the Company effected a one-for-four reverse stock
split on December 5, 2000.

Special Item.  Executive Officers of the Company.

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

         Name                      Age      Position with the Company

         Parker H. Petit           61       Chairman of the Board, President and
                                            Chief Executive Officer

         Jeffrey D. Koepsell       54       Executive Vice President and Chief
                                            Operating Officer

         Frank D. Powers           52       President - Population Health
                                            Management

         James P. Reichmann        44       President - Women's Health Division

         George W. Dunaway         40       Vice President - Finance and Chief
                                            Financial Officer

         Yvonne V. Scoggins        51       Vice President - Financial Planning
                                            and Analysis

         Roberta L. McCaw          45       Vice President - Legal, General
                                            Counsel and Secretary

         Thornton A. Kuntz, Jr.    47       Vice President - Administration

<PAGE>

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

          Mr.  Petit has served as Chairman of the Board since the Merger and as
     President and Chief  Executive  Officer since October 5, 2000. In addition,
     he served as a member of the three-person  Office of the president in 1997.
     Mr. Petit was the founder of  Healthdyne  and served as its Chairman of the
     Board of Directors and Chief Executive  Officer from 1970 until the Merger.
     Mr.  Petit is also  Chairman of the Board of  Directors  of  Healthcare.com
     Corporation and a director of Intelligent Systems Corp. and Logility, Inc.

          Mr.  Koepsell has served as a director of the Company and as Executive
     Vice President and Chief Operating Officer since May 17, 2000. From 1992 to
     1998, he was President and Chief Executive Officer of CardioLogic  Systems,
     Inc.,  a  venture  capital-backed  company  in the  cardiopulmonary  market
     segment  formed in  cooperation  with Johns Hopkins  University and Medical
     Center.  Prior thereto,  he served as President and Chief Executive Officer
     of Physiologic Diagnostic Services, Inc., a women's health service provider
     acquired  by Tokos in 1992.  Mr.  Koepsell  is also a former  executive  of
     Healthdyne.

          Mr. Powers has been President - Population Health Management since May
     17, 2000. The  Population  Health  Management  division  includes  domestic
     diabetes  disease  management and fulfillment  services and RMS. Mr. Powers
     was previously  Executive Vice President and Chief Operating Officer of the
     Company from October 20, 1997 to May 17, 2000 and Executive  Vice President
     from  March 8,  1996 to  October  20,  1997.  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.  Reichmann has been President - Women's Health Division since June
     1, 1999,  and was Vice President - Operations of that division from January
     1997 to June 1999. Prior thereto, Mr. Reichmann was Vice President of Sales
     at RIK Medical,  L.L.C.,  a specialty  support  services  company,  and was
     Executive Vice President of Healthdyne  Perinatal Services, a subsidiary of
     Healthdyne, from February 1992 to March 1996.

          Mr.  Dunaway  has been Vice  President--Finance  and  Chief  Financial
     Officer since October 5, 1999.  Prior thereto,  Mr. Dunaway was employed by
     The Dun & Bradstreet Corporation,  a commercial credit information services
     provider,  in the following  capacities:  Chief Financial  Officer of Dun &
     Bradstreet, U.S. from 1996 to October 1999; Vice President--Finance,  Dun &
     Bradstreet,  U. S.  from 1995 to 1996;  Chief  Financial  Officer  of Dun &
     Bradstreet   Plan   Services   from  1992  to  1995  and   Assistant   Vice
     President--Strategic  Planning, Dun & Bradstreet Plan Services from 1989 to
     1992.

          Ms. Scoggins has been Vice President - Financial Planning and Analysis
     since February 28, 2001 and previously  was Vice  President,  Treasurer and
     Chief Accounting  Officer of the Company from December 15, 1997 to February
     28,  2001 and also Vice  President  and  Controller  from  March 8, 1996 to
     December 15, 1997. Prior thereto,  she was Vice President and Controller of
     Healthdyne  from May 1995 to March 8, 1996;  Vice  President--Planning  and
     Analysis of Healthdyne  from May 1993 to May 1995;  and Vice  President and
     Chief  Financial  Officer  of Home  Nutritional  Services,  Inc.,  a former
     majority owned subsidiary of Healthdyne, from February 1990 to April 1993.
<PAGE>

          Ms.  McCaw  has been  Vice  President  - Legal,  General  Counsel  and
     Secretary of the Company since April 23, 1998 and  previously was Assistant
     General  Counsel and  Assistant  Secretary of the Company from December 15,
     1997 to April 23, 1998,  and  Assistant  General  Counsel from July 1996 to
     December 1997.  Prior thereto,  Ms. McCaw was a partner at Tyler,  Cooper &
     Alcorn, a Connecticut-based law firm, from January 1990 to July 1996.

          Mr. Kuntz has been Vice President - Administration  since February 24,
     1998 and previously was Vice President--Human Resources of the Company from
     March 8,  1996 to  February  24,  1998.  Prior  thereto,  he served as Vice
     President--Administration of Healthdyne from August 1992 to March 1996.


<PAGE>


                                     PART II

Item 5.  Market Price of and Dividends on the 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 stockholders as of March 9, 2001 was 1,900 record holders
and 8,500 street holders.

     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.  The  Company is a party to a Loan and  Security
Agreement that contains  covenants  restricting  the payment of dividends on the
Company's common stock.

     The following table sets forth, for the calendar  quarters  indicated,  the
high and low  sales  prices  of Matria  common  stock as  quoted on NASDAQ  from
January 1, 1999 through December 31, 2000:
<TABLE>
<S>                                         <C>                        <C>

                  Quarter                   Low                        High

                  1999
                  First                   $  9.50                    $ 17.75
                  Second                    10.75                      25.50
                  Third                     21.00                      30.00
                  Fourth                    12.00                      23.50

                  2000
                  First                    $16.24                    $ 26.24
                  Second                    11.75                      21.00
                  Third                     13.00                      18.24
                  Fourth                     7.25                      14.24
</TABLE>

     Share  prices  prior to  December  5, 2000 have been  adjusted to reflect a
one-for-four reverse stock split which took effect on December 5, 2000.


<PAGE>


Item 6.  Selected Financial Data

     The following sets forth selected consolidated  financial data with respect
to the  Company's  operations.  The  data  should  be read in  conjunction  with
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations and the consolidated  financial statements and related notes thereto.
The statement of operations  data for the five years ended December 31, 2000 and
the related  balance sheet data have been derived from the audited  consolidated
financial statements of the Company.
<TABLE>

                                                                                 Years Ended December 31,
                                                               -------------------------------------------------------------
<S>                                                              <C>         <C>         <C>         <C>           <C>
                                                                 2000        1999        1998         1997         1996
                                                               ---------- ----------- ------------ ----------- -------------
                                                                            (In thousands, except per share data)
Consolidated statements of operations data:

Revenues                                                     $   225,767     231,739      128,572     144,533       130,806
Earnings (loss) from continuing operations                        13,694      31,366     (100,406)    (20,902)      (51,121)

Net earnings (loss) from continuing operations
per common share:
      Basic                                                  $      1.10        3.05       (10.98)      (2.29)        (6.33)
      Diluted                                                       1.05        2.82       (10.98)      (2.29)        (6.33)


                                                                                       December 31,
                                                               -------------------------------------------------------------
                                                                 2000        1999        1998         1997         1996
                                                               ---------- ----------- ------------ ----------- -------------
                                                                                      (In thousands)
Consolidated balance sheets data:

Total assets                                                 $   268,293     285,713       97,304     191,132       223,188
Long-term debt, excluding current installments                    76,996      91,090       18,385       1,712         2,499
Redeemable preferred stock                                        41,446      41,005            -           -             -

</TABLE>
<PAGE>



 Item 7.  Management's Discussion and Analysis of Financial Condition and
          Results of Operations.

General

     During  1998 and early  1999,  the Company  implemented  several  strategic
actions to expand its business focus beyond  managing the condition of pregnancy
into  other  disease  management  markets.   These  actions  included:  (i)  the
acquisition in July 1998 of Quality Diagnostic Services, Inc. ("QDS"), a cardiac
event  monitoring  company;  (ii) the  completion  of a licensing  agreement  in
October  1998 with  National  Jewish  Medical  and  Research  Center  ("National
Jewish") to provide services in the respiratory  disease  management market; and
(iii) the  acquisition  in  January  1999 of the  business  and assets of Gainor
Medical Management,  L.L.C. ("Gainor Medical") and Diabetes Management Services,
Inc. ("DMS"), diabetes supplies and services companies.

     In connection with the above acquisitions,  the Company acquired intangible
assets that are being  amortized  over various  useful lives from 5 to 15 years.
The  amortization  periods are based on, among other  things,  the nature of the
products and markets, the competitive position of the acquired companies and the
adaptability to changing market conditions of the acquired companies.

     The  Company  continues  to  refine  its  diversified   disease  management
strategy.  During the third and fourth quarters of 1999, the Company  determined
that its infertility practice management business, National Reproductive Medical
Centers, Inc. ("NRMC"),  no longer fit its strategy,  and the assets of the NRMC
clinics were sold.  During the second  quarter of 2000,  the Company  decided to
exit its clinical patient record software business, Clinical-Management Systems,
Inc.  ("CMS") and, as a result,  suspended its sales efforts and fully  reserved
the value of any remaining assets.  Additionally,  in February 2001, the Company
sold the business and certain assets of QDS.

     Disease management is an emerging  healthcare sector receiving a heightened
focus  in the  healthcare  industry,  and  the  competition  in this  sector  is
fragmented  without a dominant leader.  The Company's  management  believes that
with the successful implementation of its expansion strategies, the Company will
become a market  leader in disease  management  and that these  strategies  will
result in revenue growth in 2001 and beyond.

     The  following  discussion  of the  results  of  operations  and  financial
condition of the Company  should be read in  conjunction  with the  consolidated
financial  statements  and related notes of the Company  included in this Annual
Report on Form  10-K for the year  ended  December  31,  2000 as filed  with the
Securities   and  Exchange   Commission   (the   "Commission").   The  Company's
consolidated   financial   statements   have  been   restated   to  reflect  the
Cardiovascular  segment,  QDS, as a  discontinued  operation for 2000,  1999 and
1998. The historical results of operations are not necessarily indicative of the
results that will be achieved by the Company during future periods.

Results of Operations

     Revenues decreased $6.0 million or 2.6% in 2000 compared to 1999. Excluding
$10.4 million of 1999 revenues  generated by NRMC, which was divested during the
second half of 1999, revenues increased by $4.4 million or 2.0%. Revenues of the
Diabetes  Supplies and Services  segment  increased  by $4.2  million,  or 3.8%,
primarily  as a  result  of  strong  growth  in  the  domestic  diabetes  supply
fulfillment business.

     Revenues  increased  $103.2  million  or  80.2% in 1999  compared  to 1998,
primarily due to the  acquisitions  of the Gainor Medical  business and DMS, the
businesses that are included in the Diabetes Supplies and Services segment since
January 1, 1999.  Revenues for the Diabetes  Supplies and Services  segment were
$110.5  million in 1999.  The  increase in revenues for this segment in 1999 was
partly  offset by a $5.2  million or 4.5%  decrease  in  revenues in the Women's
Health  segment in 1999,  as well as a $2.2  million  decline in revenues in the
Other segments  resulting  primarily from the sale of the  infertility  practice
management business. The decline in the Women's Health segment resulted from the
termination of marketing rights of the fetal fibronectin  immunoassay (fFN) test
effective  August 31, 1998,  as well as a decline in  prescriptions  for preterm
labor management services.
<PAGE>

     Cost of revenues as a percentage of revenues remained  relatively  constant
at 51.5% and 51.1% for 2000 and 1999, respectively,  and increased from 39.9% in
1998. The 1999 increase resulted from the acquisitions of the Gainor Medical and
DMS businesses,  whose cost  percentages  were 65.8% and 66.0% in 2000 and 1999,
respectively.

     Selling and  administrative  expenses as a percentage of revenues decreased
to 30.3% for 2000  compared to 31.8% in 1999 due to economies of scale  achieved
from the 1999 restructuring efforts within the Women's Health segment and due to
declines in the Other segments resulting from the sale of the assets of NRMC and
from the  exiting  of the  clinical  patient  record  software  business.  These
decreases are partially offset by increased  corporate expenses resulting from a
$1.2  million  severance  payment to a former  senior  executive of the Company.
Selling and  administrative  expenses as a percentage  of revenues  decreased to
31.8%  for 1999 from  47.1% for 1998 due to  economies  of scale  achieved  as a
result of the Company's acquisitions of Gainor Medical and DMS.

     The Company provides for estimated  uncollectible  accounts as revenues are
recognized.  The provision for doubtful  accounts as a percentage of revenues in
the Women's  Health  segment was  approximately  5% in 2000,  1999 and 1998. The
provision  for  doubtful  accounts as a  percentage  of revenues in the Diabetes
Supplies  and  Services  segment  was 1% for 2000 and  1999.  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.

     Amortization of intangible assets increased by $364,000 in 2000 compared to
1999 due to additional  amortization  resulting from recording  $13.7 million of
incremental  goodwill  related to the  contingent  consideration  for the Gainor
Medical  acquisition.  Amortization  of  intangible  assets  decreased  in  1999
compared to 1998 due to the  write-offs  of intangible  assets  recorded in 1998
(discussed  below).  The impact of the decrease  resulting from these write-offs
was partially  offset by the additional  amortization  of the intangible  assets
recorded as part of the acquisitions described above.

     During  the second  quarter of 2000,  the  Company  recorded  restructuring
expenses of $1.6 million  related to its  decision to exit its clinical  patient
record  software  business,  CMS. Of these costs,  $568,000  related to customer
contract  fulfillment costs,  $518,000 related to remaining software development
costs,  $312,000 related to payroll costs and related  involuntary  severance of
employees  and $201,000  related to other costs and expenses for the shutdown of
the business.  Restructuring  expenses of $4.2 million in 1999 resulted from the
implementation of a consolidation  plan for the Women's Health segment to reduce
the number of monitoring centers from 38 to 15.

     In 1998, the Company recorded an $82.9 million asset  impairment  charge to
reflect management's revised expectations of revenue and earnings growth and the
strategic  plan to expand beyond  maternity  management.  Most of the charge was
related to the write-down of goodwill and intangible assets, which resulted from
the 1996 merger of Tokos and Healthdyne.  Based on projections of future revenue
growth of its preterm labor  management  business,  the Company  determined that
estimated  future  undiscounted  cash flows of the Women's  Health  segment were
below the carrying value of its long-lived assets and goodwill. Accordingly, the
Company  reduced the carrying  value of these  assets by $74.5  million to their
estimated fair value.  Likewise,  the Company  determined that NRMC's  estimated
future  undiscounted  cash flows were below the carrying value of its long-lived
assets due to continued  operational  issues,  including the  termination of the
employment  of the  founding  physician in July 1998.  As a result,  the Company
adjusted the carrying value of NRMC's long-lived assets,  primarily goodwill, to
their estimated fair value by recording an $8.4 million asset impairment charge.
The  estimated  fair  value in each case was  based on  anticipated  cash  flows
discounted at a rate commensurate with the risk involved.

     Interest  expense  increased by $415,000 in 2000 compared to 1999 primarily
due to an increase in the number of days the Gainor Medical acquisition debt was
outstanding and due to higher interest rates. Interest expense increased by $7.1
million in 1999  compared to 1998 due to a  significant  increase in  borrowings
related to business acquisitions.
<PAGE>

     Other income for 2000  includes  gains of $6.1 million from $7.3 million in
proceeds from sales of the Company's investment in WebMD Corporation  ("WebMD").
Additionally, the Company recognized gains of $1.7 million from the 1999 sale of
assets of NRMC.  At December 31, 1999,  the Company's  balance  sheet  reflected
notes  receivable  from  the  purchasers  of  NRMC  totaling  $1.1  million  and
liabilities for patient refunds and reserves for potentially uncollectible notes
receivable and facility lease obligations totaling $2.8 million; no gain or loss
was recognized.  In June 2000, the Company received  $750,000 in full settlement
of notes  receivable  from one  purchaser.  The  recognized  gain  reflects  the
realization  of most of the proceeds and a  re-assessment  of remaining  patient
refunds and other  obligations.  Other income for 1999  includes  gains of $17.3
million  from $20.7  million  in  proceeds  from  sales of shares of WebMD.  See
"Liquidity  and  Capital  Resources"  below  where the use of these  proceeds is
discussed.

     In 1998,  the Company did not record a federal or state  income tax expense
due to the  Company's  net loss.  In 1999,  the Company  recorded a $4.0 million
income  tax  benefit  resulting  from a  reduction  in the  deferred  tax  asset
valuation  allowance  based on current and expected  future net earnings.  As of
December 31, 1999, the deferred tax asset valuation allowance was eliminated and
the full  amount of deferred  income tax assets,  totaling  $36.7  million,  was
reflected on the consolidated  balance sheet. In 2000, the Company  recognized a
$9.1 million tax provision. Cash outflows for income taxes totaled $2.2 million,
being comprised of federal  alternative  minimum taxes, state and foreign taxes.
As of December 31, 2000, the Company's  remaining net operating  losses of $54.1
million, the tax effect of which is reflected in the deferred tax asset, will be
available to offset future tax liabilities.

     In  December  2000,  the  Company  formalized  its  decision  to divest its
Cardiovascular  segment,  QDS.  Accordingly,  its operating results, net of tax,
have been reported as  discontinued  operations.  In February  2001, the Company
completed the sale of the business and certain  assets for  approximately  $18.0
million in cash. See "Liquidity  and Capital  Resources"  below where the use of
these proceeds is discussed.

Liquidity and Capital Resources

     As of December 31, 2000, the Company had cash and short-term investments of
$4.0  million.  Net cash provided by  continuing  operations  increased to $20.1
million in 2000  compared to $12.5  million in 1999.  Contributing  to this cash
flow  improvement  was an increase in  operating  earnings and a net increase in
accounts  payable,  offset by an increase in  inventories.  Net cash provided by
continuing operations was $3.0 million in 1998.

     The Company's  accounts  receivable days' sales outstanding were 64 days as
of December  31, 2000  compared to 65 days as of  December  31,  1999.  Accounts
receivable days' sales  outstanding in the Women's Health segment decreased from
90 days'  sales as of December  31,  1999 to 87 days'  sales as of December  31,
2000.  Days' sales  outstanding  for the Diabetes  Sales and  Services  division
remained constant at 41 days for both periods.

     Net cash used in  investing  activities  was $3.6  million  in 2000,  $78.2
million in 1999, and $18.9 million in 1998. Capital expenditures of $7.4 million
in 2000,  $5.1 million in 1999 and $3.9 million in 1998 relate  primarily to the
upgrade and expansion of computer  information systems as the Company positioned
itself for expansion  into new markets.  In 1999,  $93.0 million was expended on
the purchases of the Gainor Medical  business and DMS. In 1998,  expenditures of
$19.9 million were made related to the acquisitions of QDS and DMS.

     In  connection  with the  acquisition  of QDS,  the Company  invested  $2.0
million in 1998 in preferred stock of WebMD and received options and warrants to
purchase  additional  shares of WebMD for $2.7 million,  which were exercised in
1999.  During the first and second  quarters  of 2000 and the fourth  quarter of
1999,  the Company  sold 203,393  shares and 561,030  shares,  respectively,  of
WebMD, resulting in proceeds of $7.3 million and $20.7 million, respectively. At
December 31,  2000,  the Company had a remaining  investment  in WebMD of 16,423
shares.
<PAGE>

     As discussed  above,  total proceeds of $28.0 million were received in 1999
and 2000 from sales of WebMD.  Of this amount,  $2.7 million was used in 1999 to
exercise  the options  and  warrants  to  purchase  additional  shares and $21.6
million was used to repay the  Company's  term loan facility  ($15.0  million in
1999 and $6.6 million in 2000).

     In January 1999, in connection with the  acquisitions of Gainor Medical and
DMS,  the  Company  entered  into a $125.0  million,  five-year  secured  credit
facility.  The credit  facility  consists of an $80.0 million term loan facility
and a $45.0 million  revolving  credit  facility.  In January 1999,  the Company
borrowed  $105.0  million  under  the  facility,  using  $90.3  million  for the
purchases of Gainor  Medical and DMS and $14.7 million to repay  existing  debt.
The facility is collateralized by accounts  receivable,  inventories and certain
other assets of the Company.  Borrowings under this agreement bear interest,  at
the  Company's  option,  of (i) prime plus 1.25% to 2.25% or (ii) the LIBOR rate
plus 2.25% to 3.25%. The facility  requires a commitment fee payable  quarterly,
in  arrears,  of 0.375% to 0.500%,  based upon the  unused  portion.  Under this
agreement,  the Company is required to maintain certain  financial  ratios,  and
certain  limitations  are placed on cash  dividends.  At December 31, 2000,  the
Company was in compliance with these  requirements.  At December 31, 2000, $43.7
million of the term loan and $29.0 million under the revolving  credit  facility
were outstanding.

     Also, in connection  with the  acquisitions  of Gainor Medical and DMS, the
Company issued $45.0 million of redeemable  preferred stock to the former owners
of Gainor  Medical,  consisting  of $10.0 million of 4%  convertible  redeemable
preferred stock and $35.0 million of 8% redeemable preferred stock with attached
warrants to purchase one million shares of the Company's  common stock. See note
9 of  Notes  to  Consolidated  Financial  Statements  for a  description  of the
redemption provisions.

     The acquisition  agreement for the Gainor Medical business  provided for an
additional   contingent  purchase  price  adjustment  based  on  1999  financial
performance of the Gainor Medical business.  In the second and third quarters of
2000, an additional  $13.7 million of purchase price was paid by the issuance of
subordinated notes to the sellers.  These notes bear an interest rate of 12% per
annum,  and  principal  payments  will be made in the amount of one-third of the
respective  note  amounts on the third,  fourth and fifth  anniversaries  of the
notes.

     In  February  2001,  the Company  completed  the sale of the  business  and
certain  assets of its  Cardiovascular  segment,  QDS, for  approximately  $18.0
million in cash. The sale excluded existing accounts  receivable of $8.8 million
at December  31, 2000.  The  proceeds  from the sale were used to repay the term
loan  facility  in  February  2001.  QDS's net cash flows  provided by (used in)
operating  activities were  $(623,000),  $710,000 and $1.9 million in 2000, 1999
and 1998, respectively.  Capital expenditures incurred by QDS were $3.5 million,
$2.2 million and $2.0  million in 2000,  1999 and 1998,  respectively,  relating
primarily to purchases of patient equipment.

     At a special  meeting on  December  5,  2000,  the  Company's  shareholders
approved a reverse  stock split of the Company's  common stock,  whereby one new
share of common  stock was issued in  exchange  for four  shares of  outstanding
common stock.  Also, the number of authorized shares of common stock was reduced
to 25  million.  Accordingly,  all  references  to share  amounts  and per share
amounts have been adjusted to reflect the split on a retroactive basis.

     In  September  2000,  the Board of  Directors  of the Company  approved the
repurchase  and retirement of $3.0 million of the Company's  outstanding  common
stock.  On October 31, 2000,  The Company  completed  this  repurchase  program,
having  purchased  approximately  297,000  shares of  common  stock (in terms of
post-reverse  stock split  shares).  In November  2000,  the Board of  Directors
approved a  continuation  of the share  repurchase  program and  authorized  the
repurchase  of an additional  $3.0 million of common  stock.  As of December 31,
2000,  the Company  had  purchased a total of  approximately  460,000  shares of
common  stock  at a cost of  approximately  $4.7  million.  At March  27,  2001,
approximately  68,500  additional  shares  have  been  repurchased  in the first
quarter of 2001 at a cost of approximately $800,000.
<PAGE>

     The Company  believes that its  financial  condition is strong and that its
cash, other liquid assets,  operating cash flows and borrowing  capacities under
the existing credit facility, taken together, will provide adequate resources to
fund ongoing operating requirements, future capital expenditures and development
of new projects.

New Accounting Standards

     In June 1998, the Financial  Accounting Standards Board issued Statement of
Financial  Accounting  Standards No. 133, Accounting for Derivative  Instruments
and Hedging  Activities  ("SFAS 133").  SFAS 133, which (as amended  through the
issuance of Statement of Financial Accounting Standards No. 137, Deferral of the
Effective  Date of FASB  Statement No. 133) is effective for 2001,  requires all
derivatives  to be recorded on the balance  sheet at fair value and  establishes
accounting treatment for certain hedge transactions. Also, in December 1999, the
Commission staff released Staff Accounting Bulletin No. 101, Revenue Recognition
in Financial  Statements ("SAB No. 101"). SAB No. 101 provides detailed guidance
on the  recognition of revenue and is effective for 2000 through the issuance of
SAB 101B, Second Amendment:  Revenue  Recognition in Financial  Statements.  The
Company had no  derivative  or hedge  transactions  during 2000 or at January 1,
2001 that  will  require  recognition  or  adjustment  under  SFAS 133,  and the
Company's revenue recognition policy was not impacted by SAB No. 101.


Forward-Looking Statements

     This Annual Report on Form 10-K  contains  forward-looking  statements  and
information that are based on the Company's beliefs and assumptions,  as well as
information  currently available to the Company.  From time to time, the Company
and its  officers,  directors  or  employees  may  make  other  oral or  written
statements  (including statements in press releases or other announcements) that
contain  forward-looking  statements  and  information.   Without  limiting  the
generality of the  foregoing,  the words  "believe",  "anticipate",  "estimate",
"expect",  "intend", "plan", "seek" and similar  expressions,  when used in this
Annual  Report  and  in  such  other   statements,   are  intended  to  identify
forward-looking   statements.  All  statements  that  express  expectations  and
projections  with  respect to future  matters,  including,  without  limitation,
statements  relating to growth, new lines of business and general optimism about
future operating results,  are forward-looking  statements.  All forward-looking
statements and information in this Annual Report are forward-looking  statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, and are intended
to be  covered  by  the  safe  harbors  created  thereby.  Such  forward-looking
statements  are not guarantees of future  performance  and are subject to risks,
uncertainties  and other factors that may cause the actual results,  performance
or achievements of the Company to differ  materially from historical  results or
from any results expressed or implied by such forward-looking  statements.  Such
factors  include,  without  limitation:  (i)  changes  in  reimbursement  rates,
policies or payment  practices by third-party  payors,  whether initiated by the
payor or  legislatively  maintained;  (ii) the  loss of major  customers;  (iii)
termination of the Company's  exclusive supply agreement with Nissho Corporation
or failure to continue  the  agreement on the terms  currently  in effect;  (iv)
impairment of the Company's  rights in intellectual  property;  (v) increased or
more  effective  competition;  (vi) new  technologies  that  render  obsolete or
non-competitive  products and services offered by the Company;  (vii) changes in
laws or regulations applicable to the Company or failure to comply with existing
laws and regulations;  (viii) future  healthcare or budget  legislation or other
health reform  initiatives;  (ix) increased exposure to professional  negligence
liability;  (x)  difficulties  in  successfully  integrating  recently  acquired
businesses into the Company's operations and uncertainties related to the future
performance of such  businesses;  (xi) losses due to foreign  currency  exchange
rate  fluctuations or deterioration  of economic  conditions in foreign markets;
(xii)  changes  in  company-wide  or  business  unit   strategies;   (xiii)  the
effectiveness of the Company's advertising,  marketing and promotional programs;
(xiv) market  acceptance  of the Company's  disease  management  products;  (xv)
increases in interest rates,  and (xvi) the risk factors  discussed 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, 2000.  Many of such factors
are  beyond  the  Company's  ability to control  or  predict,  and  readers  are
cautioned  not to put undue  reliance on such  forward-looking  statements.  The
Company  disclaims  any  obligation  to  update or  review  any  forward-looking
statements  contained in this Annual Report or in any statement  referencing the
risk factors and other  cautionary  statements  set forth in this Annual Report,
whether as a result of new  information,  future events or otherwise,  except as
may be required by the Company's disclosure obligations in filings it makes with
the Commission under federal securities laws.
<PAGE>

Item 7a.  Quantitative and Qualitative Disclosure about Market Risk.

     The  Company is exposed to market risk from  changes in  interest  rates on
long-term debt and foreign exchange rates.

     The Company's  primary interest rate risk relates to its variable rate bank
credit facility,  which is based on LIBOR and prime rates. At December 31, 2000,
the Company's  variable rate long-term debt obligation  totaled $72.7 million. A
hypothetical  10% change in the interest  rates applied to the December 31, 2000
balance of  variable  rate debt  obligations  for a  duration  of one year would
result in additional interest expense of approximately $680,000.

     The Company's non-U.S. operations with sales denominated in other than U.S.
dollars (primarily in Germany) generated  approximately 12% of total revenues in
2000.  In the  normal  course of  business,  these  operations  are  exposed  to
fluctuations  in currency  values.  Management  does not  consider the impact of
currency  fluctuations to represent a significant  risk, and as such, has chosen
not to hedge its foreign currency exposure.  A 10% change in the dollar exchange
rate of the German mark would impact net earnings by approximately $214,000.


<PAGE>


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' Report                                               F-1

Consolidated Balance Sheets -  December 31, 2000 and 1999                  F-2

Consolidated Statements of Operations -  Years Ended
December 31, 2000, 1999 and 1998                                           F-3

Consolidated Statements of Common Shareholders' Equity and
Comprehensive Earnings -  Years Ended December 31, 2000, 1999 and 1998     F-4

Consolidated Statements of Cash Flows -  Years Ended
December 31, 2000, 1999 and 1998                                           F-5

Notes to Consolidated Financial Statements                                 F-6


Item 9.  Changes in and Disagreements with Accountants on Accounting and
         Financial Disclosure.

     None.


<PAGE>


                                    PART III

Items 10-13.

     The information  contained under the heading "Management of the Company" in
the  Company's  definitive  proxy  materials  for its  2001  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  non-affiliates  as shown on the cover page of this report,
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.

     Section  16(a)  of the  Securities  Exchange  Act of 1934 as  amended  (the
"Act"),  requires the Company's directors and executive officers and persons who
own  more  than ten  percent  of a  registered  class  of the  Company's  equity
securities to file reports with the SEC regarding beneficial ownership of common
stock and other equity  securities of the Company.  To the Company's  knowledge,
based solely on a review of copies of such reports  furnished to the Company and
written  representations that no other reports were required,  during the fiscal
year ended  December  31, 2000,  all  officers,  directors  and greater than ten
percent beneficial owners complied with the Section 16(a) filing requirements of
the Act in all instances  with the exception of late filings with respect to the
dispositions of common stock in two instances by Frederick P. Zuspan by gift and
open market sale.


<PAGE>


                                     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' Report                                               F-1

Consolidated Balance Sheets -  December 31, 2000 and 1999                  F-2

Consolidated Statements of Operations -  Years Ended
December 31, 2000, 1999 and 1998                                           F-3

Consolidated Statements of Common Shareholders' Equity and
Comprehensive Earnings -  Years Ended December 31, 2000, 1999 and  1998    F-4

Consolidated Statements of Cash Flows -  Years Ended
December 31, 2000, 1999 and 1998                                           F-5

Notes to Consolidated Financial Statements                                 F-6


     (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:

                                                                           PAGE

Independent Auditors' Report                                                F-1

Schedule II -  Valuation and Qualifying Accounts                            29

     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

Number                                      Description

2.1      Agreement  and Plan of  Merger,  dated  October 2,  1995,  as  amended,
         between Healthdyne,  Tokos and Registrant (incorporated by reference to
         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")).

2.2      Agreement  and Plan of Merger,  dated June 24, 1996,  between  National
         Reproductive Medical Centers,  Inc. ("NRMC"),  Matria, NRMC Acquisition
         Corporation and certain NRMC shareholders (incorporated by reference to
         Exhibit  2.1 to the  Matria  Current  Report on Form 8-K dated July 10,
         1996).
<PAGE>

2.3      Asset  Purchase  Agreement,  dated July 21,  1998,  for the purchase of
         assets of Quality Diagnostic  Services,  Inc. ("QDS")  (incorporated by
         reference to Exhibit 2 to the Matria  Quarterly Report on Form 10-Q for
         the quarter ended June 30, 1998).

2.4      Purchase and Sale  Agreement,  dated  December 21, 1998, by and between
         Matria  and  Gainor   Medical   Management,   L.L.C.,   with   exhibits
         (incorporated  by  reference to Exhibit 2.1 to the  Company's  Form 8-K
         dated February 3, 1999 with those portions omitted for  confidentiality
         reasons filed separately with the Commission).

3.1      Amended and Restated  Certificate  of  Incorporation  (incorporated  by
         reference to Appendix D to the Joint Proxy  Statement/Prospectus  filed
         as part of the Company's Form S-4).

3.2      Restated Certificate of Incorporation (incorporated by reference to
         Exhibit 3.1 to the Matria Annual Report on Form 10-K for the year
         ended December 31, 1995, Commission File No. 20619).

3.3      Amended and Restated Bylaws (incorporated by reference to Exhibit
         3 to the  Matria  Quarterly  Report on Form 10-Q for the  quarter
         ended March 31, 2000).

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  (incorporated  by reference to Exhibit (4)(b) to
         the  Healthdyne  Annual Report on Form 10-K for the year ended December
         31, 1986, Commission File No. 0-10647).

4.2      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  (incorporated by reference to Exhibit
         4.3 to the  Matria  Annual  Report  on Form  10-K  for the  year  ended
         December 31, 1995, Commission File No. 20619).

4.3      Certificate of Designations,  Preferences and Relative,  Participating,
         Optional and Other Special Rights of 4% Series A Convertible  Preferred
         Stock dated January 15, 1999  (incorporated by reference to Exhibit 4.1
         to the Company's Form 8-K dated February 3, 1999).

4.4      Certificate of Designations,  Preferences and Relative,  Participating,
         Optional and Other Special  Rights of 8% Series B Redeemable  Preferred
         Stock dated January 15, 1999  (incorporated by reference to Exhibit 4.2
         to the Company's Form 8-K dated February 3, 1999).

4.5      Credit Agreement,  dated January 19, 1999, among Matria,  certain other
         borrowers  from  time  to time  party  thereto,  the  banks  and  other
         financial institutions from time to time party thereto, and First Union
         National Bank as  Administrative  Agent  (incorporated  by reference to
         Exhibit 4.3 to the Company's Form 8-K dated February 3, 1999).

4.6      Amended and  Restated  Rights  Agreement,  dated April 27, 1999 between
         Matria and SunTrust Bank Atlanta  (incorporated by reference to Exhibit
         4 to the Matria  Quarterly  Report on Form 10-Q for the  quarter  ended
         March 31, 1999).

4.7      First  Amendment to Credit  Agreement  and Waiver,  dated  November 15,
         1999,  among Matria,  certain other  borrowers  from time to time party
         thereto,  the banks and other financial  institutions from time to time
         party thereto,  and First Union National Bank as  Administrative  Agent
         (incorporated  by  reference  to Exhibit  4.7 to the  Company's  Annual
         Report on Form 10-K for the year ended December 31, 1999).
<PAGE>

4.8      Second  Amendment to Credit  Agreement,  dated January 19, 2000,  among
         Matria,  certain other  borrowers from time to time party thereto,  the
         banks and other financial institutions from time to time party thereto,
         and First Union National Bank as Administrative  Agent (incorporated by
         reference to Exhibit 4.8 to the  Company's  Annual  Report on Form 10-K
         for the year ended December 31, 1999).

4.9      Non-Negotiable  Subordinated  Promissory  Note,  dated June 9, 2000
         (incorporated  by reference to Exhibit 4 to the Company's
         Quarterly Report on Form 10-Q for the quarter ended June 30, 2000).

*10.1    1996 Stock Incentive Plan (incorporated by reference to Appendix F-1 to
         the Joint Proxy  Statement/Prospectus  filed as a part of the Company's
         Form S-4).

*10.2    1996  Directors'  Non-Qualified  Stock  Option  Plan  (incorporated  by
         reference  to  Appendix  F-11 to the Joint  Proxy  Statement/Prospectus
         filed as a part of the Company's Form S-4).

*10.3    1996  Employee  Stock  Purchase  Plan  (incorporated  by  reference  to
         Appendix F-111 to the Joint Proxy  Statement/Prospectus filed as a part
         of the Company's Form S-4).

*10.4    Form of  Promissory  Note with Tokos officers and related Security
         Agreement (incorporated  by reference to an Exhibit to the Tokos
         Registration Statement on Form S-1 (Registration No. 33-33340),
         Commission File No. 0-18320).

*10.5    Split-Dollar Life Insurance Agreement between the Company and Parker H.
         Petit,  effective January 1, 1997 (incorporated by reference to Exhibit
         10.12 to the  Matria  Annual  Report  on Form  10-K for the year  ended
         December 31, 1998).

*10.6    Split-Dollar Life Insurance Agreement between the Company and Donald R.
         Millard,  effective  January  1, 1997  (incorporated  by  reference  to
         Exhibit  10.13 to the  Matria  Annual  Report on Form 10-K for the year
         ended December 31, 1998).

*10.7    Split-Dollar Life Insurance  Agreement between the Company and Frank D.
         Powers, effective January 1, 1997 (incorporated by reference to Exhibit
         10.14 to the  Matria  Annual  Report  on Form  10-K for the year  ended
         December 31, 1998).

*10.8    Split-Dollar Life Insurance  Agreement between the Company and
         Thornton A. Kuntz, Jr. effective January 8, 1998  (incorporated by
         reference to Exhibit 10.15 to the Matria Annual Report on Form 10-K
         for the year ended December 31, 1998).

*10.9    Split-Dollar  Life Insurance  Agreement between the Company and Roberta
         L. McCaw,  effective  January 8, 1998  (incorporated  by  reference  to
         Exhibit  10.16 to the  Matria  Annual  Report on Form 10-K for the year
         ended December 31, 1998).

*10.10   Split-Dollar Life Insurance Agreement between the Company and Yvonne V.
         Scoggins,  effective  January 8, 1998  (incorporated  by  reference  to
         Exhibit  10.17 to the  Matria  Annual  Report on Form 10-K for the year
         ended December 31, 1998).

*10.11   Management Agreement between the Company and Lucor Holdings,  LLC, Mark
         J. Gainor and J. Michael Highland, dated January 19, 1999 (incorporated
         by reference to Exhibit  10.18 to the Matria Annual Report on Form 10-K
         for the year ended December 31, 1998).

10.12    Standstill  Agreement between the Company and Mark J. Gainor and SZ
         Investments,  L.L.C., dated January 19, 1999 (incorporated by
         reference to Exhibit 10.19 to the Matria Annual Report on Form 10-K
         for the year ended December 31, 1998).
<PAGE>

*10.13   Severance  Compensation and Restrictive  Covenant Agreement dated as of
         April 27, 1999 between the Company and Donald R. Millard  (incorporated
         by reference to Exhibit  10.12 to the Matria  Quarterly  Report on Form
         10-Q for the quarter ended September 30, 1999).

*10.14   Severance  Compensation and Restrictive  Covenant Agreement dated as of
         April 27, 1999 between the Company and Frank D. Powers (incorporated by
         reference to Exhibit 10.13 to the Matria  Quarterly Report on Form 10-Q
         for the quarter ended September 30, 1999).

*10.15   Severance  Compensation and Restrictive  Covenant Agreement dated as of
         April 27, 1999 between the Company and Yvonne V. Scoggins (incorporated
         by reference to Exhibit  10.14 to the Matria  Quarterly  Report on Form
         10-Q for the quarter ended September 30, 1999).

*10.16   Change in  Control  Severance  Compensation  and  Restrictive  Covenant
         Agreement  dated as of April 27, 1999  between the Company and Frank D.
         Powers  (incorporated  by  reference  to  Exhibit  10.16 to the  Matria
         Quarterly  Report  on Form 10-Q for the  quarter  ended  September  30,
         1999).

*10.17   Change in  Control  Severance  Compensation  and  Restrictive  Covenant
         Agreement  dated as of April 27, 1999 between the Company and Yvonne V.
         Scoggins  (incorporated  by  reference  to Exhibit  10.17 to the Matria
         Quarterly  Report  on Form 10-Q for the  quarter  ended  September  30,
         1999).

*10.18   1997 Stock  Incentive  Plan  incorporated  by reference to Exhibit A to
         Matria's  Definitive Proxy Statement filed with the Commission on April
         16, 1998.

10.19    2000 Stock Incentive Plan (incorporated by reference to Exhibit A to
         Matria's Definitive Proxy Statement filed with the Commission on April
         14, 2000).

10.20    2000  Director's  Non-Qualified  Stock  Option  Plan  (incorporated  by
         reference  to  Matria's  Definitive  proxy  Statement  filed  with  the
         Commission on April 14, 2000).

*10.21   Employment   Letter  Agreement  between  the  Company  and  Jeffrey  D.
         Koepsell,  dated  May  16,  2000  (incorporated  by  reference  to  the
         Company's  Quarterly Report on From 10-Q for the quarter ended June 30,
         2000).

*10.22   Amendment  to  Employment  Letter  Agreement  between  the  Company and
         Jeffrey D. Koepsell,  dated May 18, 2000  (incorporated by reference to
         the Company's  Quarterly Report on Form 10-Q for the quarter ended June
         30, 2000).

The following exhibits are filed as part of this Report:

2.5      Asset Purchase Agreement, dated January 8, 2001, for the sale of
         assets of Quality Diagnostic Services, Inc. ("QDS") among Card Guard
         Technologies, Inc., Matria Healthcare, Inc., and QDS.

2.6      Amendment to Asset Purchase Agreement, dated February 1, 2001, for the
         sale of assets of QDS among Card Guard Technologies, Inc., Matria
         Healthcare, Inc., and QDS.

3.4      Certificate of Amendment of Restated Certificate of Incorporation of
         Matria dated December 5, 2000.

4.10     Non-Negotiable Subordinated Promissory Note, dated August 22, 2000.

4.11     Third Amendment to Credit Agreement, dated March 17, 2000, among
         Matria, the Required Lenders and First Union Bank as Administrative
         Agent.
<PAGE>

10.23    Amendment to the 1996 Directors' Non-Qualified Stock Option Plan
         approved by the Company's stockholders on May 18, 1998.

*10.24   Change in Control Severance Compensation and Restrictive Covenant
         Agreement between the Company and Parker H. Petit, dated October 4,
         2000.

*10.25   Promissory Note, dated October 12, 2000.

11.0     Computation of Earnings (Loss) per Share.

21.0     List of Subsidiaries.

23.0     Accountants' Consent.

24.0     Power of Attorney (included in signature page to this report).

27.0     Financial Data Schedule.


         (b)  Reports on Form 8-K.

     The Company filed a Current Report on Form 8-K on December 14, 2000,  which
reported under Item 9 Regulation FD Disclosure related to Matria's 2000 Investor
Conference conducted December 14, 2000.

         *Management contract or compensatory plan or arrangement

<PAGE>


                                   SIGNATURES

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

                                        MATRIA HEALTHCARE, INC.



March 30, 2001                       By:/s/  Parker H. Petit
                                        --------------------------------------
                                        Parker H. Petit
                                        Chairman of the Board, President and
                                        Chief Executive Officer
                                        (Principal Executive Officer)



                                        /s/  George W. Dunaway
                                        --------------------------------------
                                        George W. Dunaway, Vice President--
                                        Finance and Chief Financial Officer
                                        (Principal Financial Officer)



                                        /s/  Larry N. Brownlee
                                        --------------------------------------
                                        Larry N. Brownlee
                                        Corporate Controller
                                        (Principal Accounting Officer)



     KNOW ALL MEN BY THESE PRESENTS,  that each person whose  signature  appears
below  constitutes  and  appoints  Parker H. Petit as his or her true and lawful
attorney-in-fact and agent, with full power of substitution and re-substitution,
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 10-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                   Chairman of the Board,      March 30, 2001
------------------------------------  President and Chief
     Parker H. Petit                  Executive Officer

/s/ Jeffrey D. Koepsell               Director, Executive         March 30, 2001
------------------------------------  Vice President and
     Jeffrey D. Koepsell              Chief Operating Officer
<PAGE>

/s/ Mark J. Gainor                    Director                    March 27, 2001
------------------------------------
     Mark J. Gainor

/s/ Richard F. Levy                   Director                    March 30, 2001
------------------------------------
     Richard F. Levy

/s/ Guy W. Millner                    Director                    March 26, 2001
------------------------------------
     Guy W. Millner

/s/ Carl E. Sanders                   Director                    March 26, 2001
------------------------------------
     Carl E. Sanders

/s/ Thomas S. Stribling               Director                    March 26, 2001
------------------------------------
     Thomas S. Stribling

/s/ Jackie M. Ward                    Director                    March 25, 2001
------------------------------------
     Jackie M. Ward

/s/ Donald W. Weber                   Director                    March 26, 2001
------------------------------------
     Donald W. Weber

/s/ Morris S. Weeden                  Director                    March 26, 2001
------------------------------------
     Morris S. Weeden

/s/ Frederick P. Zuspan, M.D.         Director                    March 28, 2001
-----------------------------
     Frederick P. Zuspan, M.D.


<PAGE>


                    Matria Healthcare, Inc. and Subsidiaries
                                   Schedule II
                        Valuation and Qualifying Accounts
                             (Amounts in thousands)
<TABLE>

                                                                      Additions
                                                         ------------------------------------
                                            Balance at     Charges to
                                            beginning       Costs and         Charges to                        Balance at
        Description                         of period       Expenses        other accounts      Deductions      end of period
        -----------                         ---------       --------        --------------      ----------      -------------


<S>                                          <C>             <C>                <C>              <C>             <C>

  December 31, 1998
    Allowance for doubtful accounts           $  22,651        6,342               -               11,988          17,005

  December 31, 1999
    Allowance for doubtful accounts           $  17,005        7,193             2,089(1)          14,324          11,963

  December 31, 2000
    Allowance for doubtful accounts           $  11,963        7,043               -               12,069           6,937


---------------------------------
(1)Represents beginning balances in allowance for doubtful accounts of acquired companies.
</TABLE>

<PAGE>

                          Independent Auditors' Report

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

We  have  audited  the  accompanying   consolidated  balance  sheets  of  Matria
Healthcare,  Inc. and  subsidiaries  as of December  31, 2000 and 1999,  and the
related consolidated  statements of operations,  common shareholders' equity and
comprehensive  earnings,  and cash flows for each of the years in the three-year
period  ended  December  31,  2000.  In  connection   with  our  audits  of  the
consolidated financial statements,  we also have audited the financial statement
schedule of valuation and  qualifying  accounts.  These  consolidated  financial
statements  and  financial  statement  schedule  are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
consolidated  financial statements and financial statement schedule based on our
audits.

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

In our opinion, the 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, 2000 and 1999, and the results of their
operations and their cash flows for each of the years in the  three-year  period
ended  December 31, 2000, in conformity  with  accounting  principles  generally
accepted in the United  States of America.  Also,  in our  opinion,  the related
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 LLP

Atlanta, Georgia
February 15, 2001

<PAGE>


                    MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
                           Consolidated Balance Sheets
               (Amounts in thousands, except per share amounts)

<TABLE>

                                                                                        December 31,      December 31
                                                                                      ----------------------------------
    ASSETS                                                                                 2000               1999
    ------                                                                            ---------------    ---------------
    <S>                                                                                       <C>                <C>

    Current assets:
       Cash and cash equivalents                                                        $       3,915              9,548
       Short-term investments (notes 2 and 17)                                                    130              8,243
       Trade accounts receivable, less allowances of $6,937 and
          $11,963 at December 31, 2000 and 1999, respectively (note 5)                         39,969             41,651
       Other receivables (note 16)                                                             27,608              7,312
       Assets of discontinued operations (note 16)                                                  -             15,831
       Inventories (note 5)                                                                    17,035             10,310
       Deferred income taxes (note 7)                                                           3,182              5,122
       Prepaid expenses                                                                         2,011              1,924
                                                                                      ---------------    ---------------
             Total current assets                                                              93,850             99,941

    Property and equipment, net (notes 4 and 5)                                                15,644             13,418
    Intangible assets, net (notes 1 and 2)                                                    119,486            128,724
    Deferred income taxes (note 7)                                                             27,315             31,603
    Cash surrender value of life insurance (note 10)                                           10,813             10,803
    Other assets                                                                                1,185              1,224
                                                                                      ---------------    ---------------
                                                                                        $     268,293            285,713
                                                                                      ===============    ===============
    LIABILITIES AND SHAREHOLDERS' EQUITY

    Current liabilities:
       Current installments of long-term debt (notes 5 and 12)                          $      11,815             10,362
       Accounts payable, principally trade                                                     21,734             18,826
       Accrued liabilities (notes 6, 11 and 16)                                                 8,698             12,349
                                                                                      ---------------    ---------------
             Total current liabilities                                                         42,247             41,537

    Long-term debt, excluding current installments (notes 2, 5 and 12)                         76,996             91,090
    Accrued benefit costs (note 10)                                                             5,052              8,030
    Other long-term liabilities (note 11)                                                       3,702              4,807
                                                                                      ---------------    ---------------
             Total liabilities                                                                127,997            145,464
                                                                                      ---------------    ---------------

    Redeemable preferred stock, $.01 par value.  Authorized 50,000 shares (note 9):
       Series A convertible:  issued and outstanding-- 10 shares at
          December 31, 2000 and 1999; redemption value of $10,000                              10,000             10,000
       Series B:  issued and outstanding-- 35 shares at December 31, 2000
          and 1999; redemption value of $35,000                                                31,446             31,005
                                                                                      ---------------    ---------------
             Total redeemable preferred stock                                                  41,446             41,005
                                                                                      ---------------    ---------------

    Common shareholders' equity (note 8):
       Common stock, $.01 par value.  Authorized 25,000 shares; issued and
          outstanding-- 8,777 and 9,193 at December 31, 2000 and 1999, respectively                88                 92
       Additional paid-in capital                                                             288,900            293,486
       Accumulated deficit                                                                   (186,082)          (196,576)
       Accumulated other comprehensive earnings (loss), net of income taxes                      (521)             5,777
       Notes receivable and accrued interest from shareholder                                  (3,535)            (3,535)
                                                                                      ---------------     --------------
            Total common shareholders' equity                                                  98,850             99,244
                                                                                      ---------------     --------------
   Commitments and contingencies (notes 10, 12 and 13)
                                                                                        $     268,293            285,713
                                                                                       ==============     ==============
</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE>


                    MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
                      Consolidated Statements of Operations
                (Amounts in thousands, except per share amounts)
<TABLE>
                                                                                          Years ended December 31,
                                                                                -----------------------------------------
                                                                                     2000           1999           1998
                                                                                ------------  -------------  ------------
<S>                                                                                  <C>             <C>            <C>

Revenues                                                                            $225,767        231,739       128,572

Cost of revenues                                                                     116,179        118,305        51,278
Selling and administrative expenses                                                   68,468         73,653        60,613
Provision for doubtful accounts                                                        7,043          7,193         6,342
Amortization of intangible assets                                                      9,803          9,439        27,700
Restructuring charges (note 11)                                                        1,599          4,241             -
Asset impairment charges (note 3)                                                          -              -        82,885
                                                                                ------------  -------------  ------------
      Operating earnings (loss) from continuing operations                            22,675         18,908      (100,246)

Interest income                                                                          444            474           475
Interest expense                                                                      (8,600)        (8,185)       (1,083)
Other income, net (note 17)                                                            8,275         16,169           448
                                                                                ------------  -------------  ------------
      Earnings (loss) from continuing operations before income taxes                  22,794         27,366      (100,406)

Income tax benefit (expense) (note 7)                                                 (9,100)         4,000             -
                                                                                ------------  -------------  ------------

      Earnings (loss) from continuing operations                                      13,694         31,366      (100,406)

Earnings (loss) from discontinued operations, net of income taxes (note 16)                -          2,640        (1,136)
                                                                                ------------  -------------  ------------

      Net earnings (loss)                                                             13,694         34,006      (101,542)

Redeemable preferred stock dividends                                                  (3,200)        (3,049)            -
Accretion of Series B redeemable preferred stock                                        (441)          (420)            -
                                                                                ------------  -------------  ------------

      Net earnings (loss) available to common shareholders                           $10,053         30,537      (101,542)
                                                                                ============  =============  ============


Net earnings (loss) per common share (note 1):
   Basic:
      Continuing operations                                                           $ 1.10           3.05        (10.98)
      Discontinued operations                                                              -           0.29         (0.12)
                                                                                ------------  -------------  ------------

                                                                                      $ 1.10           3.34        (11.10)
                                                                                ============  =============  ============
   Diluted:
      Continuing operations                                                           $ 1.05           2.82        (10.98)
      Discontinued operations                                                              -           0.26         (0.12)
                                                                                ------------  -------------  ------------

                                                                                      $ 1.05           3.08        (11.10)
                                                                                ============  =============  ============

Weighted average shares outstanding:
   Basic                                                                               9,139          9,151         9,145
                                                                                ============  =============  ============
   Diluted                                                                             9,946         10,036         9,145
                                                                                ============  =============  ============
</TABLE>

See accompanying notes to consolidated financial statements.


<PAGE>


                    MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
             Consolidated Statements of Common Shareholders' Equity
                           and Comprehensive Earnings
                        (Amounts and shares in thousands)
<TABLE>
                                                                                    Additional
                                                                  Common Stock        paid-in   Accumulated
                                                              Shares      Amount      capital      deficit
                                                             --------- ----------  -----------  ------------
<S>                                                           <C>      <C>          <C>           <C>

Balance, December 31, 1997                                    9,198    $     92     282,603       (125,991)

Issuance of common stock:
   Exercise of options                                           30           -         273              -
   Employee stock purchase plan                                  30           -         365              -
   Conversion of subordinated debentures                          1           -          13              -
Purchase of treasury stock                                     (156)         (1)     (2,396)             -
Net loss                                                          -            -          -       (101,542)
                                                             -----------------------------------------------
Balance, December 31, 1998                                    9,103          91     280,858       (227,533)

Issuance of common stock:
   Exercise of options                                           37           -         309              -
   Employee stock purchase plan                                  49           1         527              -
   Conversion of subordinated debentures                          4           -          87              -
Recognition of deferred tax effect of exercise of options         -           -       7,710              -
Issuance of warrants on Series B redeemable preferred
   stock                                                          -           -       4,415              -
Accretion on Series B redeemable preferred stock                  -           -        (420)             -
Dividends on redeemable preferred stock                           -           -           -         (3,049)
Net earnings                                                      -           -           -         34,006
Change in foreign currency translation adjustment                 -           -           -              -
Change in unrealized appreciation on available-for-sale
   securities                                                     -           -           -              -
                                                             ----------------------------------------------
Balance, December 31, 1999                                    9,193          92     293,486       (196,576)

Issuance of common stock:
   Exercise of options                                            5           -          65              -
   Employee stock purchase plan                                  40           1         558              -
   Conversion of subordinated debentures                          -           -           5              -
Repurchase of common stock                                     (460)         (5)     (4,728)             -
Fractional shares retired after reverse stock split              (1)          -         (45)             -
Accretion on Series B redeemable preferred stock                  -           -        (441)             -
Dividends on redeemable preferred stock                           -           -           -         (3,200)
Net earnings                                                      -           -           -         13,694
Change in foreign currency translation adjustment, net of
   income taxes                                                   -           -           -              -
Change in unrealized appreciation on available-for-sale
   securities, net of income taxes                                -           -           -              -
                                                             -----------------------------------------------

Balance, December 31, 2000                                    8,777      $   88     288,900       (186,082)
                                                             =======    ========    =======       =========

                                                                                  Notes
                                                              Accumulated       receivable         Total
                                                                other           and accrued        common       Comprehensive
                                                             comprehensive     interest from    shareholders'     earnings
                                                             earnings (loss)    shareholder        equity          (loss)
                                                             --------------  ---------------    -------------- -------------

Balance, December 31, 1997                                           -            (3,535)       153,169

Issuance of common stock:
   Exercise of options                                               -                 -            273
   Employee stock purchase plan                                      -                 -            365
   Conversion of subordinated debentures                             -                 -             13
Purchase of treasury stock                                           -                 -         (2,397)
Net loss                                                             -                 -       (101,542)        (101,542)
                                                             -----------------------------------------------    =========
Balance, December 31, 1998                                           -            (3,535)        49,881

Issuance of common stock:
   Exercise of options                                               -                 -            309
   Employee stock purchase plan                                      -                 -            528
   Conversion of subordinated debentures                             -                 -             87
Recognition of deferred tax effect of exercise of options            -                 -          7,710
Issuance of warrants on Series B redeemable preferred
   stock                                                             -                 -          4,415
Accretion on Series B redeemable preferred stock                     -                 -           (420)
Dividends on redeemable preferred stock                              -                 -         (3,049)
Net earnings                                                         -                 -         34,006          34,006
Change in foreign currency translation adjustment                 (537)                -           (537)           (537)
Change in unrealized appreciation on available-for-sale
   securities                                                    6,314                 -          6,314           6,314
                                                             -----------------------------------------------------------
Balance, December 31, 1999                                       5,777            (3,535)        99,244          39,783
                                                                                                                ========

Issuance of common stock:
   Exercise of options                                               -                 -             65
   Employee stock purchase plan                                      -                 -            559
   Conversion of subordinated debentures                             -                 -              5
Repurchase of common stock                                           -                 -         (4,733)
Fractional shares retired after reverse stock split                  -                 -            (45)
Accretion on Series B redeemable preferred stock                     -                 -           (441)
Dividends on redeemable preferred stock                              -                 -         (3,200)
Net earnings                                                         -                 -         13,694          13,694
Change in foreign currency translation adjustment, net of
   income taxes                                                    (25)                -            (25)            (25)
Change in unrealized appreciation on available-for-sale
   securities, net of income taxes                              (6,273)                -         (6,273)         (6,273)
                                                             ------------------------------------------------------------
Balance, December 31, 2000                                        (521)           (3,535)        98,850           7,396
                                                             ==========           =======       ========         ========

</TABLE>

See accompanying notes to consolidated financial statements


<PAGE>



                    MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
                      Consolidated Statements of Cash Flows
                             (Amounts in thousands)
<TABLE>

                                                                                                 Years ended December 31,
                                                                                           ---------------------------------------
                                                                                              2000         1999         1998
                                                                                           ---------------------------------------
        <S>                                                                               <C>              <C>         <C>

           Cash Flows from Operating Activities:
              Net earnings (loss)                                                          $ 13,694        34,006     (101,542)
              Less, earnings (loss) from discontinued operations, net of income taxes             -         2,640       (1,136)
                                                                                           --------      --------     --------
              Earnings (loss) from continuing operations                                     13,694        31,366     (100,406)
              Adjustments to reconcile net earnings (loss) to net cash provided
                 by operating activities:
                    Depreciation and amortization                                            13,984        13,987       32,292
                    Provision for doubtful accounts                                           7,043         7,193        6,342
                    Deferred tax expense (benefit)                                            9,100        (4,000)           -
                    Gains on sales of investments                                            (6,077)      (17,349)           -
                    Asset impairment charges                                                      -             -       82,885
                    Other, net                                                                    -             -          146
                    Changes in assets and liabilities, net of effect of acquisitions:
                       Trade accounts receivable                                             (5,583)       (5,319)      (5,151)
                       Inventories                                                           (6,735)         (191)        (559)
                       Other current assets                                                     347           419         (827)
                       Intangible and other noncurrent assets                                (4,818)       (3,503)      (2,398)
                       Accounts payable                                                       3,713        (5,667)       1,839
                       Accrued and other liabilities                                         (4,550)       (4,458)     (11,143)
                                                                                           --------      --------    ---------
           Net cash provided by continuing operations                                        20,118        12,478        3,020
           Net cash provided by (used in) discontinued operations                              (623)          710        1,911
                                                                                           --------      --------    ---------
                 Net cash provided by operating activities                                   19,495        13,188        4,931
                                                                                           --------      --------    ---------

           Cash Flows from Investing Activities:
              Purchases of property and equipment                                            (7,395)       (5,128)      (3,941)
              Purchases of property and equipment related to discontinued operations         (3,492)       (2,233)      (2,001)
              Acquisition of businesses, net of cash acquired                                     -       (93,022)     (19,947)
              Proceeds from sales of short-term investments                                   7,298        23,579        8,997
              Investment in an affiliated company                                                 -        (2,680)      (2,010)
              Proceeds from disposal of property and equipment                                    -         1,257            -
                                                                                           --------       -------      -------
                 Net cash used in investing activities                                       (3,589)      (78,227)     (18,902)
                                                                                           --------       -------      -------

           Cash Flows from Financing Activities:
              Borrowings under credit agreement                                              23,000       108,000       16,659
              Proceeds from issuance of debt                                                    891           979          781
              Principal repayments of long-term debt                                        (37,650)      (41,552)      (1,627)
              Proceeds from issuance of common stock                                            579           837          638
              Repurchases of common stock                                                    (4,733)            -       (2,397)
              Preferred stock dividend payments                                              (3,200)       (2,249)           -
              Other, net                                                                          -             -          (60)
                                                                                           --------        ------      -------
                 Net cash provided by (used in) financing activities                        (21,113)       66,015       13,994
                                                                                           --------        ------     --------
           Effect of exchange rate changes on cash and cash equivalents                        (426)         (537)           -
                                                                                           --------        -------    --------
                 Net increase (decrease) in cash and cash equivalents                        (5,633)          439           23
           Cash and cash equivalents at beginning of year                                     9,548         9,109        9,086
                                                                                           --------        ------     --------
           Cash and cash equivalents at end of year                                         $ 3,915         9,548        9,109
                                                                                           ========       =======     ========
           Supplemental disclosures of cash paid for:

              Interest                                                                      $ 8,596         6,325        1,161
                                                                                           ========       =======     ========
              Income taxes                                                                  $ 2,167           457           10
                                                                                           ========       =======     ========

           Supplemental disclosure of noncash investing and financing activities:
              Equipment acquired under capital lease obligations                            $   266           526          707
                                                                                           ========       =======     ========
</TABLE>

           See accompanying notes to consolidated financial statements.
<PAGE>

                    MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 2000, 1999 and 1998
           (Amounts in thousands, except share and per share amounts)


(1)    Summary of Significant Accounting Policies

       (a)    Business

              Prior  to  1998,  Matria   Healthcare,   Inc.   ("Matria"  or  the
              "Company"),  a Delaware  corporation,  was  primarily a nationwide
              provider  of  women's  health   services.   During  1998,   Matria
              established   itself  as  a   diversified   provider   of  disease
              management.  In July 1998, the Company acquired Quality Diagnostic
              Services,  Inc.  ("QDS") and entered  the  cardiovascular  disease
              management  market.  In October  1998,  the  Company  entered  the
              respiratory  disease  management  market by  signing  a  licensing
              agreement with National Jewish Medical Research Center  ("National
              Jewish")  that  gives  Matria   exclusive  rights  to  market  the
              comprehensive  asthma and chronic  obstructive  pulmonary  disease
              management  programs  developed by National  Jewish.  In 1998, the
              Company  expanded  its existing  diabetes-in-pregnancy  program to
              include the general  diabetes  population.  In January  1999,  the
              Company  significantly  expanded its offering of diabetes supplies
              and disease management services through the acquisitions of Gainor
              Medical  Management,   L.L.C.   ("Gainor  Medical")  and  Diabetes
              Management  Systems,  Inc.  ("DMS").  See note 2 for a summary  of
              acquisitions, note 15 for a description of the revenues, operating
              earnings,  identifiable assets,  depreciation and amortization and
              capital expenditures of the Company's reportable business segments
              and note 16 for a summary of dispositions of businesses, including
              the sale of QDS in February 2001.

       (b)    Basis of Financial Statement Presentation

              The  consolidated  financial  statements  have  been  prepared  in
              conformity with accounting  principles  generally  accepted in the
              United States. 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  sheets,  and  revenues,  other
              income and expenses for the periods.  Actual  results could differ
              from those estimates.

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

       (c)    Revenues and Allowances for Uncollectible Accounts

              Revenues for the Women's  Health and Other  segments are generated
              by providing  services through patient service  centers.  Revenues
              from these  segments are  recognized  as the related  services are
              rendered  and  are  net  of  contractual  allowances  and  related
              discounts.  The Diabetes  Supplies and Services  segment  provides
              services through its patient service center,  provides supplies to
              patients, and assembles, packages and distributes lancing products
              to original  equipment  manufacturers.  Revenues  for services are
              recognized  when  services are provided and revenues  from product
              sales are recognized  when product is shipped.  Revenues from this
              segment are recorded net of  contractual  and other  discounts.  A
              significant  portion  of  the  Company's  revenues  is  billed  to
              third-party  reimbursement  sources.   Accordingly,  the  ultimate
              collectibility  of a substantial  portion of the  Company's  trade
              accounts  receivable  is  susceptible  to changes  in  third-party
              reimbursement policies.

              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.
<PAGE>
                    MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 2000, 1999 and 1998
           (Amounts in thousands, except share and per share amounts)

       (d)    Concentration of Credit Risk

              Financial  instruments,  which  potentially  expose the Company to
              concentrations  of credit  risk,  consist  primarily  of  accounts
              receivable from third-party payors. 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 uncollectible accounts.

       (e)    Cash and Cash Equivalents

              Cash and cash  equivalents  consist  of cash and  interest-bearing
              deposits. The Company considers all highly liquid debt instruments
              with  original  maturities  of  three  months  or  less to be cash
              equivalents.

       (f)    Short-Term Investments

              At  December  31,  2000,  short-term  investments  consist  of the
              Company's  holdings in marketable  equity  securities (see notes 2
              and 17). Under the provisions of Statement of Financial Accounting
              Standards No. 115,  Accounting for Certain Investments in Debt and
              Equity  Securities  ("SFAS  115"),  the Company  classifies  these
              short-term investments as available-for-sale  securities which are
              carried  at fair  value  with  any  unrealized  gains  and  losses
              included in  accumulated  other  comprehensive  earnings in common
              shareholders'  equity.  Unrealized  gains  of $41 and  $6,314  are
              included  in  common  shareholders'  equity  in  the  consolidated
              balance sheets at December 31, 2000 and 1999.

       (g)    Inventories

              Inventories,   which  consist  primarily  of  disposable   medical
              products,  drugs and patient supplies,  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.
<PAGE>
                   MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 2000, 1999 and 1998
           (Amounts in thousands, except share and per share amounts)

       (i)    Intangible Assets

              A summary of intangible assets follows:
<TABLE>

                                                                December 31,
                                                        ---------------------------
                                                         2000            1999
                                                        -----------     -----------
                        <S>                             <C>             <C>

                        Goodwill                        $     135,045         134,326
                        Other intangible assets                 3,825           3,978
                                                          -----------     -----------
                                                              138,870         138,304
                        Less accumulated amortization          19,384           9,580
                                                          -----------     -----------
                                                        $     119,486         128,724
                                                          ===========     ===========
</TABLE>


              Intangible assets consist of goodwill and other intangible assets,
              primarily resulting from the Company's  acquisitions (see note 2).
              Goodwill is being  amortized using the  straight-line  method over
              periods  ranging from 8 to 15 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 (see note 3).

              Other  intangible  assets  consist of  customer  lists,  purchased
              software,  covenants  not to compete and patents.  These costs are
              being amortized on a straight-line basis over periods ranging from
              four to ten years.

       (j)    Long-Lived Assets and Long-Lived Assets to Be Disposed Of

              The Company  reviews  long-lived  assets and certain  identifiable
              intangibles   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  exceeds  the fair value of the assets (see note 3).
              Assets to be disposed of are reported at the lower of the carrying
              amount or fair value less costs to sell.

       (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 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
              disclosures required by SFAS 123 (see note 8).
<PAGE>

                   MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 2000, 1999 and 1998
           (Amounts in thousands, except share and per share amounts)


       (l)    Income Taxes

              The Company accounts for income taxes using an asset and liability
              approach.  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 and net operating loss and tax
              credit carryforwards.  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 by the  flow-through
              method.

       (m)    Net Earnings (Loss) Per Share of Common Stock

              Basic  net  earnings  (loss)  per  common  share  are based on the
              weighted average number of common shares outstanding.  Diluted net
              earnings (loss) per common share are based on the weighted average
              number of common shares  outstanding and dilutive potential common
              shares,  such as dilutive  stock options and warrants,  determined
              using  the  treasury  stock  method,   and  dilutive   convertible
              preferred  shares,  determined using the if-converted  method.  In
              1998, the  computation  of diluted net earnings  (loss) per common
              share was antidilutive;  therefore, the amounts reported for basic
              and diluted net earnings (loss) per common share are the same.
<PAGE>

                   MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 2000, 1999 and 1998
           (Amounts in thousands, except share and per share amounts)

              The  computations for basic and diluted net earnings (loss) per
              common share are as follows:
<TABLE>

                                                                                        Years ended December 31,
                                                                             -----------------------------------------------
                                                                                2000             1999              1998
                                                                             ------------     ------------      ------------
              <S>                                                            <C>              <C>               <C>
              Basic

              Earnings (loss) from continuing operations                        $ 13,694           31,366         (100,406)
              Earnings (loss) from discontinued  operations,  net of income
              taxes                                                                    -            2,640           (1,136)
                                                                             -----------       ----------        ---------
                                                                                  13,694           34,006         (101,542)
              Redeemable preferred stock dividends                                (3,200)          (3,049)               -
              Accretion on Series B redeemable preferred stock                      (441)            (420)               -
                                                                             -----------       ----------        ---------
              Net earnings (loss) available to common shareholders             $  10,053           30,537         (101,542)
                                                                             ===========       ==========        =========

              Weighted average number of common shares outstanding                 9,139            9,151            9,145
                                                                             ===========       ==========        =========
              Net earnings (loss) per common share:
                 Continuing operations                                            $ 1.10             3.05           (10.98)
                 Discontinued operations                                               -             0.29            (0.12)
                                                                             -----------       ----------        ---------
                                                                                  $ 1.10             3.34           (11.10)
                                                                             ===========       ==========        =========


              Diluted

              Net earnings (loss) available to common shareholders              $ 10,053           30,537         (101,542)
              Dividends on convertible preferred shares                              400              381                -
                                                                             -----------       ----------       ----------
              Net earnings (loss) for diluted calculation                       $ 10,453           30,918         (101,542)
                                                                             ===========       ==========       ==========

              Shares:
                 Weighted average number of common shares outstanding              9,139            9,151            9,145
                 Shares issuable from assumed exercise of options and warrants       251              356                -
                 Convertible preferred stock                                         556              529                -
                                                                             -----------       ----------       ----------
                                                                                   9,946           10,036            9,145
                                                                             ===========       ==========       ==========

              Net earnings (loss) per common share:
                 Continuing operations                                            $ 1.05             2.82           (10.98)
                 Discontinued operations                                               -             0.26            (0.12)
                                                                             -----------       ----------       ----------
                                                                                  $ 1.05             3.08           (11.10)
                                                                             ===========       ==========       ==========
</TABLE>


              All basic and diluted net earnings (loss) per common share amounts
              reflected  for  all  periods  in  the  accompanying   consolidated
              financial statements and these notes thereto have been restated to
              reflect the reverse stock split (see note 8).

       (n)    Comprehensive Earnings

              Comprehensive  earnings  generally  include  all changes in equity
              during a period except those resulting from  investments by owners
              and  distributions  to owners.  Until  1999,  the  Company  had no
              elements of comprehensive earnings other than net earnings (loss).
              For  2000  and  1999,   comprehensive  earnings  consists  of  net
              earnings,  foreign currency translation adjustments and changes in
              unrealized appreciation on available-for-sale securities.
<PAGE>
                   MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 2000, 1999 and 1998
           (Amounts in thousands, except share and per share amounts)

       (o)    Fair Value of Financial Instruments

              The Company uses  financial  instruments  in the normal  course of
              business.  The  carrying  values of cash  equivalents,  short-term
              investments,  accounts  receivable,  accounts payable, and accrued
              liabilities approximate fair value due to the short-term nature of
              these  assets and  liabilities.  The  Company  estimates  that the
              carrying  amounts of the Company's  long-term debt approximate the
              fair value based on the current  rates  offered to the Company for
              debt with the same remaining maturities.

       (p)    Reclassifications

              Certain  amounts  in the  1999  and  1998  consolidated  financial
              statements  have been  reclassified  to conform  to  presentations
              adopted in 2000.

(2)    Acquisitions

       Effective January 1, 1999, the Company acquired  substantially all of the
       assets of Gainor Medical for an initial  purchase price of  approximately
       $134,000.  The acquisition was accounted for under the purchase method of
       accounting  and  resulted  in the  recognition  of  intangible  assets of
       $3,800,   consisting  of  purchased  U.S.  patient  lists  and  executive
       noncompete  agreements  (being amortized over five years),  international
       patient lists (being amortized over ten years),  and goodwill of $106,044
       (being  amortized  over 15 years).  Results of its  operations  have been
       included in the Company's  consolidated  results of operations  effective
       January 1, 1999.

       In connection  with the acquisition of the Gainor Medical  business,  the
       Company  recognized a $25,015  deferred tax asset for the  estimated  tax
       benefits of the net operating  loss  carryforwards  to be realized in the
       future as a result of the acquisition (see note 7).

       The  acquisition  agreement  also provided for an  additional  contingent
       purchase  price  adjustment  based on 1999  financial  performance of the
       Gainor Medical business. In 2000, an additional $13,719 of purchase price
       was paid by the  issuance  of  subordinated  notes.  These  notes bear an
       interest rate of 12% per annum and principal payments will be made in the
       amount of one-third of the respective  note amounts on the third,  fourth
       and fifth anniversaries of the notes.

       At the  closing  of the  transaction,  the  Company  paid  $83,758 of the
       purchase price in cash, assumed  approximately  $1,242 in debt and issued
       $45,000 in  redeemable  preferred  stock and warrants of the Company (see
       note 9). The transaction  also included a cash adjustment  payable by the
       Company  of  approximately  $6,573,  one-half  of  which  was paid at the
       closing  and the  remaining  one-half of which was paid during the second
       quarter of 1999.

       The cash portion of the purchase price was financed  partially  through a
       $125,000  five-year bank credit facility,  which the Company entered into
       in January  1999.  The credit  facility  consists of an $80,000 term loan
       facility and a $45,000 revolving credit facility (see note 5).

       In January 1998, the Company  converted a $250 note  receivable  from DMS
       and paid $500 cash to acquire a 10% equity  interest in DMS. During 1998,
       the Company  made  advances to fund the working  capital of DMS  totaling
       $1,335.  In January 1999, the Company  converted the note  receivable for
       these  advances and paid cash of $6,500 to acquire the  remaining  equity
       interests of DMS. The  acquisition  was  accounted for using the purchase
       method of  accounting  and  resulted  in the  recognition  of  $10,765 of
       goodwill,  which is being amortized over 15 years.  Results of operations
       of this business have been included in the Company's consolidated results
       of operations effective January 1, 1999.
<PAGE>
                   MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 2000, 1999 and 1998
           (Amounts in thousands, except share and per share amounts)


       On July 21, 1998, Matria purchased certain assets of QDS, a cardiac event
       monitoring  company, a Georgia corporation and wholly owned subsidiary of
       Endeavor  Technologies,   Inc.  (subsequently  named  WebMD  Corporation)
       ("WebMD") for $17,000 in cash.  The  acquisition  agreement also provided
       for  additional  cash  payments  of up to  $6,000  contingent  upon  1999
       revenues  of the  cardiovascular  businesses.  The 1999  revenue  amounts
       required  to earn  additional  consideration  were  not  achieved  and no
       additional   payments  will  be  made.  The  assets   purchased   include
       intellectual  property,  accounts  receivable,  and contract rights.  The
       acquisition  was accounted for in accordance  with the purchase method of
       accounting  with the  results  of  operations  of the  business  acquired
       included in the consolidated financial statements from the effective date
       of the  acquisition,  July 1, 1998. The acquisition  resulted in expensed
       acquired in-process research and development of $2,482, intangible assets
       of $3,846,  including noncompete agreements and workforce (amortized over
       five years),  customer lists and trade names  (amortized  over 15 years),
       and goodwill of $8,254  (amortized over 15 years). In connection with the
       acquisition,  the Company made a $2,010  preferred  stock  investment  in
       WebMD,  which was  reflected  in other  long-term  assets at December 31,
       1998.  In 1999,  the Company  made an  additional  $2,680  investment  to
       exercise options and warrants to purchase  additional shares of WebMD. At
       December  31,  2000,  the  Company's  remaining  investment  in  WebMD is
       reflected  in  short-term  investments.  In  December  2000,  the Company
       formalized its decision to sell the QDS business and accordingly reported
       all results of operations as discontinued  operations.  See note 17 for a
       summary  of  gains  from  sales  of  shares  of  WebMD  and note 16 for a
       discussion about the disposition of this business.

       The following is a summary of the fair value of assets acquired and
       consideration paid in connection with these acquisitions:
<TABLE>

                                                                             Gainor           QDS              DMS
                                                                           ------------    -----------      ----------
        <S>                                                                <C>             <C>              <C>

        Cash paid for the assets acquired, net of cash acquired         $     81,770          17,000           8,492
        Preferred stock issued for assets acquired                            45,000               -               -
        Contingent consideration                                              13,719               -               -
        Cash paid for acquisition costs                                        5,337             370               -
                                                                           -----------     -----------      ----------
        Fair value of assets acquired, including goodwill               $    145,826          17,370           8,492
                                                                           ===========     ===========      ==========
</TABLE>


(3)     Asset Impairment Charges

     In 1998, the Company recorded an $82,885 asset impairment charge to reflect
     management's  revised  expectations  of revenue and earnings growth and the
     strategic plan to expand beyond  maternity  management.  Most of the charge
     was related to the  write-down  of goodwill and  intangible  assets,  which
     resulted  from the 1996  merger  ("Merger")  of Tokos  Medical  Corporation
     (Deleware)  ("Tokos")  and  Healthdyne,   Inc.  ("Healthdyne").   Based  on
     projections  of future  revenue  growth  of its  preterm  labor  management
     business,  the Company  determined that estimated future  undiscounted cash
     flows of the Women's  Health  segment were below the carrying  value of its
     long-lived  assets and  goodwill.  Accordingly,  the  Company  reduced  the
     carrying  value of these assets by $74,496 to their  estimated  fair value.
     The  operations of Tokos and  Healthdyne are included in the Women's Health
     operating segment (see note 15).

       Likewise,  the Company determined that the estimated future  undiscounted
       cash flows of National  Reproductive  Medical Center,  Inc. ("NRMC") were
       below  the  carrying  value of its  long-lived  assets  due to  continued
       operational  issues,  including the  termination of the employment of the
       founding  physician in July 1998. As a result,  the Company  adjusted the
       carrying value of NRMC's long-lived assets,  primarily goodwill, to their
       estimated fair value by recording an $8,389 asset impairment  charge. The
       operations  of NRMC are  included in Other  Segments  (see note 15).  See
       further discussion of the disposition of NRMC in note 16.


<PAGE>

                   MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 2000, 1999 and 1998
           (Amounts in thousands, except share and per share amounts)


       The estimated fair value in each case was based on anticipated cash flows
       discounted at a rate commensurate with the risk involved.

(4)    Property and Equipment

       Property and equipment are summarized as follows:
<TABLE>

                                                                      December 31,

                                                                 ------------------------
                                                                    2000          1999
                                                                 ----------    ----------
<S>                                                              <C>           <C>
        Machinery, equipment and fixtures                     $     20,278        17,116
        Medical equipment                                           18,623        17,744
        Leasehold improvements                                       2,124         1,801
                                                                 ---------     ---------
                                                                    41,025        36,661

        Less accumulated depreciation and amortization              25,381        23,243
                                                                 ---------     ---------

                                                               $    15,644        13,418
                                                                 =========     =========
</TABLE>


(5)    Long-Term Debt

       Long-term debt is summarized as follows:
<TABLE>

                                                                                                 December 31,
                                                                                        ------------------------------
                                                                                            2000              1999
                                                                                        -------------     ------------
        <S>                                                                             <C>               <C>

        Secured  term  loan,  variable  interest  at the LIBOR  rate plus  2.5%;
           payable in quarterly installments; maturing in March 2004                 $      43,669           59,000
        Secured revolving line of credit, variable interest at the LIBOR
           rate plus 2.5%; outstanding principal balance plus all accrued
           but unpaid interest payable March 2004                                           29,000           27,000
        Subordinated acquisition note, interest at 8% payable
           quarterly; interest at 4% payable annually; payable in annual
           installments beginning in 2003 and maturing in 2005                              13,963           13,000
        Convertible subordinated debentures (net of discount of $87
           and $35 at December 31, 2000 and 1999, respectively);  interest at 8%
           payable annually; maturing on December 31, 2001; convertible into the
           Company's common stock at $19.60 per share; redeemable by the
           Company at face value                                                             1,146            1,187
        Capital lease obligations; interest ranging from approximately
           7% to 13% with various monthly payments and maturing at
           various dates through December 2003 (note 12)                                       602              754
        Other debt; interest at rates ranging from approximately 7.5%
           to 9%; payable in monthly installments through May 2002                             431              511
                                                                                       -----------        ---------
              Total long-term debt                                                          88,811          101,452

        Less current installments                                                           11,815           10,362
                                                                                       -----------        ---------

                  Long-term debt, excluding current installments                     $      76,996           91,090
                                                                                       ===========        =========
</TABLE>
<PAGE>

                   MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 2000, 1999 and 1998
           (Amounts in thousands, except share and per share amounts)

       In connection with the  acquisitions of Gainor Medical and DMS in January
       1999 (see note 2), the Company  entered  into a $125,000  five-year  bank
       credit facility. This facility consisted of an $80,000 term loan facility
       and a $45,000  revolving credit facility.  The facility is collateralized
       by accounts receivable,  inventories, property and equipment, and certain
       other  assets  of the  Company.  Borrowings  under  this  agreement  bear
       interest,  at the Company's  option,  of (i) prime plus 1.25% to 2.25% or
       (ii) the  LIBOR  rate plus  2.25% to  3.25%.  As of  December  31,  2000,
       interest  rates under this  agreement  ranged from 9.1875% to 11.0%.  The
       weighted  average  interest rate on this facility for 2000 was 9.43%. The
       facility  requires a commitment  fee payable  quarterly,  in arrears,  of
       0.375% to 0.500%,  based upon the unused  portion.  Under this agreement,
       the Company is required to maintain certain  financial ratios and certain
       limitations  are placed on cash  dividends.  At December  31,  2000,  the
       Company was in compliance with these requirements.

       Approximate  aggregate  minimum annual payments due on long-term debt for
       the five years subsequent to December 31, 2000 are as follows:
<TABLE>
                        <S>                           <C>

                        2001                 $        11,815
                        2002                          11,415
                        2003                          18,819
                        2004                          42,107
                        2005                           4,655
                        Thereafter                         -
                                                  -------------
                                             $        88,811
                                                  =============
</TABLE>


       In February  2001,  $18,000 of the term loan facility was repaid from the
       proceeds of the sale of QDS (see note 16). All subsequent payments due on
       the term loan facility will be  proportionately  reduced from the amounts
       reflected in the table above.

(6)    Accrued Liabilities

       Accrued liabilities are summarized as follows:
<TABLE>

                                                                                     December 31,
                                                                             -----------------------------
                                                                                2000             1999
                                                                             -----------      ------------
        <S>                                                                  <C>              <C>
        Accrued salaries, wages and incentives                           $       2,466            2,960
        Accrued liabilities of business dispositions (note 16)                   1,460            2,751
        Accrued interest                                                         1,431            1,893
        Accrued preferred stock dividends                                          800              800
        Accrued restructuring costs (note 11)                                      764            1,369
        Other                                                                    1,777            2,576
                                                                             -----------      ------------
                                                                         $       8,698           12,349
                                                                             ===========      ============

</TABLE>
<PAGE>
                   MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 2000, 1999 and 1998
           (Amounts in thousands, except share and per share amounts)

(7)    Income Taxes

       The provision (benefit) for income taxes consisted of:
<TABLE>

                                                                                      Years ended December 31,
                                                                            ---------------------------------------------
                                                                                2000            1999            1998
                                                                            ------------    ------------    -------------
        <S>                                                             <C>                     <C>              <C>
        Current tax provision:
           U.S. federal                                                 $        768              87              10
           State and local                                                       692             162               -
           Non-U.S.                                                              707             208               -
                                                                              ------           -----          ------
              Total current tax provision                                      2,167             457              10
                                                                              ------        --------          ------
        Deferred tax provision:
           U.S. federal                                                        6,456          (4,087)            (10)
           State and local                                                       509            (162)              -
           Non-U.S.                                                              (32)           (208)              -
                                                                              -------       --------          ------
              Total deferred tax provision                                     6,933          (4,457)            (10)
                                                                             -------        --------          ------

        Total income tax expense (benefit)                              $     $9,100          (4,000)              -
                                                                             =======         =======          ======

</TABLE>

       Below is a reconciliation  of the expected income tax expense (benefit) -
       (based on the U.S.  federal  statutory  income  tax  rate) to the  actual
       income taxes:
<TABLE>

                                                                                      Years ended December 31,

                                                                            ---------------------------------------------
                                                                                2000            1999            1998
                                                                            ------------    ------------    -------------

       <S>                                                                      <C>             <C>           <C>

        Computed expected income tax expense (benefit)                  $        7,978          10,202         (35,540)
        Increase (decrease) resulting from:
            State and local income taxes, net of federal benefit                   781           1,188               -
            Non-U.S. municipal taxes and tax rate differences                      159               -               -
            Nondeductible expenses                                                 182           1,194          39,563
            Losses in excess of allowable carrybacks                                 -               -             796
            Nontaxable municipal interest income                                     -               -             (83)
            Change in effective tax rate                                             -          (3,886)              -
            Tax benefits realized as a result of acquisitions                        -          25,015               -
            Benefit of deductions attributable to stock options
                credited to additional paid-in capital                               -           7,710               -
            Reduction in valuation allowance                                         -         (45,339)         (4,624)
            Other, net                                                               -             (84)           (112)
                                                                            ------------    ------------    -------------
        Income tax expense (benefit)                                    $        9,100          (4,000)              -
                                                                            ============    ============    =============

</TABLE>

       At  December  31,  1998,   the  Company  had  a  deferred  tax  asset  of
       approximately  $45,339  before an  offsetting  valuation  allowance.  The
       valuation  allowance  was based on an  assessment  of the  likelihood  of
       whether the deferred tax asset would be realized.  The elimination of the
       valuation  allowance  of  $45,339  during  1999 was  attributable  to the
       following  items: (1) 1999 income which utilized $12,500 of net operating
       losses;  (2) an increase in  deferred  income  taxes to include the state
       income tax benefits of $(3,886); (3) a reduction of $25,015 based upon an
       assessment  of future  operating  earnings of the combined  businesses in
       conjunction  with the  acquisition  of Gainor Medical (see note 2); (4) a
       $7,710 credit to additional paid-in capital related to the operating loss
       carryforward generated by the exercise of stock options; and (5) a $4,000
       credit to income tax benefit on the consolidated  statement of operations
       as the Company  believes  now, more likely than not, that it will realize
       the related deferred income tax assets.
<PAGE>

                   MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 2000, 1999 and 1998
           (Amounts in thousands, except share and per share amounts)


At December 31, 2000 and 1999, the deferred  income tax assets consist of
future tax benefits attributable to:
<TABLE>

                                                                               2000              1999
                                                                           -------------     -------------
             <S>                                                               <C>                <C>
             Deferred income tax assets:
                Current:
                 Allowance for doubtful accounts                        $       2,432             3,017
                 Accruals and reserves not deducted for tax purposes              750             2,105
                                                                           -------------     -------------
                                                                                3,182             5,122
                                                                           -------------     -------------
                Non-current:
                 Accruals and reserves not deducted for tax purposes            1,287             1,764
                 Depreciation and amortization                                  1,959             2,608
                 Net operating loss carryforwards                              21,045            25,766
                 Credit carryforwards                                           2,657             2,010
                 Other                                                            367              (545)
                                                                           -------------     -------------
                                                                               27,315            31,603
                                                                           -------------     -------------
                      Total deferred income tax assets                  $      30,497            36,725
                                                                           =============     =============
</TABLE>


       At December 31, 2000, 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                     credits             loss
              ------------                ------------      -------------
              <S>                         <C>               <C>

                   2001                 $          34                  -
                   2002                            38                  -
                   2003                            89                  -
                   2004                            43                  -
                   2005                            61                  -
                   2006                           151                  -
                   2007                             -                 29
                   2008                             -              1,011
                   2009                             -              4,599
                   2010                             -             11,364
                   2011                             -             34,070
                   2012                             -              1,824
                   2018                             -                414
                   2019                             -                354
                   2020                             -                436
                                            ------------      -------------
                                        $         416             54,101
                                            ============      =============

</TABLE>

       The Company also has  available  alternative  minimum tax ("AMT")  credit
       carryforwards of approximately  $2,241 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 $45,965.
<PAGE>

                   MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 2000, 1999 and 1998
           (Amounts in thousands, except share and per share amounts)


(8)    Common Shareholders' Equity

       Reverse Stock Split

       In December 2000, the Company executed a one-for-four reverse stock split
       under  which  every  four  shares  of the  Company's  common  stock  were
       converted into one new share of common stock.  All amounts  reflected for
       common  stock  and  additional  paid-in  capital,   and  all  amounts  of
       authorized and outstanding  common shares and per share amounts reflected
       for all periods in the accompanying  financial statements and these notes
       thereto have been restated to reflect the reverse stock split.

       Stock Option Plans

       During 2000, the Board of Directors of the Company adopted the 2000 Stock
       Incentive  Plan for  employees,  officers,  independent  contractors  and
       consultants of the Company.  The 2000 Stock Plan has three components:  a
       stock option  component,  a stock  bonus/stock  purchase  component and a
       stock  appreciation  rights  component.  Under the terms of this plan,  a
       total of 550,000  shares of common stock were reserved for issuance.  The
       Stock Option  Committee  shall determine the term of each option granted,
       provided that the term shall not be for more than ten years.  The options
       are  exercisable  based  on  established   performance  goals,  provided,
       however,  that they are exercisable in no less than two years and no more
       than four years and expire after ten years.

       Also during 2000, the Board of Directors of the Company  adopted the 2000
       Non-employee  Director Stock Option Plan, which provides for the issuance
       of non-qualified stock options to the Company's  non-employee  directors.
       Under the terms of this plan,  a total of 62,500  shares of common  stock
       were  reserved  for  issuance.  The options are granted  with an exercise
       price equal to the fair market value of the Company's common stock on the
       date the option is granted and vest  monthly  over the 12 months from the
       date of grant.  The term of each  option  is ten  years  from the date of
       grant.

       During 1997, the Board of Directors of the Company adopted the 1997 Stock
       Incentive Plan for key employees,  officers, independent contractors, and
       consultants  of the  Company.  The  1997  Stock  Option  Plan  has  three
       components:  a  stock  option  component,  a stock  bonus/stock  purchase
       component,  and a Stock Appreciation Right component.  A total of 450,000
       shares of the Company's  common stock have been  authorized  for issuance
       under this Plan. The Stock Option  Committee  shall determine the term of
       each option granted under the Plan, provided, however, that the term does
       not  exceed  ten  years.   These  options  are  exercisable   based  upon
       established  performance  goals,  provided,  however,  that  they are not
       exercisable  in less than two years or more  than four  years and  expire
       after ten years.

       The Company has elected to adopt the  disclosure-only  provisions of SFAS
       123 which require  presentation  of pro forma net earnings (loss) and pro
       forma  earnings  (loss) per share as if the Company had accounted for its
       employee  stock options under the fair value method.  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 earnings  (loss) from  continuing  operations  and earnings
       (loss) per common  share from  continuing  operations  would have been as
       follows:
<PAGE>
                   MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 2000, 1999 and 1998
           (Amounts in thousands, except share and per share amounts)


<TABLE>
                                                                          2000           1999            1998
                                                                       ----------    -----------    -------------
             <S>                                                          <C>           <C>             <C>

             Pro forma net earnings (loss) from continuing
             operations available to common shareholders             $     8,221         25,989         (101,343)
                                                                        =========     =========     =============

             Pro forma basic net  earnings  (loss) per common share
             from continuing operations                              $      0.90           2.84           (11.08)
                                                                        =========    ==========     =============

</TABLE>

       The weighted average fair value of the individual  options granted during
       2000,   1999  and  1998  is  estimated   at  $10.67,   $9.50  and  $9.89,
       respectively,  on the date of grant. The fair values for those years were
       determined  using  the  Black-Scholes   option-pricing   model  with  the
       following assumptions.


<TABLE>


<CAPTION>


                                                     2000            1999            1998
                                                 -----------     -----------     -----------
                <S>                                <C>             <C>             <C>
                Dividend yield                         None            None             None
                Volatility                              57%             58%              50%
                Risk-free interest rate               6.15%           5.54%            5.15%
                Expected life                       5 Years         5 Years          5 Years
</TABLE>



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



<TABLE>

<CAPTION>


                                              2000                        1999                          1998
                                     ------------------------    ------------------------     -------------------------
                                                   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     884,729     $  23.16        806,280      $ 23.63         726,346      $  24.92
       year
       Granted                         234,105        19.16        196,605        17.20         232,880         20.04
       Exercised                       (16,875)       14.62        (39,586)        8.68         (30,368)         9.00
       Canceled                        (53,615)       22.73        (78,570)       20.48        (122,578)        26.84
                                     ---------     ----------    ----------    ----------     -----------    ----------

       Outstanding at end of year    1,048,344     $  22.41        884,729     $  23.16         806,280      $  23.63
                                     =========     ==========    ==========    ==========     ===========    ==========
       Exercisable at end of year      634,478     $  24.67        499,078     $  25.32         496,267      $  23.96
                                     =========     ==========    ==========    ==========     ===========    ==========

</TABLE>

       The following table  summarizes  information  concerning  outstanding and
exercisable options at December 31, 2000:


<TABLE>
<CAPTION>



                                                Options outstanding                          Options exercisable
                                ----------------------------------------------------    -------------------------------
                                                      Weighted           Weighted                           Weighted
           Range of                                    average            average                           average
           Exercise                Shares             remaining          exercise         Shares            exercise
            Price                Outstanding         contractual           price        exercisable          price
                                                     life (years)
          --------------------- --------------     ----------------     ------------    ------------      -------------
          <S>                      <C>                  <C>                 <C>           <C>               <C>

          $  7.50 - $ 10.00          5,250               9.3            $    9.23              646        $     7.50
          $ 10.00 - $ 20.00        289,121               8.2                16.34          107,111             16.65
          $ 20.00 - $ 30.00        681,762               6.5                23.77          454,510             24.95
          $ 30.00 - $ 40.00         71,260               5.1                33.97           71,260             33.97
          $ 40.00 - $126.00            951               1.5               106.56              951            106.56
                                ----------                                               ---------
                                 1,048,344                                                 634,478
                                ==========                                               =========

</TABLE>
<PAGE>


                   MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 2000, 1999 and 1998
           (Amounts in thousands, except share and per share amounts)


       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 125,000  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 in 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 2000, 1999 and 1998,  respectively,  39,755,   48,469   and 30,133
       shares of common stock were issued under the Purchase Plan.  Compensation
       costs related to this plan determined  under SFAS 123 were  insignificant
       to the Company's  consolidated  statements  of  operations  for the three
       years ended December 31, 2000.

       Shareholders' 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
       $244 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 $0.01 per right any time before and within
       ten 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.

(9)    Redeemable Preferred Stock

       In connection with the purchase of the Gainor Medical  business (see note
       2), the Company  designated  16,500 shares and issued 10,000 shares of 4%
       Series A convertible  redeemable  preferred stock ("Series A CRPS"),  and
       designated  60,000  shares  and  issued  35,000  shares  of 8%  Series  B
       redeemable  preferred  stock  ("Series B RPS") with attached  warrants to
       purchase  1,000,000  shares of the  Company's  common stock at $12.00 per
       share.

       The  Series A CRPS is  convertible  at any time  into  555,556  shares of
       common stock. At its option, the Company may redeem the Series A CRPS, at
       any time beginning two years after the acquisition date, after the 30-day
       moving  average of the closing price of the Company's  stock has exceeded
       $21.60 per share, at a redemption price of $1,222 per share. The Series A
       CRPS has a mandatory  redemption  feature  which  requires the Company to
       redeem  one-third of the shares  issued on each of the eighth,  ninth and
       tenth  anniversary  dates of the original issuance date at the redemption
       price of $1,000 per share.  Redemption may occur at the holder's request,
       in the event there is a change of control of the  Company,  as defined in
       the applicable shareholder agreement. Dividends are payable quarterly, in
       arrears,  in cash or additional shares of Series A CRPS, or a combination
       thereof,  at the  option  of the  Company.  The  Series  A CRPS  has been
       recorded at the mandatory redemption value.
<PAGE>
                   MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 2000, 1999 and 1998
           (Amounts in thousands, except share and per share amounts)


       At its  option,  the  Company  may redeem the Series B RPS in whole or in
       part at any time at the redemption  price of $1,000 per share. The Series
       B RPS has a mandatory  redemption  feature which  requires the Company to
       redeem  one-third of the shares  issued on each of the eighth,  ninth and
       tenth  anniversary dates of the original issuance date, at the redemption
       price of $1,000 per share. At issuance date, the Company allocated $4,415
       of the $35,000 total  redemption  value of Series B RPS to the fair value
       of the warrants issued,  using a Black-Scholes option pricing model. This
       amount was  recorded  as a credit to  additional  paid-in  capital and is
       being accreted over the term of the Series B RPS.

       In the event of  liquidation,  holders  of Series A CRPS and Series B RPS
       are entitled to receive,  from the assets  available for  distribution to
       the  shareholders,  an amount in cash or property  at fair market  value,
       equal  to  $1,000  per  share  plus  unpaid  dividends.  The  Company  is
       restricted from paying  dividends on the Company's common stock until all
       unpaid dividends on the Series A CRPS and Series B RPS are paid.

(10)   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 each  participant's  contribution  but not more
       than  3%  of  the  participant's   compensation.   Discretionary  Company
       contributions  are allowed under the plan.  Contributions to the plan for
       the years ended  December 31,  2000,  1999   and 1998 were  approximately
       $784, $833 and $814, 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.  During 1997, the Company terminated
       this  nonqualified  defined  benefit  pension  plan and allowed  existing
       participants  to either  receive a  lump-sum  payment  or roll over their
       investment  into a  split-dollar  life  insurance  contract  whereby  the
       participants  or their  beneficiaries  are entitled to the greater of the
       contract's  cash surrender  value or the contract's  death benefit,  less
       insurance  premiums paid by the Company.  The  participants who chose the
       lump-sum payout were paid approximately $1,328 on January 2, 1998.

       During  1998,  the  Company  entered  into  split-dollar  life  insurance
       contracts with additional members of senior  management.  These contracts
       operate in the same manner as the contracts entered into in 1997.

       On the earlier date that occurs of: (i) the date the employee reaches age
       65;  (ii)  the  date  of the  employee's  death;  or  (iii)  the  date of
       termination  of the  employee  prior to the  completion  of ten  years of
       service,  the  Company  has the right to be repaid an  amount,  up to the
       amount of premiums paid, by which the cash surrender  value of the policy
       exceeds the employee's vested life insurance plan benefit.

       During 2000,  1999 and 1998, the Company paid $2,754,  $2,754 and $2,640,
       respectively,  in insurance  premiums related to these  split-dollar life
       insurance  contracts.  At December 31, 2000 and 1999,  respectively,  the
       cash surrender  value of life insurance  policies was $10,813 and $10,803
       and the related liability was $5,052 and $8,030.

<PAGE>
                   MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 2000, 1999 and 1998
           (Amounts in thousands, except share and per share amounts)


(11)   Restructuring

       During the second  quarter of 2000,  the Company  incurred  restructuring
       expenses of $1,599  related to its decision to exit its clinical  patient
       record  software  business,  Clinical-Management  Systems,  Inc. Of these
       costs, $568 relates to customer contract  fulfillment costs, $518 relates
       to remaining  software  development  costs, $312 relates to payroll costs
       and related involuntary  severance of employees and $201 relates to other
       costs and expenses for the shutdown of the business.

       During the third quarter of 1999,  the Company began an assessment of the
       cost  structure of its Women's Health segment and decided that the number
       of  its  monitoring  centers  could  be  significantly   reduced  without
       compromising  patient  care or reducing  services  provided to  patients,
       physicians or payors. These cost-savings  initiatives  continued into the
       fourth  quarter of 1999 and  resulted in total  restructuring  charges of
       $4,241 in 1999. Of these costs,  $3,201  relates to future lease payments
       and other related costs of closed facilities, $668 relates to involuntary
       severance of  employees  and $372  relates to the  write-down  of capital
       equipment.

(12)   Commitments

       The  Company  is  committed  under  noncancelable  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, 2000 are as follows:

<TABLE>
<CAPTION>


                                                Operating          Capital
           Years ending December 31,              leases            leases
           -------------------------          --------------     ------------
               <S>                         <C>                    <C>

               2001                       $         6,281               447
               2002                                 5,368               125
               2003                                 2,454                80
               2004                                   971                 -
               2005                                   826                 -
               Thereafter                           1,375                 -
                                               --------------    -----------
                                          $        17,275               652
                                               ==============
               Less interest                                             50
                                                                -----------
           Present value of future
           minimum capital lease payments                      $        602
                                                                ===========
</TABLE>


       Amortization of leased assets is included in depreciation expense. Rental
       expense for cancelable and noncancelable leases was approximately $6,673,
       $7,460 and $6,500 for the years ended December 31, 2000, 1999 and 1998,
       respectively.
<PAGE>


                   MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 2000, 1999 and 1998
           (Amounts in thousands, except share and per share amounts)

(13)   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.

(14)   Quarterly Financial Information - Unaudited

       Presented  below is a summary  of the  unaudited  consolidated  quarterly
       financial information for the years ended December 31, 2000 and 1999.

<TABLE>
<CAPTION>

                                                                                              Quarter
                                                                   --------------------------------------------------------------
                                                                      Fourth           Third          Second            First
                                                                   ------------     -----------    -------------     ------------
<S>                                                                   <C>              <C>            <C>               <C>

       2000:

         Revenues                                               $       56,390          57,434         58,197            53,746

         Net earnings (loss)
             Continuing operations                                       2,089           2,658          3,621             5,326
             Discontinued operations                                      (180)           (195)           (55)              430
                                                                       --------        --------       --------          -------
                Total                                                    1,909           2,463          3,566             5,756
                                                                       ========        ========       ========          =======

         Net earnings (loss) per diluted common share
             Continuing operations                                        0.13            0.18           0.28              0.44
             Discontinued operations                                     (0.02)          (0.01)         (0.01)             0.04
                                                                      ---------        --------       --------          --------
                 Total                                                    0.11            0.17           0.27              0.48
                                                                      =========        ========       ========          ========

       1999:

         Revenues                                               $       57,679          59,999         58,392            55,669

         Net earnings
             Continuing operations                                      19,961           7,189          3,327               889
             Discontinued operations                                       599             548            711               782
                                                                      --------         -------        -------           -------
                Total                                                   20,560           7,737          4,038             1,671
                                                                      ========         =======        =======           =======

         Net earnings per diluted common share
             Continuing operations                                        1.91            0.62           0.25              0.02
             Discontinued operations                                      0.06            0.05           0.07              0.08
                                                                          ----            ----           ----              ----
                Total                                                     1.97            0.67           0.32              0.10
                                                                          ====            ====           ====              ====

</TABLE>

       The sum of the four  quarterly  net  earnings  (loss) per diluted  common
       share  amounts  may  not  equal  the  annual  amount   reflected  on  the
       consolidated statements of operations due to rounding.

(15)   Business Segment Information

       The Company's  reportable  business  segments are the strategic  business
       units  that offer  different  products  and  services.  They are  managed
       separately  and the  Company  evaluates  performance  based on  operating
       earnings of each respective business unit.
<PAGE>


                   MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 2000, 1999 and 1998
           (Amounts in thousands, except share and per share amounts)


       As of December 31, 2000 the  Company's  operations  have been  classified
       into two  reportable  business  segments:  Women's  Health  and  Diabetes
       Supplies  and  Services.  The  Women's  Health  segment  offers  services
       designed to assist physicians and payors in the cost-effective management
       of  maternity  patients,   including:   specialized  home  nursing,  risk
       assessment,  patient education and management,  home uterine  contraction
       monitoring,  infusion therapy,  gestational diabetes management and other
       monitoring   and  clinical   services  as  prescribed  by  the  patient's
       physician. The Diabetes Supplies and Services segment has two components,
       diabetes disease management and fulfillment services,  and medical device
       design,  development  and  manufacturing  services.  The  Other  Segments
       include three business segments that are below the quantitative threshold
       for disclosure: respiratory disease management, clinical records software
       and  services  (business  was exited in the  second  quarter of 2000) and
       infertility  practice  management  services  (sold  during  the third and
       fourth quarters of 1999). In December 2000, the Board of Directors of the
       Company  approved  the sale of the  business  and  certain  assets of its
       Cardiovascular   segment,   a  business  that   provided   cardiac  event
       monitoring,  holter monitoring and pacemaker follow-up services (see note
       16). The results of operations of this business segment are classified as
       discontinued  operations  and are not included in the  Company's  segment
       information,  but are  included in the  reconciliations  to  consolidated
       amounts.

       The accounting  policies of the segments are the same as those  described
       in  the  summary  of  significant  accounting  policies.   There  are  no
       intersegment  sales,  and operating  earnings (loss) by business  segment
       excludes interest income, interest expense and corporate expenses.

       Summarized  financial  information as of and for the years ended December
       31, 2000, 1999 and 1998 by business segment follows:

<TABLE>

                                                          Revenues                   Operating earnings (loss)
                                               --------------------------------  -----------------------------------
                                                  2000        1999       1998       2000         1999        1998
                                               ----------  ---------  ---------  ----------  -----------  ----------
       <S>                                       <C>         <C>        <C>         <C>         <C>          <C>

       Women's Health                        $   109,716     109,986    115,147     24,292      15,566       (8,584)
       Diabetes Supplies and Services            114,694     110,529         39      9,729      11,402           39
       Other Segments                              1,357      11,224     13,386     (3,601)     (2,409)      (4,956)
                                               ----------  ---------  ---------  ----------  -----------  ----------
                Total segments                   225,767     231,739    128,572     30,420      24,559      (13,501)

       General corporate                               -           -          -     (7,745)     (5,651)      (3,860)
       Asset impairment charges (note 3)               -           -          -          -           -      (82,885)
       Interest expense, net                           -           -          -     (8,156)     (7,711)        (608)
       Other income, net                               -           -          -      8,275      16,169          448
                                               ----------  ---------  ---------  ----------  -----------  ----------
                                             $   225,767     231,739    128,572     22,794      27,366     (100,406)
                                               ==========  =========  =========  ==========  ===========  ==========


                                                     Identifiable assets           Depreciation and amortization
                                               --------------------------------  -----------------------------------
                                                 2000        1999       1998       2000         1999        1998
                                               ----------  ---------  ---------  ----------  -----------  ----------
       Women's Health                        $    38,343      39,575     57,088      2,381       3,380       29,150
       Diabetes Supplies and Services            153,620     153,772         39      9,922       9,610            -
       Other Segments                                764       2,462      6,543        151         571        3,041
       General corporate                          75,566      74,073     16,916      1,530         426          101
       Net assets of discontinued operations           -      15,831     16,448          -           -            -
                                               ----------  ---------  ---------  ----------  -----------  ----------
                                             $   268,293     285,713     97,034     13,984      13,987       32,292
                                               ==========  =========  =========  ==========  ===========  ==========

                                                   Capital expenditures
                                                -----------------------------------
                                                   2000         1999        1998
                                                ---------   -----------  ----------
       Women's Health                        $      2,212       2,933        2,828
       Diabetes Supplies and Services               3,558         787            -
       Other Segments                                  25         541          406
       General corporate                            1,600         867          707
                                                ---------   -----------  ----------
                                             $      7,395       5,128        3,941
                                                =========   ===========  ==========
</TABLE>

                   MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 2000, 1999 and 1998
           (Amounts in thousands, except share and per share amounts)


       The   Company's   revenues   from   operations   outside  the  U.S.  were
       approximately   12%  and  11%  of  total   revenues  in  2000  and  1999,
       respectively,  and less  than 1% of total  revenues  in 1998.  No  single
       customer  accounted for 10% of consolidated net revenues in 2000, 1999 or
       1998.

(16)     Dispositions of Businesses

       In February 2001, the Company sold the business and certain assets of QDS
       and received cash proceeds totaling  approximately  $18,000. The accounts
       receivable of QDS,  totaling  approximately  $8,800 at December 31, 2000,
       were excluded from the sale. The proceeds to be received and the accounts
       receivable   of  QDS  are  reflected  in  "other   receivables"   on  the
       consolidated  balance  sheets at December 31,  2000.  No gain or loss was
       recognized  on the sale of these  assets.  As of December  31,  2000,  an
       accrued  liability  totaling  $1,217 was  recorded for  estimated  future
       salary and severance costs of personnel  retained to collect the accounts
       receivable  and for net costs of  operating  activities  through the sale
       date.  The  accompanying  consolidated  financial  statements  have  been
       restated  to reflect  QDS as a  discontinued  operation  for all  periods
       presented.

       The operating results of discontinued operations are as follows:
<TABLE>

                                                                        2000            1999           1998
                                                                    ------------    -----------    -----------
       <S>                                                              <C>             <C>            <C>

       Revenues                                                   $      15,336         15,596           6,644

       Earnings (loss) before income taxes                        $           -          2,640          (1,136)
       Income tax expense                                                     -              -               -
                                                                     ----------      ---------         -------
       Net earnings (loss) from discontinued operations           $           -          2,640          (1,136)
                                                                     ==========      =========         =======

</TABLE>

       In 1999, the Company determined that its infertility  business,  NRMC, no
       longer fit the Company's diversified disease management strategy.  During
       the third and fourth  quarters of 1999,  the  Company  sold the assets of
       these  clinics and realized  cash  proceeds of $1,257 and received  notes
       from the  buyers  of NRMC  totaling  $1,079.  Due to the  uncertainty  of
       collection  of the notes and an accrual for future  patient  refunds,  no
       gain or loss was recognized on the sale of these assets in 1999. In 2000,
       the Company received $750 in full settlement of notes receivable from one
       purchaser and  recognized a gain of $1,746 from the sale of these assets,
       which   reflected  the   realization  of  most  of  the  proceeds  and  a
       re-assessment  of remaining  obligations.  As of December  31,  2000,  an
       accrual for future  patient  refunds and other  costs  totaling  $243 was
       reflected in accrued  liabilities,  and an additional  $109 for long-term
       commitments was reflected in other long-term liabilities.

(17)   Sales of Short-Term Investments

       In  connection  with the  acquisition  of QDS (see note 2),  the  Company
       invested $2,010 in 1998 in preferred stock of WebMD and received  options
       and  warrants to purchase  additional  shares of WebMD for $2,680,  which
       were  exercised  in 1999.  In 1999,  the  Company  sold  shares  of WebMD
       generating proceeds of $20,720 and a gain of $17,349, which was reflected
       in "other income" in the consolidated statements of operations.  In 2000,
       additional  shares were sold  generating  proceeds of $7,298 and gains of
       $6,077.  At December 31, 2000, the Company has a remaining  investment in
       WebMD of 16,423 shares.